Nordson Corporation (NDSN) Earnings Call Transcript & Summary

Thanks, James. Good morning, everybody. Chris Glynn, been the analyst on Nordson at Oppenheimer for a little over or roughly 10 years or so. Very happy to have CFO, Joe Kelley, with us today; and Laura Mahoney from Investor Relations. We're going to do a fireside format today, but starting with a brief overview from Joe. And there's also the question interface that participants can submit any questions, and those will take precedent over using the fireside format for the balance of the presentation. So with that, Joe, could you please start us out? Thanks for joining us.

Thank you, Chris, and thank you to the many interested and current investors who are listening today. It's my privilege to be here with you today. I will make some brief introductory comments and then turn it back to Chris for Q&A. I joined Nordson last July from Materion Corporation, a $1 billion public advanced materials company, where I had served as the CFO for the previous 5 years. I am very excited and honored to be part of the new Nordson leadership team as we embark on delivering the next chapter of the Nordson growth story. Before I continue, I want to reference our safe harbor statement, which can be found in Nordson's past filings with the Securities and Exchange Commission. During this webcast, forward-looking statements may be made regarding our future performance. These statements may involve a number of risks, uncertainties and other factors that could cause our actual results to differ. Nordson is a precision technology company focused largely on fluid dispensing and some adjacent technologies and processes. We have a direct sales presence in over 35 countries. We are differentiated by our intimate direct sales model combined with an innovative product portfolio that allows us to add value by solving critical problems and driving efficiencies for our customers. Over the past 67 years, this model has grown Nordson into a $2.1 billion manufacturer with attractive margins and returns. Another of our strengths is the diversity of our end markets and geographies. Nearly 65% of our business is outside of the United States. We serve a variety of end markets, including consumer, nondurable, medical, electronics, industrial and more. Greater than 50% of our business mix is comprised largely of recurring parts and consumables revenue. Historically, these attributes have made Nordson recession resilient, which remained true throughout fiscal 2020. We remain focused on keeping our employees safe and managing this dynamic short-term environment. We are also focused on moving this organization forward and making progress towards our long-term objectives. During our March 30, 2021 Investor Day, we introduced the Nordson Ascend strategy. Our road map to make a strong Nordson even stronger. The Ascend strategy is designed to deliver top-tier revenue growth with attractive margins and returns. Three pillars of the Ascend strategy are NBS Next growth -- sorry, NBS Next, Nordson's growth framework; Owner Mindset, Nordson entrepreneurial division-led organization; and winning teams, Nordson's talent strategy. All 3 pillars of the Ascend strategy are built on the foundation of what makes Nordson special, our culture and our values. So Chris, with these introductory remarks, I'll turn it over to you for Q&A.

Sounds great. Thanks, Joe. A little bit on the culture and strategic philosophies there. Wanted to start in with some of the technology positions. If you could please discuss the core precision dispense technology that the company is founded upon really. The legacy positions there, how that core technology, really how it spans such diverse markets, including across both the reporting segments, in fact?

Yes. Perfect. You bet, Chris. So when you think about the core and the history and what makes Nordson great, it really -- you trace the roots back to precision, hot melt precision dispensing. And so when you think about what does that really mean? That means we are selling dispensing equipment, which consists of the melter, the hoses and then the dispensing head that dispense hot melt adhesives. And so we were able to grow this in the packaging, consumer nondurable space. And then we were able to take it and expand it into other end markets such as some of the durable space with furniture and some of the other spaces went into medical and electronics. And so when we took the hot melt adhesives, and then we went into and we focused on the dispensing head, we got into cold dispensing. And so that's what penetrated us into the electronics space. And then we also went into the medical space in the fluid components. So again, tracing our roots back to fluid component and delivery by leveraging our dispense technology. Today, I would tell you, our diverse end market exposure all grounded in the dispensing technology slightly expanded in precision technology when you look at some of our test and inspection. Today, 1/4 of our business roughly is in the consumer nondurable. 1/4 of our business is in the medical space, roughly 1/4 of our business is in the electronics space and the remainder portion is in industrial and other end markets. So very diverse end markets that we serve. All grounded, I said -- would start it back in the core hot melt adhesives and really enabled us to expand that into those other end markets.

