Q2 2023 Nordson Corporation Earnings Call
Weakness in customer demand.
We believe this will enable us.
Actively navigate the current business environment and strengthen our long term position for profitable growth.
Overall, we remain invested in our competitive differentiators.
<unk>.
Our direct sales force.
Product innovation, and the training and execution of NBS next growth rainwear.
In a few moments I'll speak more about the business and what we are seeing in our end markets, but first I'll turn the call over to Joe to provide a detailed perspective on our financial results for the quarter.
Thank you Naga and good morning to everyone.
On slide number five you will see second quarter fiscal 2023 sales were $650 million and.
Kris of 2% compared to the prior year's second quarter sales of $635 million.
The increase was driven by organic growth of 1%.
And a 3% benefit from the fiber optics acquisition.
Offset by unfavorable currency impact of 2%.
During the quarter sales were strong in Asia Pacific with 7% growth partially.
Reflecting the timing difference related to the Chinese new year.
Gross profit for the second quarter of fiscal 2023 totaled $352 million.
Excluding severance costs gross profit totaled $354 million or 55% of sales.
Terrible to first quarter 2023 profitability as the team continues to actively manage the price cost dynamic and these inflationary periods.
When compared to the prior year adjusted gross margins are down 180 basis points, resulting from sales mix changes and factory inefficiencies at sites dealing with reduced volumes.
Operating profit totaled $173 million in the quarter.
During the quarter, we recorded one time severance cost totaling $3 million.
Adjusted operating profit excluding these nonrecurring items was $176 million in the quarter or 27% of sales for.
4% below the prior year adjusted operating profit of $184 million.
EBITDA for the second quarter was $203 million or 31% of sales.
Which is in line with our long term target profitability level.
However, $6 million below the prior year EBITDA of $209 million.
The decrease was primarily driven by a $4 million currency translation headwind plus unfavorable sales mix offset by the fiber optics acquisition growth.
Looking at non operating expenses.
Interest expense increased $5 million associated with higher borrowings and increased interest rates.
Other net expense decreased $38 million, primarily related to the prior year nonrecurring non cash pension and <unk> charge of $41 million.
Tax expense was $34 million for an effective tax rate of 21% in the quarter.
Which is in line with the prior year second quarter rate and the forecasted full year rate for 2023.
Net income in the quarter totaled $128 million or.
Our $2 21 per share.
Adjusted earnings per share, excluding non recurring severance costs totaled $2 26 per share.
7% decrease from the prior year adjusted earnings.
The decrease is primarily driven by lower operating profit and higher interest expense.
Now, let's turn to slide six through eight to review the second quarter 2023 segment performance.
Industrial precision solutions sales of $336 million increased 6% compared to the prior year second quarter.
Driven by strong organic growth of 9%.
Partially offset by unfavorable currency impacts of 2%.
The organic growth was driven by robust demand in the polymer processing product lines as well as products sold into consumer nondurable end markets across most regions.
Operating profit for the quarter was $112 million or 33% of sales, which is an increase of 9% compared to the prior year adjusted operating profit of $102 million.
Despite some unfavorable currency translation impacts.
As mentioned last quarter Ips remains our most globally diverse segment and therefore, most exposed to currency translation changes and the timing difference with the Chinese new year.
Looking on a constant currency basis and year to date. This segment has delivered 5% organic growth and incremental margins of 60%.
Head of our targeted 40% to 45% incremental margins.
This segment continued strong performance demonstrates the power of the NBS next growth framework.
On slide seven Youll see medical and fluid solutions sales of $167 million decreased 3% compared to the prior year's second quarter.
This change included a decrease in organic sales of 2% and a 1% decrease related to unfavorable currency impacts.
Strong demand for medical Interventional solutions product lines, primarily in the Americas was more than offset by softness in the medical fluid components, serving biopharma applications and fluid solutions product lines in Europe and Asia.
These factors drove a net 2% organic sales decrease.
