Ladies and gentlemen, thank you for standing by, and welcome to the Nordson Corporation's First Quarter Fiscal Year 2021 Conference Call. I would now like to hand the conference over to Lara Mahoney. Thank you. Please go ahead.

Thank you. Good morning. This is Lara Mahoney, Vice President of Investor Relations and Corporate Communication. I'm here with Sundaram Nagarajan, our President and CEO; and Joseph Kelley, Executive Vice President and CFO. We welcome you to our conference call today, Tuesday, February 23, 2021, to report Nordson's fiscal year 2021 first quarter results.

Good morning, everyone. Thank you for joining Nordson's fiscal 2021 first quarter conference call. Nordson was well-positioned as we entered fiscal 2021. Our COVID-19 safety measures and protocols have ensured we continue to operate safely in this environment. This has allowed us to be agile and responsive to the needs of our customers who serve a very diverse set of end markets, including consumer non-durable, medical, electronics, and general industrial. During 2020, we remained invested in what makes Nordson strong, the direct sales model and our innovative position technology portfolio. Additionally, we were successful in advancing several aspects of our long-term growth strategy. Using the NBS Next growth framework, our employees have been investing their resources in our best opportunities for profitable growth. While this remains a dynamic macroeconomic environment, our team has delivered a very solid first quarter on both the top and bottom lines. It is noteworthy that our first quarter sales and profits are about both fiscal '20 and fiscal 2019 comparisons. In particular, our Industrial Precision Solutions team delivered strong year-over-year growth benefiting from improvements in consumer non-durable and industrial end markets. They also achieved profit margin expansion as volume leverage, improved sales mix, and manufacturing efficiency gains all combined within the quarter.

Thank you, Naga, and good morning to everyone. On Slide #5, you see first quarter 2021 sales were $527 million, an increase of 6% over prior year's first quarter sales of $495 million. The increase was primarily related to organic volume and favorable currency, with additional benefits from the Fluortek and vivaMOS acquisitions. The organic growth was driven by strength in consumer non-durable and industrial end markets, plus particular strength in the Asia region. Gross Profit totaled $290 million, or 55% of sales in the quarter compared to $263 million or 53% of sales in the prior year. This 190 basis point increase in gross margin was driven by the combination of volume leverage, improved sales mix, and benefits from structural cost reduction measures taken in fiscal 2020. It is noteworthy that 55% is the highest quarterly gross margin since the third quarter of fiscal 2018. Operating profit in the quarter was $109 million, or 21% of sales, a 39% increase from the prior year adjusted operating profit of $78 million. It is here in the operating profit growth rate that you see additional benefits from the fiscal 2020 cost reduction efforts as SG&A decreased 4% from the prior year first quarter level of $188 million. EBITDA for the quarter was $135 million, or 26% of sales, which is 26% higher than the prior year EBITDA of $107 million. Looking at non-operating expense, net interest expense decreased $3 million or 28% from the prior year levels associated with reduced debt levels and lower effective borrowing rates. Other expenses increased $2 million, largely driven by currency translation losses associated with the weakening of the U.S. dollar. Tax expense in the quarter totaled $20 million or an effective tax rate of 21% in the quarter.

Thank you, Joe. Let's turn to Slide 9. First, I want to thank the team for delivering a very strong first quarter. Over the past 2 months, Joe and I have been actively engaged in business reviews and virtual facility tours around the world. I'm very excited about the energy within our divisions and the steady deployment of the NBS Next growth framework, whether that is in how teams are organizing data to fuel decision making, or the prioritization of best products in the manufacturing processes. We are also seeing the strategic analysis of product lines to identify the best growth opportunities and filling the sales funnel with these targeted accounts. One tangible result from the strategic discipline element of NBS Next was seen on February 1, 2021, as we successfully closed the divestiture of our screws and barrels product line. Our decision to divest this product line was based on critical insights gained from the NBS Next data-driven segmentation approach. While this business is a respected leader in the plastics industry, it did not fit Nordson's profitable growth objectives. By divesting this business, we will focus our resources on growing more profitable product lines that will deliver on our long-term objectives. We believe our remaining PPS division has the right degree of differentiation and related technical competitive advantages to deliver over time, Nordson-like growth and returns. I would like to take a moment to recognize recent changes to our Board of Directors. At the end of November, we welcomed Dr. John DeFord, the Executive Vice President and Chief Technology Officer of Becton, Dickinson and Company; and Jennifer Parmentier, Vice President and President of the Motion Systems Group of Parker Hannifin to our Board of Directors. John's technical and regulatory experience in the medical device end market will enrich the strategic perspective of our Board as we continue to grow in this attractive market. Jenny brings strong operational, industrial, and M&A experience to the Board, which will be important as we continue to deploy our NBS Next growth framework. John and Jenny's appointments follow the retirements of Joe Keithley, Randy Carson, and Lee Banks. I would like to thank Joe, Randy, and Lee for their many insights and contributions throughout their time on the Board. Our Board now stands at 9 Directors, 56% of whom are diverse. The average tenure is now 7 years. I would also like to remind you of our upcoming Virtual Investor Day, the morning of March 30. We will share more about the ongoing deployment of NBS Next, as well as our long-term strategic priorities and financial goals. We will also use this time to give investors a better understanding of our strong competitive advantage, differentiated product portfolio and diversified end markets and growth drivers. Please visit our website to register.

