Q4 2019 Earnings Call
This time all participants are in listen only mode. After the speakers presentation. There will be a question and answer session to ask a question. During the session. You want me to press Star one on your telephone. Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero I would now like to hand the conference.
Over to your speaker today Lara Mahoney. Please go ahead.
Thank you Lisa.
Good morning. This is learn Mahoney, Vice President corporate communications and Investor Relations.
Here with into run off a rush on Nordson, President and CEO .
And Greg.
Executive Vice President and CEO .
We welcome you to our conference call today Thursday December 12 2019.
<unk> North this fiscal year 2019 fourth quarter.
Our conference call is being broadcast live on our Investor Relations Web page.
Yesterday.
And it will be available there for 14 days.
We'll be a telephone replay of the conference call available until December 26.
South in 19, which can be accessed by dialing four one sick.
Two one for that.
Sure.
You will need to reference I'd number 10579.
During this conference call forward looking statements may be made regarding our future performance based upon nordson current expectation.
These statements may involve a number of risk.
And other factors.
In the company's filings with.
Securities and exchange Commission that could cause actual results to differ.
After our remarks on the corridor, we will be happy to take your question.
I'll turn the call over to not.
Good morning, everyone. Thank you for joining Nordsons fiscal 2019.
HM.
Like to begin by recognizing the nordson steam.
For a strong performance against a challenging macroeconomic environment.
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Well it might Nordsons site visits for the past four month.
I'm very impressed by our passion for our customers.
We are focused on serving our customers critical needs and creating physician technology solutions that bring differentiated.
Well you to our customers business.
Our focus on the customer.
Fine with the diversity of our end markets and applications.
Continued to help us during these challenging macro economic.
Well the fourth quarter, the generated solid organic growth of 4%.
Well the full year 29 team.
Any company organic sales were down 1% as compared to last year.
Organic growth in both adhesive dispensing.
And industrial coating segments.
Offset by softness in electronics end markets.
Third by the advanced technologies segment.
Well the total company on a full year basis.
We maintained operating margin and EBITDA margin inline with prior year.
Despite lower sales and the distraction from there.
I'll speak more about our fiscal 2020 annual guidance in few moments, but first.
Turning the call over to Greg tax and to provide more detail perspective on our financial.
Thank you Naga and good morning to everyone.
Fourth quarter, 2019 sales increased 3% compared to the prior years fourth quarter.
Change included an increase of approximately 4% organic volume growth.
Roof of less than 1% related to the first year effect of the fiscal 2019 acquisition of optical control and a decrease related to the unfavorable effect currency translation of approximately 1%.
With any adhesive dispensing systems segment fourth quarter sales increased 1% compared to the prior year inclusive of a 3% organic growth and a 2% decrease related to the unfavorable effect of currency translation as compared to the prior year.
This segment continues to benefit from the stability of consumer nondurable end markets as well as our growth initiative.
Advanced technology system sales decreased less than one per cent compared to the prior years fourth quarter inclusive of a decrease in organic volume of less than 1%.
An increase of 1% related to the first year effective acquisitions, and a decrease of 1% related to the unfavorable effect of currency translation as compared to the prior year.
The fourth quarters acquisitive growth includes the fiscal 2019 acquisition about the optical controls.
Strengthen medical end markets was offset by weakness in electronic end markets.
Industrial coating system sales increased 21% compared to the prior years fourth quarter.
As discussed during our third quarter conference call strong backlog entering the fourth quarter and solid order activity during the quarter drove organic volume growth of 22%.
Unfavorable effect of currency translation negatively impacted sales by 1%.
For the segment was a record quarter and I'd like to thank the team for their efforts.
Moving down the income statement gross margin for the total company was approximately 54% in the quarter.
Operating profit was $140 million, an increase of 20% compared to prior year.
Operating margin was 24% as compared to 21% in the prior years fourth quarter.
