Q1 2023 Nordson Corp Earnings Call
Speaker 2: Ladies and gentlemen, good morning. My name is Abby and I will be your conference operator today. At this time, I would like to welcome everyone to the Nordson Corporation first quarter fiscal 2023 conference call.
Speaker 2: Today's conference is being recorded and all lines have been placed on mute to prevent any background noise.
Speaker 2: After the speaker's remarks, there will be a question and answer session.
Speaker 2: If you would like to ask a question during this time, simply press the star key followed by the number 1 on your telephone keypad.
Speaker 2: If you would like to withdraw your question, you must press star 1 once again.
Speaker 2: Thank you, and I will now turn the conference over to Lara Mahoney. You may begin. You may begin.
Speaker 3: Thank you. Good morning. This is Laura Mahoney, Vice President of Investor Relations and Corporate Communications. I'm here with Sundaram Nagarajan, our President and CEO , and Joseph Kelly, Executive Vice President and CFO . We welcome you to our conference call today, Tuesday, February 22nd.low.
Speaker 3: nordson.com forward slash investors
Speaker 3: This conference call is being broadcast live on our investor website and will be available there for 14 days.
Speaker 3: There will be a telephone replay of the conference call available until Tuesday, February 28, 2023.
Speaker 3: During this conference call, references to non-GAAP financial metrics will be made.
Speaker 3: A reconciliation of these metrics to the most comparable GAAP metric was provided in the PREPs release issued yesterday.
Speaker 3: Before we begin, please refer to slide two of our presentation where we note that certain statements regarding our future performance that are made during this call may be forward looking based upon Nordson's current expectations.
Speaker 3: 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.
Speaker 3: Moving to today's agenda on slide 3, NAGA will discuss the first quarter highlights.
Speaker 3: He will then turn the call over to Joe to review sales and earnings performance for the total company and the three business segments.
Speaker 3: Jill will also discuss the balance sheets and cash flow.
Speaker 3: Nanca will then share a high-level commentary about our earnings performance.
Speaker 3: We will conclude with an update on the fiscal 2023 full year and second quarter guidance.
Speaker 3: We will then be happy to take your questions.
Speaker 3: With that, I'll turn to slide four and hand the call over to Naga.
Speaker 4: Good morning, everyone. Thank you for joining Nordstrom's fiscal 2023 first quarter conference call. I want to thank our team for delivering another strong first quarter performance.
Speaker 4: There were a lot of bright spots in this quarter.
Speaker 4: To begin, it was the first quarter of contribution from our cyber optics acquisition.
Speaker 4: The integration of the business is going well and we are pleased with the energy and engagement of our cyber optics team.
Speaker 4: Testing inspection.
Speaker 4: is a long-term growth focus for Northson, and we are very excited about the differentiated optical precision technology that cyber optics adds to our portfolio.
Speaker 5: Next.
Speaker 4: We had a solid regional performance in the Americas and Europe , which collectively delivered 9% organic growth.
Speaker 4: This was partially offset by declines in Asia specifics.
Speaker 4: which saw weakness in China relating not only to the lunar New Year shutdown.
Speaker 4: but also labor shortages due to the unfortunate spread of COVID-19 in the region.
Speaker 4: Once again, the diversification of our business.
Speaker 4: and our steadfast dedication.
Speaker 4: to the needs of our customers ensures we deliver results.
Speaker 4: Finally, I remain pleased by the ongoing deployment of the NBS NAGS Growth Framework.
Speaker 4: Each division is gaining momentum towards achieving top-tier growth, quality, and on-time delivery performance.
Speaker 4: in this dynamic environment.
Speaker 4: NBS Next ensures we are focused on our greatest opportunities for profitable growth, and it also clarifies where we can simplify so we can better focus resources on those opportunities.
Speaker 4: In a few moments, I will speak more about the business.
Speaker 4: and what we are seeing in our end markets.
Speaker 4: But first, I'll turn the call over to Joe to provide a detailed perspective.
Speaker 4: on our financial results for the quarter.
Speaker 6: Thank you, Naga, and good morning to everyone.
Speaker 6: On slide number five, you'll see first quarter fiscal 2023 sales were $610 million.
Speaker 6: comparable to the prior year's first quarter sales of $609 million.
Speaker 6: The increase was primarily related to 1% organic growth plus the cyber-aptics.
Speaker 7: Acquisition?
Speaker 6: offset by unfavorable currency impact of 4%.
Speaker 6: The organic growth as Naga referenced
Speaker 6: was driven by strong demand in Europe and the Americas, offset by weakness in Asia Pacific, primarily China.
Speaker 6: Gross profit for the first quarter of fiscal 2023 totaled $329 million.
Speaker 6: excluding the amortization of acquired inventory step-up.
Speaker 6: Growth profit totaled $333 million, or 55% of sales.
