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Nordson (NASDAQ:NDSN)

F1Q08 Earnings Call

February 22, 2008 8:30 am ET

Executives

Barb Price - Manager Shareholder Relations

Ed Campbell - Chairman President and Chief Executive Officer

Greg Jackson - Vice President Chief Financial Officer

Analysts

John Francis - Sidoti

Matt Somerville - Keybanc

Tom Brinkman - BMO Capital Markets

Operator

Good Morning. My name is Carmen and I'll be your conference operator today. I would like to welcome everyone to the Nordson Corporation First Quarter Fiscal Year 2008 Conference 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 you would like to ask a question during this time simply press star then the number 1 on your telephone keypad. If you would like to withdraw your question press the pound key. Thank you. I would now like to turn the call over to Mrs. Price. You may begin your conference.

Barb Price

Thank you Carmen. Good morning everyone. This is Barb Price, Manager Shareholder Relations along with Ed Campbell, Chairman President and Chief Executive Officer, and Greg Jackson, Vice President Chief Financial Officer. We would like to welcome you to our conference call today, Friday February 22, 2008 on Nordstrom's First Quarter Fiscal 2008 Results. Our conference call is being broadcast live on our web page at www.Nordson.com and will be available for 14 days. There will be a telephone replay of our conference call available until midnight Friday February 29 by calling 18006421687 and you will need to reference ID number 34551546. Our attorneys have requested we open this conference call with a cautionary statement: Under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. During this conference call future statements may be made regarding our future performance based on Nordstrom'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. After our remarks we will have a question and answer session. I will now like to turn the call over to Ed Campbell for an overview of our First Quarter Fiscal Year 2008 results and Nordstrom's future outlook. Ed..

Ed Campbell

Thank you Barb and thank all of you for attending Nordson's conference call discussing our First Quarter Fiscal Year 2008 Results. Much of the data that I have typically provided in my comments such as order growth rates has been included with the earnings release, so my comments this morning will provide highlights of what was a very strong quarter for Nordstrom, both in terms of revenue growth and operational performance. In addition, I'll provide some guidance relative to out outlook for the second quarter.

Our first quarter performance generated record sales of $245 million, up 20% from the prior year driven by a volume increase of 15% and favorable currency impacts of 5%. Of that volume increase, the first year effective acquisitions added approximately 9% with 6% coming from internal growth. All segments contributed solid revenue growth in the quarter, led by the advance technologies segments' gain of 41%. Although much of this segment's growth is from the first year effective acquisitions, internal volume growth in this segment was approximately 9%. This is encouraging as it represents another progressively stronger quarter of advance technology shipments and reflects not only improvements in some of our end markets within this segment but also growth from products introduced in recent quarters. The 13% growth in the adhesive segment is also very encouraging, as the growth is fairly broad based in terms of product lines and geographies. Within the industrial automotive segment, the 8% growth is primarily centered in Japan and Asia Pacific. I will remind you as well that this segment is driven by margin dollar engineered systems which can lead to volatility in both quarter sales and order entry comparisons. On a geographical basis, first quarter revenue was up double digit growth rates in all geographical markets except for the Americas which grew by 8%. Asia Pacific continues top be red hot with growth of 44%. Although the 20% sales growth in the first quarter fell just below our guidance range of 21-25%, I'll point out that we had a larger than normal value orders that were scheduled to ship in quarter one, but were rescheduled until later quarters due to customer requests. These are not order cancellations, they are request for delivery beyond the original delivery date for orders that tend to be margin dollar systems orders. The overall gross margin rate of 57.2% in the quarter was higher than guidance due to a variety of factors including favorable mix, including the shift of the orders noted above and down slightly from the prior year due to a higher mix of system revenue versus parts in the current quarter as compared to last years first quarter.

Let me turn to the impact on 2008 current results from purchase accounting from the 2007 acquisitions. During the first quarter, the impact on earnings was neutral compared to last years first quarter. During the final nine months of 2008 the acquisition accounting will provide a favorable $.12 per share as compared to the charges in 2007.

Operating profit increased 29% to a first quarter record of $36 million, or 15% of sales. A strong performance per quarter that is traditionally our lowest performing quarter. On a segment basis I'm very pleased with the improved operating margins in the adhesive segment, demonstrating the leverage that revenue growth has on operating performance. Likewise the 4 percentage point improvement in the industrial coating and automotive segment's operating margin is very satisfying. Although not yet at the performance levels we ultimately expect from this segment, we continue to see the benefits of our restructuring efforts.

With regards to the advance technologies segments, we are seeing the mix impact associated with acquisitions in the current quarter, and like most of our traditional product lines the first quarter performance for the acquired businesses tends to be the weakest quarter performing quarter. I fully expect the margin performance of this particular segment to improve in the out quarters.

