Q3 2021 Nordson Corp Earnings Call
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 Web site and will be available there for 14 days.
There will be a telephone replay of the conference call available until Tuesday September seven.
During this call references to non-GAAP financial metrics will be made a reconciliation of these metrics to the most comparable GAAP metric was provided in the press release issued yesterday.
Before we begin please refer to slide two of our presentation, where we note that certain statements regarding our future performance that are made during this call 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 three Naga, who will discuss the third quarter highlights.
He will then turn the call over to Joe to review sales and earnings performance for the total company and the two business segments.
Bill will also discuss the cash flow and balance sheet Naga.
<unk> will conclude with high level commentary about our enterprise performance as well as our updated fiscal 2021 full year guidance.
We will then be happy to take your questions.
With that I will turn to slide four and hand, the call over to Naga.
Good morning, everyone.
Thank you for joining nordson fiscal 2021 third quarter conference call.
First and foremost.
Want to congratulate the nordson team on another record quarter.
During this quarter, we continued to benefit from the execution of our NBS next growth framework.
In combination with robust end market demand.
Investments in industrial Capex, and the strengthening medical and <unk>.
Phonics and markets drove record results in the quarter.
I'm also pleased with the resilience of our colleagues.
And this dynamic macro environment that continues to be plagued by supply chain labor and COVID-19 concerns.
Our division leaders are deploying NBS next.
To focus resources.
On the greatest growth opportunities.
In their respective businesses.
I'll speak more about the business, including the recent announcement of the.
MDC technologies acquisitions in a few moments, but first I'll turn the call over to Joe.
Provide detailed perspective on our financial results for the quarter Joe.
Thank you Naga and good morning to everyone.
On slide number five you will see third quarter 2021 sales were $647 million, an increase of 20% over prior year's third quarter sales of $538 million.
This is a new quarterly record for the company $57 million above the prior quarterly record.
The increase was primarily related to 20% organic volume growth and favorable currency <unk>.
<unk> offset.
<unk> net negative impact from acquisitions and divestitures.
The benefits from the floor Tech and <unk> acquisitions were more than offset by the headwind from the divestiture of the screw and barrel product line.
When excluding the divested product line in the prior year for comparability purposes sales growth would have been 24% in the current year third quarter.
The organic sales increase was driven by continued demand across all divisions and end markets, including a seasonal increase in quarterly shipments into the electronics end markets.
From a geographic perspective growth was once again strong in all regions, except Japan, which continues to manage pandemic related impacts.
Gross profit totaled $365 million or 56% of sales in the quarter compared to $281 million or 52% of sales in the prior year.
This 430 basis point increase in gross margin was driven by volume leverage Ben.
Fitz from structural cost reduction measures taken in fiscal 2020.
And improved sales mix, particularly resulting from the divested screw and barrel product line at the beginning of fiscal second quarter.
Also record in the quarter, where operating profit of $188 million or 29% of sales.
Up 57% increase from the prior year adjusted operating profit of $120 million.
And EBITDA of $215 million or 33% of sales.
This result was 45% higher than the prior year EBITDA of $148 million.
Our broad based organic growth plus the favorable sales mix benefits, including the divestiture.
Led to attractive incremental EBITDA margins of greater than 60% in the quarter.
The application of the NBS next growth framework at our divisions is helping us to focus and realize profitable growth in areas of greatest opportunity.
Looking now at non operating expense.
Net interest expense decreased.
$1 million or 18% from the prior year associated with reduced debt levels.
Other net expense decreased $7 million, driven primarily by smaller currency translation losses, and a noncash pension settlement charge of $3 million in the third quarter of 2020.
Associated with retirement of the prior CEO that did not repeat.
<unk> expense totaled $38 million or an effective tax rate of 21% in the quarter.
Net income in the quarter increased 71% year over year to $142 million or $44.0 per share yet.
Yet another quarterly company record.
This significant growth is reflective of volume leverage driven by the 20% increase in sales.
As well as benefits from cost control measures and improved sales mix and manufacturing efficiencies.
Now, let's turn to slide six and seven to review the third quarter 2021 segment performance.
Industrial precision solutions sales of $345 million increased 20% compared to the prior year third quarter.
The organic volume increase of 22% was driven by sustained growth in hot melt adhesive dispensing and industrial coating product lines.
System sales in the quarter were particularly strong up.
Up 37% across a broad set of end markets and geographies.
The divested screws and barrels product line.
More than offset the currency gains on a year over year sales growth.
Operating profit in the segment was $124 million.