Speaker 6: a 3% or 150 basis point decrease compared to the 342 million or 56% of sales in the prior year first quarter.
Speaker 6: The team continues to actively manage the price-cost dynamic in these inflationary periods, in addition to unfavorable currency impacts.
Speaker 6: Similar to the fourth quarter of 2022, the impact of passing along the significant year-over-year cost inflation, while slightly positive in gross profit dollars, squeezed margins approximately 100 basis points.
Speaker 6: Additionally, the sales mix in the quarter was slightly unfavorable.
Speaker 6: With BioFarma fluid dispense.
Speaker 6: product assembly in Asia being down.
Speaker 6: Offset by growth in plastics processing and medical interventional solutions.
Speaker 6: On a sequential basis, comparing first quarter to fourth quarter 2022, adjusted gross margins improved approximately 150 basis points.
Speaker 6: Operating profit totaled $144 million in the quarter.
Speaker 6: During the quarter, we recorded one time transaction fees, inventory step-up, and other non-recurring items associated with the cyber optics acquisition totaling $10 million.
Speaker 6: Adjusted operating profit, excluding these non-recurring items, was $155 million in the quarter, or 25% of sales.
Speaker 6: 2% below the prior year adjusted operating profit of $157 million.
Speaker 6: Foreign currency translation negatively impacted operating profit 6%.
Speaker 6: offset by 4% constant currency operating profit growth.
Speaker 6: EBITDA for the first quarter was $181 million, or 30% of sales, which is in line with our long-term target profitability level and comparable to the prior year first quarter.
Speaker 6: Looking at non-operating expenses.
Speaker 6: Interest expense increased $5 million, associated with higher borrowings and increased interest rates.
Speaker 6: Other net expense increased $4 million related to higher foreign exchange losses and increased hedge costs.
Speaker 6: partially offset by lower non-operating pension costs.
Speaker 6: Tax expense was $27 million for an effective tax rate of 20.5% in the quarter, which is in line with the prior year first quarter rate and the forecasted full year rate for 2023.
Speaker 6: Net income in the quarter totaled $104 million, or $1.81 per share.
Speaker 6: adjusted earnings per share, excluding non-recurring acquisition costs.
Speaker 6: totaled $1.95 per share, a 6% decrease from the prior year.
Speaker 6: The decrease is primarily driven by unfavorable currency changes.
Speaker 6: Now, let's turn to slide 6 through 8 to review the first quarter 2023 segment performance.
Speaker 6: Industrial precision solutions fails of $312 million decrease 4% compared to the prior year first quarter due to unfavorable currency impacts of 5%.
Speaker 6: The organic growth of 1% was driven by steady demand across most product lines and regions.
Speaker 6: offset by softness in Asia Pacific.
Speaker 6: particularly product assembly in China.
Speaker 6: due to the timing of Chinese New Year and labor shortages from the spread of COVID-19.
Speaker 6: Operating profit in the quarter was $102 million or 33% of sales.
Speaker 6: which is a decrease of 1% compared to the prior year adjusted operating profit of $104 million.
Speaker 6: Unfavorable currency, negatively impacted operating profit, year over year, 6%.
Speaker 6: IPS remains our most globally diverse segment and therefore most exposed to currency translation changes.
Speaker 6: Looking at a constant currency basis and organic only.
Speaker 6: This segment now has delivered quarterly sales and operating profit growth eight out of the last nine quarters.
Speaker 6: highlighting the strength of the business, the team, and the execution of the ASCEND strategy.
Speaker 6: Medical and fluid solutions failed.
Speaker 6: of $154 million decreased 3% compared to the prior year's first quarter.
Speaker 6: This change included a decrease in organic sales of 1% and a 2% decrease related to unfavorable currency impacts.
Speaker 6: The 1% organic decrease was driven by significant softness in the medical fluid components serving the biopharma market.
Speaker 6: Enfluid Solutions product line in China.
Speaker 6: offset by strong demand for Medical Interventional Solutions product lines, primarily in the Americas and Europe .
Speaker 6: First quarter operating profit was $39 million, or 26% of sales, which is a decrease of $10 million compared to the prior year operating profit of $49 million.
Speaker 6: The decrease in operating profit was driven by meaningful sales mix changes within the medical product line.
Speaker 6: and related individual factory inefficiency due to reduced volumes.
Speaker 6: Turning to slide 8, you'll see Advanced Technologies and Solutions sales were $145 million.
Speaker 6: a 14% increase compared to the prior year first quarter.
Speaker 6: Organic sales growth in the quarter was 5%. Plus another 14% from the cyber optics acquisition.
Speaker 6: This was offset by an unfavorable currency impact of 4 percent.
Speaker 6: The organic growth was particularly strong in the Americas region and was driven by the test and inspection acoustic product line, which continues to benefit from new product innovation.
Speaker 6: The first quarter adjusted operating profit, excluding the inventory step-up and acquisition transaction expenses was $27 million.