Your first question is from Saree Boroditsky with Jefferies. Your line is open.

Hi. Thanks for taking my questions. So sales guidance, I guess implies around 5% growth for the remainder of the year, which is slightly below one quarter despite having some easier comparables. So could you just talk about if there's anything that you're seeing in the market that makes you more cautious on improving growth rates?

Joe, you want to take that?

Yes. So when you think about our sales guidance, Saree, for the remainder of the year, you have to consider that we have the divestiture of the screw and barrel business. So excluding the divestiture of the screw and barrel business, it suggests a 7% to 9% growth rate when you look at our guidance. Now, I will remind you that is comparable to our Q1 growth rate excluding the screw and barrel business, which was over 7%. And entering Q2, our backlog is approximately $500 million, which is approximately 7% above when we entered Q2 last year.

Thanks. That's a lot of great color. And then more of a high level question, there's been a lot of semiconductor capacity announcements out there. Could you just talk about how you could benefit from this expansion activity? And have you seen any of this flow through your order rates yet? Thank you.

Yes. Saree, that's a great question. As we have talked about semiconductor devices, and the opportunities for Nordson, this is an area of particular strength for the company. Clearly, we see advantages for us in the test and inspection, as well as our dispense business. What you find is that there are two things going on here. With semiconductor device demand increases, you're going to get capacity additions. Now, those capacity additions will take the form of both dispense product lines, as well as test and inspection product lines. But in the shorter term, you're going to find more test and inspection because our customers, it takes a little bit of time to bring on new capacity. But what they are really spending a lot of time on is using test and inspection to improve yields, help them meet some of the accelerating demand. So very excited about this. This is a great opportunity for the company, well-positioned to win here. So if you have any additional questions, certainly we'll be happy to answer them.

I guess one more then. You talked about renewed growth in the auto end market. Could you just talk about what you're seeing in that space, and then how Nordson can benefit from the increase in CapEx and facilities for EVs? Thank you.

Yes. On the EV side, clearly we’re -- this is an emerging market for us, an emerging opportunity, where we find the greatest opportunities are in battery manufacturing. So you could think about batteries, they are put together in many different ways. One of the ways is, you're combining multiple cells. So we have a lot of opportunity in manufacturing the battery. That is one way. The second is that you could think about our test and inspection. Our test and inspection business definitely benefits from power electronic components like IGBTs, which are increasing in demand, becoming more complex, and hence we have an opportunity here both to benefit in battery as well as in electronic components.

That's great color. Thanks for taking my questions today.

Thank you.

Your next question is from Matt Summerville with D.A. Davidson. Your line is open.

Thanks. A couple questions. Maybe just back to test and inspection, Naga, if you were to use a baseball analogy in terms of how much in-line testing is being performed, and how much runway is in front of that business. What inning would you say we're in with what you're seeing in T&I right now?

T&I, 100% inspection is early innings. So you see that a lot in auto electronics. You're beginning to see some of that in semiconductor, but clearly early innings.

And then just maybe one on corporate expense. In the fiscal first quarter, I think it was some $8 million above the prior year that seemed unusually high. Can you talk about what drove that variance and what sort of quarterly run rate we should be utilizing going forward? Thank you.

Hey, Joe, you want to take that?

Yes. The increase when you look year-over-year, as I mentioned in some of my comments, is from incentive compensation. And so while that was a tailwind last year, it's a headwind this year. And so from a year-over-year standpoint, that's what you see in the drive in some of the corporate expense increase. When you think about it from a full year run rate, historically that fluctuates between $50 million on an annualized basis, and call it $65 million, depending on performance.

