Q3 2019 Earnings Call
All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question and answer session.
If he would like to ask a question. During this time simply press Star then the number one on your telephone keypad. If you would like to withdraw your question press the pound key. Thank you Laura Mahoney you may begin your conference.
Thank you Lisa.
Good morning. This is Lara Mahoney, Vice President of corporate Communications and Investor Relations.
Today I'm joined by syndrome, not Mirage on Nordsons, New President and CEO .
Mike Hilton senior adviser to the company and former President and CEO , and Greg Sexton Executive Vice President and CFO .
We welcome you to our conference call Today Wednesday August 21st 2019, the report Nordsons fiscal year 2019 third quarter results.
Our conference call is being broadcast live on our new Investor Relations Web page at investors Dot Nordson dotcom and it will be available there for 14 days.
There will be a telephone replay of the conference call available until September four 2019, which can be accessed by dialing 416.
Six to one.
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You will need to reference I'd number 5937 809.
During this conference call forward looking statements may be made regarding our future performance based upon nordsons current expectations.
These statements may involve a number of risks uncertainties and other factors as discussed in the Companys filings with the Securities and Exchange Commission that could cause actual results to differ.
After our remarks on the quarter, we will be happy to take your questions with that I will turn the call over to Mike.
Good morning, everyone. Thank you for joining Nordsons fiscal 2019 third quarter conference call.
Before we discuss the financial results I'd like to welcome all go to the call Naga joined US as President and Chief Executive Officer on August Onest 2019, just about three weeks ago.
He joins US following 23 year career with I T. W. We were very pleased to have him join the company.
Thank you, Mike, it's an honor to join Nordson and on behalf of the Nielsen colleagues.
I want to thank you for your leadership over the past 10 years.
I appreciate the opportunity now to lead this talented team.
Thanks, Mike and our board of directors for trusting me with this position.
I'm starting to travel to our sites to get to know the business.
And I've had the opportunity to meet individually.
With members of our leadership.
Throughout my career, I have thrived and driving growth and profitability like focusing on customer, while prioritizing innovation and comment.
Similarly, nordsons focus on customer passion and innovation has resulted in a market leading enterprise.
Great track record of growth and solid profit margin.
I'm using my first 90 days 90 days to listen and understand the opportunities that will drive absence next chapter in <unk>.
I also look forward to meeting with our shareholders and analysts.
Thank you Naga, we're very glad to have you on the team.
Now turning our attention to the third quarter, the ongoing uncertainty related to international trade disputes.
It's continuing to influence customer investments in new technology and capital.
This challenging macro economic environment is lasting longer than most expected and as a result capital projects have been delayed and we've had a weaker third quarter than we originally anticipated.
The softness in product line, serving electronics end markets those within the industrial coating segment.
Offset solid organic growth from our adhesive dispensing segment and the non electronics product lines within advanced technology.
Also during the quarter within industrial coating segments, some customers move deliveries into the fourth quarter.
So we expect to deliver a strong topline results for this segment in the fourth quarter.
Throughout this period, our team has been focused on executing continuous improvement initiatives and managing costs.
As a result, they held third quarter operating margin equal to the prior year when adjusting for one time charges in both years. Despite the decline in total company sales during the quarter.
As well as the pressure and distraction from travelers I'll now turn the call over to Greg to provide a more detailed perspective on the third quarter.
Thank you, Mike and good morning to everyone.
Third quarter, 2019 sales decreased 4% compared to the prior years third quarter.
This change included a decrease of 2% organic volume and a decrease of 2% related to the unfavorable effects of currency translation.
Growth in the quarter related to the first year effect of the fiscal 2018 acquisition of clot of medical devices and the 2019 acquisition of optical control was not significant.
Within the adhesive dispensing systems segment sales increased 2% compared to the prior year's third quarter inclusive of an increase in organic volume of 4% and a decrease of 2% related to the unfavorable effects of currency translation as compared to the prior year growth was solid across most all product lines.
Advanced technology system sales decreased 5% compared to the prior year's third quarter inclusive of a decrease in organic volume, a 4% and a decrease of 1% related to the unfavorable effects of currency translation again as compared to the prior year.