Speaker 6: or 19% of sales.
Speaker 6: which was comparable to the prior year first quarter operating profit.
Speaker 6: Organic operating profit growth of 3%
Speaker 6: Plus, the acquisition benefit was offset by a 5% unfavorable currency impact.
Speaker 6: Finally, turning to the balance sheet and cash flow on slide 9.
Speaker 6: Our first quarter balance sheet includes cash of $122 million and net debt was $894 million.
Speaker 6: resulting in a 1.1 times leverage ratio based on the trailing 12-month EBITDA.
Speaker 6: We continue to have significant available borrowing capacity to pursue organic and inorganic opportunities.
Speaker 6: inclusive of the borrowing that we incurred to fund the cyber optics acquisition in November .
Speaker 6: Free cash flow in the quarter was $114 million.
Speaker 6: or a conversion rate of a net income of 109 percent, an $8 million improvement over the prior year first quarter free cash flow.
Speaker 6: Dividend payments were $37 million, reflective of the 27% increase in the annual dividend approved last year.
Speaker 6: During the quarter, we did not repurchase any shares under our 10B51 plan.
Speaker 6: For modeling purposes in Fiscal 2023, assume an estimated effective tax rate of 20-22% and capital expenditures of approximately $50-55 million.
Speaker 6: We will now turn to slide 10, and I will turn the call back to Naga.
Speaker 4: Thanks, Joe. I want to thank our teams.
Speaker 4: for continuing to respond to the needs of our customers and deliver the strong first quarter performance.
Speaker 4: I'm very thankful that our operations in China are returning to normal.
Speaker 4: as employees have returned to work following the spread of COVID-19 in the region.
Speaker 4: We will always prioritize the health.
Speaker 4: and safety of our employees.
Speaker 4: and we are so glad that they are well.
Speaker 4: Throughout the first quarter, I had many opportunities to engage with our employees and travel to sites in North America and Europe .
Speaker 4: I'm very pleased with the ongoing deployment of NBS Next.
Speaker 4: which continues to help us prioritize.
Speaker 4: our greatest opportunities for profitable growth.
Speaker 4: in this dynamic environment.
Speaker 4: The accelerated deployment of this growth framework will guide our decisions.
Speaker 4: on where to focus and where to simplify.
Speaker 4: Going into fiscal 2023,
Speaker 4: We deal, we would be dealing with a dynamic environment.
Speaker 4: as we had limited visibility into the full year.
Speaker 4: Turning to slide 11, I'd like to spend a few minutes sharing what we are now seeing in our end markets. Please visit grey KumForge.com today!
Speaker 4: In the industrial precision solution segment,
Speaker 4: We are seeing increasing demand in automotive.
Speaker 4: and steady demand in industrials and consumer non-durable product lines.
Speaker 4: Packaging and product assembly end markets continue to perform well in Americas and Europe .
Speaker 4: And there is softness in China.
Speaker 4: Within the Advanced Technology Solutions segment, we have started to see a softening of semiconductor orders over the past 45 days.
Speaker 4: Electronics is known for being a cyclical end market and we benefited from the boom in investments over the past two years.
Speaker 4: Now our customers are starting to reevaluate.
Speaker 4: near term
Speaker 4: from capital spending.
Speaker 4: which is having an impact on orders for electronic dispense product lines.
Speaker 4: In some cases, it's been a matter of pushing out system orders into the second half.
Speaker 4: We will continue to monitor this closely.
Speaker 4: We're also seeing weakness in optical test and inspection product lines relating to the memory and market.
Speaker 4: A remaining test and inspection order rate remains strong.
Speaker 4: and is somewhat offsetting the areas of weakness in this segment.
Speaker 4: KNI is benefiting from new product innovation.
Speaker 4: such as our new acoustic system that drove growth in the first quarter.
Speaker 4: The strategy to diversify our APS product offering in terms of technology and application
Speaker 4: is muting the historical volatility of the company's overall electronics exposure.
Speaker 4: Turning to the medical and fluid solutions segment.
Speaker 4: We are experiencing double-digit growth in our Interventional Solutions product lines.
Speaker 4: This is a business that was pressured during the pause in elective surgeries.
Speaker 4: during the pandemic.
Speaker 4: And now these product lines are returning to high single-digit growth levels.
Speaker 4: Orders for balloons, cannulas, and catheters are a big part of our backlog.
Speaker 4: Elsewhere in the MFS segment, we're seeing continued weakness in our medical fluid components product lines.
Speaker 4: Over the past two years, we benefited from strong double-digit organic growth in this division.
Speaker 4: This was driven by demand from bi-former customers.
Speaker 4: which partially benefited from the COVID vaccines and then from inventory rebuilding.
Speaker 4: to compensate for supply chain concerns following the pandemic.
Speaker 4: Now, we believe that it's inventory destocking at large customers for these product lines.