During the second quarter, we took targeted cost actions and businesses responding to volume pressure that resulted in $1 million of nonrecurring severance costs.
Second quarter, adjusted operating profit was $49 million or 30% of sales, which is a decrease of $9 million compared to the prior year operating profit of $58 million.
The decrease in operating profit was driven by the meaningful sales mix changes within the medical product lines and related factory inefficiencies due to reduced volumes.
It is noteworthy that the segment profitability sequentially improved 400 basis points over the first quarter of 2023 and is again running more in line with the profitability levels of the prior two years.
Turning to slide eight you.
Youll see advanced technologies solutions sales were $148 million.
A 1% increase compared to the prior year second quarter.
During the quarter, the cyber optics acquisition contributed 12% growth.
Organic sales volumes.
We're down 10% and unfavorable currency impact during the quarter was 2%.
The organic decrease was driven by electronics defense products, serving the semiconductor end markets in the Americas and Asia.
Slightly offset by continued growth in the test and inspection product lines.
Cost reduction actions during the second quarter of fiscal 2023 to address the significant decrease in electronic defense product lines or structural in nature and resulted in $2 million of nonrecurring severance costs.
The second quarter adjusted operating profit was $28 million.
Or 19% of sales.
Which was below the prior year second quarter operating profit of $40 million.
The decrease in adjusted operating profit was driven by the organic sales decrease partially offset by the profitable acquisition growth.
Finally, turning to the balance sheet and cash flow on slide nine.
Our second quarter balance sheet includes cash of $129 million and net debt was $820 million, resulting in a one times leverage ratio based on the trailing 12 months EBITDA.
We continue to have significant available borrowing capacity to pursue organic and inorganic growth opportunities.
Free cash flow in the quarter was $159 million, bringing the year to date cash conversion rate on net income to 118%.
As working capital efficiency improved during the current quarter.
During the second quarter, we made $37 million in dividend payments and spent $47 million on repurchasing approximately 221000 shares of company stock at an average price of $212 per share.
For modeling purposes in fiscal 2023 assume an estimated effective tax rate of 20% to 22% and capital expenditures of approximately $45 million to $50 million.
We will now turn to slide 10, and I'll turn the call back to Naga.
Thanks, Joe going into fiscal 2023, we knew we would be dealing with a dynamic environment.
As the year progresses, we gain better visibility to our customers and I would now like to provide an update of what we see in our end markets.
The industrial position solutions segment.
Continued to see steady demand in industrial and consumer non durable product lines.
Investments continued to be been in automotive product lines, notably electric vehicles, we're on.
Also seen continue.
Continuing strength in our polymer processing product lines related to recycling and battery applications.
These diverse end markets and applications combined with our direct sales and the combination of both systems and parts revenue is driving the strong year to date profitable growth for this segment with Joe reviewed.
Turning to the medical and fluid solutions segment.
We continue to experience <unk>.
Double digit growth in our.
Our intervention solutions product lines and the backlog is strong.
These products include balloons.
And catheters.
Our integrated into medical devices for a variety of procedures, including.
Hartwell replacement <unk> delivery.
Angioplasties and ethanol for blood oxygenation.
The fluid solutions product lines within the MFS segment.
Serve a diverse set of end markets, including industrial construction Electronics Assembly animal health and medical.
The construction and electronics Assembly end markets within this product line.
You can see soft demand, particularly in Asia and Europe .
Finally in the MFS segment, our medical fluid component product lines, which make single use plastic connectors.
Rob Cox and bounce for the medical and biopharmaceutical markets.
Over the past two years this division.
Benefited from strong double digit organic growth in Biopharma applications.
As we shared in the last quarter.
Our customers in this end market.
We are continuing to work through inventory destocking.
As this business normalizes, the patient Tam applications within fluid components, such as blood pressure cuffs and IV bags remained stable.
That said the normalization within the Biopharma market.
<unk> is to provide a significant growth headwind for this segment.
Within the advanced Technology solutions segment, we are in the midst of the downside of electronic cycle.
