Q2 2021 Nordson Corp Earnings Call
Good day and thank you for standing by welcome to the Nordson Corporation second quarter fiscal year 'twenty 'twenty 1.
At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question during the session.
My Star 1 on your telephone please be advised that today's competencies.
If you require any further assistance. Please press star zero I would now like to hand, the conference over to <unk>.
Barbara.
Thank you. Good morning. This is Lara Mahoney, Vice President of Investor Relations and corporate communications I'm here with tuned around knock erosion, our president and CEO and Joseph Kelly Executive Vice President.
<unk> CFO, we welcome you to our conference call today Tuesday May 25th 2021 to report North since fiscal 2021 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 Dot Nordson dotcom forward slash 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 June 1st.
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 was provided in the press release issued yesterday.
Before we begin please refer to slide 2 of our presentation, where we note that certain statements regarding our future performance that are made during this call maybe forward looking based upon nordson current expectation.
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 3 knocker will discuss second quarter highlights.
He will then turn the call over to Joe to review sales and earnings performance for the total company and the 2 business segments.
Joe also will talk about the balance sheet and cash flow.
Naga, who will conclude with high level commentary about our enterprise performance as well as our updated fiscal 'twenty 'twenty, 1 full year guidance.
We will then be happy to take your questions.
With that I'll turn to slide 4 and hand, the call over to Naga.
Good morning, everyone. Thank you for joining nordson fiscal 2021 second quarter conference call.
Throughout fiscal 2020, we remain invested in what makes nordson strong.
Our direct sales model and innovative position technology portfolio.
We also advanced our new NBS next growth framework, which ensures we focus our resources on the best opportunities for profitable growth.
This strategy has positioned us well last year.
And as the recovery continues to accelerate in 2021.
It has put us in an excellent position to respond to our customers and deliver record sales gross margin operating profit and EBITDA EBITDA.
During the fiscal 2021 second quarter.
As per the quarter progressed and market demand accelerated faster and to a greater degree than we originally anticipated.
Particularly in medical electronics, and industrial end markets.
Nordson dispense applications.
The industrial position solutions segment benefited from the pickup in industrial end markets as well as sustained demand for food and beverage packaging.
In the advanced Technology solutions segment and data centric economy, we're increasing demand for semiconductors and complex electronic devices drove the need for our test and inspection and fluid dispense products.
We have also started to see recovery in our medical interventional solution product lines as the outpatient surgeries are beginning to increase following the COVID-19 related slowdown.
Our medical businesses continues to benefit from accelerated growth of single use plastic fluid components for biopharmaceutical applications.
I want to congratulate and thank the nordson global team for achieving this record second quarter.
I'm also proud of our teams.
Dedication to meet this accelerating demand, while maintaining COVID-19 safety protocols and effectively managing supply chain and capacity constraints.
I'll speak more about the business in few moments, but first I'll turn the call over to Joe to provide more detailed perspective on our financial results for the quarter.
Thank you Naga and good morning to everyone.
On slide number 5 you see second quarter 2021 sales were $590 million, an increase of 11% over prior years second quarter sales of $529 million.
This double digit growth is more than a bounce back in fact as Naga noted. This is a quarterly record for the company breaking the previous record established in Q3 of 2017.
The sales increase was primarily related to 10% organic volume growth.
Off of a relatively strong Q2.2020 performance.
Favorable <unk>.
Foreign currency.
And the net negative impact from acquisitions and divestitures.
The benefits from the floor tech in vivo modest acquisitions were more than offset by the negative headwind from the divestiture of the screws and barrels product line.
When excluding the divested product line in the prior year for comparability purposes sales growth would have been 15 per cent in the current year second quarter.
Robust growth in electronics, and consumer nondurable end markets.
As well as strengthening medical and industrial end markets were the primary drivers of this performance.
From a geographic perspective growth was strong in all regions, except Japan.
Which has been more heavily impacted by shutdowns related to the pandemic.
Gross profit totaled $338 million or 57% of sales in the quarter compared to $290 million or 55% of sales in the prior year.
This 260 basis point increase in gross margin was driven by the combination of improved sales mix.
Volume leverage and benefits from structural cost reduction measures taken in fiscal 2020.
The divested screws and barrels product line at the beginning of the fiscal second quarter was a significant contributor to the improved sales mix.
It is noteworthy that.
Net or gross margin of 57% is a new quarterly company record.
Also records in the quarter, where operating profit of $166 million or 28% of sales.