And you bridged to some of the different sorts of dispense technologies in there. Skipping to a different kind of core technologies, your test and inspection. It's really been the really primary topic on your calls the last couple of years, I think that in medical, really. But it's been a feature of ongoing technology development and application engineering. Curious, if you could just kind of highlight your overall positioning there, the breadth of applications and why NDSN continues to win there? I think it's been really a lead initiative. Any instances where you've actually come up short on the strategy, notwithstanding the overall success?

Yes. So thank you, Chris. Yes, when you think about our test and inspection, it's been a very strong pillar within our ATS segment, delivering nice growth over the last several years. And we again, continue to prioritize that and think going forward, will continue to be a strong component of the Nordson growth story. So if you think about test and inspection and try to connect that to dispensing, I mentioned the dispensing technology got us into the electronics space, cold dispensing. And what we quickly found was that dispensing was being done in a very precise manner in semiconductor, in the electronics space, it's also then required some testing. And so we started to acquire X-ray, optical, acoustic testing capabilities and -- that serve the electronics space. And so when you think about the overall trend in electronics and how these chips are becoming used in more and more critical applications, the focus on testing and quality has really heightened over the last several years. And it's gone from sample testing, to inline testing, to 100% testing of some of these chips, which really has helped us and contributed to the growth of our test and inspection space. Again, I mentioned, our main technologies are the X-ray and optical and acoustic. And so you ask, Chris, hey, where has our strategy worked? It's worked in those areas? Where has our strategy not worked? We are very careful not to go into test and inspection. That's not a defendable, differentiated technology. And so you've seen us do some acquisitions, the vivaMOS acquisition. And if you go back in time around the X-ray space, really ensuring that where Nordson expands and grows, it's not just high margin, differentiated, but it's also defendable. And so if you think about that strategy and that focus and you say, hey, where were we not successful. I would argue, in the screw and barrel business, it's not in T&I. But if you look at that in our IPS segment, we had expanded into that business. And I would tell you, while it was a strong business, the margin profile wasn't Nordson-like. The degree of differentiation and defendable nature of that wasn't enabling Nordson-like return, so we did divest that business. So when we look at growing in T&I, we're very focused on not just the technologies but ensuring those technologies and where we go test and inspection is a defendable position.

Okay. How would you describe the makeup of -- or the participation of test and inspection in the acquisition pipeline? You seem to have plenty of thrust on internal development, and the range of acquisitions you've done over the few years, whereas the medical space seems to be -- have a little bit more of that fragmented dynamic perhaps. Just wondering if you could repudiate my characterizations or?

Yes. So I would tell you, Chris, we view both the medical and the test and inspection to be large, relatively fragmented markets, where there is opportunities for niche technologies. Technologies, which are differentiated and defendable for us to play. There are physicians in those markets that are not as differentiated. And so we need to remain focused in our M&A efforts to, again, make sure that we're acquiring defendable positions and truly differentiated position. So in the test and inspection space, there are some technologies, let's just say, electronic test, which is not as defendable, I would say. It's a little more commoditized. And so we're careful to stay out of that space and really focus where we're differentiated. If you go to the medical, we really leverage our design and development capability to maintain intimate recurring revenue, differentiated products that help us maintain the margin and not go down the commodity path of a components manufacturer. And so in both of those, when we look at it from an M&A, we feel the market is large, the market has attractive growth rates. But there are niche applications in each of those where Nordson could be the better owner of assets and leverage some of our core competencies to maintain generating -- generate returns, Nordson-like returns.

Okay. And there's nice secular drivers that are apparent in both spaces. The electronification of the world, the increasingly mission-critical aspect of electronics. And then medical, obviously, has demographics, aging population. But there are a couple of other interesting angles to why and how medicals in Nordson sights and has been for some time, and secular trends, I think, within the global medical device industry. What specifically have you identified there?