This has impacted sales in our electronics defense and cyber optics product lines.
We firmly believe in the long term growth of the electronics end market.
We have not yet seen the benefits from investments related to the chips Act.
As we all know that the investment in automation memory and electronics, new product innovation will continue.
While the teams to targeted actions to adjust cost structure for our current volumes.
We remain invested in product innovation that will serve this end market.
Growth in our X Ray test and inspection product lines are successfully muting the historic volatility of this cycle.
Even in the downside of the cycle customers continued to invest in DNI systems to ensure quality and efficiency in their manufacturing lines.
Our cyber optics acquisition has more exposure to the memory end market. So its product lines have experienced weakness.
Regardless, we remain excited about the long term growth opportunities in the optical end market.
And we are pleased with the ongoing integration of this business.
I remind investors the past two years this segment delivered.
17% organic growth on average.
This multiple quarters.
Simply this cycle of semiconductor capital expenditures and we continue to be encouraged by.
By our differentiated technology, serving this long term attractive growth market.
Overall, the diversification of the nordson product portfolio.
And market and.
And geographic exposure enables sustainable profitable growth.
However, we are in a period, where two divisions are seeing significant market corrections.
Semiconductor equipment and Biopharma connectors.
The remaining nine divisions.
Our approximately 80% of nordson is delivering 5% organic growth year to date at targeted incremental profit levels.
Considering the combination of these end market headwinds tailwind.
As well as current order entry.
We are maintaining our previously provided 2023 revenue guidance of zero to 3% growth over fiscal 2022.
And narrowing our adjusted earnings to the range of $8 90.
To $9 30.
Looking specifically at the quarterly sales and earnings split.
Q2, 2023 was stronger than anticipated.
Some sales previously forecasted for Q3.
Pulled into Q2 therefore.
Therefore, we're now forecasting third quarter fiscal 2023 sales to be comparable to the prior year third quarter.
Third quarter earnings are forecasted in the range of.
$2 20.
To $2 35 per share.
We expect fourth quarter sales to be the strongest of the year.
Increasing low to mid single digits over the prior year fourth quarter.
Our full year guidance range sustains.
Our record 2022 sales performance.
Richardson Testament to our dedicated employees.
Our customer focused business model.
The diversification of our end markets.
And the solid execution of NBS next and DSM strategy.
As always.
Want to thank our customers shareholders and the nordson team for your continued support.
With that we will pause and take your questions.
Thank you as a reminder to ask a question. Please press star followed by the number one on your telephone keypad.
Our first question comes from Jeff Hammond from Keybanc Capital markets. Please go ahead. Your line is open.
Hey, good morning, everyone.
Good morning, Jeff and Jeff.
Just wanted to focus on the Biopharma piece I know you talked about inventory Destocking I think thought maybe by <unk> it would be wrapping up but it sounds like it's.
It's lingering so just just trying to get a better sense of your visibility for that business to kind of either hit easier comps or re inflect positive.
Yes.
Jeff.
Overall, I would start with Biopharma.
Secular growth.
Drivers all intact that is no.
No negative impact to what we have always thought about this business. So this is a strong high single digit growth business in terms of this short term destocking. What we had expected was maybe we would be in the second quarter recovering from it but it doesn't.
Looked like it as we indicated our expectations are by the end of this year, we should be back to normalized order patterns from our customers and so also by this time you would have.
Comps the growth comps would also be anniversaried.
Anniversaried by that time.
Okay, Great and then.
Just can you give us a little more color on where you saw the systems pull forward in terms of.
Segment or business detail and then.
Just a little more color on your level of visibility for that.
<unk> fourth quarter ramp thanks.
Yes, Jeff.
As it relates to the second part of that question the visibility I mean, what I would tell you is our backlog remains very elevated level near $1 billion, but the mix is very different if you think about our business and our backlog pre COVID-19. We typically ran with a backlog that was 80% to 90% of quarterly.
Sales.
But today I would tell you <unk>.
