Nordson Corporation (NDSN) Earnings Call Transcript & Summary

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Hi, guys. Good morning. Welcome to the Wells Fargo Industrial Conference. We're excited to once again have Nordson joining us today and with -- from Nordson is the CEO, Naga, who joined in August of 2019. So an unusual time, certainly for Naga to be joining. [Operator Instructions] And before we get started, I know, Naga, you had a few opening remarks you wanted to make. So I certainly want to turn it over to you now.

Thank you, Allison. Thank you to many of our current and interested investors who are listening in today. Before I continue, I want to reference you to 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 based on Nordson's current expectations. These statements may involve a number of risks, uncertainties and other factors that could cause actual results to differ. Nordson is a precision technology company with direct sales presence in 35 countries. We are differentiated by our customer-centric business model, and our commitment to innovation. Our intimate customer relationships allow us to add value by solving critical problems for our customers, enabling innovation in their products or driving efficiency in their manufacturing businesses. Over the past 67 years, this model has grown Nordson into a $2.1 billion manufacturer with leading margin. Another core strength of the company is the diversity of geography and end markets we serve. Nearly 65% of our sales is outside United States. We serve a variety of end markets, including customer non-durables, medical, electronics, industrial and many more. Approximately 57% of our business mix is recurring revenue, parts and consumables. Historically, These attributes have made Nordson recession-resilient, which remain true through fiscal 2020. We remain focused on keeping our employees safe and managing this dynamic short-term environment. We're also focused on moving the organization forward and making progress toward our long-term objectives. During the March 30 Investor Day, we introduced Nordson's new Ascend strategy, our road map to a stronger Nordson. The Ascend strategy is designed to deliver top-tier growth with attractive margins and returns. Three interconnected pillars of the Ascend strategy are: NBS Next, which is our growth framework; owner mindset, which is Nordson's entrepreneurial division-led organization; winning teams, Nordson's talent strategy. All 3 pillars of the Ascend strategy are built on the foundation of what makes Nordson really special, our culture and values. Allison, I know you have a lot of questions, and we'll get into details of many of these. So let me turn it back over to you.

Great. And I certainly want to delve into that Ascend strategy a bit more. But maybe before we do that, at a very high level, and you and I talked about this, you were in a unique position, coming in as a new CEO. You are inheriting a very strong growth and profitable company. As you thought to develop that Ascend strategy that you laid out, what were the tenets of Nordson's core that you aim to kind of elevate during that process?

Yes. And it's a great place to start. As you know, I was lucky enough to get at least 6 months under my belt, be able to travel to many of our businesses, spend a lot of time listening during that period of time, not only to our people, to our investors, to Board members and our customers. And all of that really, what I was trying to answer at that point in time is exactly what you're saying, "What do you do with this great company?" So what is next for Nordson, was a common theme that I was looking to answer. And really, what it resulted in was we looked at it and said, there are great strengths to the company. Highly diverse set of end markets that we serve with an attractive portfolio of precision technologies, a very customer-intimate business model we really liked. We like the recurring revenues, a strong balance sheet. So there are many things to like about the company. But at the same time, we were, one way to be critical and to look in the nearer term and said, maybe our growth has stopped if you look at the 3 years. And so we said not only growth is our biggest opportunity because it's a great margin company, adding to the top line at the current margins were more accretive to our investors than just expanding margins. So growth was important. So we're focused on that. But the second thing we also said was we had an opportunity -- we had a business model that we call NBS at that time, which is very operationally focused, and probably not very holistic. So we looked at that as a very important opportunity to add to the company to say, how do we make this a -- transform this to a growth framework that allows us to grow the company, because that's where our greatest opportunity was. And that's kind of where we started. It's like how do we keep all the great things and how do we add this growth framework that allows us to move the company forward?

Great. And when we think about that NBS, the Ascend strategy, you mentioned sort of the NBS Next tenet, the main mindset -- the owner mindset and winning teams. Why are those key attributes to focus on here for Nordson? What should each of those provide in terms of that growth strategy?

