Good morning, and welcome to Nordson Corporation's Second Quarter Fiscal Year 2023 Results Conference Call. All participants are in a listen-only mode. After the speakers' presentation, we will conduct a question-and-answer session. As a reminder, this conference call is being recorded. I would now like to turn the call over to Lara Mahoney, Vice President of Investor Relations and Corporate Communications. Thank you. Please go ahead.

Thank you. Good morning. This is Lara Mahoney, Vice President of Investor Relations and Corporate Communications. 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, May 23, to report Nordson's fiscal 2023 second quarter results. You can find both our press 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 14 days. There will be a telephone replay of the conference call available until Tuesday, May 30, 2023. During this conference call, references to non-GAAP financial metrics will be made. A reconciliation of these metrics to the most comparable GAAP metric was provided in the press release issued yesterday. Before we begin, please refer to Slide 2 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. Moving to today's agenda on Slide 3, Naga will discuss second quarter highlights. He will then turn the call over to Joe to review sales and earnings performance for the total company and the three business segments. Joe will also discuss the balance sheet and cash flow. Naga will then share a high-level commentary about our earnings performance. He will conclude with an update on the fiscal 2023 full year and third quarter guidance. We will then be happy to take your questions. With that, I'll turn to Slide 4 and hand the call over to Naga.

Good morning, everyone. Thank you for joining Nordson's fiscal 2023 second quarter conference call. During the second quarter, Nordson continued to experience a macro environment that can be described as a multi-speed economy. Customer demand in industrial, consumer non-durable, and medical interventional end markets were solid. Alternatively, electronic dispense product lines are being negatively impacted by the downside of the semiconductor cycle. And sales of biopharma product lines in our medical fluid components division continue to normalize the gains, challenging prior year comparisons as customers continue to work through excess inventory. These factors balance themselves out, and the team delivered organic sales growth of 1% compared to the prior year's second quarter. During the quarter, the teams also took targeted cost actions in areas where we are seeing weakness in customer demand. We believe these will enable us to effectively navigate the current business environment and strengthen our long-term position for profitable growth. Overall, we remain invested in our competitive differentiators, including our direct sales force, product innovation, and the training and execution of NBS Next growth framework. In a few moments, I'll speak more about the business and what we're seeing in our end markets. But first, I'll turn the call over to Joe to provide a detailed perspective on our financial results for the quarter.