Net income for the quarter increased 37% over the prior year to a first quarter record of $21 million in fully diluted earnings per share increased 35% to a first quarter record of $.62 per share versus $.46 in the prior year.

Let me provide some additional perspective on cash flow. Contributions to cash flow were net income of $21 million, non cash charges of $10 million and $5 million from the net change in long term assets and liabilities. Typical for first quarter as we build inventory, the use of cash for net change and working capital was $23 million resulting in cash from operations of $13 million. Net capital expenditures in the quarter were $4million and dividends were $6 million. In addition, we did buy back approximately $7 million of stock in the quarter. The current years EBITDA, was $45 million a 36% increase over last year's $33 million.

Our debt leverage measured on total debt capital ended the quarter at 40%. Net of cash, this ratio would be 37%. As we have articulated in the past, we are very comfortable at this level of debt and short of any acquisition activities we'll anticipate a fairly rapid reduction of this leverage as we move forward. In summary, we have a very strong start to the year and I'm pleased with the sales growth and operating performance in each one of our segments.

Let me turn to some brief comments about our outlook for the second quarter 2008. Back log at the end of the first quarter was approximately $131 million up $25 million in the same period of the prior year, and up $32 million from the beginning of the fiscal year, all measured in constant currency. Recent demand as measured by orders has shown considerable strength. The details of order rates by segment and geography have been included in their press release, but in summary, orders for the last 12 weeks, pending February 17 measured in constant currency including acquisitions in both years were up 8% from the same period from the prior year. To add some perspective to the current order growth rate the 12% adhesives order growth rate is certainly a strong rate for this segment and is broad based both geographically and across product line. Asia Pacific orders continue to grow in excess of 30% within this segment.

Within the advance technologies segment the growth of 10% is also fueled by Asia Pacific, orders are up 52% in this segment. I would also like to comment that this 10% order growth is the strongest we've seen for this segment in the last 5 quarters, and demonstrates growth both in our long standing product line as well as the new acquisitions.

Regarding Industrial Coating and Automotive, the decline in order rate, one observation is that order rates at this time last year were up 15%, so we have a somewhat difficult comparison and as noted above, orders in this segment relate to margin dollars systems orders which can be lumpy on a quarter to quarter basis. Even with these current order rates, I remain confident that we will see respectable performances this year within this segment.

With the perspective on order rates, we currently have an outlook on sales volume increase of 10-14% for the second quarter. Favorable currency affects should contribute a 4% increase to year to year sales resulting in overall sales growth of 14-18% in the quarter. The sales outlook would be a record for any second quarter. Given the mix of products, we should see gross margins around 57%. This outlook results in earnings per share for the second quarter in the $.77-$.86 range versus the prior year of $.61. Earnings in this range would represent record earnings for share for any second quarter and with the $.82 midpoint of this range 34% higher than the prior year second quarter earnings per share. Obviously the strong performance delivered in quarter one coupled with this outlook for the second quarter puts ups well on the way to a very strong first half of the fiscal year.

Let me stop now and open it up for your questions.

Question-and-Answer Session

Operator

At this time I would like to remind everyone, in order to ask a question, please press star and then the number one on your telephone keypad. We'll pause for just a moment to compile the Q and A roster. Your first question comes from John Francis with Sidoti and Company.

John Francis - Sidoti

Good Morning Ed.

Ed Campbell

Good Morning John.

John Francis - Sidoti

First question is a clarification; you said that purchase accounting was flat in the quarter. If I recall a year ago I think it was $.03. Does that mean that you had a $.03 negative impact on accounting in the current quarter?

Ed Campbell

Let me just give a broader background; The purchase accounting falls into 2 categories. The first is the short term inventory effect that are essentially all behind us as we now begin 2008. Last year's first quarter we had the inventory on the Dage acquisition as well as a small piece of that second element of purchase accounting which is the Amortization of the Intangible Assets associated with the purchased company. We're now in 2008, we have no more of the inventory effects but we have the intangibles from the four acquisitions coming through the income statement. We expect this year for those intangible to total around $.10, or between $.02-%.$.03 this quarter. That $.02-$.03 of '08 is equal and offsetting to the roughly $.03 that we had in the first quarter of '07. Then with the remaining nine months, it becomes quite favorable totaling about a 12% pickup as we have that continuing 2-3 this year compared to much larger charges last year.

John Francis - Sidoti

Understood, thank you very much. The adhesive dispensing order growth was rather impressive at 12%. You said it was broad based but I wanted to ask if you could provide some additional color as to what kind of end markets may be a little bit stronger than others?