Yes. No, I think if you think about all 3 of them, first is important to recognize, all 3 are interconnected, right? The success of one of the pillars is equally important for the success of the others. And we'll start with the growth framework. What the company was really good at was, had great customer relationships in a very customer-centric business model, very strong precision technologies. What we really needed was a growth framework that allows us to pick where do we want to focus on. So if you look at NBS Next, our growth framework starts with strategic discipline, which is really informs each of our divisions, what are the best growth opportunities for them. And then more importantly, how do you double down on those opportunities, right? So it is not only important to know what are your best opportunities. And it's a very data-driven approach with segmentation that allows us to say these are the best customers, these are the best products and here are the best market opportunities. And then say, "How do you double down commercially on that? How do you put all of your innovation resources on those few best opportunities? And how do you organize your operations to serve those products and customers the most?" And all of this provides us a consistent, systematic way to think about growth and act on growth across our portfolio, right? So for us, NBS Next was this growth framework that we fundamentally believe when executed over the next few years holistically and with rigor that it is going to provide this growth engine for the company. That will be a new add to the company. Being disciplined about growth is something new to Nordson, right, using data to decide where you want to grow is also new to Nordson. But it is something that we're working, having really incredible early successes with it. So that is NBS next. And then if you think about decentralized entrepreneurial environment, it was resonant in some parts of the company, but it is not one that was consistent across the company. This is so important for us. If you look at a diversified company like Nordson, the opportunities in medical are not the same as the opportunity in electronics or in consumer non-durable, very different opportunities. And the best people who can make those decisions are our division leaders, closest to our customers, who understand their competition, who understand the market trends, much better than anybody in Westlake ever would. And so for us, it was really important to empower this leadership team to really do the best they can in the marketplace and to really get out of their way. But with that comes accountability, right? So our owner mindset, it's not only autonomy, which everybody loves, but it also comes with accountability. And I think that combination makes this along with NBS Next. You have a consistent way of looking at growth across the company. You have a consistent way of seeing what winning looks like across the company. So those two are really great. And in the third part of our talent strategy is a recognition that we're going to grow, but if we don't grow our people along with that, we're going to have a difficult time delivering on that growth aspirations or the growth opportunities. And so for us, all 3 are important, and they're interconnected. They bring different pieces, but all 3 together really deliver on our aspirations to be a top-tier growth company.

Great. And just to maybe quantify that a little bit. And I know it's -- we've hadn't had a normal in quite some time, but what's sort of that normalized growth rate we should be thinking about for Nordson over time through cycles?

Through cycles, I think what we have focused on really through our strategy plan and through our market growth rates for each of the different markets. So we have -- we looked at our 4 big verticals, which is consumer non-durable, electronics, medical and industrial. And through the cycle, our expectations are that we have 4-plus percent growth rate. And our expectations are that early in the cycle, would we be north of that number? Yes, that will be our expectation. But at the back end of the cycle, given electronics, it's really difficult for us to suggest what it might look like. But in aggregate, over the 5 years, our expectation is to have an organic growth rate of 4-plus percent.

Understood. And I think you somewhat touched about how you got to that. I think one of the feedback we got from the Analyst Day is that normalized growth rate was maybe a little underwhelming, just given the amount of opportunity it appears Nordson has. Is it really just sort of a cycle aspect to it? Is it businesses getting bigger over time? Any color you can provide there?

Yes. No, I think it's both of that, right? So first, there is a cycle to it. Early in the cycle, you are going to see us overperform to that 5-year target. So that's important to remember. This is a 5-year target. It's not a 1-year target. And if you think about what we said in the first quarter of 2021, our expectations are far north of that, right? If you take away the divestiture, we're thinking about 7% to 9%. And so early in the cycle, you're going to see us overperform. Back half of the cycle, we're not sure how our electronic businesses do. It's really difficult for us to quantify that drop, which we expect there will be. But -- and so that is maybe the hesitation in sort of trying to be bullish about the whole thing right now based on what you're seeing in the marketplace. So that's number one. Number 2 is, should we exceed this target, we'll be the first ones to tell you that, yes, we could do better than that. But given everything that is going on today, it is really difficult to look at 5 years and say, "this is going to be significantly better than what we have laid out for now."

Great. And you touched on the divestiture. As you look at the portfolio today, is there any other businesses that -- do you have sort of this bucket of businesses that you're continuing to monitor maybe product lines? How do we -- what metrics are you looking at to evolve your portfolio over time here?

Yes. It's a great question, Allison. We look at portfolio as an integral part of NBS Next. So we have strategic discipline that allows us to really think about what are the businesses that drive the long-term profitable growth of Nordson? So we look at it in 2 axis. One is we look at growth contribution, organic growth contribution. The other axis, the EBITDA margins or profitability to the company. So if you think about those 2, based on our analysis today, we like the portfolio we have, but it is an ongoing process. Should we come to a place a few years down the road that something else does not fit the portfolio anymore, we will certainly add. But as of today, we like the group of businesses we have. They have the characteristics to deliver the kind of growth and profitability that we're looking for in our companies.