A 33% increase from the prior year adjusted operating profit of $125 million.
And EBITDA of $192 million or 33% of sales, which is 26% higher than the prior year EBITDA of $152 million.
The incremental EBITDA margins were 65% in the quarter.
Investors are starting to see the power of the NBS next growth framework as it drives double digit organic sales volume growth.
Improved sales mix enhances manufacturing efficiencies, resulting in strong profitable growth.
Looking at non operating expenses.
Net interest expense decreased $1 million or 17% from the prior year levels associated with reduced debt levels and a lower effective borrowing rate.
Other net expense increased $3 million largely driven by currency translation gains in the prior year that did not repeat in the current year.
<unk> expense totaled $32 million or an effective tax rate of 20% in the quarter.
Net income in the quarter increased year over year, 35% to $124 million or $2.12 per share.
Yet another quarterly company record.
This significant growth is reflective of volume leverage driven by the 11% increase in sales as well as benefits from cost control measures and improved efficiencies.
Now, let's turn to slide 6 and 7 to review the second quarter 2021 segment performance.
Industrial precision solutions sales of $299 million increased 6% compared to the prior year second quarter.
The organic volume increase of 8% was driven by strong demand in flexible packaging and industrial coating product line.
A strengthening euro and RMB also contributed to a 5% and currency benefit during the quarter.
The divested screws and barrels product line was a negative 7% impact on the year over year sales growth.
It is important to note that the segment sales are north of 2020, and 2019 levels. When prior year balances are adjusted from the divested screw and barrel product line.
Operating profit in this segment was $104 million or 35% of sales compared to $77 million of adjusted operating profit in the prior year period.
The 36%.
Profit growth was driven by sales volume leverage associated with the 8% organic growth.
Favorable sales mix improved manufacturing efficiencies and lower year over year, SG&A, including reduced travel expense that we continue to experience through the second quarter.
Moving now to advanced technology solutions.
Sales of $291 million increased approximately 18% compared to the prior year second quarter.
This change included an organic increase of approximately 13% as well as increases of approximately 3% related to currency and 2% related to acquisitions.
The increase in organic sales volume was driven by strong demand for test and inspection product lines, serving electronics end markets and.
And fluid management product lines, serving medical and industrial end markets.
Also as we forecasted on our first quarter call. We started to see the electronic dispense applications contribute to growth late in the quarter.
Second quarter 2021 operating profit for this segment was $77 million or <unk> 26 per cent of sales.
This increase of 30% over prior year operating margin of $59 million or 24% of sales was driven by sales volume leverage favorable sales mix and the realization of benefits from cost control measures.
Taken in fiscal 2020.
It is encouraging to see the benefits of NBS next driving the topline organic growth and delivering strong incremental profit margins in both of our operating segments.
Finally, turning to the balance sheet and cash flow on page 8.
We again ended the quarter with a very strong balance sheet and sufficient available borrowing capacity.
Cash totaled $133 million and net debt was $734 million ending the quarter with a 1.2 times leverage ratio based on trailing 12 months EBITDA.
Free cash flow in the quarter was strong at $94 million, which was 4% above the prior year free cash flow.
Cash conversion on net income was 75% in the quarter.
Which was below normal levels due primarily to a $50 million discretionary pension contribution.
Improvements in working capital efficiency contributed favorably to our free cash flow in the quarter.
The year to date free cash flow conversion rate remains north of a 100%.
I'll now turn the call back to Naga.
Thank you Joe.
Let's turn to slide 9.
Again, thank you to the nordson team for delivering this outstanding performance in the quarter.
We hosted an Investor day on March 30th 2 detailed our long term plans for making a strong nordson even stronger.
If you did not have a chance to participate.
In our Investor day.
Play of the event is available on our website.
Now I'd like to summarize a few highlights.
First and foremost we described the strong growth drivers, enabling nordson future profitable growth performance, including diverse end markets, new applications and the emerging markets.
While our growth drivers are unique to each of our divisions.
The diversity of our end markets and the high level of recurring revenue made us resilient through fiscal 2020, and our strengthening in fiscal 2021 results.
At our Investor Day, we also reiterated our commitment to innovation 1.
<unk> Nordson <unk> key competitive advantages.
Our customer intimate model gives us insight to the needs of our customers and we do book our product roadmap as an enabler of their new technologies.
In the presentation, we highlighted 2 of our newest products.