65% of our business is roughly normalized where the backlog is about 1% of quarterly sales, but there's 35% of our business, where the backlog remains elevated at call. It two and a half quarters worth of sales and backlog and the majority of this is our large systems business, particularly in the <unk>.
<unk> and plastics processing, which to answer your question is in the Ips segment.
Here. These are discrete large system orders, where we have customer prepayments and we have clear visibility to customer request dates that being said they can move depending on the customer request dates in our ability to ship within the quarters. The remainder of the heavy backlog is in our medical interventional solutions business.
And here. These are large blanket orders placed by our customers perspective product.
And then they routinely communicate delivery quantities. So when you think about it in our strong Q4, it's predominantly driven by these heavy systems businesses, where we do have backlog.
And but it could fluctuate in any given quarter as you saw here in Q2, some of the Ips the coatings, particularly in the coatings and the plastic processing, which was quite strong the plastic processing was where we saw the pull in from Q3 to.
Q2, and so that's it's really the large systems business within Ips, that's driving our clear visibility I would say that Q4 and customer tiny but also results in our ability to pull in or push out in any given quarter for these large systems.
Let me add something to that.
Color is that we feel really strong about the systems businesses as Joe indicated. It is also a strong testament of NBS next growth framework in action. What you find here is that the businesses are truly focused on our best products.
And have the agility and flexibility to respond to.
Demand.
In our market leading way so we feel really really strongly about it and we also feel good about our medical interventional business, which is showing some pretty strong strength I would say those two things drive.
Our optimism for the fourth quarter.
Okay I appreciate the color.
Our next question comes from Saree <unk> from Jefferies. Please go ahead. Your line is open.
Hi, good morning.
So good morning, good morning, guys.
The weakness in Acs, obviously isn't well telegraphed, but theres also a lot of government funding going towards you.
You mentioned, a little bit about the chip sac. So when would you start to see that benefit and then how long do we think about this down cycle.
Yes.
Right.
Way to think about it if you look at historical semi cycle.
And expect that.
Normal cycle expects about four quarters of downturn and so we are in quarter. Two is really where we are so any what we expect is somewhere.
Middle of next year for sure.
Be in a place where this.
Expenditures start to come back to the Capex expenditures start to come back to our conversations our customers are pretty bullish about the long term prospects for this business as you know.
Given geopolitical considerations given that ships act is going to come in.
What you find our businesses benefit from Capex expenditures.
Our allocated from these kind of investments our customers are making typically towards the end of their construction. So right now people are constructing plants.
They will eventually start putting in equipment hours would come in at sort of the back end of that.
<unk> that goes to <unk> semiconductors, that's where you would see us benefit.
That's helpful and speaking with Acs margins have been rather volatile I know some of this is mix related but what is the normalized mix and how do we think about my current here and can train train four and over the long term.
Yes, Sir.
When you think about the ATF business as I mentioned in the quarter. We were responding as you saw to the lower volumes for semiconductor and some of those cost actions were structural in nature, which will help us going forward in terms of the margin profile, but a portion of that.
I would tell you that the consolidated level over 100 basis points was the impact.
Responding to the lower volumes, both in semiconductor and in the medical fluid components business, but specifically on the Ats segment. When you think about the profitability you know.
Over the last several years that has improved quite significantly from lets just say, 11% operating profit margins up to ending last year at 29%. So right now running at these volumes, it's roughly 19% in the quarter and that's how I would think about it for this year at these.
<unk> with this mix.
Okay.
And if you think about frankly for us anything mixed related at least thinking about benefit I was just really a question of volume at this point.
Yes.
Reason as we recover that we wouldnt get back to 22 tight margins for this segment.
Great. Thanks for taking my questions.
Our next question comes from Chris Dankert from Loop capital. Please go ahead. Your line is open.
Hey, good morning, guys. Thanks for taking the question.
Good morning, Chris I guess as I look at.
As I look at the guide for fiscal third quarter here.