Double digit growth in medical product lines was offset by softness in product lines, serving electronics end markets. This is largely the result of a minimal customer innovation coming to market in 2019, as well as attention related to the ongoing trade dispute.
Industrial coating system sales decreased 18% compared to the prior year's third quarter. These results include a decrease in organic volume of 17% and a decrease of 1% related to the unfavorable effects of currency translation as compared to the prior year as Mike noted the timing of system shipments can impact quarterly results and we expect strong fourth quarter volume growth within this segment.
Moving down the income statement gross margin for the total company was 54% in the quarter operating profit was $130 million with reported operating margin of 23%. These results include $1.2 million for onetime restructuring charges and a charge of $200000 for the onetime step up in the value of acquired inventory.
Adjusted operating margin for the quarter. Excluding these one time charges was 24% equal to the prior year's third quarter. Adjusted operating margin also exclude onetime charges again. This is strong operating performance in the quarter against a challenging macro environment.
On a segment basis adhesive dispensing systems delivered strong operating margin of 31% in the quarter were pleased to see the progress the team is making to drive margins within this segment.
Within the advanced Technology systems segment reported operating margin was 21% in the third quarter down from the prior year, primarily due to lower sales volume.
Industrial coating systems segment delivered operating margin of 19%.
This team has worked hard to make sustainable improvements to its operating performance and we are pleased to achieve this level of performance despite weaker sales in the quarter.
On a total company basis net income for the quarter was $94 million and GAAP diluted earnings per share were one dollar and 62 cents, we delivered third quarter EBITDA of $158 million or 28% of sales.
Our press release includes financial exhibits reconciling net income to free cash flow before dividends and adjusted free cash flow before dividends as well as EBITDA and adjusted EBITDA.
From a balance sheet perspective, net debt to EBITDA was approximately 2.1 times trailing 12 months EBITDA at the end of the third quarter.
And I'll now turn the call over to Mike for a few closing comments.
Thank you Greg.
As I reflect on our expectations at the beginning of the year. The effects of recent macroeconomic trends has had more significant impact than anticipated, especially with the trade dispute continuing longer than most as expected.
Many of our end markets such as those within the ease of segment and the medical portion of advanced technology have held up well. Despite these pressures, but some customers are certainly more cautious with capital investment during these uncertain times.
For the full year, we now expect flat to modest organic sales growth and unfavorable foreign currency effects of approximately 2% on sales as compared to the prior year.
We will remain focused on continuous improvement initiatives to offset cost and the weaker expected sales growth. The whole were modestly improve operating margin and EBITDA margin as compared to the prior year.
The macro climate underscores the importance of our diversification strategy.
Despite the weakness in the electronics end markets I'm pleased with the solid organic growth in our adhesive dispensing segment.
And the non electronic product lines within advanced technology segment during the quarter.
We expect that growth to continue we also expect a strong fourth quarter from our industrial coating segment based on our current backlog.
We will continue to look for opportunities to diversify our business on July 1st we announced the acquisition of optical control, Germany based designer and developer of high speed fully automatic accounting systems using X Ray technology.
This product line expands nordsons test and inspection capability for electronics customers.
I'd like to formally welcome the optical control employees to the nordson team.
The strength of Nordsons position as a valued solution provider to our customers combined with the diversity of our end markets gives us confidence that we will continue to drive organic growth going forward.
We also remain focused on delivering value to our shareholders earlier. This month, we announced a dividend increase of 9%.
This marks the 56th consecutive year of annual dividend increases.
Ranking us 14th among publicly traded companies for the longest running record of annual dividend increases we take pride in returning a portion of our cash flow to our shareholders.
Before we move into Q in a I'd like to take this moment had as much as it is my last conference call. Thank our shareholders analysts employees and customers for their support over the past 10 years.
We have entered new markets and grown this business, while holding true to nordsons core values of integrity.
Spec for people customer passion excellence and energy.
It's been an honor to lead this great company.
I know Naga and north and strong leadership team will continue to enhance the company's great legs.
I will continue to work with not to go to ensure a smooth transition.
To start to see him Gregg and Laura on the road meeting with the investment community and I'm pleased to pass the torch to him.
With that we pause and take your questions.
