Release Date: May 21, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Nordson Corp (NDSN, Financial) reported solid second quarter results with sales of $651 million, driven by the ARAG acquisition and strong performance in industrial coatings and fluid solutions.
- The company achieved a top-quartile EBITDA margin of 31%, reflecting improvements in gross margins and strategic cost adjustments.
- Adjusted earnings per share were $2.34, at the top end of the company's guidance range.
- Nordson Corp (NDSN) generated $108 million in free cash flow, converting 92% of net income into cash flow.
- The company successfully retired nearly $100 million of debt within the quarter, demonstrating strong cash flow management.
Negative Points
- The electronics product lines continued to show weakness, impacting overall sales performance.
- Organic sales decreased by 4%, partially offsetting the growth from the ARAG acquisition.
- Net interest expense increased by $9 million due to higher debt levels and increased interest rates.
- The Advanced Technology Solutions segment saw a 22% decrease in sales compared to the prior year, driven by ongoing weakness in electronics end markets.
- The company revised its full-year revenue guidance to a range of flat to up 2%, reflecting weaker electronics and agriculture end markets.
Q & A Highlights
Q: Naga, maybe you could just talk to what's assumed in guidance as you work through the year from an end market recovery. I certainly understand the electronics piece and the ag piece. You look at the implied fourth quarter ramp, it's still probably a little above seasonality. So wondering if you still have some of those systems and projects hitting in the fourth quarter or if that's been pushed to next year. And thoughts about any sustainability of the packaging piece and how you think the biopharma is going to recover. So basically, just maybe lay out how you think the end markets track as we work through the remainder of the year and what's assumed in guidance.
A: Let's get started with IPS. The guide is really -- maybe start with the first 2 big hits and then we'll go through the end markets, Mike. So the first -- the 2 factors which you highlighted is that we're not seeing the pickup in orders for electronic systems that we had expected with the implied second half ramp. So that's number one. Number two is the agriculture cycle is having a greater impact on ARAG than our own expectation. So timing is just -- there is not enough time here to achieve the ramp we had originally expected. In terms of end markets, if you think about IPS, non-ARAG, our expectation is going to be flat to slight growth following record 2 years. In terms of -- ARAG continues to contribute to the growth of the business. In terms of ATS, certainly, the growths are below our long-term growth rates. We're not seeing the pickup as we talked about. In terms of Medical Fluid Solutions, our expectation is that our fluid components business will be slightly up. Our fluid solutions business would also be slightly up offset by tough comps on the interventional components. So in summary, we're going to have IPS flat to slightly up, ATS down, MFS returning to growth slightly.
Q: So following up on that then, are you assuming any sort of pickup in some of those stressed markets or any sort of backlog let out in any of those stressed markets in the fourth quarter? In other words, just trying to understand how derisked some of those stressed points are in the guidance as we work through the rest of the year?
A: What I'll tell you is that if you think about our fourth quarter is -- does not require electronics to come back, does not expect ARAG to come back. So if you think about those 2 stressed markets. But what is expected, though, is sequential continued improvement in both these markets. So we saw that in second quarter, both electronics -- ATS is sequentially up and so that's our expectation.
Q: I just wanted to kind of follow up on the ARAG. So can you kind of provide more color on kind of increased pressure? Because I thought you guys said that you guys have got high recurring revenue here. And kind of when do you expect to see an inflection point in the ag market?
A: In general, this market is expected to be down this year. And we expect this turnaround sometime in '25, but we're not really giving any guidance on '25. So difficult to tell you exactly when that will happen. But our guidance does not imply any pickup in ag, agriculture markets this year.
Q: Got it. And I kind of wanted to follow up on the -- like the strong gross margin performance here despite like flat revenue growth. So how should we think about like gross margin for the remainder of the year?
A: Yes. Yes. No. So what I would tell you, and that really kind of ties back to our, what I would call, very strong Q2 performance, right? Basically, from a sales standpoint with Q2, we came in really where we expected from a sales standpoint. We came in with $651 million of sales in Q2. And that was -- when we gave the guidance for Q2, we assumed currency neutral. So if you add back about a $5 million unfavorable impact of FX, we basically came in spot on near the midpoint of our guidance. And we actually were at the high end of our guidance in Q2 because of the gross margin performance that you referenced there. And the way I would think about that is we really had a strong performance in margins for a number of factors in Q2, right? We had a very strong mix. I would tell you in Q2, whether it was parts versus sales, that was very strong, we had good customer mix, and even mix within product lines, and also had -- we referenced in our earlier comments manufacturing efficiencies and cost controls. How I would think about gross margins going forward, I think I mentioned this on a previous call, we're not focused on gross margin expansion. Our long-term focus is really to maintain the gross margins that we have. So I do think what you saw in Q2 was a favorable mix than normal. So that's how I would think about that going forward. I wouldn't expect as favorable of a mix in the balance of the year.
Q: Just a question on ARAG. I remember back to when you did the call as it related to the acquisition. We seem pretty convinced that this business would be less impacted by a down ag cycle. And clearly, that's not the case here. So what I guess have you learned over the last couple of quarters about ARAG and how indeed tied to the cycle that business seemingly is? And to that point, you mentioned inventory destocking. I assume that's at the OEM level, but correct me if I'm wrong. How long do you think that destock lasts?
A: Yes. You're right, Matt, in that our expectations that this business would have been less muted because of the precision ag exposure certainly did not play out the way our expectations were. But look, what is really important to remember is we still like the technology. We like the people we have added to the organization. Certainly, a very interesting end market. If you look at expectations of some of the OEMs, the precision ag itself is down or expected to be down 20%, 25%. So even if you think about our expectations with precision ag is going to continue to grow through the cycle, that has not worked out the way it is. In terms of inventory destocking, remember, 40% of this business is aftermarket parts. And those aftermarket parts go through distribution. They're not direct sale. So they don't go through the OEM, they go through a distributor. And there is some level of inventory destocking that is going on in ARAG.
Q: With respect to -- you mentioned kind of last conference call the canary businesses, and I mean that in a positive way with respect to electronics, showing some signs of life. Are you concerned that maybe those are no longer good leading indicators for a broader upturn in the electronics side? And could you maybe just put a finer point on how those businesses -- those canary businesses, if you will, performed in the
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
