Thank you for standing by. My name is Eric and I will be your conference operator today. At this time, I would like to welcome everyone to the Nordson Corporation Second Quarter Fiscal Year 2024 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. Thank you. I would now like to turn the call over to Lara Mahoney. 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 Stephen Shamrock, Chief Accounting Officer. We welcome you to our conference call today, Tuesday, May 21st to report Nordson's fiscal 2024 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 30 days. There will be a telephone replay of the conference call available until Tuesday, May 28th, 2024. During this conference call, we will make references to non-GAAP financial metrics. We've provided a reconciliation of these metrics to the most comparable GAAP metrics 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 materially differ. Moving to today's agenda on Slide 3, Naga will discuss second quarter highlights. He will then turn the call over to Steve to review sales and earnings performance for the total Company and the three business segments. Steve will also discuss the balance sheet and cash flow. Naga will then share a high level commentary about our end-markets and provide an update on the fiscal 2024 full year and third quarter guidance. We will then be happy to take your questions. With that, I'll turn the call over to Naga.

Good morning, everyone. Thank you for joining Nordson's fiscal 2024 second quarter conference call. Before we begin, I would like to welcome Dan Hopgood, our new Executive Vice President and Chief Financial Officer to Nordson. Dan started with us yesterday. He brings more than 25 years of financial and operational expertise to the CFO role. Prior to joining Nordson, he held roles of increasing responsibility at Eaton Corporation, a $23 billion multinational power management company. Most recently, he served as Eaton's Controller and Chief Accounting Officer. As I got to know Dan, I was impressed with his robust financial experience, his time as an operational leader and his passion for developing talent. Today, he will be listening in and we look forward to introducing him to all of you in the coming months starting at the KeyBanc Industrials and Basic Materials Conference in Boston next week. Now let's shift into our second quarter earnings results on Slide 5. At the outset, I would like to recognize the dedicated Nordson team, who have leveraged the NBS Next Growth Framework to deliver solid second quarter result. Sales of $651 million were within our second quarter guidance range. Growth was driven by the ARAG acquisition as well as strong performance in our Industrial Coatings and Fluid Solutions product lines, which offset continued weakness in our electronics product lines. In addition, our focus on top customers and differentiated products improved product mix. This focus and strategically adjusting costs led to improvements in gross margins and top quartile EBITDA margin of 31%. In the quarter, we delivered adjusted earnings per share of $2.34, which was at the top end of our EPS guidance for the quarter. Finally, I'd like to highlight our second quarter free cash flow of $108 million, which was 92% of net income. We continue to convert earnings into cash flow and use this cash flow to retire nearly $100 million of debt within the quarter. I'll speak more about the enterprise performance in a few moments, but first, I'll turn the call over to Steve to provide a detailed perspective on our financial results for the quarter.