Blue Flex smelter for packaging customers and the new vantage integrated dispense an automation system, which is the first fully integrated.
Wafer handling system designed for the semiconductor industry.
In both cases.
These new products are advancing automation.
Do you think cost and accelerating productivity.
Both products contributed to record sales in the quarter.
To make a strong nordson, even stronger we also spoke to the new competencies that we are building, notably the NBS next growth framework.
This data driven framework is driving our decision making.
We are already starting to see the benefits of our deployment of NBS next.
Last year, we announced structural cost reductions that were based on our strategic disciplined analysis.
It also drove our decision to divest the screws and barrels product line at the beginning of the second quarter.
Simultaneously, we approved new investments in.
In our top opportunities.
Such as funding.
New equipment for our Loveland, Colorado facility to grow our biopharmaceutical components and.
And building a new facility in Mexico to support the needs of our Nordson medical interventional solution products.
These decisions are strengthening both our top and bottom line.
Since being vaccinated I have started to travel to our businesses. It is exciting to see the engagement of our teams deploying NBS next to make data driven decisions on how to delight, our best customers are invest in the most innovative.
Acknowledging projects are.
Our prioritize top products in manufacturing operations.
Turning to slide 10, NBS next is a critical pillar of our new <unk> strategy, which is designed to deliver top tier revenue growth with leading margins and returns.
In addition to NBS next.
The other interconnected pillars of <unk> strategy or <unk>.
Owner mindset.
Nordson entrepreneurial division led organization and winning teams nordson talent strategy.
It is also exciting to experience the progress we are making in each of these pillars.
We now have all of our division leaders in place.
And they are focused on building, a deep and diverse bench of talent.
Who will support our long term growth.
The successful execution of the <unk> strategy will help us achieve our long term growth milestones of $3 billion in revenue and 30% EBITDA.
This target will be achieved through a combination of organic growth within each segment.
As well as the acceleration of acquisitions.
Clearly the record second quarter and updated fiscal 'twenty 'twenty 1 outlook.
Inventory that we are off to a strong start towards achieving our long term goals.
Now, let's turn to our updated fiscal 2021 outlook on slide 11.
As we enter the fiscal third quarter backlog is strong.
And trailing 12 week order entry is up double digits above prior year levels across the majority of our product lines and geography regions.
For full year fiscal 2021 <unk>.
We expect sales growth.
To be approximately 8% to 10% over fiscal year 2020.
Excluding the 3% headwind from the revenue of the divested.
Screws and barrels product line in the prior year, our forecasted full year sales growth would be approximately 11% to 13%.
Our forecasted sales growth.
Combined with strategic actions taken around efficiency and cost.
This forecast is to deliver earnings in the range of.
$7 in 'twenty.
$2.7.50 per diluted share.
The midpoint of this guidance reflects 34%.
Earnings growth compared to prior year, and a 25% increase over 2019 earnings.
Our current financial results signify more than the benefits of the recovery.
Nordson wins because of the foundation of our position technology focus.
Customer centric model and diversified end markets.
We are well positioned to benefit from the recovery and our products remain a critical solution to our customers through the cycle.
Additionally.
Our management team is fully engaged in advancing the implementation of <unk> strategy, which will establish a growth framework.
Entrepreneurial organization and a deep diverse team to drive sustainable profitable growth.
As always I want to thank our customers employees and shareholders for your continued support.
With that we will pause and take your questions.
Sure.
As a reminder to ask a question you will need to press star 1 on your telephone to withdraw your question press the pound key please standby, while we compile the Q&A roster.
The first question comes from the line of Allison <unk> with Wells Fargo.
Good morning.
Now we're hearing a lot about supply chain issues that are impacting maybe ask from growth opportunities, particularly as we enter the back half.
Any thoughts there in terms of what Youre seeing at this point.
Thank you Allison.
From our standpoint.
<unk> had some issues, but very limited.
Around.
Resin.
From where we stand today it is really nonmaterial.
Our expectations in the back half of the year.
Perfect and then I just want to get back to your comments on medical obviously youre seeing an improvement there and you mentioned that single point of use on the consumable side is there a sense is that an inventory issue that people are replenishing inventories or is this sort of true demand kind of behind that what youre seeing today, yes.
In our single use components. These are for Biopharma applications. So think of vaccine think of.
New biopharmaceutical Sadat coming on the market, we truly see it is representative of the demand because this is a demand we have seen all through last year as well as this year. So.