Well, so there's minimally invasive surgery. And so if you think about a lot of our products, our -- the delivery -- involve the delivery of the product or the treatment or the application in terms of catheters and balloons. And so we think the movement towards that favors us. The other movement, I would tell you, is single-use components. It used to be a move towards sterilization and stainless steel, and as they move to single-use components and not just in the hospitals, but also in the pharmaceutical manufacturing realm of these drugs and components, single-use components favors our fluid connector business. And so that's how we think about it. And then I would tell you, when you think about Nordson's core competencies around fluid management and dispensing capability. A lot of that parlays into the medical design and development of some of these noninvasive interventional solutions. So that's how we think about it, and that's where we remain focused, I would tell you.

Okay. And -- so yes, it's been pretty full steam ahead for medical and T&I. I think another platform in the past that Nordson kind of built up through assembling some acquisitions was the polymer processing platform, it had some different fits and starts and restructurings along the way. How would you describe the overall position of your polymer processing platform today, the scale of that within the IPS segment and the long-term operating visibility that you have with that market?

Yes. So let me just -- if you don't mind, Chris, let me just go back and share a little bit, in the last part of the question, our operating visibility. And so when Naga joined a little less than 2 years ago, he went through and looked at the business and formed it into 2 operating segments, IPS and ATS. And then within those segments, and as we drive NBS Next and the Ascend strategy, which includes the component of owner mindset, he broke those segments down into divisions. And so -- and then each of those divisions is responsible for driving the NBS Next growth framework. And the first component of the NBS Next growth framework is strategic discipline and portfolio analysis. And so if you think about it at the PPS level, which is a division within IPS, when you do the portfolio analysis and you analyze that business, that's how the screw and barrel component of that became -- was highlighted, had visibility to it. And when we looked at the long-term growth trajectory and the potential margin profile of that and the degree of differentiation, it was determined not to be potential to get to be Nordson-like, while the other components of PPS were. And so we then, at the end of Q1, divested of the screw and barrel business within the PPS division. And I would tell you what remains in the PPS division, it does have the growth trajectory, the degree of differentiation and is a defendable position. And so we view it as core to Nordson and remain invested in that. So today, PPS is a division within IPS that we have very clear visibility to. We have hired a new division leader of that division, particularly, and we're driving profitable growth.

Okay. And what's the present size of that business? And also just in terms of -- I think of it primarily as a flexible packaging automation player, but maybe you could kind of augment that understanding?

Yes. So there is a die. So if you think about the products in that, it's dies, it's pelletizing, it's melter delivery. And so flexible packaging, primarily around the plastic processing space. And so when you think about divisions holistically at Nordson, Nordson is a $2 billion business. We have 10 divisions, 2 segments and 10 divisions. And so a division is roughly $200 million, ballpark.

Okay. And in terms of the overall mix of consumables recurring revenue versus engineered systems, I think you talked about 50-50. Is there a target mix in the future? Is it important to change or evolve that over time? Or is that not material?

Yes. So it's very significant, I think, to the Nordson long term story, and I mentioned in the opening comments. Because when you think about -- it enables you to be relatively recession resilient. I think we showed that in 2020. And it's roughly, let's just say, a little bit greater than 50% is parts and consumables. So historically, going back to the foundation, that was the hot melt adhesives. And so we were selling the systems and then selling the parts. But it wasn't a story where you sell the system at 10%, you sell the parts at 80% gross margin. We maintain very attractive profitability, both on the systems and on the parts. And as we go forward, that's true. So that has maintained the case, I would tell you, within the legacy Adhesives businesses. When you then expand and you think about medical. Medical has a lot of -- it's basically a consumable. And so we are manufacturing consumables, whereas test and inspection is predominantly a system. And so it's funny as we grow both of those, it enables us to maintain that 50-50 ratio between parts and consumables and the systems.

Great. And at your recent Investor Day, I'd encourage people look at the slides, but you put out high organic growth rates for each segment, and I think we'll just take each of those in turn. Starting with IPS targeting a 3% CAGR for the fiscal '25 operating plan, that compares to just 1% in the 5 years leading into the new plan. What were the gates to more GDP or GDP-plus-like growth leading into this period? And I'm not going to push back on the 3% because you might do better than that with some of the NBS Next, et cetera. But just kind of discuss that bifurcation of the 5-year periods.