Thank you at this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad, well pause for just a moment to compile acuity roster.
And our first question comes from the line of Allison Poliniak from Wells Fargo. Your line is open.
Hi, guys good morning.
Good morning, Welcome Naga welcome now again and best of luck, Mike I, just want to go to IC asked for a second.
You know I know the customer delays and push outs on aren't on common at you know any color around those push outs any ability to quantify it and then I guess any risk that they don't executing Q4.
Yes, I'd say, there's nothing really unusual about that I'd say, we've had some large projects that were ready to go.
In the quarter and the customers just move them back a little bit so they're all in execution now and will be delivered in the quarter.
We expect to see as we said a strong quarter. There. So there's nothing unusual or underlying that other than just the.
Some movement of larger orders into the fourth quarter.
Okay, perfect and then the growth reduction I know you guys were looking at.
The mobile the mobile, but Anthony electronics, that's not a surprise I guess, what what Harry I guess drill down that that growth target for the year.
A I would say most all of that falls into the electronic space. If you think back to where we were in the second quarter. The electronics industry in general is expecting a recovery in the second half that's really not playing out and we were working on a number of specific mobile projects that given the.
Trade disputes essentially all of them have been put on hold so I'd say the.
The area that really has.
Driven the shortfall has been those delays in the capital spending around electronics.
And in particularly affecting our dispense business there.
Okay. Okay. Thank you very much.
Our next question comes from the line of Christopher Glynn from Oppenheimer. Your line is open.
Hey, Thanks, just echo Allison's comments.
Welcome not gotten Mike it's been great working with you.
Just wanted to drill sites, you electronics markets continuing softening I'm wondering if any other areas starting to get tougher to pin down it doesn't look like anything in the quarter really but.
As you are looking at things in real time, any other demand patterns fraying are still pretty solid.
No I would say if you look at sort of our adhesive dispensing segment that's.
Moving along at a nice.
Nice pace kind of what we would expect our medical businesses is very strong.
Our business in advanced technology outside the electronic space is solid.
I think when we look at the end of the year, we'll see a nice recovery in the coatings business in this fourth quarter, it's even within electronics, our test and inspection business is holding its own.
The one that's been most affected significantly is the dispense side of things and Thats really.
Kind of been the key driver in the short term. So I'd say the runway businesses are doing strong we'll see an improvement in coatings in the in the next quarter and.
We're really not expecting the electronics piece to be a drag in the next.
This quarters.
I'd say nothing else.
Concern in general.
The trade dispute gets worse, you could see some pullback on overall capital spending and we're not seeing that yet.
Okay that makes sense. Thank you for that and on the guidance for flat ish margins for the year or a little better in the first nine months were down each quarter, obviously, but.
It implies maybe near record segment margin performance since after the first polymer deals wondering if you're.
You know seeing a clear path radius to have the best organic.
Growth and margin rate of the year 'cause it because you kind of back into that with the full year company outlook.
While we do expect volume to go up in the four quarter across most all of the.
Businesses and we as we have seen improvement coming from our polymer business as we've talked about we expected to see elimination of most of duplicate costs. This year, we have the facilities running at good operating rates, but we would expect.
Next year to see some additional improvement so.
I think we're in a good a good spot on the his segment at this point.
Sounds great. Thank you Mike.
Our next question comes from the line of Matt Summerville from D.A. Davidson. Your line is open.
Thanks, Good morning.
A couple of questions first can you talk about a quarter, but as a follow up to Christys question. The annualized savings you anticipate to generate from the manufacturing or footprint optimization that you completed a couple of quarters back in the adhesive dispensing segment beyond kind of the elimination of duplicative costs you mentioned Mike.
Yeah, I would say Matt for this year, we didnt expect to see much beyond the elimination of those cost, but weve said as we get the new facility up and running and the equipment all lined out.
Given our investment in sort of newer technology in the equipment as we load those facilities, we expect to see some efficiency gains we haven't specifically quantify that I think historically, we've gotten questions around.
Can we get back at segment back on an annual basis is 30% margins are above and we said we think we can do that so obviously that improved performance would be part of that.
This year, we weren't necessarily counting on.