Thank you, Naga, and good morning to everyone. On Slide 5, you will see second quarter fiscal 2023 sales were $650 million, an increase of 2% compared to the prior year's second quarter sales of $635 million. The increase was driven by organic growth of 1% and a 3% benefit from the CyberOptics acquisition offset by an unfavorable currency impact of 2%. During the quarter, sales were strong in Asia Pacific with 7% growth, partially reflecting the timing difference related to the Chinese New Year. Gross profit for the second quarter of fiscal 2023 totaled $352 million. Excluding severance costs, gross profit totaled $354 million, or 55% of sales, comparable to first quarter 2023 profitability as the team continues to actively manage the price-cost dynamic and these inflationary periods. When compared to the prior year, adjusted gross margins are down 180 basis points resulting from sales mix changes and factory inefficiencies at sites dealing with reduced volumes. Operating profit totaled $173 million in the quarter. During the quarter, we recorded one-time severance costs totaling $3 million. Adjusted operating profit, excluding these non-recurring items, was $176 million in the quarter, or 27% of sales, 4% below the prior year adjusted operating profit of $184 million. EBITDA for the second quarter was $203 million, or 31% of sales, which is in line with our long-term target profitability level; however, $6 million below the prior year EBITDA of $209 million. The decrease was primarily driven by a $4 million currency translation headwind plus unfavorable sales mix, offset by the CyberOptics acquisition growth. Looking at non-operating expenses, interest expense increased $5 million associated with higher borrowings and increased interest rates. Other net expense decreased $38 million, primarily related to the prior year non-recurring, non-cash pension annuitization charge of $41 million. Tax expense was $34 million for an effective tax rate of 21% in the quarter, which is in line with the prior year second quarter rate and the forecasted full year rate for 2023. Net income in the quarter totaled $128 million, or $2.21 per share. Adjusted earnings per share, excluding non-recurring severance costs, totaled $2.26 per share, a 7% decrease from the prior year adjusted earnings. The decrease is primarily driven by lower operating profit and higher interest expense. Now let's turn to Slide 6 through 8 to review the second quarter 2023 segment performance. Industrial Precision Solutions sales of $336 million increased 6% compared to the prior year second quarter, driven by strong organic growth of 9%, partially offset by unfavorable currency impacts of 2%. The organic growth was driven by robust demand in the polymer processing product lines as well as products sold into consumer non-durable end markets across most regions. Operating profit for the quarter was $112 million, or 33% of sales, which is an increase of 9% compared to the prior year adjusted operating profit of $102 million despite some unfavorable currency translation impacts. As mentioned last quarter, IPS remains our most globally diverse segment, and therefore most exposed to currency translation changes and the timing difference with the Chinese New Year. Looking on a constant currency basis and year-to-date, this segment has delivered 5% organic growth and incremental margins of 60%, ahead of our targeted 40% to 45% incremental margins. This segment's continued strong performance demonstrates the power of the NBS Next growth framework. On Slide 7, you'll see Medical and Fluid Solutions sales of $167 million, decreased 3% compared to the prior year's second quarter. This change included a decrease in organic sales of 2% and a 1% decrease related to unfavorable currency impacts. Strong demand for medical interventional solutions product lines, primarily in the Americas, was more than offset by softness in the medical fluid components serving biopharma applications and fluid solutions product lines in Europe and Asia. These factors drove a net 2% organic sales decrease. During the second quarter, we took targeted cost actions in businesses responding to volume pressure that resulted in $1 million of non-recurring severance costs. Second quarter adjusted operating profit was $49 million, or 30% of sales, which is a decrease of $9 million compared to the prior year operating profit of $58 million. The decrease in operating profit was driven by the meaningful sales mix changes within the medical product lines and related factory inefficiencies due to reduced volumes. It is noteworthy that the segment profitability sequentially improved by 400 basis points over the first quarter of 2023 and is again running more in line with the profitability levels of the prior two years. Turning to Slide 8, you'll see Advanced Technology Solutions sales were $148 million, a 1% increase compared to the prior year second quarter. During the quarter, the CyberOptics acquisition contributed 12% growth. Organic sales volumes were down 10% and unfavorable currency impact during the quarter was 2%. The organic decrease was driven by electronics dispense products serving the semiconductor end markets in the Americas and Asia, slightly offset by continued growth in the test and inspection product lines. Cost reduction actions during the second quarter of fiscal 2023 to address the significant decrease in electronics dispense product lines were structural in nature and resulted in $2 million of non-recurring severance costs. The second quarter adjusted operating profit was $28 million, or 19% of sales, which was below the prior year second quarter operating profit of $40 million. The decrease in adjusted operating profit was driven by the organic sales decrease, partially offset by the profitable acquisition growth. Finally, turning to the balance sheet and cash flow on Slide 9. Our second quarter balance sheet includes cash of $129 million and net debt was $820 million, resulting in a one-time leverage ratio based on the trailing 12 months EBITDA. We continue to have significant available borrowing capacity to pursue organic and inorganic growth opportunities. Free cash flow in the quarter was $159 million, bringing the year-to-date cash conversion rate on net income to 118% as working capital efficiency improved during the current quarter. During the second quarter, we made $37 million in dividend payments and spent $47 million on repurchasing approximately 221,000 shares of company stock at an average price of $212 per share. For modeling purposes, in fiscal 2023, assume an estimated effective tax rate of 20% to 22% and capital expenditures of approximately $45 million to $50 million. We'll now turn to Slide 10, and I'll turn the call back to Naga.