On a segment basis adhesive dispensing systems segment delivered strong operating margin of 31% in the quarter, which is an increase of approximately 350 basis points as compared to the prior years fourth quarter.
We are seeing the benefit of the facility consolidation efforts in Germany, and Austintown, Ohio, as well as some improved product mix impacts on gross margin.
We are pleased to see the continued progress the team is making to drive margins within this segment.
Within the advanced Technology systems segment operating margin was 22% in the fourth quarter, which is an increase of approximately 150 basis points as compared to the prior years fourth quarter. This margin enhancement is largely driven by lower spending in the quarter as compared to the prior years fourth quarter.
Industrial coating systems segment improved operating margin by 425 basis points to 25%, which is a record for this segment.
This margin enhancement is largely driven by better absorption and lower spending in the quarter as compared to the prior years fourth quarter.
On a total company basis net income for the quarter was approximately $103 million and GAAP diluted earnings per share were one dollar and 76 cents.
Excluding restructuring charges, the step up and value of acquired inventory and a net discrete tax expense in the quarter adjusted diluted earnings per share was one dollar and 79 cents.
EBITDA increased 15% over the prior years fourth quarter $464 million were 28% of sales and free cash flow before dividends increased 9% over the prior years fourth quarter were 125% of net income.
I'll now share a few comments on full year results sales for the fiscal year were $2.2 billion, a decrease of 3% compared to the prior year.
This change in sales included a decrease inorganic organic volume of 1% growth related to the first year effective acquisitions of less than 1% and a 2% decrease due to the unfavorable effect of currency translation as compared to the prior year.
Full year operating profit was $483 million reported operating margin was 22%, which is equal to last year's operating margin despite lower sales.
Net income for the full year was $337 million and GAAP diluted earnings per share were $5 in 79 cents.
Adjusted diluted earnings per share to exclude restructuring charges to step up and value of acquired inventory and a net discrete tax expense was $5 an 87 cents.
EBITDA for the for full year was $587 million or 27% of sales equal to the prior year.
Free cash flow before dividends was $320 million or 95% of net income.
From a balance sheet perspective, net debt to EBITDA was approximately 1.9 times trailing 12 months EBITDA at the ended the fourth quarter.
In addition to funding organic and acquisitive growth initiatives with our free cash flow, we returned value to our shareholders by distributing $82 million in dividends and investing $115 million for the repurchase of shares during the year.
A reconciliation between GAAP earnings and adjusted earnings per share is included within the financial exhibits of our press release.
Our press release also includes financial exhibit reconciling net income to free cash flow before dividends and adjusted free cash flow before dividends as well as EBITDA and adjusted EBITDA.
Moving on to fiscal 2020 guidance.
Forecasting organic sales volume growth in the range of 1% to 3% as compared to fiscal year 2019.
Growth from the first year effective acquisitions will add 20 basis points and based on the current exchange rate environment. We expect an unfavorable currency translation effect of 30 basis points as compared to fiscal 2019.
With the sales outlook, we expect to hold operating margin and EBITDA margin equal to fiscal 2019 results offsetting the dilution of inflationary pressure on cost.
We expect fiscal 2020 to be a typical year from a seasonality perspective with a stronger second half than the first and with the first quarter being the softest quarter from a revenue perspective.
Our margin performance will follow this pattern given our direct model, where we have a relatively consistent level of spending from quarter to quarter.
We expect interest expense to be approximately $36 million in fiscal 2020, and maintenance capital expenditures to be approximately $50 million.
Companies estimated effective tax rate for fiscal year 2020 is approximately 22%.
Based on this outlook GAAP diluted earnings per share growth is forecasted to be in the range of 2% to 6% as compared to fiscal year 2019, GAAP diluted earnings per share.
Thank you Greg.
Once again I want to thank our team for delivering a solid full year results against a challenging macro environment.
As we look forward to fiscal 2020 , we are taking a conservative approach to our outlook as we have not seeing indications that next year will be any better than the fiscal 2019 from a macro economic perspective.