We have very limited supply chain kind of restocking.
In this business, we sell mostly directly to our customers there.
Great I'm, just going to take 1 more and any net.
This needs to be mindful of in the back half of the year for you.
Joe you want to take that 1.
Yes, I think Allison good question I do think that the mix was quite favorable when we looked at our Q2.
Performance, but when we look at the forecast for the remainder of the year again, it's pretty much a broad based demand environment that we see and as it relates to geographies.
And as you see the volume organic growth in both segments. So I would tell you there is no mix issues to be aware of heading into.
The back half.
That we see at this time perfect.
Perfect. Thank you.
The next question comes from the line of Saree <unk> with Jefferies.
Good morning, Congratulations on the great corner, you had really great margin performance in Lps could you just talk through if this is the right level to think about going forward keeping the divested share and how should we think about the benefit of flow of our channel that you mentioned.
Julia Thanks, so much.
Ill take that 1.
When you look at our Ips.
Margins in the quarter.
Nordson record level margins in the quarter, we did benefit clearly from the volume leverage and then the improved sales mix. When you think about that the divestiture of the screw and barrel business.
It had a significant impact I would tell you at the nordson level. It probably expanded margins of 150 to 200 basis points and at the Ips level Youre talking about 300 to 400 basis points can be attributed to the improved sales mix.
<unk> to the divestiture of the screws and barrels product line and so even excluding that there are some nice margin performance. When you think about going forward I do think there is a component as I mentioned in the script.
Our expense will start to ramp up a little bit in the second half, particularly if you think about our direct sales model.
The travel and expense <unk> expense coming up will begin to ramp a little bit more in the second half than we saw in the first half.
Great and then you know.
With leverage now at 1.2 times really book below your target range, maybe you could talk a little bit about what youre seeing in the M&A market or how youre thinking about share buybacks.
Yes, so on the M&A market I would tell you we remain very active.
And looking at deals I will tell you there is a feeling in the market that the number of deals come across has continues to I would say increase as we work through post pandemic.
And so we remain very active.
Strategic discipline that we reviewed in our Investor day is our primary filter and then after we confirmed strategic discipline, we put the financial criteria on and we remain financially disciplined so we're looking as you know.
For acquisition targets, primarily in the test and inspection in the medical space and.
And we will continue to be active so the volume I would tell you is picking up in terms of what it is we're looking at.
As it relates to homecare buyback, we target to offset dilution I will point out theory that we did contribute an additional $50 million to our defined benefit pension plans from now U S funded status is north of 98%.
And we did pay down $150 million of debt in the quarter.
Thanks for taking my question.
The next question comes from the line of Conor limit with Morgan Stanley.
Yes. Thanks.
I was wondering if we could return to the supply chain conversation a little bit. So it sounds like availability is really not an issue for you are you seeing component cost inflation that you need to address with price or is that also relatively muted.
I guess when would you think about inflation.
As it relates to Nordson first of all you have to think about our overall nordson cost structure and I would tell you. The material cost is a relatively small component of our overall cost structure. So manufacturing conversion cost fixed manufacturing costs and SG&A represents a larger component then.
Material cost itself, we do have procedures and processes in place to address material cost increases with price where and when appropriate.
But I would tell you counter that the challenge is more on the labor cost potential inflation, there or availability. So when you think about the NBS next initiatives and investments that we've made in lining and streamlining the manufacturing process.
This is really helping us mitigate.
Some of those pressures on both inflation and availability of the labor cost on the manufacturing side, and where availability isn't a problem, we're able to expand our capacity to serve this 10% volume growth. So that's.
The pressure I would tell you we're seeing is more on the labor side than on the material cost inflation side.
Okay got it and then maybe just sticking with the cost savings that you called out the discretionary.
Expenditure headwind as we move toward further towards reopening could you maybe just give us an order of magnitude to think about is that at nordson level. A 50 basis point 100 basis point, how should we think about how significant that could be.
Yeah, I would tell you if you just look at the first half year over year.
It's about a probably a $5 million benefit in terms of travel and entertainment expense.
Particularly on our commercial sales force direct sales model. So a portion of that is going to start to come back.
Yes.
Okay understood and maybe just to tie this together with some of the questions that others have been asking I mean, it seems like based on the EPS guidance, but there is a certain degree of margin degradation, maybe maybe some reversal of mix is that the right way to think about the back half outlook is that there could be some pressure on margin but.
Top line growth is strong.