Thanks, Joe. Going into fiscal 2023, we knew we would be dealing with a dynamic environment. As the year progresses, we gain better visibility through our customers. And I would now like to provide an update of what we are seeing in our end markets. In the Industrial Precision Solutions segment, we continue to see steady demand in industrial and consumer non-durable product lines. Investments continue to be made in automotive product lines, notably electric vehicles. We're also seeing continuing strength in our polymer processing product lines related to recycling and battery applications. These diverse end markets and applications combined with our direct sales and the combination of both systems and parts revenue are driving the strong year-to-date profitable growth for this segment, which Joe reviewed. Turning to the Medical and Fluid Solutions segment, we continue to experience double-digit growth in our interventional solutions product lines and the backlog is strong. These products include balloons, cannulas, and catheters that are integrated into medical devices for a variety of procedures, including heart valve replacement, stent delivery, angioplasties, and ECMO for blood oxygenation. The fluid solution product lines within the MFS segment serve a diverse set of end markets, including industrial, construction, electronics assembly, animal health, and medical. The construction and electronics assembly end markets within this product line continue to see soft demand, particularly in Asia and Europe. Finally, in the MFS segment, our medical fluid component product lines, which make single-use plastic connectors, stopcocks and valves for the medical and biopharmaceutical markets, have benefited from strong double-digit organic growth in biopharma applications over the past two years. As we shared in the last quarter, our customers in this end market are continuing to work through inventory destocking. As this business normalizes, the patient care applications within fluid components, such as blood pressure cuffs and IV bags, remain stable. That said, the normalization within the biopharma market continues to provide a significant growth headwind for this segment. Within the Advanced Technology Solutions segment, we're in the midst of the downside of the electronic cycle. This has impacted sales in our electronics dispense and CyberOptics product lines. We firmly believe in the long-term growth of the electronics end market. We have not yet seen the benefits from investments related to the CHIPS Act, as we all know that the investment in automation, memory, and electronic new product innovation will continue. While the teams took targeted actions to adjust cost structures for current volumes, we remain invested in product innovation that will serve this end market. Growth in our X-Ray test and inspection product lines is successfully muting the historic volatility of this cycle. Even in the downside of the cycle, customers continue to invest in T&I systems to ensure quality and efficiency in their manufacturing lines. Our CyberOptics acquisition has more exposure to the memory end market, so its product lines have experienced weakness. Regardless, we remain excited about the long-term growth opportunities in the optical end market, and we are pleased with the ongoing integration of this business. I remind investors that the past two years, this segment delivered 17% organic growth on average. This multiple-quarter dip is simply the cycle of semiconductor capital expenditures, and we continue to be encouraged by our differentiated technology serving this long-term attractive growth market. Overall, the diversification of the Nordson product portfolio, end market, and geographic exposure enables sustainable profitable growth. However, we are in a period where two divisions are seeing significant market corrections, semiconductor equipment and biopharma connectors. The remaining nine divisions, or approximately 80% of Nordson, are delivering 5% organic growth year-to-date at targeted incremental profit levels. Considering the combination of these end market headwinds and tailwinds as well as current order entry, we are maintaining our previously provided 2023 revenue guidance of 0% to 3% growth over fiscal 2022 and narrowing our adjusted earnings to the range of $8.90 to $9.30. Looking specifically at the quarterly sales and earnings split, Q2 2023 was stronger than anticipated, as some sales previously forecasted for Q3 were pulled into Q2. Therefore, we're now forecasting third quarter fiscal 2023 sales to be comparable to the prior year third quarter. Third quarter earnings are forecasted in the range of $2.20 to $2.35 per share. We expect fourth quarter sales to be the strongest of the year, increasing low to mid single digits over the prior year fourth quarter. Our full year guidance range sustains our record 2022 sales performance, which is a testament to our dedicated employees, our customer-focused business model, the diversification of our end markets, and the solid execution of NBS Next and the Ascend strategy. As always, I want to thank our customers, shareholders, and the Nordson team for your continued support. With that, we will pause and take your questions.

Thank you. Our first question comes from Jeff Hammond from KeyBanc Capital Markets. Please go ahead. Your line is open.