A big step up due to the efficiency there as we lined out this.
Just as a follow up on two things first.
In the past I know you don't comment numerically specifically on incoming order rates. So you've been willing to give at least some sort of year over year color, if you're able to do that regarding the three businesses. What you saw through the quarter, perhaps even kind of the monthly cadence whether things got better got worse stayed the same and then lastly, Greg can you just comment on your free cash flow performance this quarter versus the year ago period, and maybe parse out why it was down quite a bit. Thank you.
Yeah, I would say overall as you look progress through the quarters order rates improve a little bit not dramatically, but improved a little bit and so I'd say a combination of what we see in our run rate businesses.
Plus the backlog in some recent orders in our coatings.
Business in particular gives us some confidence in the fourth quarter.
Im growth, we expect to see so I'd say modest improvement, but I wouldn't read too much into that.
Throughout the quarter.
Yes, Matt on the free cash conversion, we will have this.
In different quarters in the year, it's really a combination of two things related to working capital.
It's the timing during the quarter of of of when we ship some larger system sales. So if they occur at the back end to the quarter.
They are still sitting in receivables and it's also I'd say more so related to an inventory build.
As we gear up for.
Expected strong fourth quarter. So it's working capital related and I would expect that when we get to the end of the year, we'll we'll be back at that 100% conversion rate.
Got it thank you guys.
Our next question comes from the line of Jeff Hammond from Keybanc capital markets. Your line is open.
Hi, good morning, guys.
Morning.
Congrats Mike Hershberger, Brent Turner and Naga welcome aboard.
Thank you Bob So this girl.
Well a couple a couple of quick ones go back to the coating work hard to pin down for their way to quantify how much revenues personal from Threeq to Four Q2 .
As we set aside for growth rate into Fourq you.
Not specifically.
But what I would say Jeff is it we wouldn't have called out if it wasn't a substantial amount of.
Revenue, it's moving in some large shipments so.
It Wasnt incidental and Jeff. This is Greg I would add to that it's it's both the timing of some of those orders in terms of when they ship, but I think for this segment. We have to remember that we're we're often talking about larger dollar system sales. So it's also.
The timing of when we get those orders and in the quarter that theyre going to ship. So it's the comments that we're trying to provide is to suggest that although.
Third quarter alone with volume down in the direction that it was yes. It is we are trying to suggest that it's that's not really the flow of the demand that we're seeing within that segment than when you balance what we expect to deliver in the fourth quarter, it's going to get you back to.
Call it normalized.
Performance, but we would look at would say is we the fourth quarter is probably going to be a record in that particular segment.
Okay. That's very helpful and then.
Microphones instead of led products then we expect to do a drag in the fourth quarter or just you know this is kind of been our consistent.
Well, a little a little more required. So again this year. So just give us a sense of what your school.
That's good confidence that we see some kind of kirker earn out it doesn't preclude.
Yes, I would say part of that is a function.
To be Frank of Comparables with last year part of that is.
Function of sort of the steady state part of that business. There is a steady state part of the business.
The test inspection business has been.
Pretty steady.
And so really I'd say, it's not that we're looking for a big uptick we just don't see it going down anymore at this point in time.
And of course, we've got the stability of the non electronics.
Portion of the business within the advanced Tech segment.
Performance.
Okay and then.
Last one on.
Regarding the margin.
There were no principal payments of your Incrementals were were pretty close to 100%, but just give US then I think you said it was really just volume driven but is that just mix.
Business that is going away or is there something else going on thats driving into the system for margin decline.
Yeah, I think we heard all that Jeff what I would say is first volume does have an impact in the short term.
Secondly, particularly within the electronics part of the business, our dispense business as I as I said is.
Down substantially and that business tends to carry higher higher margins than our test inspection business largely because.
We make more of the specific components for that business as opposed to purchasing some in on the test and inspection side. So.
Those two or I'd say the biggest contributors.
Same there.
The volume piece in the mix.
Okay, great. Thanks, guys.
And again, if youd like to ask a question Thats Star one on your telephone keypad. Our next question comes from the line of Mike Halloran from Baird. Your line is open.
Good morning, everyone. This is pads on for Mike.
Hi, Pat good morning.