And though we are hopeful we'll see improved project activity in electronic end markets convert into improved order trends.
Assuming a flat outlook for these product lines in fiscal 2020.
The resilience of other end markets, we serve notably.
Consumer non durables and medical gives us confidence that even against a challenging macro environment. We will achieve total company organic sales growth in fiscal 2020.
Before we move into given a I want to recognize the important announcement that we made this morning.
Great. Thanks, Dan has announced his intention to retire in 2020.
Greg started with Nordson in 1989, it's a financial analyst.
Is sound judgment strong financial acumen and strategic leadership.
Drilled his success within the organization.
Since 2008, he has served us nordsons Chief financial Officer.
On behalf of the Nordson team and our board of directors I want to thank Greg for his many contributions to nordson.
Personally I've appreciated Greg leadership perspective, and humor as I have transitioned into the role of CEO .
His passion for nordson is evident to everyone, who interacts with them.
That's a new CEO one of the last thing she want to here is that your CFO is thinking about retiring.
Greg was gracious to put his plans on hold so that nordson good first execute.
Dave Smoothed CEO leadership transition now, it's his stern and I wish you, Greg and your family nothing but the best as you begin planning for this new chapter in your life, but before Red gets too excited.
Is committed to staying with his onto his success. It is identified and the Onboarded Greg would you like to see if you works.
Thank you Naga earlier this year I'm, Mark 30 years with Nordson. It has truly been a pleasure to be part of such a great organization and I want to thank all those I have worked with over these many years.
With Knockers direction and the collaboration in support of our executive team.
Company is planning for its next phase of profitable growth. This is an exciting time for nordson and I know the company is well positioned and I will remain committed to ensuring a smooth transition over the next several months.
Thank you Greg.
We will be launching a search for Greg success, or including both internal and external candidates.
Thank you for your time and patience during this morning's call.
We'll now pause and take your questions.
Thank you as a reminder to ask a question you in each press star one on your telephone to withdraw your question press the pound or hash key please standby well we can pilots you in a roster.
And our first question comes from the line of Christopher Glynn from Oppenheimer. Your line is open.
Thank you good morning, everyone and Greg can grab it's on a great long run at Nordson.
Thank you.
[laughter] question on medical I was wondering if there's any like QE program roll offs, you need to transition through on the horizon or if you're expecting consistent performance with the long short term organic view there.
Chris Thank you for your question I.
We don't see any roll offs that significantly impact our performance.
We had a real strong year in medical was 11% organic growth and our expectations are will continue to be consistent with our performance in medical.
Great and I'm just done a flat margin outlook for next year, a understanding your conservative caveat. It does seem hds built some structural.
Gentlemen, the profitability in the second half and.
At Ats, the electronics is kinda scraping the bottom it seems and you should have medical leverage so.
I see more intuitive that there is a bit of embedded margin tailwind. There if you could kind of comment on that view.
You know if you look at the midpoint of for sales forecast and include some currency offset and consider that we had a direct organization we want to stay invested in our technology development and our sales interaction with our customers.
We do expect inflationary impact on our labor costs. So that is really at the midpoint of on sales forecast is probably not a significant improvement to our margin, but as we moved towards the higher end up our sales target you know, we would expect positive margin leverage.
Okay, great. Thank you I'll pass not.
Our next question comes from the line of Matt Summerville from D.A. Davidson. Your line is open.
Thanks.
Congrats great.
First maybe can you just give a little more granularity into demand trends you saw in the fourth quarter in kind of what the outlook is for the different pieces of Ats being rigid polymer nonwovens product Assembly.
Yeah, Matt This is Greg.
You know order trends.
Within adhesives again, that's the kind of the resilient set of end markets with the with the Nondurables.
Have held up pretty well pretty short overall short cycle lead times. So the performance that you saw on fourth quarter and really the full year is indicative of the resiliency of those end markets.
We don't go down to that product line level, but.