Speaker 4: over the medium to long term.
Speaker 4: Revenue growth rates for these product lines remain strong.
Speaker 4: driven by secular growth drivers, such as single-use components in biopharma applications.
Speaker 4: Finally, in our MFS fluid solution product lines.
Speaker 4: We are seeing some weakening in injection molded product lines relating to the construction as well as electronics applications in China.
Speaker 4: Considering the combination of end market headwinds and tailwinds,
Speaker 4: Current order entry.
Speaker 4: and the push out of delivery dates, we are updating.
Speaker 4: are previously provided 2023 revenue guidance.
Speaker 4: to zero to 3% growth or fiscal 2022 in adjusted earnings in the range of...
Speaker 4: $8.75 to $9.50.
Speaker 5: I remind
Speaker 4: While we are seeing some changes in order patterns, we are seeing some changes in order patterns.
Speaker 4: Our guidance reflects.
Speaker 4: sustaining our record level 2022 performance.
Speaker 4: which is a testament to our dedicated employees.
Speaker 4: the diversification of our business.
Speaker 4: and the solid execution of the SM strategy.
Speaker 4: Looking specifically at the second quarter, 2023,
Speaker 4: On slide 13,
Speaker 4: We are forecasting second quarter fiscal 2023 sales to be comparable to the prior year second quarter.
Speaker 4: as acquisition benefits are largely offset by currency headwinds.
Speaker 4: Second quarter earnings are forecasted in the range of $2.
Speaker 4: to $2.15 per share, reflective of the anticipated sales mix.
Speaker 4: which is comparable to the first quarter of 2023.
Speaker 4: while we remain financially prudent in this environment.
Speaker 4: We are adopting a balanced approach and will remain invested in innovation.
Speaker 4: differentiated service experience for our customers in strong core businesses.
Speaker 4: We also will continue to accelerate strategic investments.
Speaker 4: to fully participate in high growth markets.
Speaker 4: while making tactical adjustments to cost structure in select businesses when it is needed.
Speaker 4: As always, I want to thank our customers, shareholders, and the Noteson team for your continued support. With that, we will pause and take your questions.
Speaker 2: And, ladies and gentlemen, at this time, I would like to remind everyone in order to ask a question, press star, then the number 1 on your telephone keypad. Pressing star 1 a second time will remove your line from the queue. And we will pause for just a moment to compile the Q&A roster.
Speaker 2: And we will take our first question from Mike Halloran with Baird. Your line is open.
Speaker 8: Good morning everyone.
Speaker 4: Good morning. Morning, Mike.
Speaker 6: So Naga, obviously a lot of moving pieces here. Maybe help understand the change in 2Q and...
Speaker 9: in college.
Speaker 9: you know, it's a little bit more stability in how you're thinking about the back half of the year here. It seems like the outside to cue that we were talking about on the last quarter has been pushed in the back half.
Speaker 9: So maybe talk a little bit about the backlog, why you think it's sustainable, risk of cancellations, what kind of seasonality you're assuming, front half versus back half versus a normal year and just...
Speaker 9: any of the puts and takes to help understand those moving pieces a little bit better.
Speaker 4: Yeah. Mike, what I'll do is I'll take you through.
Speaker 4: segment by segment, the end market trend, and then Joe, if you could sort of bridge some of the questions that Mike has, will be great. So first and foremost, in the last 45 what we have really seen, orders have fallen off approximately 9%.
Speaker 4: versus the prior run rates.
Speaker 4: And portions of this could be attributed to Chinese New Year's. Some of it could be our softening in the electronic process solutions.
Speaker 4: business which essentially does fluid dispensing for semiconductor and back-end electronics.
Speaker 4: What you also are seeing is that in these end markets,
Speaker 4: In addition to softer orders, we have had customer requested push outs.
Speaker 4: the software orders we have had customer requested push outs of order delivery.
Speaker 4: So those are the two things that are happening. Broadly, let's go segment by segment. We can look at our industrial precision solutions.
Speaker 4: We're running at or above our long-term growth rate.
Speaker 4: increasing demand in automotive, steady demand in industrials and consumer non-durable product lines.
Speaker 4: Packaging and product assembly particularly, doing fairly well in America and Europe with some softness in China.
Speaker 4: So, IPS in general, we feel really good about where the orders are, where the backlog is, and how we're thinking about Q2 and the rest of the year.
Speaker 4: If you come to Advanced Technologies,
Speaker 4: This is below our
Speaker 4: long-term growth rates.
Speaker 4: One thing to remind you is that the growth rates we are looking for in this segment particularly because we have diversified the volatility in this segment is suddenly muted and what we have seen in the past.
Speaker 4: So a couple of things happening here, as I said. Softening semiconductor orders over the past 45 days.
Speaker 4: You know, electronics traditionally being cyclical, you know, we've benefited in the first two years, and what we are now seeing is the down, you know, down side of the cycle.