Or 36% of sales.
Compared to $78 million of adjusted operating profit in the prior year period.
This 60% profit growth was driven by sales volume leverage associated with the organic growth.
<unk> sales mix and improved manufacturing efficiencies.
The NBS next growth framework is driving strong sales growth at very attractive incremental operating profit margins.
Excluding the impact of the divestiture incremental operating profit margins were 55% in the quarter.
Yeah.
Moving now to advanced technology solutions.
Sales of $301 million increased approximately 21% compared to the prior year third quarter.
This change included an organic increase of 18%.
As well as increases of 2% related to currency and 1% related acquisitions.
The increase in organic sales volumes was driven by strong double digit growth in all product lines, particularly those serving electronics end markets.
And fluid management product lines, serving medical and industrial end markets.
Third quarter 2021 operating profit for this segment was $81 million or 27% of sales.
This increase of 51% over prior year, adjusted operating profit margin of $53 million.
It was driven by sales volume leverage.
<unk> sales mix.
And the realization of benefits from cost control measures taken in fiscal 2020.
Similar to the Ips segment.
The implementation of NBS next throughout the divisions of Ats.
Is driving strong sales growth at attractive incremental operating margins of greater than 50%.
Finally, turning to cash flow and balance sheet on slide eight.
Free cash flow in the quarter was strong at $118 million, which was 45% above the prior year free cash flow.
Cash conversion on net income was 83% in the quarter.
It was below normal levels due primarily to investments in working capital to support growth.
And a $30 million pension contribution.
The year to date free cash flow conversion rate remains north of 100%.
Dividend payments were $23 million in the quarter and the company's board approved a 31% increase in the annual dividend effective in the fourth quarter of fiscal 2021.
This marks the 58 consecutive year the company has increased its dividend.
The significant increase of 31% reflect the strength of our financial results.
Which is driven by our continued progress in executing the strategy.
Combined with the desire to maintain targeted payout and yield ratios.
The annual dividend yield remains just under 1% at current market prices.
Our third quarter balance sheet includes cash of $174 million and net debt was $647 million.
Ending the quarter with a 0.9 times leverage ratio based on trailing 12 months EBITDA.
We continue to have significant available borrowing capacity to pursue organic and inorganic growth opportunities.
Similar to the M D C acquisition announced last week.
I'll now turn the call back to Naga.
Thank you Joe.
Let's turn to slide nine.
Again, Ken.
Thank you to the nordson team for delivering this outstanding performance.
We are making progress on our ascend strategy to achieve.
To your revenue growth with leading margins and returns.
During the quarter, Joe and I continue to visit our divisions to review their progress with NBS next deployment.
It is exciting to see how NBS next is being applied to make data driven decisions to meet the increased demand of our customers.
For example, in our Nordson medical Interventional solutions facility in Salem, New Hampshire.
The team has used NBS next.
Understand complexity and standardize their product offering.
This has allowed them to disproportionately focus resources for their best customers and products.
We had a purpose pool in where we focus our energy to.
To ensure we take advantage of the greatest opportunities for profitable growth even during the recovery.
NBS next is at the core of our SME strategy.
<unk> is designed to deliver.
$3 billion in revenue and 30% EBITDA.
This target will be achieved through a combination of organic growth within each segment.
Well as the acceleration of acquisitions.
Clearly the.
The record setting second quarter.
Followed by the record setting third quarter.
Demonstrates that we are off to a strong organic start.
Toward achieving our long term goals.
We're also making progress on our acquisition objectives.
On August 23rd.
We signed a definitive agreement to acquire MDC technologies.
Leading global provider of precision measurement solutions for in line process control.
This acquisition expands our test and inspection platform into new markets and adjacent technologies.
With nordson like gross margins. It is clear that NBC has a differentiated product portfolio that is leveraged through a customer centric business model.
This portfolio includes inline measurement sensors gauges and analyzers using.
Near infrared laser X Ray.
Typical and Nucleonic technologies, as well as proprietary algorithms and software.
For example, it's near infrared technologies can simultaneously measure moisture oils and surface Brown this of a potato chip.
Sure.
It can estimate the porosity level in the film used to separate the anode and cathode.
Electric vehicle battery.
It's laser and ultrasonic capabilities are used to measure wall thickness, ovality and diameter of industrial cables are medical tubing.
As customers focus on automation and process control.
N D C supports their success through these critical quality control technologies.
We also look forward to leveraging Mdc's software and algorithm expertise to advance nordson capabilities in manufacturing process intelligence development.