Got it. Thank you.

Your next question is from Allison Poliniak with Wells Fargo. Your line is open.

Hi, guys. Good morning.

Good morning.

Just going back to the semi challenges that are happening right now, I know you talked specifically to that market. But are you hearing or seeing any sort of project delays related to maybe your other electronics end market? Auto comes to mind just given some of the plant closures that have been happening lately. Any color there?

Yes, sure, Allison. No, we have not really heard a lot in terms of -- if you remember, we are more involved in setting up the line and in platform launches. We're not really in the direct production line, which is sort of where you're seeing some of the delays. So, no, we do not anticipate any delays, have not noticed. But what we are seeing is a pickup in expectations from specifically auto electronic customers who are looking to ramp up capacity by increasing yield. And so you see that in test and inspection growth.

Got it. That’s helpful. And then just looking at leverage, obviously, a very healthy range for you. As we're sort of hopefully getting out of this COVID, and the COVID challenges, any thoughts or changes to how you would view the optimum leverage range for Nordson going forward here?

Joe?

Yes. So, we ended the quarter at approximately 1.3x leverage. We continue to be very comfortable at leverage ratios higher than that. When you think about 2x to 3x leverage, we would be comfortable. We have the capacity to go up based on our current debt structure to 3.75x. But as we look at it and assess the opportunities, we do continue to prioritize M&A and would be looking to take that leverage ratio up closer to the 2x to 2.5x half range to support that.

Great. Thank you. I'll pass it along.

Your next question is from Chris Dankert with Longbow Research. Your line is open.

Hey, good morning, guys.

Good morning, Chris.

I guess, Joe, definitely appreciate the comments around incremental and how guidance moves forward from here. But I guess to dig in a little bit on an IPS, specifically, 1Q typically the low watermark for IPS margin. 29% is quite impressive, I guess, is that level of margin execution repeatable? Do we build from here as the rest of the year is flat, good performance? Just any -- if you could put that 29% margin number in context, that'd be really helpful.

Yes. Part of what we see going on here is this acceleration of demand in Q1, I think makes some of our normal seasonality a little bit in question. Perhaps this acceleration overrides the normal seasonality you would see throughout the year. But as specifically related to that 29%, they had a very favorable mix, particularly parts, volumes were up and there was nice leverage going on. It was in that business where we did take some cost out. If you recall, cost action there in Q4, which was delivering benefits here in Q1 to the cost structure. But when you think about that segment going forward, the divestiture of the screw and barrel business will provide further margin improvement to that. So when you think about it going forward, the margins there should expand off of this with the references as a very high watermark here in Q1.

Got it. And not to press my luck too much here, but I guess, are you willing to break out what the impact of mix was on the quarter?

Yes, we're not willing to -- I mean, you referenced 29% was a very high watermark, we haven't seen that since back in 2019. And so we're pleased with the profitability levels back there. At this lower range, a lot of it is coming from the improvement in the mix within the business. So if you think about NBS Next, and as we focused on our most profitable opportunities, really that has allowed us not just to take cost out, but also to drive an improvement in the sales mix. And so that's what you see in that 29%.

Got it. Got it.

Chris, one more point that I would add is that if you think about the volume, the volume leverage in this business is really good. And so we had a pretty strong volume growth that helped us deliver some pretty nice incrementals. So you've got an accelerated recovery that is helping us and as you go into the out quarters, that volume is going to come down a bit. But we're comfortable with the current margin rates, but I think it's important to remember the volume play here as well.

Yes. Yes, thank you for that color. Really appreciate it. And I guess one last one for me. What is the FX benefit assumed in guidance when historically, FX swings can be fairly significant on earnings? Just any comment on FX and kind of what you're baking in here would be great.

Yes. FX in the quarter proved to be more favorable than we had originally anticipated. And so for our forecast, we are assuming the current exchange rates maintained throughout the remainder of the year. And so that had or that benefit should continue. It starts to moderate a little bit on a year-over-year basis in Q4.

But that should still be not dipping it down, but about a 2% to 3% benefit for the full year at current rates. Correct?

You are correct.

Your next question is from Christopher Glynn with Oppenheimer. Your line is open.

Thank you. Good morning, guys and gals.

Good morning.

