Nordson Corporation (NDSN) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Nordson Corporation announces agreement to acquire Atrion Corporation Conference Call. [Operator Instructions] I'd now like to turn the call over to Lara Mahoney. You may begin.

Thank you. Good morning. This is Lara Mahoney, Vice President of Investor Relations and Corporate Communications. I'm here today with Sundaram Nagarajan, our President and CEO; Stephen Shamrock, Chief Accounting Officer; and Stephen Lovass, Executive Vice President of the Medical & Fluid Solutions segment; Dan Hopgood, Nordson new Executive Vice President and Chief Financial Officer who started last week, is also on the line and listening in. We welcome you to our conference call today, May 28, to discuss this morning's announcement of our agreement to acquire Atrion Corporation, a market leader in single-use proprietary medical infusion and niche cardiovascular technologies. A press release about the transaction was issued earlier today. You can find a copy of the release as well as our webcast slide presentation that we will refer to during today's call on our website at www.nordson.com/investors. This conference call is being broadcast live on our investor website and will be available there for replay. There will be a telephone replay of the conference call available until Tuesday, June 4. On today's call, as you'll see on Slide 2, we will discuss Atrion's complementary fit within the Nordson Medical platform, review Atrion's strong product portfolio and discuss the details of the transaction. We will then open the call for questions. Before we begin, please refer to Slide 3 of our presentation, where we note that certain statements regarding our future performance that are made during this call, may be forward-looking based upon Nordson's current expectations. These statements may involve a number of risks, uncertainties and other factors as discussed in the company's filings with the Securities and Exchange Commission that could cause actual results to differ. We'll now turn to Slide 4, and I'll turn the call over to Naga.

Thank you, Lara. Good morning, and thank you for joining us today. Over the past 15 years, Nordson has built an almost $500 million medical platform that is now part of our Medical & Fluid Solutions segment. Scaling our portfolio of precision technologies for medical end markets remains an important component of our growth strategy. The medical space is an attractive end market, supported by several secular growth drivers, including the aging population, increasing health care spending and procedure volumes, an option of minimally invasive surgical techniques and continued innovation and medical OEM outsourcing. Over time, we have successfully grown in this end market, both organically and through acquisition. As noted on Slide 5, Atrion's products will expand our current portfolio in medical fluid components and interventional solutions by adding a category leader in infusion fluid delivery and niche cardiovascular therapies. Atrion expands Nordson fluid components addressable market by more than 50% by adding products and solutions for infusion therapies and drug delivery. This also extends our current offering to top medical device customers and broadens Nordson's exposure to high-growth medical end markets with significant single-use consumables with recurring revenue streams. Over the past few years, we have gotten to know Atrion's management team, its products and operations. While they have experienced post COVID challenges to revenues and margins, they have invested over $70 million in the business over the last 3 years, including a significant expansion of their world-class FDA design and manufacturing facility in St. Petersburg, Florida. Leveraging our NBS Next growth framework and medical business expertise and this additional capacity, we see significant operational synergies while supporting Atrion's return to historical margin levels. Atrion will become part of our Medical Fluid Solutions segment. I will now turn the call over to the MFS segment leader, Stephen Lovass, to share more about Atrion's product portfolio and complementary fit with Nordson.