I'm very pleased with the strategic fit of this business, which aligns with the acquisition portion of the SME strategy.
<unk> at our Investor day earlier this year.
We look forward to welcoming the NBC team to nordson.
Our NBS next growth framework and investing in Mdc's greatest opportunities for profitable growth.
We expect the deal to close within our fiscal first quarter of 2022.
Now, let's turn to our updated fiscal 2021 outlook on slide 10.
As we enter the fiscal fourth quarter.
Backlog is approximately $700 million.
And 70% above the prior year.
Customer order patterns have clearly changed in terms of both volume and extended shipment request dates in this dynamic environment.
Based on the continued strength in our order entry and elevated backlog, we are increasing our full year revenue and earnings guidance.
For full year fiscal 2021, we expect sales growth to be <unk>.
<unk>, 11%, 12% over fiscal year 2020.
Excluding the 3% headwind.
From the revenue of the divested.
Bruce <unk> product line in the prior year of.
Our forecasted full year sales growth would be approximately <unk> <unk>.
2014% to 15%.
Our forecasted sales growth combined with the benefits from the strategic actions taken around efficiency and cost is forecasted to deliver earnings in the range of $82.0 to.
The $102.
Our diluted share.
The midpoint of this guidance reflects 43% earnings growth.
<unk> to prior year.
And a 34% increase over 2019 earnings.
Given the strong system sales in the third quarter 2021.
Plus the seasonality in electronics.
It is important to investors look at the second half of 2021, when reviewing our full year guidance.
At the midpoint the guidance.
Guidance suggests.
Second half sales growth of 14% and earnings growth of 47%.
Additionally, the guidance implies that we expect to enter 2022 with a robust backlog of approximately 70% greater than the backlog entering fiscal 2021.
Our current financial results signify more than the benefits of the recovery.
Nordson wins.
Cause at the foundation of our position technology focus.
Customer centric model.
And diversified end markets.
We are well positioned to benefit from this increase in demand.
So our products remain a critical solution to our customers through the cycle ahead.
Additionally, our leadership team is advancing the implementation of the <unk> strategy.
Establishing a growth framework.
Entrepreneurial organization.
In a deep diverse team to drive sustainable profitable growth.
As always I want to thank our customers shareholders and the nordson team for your continued support.
With that we will.
We'll pause and take your questions.
If you would like to ask an audio question. Please press star one on your telephone keypad.
The star one to asking audio question.
Your first question comes from the line of Matt Summerville with D. A Davidson.
Thanks, a couple of questions.
Typically how much of your backlog.
Would convert in the current quarter I guess excuse me I'm trying to get a sense in terms of how elongated maybe some of these orders have become.
Yes, So Matt Joe Let me just take that typically I would tell you entering backlog, we have less than a 100% of quarterly sales entering any given quarter and so it will trend that are no. Let's just say in the 80% range.
The quarterly upcoming quarterly sales and we clearly see that changing as the customer requested delivery date is.
Is out further and further so customers are just placing orders.
Further in advance and so if you if you look at our quarterly sales.
Going forward in our implied guidance it would suggest that.
The midpoint is about $600 million and our backlog entering the year is about right.
Eight quarters about 700 million. So it has elongated it depends on the systems businesses versus parts and it's different for each business, but some of them are going out into Q2 of.
2022.
Great. That's helpful. And then have you guys encountered any actual shipment delays to customers and in your mind are things getting better worse stabilizing as we think about supply chain challenges right.
Issues et cetera.
Hum.
Matt This is Naga, let me take that one.
Yes, we are experiencing some but not significant.
Especially our international shipments, sometimes seems to get pushed out.
But what we have experienced in the third quarter really is customers pulling orders forward.
And what is impressive is to see the team moving in a very difficult environment and be able to manage and ship them to customers who requested it.
And again just to put a finer point on my question do you get the guidance of things in this regard are getting more challenging is the situation stabilized are things starting to loosen up and get better yet. Thank you yeah.
Matt I would say it is a dynamic environment. It is not getting any worse, but it's not getting any better either but I will tell you that.
The nordson team is fully participating in this recovery under some challenging environments, but.
Boom excellent job so.
Excellent. Thank you guys.
Your next question comes from the line of Allison <unk> with Wells Fargo.
Hi, good morning.
Yeah.
The order trends a little bit more for you guys.
I guess when you talk to your customers is it more on the Ips or is it an advanced technology is it really just a reflection of some of that is I think it's not talking about the supply chain challenges that people are trying to get those orders in a little earlier to guarantee delivery just any thoughts does this sort of a temporary situation or do you think this is sort of your customer.