Speaker 4: Our customers are beginning to re-evaluate more the near-term capital spending versus the long-term capital spending. We still feel good about the long-term, but in the short-term, there is some softness in the orders.
Speaker 4: We're also seeing some weakness in our optical test and inspection product lines as it relates to the memory end market.
Speaker 4: Remaining test and inspection looks pretty strong and if you go to now going to our medical fluid components
Speaker 4: This is also below our long term growth rate.
Speaker 4: But there are two different things happening here. What you find is double digit growth in our interventional product lines. So this is the part of the business where we were pressured due to postponement of elective surgery during the pandemic. And now you see this business coming back pretty strong.
Speaker 4: And orders for balloons, cannulas, catheters are really a big part of our background.
Speaker 4: And in our bioforma facing fluid component business, the order rates continue to be weaker than we had expected. This is partially driven by…
Speaker 4: are bi-former customers who are, you know.
Speaker 4: or destocking inventory.
Speaker 4: during the pandemic they benefited partially from COVID but also where
Speaker 4: you know, rebuilding that inventory because of supply concerns.
Speaker 4: We fundamentally believe it's a strong business. It'll get back to the high single digits in time. And the last bit I would say is, there is some weakening in our fluid dispensing.
Speaker 4: inject mold the product lines in construction as well as
Speaker 4: Electronics in China, So hopefully that gave you. I gave you a lot of things here, but gave you some other.
Speaker 4: segment by segment what we're seeing
Speaker 6: Sorry, go ahead, Joe.
Speaker 6: Yeah, maybe if I could reconcile those comments to your questions around the guidance and the change in the guidance. So if you think about our revenue guidance at the midpoint, we brought it down by about $65 million from the prior guidance. The majority of that decrease is what NAGA referenced and what we're seeing in change in order.
Speaker 6: around the semiconductor and back-end electronics market. The remainder is the delay in the timing of the biopharma recovery, and I would tell you also a little bit of the softness that we saw here in Q1 in China.
Speaker 6: From a timing perspective on the guidance, Mike, your question there, the timing is just not just for the order entry, but it's also given the customer pushouts of their delivery dates. And when we're seeing that in electronics and markets, these are large system orders where we have-
Speaker 6: payments from the customers. So we're seeing in electronics a little bit in the industrial coatings and in the plastics and markets where they're pushing out Q2 delivery dates into the back half and again we have prepayments on these and so there's limited risk of cancellation.
Speaker 6: And then as it relates to your comments as we think about the guidance in the back half versus Q2, when you think about the back half, first of all, last year's back half was very, very strong, as you know, for Nordson, a record Q3 followed by a record Q4. And so the guidance
Speaker 6: When you look at the back half, FX is going to become favorable on a year-over-year basis if we maintain the current exchange rates. So that would be favorable about 2% acquisitions to be about 3%. And so it basically implies that the midpoint, the organic, would be down about 2% in the back half based on the comments, not just made.
Speaker 9: That's a lot of great color. Really appreciate it. The follow up then on the...
Speaker 9: food component side, what do you guys think the de-stocking is going to be behind you and maybe more normal order patterns start coming through, at least relative to underlying demand? And should we think about this as the right run rate for the margins of that segment until that mix is more balanced out versus normal?
Speaker 4: Let me just comment on the order rates, and Joe, you can pick up on the margin for the segment. encourage lower productivity, so you can get to what we would consider Lets see,clus north
Speaker 4: Order rates, what we are seeing is the customer order patterns have stabilized and might there be some green shoots in terms of recovery of order rates from these customers?
Speaker 4: long-term, 7 to 8 percent, you know, high single digits is how you want to think about this business. I'd love to feel that I know exactly when this is going to come back. From what we can see is we feel good about the stability in the orders and a slight pick-up in orders that we're beginning to see.
Speaker 4: If you push me to give you an exact date, it's going to be difficult, but definitely this is a recovery that has already begun. It's probably the best way for that.
Speaker 6: Yeah, Mike on the margins of the segment, you know, as you know, in 21 was running at about 31 percent, 22 at about 32 percent. So this 26 that we did in Q1 is not the new normal. We would anticipate to recover back to the historical run rate as we move forward in 23.
Speaker 6: And the logic there is this initial drop-off and then the comment I made on inefficiencies of – within the individual factories as they adjust for this volume drop and adjust their variable cost and that efficiency will improve as we move forward.
Speaker 9: Great, really helpful. Thank you so much.
Speaker 2: And we will take our next question from Alison Woliniak with Wells Fargo. Your line is open. Hi, good morning. Good morning, Alison. Just turning to IPS, it seems pretty stable. Asia Pacific was a headwind this quarter. Do we assume that headwind starts to mitigate here for Asia Pacific where...