Hi. Good morning, everyone.

Good morning, Jeff.

Good morning, Jeff.

I just want to focus on the biopharma piece. I know you talked about inventory destocking. I think you had thought maybe by 2Q it’d be wrapping up, but it sounds like it is lingering. So just trying to get a better sense of your visibility for that business to kind of either hit easier comps or re-inflect positive?

Thank you, Jeff. Overall, I would say that the growth drivers in biopharma are still strong. There has been no detrimental effect on our outlook for this business. We anticipate solid, high single-digit growth moving forward. Regarding the short-term destocking, we had hoped to see recovery by the second quarter, but it appears that this may not happen as soon as we expected. We believe that by the end of this year, we should return to normal order patterns from our customers. At that point, the growth comparisons will also have anniversary effects.

Okay, great. And then can you give us a little more color on where you saw the systems pull forward in terms of segment or business detail? And then just a little more color on your level of visibility for that strong fourth quarter ramp? Thanks.

Yes, regarding the second part of your question about visibility, our backlog remains at a very high level, close to $1 billion. However, the composition has changed significantly. Before COVID, our backlog typically represented 80% to 90% of quarterly sales. Currently, about 65% of our business has returned to this normalized state, with the backlog constituting around 1% of quarterly sales. Conversely, 35% of our business still shows a high backlog, which I estimate to be about 2.5 quarters' worth of sales. This heavy backlog is primarily found in our large systems division, particularly in the coatings and plastics processing sectors, which falls under the IPS segment. In these cases, we have significant orders with customer prepayments and well-defined customer request dates. However, these dates can shift based on our shipping capabilities within specific quarters. The rest of our significant backlog is within our medical interventional solutions area, where customers place large blanket orders and regularly update delivery quantities. Our strong performance in Q4 is largely a result of these system businesses with existing backlog, though this can vary from quarter to quarter. For instance, in Q2, we saw strong performance in coatings and plastics processing, with plastics processing pulling demand from Q3 into Q2. So, it’s predominantly the large systems business within IPS that provides us with clear visibility for Q4 and customer timing, while also affecting our ability to adjust orders in any given quarter.

Let me add something to that color is that we feel really strong about the systems businesses, as Joe indicated. It is also a strong testament of NBS Next growth framework in action. What you find here is that the businesses are truly focused on our best products and have the agility and flexibility to respond to customer demand in a market-leading way, so we feel really, really strongly about it. And we also feel good about our medical intervention business, which is showing some pretty strong strength. I would say those two things drive our optimism for the fourth quarter.

Okay. I appreciate the color.

Our next question comes from Saree Boroditsky from Jefferies. Please go ahead. Your line is open.

Hi. Good morning.

Good morning.

Good morning.

So I guess first, the weakness in ATS obviously it's been well telegraphed. But there's also a lot of government funding going towards semis. You mentioned a little bit about the CHIPS Act. So when would you start to see that benefit? And then how long do we think about this down cycle given that?

Yes. The way to think about it, if you look at historical semi cycles, expect that the normal cycle expects about four quarters of downturn. And so we are in quarter two is really where we are. So what we expect is somewhere middle of next year for sure we'll be in a place where these expenditures start to come back, the CapEx expenditures start to come back. Our conversations with our customers are pretty bullish about the long-term prospects for this business. As you know, given geopolitical considerations, and given that the CHIPS Act is going to come in, what you find is that our businesses benefit from CapEx expenditures that are allocated from these kinds of investments our customers are making are typically towards the end of their construction. So right now, people are constructing plants; they would eventually start putting in equipment. Ours would come in at sort of the back end of that expenditure that goes towards the packaging of semiconductors. That's where you would see us benefit.

That's helpful. Then thinking with ATS, margins there have been rather volatile. I know some of this is mix related. But what is normalized mix? And how do we think about margins here into 2024 and over the long term?