Yes. So if you look back over the prior 5-year periods for the IPS segment, as you referenced, the top line growth was 1%. What I would tell you, Chris, is when you look at these businesses and you do the portfolio segmentation. Over the last 5-year period, if you look at the profit of that IPS segment, it actually grew very nicely. And so there was a case where the opportunity or value -- true value creation was to improve the margins of that business. And so while it was only 1% top line growth, the incremental margins were very attractive. The margin expansion was attractive and it ended with a 30% EBITDA. And so when you looked at that business, the last 5 years, the opportunity was profit margin expansion, not top line growth. When you look going forward, we like the profitability of that business and the top line growth is the entire -- the opportunity. And then the incremental margins will come in at 40% to 45%. So the NBS Next really now is, okay, IPS, we like the profitability of it, let's really grow it. And so when you think about the growth and driving the 3%-plus, there's a couple of things that are going to contribute to that. One is our very, very strong position in hot melt adhesives. There's application expansion. And so when you think about expanding into clothing applications, when you think about expanding into e -- vehicle battery manufacturing, also, I would tell you, geographically, our position in Asia is quite strong. Our ability to serve our customers, whether they're moving in or out of China into Vietnam, into India. We have a very, very strong global footprint. And I think Asia will be a nice contributor to the growth of the IPS segment going forward. So the last 5 years, it was a margin expansion story, not a top line growth. And NBS Next is a growth framework. We like the margins, and we're really going to drive growth in that business going forward.

Sounds great. Just a similar question for ATS 5%-plus organic target. I think that's consistent with the past 5 years. But I think a significant remixing of the drivers. So a little bit of that kind of non-pivot on the growth rate, but pivot on how you do it.

You are correct, Chris. I would tell you, entering the next 5-year period, our exposure and our portfolio mix is completely different than where we entered the previous 5-year period. The previous 5-year period saw a lot of growth in medical, whereas 2020 was a rough year for medical, given the pandemic. But also, I would tell you, on the electronics side, a lot of that growth was driven by handheld devices. And if I look at our electronics portfolio of products and exposure for that business now as we enter the next 5-year period, it is very broad. We touched a lot on the test and inspection. That is not handheld device-specific. It is broad customers and broad applications of X-ray, acoustic and optical, electronics testing and inspection. When I look at the dispensing applications, again, I would tell you, it is broad-based. It's not 1 application specific. And when you think about the complexity of the semiconductor chips and the wafer and the manufacturing process and some of the mega trends around the Internet of Things and 5G is 1 application. The growth rate there and our ability to participate more broadly in the growth in the electronics space, we're quite encouraged by it. And so those are the 2 drivers. And with some of the macroeconomic that you referenced, conditions in those 2 spaces that will drive us going forward as opposed to handheld and medical only.

Okay. And you referenced 40% to 45% incrementals at IPS. Is that the right level to think about for ATS?

That's the right level to think about for ATS as well.

Okay. And...

And it's like a function of our variable versus fixed cost and the opportunities that we see there.

Okay. And a couple of questions from the queue. Supply chain bottlenecks and input costs, where do you stand on that? It's been a main topic on the earnings calls, and you guys are little -- on a little different reporting cycle.

Yes. So when you think about -- I would just start off with Nordson has made 50% plus gross margins. And so we are selling the value proposition of the products we provide. And so when it comes to raw material cost and inflation, first of all, I would tell you, we're largely an assembly -- light assembly shop, and it's not like we're a material supplier. And so our material margin is quite high. And so we have maintained an internal practices and have the ability to pass-through price when needed if raw materials start to impact gross margin. So that's holistically. I will tell you there's challenges out there, as you're aware, as it relates to resins, resin pricing, resin supply. I would also tell you there's challenges as it relates to freight. And so -- but I would tell you, Nordson has this well established, not only commercial direct sales model, but we have a very robust supply chain and a global footprint. And one of the things that served us well during the pandemic is we did not miss a shipment to our key customers. And so what was a strong customer relationship, I'd tell you, was strengthened by the quality of our supply chain and our delivery capabilities. And I would anticipate these challenges to be no different as it relates to Nordson meeting customer expectations.