Ed Campbell

If I look at the matrix of orders in that business geographically, the Asia-Pacific region is over 30% at it was last quarter so if you will, 6 months equivalent verses order rates, we've been trucking along at over 30%. We also see positive growth comparisons in all territories, including the US. If we look at the product lines within that segment it is all relatively strong as compared to what each of those product lines might traditionally deliver. For example, our packaging products tend to be quite stable but perhaps not with the kind of growth rate that we might get in assembly markets. Packaging relative to what it might be producing in other periods of time is moving along well. Or non woven business, again fueled by good strength in Asia is quite strong as what's encouraging about this, I think, that 12% this quarter was 19% last quarter. These are big numbers for this segment and reflect good levels of investment by customers and good success in some of our initiatives that we've got out there in the various regions and we're just real pleased with it.

John Francis - Sidoti

I agree, these are very impressive numbers. Last question is, the Industrial Automotive Business, I know you said you had a tough comparison, should we be concerned that business might dip into the red in coming quarters or is there enough confidence in the cautions taken out on that business or the potential order bulk, that we should not be concerned about that?

Ed Campbell

The first quarter for this segment is always the weakest. I think if you look back a year ago, my recollection is that impact on the income statement it had a down performance, it's not uncommon for it to have that kind of relationships in quarter one compared to out quarters. I'm not, I think the short answer to your question is, no you should not be concerned.

John Francis - Sidoti

Thanks a lot Ed.

Operator

Again if you would like to ask a question please press star the number one on your telephone keypad. Your next question comes from Matt Somerville with Keybanc.

Matt Somerville - Keybanc

Morning. Couple of questions, first, as you commented that you felt that there were some orders that you thought would ship in the first quarter that have been rescheduled for the later three quarters of the year, could you provide a little more granularity in terms of was that relegated to a specific geography, a specific business segment, and then I guess how substantial would you say the dollar value of that business was and then is this something you traditionally see or should this be viewed as somewhat cautionary I guess?

Ed Campbell

First of all, I'll answer the second question first. I don't think you should be concerned, these are issues associated with logistics that our customers have in the facilities where they're looking to take these deliveries, its across a handful of orders, its not a large quantity of different circumstances, each has their own story, but I don't think its in anyway reflective of macroeconomic conditions but rather just particular customer circumstances. As to segment, it is substantially all in adhesives and geographically its not concentrated is it Greg?

Greg Jackson

No, it's not.

Ed Campbell

In terms of magnitude, in the internal growth rate its order magnitude couple percentage points, now we always have some of this that comes and goes at the end of every quarter. That a couple pf percentage points that we specifically identified isn't larger than we would typically see, but it would have changed had those circumstances not arisen, it would have changed the actual shipments in the quarter in the range that we had forecasted in our guidance in December.

Matt Somerville - Keybanc

For your volume outlook in the second quarter, I think the number that you provided was plus 10-14%. How much of that do you anticipate to be organic volume gains verses contributions from acquired business?

Ed Campbell

The acquired business are, in terms of the first year effect, are between 4-5%, so if I just split that number in the range for the volume would be 5.5-9.5.

Matt Somerville - Keybanc

Perfect. With respect to advance tech margins, I just want to make sure I understand the issue here. You had a couple extra cents of intangible amortizations, even if I add that back I can still, I would highly doubt I would see margin improvements. Can you help me close the loop on that? How profound was the mixed shift in the business and then do you expect in the second quarter to get back on that trajectory of margin improvements that can get you kind of back into the high teens range for the full year that I think you talked about previously?