Yes. Saree, when you think about the ATS business, as I mentioned in the quarter, we were responding as you saw to the lower volumes for semiconductor. And some of those cost actions were structural in nature, which will help us going forward in terms of the margin profile. But a portion of that I would tell you at the consolidated level over 100 basis points was the impact of responding to the lower volumes, both in semiconductor and in the medical fluid components business. But specifically, on the ATS segment, when you think about the profitability, over the last several years, that has improved quite significantly from let's just say 11% operating profit margins up to ending last year at 29%. So right now, running at these volumes, it's roughly 19% in the quarter. And that's how I would think about it for this year at these volumes with this mix.

And as you think about 2024, is there anything like mix related that we think about benefitting or is it really a question of volume at this point?

Yes, I see no reason as we recover that we wouldn't get back to the '22 tight margins for this segment.

Great. Thanks for taking my questions.

Our next question comes from Chris Dankert from Loop Capital. Please go ahead. Your line is open.

Hi. Good morning, guys. Thanks for taking the question. As I look at the guide for fiscal third quarter here, the reason for the comp below seasonal sales expectation, is it just the timing of backlog, is it that semis are actually getting weaker? Just can you kind of give us a little more color around how to think about that third quarter sales guide?

Yes. As it relates to the semiconductor, and we've commented, order entry appears to have leveled off as it relates to those particular product lines. And so while we saw a sequential deterioration in semiconductor sales, the guide for Q3 does not imply further sequential deterioration from the Q2 levels for semiconductor specifically. It is the timing issue between Q3 and Q4. And actually Q2 is predominantly on those large systems sales, Chris, particularly in the plastics and in the coatings space where we do have the backlog. And there were cases where some got pulled forward. I would estimate roughly about $10 million got pulled forward from Q3 into Q2. And now roughly speaking, probably $10 million got pushed out from Q3 to Q4. That's how I would think about the guide.

Got it. That's very, very helpful. And then maybe just kind of a housekeeping thing here. Could you quickly remind us about the mix within that MFS segment in the interventional versus life sciences versus EFD? I think there's a little bit of confusion there?

Yes. So the way I would think about that is you're correct. So there's the medical biopharma, which is roughly I would tell you $100 million business, and then there's the interventional solution, which is roughly a $300 million annual business. And then the remainder is your EFD, which is your fluid dispense. And as a reminder, that business serves a diverse set of end markets, some of which are medical, some of which are construction, some of which are industrial, and some of which are actually electronics; electronics assembly, some semiconductor. And so it's a very diverse set of end markets served by that business. And so in the quarter, we saw significant strength in the medical interventional solutions business, as Naga has mentioned, and that order entry there continues to be strong. Growth is strong. The biopharma has been talked about, but within that EFD business, I will tell you the electronics semiconductor component of that was pressured within the quarter and contributed to the performance.

Let me add a little bit more color to the fluid components business. Of those $100 million, not all of it is biopharma. A portion of it is biopharma. But you also have other medical fluid connector applications in that business. And so what you find is biopharma is the one that is sort of normalizing. But you have other connectors that have been pretty stable. But the biopharma normalization was fairly significant to show up at the division level. And as I indicated in one of my answers, we expect that this normalizes by the end of the year.

That's helpful. Thank you, guys.

Our next question comes from Matt Summerville from D.A. Davidson. Please go ahead. Your line is open.

Thanks. Just a couple quick questions. Just to put a finer point on third quarter EPS guidance relative to last year, roughly a $0.20 delta on flat revenue, currency is going to be probably a somewhat material tailwind in the quarter. Can you kind of parse out what's driving the year-over-year reduction in earnings on flat sales?

Yes. There are two components also to that earnings guide. One is interest expense is clearly up on a year-over-year basis in the quarter. On the full year, it's going to be up about $20 million. So that contributes. And then also last year, there were some FX hedged gains in the quarter, which benefited, which are not forecasted to repeat. And so those are below the OP, which I would tell you are having an impact on the year-over-year earnings guide.

Sorry, Matt. Just to add, I think it's important to remember that in the quarter, we delivered 31% EBITDA margins, so about all of these above the line. Operationally, while the earnings are pretty strong at 31%, our expectation is that we are at that level going into the second half of the year.