Great. And we're excited about growth here in sort of the next phase of the cycle. How do you allocate growth investments? What's your approach to that? I think things are quite uncertain still. Is it weighted to specific sectors? Are there certain return metrics that you're having your businesses meet? How are you allocating those R&D dollars today?

Yes. So if you think about it, our best investments are organic growth investments. Quite frankly, we are blessed with a very capital-light business model. And hence, Joe and I have not really turned down any growth investments that were -- came across our desks. We are interested in differentiated businesses that have the growth potential. If the business is differentiated and they have growth potential, we are funding all the projects we can find. And typically, those growth, I'd tell you, the returns on our organic growth projects are so good that we don't turn any down, quite frankly. But when it comes to acquisitions, that is slightly different, right? So we have really said our greatest dollars on acquisitions will go towards our medical businesses and our test and inspection businesses. Mainly because these are 2 businesses we have got to a critical mass, and we see a scaling opportunity. So rather than looking everywhere, this is a question of NBS Next, and a strategic discipline to say, "Where do we have the best growth potential and opportunity?" And so we have decided to focus on medical and test and inspection. In all of our other businesses, should we have adjacent technology opportunities that we would add to them? We will consider them. But it goes to the same filters that we have, which is a strategic filter and a financial filter. We don't get through a strategic filter of buying a very -- we ask simple questions like do you like the market, first. And do you like the company, next. And that's really about adding to the company that look like Nordson, differentiated precision technologies in markets that have growth rates and that have a customer business model that we really like. So those -- fundamentally, for me, it is a strategic analysis, first; a financial analysis, next. We will be disciplined. We're not going to grow for growth's sake. So that's sort of how I would think about growth investments would be organic and acquisitions will be 2 different ways to think about.

Great. And you touched on medical. So I want to go into that one a little bit more. I would say, at a high level, and Lara was very helpful in setting me up at various trade shows, kind of pre-COVID, to better understand this business. Why is it a good business for Nordson? Where do you see it in sort of that short and longer term as an additive for you guys?

Yes. Medical, in my mind, is a great business for the company. It's something that we've built over the last 5 years, and it continues to do really well. And the main reason we like medical are because of the growth drivers that are associated with medical. First and foremost, an aging population that we wish we all will get more healthier. But either it is one of those cases where the aging population, along with the health factors that you have, it is a mid- to high single digits base growth market. So it's a very attractive growth market. So that's number one. Number two is that if you think about the spaces that we are participating in, hospitals, patients, doctors, everybody wishes to have less number of stays in the hospital. Nobody wants to be in the hospital, think about infection rates or think about recovery rates. So what you find is a growth in minimally invasive therapies, which is sort of where we are focused on. So a good example of a minimally invasive therapy would be a stent replacement rather than an open heart surgery, right? Open-heart surgery is complex, takes longer to recover, you're in a hospital for a longer period of time, more painful for the patient. And -- but if you have a stent replacement or -- that allows for a much faster recovery and a shorter stay, less infection rate. So that's, again, a great driver. We participate there. We really like it. And the third bit of it is the medical device industry has been on this path of outsourcing, right, outsourcing components. So if you think about the -- our customers, they want us to become a greater part of their business. And they're outsourcing a lot of components, and we play a really good role in it. We have a great design development capability. We have a good set of components. Things we manufacture, our balloons, catheters, tubes. All the things that allow our customers, our medical device customers to place their device inside a patient's body safely and effectively. That's what we do. We're a delivery mechanism expert, still a fragmented space. So many aspects of this, we really like, and we fundamentally believe we have opportunities, not only grow organically as well as acquisitions.

That's great. And then I just -- I also want to turn to technology, particularly within the advanced tech space, it's been a great growth driver for Nordson over time. I guess two parts to this. One, is there any technology that's emerging that Nordson is sort of weighing into? And then second, really, how do you, I guess, maintain discipline not to chase some of these maybe less profitable growth opportunities for Nordson?