Patterns, our order patterns are starting to shift a little bit permanently.
I would say what you're seeing is broad based with strong order patterns across markets across regions.
And are there are some cases, where people are trying to get in front of the line or ahead of the line proactively yes, but quite frankly to think about the kind of end markets. We play in and look at all of the secular drivers for them.
Tell you.
We are.
Very pleased with the momentum that we're seeing for example.
In our medical business, you can think about our fluids component business with Biopharma.
It's just not vaccine, but biopharma and in general we see some prudent strong order rates that is.
Embedded in.
We believe the secular growth drivers around.
<unk> do you need to go and go out for Us and we can think about.
<unk>.
Solutions in the medical side, what you find areas are aging populations single use components all of those drivers are still intact.
Selective surgeries or you know some of unfortunately have started calling it as elective surgeries.
Have come back but that remains.
A little bit fluid, but we feel really good about the recovery, we're seeing in our medical businesses on our electronic businesses.
We are at the beginning of the really nice.
Growth cycle here, you hear about chip shortages.
And you can all of those read the headlines around the big investments that major semiconductor manufacturers are making a nordson is participating nicely unit. We've got a couple of new products that are entering the market.
Both on testing inspection and our defense business.
No.
Industrial Capex is pretty robust might you say that might moderate over time, I would say, yes that might do that.
On the packaging side on the consumer non durables.
I mean really very strong move towards eating at home rather than out of the restaurant.
That continue worsening a lot of activity in packaged goods packaged beverages.
Our teams like to call them from <unk> to 10, when you have more people using cans. So we see a lot of container businesses that are going well for us hopefully that gives you enough color Allison.
That's really helpful. And then I just wanted to touch on operating execution incredibly strong.
In the past two quarters here.
Relative to your expectations or sending some of these operational plans in place.
It's the execution, maybe better than maybe you would have anticipated kind of walking into this up cycle any color on how that is relative to what your view was in terms of what the organization can do yes.
No.
I'm incredibly proud of the execution of the team you know these businesses not ordinary times or.
Environment that we're operating in.
We are using NBS next.
And <unk>.
In our businesses to meet this incredible demand and it plays out.
Many different ways.
In multiple businesses across the company.
<unk> fundamentally is all about making choices to drive growth and what you begin to see us.
<unk>.
For example in some of our businesses.
Understanding what are your greatest growth opportunities and disproportionately investing in them.
Is one way it shows up in this great execution.
You can see our team standardizing product offering.
Yeah.
Reducing complexity and streamlining and dedicating products through the most important products in the business press.
Prioritizing our best growth opportunities, our best customers, so lots of different ways be it quality manufacturing capacity be it conversion cost be at selecting the right the end markets to choose to pay and also.
Trading very differently on attractive opportunities in the business. It's really how this is playing out.
I am really happy about.
Progress we are making.
And I.
Wouldn't you say I'm surprised but I am.
Excited about the fact that the teams are doing one heck of a job.
Unique converting orders to shipment shipments to <unk>.
Profitable growth for all of us.
Great. Thanks, so much I'll pass it on.
Your next question comes from the line of Connor Lynagh with Morgan Stanley.
Yes. Thanks.
So maybe we could touch on the MVC acquisition and basically I'm just wondering if you could sort of eliminate.
You guys are very focused on growth.
And how is the growth profile of this business looked over the past few years, where do you see the opportunities is it.
This business enhancing your growth in your existing portfolio your portfolio existing growth in this business. How do you think about that yeah.
In this business historically, they have underperformed in terms of growth versus where they should really be growing because we play in the same end markets. As these businesses. So we fundamentally see an application of NBS next thing this to understand what are the best growth opportunities for.
And invest disproportionately in those to drive growth.
This would most likely be.
I would say mid single digits and score at sort of our growth expectation for this business and we feel really good about it their performance in the year is looking really good suddenly we don't talk about specific product lines and how they performed but we feel really good about it.
But what I will tell you about this business that we really liked.
It is strategically.
Similar to lot of Nordson businesses, it's got a customer centric business model.
I would draw.
Direct sales model go global sales and service support large installed base.
Non durable businesses.
It has a very strong suite of differentiated products.
And you see that in nordson like gross margins.
So we're looking forward to low coming this theme using NBS mentioned understanding the growth initiatives and really.
For us it is a pretty pretty strong place to be.
We do clearly see a path for the margins to expand north of 20%.
EBITDA.