Ed Campbell

Let me just talk more broadly about operating margins in that segment. 2006 was a year that the 4 businesses that we owned before the acquisitions in '07, was a very good year for 3 of 4 of those businesses, including 2 of the larger businesses, both had really good years, we had 24% operating margins in the segment on a full year basis. When we announced the financials associated with each of the 4 acquisitions that we did last year, we indicated that their operating margins were in the range of 20% of sales, that was before the impact of any acquisition accounting. So if you do a weighted average of the size of those businesses versus the size of the businesses that we have today, the combined organization would be aiming to produce 20% operating margins, including the effects of acquisition accounting, and we're obviously finishing this first quarter, which is always our weakest quarter a little more than 12% margin. If you adjust for the acquisition accounting, it still gets you up to 14, so we're very sure of the 20% kind of number that we think we ought to be setting our sights to the shareholders. There's a number of things that go on, one is just the seasonality. The first quarter is always a little b it weaker than the others. Second, the business we've talked about in 2007 regularly, is not at the rate of investment in technology markets as we saw in 2006 which was a very good year in those markets. '07 was weak, some segments of technology markets are projected to be even weaker in 2008, fortunately for us many of the product lines that we sell are actually targeted, advance technology and advance packaging assembly that have different dynamics than say do markets like memory, where there was real weakness in capacity and very limited investments, but we have some exposure to those markets and businesses other than at Simtech for example, so that the economic environment that is influencing our results in '07 and continuing in '08 is not back to where it was in 2006. So you combine those varying factors, the quarter, the rate of investment and the last I'll mention is that we made conscious efforts in 2007 to increase the rate of investment in new product development, some programmatic activity that is delivered, brand new product lines that we have introduced here in recent months, and multiple of our businesses that are beginning to fuel some of the order rates that we have reported in this most recent announcement. That spending though is measurable and visible in the operating margins that we're producing now, compared to the operating margins that we had in 2006 and we need to, as an organization, reap the benefits of those investments, look forward to improving environmental factors that should accelerate the rate of growth and we think that we're on the way to drive ourselves toward that kind of target that I shared. But I'm not forecasting that we will be at that 20% or greater operating margin in 2008.

Matt Somerville - Keybanc

As far as, in order to get to the EPS guidance you've provided for the second quarter now, I mean sufficient to say you're looking for a pretty measurable sequential improvement advance tech op margins. Is that fair, Ed?

Ed Campbell

I hear the question, I'm just reflecting on the very things that are in this report. I expect operating margins in advance technology to improve, frankly across most of our businesses in quarter two compared to quarter one. Simply as we grow, and the seasonality of the line that we have in quarter two compared to quarter one. I can't specifically speak to that margin because frankly I don't have that in front of me but I'll tell you that 7-8%, at the center of the growth guidance for the quarter before currency, we've got meaningful growth over a quarter of a year ago that obviously with the same seasonal factors we're stronger than quarter one, so I'd expect to see some improvement over operating margins. I think if you do the arithmetic on earnings per share you can back end the sequential margin change would be positive.

Matt Somerville - Keybanc

OK. As far as more broadly speaking about the semiconductor piece of advance tech, I guess the road maps to your key customers, or that you speak about your key customers sharing with you that gives you some level of longer term visibility, over the last quarter or so, have those road maps become more favorable, less favorable, or pretty much stayed the same? How do you feel about the beyond '08 trajectory in advance tech?

Ed Campbell

There are two developments that have evolved in the advance tech markets for us. As we mentioned in our last conference call, the Simtech business, for example, introduced an entirely new and major product line at an important trade show in Europe, and some of the strength that you see in advance technology orders at 10% is particularly being fueled by very good order growth in that business and with those products. That is consistent with out expectations, we believe that when this new product was introduced and based upon timing we expected that we would have accelerated business and I'll tell you that Simtech orders are very strong right now, and they are the stand out in this segment and that's consistent with all the things in this segment.

Matt Somerville - Keybanc

Great, thanks a lot.

Ed Campbell

You're welcome Matt.

Operator

Your next question comes from Charles Brady - BMO Capital Markets.

Tom Brinkman - BMO Capital Markets

Hi Good Morning, this is actually Tom Brinkman for Charles Brady. Just one quick question, I apologize I joined the call a bit late, if you've already covered this. Just wondering about the organic growth rate of technology, what your assumption is with the guidance going forward.

Ed Campbell

Well, first of all in the quarter we just announced organic growth was 9%. The acquisition effect was about 30%, that 9% is consistent. If you will, with the 10% order growth which is a performance type of order growth, I'm putting the acquisitions in the prior year as well as the current year, so its apples to apples. So 9-10% average in both orders and shipments in the most recent period drive, obviously, a portion of the expectations that we have in the second quarter. But I don't have a specific forecast to share with you relative to organic growth in tech in the second quarter.

Tom Brinkman - BMO Capital Markets

OK, so it's been relatively steady recently and you expect that going forward as well?

Ed Campbell

Well, its actually been accelerating. If you look back over the last several quarters we had declines in order rates in advance technologies back in the first half of 2007. The third quarter was 5, the fourth quarter was 10% in organic growth and then we've got another quarter of 10% that was accelerated and has been 10 for the last two quarters.

Tom Brinkman - BMO Capital Markets

OK, thank you.

Ed Campbell

You're welcome.

Operator

At this time there are no further questions.

Ed Campbell

OK. Well, again, let me thank all of you fir your continued interest and support in Nordson Corporation and I look forward to producing the kind of results that we've shared with you in terms of our second quarter outlook. Thank you.

Operator

This concludes today's Nordson Corporation First Quarter Fiscal Year 2008 Results Conference Call. You may now disconnect.

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