Okay. And in terms of acquisitions, is there -- what's the notional thought on a new platform for acquisition dollars?

Yes. So I would tell you, the thought is this. As we said at Investor Day, we feel confident that we're going to deploy our capital to acquire approximately $500 million of revenue over the next 5 years. When we look at our test and inspection and we look at the medical space, we say, hey, those are large fragmented markets where there are some assets despite market multiples being high and then a lot of other investors interested in those spaces. Nordson does have some core competencies where we could be the better owners of those assets and create value for shareholders in the form of return on invested capital north of our cost of capital. So we're confident that those 2 spaces are large enough, and we have core competencies that we could deploy the capital in those areas. That being said, we also do keep our eye open for other precision technologies where Nordson could leverage our core competencies to create value. But the majority of our pipeline, Chris, I would tell you is in the medical and the T&I. But we do look at other opportunities, but it's not like that $500 million is all going to be coming from some other platform. If we enter another platform, it would be at a smaller incremental scale, kind of like how we got into test and inspection over a period of years.

Okay. And also from Investor Day, you talked about performing at a 30% EBITDA margin target over the horizon or by fiscal '25. You're really not far off and -- from just under 27%, the screws and barrel divestiture and little growth this year, probably get you at least halfway there. Does the 30% target, does that include the impact of inorganic contributions rolling in along the way?

Correct. Exactly. So if you think about it, Chris, to your point, the organic growth only that we see, which is quite attractive in the 5%-plus and 3%-plus in our 2 segments, when you look at that in terms of incremental margins, plus some of the other benefits of NBS Next, which should drive some margin expansion, you referenced the screw and barrel divestiture, which is just a portfolio mix, favorable impact. So organic only, we would get north of the 30%. And then the acquisitions, we assume those acquisitions come in at roughly a 20% EBITDA on average. And so that dilutes us back down to the 30%.

Okay. Great. And another one from the queue. And I think you sort of addressed this, but maybe just final clarification in order. It's about -- if the handset market is a determinant of quarter-to-quarter growth, I believe that dynamic is dead and buried.

Ship has sailed.

Okay. Great.

We don't look at individual handheld. So our exposure in the electronics is much broader than that in terms of applications where we are in the cycle. We're selling not just the dispensing equipment, but we're selling the test and inspection equipment. And so we have a very broad electronics exposure and very defendable positions that we like, and we're very encouraged by the attractive growth trajectory. And so there's a lot of new applications that we're working on. And so we're no longer single application-dependent.

Right, right. And it's been shrunken and pretty stable and static for several years now. So just to underscore your point. And I think last one from me here. There's been a lot of disruption, I guess, in the global economy and supply chain. You mentioned you guys didn't miss a shipment. Are you seeing any particular opportunities where front end investment in commercial excellence, sales and marketing is presenting particular opportunities for Nordson?

Without a doubt. And I kind of touched on that. I mean, if you go back during this pandemic, we remained invested in what makes Nordson great, which is our direct sales model. That is what enabled us to not miss shipments, that is what enables us to deliver the 50%-plus gross margin because we have a direct sales model that sells the value proposition that we provide. And so we are very proud of that. But also, we understand that that's key to what makes Nordson great. And we remained invested in that during 2020. And I mentioned sales were only down 3% in the year, but we remain invested in our direct sales model. And so we continue through NBS Next growth framework, we do the strategic discipline, and then we look at customer success or customer excellence, and we look for those opportunities to invest and to further drive our core competency there, which is the direct sales model. So we will -- we did, and we will continue to invest in that.

Great. Thanks a lot, Joe. That brings us to within a few seconds of the close, I believe.

Well, thank you, Chris, and thank you for everyone for joining.

Have a good day. Thanks, Lara, too.

Thanks.

Bye.