Got a couple of context I'm wondering if you could just characterize the broader M&A landscape out there.
Was this a diamond in the rough with this.
One of many good options you saw out there just just an update on sort of the opportunity set in valuations would be great.
Yes.
M&A, we clearly the main focus.
As everybody would tell you M&A.
Landscape has improved banquet activity suddenly have expanded and accelerated.
This year when compared to last year, we remain focused though.
We are very focused around.
Continuing to scale up our medical businesses, we see a lot of opportunities there will continue to stay focused there.
Test and inspection as MDC will illustrate for you is an area, we continue to diversify into new markets getting to new technologies.
Our test and inspection kind of today is very electronic center with MDC, you can begin to see us move.
Beyond electronics, and that's really where you would see so we see opportunities there and finally.
We have an internal team that continues to.
Explore opportunities on precision technologies that are very adjacent to what we do today.
Just as a reminder, we are laser focused on strategic criteria.
Play in attractive end markets.
<unk>.
We have good growth.
Profile to them positioned technology suite of products and have a customer centric business model.
On the financial side.
Clearly we are looking for assets that can.
Add to our organic growth ambitions.
The nordson <unk> gross margins, that's really critical for us for US gross margin equals differentiation is the way to think about us today's approximately 20% when we do deals below that yes. It would be do deals above that but we're looking for a clear margin expansion opportunities.
And all of this results in a fairly decent.
Yeah.
Otherwise see greater than our cost of capital or.
Three to five years.
Got it. Thank you very much for the color I'll turn it back.
Your next question comes from the line of Jeff Hammond with Keybanc capital.
Hey, good morning, everyone.
Good morning, John Jeff.
So just back on margins.
I think there was an earlier question on that but just I think the expectation was <unk> would step down from <unk> and we've gone the other way and I think <unk> guide suggests a step down.
<unk>.
What's surprising you the most or maybe where is the caution in the guide on the margin as it does it largely mix or do we start to see some of the inflationary pressures come through maybe just a little color there.
Yeah, maybe if I could on the gross margin.
In Q2, we did 57% in <unk>.
And when you think about our gross margin we used to operate in the range I would say between 53 and <unk> 55.
Given the divestiture of the screw and barrel product line that has systematically I would tell you moved our gross margin and op margin profile up probably 175 basis points and so now I think the new normal from a gross margin standpoint.
<unk> is in the range of 55 to 57 and you see that.
It was sustainable.
Q2, and in Q3 when.
When you think about the sequential Q3 to Q4 and you look at our guidance and more specifically I guess, if you look at the second half 2021, Jeff.
<unk> forecasted performance you need to understand that approximately $25 million worth of system orders were pulled forward.
From our scheduled Q4 shipment into Q3 based on customer requests.
This was primarily in the industrial end market and primarily in Ips.
Therefore.
The guidance range.
Implies Q4 performance would actually be comparable to Q3, if you adjust both quarters for the $25 million sales pull forward again. This was pro forma gross request of the customer and as Naga mentioned proud of our team's despite some of the supply chain issues ability.
To meet the customers' requests and demand that pull that forward.
It is also noteworthy I guess, if you exclude that $25 million from Q3, it would still have been a record breaking quarter $30 million north of the prior quarterly record.
The sequential swing.
We tried to point this out to investors by talking to the second half performance at the 14% growth in.
And revenue and 47% growth in earnings at the midpoint I would tell you. The other noteworthy point when you look Q3 to Q4.
And you look at the year over year tailwind that we had in Q3 that starts to moderate when you look at the year over year growth rate in Q4 to about 1% and again Thats just given the movement in exchange rates last year Q3 to Q4.
Okay. That's all very helpful. Thanks, Joe.
Just back on medical I think now that you called out Biopharma is particularly strong.
And.
Your comments I just wanted to dig in more on the kind of the elective surgery expected.
Yes.
Jeff Thank you on elective surgery.
<unk> in the third quarter, we did really well and it was trending nicely.
Now with Delta variant.
Bye.
Expect that to tick back down that is possible, but I.
Fully expect that what had happened last year as we talked last all of last year.
Our surgeries I'd like.
Our teams will describe.
I have a more selective not elective.
To get a heart valve replacement you have to get out in front of replacement. It just matter of time, So you could get it postponed but you couldnt get a cancel right.
It's something that's not.
What youre, hoping for.
So what we do see.
What we experienced in the third quarter is a nice in the quarter and that was really nice to see.
Going into fourth quarter, you know, we're trying to be cautious here.
We don't see it go up.
All the way back down like last year.