The reason for the kind of below seasonal sales expectation is it just the timing of backlog is it that some of these are actually getting weaker does can you kind of give us a little more color on how to think about the third quarter sales guide.
Yeah as it relates to the semiconductor and we commented order entry appears to have leveled off as it relates to those particular product lines and so while we saw sequential deterioration in semiconductor sales.
The guide for Q3 does not imply further sequential deterioration.
From the Q2 levels for semi conductor specifically is the timing issue between Q3, and Q4 and actually Q2 is predominantly on those large systems.
Sales, Chris, particularly in the plastics and in the coding space, where we do have the backlog and there were cases, where some got pulled forward I would estimate roughly about 10 million got pulled forward from Q3 into Q2 and now roughly speaking probably $10 million got pushed out from Q3 to Q4, that's how I would think about the guidance.
Got it that's very very helpful.
And then maybe just kind of a housekeeping thing here could you quickly remind us about the mix within that.
MFS segment, the interventional versus life sciences versus the FDA thinks a little bit of confusion there.
Yeah, So the way I would think about that.
You are correct. So theres the medical Biopharma, which is roughly I would tell you on a 100 million dollar business and then there is the interventional solution, which is roughly a $300 million annual business and then the remainder is your FD, which is your fluid dispense and as a reminder of that business.
Serves a diverse set of end markets some of which are medical some of which are construction some of which are industrial and some of which are actually electronics electronics assembly from semiconductor and so it's a very diverse set of end markets.
Served by that business and so in the quarter.
We saw significant strength in the medical interventional solutions business as Naga is mentioned and that order entry. There continues to be strong growth is strong. The biopharma has been talked about but within that <unk> business I would tell you the electronics semiconductor component of that.
Was pressured within the quarter and contributed to the performance.
Let me, let me add some a little bit more to be.
Fluid components business.
Of those $100 million not all of it is biopharma.
A portion of it is biopharma, but you also have other medical fluid connector applications in that business and so what youll find is biopharma as the one that is sort of normalizing.
But you have other connectors that have been pretty stable, but the Biopharma run organization was fairly significant to show up at the division level.
And as I indicated.
Indicated in one of my answers.
We expect that this normalizes by the end of the year.
That's helpful. Thank you guys.
Our next question comes from Matt Summerville from D. A Davidson. Please go ahead your line is open.
Thanks.
Just a couple of quick questions just to put a finer point on third quarter EPS guidance relative to last year roughly at 20 Delta on flat revenue currency is going to be probably a somewhat material tailwind in the quarter can you kind of parse out what's driving the year over year reduction in earnings.
On flat sales.
Yes, Theres two components also to that earnings guide is one is interest expense is clearly up on a year over year basis in.
In the quarter on the full year, it's going to be up about $20 million. So that contributes and then also last year. There was some FX hedge gains in the quarter, which benefitted which are not forecasted to repeat and so those are below the <unk>, which I would tell you are having an impact.
The year over year earnings guidance.
And then sorry.
Sorry, John .
Sorry, Matt just just to add I think it is important to remember that.
In the quarter, we delivered 31% EBITDA margins so about all of these above the line.
Operationally.
The owners are pretty strong at 31% our expectation is that we are at that level going into.
The second half of the year.
Got it that's helpful and then maybe just.
Spend a minute now youre talking about.
Any sort of evolution in your.
For M&A funnel backlog.
Relative to coming out of last quarter, how youre thinking about action ability et cetera.
Yeah, our acquisition pipeline remains healthy we continue to work on projects.
Our focus areas remain the same which is sort of.
Continuing to expand our test and inspection continuing to add to any core businesses around dispensing, if we run into that or continuing to scale up our medical businesses. So those three things strategically have not changed pipeline.
Pipeline pretty healthy, but we remain.
Financially disciplined and we've talked about those criterias.
And so.
We continue to work it.
But.
Yes.
Youre going to expect to see us be disciplined.
But our work continues so there is.
I can only tell you that.
This is top of mind and it's an important piece of our growth strategy.