Got it. That's helpful. And maybe just spend a minute, Naga, talking about any sort of evolution in your M&A funnel backlog relative to coming out of last quarter, how you're thinking about actionability, et cetera, therein?

Our acquisition pipeline is in good shape. We are actively working on various projects, maintaining our primary focus on expanding our testing and inspection capabilities, enhancing our core dispensing businesses as opportunities arise, and scaling our medical businesses. These strategic priorities have not changed. Our pipeline is strong, and we remain committed to being financially prudent. We have established clear criteria for our acquisitions and will continue to adhere to them. You can expect us to be disciplined in our approach while we advance our initiatives. This remains a key component of our growth strategy. We previously committed to achieving $500 million in acquisitions during the plan period and have already secured approximately $225 million in revenues. We anticipate fulfilling our $500 million target over this timeframe. Our adaptability in pursuing various deal types has proven successful; for instance, we've completed the acquisition of CyberOptics, which involved a public company. Last year, we also undertook a public company carve-out. We remain committed to this process and are optimistic about our current position.

Got it. Thank you.

Our next question comes from Mike Halloran from Baird. Please go ahead. Your line is open.

Hi. Good morning, everyone.

Good morning, Mike.

Good morning.

So a couple of questions. First, how are you approaching backlog normalization, which remains quite elevated? It seems like you don't anticipate a return to normal levels until probably next year. Additionally, regarding your guidance, have there been any changes in the assumptions for underlying demand from current levels, or is the current run rate already reflected in your future outlook?

Yes. I guess let me take the first part on the backlog question, Mike. I would tell you, if you look at 65% of our business, that backlog is getting close to historical pre-COVID levels. If you say pre-COVID levels, we ran this business at about 80% to 90% of quarterly sales in backlog heading into any given quarter. For 65% of our business, we're at about one quarter's worth in the backlog. So it's almost at historical levels. The piece that hasn't reverted and I don't know that it is going to revert to historical practices is about 35% of our businesses, which is the large systems business, the coatings business, the plastics business, and the medical interventional solution business. There where we continue to have backlog at an elevated level, orders continue to be strong, and it's about 2.5 quarters worth of backlog that we're running in those businesses. And so we're not seeing that portion of our business revert to historical norms, while the remainder is.

And the second part of the question then.

Sorry. Could you repeat the second part of the question, please?

Just within the guide, is there any assumption for improvement or deterioration underlying fundamentals avoiding backlog normalization noted in the guide?

Yes. Our assumption on order entry indicates that it has stabilized at the level we observed during Q2. We believe that our guidance reflects this stability. The quarterly fluctuations are influenced by the timing of systems deliveries.

Sounds good. And then within the medical business, the fluid business there, should that just correlate more with ATS at a high level on a forward basis? And how are you guys thinking about the normalization of that piece? Because within the biopharma piece, you've given a lot of context to the other parts of that medical side of things you're feeling pretty healthy about. So just more of the timing on that remaining piece and how you think about that normalizing?

The biopharma is part of MFS, I would say, normalizes by the end of the year, right? And so going into next year, we are back to the 7%, 8% year-on-year growth. That's our expectation for our medical and fluid component business. And as you think about ATS, that's going to be a little bit in the middle of 2024. So our fluid components come in first, our IPS business comes in next. And some of this is normalization of comps too.

No. Naga, I think you mentioned that earlier in the call. I was more specifically referring to the parts of that segment that are working construction, the optimizing, etc., type pieces.

Okay. Joe, would you like to respond?

Yes. The management piece of MFS that's not on the medical interventional and not on the medical fluid components side, that piece of the business EFD I would tell you roughly half of that business has the exposure and market exposure similar to our broad ATS segment. And the other half is more industrial, construction, there's animal health, there's medical. So that's how we think about it.