Was curious, a couple of questions on IPS. Wondering if any markets or production processes that you serve are currently showing any nice shifts to adhesive-centric assembly from stitch or fasteners?

Yes. Chris, a couple of things. First and foremost, the core adhesive business is pretty strong. One of the areas that we're beginning to see some really nice pickup is in electric vehicles and in battery manufacturing. It's an area that we continue to benefit from. Ongoing automation across a wide variety of application is also beneficial to this business. So think about adhesive dispensing allowing our customers to automate their manufacturing processes. So we see a lot of benefit there, not any particular one end market the other, but I would say a broad set of end markets. Clearly, consumer electronics, interestingly enough, as you have some wearables and other new consumer opportunities. So if you think about our adhesive business, really is apparent -- it has grown mainly through new applications of big lever, and that is pretty strong and we continue to benefit from automation. So the two things I would tell you on a big driver would be battery, and number two automation.

Okay. Thank you for that. And wondering relative to the two segments within your organic outlook, do you see ATS kind of pulling up to where IPS started the year and kind of coupling the type of organic growth you expect for the balance of the year?

Yes. What we have really -- let me give you some end market trends and then Joe can add some color about how we’re thinking about the actual growth rates. Yes, what we expect is in the back half -- there are two things here. One is, if you know our medical business, as COVID eases and as elective surgeries come back, we said expect our medical business to get back to high single-digit rates in this back half of the year. So that's one big driver for us. The second is, you begin to see some very strong electronic orders in our business today that will show up in the second half as a growth driver for us. In terms -- so those two will certainly help our ATS business. One thing we have not talked about is that our medical fluid component business, which is primarily driven by biopharm applications, has solid growth in the quarter. We expect that to continue -- that continued strength in the out quarters. It's a small business today, but we are very excited about this opportunity. This is really because of all of the single-use components.

Sounds great. Thanks. Just the last one, if I can sneak it in. The FX impact on the top line, does that still sort of drop through? Is it 2x to 3x multiplier to the earnings impact?

Yes, so the FX to the bottom line, our cost structure aligns, I would say with our sales structure quite well in terms of the FX, Euro denominated and GBP dominated costs as well as revenue. So that does flow through. There is a little bit of a margin expansion within our IPS business when you see the dollar weaken against the euro and the GBP.

Your final question is from Andrew Buscaglia with Berenberg. Your line is open.

Good morning, guys.

Good morning.

Good morning.

I just want to touch on the ATS. So, I thought we would see that turn to growth, just given a difficult -- just given like, we're laughing some easier comps. And your overall guidance really for organic growth isn't quite that high if you exclude FX, it doesn't really seem to be assuming much of a snapback in ATS in the back half. So I'm just trying to figure out is this you just being conservative, or just the ATS segment hasn't quite grown. What do you say can grow 2x to 3x times GDP in 3 years now. So I guess what gives -- or can you give some investors some confidence that this growth is coming? Or is this conservatism?

Yes, so I guess when you think about the growth rate of 4% to 6% going forward, it's important that excluding the divestiture, again, it's 7% to 9%. And so if you think about FX, that would suggest 3% -- sorry, 4% to 6% organic in that range. So just so we're clear, I guess …

Right.

Right. Well …

Yes. Andrew, one of the things that I would add to is that on the ATS side, as COVID eases, our medical business today is primarily flat because COVID declined -- COVID related surgery declined putting a damper on our component business, but offset by very strong growth in biopharm, okay? But as COVID eases in the back half, we do expect this business to get back to high single digits in the back half. So, the ATS on what we're baked in is we are expecting medical to come back. We certainly, on the electronic side, it is important for you to remember that broadly Nordson plays in high precision applications, with -- what we are really good at is. Test and inspection is growing nicely for us. So that is baked in to our outlook as we forecasted it today. Test and inspection continues to grow. And if you think about electronic dispense business, we are seeing some pretty nice order entry that is starting to grow in the second half, maybe level set here on the electronics dispense side of our business. If you think about our electronics dispense business, what we're really good at is high precision reliable dispense at very high speeds. That's what we're good at. And those have great application across a broad category of electronic end markets, not specifically one particular product category, like a, I guess, smartphone or other things like that. What we are finding is that the demand is pretty high for this level of precision, driven by all of this digital acceleration that you're seeing, driven by automotive electronics. And so, what we really like here is that we have a new team in place that is looking, that is using NBS Next and looking at opportunities, clearly, what we are seeing is that mobile phone manufacturing has matured. It has matured, and hence, these applications don't require that level of precision that is needed. And so we've got a new team looking at -- really looking at this opportunity. But more focused around semiconductor packaging, more focused on the digital acceleration across a broad spectrum of end markets. And we're confident that this business gets back to mid-single-digit growth, and you'll start to see some of that in the second half of the year.