Speaker 6: that grows maybe is a slight improvement from quarter to quarter. Just trying to think through that, or between 2Q and 3Q. Thanks. Yeah, Allison, I would tell you, as you know, our IPS business has a large China presence, and Chinese New Year fell into Q2 last year, whereas Q1 this year.
Speaker 6: you will see sequential improvement in that segment just given that. And then also within that business, I referenced the industrial coatings division as well as the plastics division where there are large systems businesses. Those businesses are seeing some of those Q2.
Speaker 6: push outs in the back half and again, prepayments for all those systems locked in. It's predominantly our customers, their projects are being delayed. The projects are still taking place, but they're being delayed for other reasons. And they're asking those businesses to delay shipment in the back half. So
Speaker 10: sequential improvement and then sequential improvement first half into second half. Got it. Thanks. And then Naga you talked about MBS Next and the innovation side. How are you thinking about that investment this year? Are you starting to tighten the lens a bit more? Are we looking for an increase there as you look to position the company coming out of this? Just any thoughts there?
Speaker 4: Yeah, I think, you know, the way to think about it is our NBS Next deployment is accelerating, gaining momentum within the company, and it is becoming more holistic than it was maybe two years ago. So what does that all mean? That means that...
Speaker 4: Our businesses are really sharp on what are the best opportunities, division by division, not the entire company in total, but division by division, and staying invested in innovation in our core strong businesses. That is a top priority for us.
Speaker 4: And we're also accelerating capital investments in businesses where we have pretty strong growth. For example, our intervention of business. Very recently we have signed out on this significant capital to expand product line.
Speaker 4: Right. So I feel really good about where we are. I think it is really important to remember not only are we staying invested in our core businesses where we have strong positions, but we are also investing in our core businesses.
Speaker 4: But we're also investing in businesses that have a growth potential for us.
Speaker 4: In some cases where the order entry has declined, we are adjusting cost.
Speaker 4: more from a variable perspective. But even in those cases, we stay invested in our innovation in our electronic businesses because that is the source of our differentiation, our customers count on us. These are not.
Speaker 4: three-month kind of thinking process. This is multi-year because in our electronic business, most of our customers, long-term, we are going to see significant capital investments to expand capacity for semiconductor in North America and in Europe , and we need to stay.
Speaker 4: relevant in those, continue to participate in those, and fully leverage our technologies.
Speaker 4: in those, continue to participate in those and fully leverage our technologies.
Speaker 2: We will take our next question from Matt Somerville with DA Davidson. Your line is open.
Speaker 11: Thanks. Is there any way that you guys can sort of parse out and try and quantify what you know the China related impact was as it pertained to you know COVID and the associated labor shortages? How much may be pushed at the end of the quarter due to the new year? And do you think all of that gets captured in Q2 or is that also?
Speaker 6: just 15 to 20 million, depending on what quarter that falls into. And so that's consistent on our full year basis and has no impact. The COVID issues that they experienced right before the new year and the lockdown at some of the customer and supply chain challenges.
Speaker 6: I would characterize that as closer to about a $10 million disruption in the corridor. And I don't know that that recovers in the full year. And so that was what I would tell you part of our reduction in our full year guidance was that about $10 million missing in Q1.
Speaker 6: in China, anticipating that that doesn't recover itself within the year or make itself up in the year.
Speaker 11: Maybe it's his comment on cyber optics and what.
Speaker 11: You're sort of expecting, if I recollect, annualized revenues around the time you announced the acquisition were a little more than $100 million. You look at the contribution in Q1, clearly nowhere near that run rate. So can you talk about maybe what you're seeing in that business and what a reasonable tuple?
Speaker 4: kind of year one revenue and accretion outlook might be for that business. Thank you. Let me, Matt, thank you for the question and follow up. And on cyber optics, you know, we're incredibly pleased with the team, incredibly pleased with the technology that we are adding to the company, incredibly pleased.
Speaker 4: memory market, which is sort of one of those areas where they are really strong in.
Speaker 4: is not, you know, near-term capital investments have been
Speaker 4: And because of that, they have not...
Speaker 4: at the same run rate as what we had expected, right? And Joe, if you could spend a little time talking, that would be helpful.
Speaker 6: Yeah, so I mean as we highlighted in the first quarter is $17 million of sales. I can tell you as a favorable, contributed favorably to our operating profit.
Speaker 6: And from an EBITDA standpoint, it's running in the mid-teens. And so when you think about our forecast going forward, we have that contributing on the full year, approximately 3% to our year-over-year sales growth.
Speaker 6: to be contributing to operating profit growth on an adjusted basis. Thank you.
Speaker 6: contributing to operating profit growth on an adjusted basis. Understood. Thank you guys.
Speaker 6: to operating profit growth on an adjusted basis. Understood, thank you guys. Thank you guys.