I do think it'll be a little bit lower but we fully expect medical to recover.
Completely because all of the growth factors that we play towards that an aging population all of this.
He is going to miss.
That would that is already returning to normal.
Would there be bumps in the road, yes, absolutely.
Given the data.
You could have a few bumps in the road.
Right.
Hopefully that gives you.
Answers your question.
Very helpful. Thanks.
If you would like to ask a question. Please press star one on your telephone keypad.
Your next question.
Good morning, everyone. Good.
Good morning, Mike.
Just a quick clarification on that last question, Jeff asked so so is it fair to say that you haven't seen a full recovery in the medical.
But anyhow.
Yes.
The broader Delta variant goes and other factors.
On a trailing.
Billing basis, you don't think that we've got in that full recovery yet is that fair.
Okay.
And so two questions first long dated and shifted have you seen any change in the seasonality.
We're expecting on the actual conversion of those orders in other words is the demand carry through.
Still thinking that.
On an all in basis the seasonality is about the same or do you think the seasonality has shifted some.
Exposure in our particular applications.
I don't.
We studied the numbers on the quarters I don't know what it is.
Normal seasonality anymore I mean, if you take for example, our customers behavior on the industrial side pulling in shipments into Q3.
Typically Q4 was our strongest quarter.
Look at our implied guidance suggests that Q4 is going to be down from Q3.
Because of that so I don't know that given our electronic <unk>.
<unk> has changed in terms of applications with the semiconductors.
Cycle, our medical business the Biopharma has been strong.
The elective surgeries come back on the interventional side starts to return to growth our normal seasonality is I would say really challenge to make that statement anymore.
So the answer is when it seems like no, but when you look at the orders that you're getting in.
What's the risk that theres been some double ordering.
Or that there's cancel ability in that order book versus just this is just a different cadence and the underlying demand underlying order cadence of that declines can reserve spots over the next couple of quarters.
Yeah, I would tell you we track order cancellation very closely and we do not see an uptick in that whatsoever. So I think we monitor that risk but to date that risk is very low.
No go ahead.
Sorry, Mike go ahead finish up and then no no no no I was going to say, thank you, but I didn't know I didn't know there was something else. So please go ahead yeah.
What I would add is just look at the unprecedented investments that are going on in the industrial Capex that is one that I would really point to as one of the big drivers and what you've seen our Ips business.
Also C <unk>.
Tom It's the Ats business.
The real strong semi.
Investments and.
Particularly strong consumer electronics demand for what is 2019 be digital economy. So.
The macro drivers are pretty strong.
That that we feel really good about.
What we are seeing in terms of the demand for some of our precision technologies.
So is the implication there than that yes. The order book has been very good.
We like the fact that you're getting more visibility, but it seems like you also implying that the front log of opportunity still remains pretty robust.
Yes, yes.
Europe.
Okay.
Good I appreciate it.
Your next question comes from the line of Christopher Glynn with Oppenheimer.
Thank you good morning.
Hey, good morning, Tom.
Just wondering Naga.
If you had any anything to call out in terms of notable changes and if anyone's kind of fallen off forgotten flat footed.
Clearly it seems like you've.
Kicked up some some.
Matt.
And then that you've generated but just wondering about the kind of broader question as well.
Yeah.
We generally.
Don.
You have some really strong competitors, but consumer non durable businesses.
We really.
Gary.
I can't.
Position with being a global competitor right. So a lot of our businesses. What you see us being is this global competitor that can be relied upon through good times and bad times and can be relied upon for.
Global support for our customers' applications and service and sales right and so what we've seen come through in this environment is that value proposition getting strengthened even further as others will have some hiccups here or there.
I'm not able to make commitments nordson team is there supporting our customers and released.
A lot of waste strengthens our value proposition and Ria firms, where the customer why you want to work with nordson, not not only because youre going to get our positioning technologies.
Turning to get reliable support that is going to be global in nature.
And then Thats if anything it just reaffirms our strong value proposition.
Thank you.
And then the backlog up 70% should we think about that is they are both SEC.
Segments kind of.
Dissipating in parallel more or less.
Yeah.
We don't give backlog guidance on a segment specific basis, but you can interpret or.
Performance year to date has been quite broad based I mean, you see both segments growing approximately 20% organically in the quarter.
And broad based in terms of geography and end market supervision. So.
Bob.
But we're not going to start giving backlog segments separately.
Yeah, no that wasn't what I asked I appreciate the answer.
Last one from me.
Just curious about the industrial trends in particular has that been accelerating sequentially.