Thank you, Naga. Headquartered in Allen, Texas, Atrion Corporation generated approximately $169 million in annual revenue in 2023. Established in 1944, the company supports customers globally through 3 specialized FDA-registered manufacturing facilities located in the United States. As you'll see on Slide 6, its portfolio consists of 3 key business brands that will significantly expand Nordson's addressable market in infusion and cardiovascular therapies. Comprising 43% of revenue, Halkey Roberts is a leader in infusion fluid delivery solutions, including single-use OEM medical components such as needle-free swabable valves, [indiscernible] valves, pressure relief and check valves used in intravenous, intubation, catheter and other fluid transfer therapies. These products are used in applications such as drug delivery, oncology, dialysis, contrast media delivery and more. 42% of revenue is in cardiovascular solutions delivered through its Quest and Atrion Medical branded businesses. Quest Medical's highly differentiated microplegia, myocardial protection devices and related single-use consumables deliver real-time precise blood and cardioplegia solutions during open heart surgery. Quest's microplegia system improves patient outcomes, including faster recovery times and reduced medication costs while also mitigating the risks of bacterial infection. Quest Medical also designs and manufactures single-use components used in cardiovascular procedures, including cardiac surgery vacuum relief valves, silicon vessel loops for minimally invasive surgical procedures and aortic punches for attachment of bypass vessels. Next, the Atrion Medical business is a differentiated provider of OEM inflation devices used in minimally invasive therapies for structural heart, ENT and gastrointestinal procedures. The remaining 15% of revenue is in other specialties, including ophthalmic applications, and specialty inflation systems and valves used in marine and aviation safety products. Turning to Slide 7, you'll see how the addition of Atrion's portfolio will significantly expand Nordson's addressable market. First, the Halkey Roberts portfolio expands Nordson's fluid component addressable market by over $600 million with its infusion therapy products. Second, Atrion Medical interventional inflation devices add to Nordson's existing interventional solutions offering for global OEMs. And finally, Quest Medical will expand our solutions for cardiovascular and structural heart. Nordson Medical has long had a leading position in providing interventional solutions for minimally invasive and surgical structural heart procedures. Nordson also offers product lines in cardiopulmonary vascular cannula, catheters and specialized tubing for ECMO procedures. Quest Medical's microplegia myocardial protection systems and related single-use consumables will expand the applications that Nordson can serve from supportive therapies through the surgery. Turning to Slide 8, you'll see additional value creation opportunities related to this transaction. Atrion has 3 registered facilities in Florida, Texas and Alabama. It is a well-invested company, having undertaken over $70 million of CapEx in the last 3 years. This included the expansion of a world-class FDA registered design and manufacturing facility in Florida, that Naga mentioned, with top-of-the-line clean room automation. We believe Nordson will be able to leverage the investments that Atrion has made in its facilities to support Nordson's future growth with less new capital investment. Second, Nordson has deep experience in the medical device industry and is very familiar with Atrion's injection-molded fluid components business as one example. We believe there is ample opportunity to leverage this knowledge and our NBS Next growth framework to deliver operational synergies here and elsewhere in the business. Nordson has proven itself to be a strong operator, and we're confident in returning this business to its historic margin levels. Third, Atrion's businesses are supported by a strong patent portfolio of 498 active and pending patents. A good example of its innovative product portfolio is the newest generation of their myocardial protection system. Despite being impacted by supply chain issues in 2023, the product has received strong market acceptance. Nordson will support the successful acceleration of sales for this product, including an attractive opportunity to recapitalize its installed base. Finally, Atrion's skilled engineering and technical teams have built a strong new product pipeline. We're excited for these teams and the broader Atrion employee base to become part of our Nordson Medical team. Moving to Slide 9, I'll turn the call over to Stephen Shamrock to discuss the transaction summary.

Thank you, Stephen. This all-cash transaction is valued at $460 per share or an enterprise value of approximately $800 million. This reflects a valuation of approximately 15x 2024 estimated EBITDA, inclusive of synergies that we expect to realize within the first 2 full years of ownership. Historically, Atrion has a strong financial profile that is underpinned by the details that Stephen just reviewed, notably leading innovation capabilities and favorable secular growth trends in the medical end market. More recently, Atrion has been negatively impacted by operational and supply chain challenges. We have developed a robust plan to achieve synergies by leveraging our NBS Next growth framework and knowledge of the medical space to improve the operational performance and better leverage the substantial assets Atrion has in place, in addition to rationalizing duplicate public company costs. The acquisition of Atrion emphasizes Nordson's disciplined capital deployment strategy, which is focused on high-quality niche leaders serving attractive growth markets that are additive to Nordson's existing lines of business and support long-term shareholder value creation, achieving high single-digit return on invested capital in year 5. We will finance this transaction through a combination of cash on hand and financial debt. We expect to close this transaction by the end of fiscal 2024 and exit the year with a net debt-to-EBITDA leverage ratio within our targeted range of 2x to 25x. I'll now turn the call back to Naga.

Thank you, Steve. We are very excited to welcome Atrion and its 700 employees to the Nordson team upon close of the transaction. All of what you just heard energizes us as we make progress on our long-term Ascend strategy to deliver top-tier growth with leading margins and returns. With that, we will now open the call for questions.

[Operator Instructions] Your first question comes from the line of Jeff Hammond from KeyBanc Capital Markets.