Speaker 2: And as a reminder, it is star one if you would like to ask a question. And we will take our next question from Sari Broditsky with Jeffries. Your line is open. Thanks for taking the question. Just kind of sticking on this electronics for a second. You know, there's been some concern I think from investors on this space for a while. So was the softening in semi-orders a surprise to you? And how have conversations been
Speaker 4: about semiconductor customers or memory customers, all of them very bullish about their investments in the long term, but suddenly we evaluating what they spend in the short term as they manage through their PNL. So in line with what you would expect in the marketplace, but if you think about in the longer term.
Speaker 4: And if you compare with our volatility in the past, this is suddenly muted. And what we are hearing from them is very bullish about the longer term, you know, 24 and a half. Certainly in the short term, they're reevaluating spend. And that is sort of how I would think about it.
Speaker 4: Is that a surprise? Yes, the order rate declined in the 45 days was certainly surprised. But what is also strong is TNI.
Speaker 4: excluding optical is pretty strong and continues to remain strong and has a very strong backlog and we think will do really well there. So I think this diversification and expansion into T&I has certainly reduced the company's historical...
Speaker 4: volatility or muted to cyclicality. Shari, did I answer?
Speaker 2: Yes, thanks for that. And you talked about obviously the push out of systems in the second half and industrial coatings. Could you provide more color on why these systems are being pushed out? And then generally, does your guidance assume any additional push outs across the segments and into 2024? Let me take sort of what we are seeing with our customers.
Speaker 4: a larger manufacturing line. So typically that's what we do. We play a... so when you have a large construction project, definitely.
Speaker 4: We don't hear any of our customers saying these capital expansions are going away. That's not what we're hearing. What we are hearing is that in the construction phase of it, they do have other vendors that they are expecting. So now we are a blasting group on their period of running their Own SWI, whether it be a
Speaker 4: delivery of subsystems from are delayed and hence don't need this delivery in this quarter, right? And so it has been pushed to the second half.
Speaker 4: And the reason we're confident about this is just the prepayments. So all of these large system orders come with prepayments and our prepayment increases are in line with our backlog increases. And so feel pretty good about it and that's hopefully that gives you...
Speaker 6: which you're looking for. Yeah, and, and, sir, if I could add to your question around timing in 2023, 2024, it's, it's when you look at these large systems businesses in the industrial coding space, in the test and inspection space, in the plastic space.
Speaker 6: Those businesses combine with our medical interventional solutions. Those are the businesses that comprise over 70% of our backlog.
Speaker 6: And so there are orders already on the books going out into 2024 for those divisions. And so when you think about our backlog and our confidence, it's not so much just 23, that actually goes into 24 for that subset of the Norton businesses.
Speaker 6: And so that means that support sites stay less than half of our revenue.
Speaker 6: And so greater than half of our revenue is supported by only 30% of our backlog. And so it's that portion of the business where our backlog only comprises less than one-quarters of sales. And so there is where we're more subject to changing order patterns and we need book and ship business in the quarter for that portion of the business.
Speaker 4: You know, one thing I would also add to that is in these businesses where we have a book and ship, our recurring revenues are more than 50% of our revenues. So, I mean, those businesses, in some cases, are little higher. So, you know, our conference level in...
Speaker 4: these businesses more comes down to the fact that our customer confidence level on the supply chain has improved. And I think that's the good news. The good news is in 50% of our businesses, the customer has begins to believe that this supply chain problems have gone away and hence their order entry.
Speaker 2: or sort of in line with what you would expect for the real demand is. So that's, you know, for me, that gives me pretty good contents as well. Great, thanks for taking my questions. And as a reminder, it is Star One if you would like to ask a question, and we will take our next question from Walt Lepak with Seaport. Your line is open.
Speaker 6: Hi, thanks. Good morning. I wanted to ask about the industrial precision segment and just see if I can get a little bit more color on orders in the Americas and in Europe . But before we get started, I just want to say thanks so much for being a samples re Meroon and it is amazing how you can count on a million people to cat set if you talk to a question
Speaker 6: And specifically about what's going well, I think you called out automotive, industrial, and packaging. And I wonder if you could just talk about the last 45 days there and just the tone of the business, how you're feeling about it.
Speaker 6: Yes, Walt, thanks for the question. In that business, in that segment, I think about it as we see the steady growth in line, as Naga mentioned, with our long-term growth rates. So there, what's driving it is, as we referenced, America is in Europe , particularly in the sportssteady quarter.
Speaker 6: But it's also, you know, our consumer non-durable has been pretty steady, in-line growth for us. There, you'll recall, is where we have several of our new product launches that were, you know, contributed to last year's performance and continue to gain traction. It's also within that, the largest factory within that segment.
Speaker 6: was a pilot site for our NBS next. So when you think about the traction and the improvement that they're having there with their on-time delivery, it's contributing to that growth as well. So that, and then if you go to the coding side, as Naga mentioned, we're seeing a pickup I would tell you in automotive.