Yeah. So the topline growth is strong I think you know as youre familiar are the mix in any given quarter.
Could be.
Favorable or unfavorable and I do think in Q2, we did see a favorable mix.
So as it goes forward that may moderate a little bit and then I would tell you on the cost structure side.
The <unk>.
Expense some of that expense should start to come back.
And that's what.
Joe Let me add something to this kind of the best way to think about US is that you know.
Long term incrementals on growth is 40% to 45% we believe.
Just on guidance, we would still be north of that 40% to 45% incremental in the back half. So yes. There is some cost coming back but still pretty solid performance is what we are forecasting.
Got it appreciate the color I'll turn it back.
The next question comes from the line of Jeff Hammond with Keybanc capital markets.
Yes.
Just on just on backlog can you give us the backlog number and what that is up organically.
I don't know if I missed that in the presentation.
Yes.
These are abnormal types coming out of the pandemic.
When we're looking at our customers' behavior, our backlog our order entry.
We're seeing differences in now and the timing of delivery and so I don't think our backlog is indicative of the next quarter sales what I can tell you is our backlog in our order entry are up double digits and therefore, we have confidence in the guidance that we provided but.
But to give a backlog number right now.
Not me.
Appropriate I think.
So the idea is that you are getting significant orders, but they're longer turnaround than normal yes.
Yes, we do see in particular businesses on the systems side customers, placing orders in advance.
And so therefore.
With delivery times that go out actually into 2022, which is a little bit abnormal for our historical customer order pattern. So therefore, its distorting that data point.
Okay and then just.
Maybe just to go back to Ips margins.
Just is there a way to give what the underlying core incremental margins were in the quarter.
And I'm, just trying to understand like outside of screw and barrel like.
How much mix drove it versus some of those temp cost and kind of how you think about that in the second half because those are pretty eye popping.
Yeah. So when you think about the Ips business in the quarter itself I would tell you the screw and barrel divestiture expanded margins roughly 300 to 400 basis points. So if we were 35% O P. You can drop that down.
Which is still a very strong north of 30% operating profit number for that business and so the way to think about that is the power of the leverage on the 8% organic growth within that segment and so as Nigel mentioned very strong incremental margins in that business some favorable mix on the consumer.
Non durable as it relates to packaging.
Some favorable mix also within our industrial coatings segment.
And it's also the in this business the industrial coatings, where we took some actions last year to structurally reduce our costs late in Q4, and so you see some of that benefit coming through as well.
Okay, and then just last 1 you mentioned.
In advanced Tech.
The electronics precision dispense kind of picking up late in the quarter, maybe thats still lagging from a growth standpoint, but just talk about what youre seeing there from a forward kind of order quoting visibility. Thanks.
Joe Let me take that 1.
And then you can give some color.
Jeff what we're beginning to see here is.
On the PCB side, we're starting to pick up some pretty pretty strong auto patents around surface treatment.
Our plasma San Francisco.
Surface treatment systems layer.
Late in the quarter, we also begin to see.
Our flow with dispense.
Product lines in electronics, beginning to contribute across a diverse set of.
The electronic supply chain semiconductors suddenly, helping PCB, helping in complex electronic components also helping so.
I would say, we feel pretty good about what we see in that business and.
And I expect it to contribute nicely in the quarters to come.
Okay. Thanks, a lot.
The next question comes from the line of Mike Halloran with Baird.
Hey, good morning, everyone.
So on the medical side, maybe just some thoughts on elective versus non elective underlying trends that youre seeing it today and then how do you think that inflection curve happens from here, obviously, some nice improvement this quarter.
Is this kind of the right sustainable pace and when do you think you're back to what a more normalized level would look like.
Well.
When we come to normalized levels that theres going to be difficult to predict but let's talk a little bit about what we're seeing in the business right now first and foremost if you think about our biopharma side of the business, where we have the fluid components continues to be strong has been strong continues to be strong and.
And mainly led by not only vaccine, but yes. The number of drugs that are getting manufactured and introduce 4 from a bio.
From our perspective is just accelerating we expect.
That part of the business continued to contribute in a nice way.
On the elective selective surgery, what youre beginning to see is the COVID-19 slowdown.
Suddenly benefiting and Youre beginning to see.
Elective surgeries are selective surgeries in our case starting to pick up we saw some nice growth in the business.
In the quarter.
We expect that the.
The next 2 quarters look pretty good.
It's really difficult for us to say.