Congrats on the deal. Just maybe I want to start digging a little bit better -- a little bit more on this, maybe some of the challenges they were having with supply chain, it looks like maybe some planned absorption and inventory correction issues. Just maybe walk through what's been going on there and where you think the opportunity is? Kind of where they are in fixing it and where you can kind of add value to that process?

Yes. Let me get us first started with some broad thoughts on that and have Steve add a little bit more color. As you think about it, this is historically a very strong company. Through the last couple of years, they've had supply chain challenges, and we fundamentally believe through our diligence process, those supply chain problems have been resolved. So this is really related to one of their newer generation NPS system launch. The second is, Steve will walk you through a lot of the details of how we've got what we have planned. But what I would tell you at the broadest level, we understand the medical business, we understand injection molding plastics, which is exactly what they do. And third, we have NBS Next that gives us a clear line of sight of what operational improvements that we can achieve. And with that, we have developed a pretty robust plan to restore the company's historical margin levels. Steve, do you want to add a little bit more color?

Yes. Sure, Naga. To your question, Jeff, I think Naga highlighted the 2 main challenges. And actually, Atrion touched on that in their shareholder letter, if you want to obtain more details there. But basically, related to their new MPS III console, there were some shortages of electronic components. So that negatively impacted their sales in 2023. And then they had some inventory challenges where customers placed orders in 2022 in excess of their actual needs. So their customers needed to work through that in 2023. So that really were 2 of the main drivers in terms of their performance in 2023. If you pivot to 2024 and going forward, we touched on that, I think, in our earlier comments, just in terms of the operational synergies that we see through NBS Next, right? And it's not just a simple matter. It's not based solely on volumes coming back, right? I mean I think about some of the strategies that we've effectively executed at Nordson in terms of product simplification, procurement savings that are there, leveraging the investments. Steven and Naga touched on that, $70 million. That includes some automation investments as well. So again, we've been -- I would say we've demonstrated an effective ability to manage incremental and decremental margins from a Nordson standpoint. We look forward to bringing that to Atrion. And it goes without saying there's obviously public company costs that will go away and represent part of those operational synergies.

Yes, that was my next question. So it looks like there's maybe $14 million of synergies built in. Maybe just talk through how much of that is public company costs and maybe some of the other buckets, if you have any?

Yes, Jeff, what I would tell you of that number, about $5 million is the public company costs that will be eliminated. And then beyond that, I would tell you, it's really just a mix in terms of just, again, some of the things I mentioned earlier, automation, product simplification, procurement savings, those type of operational synergies that we've demonstrated an ability to effectively manage on Nordson's side. So...

Your next question comes from the line of Michael Halloran from Baird.

So exclusive of the supply chain challenges, maybe you could just talk through what they're seeing in the fluid component pieces, the interventional pieces, cardiovascular, just kind of go through those pieces similar to where what Nordson seeing, where it's different? Maybe just kind of trend line as you worked through last year and then what the expectations are for this year?

So what I would say is there are some similarities here and close adjacencies in the markets we operate, but they are different. And I'll take it maybe piece by piece, as you touched on there. If you think about in the fluid components side, we are a leader in terms of components for patient care biopharma and surgery. And so you have -- as you know, you've seen some impacts from the biopharma destocking in that part of our business. Atrion, through its Halkey Roberts brand, operates in the infusion therapy market. So a little bit of a -- it's a very close adjacency, but a different market that over time is typically a mid-single-digit growth rate. They have a strong position there in terms of long track record with leading OEMs and through their innovative products and service levels. You have seen in the first quarter, good recovery in that market. And -- but over time, we expect that to be a strong mid-single-digit market. As was touched on earlier in terms of the cardiovascular side of the business, they were impacted last year by the supply chain issues. Overall, again, that market is in the mid-single-digit range, but we think there is a strong opportunity relative to the recapitalization of the installed base over time with the MPS systems.

So -- but the -- and then the second part of that, when is the expectations for this year because I think their guidance is high single digits or something like that for the full year? Just curious how you think that plays out between the various pieces and kind of what the moving pieces below the hood are there?

I would say overall, we -- as the -- I would follow the guidance that was issued in the first quarter. We believe that they are on track to meet their -- the guidance that has previously been given.

But just the components beneath it, any context on that, right, like what the drivers are? I mean, is this mostly the recovery in cardiovascular against easy comps? Is it something else?