And then Joe, do you want to take it? Yes. The management piece of MFS that's not on the medical interventional and not on the medical fluid components side, that piece of the business EFD I would tell you roughly half of that business has the exposure and market exposure similar to our broad ATS segment. And the other half is more industrial, construction, there's animal health, there's medical. So that's how we think about it.

Go ahead. Sorry, Naga.

Sorry, Mike. So for the portion that has the electronics and construction exposure in Asia, you are right. We got to think about it like the ATS.

Great, I appreciate it. Last question, you guys mentioned some actions internally to normalize for demand. Is there any way you could quantify what those cost actions look like? Or are you thinking about more just run rates with demand and helps mitigate what those detrimental margins would look like?

Yes. The cost actions in the quarter amounted to approximately $3.5 million, aimed at making targeted adjustments in the MFS and ATS segments to refine our cost structure. Some of these actions were structural rather than just piecemeal. We implemented specific structural cost reductions, especially in ATS, which will aid that segment as profitability rebounds to historical levels, anticipated in 2024. The savings achieved throughout the quarter and the year will counterbalance the $3.5 million.

Great. I really appreciate it. Thanks.

Mike, I know you didn't ask this question. But one thing I would remind all of us is that, yes, the business is adjusting to the market demand. And I think that was the right thing for us to do. But I keep in front of mind for all of you that we stay invested in our customer-centric business model, in our product innovation, in NBS Next deployment. So this is really important to making sure the company is well positioned as we adjust for the short-term headwinds, is well positioned for long-term continued growth. More than 80% of the business is growing. And so we want to make sure we stay invested in innovation, stay invested in our customer experience. So that we do well in those parts, but also even in the parts where we have some short-term headwinds, we are invested in innovation.

Thanks, Naga. And maybe next call, we'll have a smoother back and forth. I won't cut you off.

That's okay.

Our next question comes from Allison Poliniak from Wells Fargo. Please go ahead. Your line is open.

Hi. Good morning.

Good morning.

Good morning, Al.

Naga, I'm starting to get some questions on China's Micron ban. Just any comments or color on flow through to you guys or any risks that you guys see there. Thanks.

Micron is a partner in our optical business, and we are focusing on the long term. As Micron anticipates increasing capacity elsewhere, we stand to gain from that. They have made significant projections regarding their investments in North America. As I see it, we will benefit from their alternative capacity investments. Nordson profits when companies add new lines, expand their capacity, or make different investments. While this may raise concerns regarding their investment strategies, it is important to view it as a reason for them to enhance their capabilities. There might be some effects on their production volumes in China, but our business is not affected by the volume of chips produced. Our customer-centric approach keeps us closely connected with our clients, enabling us to understand their direction and our role in it. This is new information, and we're considering its long-term implications for us.

Understood. Thanks. And then you made a comment, IPS generating better growth and execution the main thing you had laid out at the Analyst meeting. Just want to understand kind of where the surprise was for you in terms of that division, will it sort of be development of products, is it execution, just get a better sense on how sustainable you think that is going forward?

I would like to highlight a few key points. Firstly, each of our divisions has been focusing on our NBS Next growth framework and using what we refer to as strategic discipline. This concept involves identifying the most promising growth opportunities and concentrating our efforts on them. As a result, there is a unified initiative across all divisions to capitalize on these growth prospects. We are particularly excited about some macro trends, especially onshoring or reshoring, as our customers are increasing capacity closer to home rather than in Asia, which benefits us. Additionally, we are seeing growth from emerging applications in electric vehicles and battery manufacturing, although these developments are still evolving. Strategic discipline helps us sharpen our focus on these areas and directs investment accordingly. Furthermore, our commitment to producing our best products is also yielding positive results. In the divisions where we have effectively implemented NBS Next, customer service has markedly improved and is now leading in the market. I would emphasize these three aspects as indicators of how NBS Next is enabling our teams to pursue growth opportunities.

Great, thank you.

Our next question comes from Walt Liptak from Seaport. Please go ahead. Your line is open.

Hi. Thanks. Good morning, guys.

Good morning, Walt.