Would we get back to high single digits, which is normally what we expect out of this business in.
End of this year early next year, it's difficult to say, but.
That's kind of how we're thinking about is that our expectation for the second half of this business is still pretty good.
And then maybe this is similar conversation on your industrial facing end markets underlying trajectory trends any nuance that you're seeing within those pieces.
Yes.
The industrial businesses.
You can see there is a certain amount of pent up capex spending demand that we are certainly enjoying in the quarter.
Based on backlogs and order entries, we see.
We expect a pretty double digit kind of growth is what we have what implies in our.
Guidance for the full year.
What is difficult for us to gain pinpoint is that when this gets to a normalized level that is something difficult to predict right now, but based on what we can see you free.
Really good about the second half, having a pretty broad based.
Performance across a number of events across all of our core end markets and across all of our geographies.
Thanks, and I appreciate it.
Thank you.
The next question comes from the line of Chris Dankert with Longbow Research.
Hey, good morning, Thanks for taking the question.
I guess thinking about the strong semiconductor demand we saw in the quarter can you comment about kind of the mix. There is just being more driven by strong product adoption of the P&I business or is this more customer expansion or a combination of the 2 just any comments there would be great. Yes.
Yes, Thank you Chris.
We certainly benefit from our P&I business, which is having a really strong.
A number of quarters and continues to benefit from this semi investment in semi growth and also the complexity of the semiconductors complexity of electronic components as well.
Definitely benefiting the P&I business, but late in the quarter, we begin to see as I indicated in the script, we're beginning to see.
<unk> contribution.
Contribution from our fluid dispense business as well.
Our surface treatment.
Product lines are doing really well, we're beginning to have some very good progress in our coating as well as dispense product lines as well and so.
Alright in terms of where we participate broadly I will tell you in the semiconductor space.
This is beth.
No.
In.
Firstly, the surface cleaning side of it second in the under Phil in terms of packaging.
In the past a lot of this packaging happened.
Most way for sliced and then packaging happened, but now we are beginning to see packaging starting to move upfront and theyre starting to participate in that as well so.
Pretty broad based growth, Chris I wouldn't pinpoint that just semiconductor or just 1 particular product.
Got it got it thanks for the color and then not to put too fine a point on it but is it safe to assume TNI was up double digits in the quarter, though yes, yes.
Okay. Okay.
And again you can.
Hold it out a little bit ago.
Very very robust PCB demand and growth. There is this part of the beginning of some of the <unk> cycle in your opinion or is this just it's really much more broad based than that yes.
We have spent quite a bit time right.
Past year or 2.
On the shift in this strategy in electronics for US is to get to a place where we have broad set of applications across the electronics supply chain and so.
What I would tell you is the growth that we're seeing.
Our cash thing that we're thinking about is it broad base demand rather than specific particular product.
Understood. Thanks, so much.
Sure. Thank you Chris.
The next question comes from the line of Matt Summerville with D. A Davidson.
Thanks, just to follow up on the whole the test and inspection piece of the business what sort of anticipated duration do you see Naga in the cycle. What inning are we in and do you expect that double digit growth that you experienced in the second quarter to continue into the foreseeable future whats the right way to kind of.
Thinking about that.
Yeah, I would say we are.
Typically semi cycle is 3 to 5 years, depending on what happens.
And we would say we are probably in year 1.
A little bit past year, 1 and so.
The best way to think about it is early in the cycle and certainly the growth is much more.
Magnified than it is in the back half of the cycle.
That's it's very difficult to sort of pinpoint how many more quarters or a year. We have on this double digit kind of growth, but over the cycle is the best way to think about our end market opportunity is 4% to 5%. We just kind of what we indicated at our Investor day.
Clearly our in.
In the first leg of the growth is maybe the best way to think about it hopefully that helps you.
Thanks, and then just 1 last 1 on pricing with the strength and demand you are seeing pretty much across the board in your business double digit growth in orders and backlog are you able to be more of a price taker are you positioned to be so as.
As we think about this going forward given the demand environment you're experiencing.
Let me maybe make 1 comment and then Joe you could add a little bit more detail to it that would be very.
Helpful.
Yes.
Think about the gross margin of the company.
<unk> is pretty strong right 55, plus percent and that is indicative of the value we create for our customers in some some of our product lines. We have the regular price increase once a year to sort of take into account.
Inflation and things like that but we really need to be thoughtful.
We create value and we get paid for it and should inflation pickup an issue we will certainly have the opportunity to cover it.