We'd expect to continue to benefit from the strength of those end markets as well as where we bring innovation to new applications and new opportunities. So that part of the business even against these challenging times as we would expect has held up pretty well.
And then maybe if you guys can just comment on what you're seeing act in terms of Actionability in the M&A pipeline.
Side of medical are there other areas and maybe maybe test on the electronic side outside of those two areas. Naga are you looking to explore sort of other types of M&A avenues for the company going forward.
You know these are fairly still early in sort of thinking about it we still have significant opportunity and scaling up our medical platform and our test inspection platform. So we remain focused there that I still opportunities when they come to market is something we can really determine.
If we ever run out of opportunities. There you know that are always or other areas. We are looking at but.
Not at the moment so.
Got it thank you guys.
Our next question comes from the line of Allison Poliniak from Wells Fargo. Your line is open.
Hi, guys good morning, and congrats Craig on the announcement today.
Yes, you talked about eats yes is it some project I guess inquiries could you talk relative to last year as those are the increase increase picking up I know, it's up to save some are forward, but how does your feeling around this increase the projects for 2020 or 2020.
Allison.
We we suddenly still see pretty good project activity. We are in middle of all of that you know as you know we had a market leader in those applications, where our customers lead on our technology and our capability to solve problems. So we are in middle of lot of activity, we have not seen them convert into order rates.
Our our order rates have not significantly picked up but we're right in the middle of those projects, we feel very good about our market position and continue to work with our customers and acid windows.
Project activities turn into orders you know you if you will see US adjusts you know our expectations.
Great and then just I guess your overall feeling I mean is there do you feel like we've re some level of stability there where you know your downside risk it is a little bit more minimal at this point.
Yeah, if you could sort of think about what we're seeing in our businesses. Today is we from third to fourth quarter. You know we continue to see neutral we really don't see the.
Downside.
Great. That's helpful. Thank you.
Our next question comes from the line of Jeff Hammond from Keybanc capital markets. Your line is open.
Hey, good morning, guys, great Congrats good to hear.
Thank you Chuck.
Hey.
Maybe just staying on electronics, where you've seen specifically activity levels pick up.
The they're not translate into orders.
So if you think about you know if you think about electronic business. We are involved in a very diverse set of applications and end markets, including.
Semiconductor packaging, you know product applications to.
PC board to automotive electronics to Fiveg. So it's not one particular drive it'll be a there but overall through odd the electronic supply chain. We are involved in multiple different applications. As you know and we find that the project activities are pretty strong across.
The board.
Okay. Maybe you can just comment on I think you've talked at length about five GE and what you're seeing there and then just.
Just in terms of infrastructure and then and then what you're hearing from the mobile handset guys. Thanks.
Oh.
So as I would tell you that you know fiveg key projects continue to be in project phase in conversation.
And discussions and product development phase.
Really as as you think about fiveg infrastructure rollout they are slower than expected.
Probably early days now in terms of how these projects converted orders.
But ah, but in general you will find a that that a activity levels have pretty good and you know were sole engage in solving issues where people. So so we feel good about a project activity. It just you know they've not converted into orders yet.
And just as Greg I'd add just from what we tend to see from a seasonality perspective. This is kind of a low point at which we would tend to see project activity for some of those end markets that you were referring to.
Okay and then.
I know you don't give segment guidance, what would you expect to each of the segments to be within that 1% to 3% organic or <unk>.
I guess I guess industrial coating tends to be a little more economically sensitive is there maybe a little more pressure there.
As we look at you know 2020, you know we feel good that that the mid to high end of the you know you would expect to see organic growth across the segment.
Yeah Okay.
Okay, and then just housekeeping I think he said.
Three cents of kind of onetime items can you can you split that out on on kind of a pre tax basis, where it would hit the segments or if there's.
I think you mentioned the tax item or you know if anything it corporate thanks.
Yep.
You know there it really isn't significant across the segments, it's primarily some restructuring charges that hit across.
This segments as well as corporate it makes up the bulk of it so it's not enough to really move margin performance for any particular business.