As a reminder, we committed to delivering $500 million in acquisitions.
Over the plan period.
And we have acquired up to $225 million.
Revenues already.
And fully expect that we will deliver on that $500 million in the plan period.
So.
<unk>.
Good work and we have demonstrated we are flexible and type of deals we're able to do.
We have completed.
Optics, which is sort of public company deal last year, we did a public company carve out but we continue we remain invested in this process and feel good about where we are.
Got it thank you.
Our next question comes from Mike Halloran from Baird. Please go ahead. Your line is open.
Hey, good morning, everyone.
So good morning.
So a couple of your first.
Thinking about backlog normalization still very elevated sounds like.
We don't expect that to get more normalized until probably next year and then related any any in your guidance is there any change in the assumptions for underlying demand at this point.
From current levels or is the run rate you are seeing kind of what's embedded in the guide.
Yes, I guess, let me take the first part on the backlog question, Mike I would tell you. If you look at 65% of our business that backlog has.
Getting close to historical pre Covid levels. If you say pre COVID-19 levels. We ran this business at about 80% to 90% of quarterly sales and backlog heading into any given quarter for 65% of our business. We're at about one quarter work in the backlog. So it's almost at historical levels.
That hasn't reverted in I don't know that it is going to revert to historical practices.
Is 30.
About 35% of our businesses, which is the large systems business the coatings business, the plastics business and the medical medical Interventional solutions business, there, where we continue to have backlog at an elevated level orders continued to be strong and it's about two and a half quarters worth of backlog that were <unk>.
Running in those businesses and so we're not seeing that portion of our business revert to historical norms.
While the remainder yes.
The second part of the question.
And sorry could you repeat the second part of the question. Please.
Just within the guide is there any assumption for improvement or.
Curation underlying fundamentals.
Yes.
Avoiding backlog normalization again.
Yes. So if you look at our assumption on order entry, we do feel that it has stabilized at the level, we saw that stabilization throughout Q2, and so we continue to guide assumes that we remain at these levels.
And then what you have on that within the quarters as the timing of the systems.
Deliveries and so that's what drives the quarterly fluctuations.
Sounds good and then within the medical business the fluid business there.
Should that just correlate more with Ats at a high level on a forward basis and how are you guys thinking about the normalization of that piece, because we need the biopharma piece, you've given a lot of context to that.
Parts of that medical side of things, you're feeling pretty healthy about.
Just more of a timing on that on that remaining piece and how you think about that normalizing.
The Biopharma part of MFS I would say.
Normalizes by the end of the year right and so going into next year.
We do.
We are back to the 7% to 8% year on year growth, that's our expectation for us.
Medical fluid component business and as you think about Ats, that's going to be a little bit in the middle of 2024 or so.
Yes.
Our fluid components comes in first.
Aps business comes in next.
And some of this is normalization of comps too so.
Right No no no.
Yes.
You mentioned that earlier in the call I was more specifically referring to that.
Parts of that segment I don't want to construction.
The optimized et cetera type pieces.
John you want to take that.
Yes.
The fluid.
Management piece of MFS, that's not on the medical interventional and not on the medical fluid components side that.
Piece of the business FD.
I'd tell you roughly.
<unk> of that business has the exposure and market exposure similar to our broad Ats segment.
And the other half is more industrial construction theres animal health or medical so that's how we think about it.
And then go ahead sorry.
Sorry, Mike.
So for the portion that is has the electronics construction.
Construction explosion in Asia, you are right, we got to think about it right.
The Aps.
Great Great I appreciate it last question you guys mentioned some.
Actions internally to normalize for demand or is there any way you could quantify what that with those cost actions look like.
Are you thinking about more this just run rates with demand and helps mitigate what those decremental margins would look like.
Yes, those the cost actions during the quarter were 3.5.
$5 million roughly.
To respond very focused actions within the MFS segment in the Ats segment to adjust.
Adjust our cost structure I will tell you some of those Mike more structural not so it's not just the variable piece, but we did take some structural cost reduction actions, particularly in Ats that will help benefit that segment's profitability recovers.