But in general we feel good about where we are.
Joe you want to add any more color to it yes.
Yeah again, I would just say that we feel very good about our gross margins to a record 57% gross margin.
Have processes in place to monitor raw material cost increases inflation and processes to maintain that margin.
But I would tell you our best opportunity is to support this volume growth and to meet the customers' needs.
As opposed to take this opportunity to raise price because we're already running at very nice incremental margins as Maggie mentioned as.
As we look at the back half.
Double digit organic growth.
We think about it we are managing the incremental margins to be attractive and that's the best opportunity to support the organic growth and our customers.
And maybe 1 more to think about is just to reiterate nordson position typically nordson is the lowest cost at a very critical component really.
Small part of our customers' total cost day alright. So.
Our components are smaller part of the company customers total cost stack and so.
Should we need to raise prices, we are able to provide that.
Got it thank you guys.
<unk>.
As a reminder, if you would like to ask a question. Please press star 1 that is start went for questions. The next question comes from the line of Christopher Glynn with Oppenheimer.
Thanks, Good morning all.
Covered a lot of ground. So far just wanted to follow up on industrial demand patterns.
You have seen any demand transitions within industrial recovery at this stage and what I mean by that is.
Typically early on you just see a lot of production oriented OEM activity and then more maybe mid cycle type capital improvements.
Driven by different types of capacity coming online just wondering any light you can shed on how that's evolving.
Yeah from what we can see Chris today is mostly what we're seeing is a demand pickup based on pent up capex spending.
Spending.
And.
We have not seen significant capacity yet at yet.
Okay. Thanks.
Sure.
Okay.
The next question comes from the line of Andrew Sculley with Greenberg.
Hey, guys.
I know you got a lot of questions on this on the supply chain and navigating that and I think.
I was hoping you can explain 1 thing in that.
Headlines every day around these component shortages.
Im wondering whats the nature of your business and that you were able to kind of sidestep that.
Correct, if I'm wrong your business has been stacked various components and that's coatings on other components I just don't I don't quite understand I guess I would not have expected a quarter in which that.
Ah performed so well.
Can you give any color there.
Yeah, Let me maybe give you some.
Overall point of view and Jojo can add a little bit more color to it at the end with some data.
Think about nordson from from who we are what we are is we had an assembler of differentiated components to create value for our customers in specific end markets or critical applications. So what that really is is that we are.
Assembler of value added components.
And and what that really means is that materials.
As a part of our total cost structure is fairly small.
It's 1 thing to keep in mind. The second is that we do manufacture our products in country and region in most of the cases, so we really don't run into a lot of supply chain issues that way.
So you put those 2 things in perspective.
I'm not saying, we don't have any problems at all we've got 1 or 2 issues given there, but they are really not material, it's kind of what would we say let's.
Let's see you just so niche.
You can't look at it you can't look at the broad broader headlines.
You are kind of too.
Narrowly focused.
It really doesn't impact your teams.
Yeah, and what amount of big prices of raw materials, either right. Yes, we have some consumable business, but we're not a big.
Resin converter too.
Contract manufacturing of <unk>.
<unk> motor parts, that's not who we are right. So.
Yeah.
Okay, and then maybe Naga.
It out that long term target of 30% EBITDA margins, but it looks like you're I mean, this year youre going to.
Brush close to that I mean, I think it would be.
So the 29 <unk> 29.
Based on the implied guidance so.
This is the way to look at.
So that long term guidance more like 3 what should we be looking at year over year.
EBITDA growth from like a dollar perspective or.
I guess or are you just being really conservative with being able to achieve 30% long term because they are practically there after this year.
Okay.
Joe Joe can walk you through some of the some of our thinking but really it is a long term target and what you're seeing now is only the impact of our organic growth. This year, so and our long term guidance includes organic growth and a dilution from acquisitions. So from that is 2 things we don't believe this.
As a conservative.
Estimate this is through the cycle over the 5 years. This is what we expect we will do Joe would you add a little bit more color to that please yes.
Yeah, I mean, I would just add Andrew that when you think about it the organic growth has to drive margin expansion north of 30% at the EBITDA line.
Such that when that $500 million of acquired revenue comes in at a 20% EBITDA. The net dilution is down to the targeted 30%. So.
Our 30% is still an appropriate goal.
It includes the dilution of $500 million worth of acquisitions over the next 5 years at a 20% EBITDA.
Another way to think about it is that.