Okay. Thanks, a lot.
Our next question comes from the line of Mike Halloran from Baird. Your line is open.
Hey, good morning, everyone and congrats great.
Right so.
So first first on the operational improvements side it sounds like that's going well on these uses maybe just some context and and what you're seeing there and and thoughts on what kind of actions you're thinking about into 2020.
On the operational improvements side on the adhesive.
Segment, you know pretty much as you indicated all of those came from consolidations and happened last year with three most of those.
We feel like we're in a pretty pretty good place in terms of margin performance here.
I would say.
The.
Really the margin performance in that business is going to be more proportional to the volume rather than any structural.
Restructure.
Yes.
Okay that makes sense and then the follow up is when you're thinking about bridging gap to adjusted earnings for fiscal 2020 at this point.
It's a thought that based on what you know today the gap in the adjusted numbers are about equal into next year or.
Or is there something or or is there an seem anticipated restructuring or other items that you think.
Oh, yes, the too.
This is Greg it would be pretty much in line with the with the growth in reported bps.
Oh, so you're saying gap the expectations for GAAP bps gross or should be similar for adjusted EPS growth adjusted 2020 versus adjusted 29 too.
Correct.
Alright, great I appreciate the time thank you.
Thank you.
And again, if he'd like to ask a question that star one on your telephone keypad. Our next question comes from the line of Walter Liptak from Seaport Global Your line is open.
Hi, Thanks, good morning.
Congratulations Greg spent a good run.
Wanted to ask about.
The geographic regions and others.
It looks like the U.S. recovered a little bit that's probably on the back of a coding I wonder if we can just kind of review.
You know some of the geographic regions and thinking about that you, which looks like it weakened a little bit as well as off Japan, and these repair which.
Which looks like that maybe you don't start to recover just any trends that you're seeing.
Yeah. Walter This is Greg I think you characterize some of it pretty well.
U.S.
Volume really in the quarter, we saw good good growth across each of the segments.
You're up to a large extent.
Is related to some softness we've talked a long throughout the year of some challenging comps.
Within certain product lines within pieces, primarily non woven product line.
Being up against really challenging comps from the last couple of years and that's where many of the Oems are located so that's oh, the largest impact there within Europe and then in Asia Pacific were in the quarter, a really some some good strength across all the segments.
Okay, great the Oh.
The coatings part of the business, we had that slowdown last quarter and then it looks like those shipments they calculate came through.
How do how did things look as you start the 2020 periods or are we back to kind of that macro overhang on coding.
Under coatings.
You're right in the fourth quarter, we suddenly realize.
As a strong backlog going into the quarter.
As we look into 2020.
Our expectations are it's going to be GDB kind a business really we're through most of shipping all of our backlogs there, but you know, we're well positioned to deliver on the GDP type of growth rate.
Yes.
Okay, Great and the last one for me just going back to the Fiveg comments about infrastructure and mobile.
Uniform those about so don't.
You know to get the visibility that you do.
Why is the infrastructure a party that's pushing out and is there any.
You know is there any regions a world where there's a there's the latency.
So so think about think about of the U.S. into Europe , and just think about overall supply chain in the Fiveg has been disruptive pretty dramatically because of.
<unk>.
Trade disputes and such and that is really put a lot of project activities slower pace.
And and and so if you think about Fiveg technology as they transition into the phones, you really want to consider that the infrastructure work needs to get done first then if you.
Back on the supply chain issues that have been created.
That is really you know are sort of understanding and recognition that's sort of where that has some.
Slowdown.
Okay, great. Thank you.
Our next question comes from the line of Chris Dankert from Longbow Research. Your line is open.
Hi, good morning, everyone at congratulations again great.
Just wanted to just quick talk on a semi is broadly and if you could just comment on what you're seeing it friends.
Inspection, specifically that's really helpful.
Yeah.
On the semi yes, we do see increase activity and suddenly we on the test and inspection side, especially over X Ray businesses.