Maybe as a follow-on to the last couple of questions using NBS Next with these strategic disciplines. In the ATS segment, I think you guys have been working on trying to broaden some of the applications from traditional semiconductor electronics to automotive sensors, IoT, things like that. And I wonder if there's a metric that you're looking at now, or if there's something that you tell us about sort of the fruits of that effort?

Yes. Within the business, we have got like four targeted KPIs that we measure, which sort of gives us a view of how we are doing in terms of deploying NBS Next and we call it leadership level performance. So we have leadership level performance on customer growth as one of the key metrics for the business within the company. And what you're beginning to see is where businesses that are not impacted by significant macro trends, that metric is trending towards where we would like to be, right, and it differs from business to business. So I can't give you a specific number. But what I will tell you is business by business, the teams are identifying what is leadership level performance, and we are beginning to see some nice progress in businesses on customer growth, certainly on new product innovation. And there are a couple of other metrics around customer service levels that we are very excited about. So a number of internal metrics allows us to track the effectiveness of the strategy deployment and execution that is leading to some pretty strong customer experience that we believe translates into growth and profitable growth for the company.

Okay. All right, great. That's helpful. And then just switching over to IPS, again, the 9% organic, I wonder if you could help us understand how much of that was volume growth and how much was price?

Yes. Walt, this is Joe. I would tell you that the price realization for Nordson broadly improved in Q2, and so I would estimate that approximately 4% of that 9% for the IPS segment would be attributed to price and 4% would be volume.

Yes, Walt, this is Joe. I would tell you that the price realization for Nordson broadly improved in Q2, and so I would estimate that approximately 4% of that 9% for the IPS segment would be attributed to price and 4% would be volume.

Sorry, go ahead.

And the 60% incremental margins looked really good too. Is there NBS Next in there, so we're now operating at a higher level, or is that just catch up on some of the price cost?

No, I would tell you that NBS Next expressing itself on the price cost, we got to the point where I would tell you that that is no longer a headwind. If you'll recall the last two quarters that's been pressuring our gross margins. And so here, that is price cost balanced for Nordson is no longer pressing the gross margins as we have realized the price increase to offset inflation and maintain our margins. So what you'll see there in the 6% incremental margin for IPS is largely consistent with what we've seen over the past couple of years. And I would tell you, there's a host of issues there, but it's the benefit of NBS Next and being broadly implemented throughout those divisions.

Okay. Congratulations on that. Thank you.

I would like to make one other comment, I think it's back to Matt's question around the Q3 guide. I spoke to what was assumed in the guide below operating profit. But when you look at the operating profit line and the gross margin line, our gross margins were at roughly 54.5% here in Q2 consistent with Q1. That being said, the drivers of that were a little bit different than Q1. The price realization is no longer a headwind. But what you see in Q2, the margins are pressured by the lower volumes that we've talked about on those two particular businesses. And then offsetting that is the growth but the growth is coming with a less favorable sales mix as it’s becoming and coming in product lines such as plastic processing and others who are delivering double-digit growth. So the profitability when you think about Q2 going into Q3, profitability from gross margin and OP margin should be comparable because the mix is comparable.

We have no further questions. I would like to turn the call back over to Naga for closing remarks.

Our performance reflects the strength of our differentiated precision technology, customer-centric model, and diversified end markets. Again, I want to thank Nordson's employees for their commitment which makes these results possible. The continued deployment of NBS Next in the Ascend strategy will position us well for long-term growth. We look forward to the opportunity to talk with you at upcoming investor events. Joe, Lara, and Stephen Lovass, our MFS segment leader, will be at the Deutsche Bank Industrial conference on June 8 in New York. Joe, Lara, and Jeff Pembroke, our IPS segment leader, will be at the Wells Fargo Industrial conference on June 13 in Chicago. And Joe, Lara, and our segment leader of ATS, Srini Subramanian, will be participating in a Virtual Roadshow with Loop Capital on June 14. Thank you for your time and attention on today's call. Have a great day.

This concludes today's conference call. Thank you for your participation. You may now disconnect.