For every dollar of growth our expectation, but then within the businesses and how where we are at it is that we're going to have 40% to 45% incremental that's really what we are focused around.
And.
So on a yearly basis, that's how we are thinking about it.
And if you protect that over time with acquisitions.
Sort of how we come to this study per cent EBIT.
EBITDA.
Okay. Thank you guys.
The final question comes from the line of Walt Liptak with Seaport Global research.
Hey, good morning, guys good quarter.
Thank you Paul.
I wanted to follow up on a couple of things when you were talking about the backlog earlier.
You were saying that there was some systems.
There were booking out to 2022 I Wonder if you could give us some idea of what.
Each segment those might be in.
And why they are running so low so so long as.
Just timing of when these things are supposed to get it solved or is there something else going on.
Yeah, Walter I would just tell you.
Our understanding is that the macroeconomic environment, where people are hearing what what's been discussed on this phone call as it relates to the supply chain challenges and so some of our customers are I think responding to that and placing orders in advance of when they would typically place orders. So they're not building orders are building inventory.
Or just placing their orders with us earlier than they used to.
So that's what.
We view is going on and why we're choosing not to disclose the backlog number at this time.
Okay I understand can you.
Can you give us some color, though about which segment or is it kind of across the board where customers are just concerned about future delays and so they're sort of.
Replacing these orders.
Yes, I would tell you is we see it a little bit in both of our segments.
And so it's not 1 segment specific.
And it's generally tied to those products that typically have a longer lead time naturally.
Net debt there.
Calling in ordering in advance of those and that's why I made the comment about the systems as it relates to the parts business.
Many of those it's book and ship within the week.
And so there we don't have that built up backlog.
Okay great.
No.
Pointed out the gross margin was absolutely great.
And I understand that early in the cycle.
Some things that are abnormal but as we look into the back half of the year or is this 57%.
A reasonable run rate, given what youre seeing from volume levels and mix.
Yes, I think it's 57% I would tell you.
As a new high watermark.
But I do think that a lot of what drove it is sustainable and when you think about the impact from the divestiture and the improved mix the divestitures of the screw and barrel business you think about the benefits of the cost structure actions that we took last year and at these increased demand levels. So this is the type of <unk>.
Leverage you would expect with strong incremental margins and so you know on any given quarter that can fluctuate up or down 100 to 200 basis points based on mix, but I do think this is reflective of the profitability of this business.
Day sales levels.
Okay, Great and then maybe a last 1 from me is just.
I think it was in August comments, you made a comment early on that.
The majority of the products are growing double digits.
And.
Some of those.
Elective surgery medical or not growing double digits, but I wonder if you can talk about what else is not growing double digits and.
If you think you can gather recovery in those in the back half of the year.
Yeah, I guess, let me, let me take a stab at it and then value add some more color, but when you look at our geographic.
Split Walt I would tell you the 1 that.
Was not growing double digits in the quarter organically was Japan.
There are business experienced.
That region, they experienced significant shutdowns and due to the pandemic and so we did deliver double digit organic growth in Japan.
But I think the comment then going back to your question on the electronics and the medical I think if you look at our performance over the last several quarters. The medical was driven by the borrower biopharma in the single fluid components single use applications and what we started to see late in the quarter. It was the <unk>.
Most of the interventional solutions, which is encouraging because that's the 1 that's more closely tied to elective procedures or selective procedures and so it was encouraging to see that come back on the electronics space. You know the TNI had been a strong performer strong performer and it was encouraging to see the.
Chronic dispense fluid dispense portion of that business come back and contribute to growth in the later part of Q2.
So that was the comment there.
Okay.
The thing I would add is that if you compare the growth rate year over year remember last year nordson growth performance or declines were not as deep.
As you know.
We were down about 4% so the double digit growth. We are seeing is on top of.
What was not too bad of a decline last year, given sort of the broader environment.
Okay got it alright, thank you very much guys.
I will now turn the call back over to Nathan for closing remarks.
Right.
Thank you.
I wanted to reiterate that we are well positioned to benefit from the accelerating recovery and our position technologies remain a critical solution to our customers through the cycle ahead Adil.
Additionally, our management team is fully engaged and advancing the implementation of DSM strategy, which will establish a growth framework.
No real organization and a deepening of diversity to drive sustainable profitable growth.
Thank you for your time and attention on today's call have a great day.
This concludes today's conference call. Thank you for participating you may now disconnect.
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