Yes. No, I think this is a great question and a great opportunity for us. The company has spent probably the last couple of years being very diligent about diversifying our exposure in the technology space. That's one of the things rather than be reliant on one end product like a mobile phone. We have taken time to diversify across semiconductors, components, end products, PCBs and that has been -- that strategy is continuing to play out. So what you're going to find Nordson's portfolio is going to be a more steadier growth through the cycle rather than big swings up and down, right? So that's one that we have worked hard at and we're just playing on and we really like it. So that's number one. The number two is that we have -- if we thought about the company 5 years ago, we were very much in making things, right? So if you're making a semiconductor or you're making a component or a camera module for a phone or you're assembling a phone, you always thought of Nordson as supplying these precision dispensing machines that allowed our customers to make these very intricate circuits or very custom products in fast speeds as well as very accurately. That's what we did. But over time, we've also added a testing and measurement capability to this. So our testing and inspection business now ensures that our customers made this right. So that gives us diversity not only in what we make but also what we test and inspect. So that has been really good for us. In terms of technology, the 3 big drivers here are, for us, first and foremost, you have a data and a technology-driven economy, right? Think about this conference, think about this conversation, Allison, you and I are having. Traditionally, we would have done it. We have flown to New York City or wherever you have your conference, and we would have been in person. But now we are able to do this from different locations and still have a very seamless conversation. Well, that is all because of the technology and the data that is running behind seamlessly. There is an explosion of this. This is just the start. It's going to continue to go. So from our perspective, that is a great growth driver for the components that our customers make, for the semiconductors our customers make and end products our customers make. So a big revolution that is going to continue to go on and Nordson will benefit from it. The second thing is, these devices are getting smaller. If you thought they were already small, they're getting even more small and they're getting even more complex, right? If you think about semiconductors, in the past, you would have chips that will do a function. And our customers who make the chip to make a memory chip or they would make a processing chip, a logic chip or something else. But nowadays, they can assemble all those chips on one wafer. And so they've got -- this complexity is a boom for Nordson because we enable technologies that allow our customers to build these intricate devices, more complex devices. And probably the third bit of it is that as things have gotten very complex and the functions of those complex device have gotten very critical, our customers have to test them. They have to inspect them 100%. We used to do batch inspection of these semiconductors. Now we're doing 100% inspection. And so in our way to not only help people build things, but inspect things have now given us a benefit. And I think those 3 drivers particularly position Nordson well in the cycle that we're in.

Great. And one question we get oftentimes with these quality industrial technologies is really, margins are great. How do they get better from here? Could you maybe talk to that from Nordson's perspective?

Yes. There's a couple of ways to think about it, right? First and foremost, if you think about our organic growth in the next 5 years, our target is to grow 4-plus percent organic growth. But we also have a pretty good discipline around having great incrementals around 45% to 50% -- 40% to 45% incremental, this is what we're looking at. Just by virtue of organically growing at that kind of incrementals, our margins are going to expand, right? So that is one big lever. The second lever is that when we have a 27% EBITDA margin today, we're just pretty darn good, really good for an industrial company. But that is an average, and that should indicate to you that there are businesses above and that our businesses below. And we do believe with the use of NBS Next that we do have opportunity to expand margins by a couple of hundred basis points. The reason we are going from 27% to 30% is that our expectation is that we would acquire businesses at 20% EBITDA, which is going to be diluted. So if we don't acquire any, our margin expectation should be higher. But we believe that we have opportunities to continue to add businesses, really strong differentiated businesses. And even if we acquire them at 20% EBITDA, we would still continue to have this growth engine that will allow us to expand margins after the acquisition part. So at least in the near term, those are the two levers, organic growth that create incrementals as well as NBS Next actions that will improve some businesses that are below the company average. I think just those two are very good opportunities for us to expand margins. And all the while, we're adding value to the customer. This is not about -- we're earning our way here, so.

That's great. I know we're running out of time here. So great conversation. Any closing remarks that you wanted to make for folks?

Yes. I think what I would talk to you about is think of Nordson as a company that has got a great portfolio of attractive end markets with some strong secular growth drivers behind it. And competitively, I would say, precision technologies portfolio remains a strength for the company. And we are adding to these two great strengths. We are adding NBS Next with Ascend strategy, and we're adding a growth framework. We're adding a decentralized way of operating. And we have a very thoughtful, balanced growth approach of organic growth and acquisitions. So this is an exciting time to be at Nordson and great momentum building in the company because we have rolled out NBS Next for the last, more than a year now and we're having early wins. And so we're truly excited about where we're headed and what holds in the future for Nordson.

Great. Well, thank you so much for your time. And I'm sure if anybody has any follow-up questions, reach out to me or Lara at Nordson, and we'll certainly get back to you. All right. Thanks, everyone.

Thanks, Allison. Appreciate the opportunity.

Thanks.