Back to historical levels lets just say in 'twenty four.
And so the savings generated within the quarter or within the year, we'll offset the $3.5 million.
Great really appreciate it thanks.
Mike I think.
You didn't ask this question, but one thing I would remind all of us as that.
Yes, the business is adjusting to.
The market demand and I think that was the right thing for us to do but.
Keep in front of mind for all of you that we stay invested in our customer centric business model in our product innovation in NBS next deployment. So this is really important to making sure.
The company is well positioned as we adjust for these short term headwinds is well positioned for long term continued growth more than 80% of the business is growing and so we want to make sure. We stay invested in innovation stay invested in our customer experience.
So that.
We do well in those parts, but also even in the parts, where we have some short term headwinds.
We are invested in innovation.
Thanks, Megan maybe next call.
We'll have a smoother back and forth I won't cut you off.
Okay.
Sure.
As a reminder to ask a question. Please press star followed by the number one on your telephone keypad.
Our next question comes from Allison <unk> from Wells Fargo. Please go ahead. Your line is open.
Hi, good morning.
Morning, or anything else.
I'm starting to get some questions on my credit China's Micron band, just any comments or color on flow through to you guys or any risks that you guys see there.
Micron is.
Somebody that we work with in our optical business.
What we.
We are focused more on the long term so because as micron a expected capacity in other places we are certainly going to benefit as you have seen they've made some pretty.
Strong projections on where they are investing here in North America, So as I think about this.
Going to benefit from alternate investments they make and capacity so as you know.
Nordson benefits when people add new lines expand capacity or make alternative investments so I feel like.
Yes that might have a pressure.
Questions on what their investment, but I think long term the way you want to think about this is this is another reason why they would want to expand their capability.
Yes, there may be some impact on their volumes in China.
We're not our business is not impacted by volume of chips manufactured.
Yes.
Great.
Other ways, we are very close our customer centric business model allows us to stay in touch with our customers in a very close way and allows us to understand where they are headed and where they're doing so.
It is pretty new news. This is probably we thinking about it how does it impact us in the long term.
Understood. Thanks, and then you made a comment Ips.
Generating better better growth and execution that <unk> had laid out at the analyst meeting.
Want to understand kind of where the surprise less for you in terms of that division with it sort of the development of products is it execution just get a better sense on how sustainable you think that is going forward yes.
Yes, I think there are a couple of things that are alive, 0.1st I would point to that each of our businesses have been thinking about our.
NBS next growth framework and have been using what we call internally strategic discipline strategic discipline really used about understanding the best growth opportunities and doubling down on those best growth opportunities. So what you begin to see here is a concerted effort by all of our divisions to be focused on.
The best growth opportunities depth.
Definitely did benefit from some macro secular trends that we are pretty excited about first in terms of.
Onshoring more reassuring for ensuring whatever you want to call. It what you find is our customers beginning to add capacity.
Moving away from Asia investing more closer to home, we certainly benefit from it. So that is an important one the other thing that we are benefiting from it this business is that.
There are a number of emerging electric vehicle applications that are <unk>.
Electric vehicle as well as battery manufacturing continues to evolve so I wouldn't say business fully solidified yet, but these new applications certainly help us and help the company.
Play in some new applications, we have not had opportunities, but strategic discipline kind of brings all of that into focus for the business allows them to invest there.
So those would be the two things that I would point to certainly execution inside the business in terms of factory.
Dedication to our best products is suddenly also playing out so in most in the businesses. We are realistically implemented NBS next year starting to see.
A significantly better customer service that has market, leading so I would point to those three things as sort of.
Where we see.
<unk> is helping our teams delivered on growth opportunities.
Great. Thank you.
Yes.
Our next question comes from Walt Liptak from Seaport. Please go ahead. Your line is open.
Alright, Thanks, good morning, guys.
Good morning, I Wonder if you might be able to.