During and through past the quarter.
And in particular are there any types of applications that youre seeing really breakout in industrial.
Our industrial business and our strong investments in a couple of areas I would point out for you.
We've applied NBS snacks in all of our businesses to really understand what are the best growth opportunities, where they simply want to focus on.
And how do we treat some some positions that are inherently and attractive and so the net result of all of this is we find some real strong growth in container. For example, so we've talked about beverage cans in our nordson has a very strong position.
And a very attractive position technology.
Suites that supplies people will make beverage cans and you could set up a beverage can in that sense. That's an example of what you see in this coal consumers.
Consumer shift in how they eat and consume beverages and crude so so really we're benefiting there. We're also beginning to see in our powder business. This broad broad base industrial activity.
That is leading to investments on paint lines and things like that so so we're doing well there.
Our packaging on the industrial adhesives, Atmos adhesives is doing extremely well this fall.
Certainly.
Yes.
Broad based.
So how the team is.
Totally participating in the call.
Oh, great that was going on.
Great. Thanks for the color.
Your next question comes from the line of Andrew Buscaglia with Bamberg.
Good morning, guys.
Good morning, Andrew.
I wanted to talk a little bit about mix in the quarter. So obviously MBS snacks and is helping.
And in industrial position Youre seeing.
The divestiture is helping but is there are you seeing any.
Interesting trends that are helping mix.
On that standpoint, and then payment in Ats I would think that actually with electronics and test and inspection improving maybe <unk>, maybe a less favorable mix, but what's going on in there.
Yes, so within the segments I think particularly let's just take them one segment at a time Ats.
Do see some favorable mix and I really think it's not to your point at the division level, but it's almost within the division. So if you think about NBS next is being implemented at the division level, so even the relatively low margin.
Businesses or divisions within that are seeing nice improvement in their profitability and their gross margin, which is driving the favorable mix within the divisions. So it's funny at Ats within at the division level. The mix is actually unfavorable but it was favorable within each of the divisions such that the end result was.
Was favorable for the segment.
And so I think thats evident now that NBS next being applied at.
Within the division what are you looking at specific applications, I mean, Naga mentioned with Nics.
The liquid coating opportunities is clearly.
Favorable mix expansion within Ips.
You see a very similar story.
And particularly I mean, you had strong growth in the systems over the parts within Ips, but yet the margins improved but beyond that of the mix benefit that we got from the divestiture to screw and barrel business, which if you look at the Ips business that divestiture alone is probably worth 350 basis points of margin expansion.
Spansion.
But they are expanding beyond that due to the favorable mix that I would tell you within the divisions.
Okay.
Interesting another.
Noteworthy guests, which is also helping us.
We've had some nice success, both in Ips M&A Ats with our new product launches.
Blue Flex and the vantage continued to gain traction.
I would tell you that that is helping us from.
From a top line perspective, as well as the mix.
Standpoint.
Okay.
Helpful.
And then another one on and that with the NDP acquisition seems like a great company.
I guess I was a little bit surprised given like the specialty made pretty good deal.
EBITDA margins that look like they are on <unk>.
17% is this a is this a situation where this company has a very high gross margin profile.
But maybe EBITDA margins, 20%.
Target is that is that a near term target or the longer term to more get that margin in line or above corporate average.
Okay.
Let me first start and then Joe.
You could add a little bit more color that'd be good. The reason we acquired it in D. C technologies is because it fits right with our customer inspection business and particularly that particular company. We really like is because if you look at gross margins. They have nordson like gross margins and a customer centric business.
Note that this late March so it seems this case of strong gross margins, indicating a strong differentiated product portfolio, but.
EBITDA margins are slightly lower than our target Joe if you want to just add a little bit more color on what we're thinking near term.
Yes. So you are correct the margins coming in are about 17.
The execution of NBS next to get.
Margin expansion over the next I would say a couple of years similar to what you see on the core Norton.
Next.
But.
The main opportunity for here.
Identify the best growth opportunities to invest in them disproportionately and really grow the company.
Carlo.
With the 55% growth.
<unk> incremental margin so it's the growth that drives the margin expansion.
Okay got it thanks guys.
Your next question comes from the line of Walter Liptak.
Hi, good morning, everybody.
Good morning morning, Walt.
Great quarter.
To go back to the $25 million of Ips systems that got pulled forward I guess, it's impressive you got with the supply chain.
You were able to get that into the quarter.
But I guess my question is about the fourth quarter I think you said, Joe that the system Ips systems would be down sequentially.