I was hoping to maybe get a little bit more color going back to margins. So we have the moving pieces with ice yes. Some of the cost initiatives you could maybe help us directionally by segment. It feels like maybe we're expecting a little bit of nonwovens improvement and then also some dts.
Could you maybe help US bridge the gap a little bit there working into Fourq, you and some of the puts and takes there.
Well I would say.
Overall, we expect for the year to be kind of flat to modestly up is what were thinking here.
Part of that improvement is going to come in the fourth quarter as our volume improves and we'll get leverage.
On that.
That volume.
As we've talked about our run rate businesses have been solid and we'll see some improvement in the coatings business as well.
Yeah, we've been working very hard on our continuous improvement.
Initiatives.
Hard to try and offset the impact of the volume decline, but also to deal with the great issues that bring tears into play. So when you when you look at that overall in his thesis side.
Specifically to your question around Nonwovens. The overall segment is.
Is growing as we've talked about in this quarter, particularly strong and packaging and product Assembly.
Well this is off a little bit but in aggregate.
Solid growth in a tougher macroeconomic environment.
Great. Thank you I'll pass it on.
Okay.
Our next question comes from the line of Chris Dankert from Longbow Research. Your line is open.
Hi, Good morning, everyone. Thanks for taking my question here.
Morning, looking at looking at advanced technology from a high level here, obviously I think fiveg is top of mind for a lot of people. Obviously like circuitry is another driver, albeit a bit lumpy, but when we think about innovation that could drive change and long term revenue growth for north I guess beyond Fiveg Flexibles kind of gets you excited in that business from a high level.
Yes, I would say and what we see continued growth around is auto electronics that are particularly as we've talked about in the past be associated in the short term with a lot of measures are put in place from a safety perspective and longer term its imports.
No movement too.
On them is driving we're also seeing an increase on the electric vehicle side, and so, particularly the battery technology although.
Trace in electric vehicles is modest but in the long run that's going to improve.
Creates some opportunities.
We do see some opportunities coming from five G., we think that's going to play out over a number of years because of the need to build.
Oh, the infrastructure piece to really make that effective the phone piece won't be the.
Gating item it'll be the infrastructure piece it'll be gating item and then longer term, there's probably some additional opportunity around all the.
Dan.
So forth I think.
As we look at our diversification in this segment.
That's that's affection part of it.
Ah, Yes grier.
Usually and then taps into a lot of different markets. So we feel good about that balance and then obviously the balance.
Side of electronic thing.
So I would say there are longer term growth drivers, Oh, which play into medical the model, which.
Oh.
We'll see those on the horizon.
Drivers.
Got it got it and then just kind of a follow up on that theme I guess you know what inning do you guys think we are in terms of you know the hearing inside of advanced technology here.
I'm sorry, what they want.
Hearing the tone.
Yeah.
Yeah, I would say if you look at that that applies mostly.
ER to the electronics parts of our business, but there are some in the non electronics parts as well.
I'd say, we've got a pretty broad portfolio and both spends and the test inspection side that involves.
Significant tiering, you know probably four to six.
Levels of offering now lot of those are just relatively new being introduced in the last year or.
We're so.
And I'd say, if we look at things like our valve portfolio of the business we've got a.
A full stack with some possibilities to continue to develop that.
I think.
Well, we're very well positioned as a.
Customers move from manual semiautomatic operation into automated operation.
Businesses I think we're well positioned in the short term I think we've seen a pause here.
Significantly related to.
Ongoing trade dispute.
Got it got it makes sense thanks, guys.
Q.
And we have no further questions in queue I will turn the call back to the presenters for closing remarks.
Thank you.
And again, thank you for your support.
We've talked about some short term macroeconomic challenges, but I think what you've seen is the diversity of our end markets. Our focus on customer solutions have allowed us to continue to have opportunities for growth and improved margins over the long run and in the short run our run rate businesses have done well and we expect to see.
Improvement in the fourth quarter and in some of our other businesses. So were I'd say encouraged in a difficult market the diversity of our business is.
Positioned us well. Thank you again for your support we appreciate your time and attention on todays call.
Thank you. This concludes today's conference call you may now disconnect.