Maybe as a follow on to the last couple of questions using NBS next with these strategic discipline.
In the Ats segment, I think you guys have been working on trying to broaden some of the applications from.
Traditional semiconductor electronics to automotive sensors, Iot things like that and I Wonder if there is a metric that youre looking at now or if there is.
Something that you can tell us about sort of the.
The fruits of that effort.
Yes within the business, we have got like poor targeted kpis that we measure.
Which sort of <unk>.
<unk> view of how we're doing in terms of deploying NBS next.
We call it leadership level performance. So when you have leadership level performance on customer growth is one of the key metrics for the business within the company and what you're beginning to see is they're businesses that are not impacted by significant macro trends that metric is trending towards where we would like to be right.
And it differs from business to business. So I can't give you a specific number but what I will tell you is business by business by business teams are identifying what his leadership load performance and we are beginning to see some nice progress in businesses.
On customer growth certainly on new product innovation.
And there are a couple of other metrics around customer service levels that would be very excited about so.
Number of internal metrics that allows us to track the effectiveness of this strategy deployment and execution that is leading to some pretty strong.
Customer experience that we believe translates into growth and profitable growth for the company.
Okay, Alright, great Thats helpful. And then just switching over to Ips again.
The 9% organic I wonder if you could help us understand how much of that was volume growth and how much was price.
Yes.
This is Joe I would tell you the price realization.
For Nordson broadly improved in Q2.
And so I would estimate that approximately 4% of that 9% for Ips segment would be attributable to price and 4% would be volume.
Okay, great incremental margin.
Sorry go ahead.
Oh.
50% incremental margins looked really good to us.
Is that Theyre NBS next in there.
We're now operating at a higher level or is that just catch up on some of the price cost.
No I would tell you that the NBS next.
Pressing itself on the price cost.
We got to the point, where I would tell you that that is no longer.
A headwind if youll recall the last two quarters, that's been pressuring our gross margins.
So here that is price cost balance for nordson Theres no longer.
Pressuring the gross margins as we have realized the.
A price increase to offset inflation and maintain our margins.
So what you'll see there in the 6% incremental margins for IPF is largely consistent with what we've seen over the past couple of years and I would tell you.
A host of issues there, but it's the benefit of NBS next being broadly implemented throughout those divisions.
Okay, Yeah, congratulations on that okay. Thank you.
I would like to make one other comment I think it's back to Matt's question around the Q3 guide I spoke to what was assumed in the guide below operating profit, but when you look at the operating profit line and the gross margin.
Our gross margins, we're at roughly 54, 5% here in Q2, consistent with Q1 that being said the.
The drivers of that were a little bit different than Q1 price realization is no longer a headwind.
But what you see in Q2.
Margins are pressured by the lower volumes that we've talked about on those two particular businesses and then offsetting that is the growth, but the growth is coming with a less favorable sales mix as its becoming an coming in product lines, such as plastic processing that we're in.
Others, who are delivering double digit growth for the profitability. When you think about Q2.
Going into Q3 profitability from a gross margin and the op margin should be comparable.
Because the mix is comparable.
Yes.
Okay.
We have no further questions I would like to turn the call back over to now go for closing remarks.
No.
Okay.
Our performance reflects the strength of our differentiated position technology customer centric model and diversified end markets again, I want to thank nordson employees for their commitment which makes these results possible.
<unk> deployment of NBS next and DSM strategy will position us well for long term growth.
We look forward to the opportunity to talk with you at upcoming Investor events.
Joe Lora and Stephen low loss R. MFS segment leader will be at the Deutsche Bank Industrial Conference on June eight in New York.
So Laura and Jeff Pembroke, Our Ips segment leader will be at the Wells Fargo Industrial Conference on June 13th in Chicago.
And Joe Laura in our segment leader of Ats Shriti, several money and we will be participating in a virtual roadshow with Luke capital on June 14.
Thank you for your time and attention on today's call have a great day.
This concludes today's conference call. Thank you for your participation you may now disconnect.
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