Is that right and then.
What does that do to the operating leverage you know what is that due.
Due to the margins if you've got more mixes.
Aftermarket parts in Ips in the fourth quarter.
Yes, so just.
My comment that was Holistically there was about $25 million both from Q4 into Q3.
Predominantly systems and predominantly I would say Ips.
And so.
Two Naga is point in your point it was impressive our team being able to meet that customer request those customer requests.
But from a margin standpoint, you know you build these systems over time.
It shouldn't have huge our incrementals are what they are and we're still going to deliver growth.
In Q4, if you take the midpoint of our guidance.
And the sequential comment really Walter just Q3 to Q4.
For nordson.
When you level out and adjust that $25 million and take it out of Q3 into Q4, but in Q4 on adjusted basis, we would be relatively flat and so it's just that swing in the systems, which is driving the sequential drop.
Okay, and how are you thinking about the fourth quarter margins.
Are you, saying that theres going to be less leverage because the volume growth.
Won't be as high or.
Or is there a pickup in margin because there'll be more aftermarket because I typically think of system.
No that's incorrect.
Yes. It is.
Changing it a little bit but not to the degree I think it was historically and so I would tell you.
Thinking about margins for Q4, two at the gross margin line to be comparable with our new run rate that we saw in Q2.
$113.0, and a half here in Q3, so we feel confident to operate in the $112.0 gross margin range at the level of call it $600 million to $650 million in sales.
Okay great.
Yeah.
Okay. Thanks, and then.
I Wonder if you guys talked about this last quarter, a little bit but.
It sounds like the supply chain, there is a little bit of challenges, but I wonder on pricing are you seeing some inflationary pricing that you're passing along to customers.
How are you doing that or is it.
On a project by project basis.
Taking our printers.
Yes, it's really a project by project.
I would tell you division by Division.
We are experiencing Naga.
You touched on some supply chain challenges some logistics challenges.
But we are laser focused on managing the.
Gross margins of this business and we're also I would tell you looking out over the long term.
As it relates to our customer relationships and our position I think that bodes well for us when we entered this pandemic in terms of strengthening.
Core to nordson is that intimate customer direct sales model and as we work through these challenging times.
Remaining focused on the gross margin and capturing the value we provide but also protecting the long term relationship with our customer. So that's how we I would tell you look at that pricing.
There'll be others.
Well the one thing I would add to it is given our gross margins the material cost in our business.
Fairly small when compared to other companies. We are a value added assembler of components not we don't have big process component to our business. So to the extent that we need to increase prices in certain areas. We have done that we will continue to do that but in general this is not a huge.
<unk>.
Significant material issue for us.
Yes.
There is no doubt about that.
Okay and then maybe last for me is now you mentioned that you and Joe open out traveling and visiting the.
The facilities, yes.
And.
I Wonder if you.
If you finish that process how are you feeling now about like the Delta variant.
We continue to visit operations.
Do you think the delta variance can have any impact going into the end of the year.
Yes.
From our travel perspective, we continue to remain safe.
But we can continue to just stay in the bunker strike. So so Joe and I are being very cautious in how we travel where we travel.
But we're going to continue to travel.
In a very limited basis.
This thing they make this would we be more businesses than we what we do we are today, absolutely, yes, but so trying to find the right balance in terms of being safe as well as being in the businesses with a team which is really where all of the action is going on.
Yeah.
Okay great.
And are your salespeople I mentioned are getting now too and visiting with customers.
We expect that to continue through the end of the year, yes.
Yes.
It is by request of our customers and it is in region we're not.
We do have some.
Some thoughts around timing.
Finding balance safety as well as you know.
Trying to help our customers meet their business needs. So.
It is still.
Decided by senior leaders in the company, who travels better with travel we have started going to some shows on a very limited basis.
So the dynamic environment.
Team is doing an excellent job of taking.
Taking prudent measures to be say, yet make sure we're taking care of our customers.
Okay, great. Okay. Thank you.
At this time there are no further questions I would now like to turn the floor back to management for any additional or closing remarks.
Thank you.
Wanted to reiterate that nordson is well positioned to.
To benefit from the accelerating recovery.
And our position technologies remain a critical solution to our customers through the cycle.
Additionally, our leadership team is advancing the implementation of the <unk> strategy, which is establishing a growth framework entrepreneurial organization and a deep and diverse team to drive sustainable profitable growth.
Thank you for your time and attention today have a great day.
Thank you for participating in today's conference call. You May now disconnect your lines at this time.
Okay.
Okay.
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