Given the complexity of the new you know semis that are starting to come out the two d. two and a have.
We are starting to see some new opportunities.
<unk> lots of new product project activity right now still going on.
So in our expectation as those project activities convert into orders that we would oh, we would adjust our expectation for that segment.
Chris This is Greg we've commented throughout the year that.
When you look at the electronic systems portion of advanced technology, it's really been that dispense.
Platform that's.
And the area that we've seen the challenge against prior years.
That's an inspection has held up pretty.
Pretty well for us this year given all of these trends that are occurring within those spaces and it's an area that we would expect to see some good growth opportunity going forward.
Got it got to thanks to color there guys.
Circling back to Mikes question, a little bit obviously, you know we did last the duplicative costs in that either dispensing and kind of that realignment.
But my understanding was we're supposed to be some additional backend synergies as we kind of moved away from that or is it as you said I mean, we just need to get volumes. So really you see that first.
Yeah. This is Greg <unk> worked through most of that.
You know the consolidation the period, where we're incurring the duplicate costs.
You know we were behind that much of that at the end of last year in into this year, So where we're going to see the benefit going forward would be as we're operating in a more efficient environment both from the standpoint of.
Two facilities versus five as well as where we've made investments in automation within the manufacturing environment, That's where we'll see the pick up the efficiency gains in margin going forward. So it's a it's about pushing volume through this current state.
Understood understood that makes sense.
And just one last one from me.
On kind of what's what the M&A strategy as again, obviously medical and remains top of mind.
Inspection.
And here, though is kind of the battery sealant cold material dispensing, that's still kind of on the menu as an additional M&A target.
Yes.
On the on the battery side, we have significant I would say organic growth opportunities in battery and you know Weve made some nice progress we've made a.
Some nice wins in the marketplace, certainly some of which you're seeing in the ice yes business.
But you know we remain focused there, but it is not as big an opportunity when you compare to test and inspection and and our medical platform. Yeah. We're participating in battery really in each of the three segments.
And continuing to work with those.
Who are driving the innovation there so.
I wouldn't be.
One that we would highlight as a target for M&A, it's more ensuring that we're funding the organic growth opportunities there.
Within each of our segments.
Got it thanks, so much guys.
Since our next question comes from the line of Christopher Glynn from Oppenheimer. Your line is open.
Yeah, I wanted to ask if the parts and consumables that does that perform pretty steady and in particular at 80 Ats as were going through an extended period between.
Weapons cycles for electronics should that engender a.
A pickup in the pets consumables, there just wondering about that optionality.
Yeah, Chris This is Greg <unk> on a full year basis.
And this would be.
Kind of intuitive any year, where in some of the segments. Our systems volume was down on a full year parts. So we're about 56 per per cent of of revenue. Now. That's also aided by continued strong growth in medical which is falls into that parts and consumables category.
Sorry.
So if we start to see a pick up in some of our end markets and.
We're getting more system demand across the portfolio that that might moderate a bit.
The other hand, we expect to continue to see medical a growing at the kind of rates that we've been talking about historically so.
It's up a bit from historical largely due to growth in the medical portion of the portfolio and just it's also math right because our systems as a percent of revenue was down so suddenly you know.
But you know were pretty.
Pretty pleased with our you know how how we are growing that part of the business and so our expectation is that wouldn't continue to be a big part of or we can to grow the business.
Okay. Yeah I'm just wondering also if you see a particular.
Driver that kinda necessitates for you know.
Better growth into electronics products.
As the equipment age is out there and the installed base.
No I would suggest that if we see an improvement in those end markets is going to be more about system volume that that.
That's driving the topline.
Got it thank you.
We have no further questions in queue I'll turn the call back to the presenters for closing remarks.
Again I want to.
Thank you for your support despite macro challenges for our business the diversity of for end markets and our focus on customer solutions will allow us to grow and improve margins over the long term Rishi at your time and attention on todays call.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.