The other thing I would …

Yes, and I think, you said you sound like China had a good -- as expected, was pretty strong with Q2. It's going to be a little dampened over there. But I guess exiting the year in the second half, presumably, all three regions, China, Europe and U.S., you sounded like those all have to be -- you're assuming those are all growing in tandem exiting 2021. Yes, just I guess, based on easy comps and the pandemic lifting. Is there any other like regional, I guess, regional color you can provide that would …?

Andrew, I think you've kind of covered -- if anything, what I would tell you is that Asia is strong today, Europe is flat organically, we do expect that to change. U.S. is starting to strengthen, but right now, it was slightly low in the first quarter. But I wouldn't add anything more than what you've already captured there.

Okay. All right. Thanks, guys.

Your final question is from Walter Liptak with Seaport. Your line is open.

Hi. Good morning, guys.

Good morning.

Good morning.

I wanted to ask about the NBS Next, and can you maybe elaborate a little bit about the cost savings that you got that benefited this quarter versus the benefits from NBS Next? Is it possible to differentiate one from the other?

No, I mean, it's really not because when you say the cost savings that we referenced, I think at several points, when you step back and think about our cost actions, it was all driven by the strategic discipline within our NBS Next growth framework. And so as we focus on the best growth opportunities, we stayed invested in those opportunities, so that we could capitalize on that. And then where there weren't the best growth opportunities, that is where we took action to the right size, I would say, our cost footprint, or in the example of the screw and barrel divestiture, improve our profitability there. So at the heart of it, Walt, I would tell you the margin expansion when we referenced sales mix improvement within IPS, when we reference benefiting from the cost structure reduction actions, all of that is rooted in the NBS Next strategic discipline growth framework. And so it's really, when I look at it -- when we look at the incremental margins of 97%, we say that's a lot of NBS Next delivering the benefit.

Okay. Okay. Let me try it this way. As you look at your SG&A overall for the remainder of the year, is there like $1 level or percentage of sales so you can help us with so we can think about the cost benefits, and some of these costs coming back into Nordson?

Yes. So, I guess, let me just give a little color commentary specifically on costs. Last year we had several actions that referenced incremental annualized cost savings, some of them were $10 million, one was $5 million. And some of those started at different points throughout 2020. And so those are hitting at the full, I would say, benefit run rate here in Q1. So that you see that that should be maintained going forward. I will tell you also on the cost side, we're benefiting on a year-over-year basis of about $6 million for lower T&E expenses as Q1 last year did not have the pandemic cost structure of no travel. And so as that starts to come back, going forward, there's a potential for another $6 million I don't think at all comes back right away. But as you think about it from this run rate, it's about 6 million on the T&E that we benefited in Q1. So -- and the other thing, I referenced is that Q1 typically is our heavy SG&A quarter. If you look at last year and the prior year, for different employee benefit reasons. And so that trend should continue as we go forward throughout 2021.

Okay. Okay, thanks for that color. And then maybe just the last one for me about, you mentioned in the prepared remarks, the vaccine packaging. I wonder if you could just talk a little bit more about that? Was there -- is there a revenue size or these orders that came in last year that shift is there more orders that will benefit or come through as sales in the second quarter or second half?

Sure. This is a really strong growth driver for us and the one that we have been working on for a number of years, Walt. It's starting to show up in the marketplace right now. This is single-use plastic components, which are used in the manufacture of biopharm, and in this particular case vaccines as well. And we saw some pretty strong growth in the quarter. We expect the growth to continue in the out quarters and maybe even further out. And the biggest reason we are able to have a sort of a flat medical revenue when compared to our customers being down 15% is mainly because of this biopharm growth driver. And so it is more of our single use plastic components that are used in critical biopharm manufacturing steps.

Okay, got it. All right. Thank you.

We have no further questions. I will turn the call back to presenters for closing remarks.

Thank you for your time and attention on today's call. We look forward to talking to you further during our Virtual Investor Day on March 30. Have a great day. Thank you.

This concludes today’s conference. You may now disconnect.