Speaker 6: demand for the industrial coatings business there. Okay, good. Yes, so just to be clear, there was the steadiness that you were speaking of that was fine throughout the quarter, and not just on average, but including in that 45-day period where you've been seeing 200, 400 people 31 years ago asking if they were going to buy one when
Speaker 6: other parts of the business often. Yeah, as we said, you know, it's the term, as I would say, a multi-speed economy. You have some that are going down, some that are steady, and some that are growing nicely. And I would lump that business into the steady growth in line with our long-term expectations.
Speaker 6: Okay, great. Great. And then just as a follow-up in IPS, how are you feeling about price cost? It sounds like you were a little bit positive this quarter. How are you feeling about the rest of the year?
Speaker 6: Yeah, so price cost again as we communicate in Q4 and here in Q1, it is net favorable from a gross margin dollar standpoint, but it is diluted from a gross margin percent standpoint. We have been successful in passing through the inflation.
Speaker 6: but not passing through the inflation plus a 55% gross margin. So it's diluted our consolidated Nordstrom margins by about 100 basis points. And I would tell you this division has been successful and they incurred a significant inflation, so passing that through.
Speaker 6: this division clearly has, I would say, led the way and been successful in that pricing initiative.
Speaker 6: this division clearly has, I would say, led the way and been successful in that pricing initiative. Okay, that sounds great. Thank you.
Speaker 2: And we will take our next question from Jeff Hammond with KeyBank. Your line is open. Hey, good morning.
Speaker 12: Good morning. Yeah, so you guys gave a lot of great color on kind of where the softness is, but I'm just wondering if you can maybe parse out the split between seems like IPS no change and then maybe the split between medical and ATS in terms of like the cut. Is it 50 50? Is it?
Speaker 6: lean heavier one way or the other. Yeah, I would tell you as I if you think about the change in our guidance and so we dropped the midpoint on revenue 65 million dollars The majority of that is simply in response to the semiconductor what we're seeing in that market
Speaker 6: And so from a segment perspective, the reduction is greater in ATS than it is in the MFS segment. Okay, that's really helpful then. And then just the...
Speaker 6: What are you hearing in terms of how long this medical de-stocking will take and kind of what have you built in there? I think the way to think about this, and I would love to be able to give you a more precise answer on when this is going to come back. What I can tell you is that I have a lot of experience with the medical de-stocking.
Speaker 4: would hate to give you any more detail because it will be more speculation from my perspective. Feel really good about our long term business because we feel this is going to be a strong high single digit growth company. We have no
Speaker 4: are long-term prospects on secular growth drives of single-use components in this space still holds good? We expect a further, more increasing use and less increasing use, but not answering your question on when exactly we will see this fully normalized.
Speaker 4: I sure hope it will be sooner than later, but what we are beginning to see and we feel confident about is that.
Speaker 6: stabilized beginning to see recovery. That's great. That was part of the change in the guidance. If you think about our two guides before, we thought the recovery might come in Q2. It appears to be delayed about, in our guidance, about a quarter. Okay, that's great.
Speaker 12: Just last one on cyber optics. I don't know if there was seasonality or don't recall it from their file lenses.
Speaker 12: Is the one queue kind of revenue contribution run rate the right way to think about?
Speaker 12: you know the go-forward or is there some seasonal step up or
Speaker 12: You know and maybe just I don't know it seems like that business is softer is that is that business going to be down year on year?
Speaker 6: Yeah, I would, I guess I would comment, I wouldn't take the Q1 run rate to say annualize that. I think Q1 for that business like many businesses is light. Again, RQ1 includes Thanksgiving, RQ1 includes Christmas, RQ1 includes Chinese New Year.
Speaker 6: So, uh, I would, you know, think that their Q1 is not indicative of their quarterly run rate. That's probably, you know, 15 to 20 million dollars, uh, or try 15 to 20% light.
Speaker 4: Yeah, on a year-on-year basis, yes, they would be lighter.
Speaker 4: But it's not, I wouldn't take our first quarter and run with that.
Speaker 13: Okay, thanks so much. Thank you.
Speaker 13: Thanks so much. Thank you. Thank you.
Speaker 2: And there are no further questions at this time, so I will now turn the call back to NAGA for additional and closing remarks. Our first quarter.
Speaker 4: performance was solid and it reflects the strength of our differentiated precision technology, customer-centric business model and diversified geographic and product end markets.
Speaker 4: While we are seeing some change in order patterns, 2023 remains a strong year with our guidance reflecting our ability to sustain our record 2022 performance. We will remain financially prudent in this environment.
Speaker 4: will adopt a balanced approach that remains invested in innovation and differentiated service experience for our customers in strong core businesses.
Speaker 2: Thank you for your time and attention on today's call. Have a great day. And ladies and gentlemen, this concludes today's conference call, and we thank you for your participation. You may now disconnect.