Thank you, Naga, and good morning to everyone. On Slide number 6, you'll see second quarter fiscal 2024 sales were $651 million, a slight increase to the prior year's second quarter sales of $650 million. This was driven by a favorable 5% benefit from the ARAG acquisition, partially offset by an organic sales decrease of 4% and an unfavorable foreign exchange impact of 1%. As Naga referenced, strength in our Industrial Coating Systems and Fluid Solutions product lines were offset by an ongoing weakness in our electronics product lines. Gross profit performance was strong in the second quarter. We delivered gross profit margins in excess of 56%, an approximately 200 basis point improvement over the prior year. Deploying our NBS Next Growth Framework, we are focusing on top products, driving a favorable product mix and product simplification efforts to improve manufacturing efficiency. We also remain disciplined on managing our cost structure and taking actions where necessary. EBITDA, adjusted for special items in both periods, totaled $203 million or 31% of sales, which was consistent with the prior year. Improved gross margins were offset by higher selling and administrative costs, attributable primarily to the addition of ARAG. Looking at non-operating expenses, net interest expense increased $9 million, associated with higher debt levels and increased interest rates. Other expenses net decreased $1 million, primarily related to lower foreign exchange losses compared to the prior year. Tax expense was $31 million for an effective tax rate of 21% in the quarter, which is in line with the prior year rate and our guidance range for 2024. Net income in the quarter totaled $118 million or $2.05 per share. Adjusted earnings per share, excluding $2 million of nonrecurring cost reduction actions and amortization of acquisition-related intangibles of $19 million totaled $2.34 per share, a 4% decrease from the prior year adjusted earnings per share amount of $2.45. The decrease in earnings was driven primarily by higher interest expense due to the ARAG acquisition. Now let's turn to Slide 7 through 9 to review the second quarter 2024 segment performance. Industrial Precision Solutions sales of $367 million increased 9% compared to the prior year second quarter, driven by the ARAG acquisition, as well as increased sales in our industrial coating systems and packaging product lines. Organic sales increased 2% over the prior year second quarter, continuing to build upon a record fiscal 2023 for the segment, partially offset by an unfavorable foreign exchange impact of 1%. This segment has now delivered organic growth in 12 of the last 14 quarters. EBITDA was $132 million in the second quarter or 36% of sales, an increase of 11% compared to the prior year EBITDA of $119 million. The increase in EBITDA was driven primarily by the ARAG acquisition, plus organic sales growth and gross margin improvement in the base business. It's also worth highlighting that this quarter marks 13 out of 14 consecutive quarters of EBITDA growth. On Slide 8, you'll see Medical and Fluid Solutions sales of $169 million increased 2% compared to the prior year second quarter, driven by modest growth in fluid and medical interventional solutions product lines. This was partially offset by lower sales in our medical fluid components product lines versus last year. Despite the year-over-year decrease, we did see a modest increase in the medical fluid component sales sequentially. Second quarter EBITDA was $63 million or 37% of sales, which was flat to the prior year EBITDA of $63 million, which excluded $1.5 million of special items for cost reduction actions. This segment has now delivered EBITDA margins greater than 35% in 13 of the last 14 quarters. Turning to Slide 9, you'll see Advanced Technology Solutions sales were $115 million, a 22% decrease compared to the prior year second quarter. The decrease in sales was driven by continued weakness across the segment, primarily related to products serving electronics end-markets. Second quarter EBITDA was $24 million or 21% of sales, which trailed the prior year second quarter EBITDA of $32 million, which excluded special items of $2 million related to cost reduction actions in both periods. While the reduction in EBITDA was tied to the overall decrease in volume, favorable mix and cost reduction actions contributed to 22% decremental margins. This is well ahead of our decremental target of approximately 55%. Finally, turning to the balance sheet and cash flow on Slide 10. At the end of the second quarter, we had cash of $125 million and net debt was $1.4 billion, resulting in a leverage ratio of 1.7 times 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 was $108 million or a 92% conversion rate on net income. We strategically deployed this strong cash flow in the quarter. We repaid $100 million of revolver debt and paid $39 million in dividends during the quarter. For modeling purposes for the full fiscal year, assume an estimated effective tax rate of 20% to 22%, capital expenditures of approximately $40 million to $50 million, and net interest expense of $74 million to $77 million. In summary, we delivered another strong financial performance in the second quarter in line with our expectations. We'll now move to Slide 11, and I'll turn the call back to Naga.

Thanks, Steve. I also want to commend the business for delivering strong operating performance under a challenging demand environment in some of our segments. This is a testament to how NBS Next is becoming the way we run our business. I want to spend a few minutes talking about our end-markets and the changes we are seeing as we move into the second half of fiscal 2024. Starting with Industrial Precision Solutions segment. We continue to see steadiness in industrial and consumer non-durable end-markets. After two years of record growth, our full year guidance implies IPS excluding ARAG is about flat to slightly up versus prior year. And while the ARAG integration continues to go well, we cannot ignore the impact of weakening agriculture and market conditions. Despite the weakening of this particular agricultural cycle, which is causing customers to pause spending and work through inventory, we are undeterred in our belief that precision agriculture is a high growth end-market and this cycle is temporary in nature. Based on the past nine months of integration, we remain excited about ARAG's differentiated technology and value proposition that will help customers boost crop yields while sustainably reducing the expensive usage of fertilizers and chemicals. Within our Medical and Fluid Solutions Segment, we are continuing to see modest order entry pickup in our fluid components business, which is returning to growth following last year's biopharma destocking. Similarly, our fluid solutions product lines, which have exposure to the electronic cycle, are turning positive. Our medical interventional solution product lines, which grew double-digits in fiscal 2023, driven by the trends in minimally invasive therapies and the aging of population, we have tough comparisons in the second half of the year. In the ATS segment, we continue to see positive early indicators of the electronic cycle inflection, but we're not seeing order entry pickup that would support the implied ramp in our prior second half guidance, keeping in mind, the semiconductor sub-segment, Nordson applications are largely positioned at the back end of the manufacturing process with a focus on advanced packaging of semiconductor chips. Currently, investments are being made in the front end of the semiconductor manufacturing process related to fabrication and processing of silicon wafers. As production shifts towards converting the wafers to individual chips and advanced packaging of these chips, customers will invest in Nordson Electronics dispense and test and inspection technology. Overall, we will benefit from the increasing demand for chips in support of AI, automotive electronics, onshoring, CHIPS Act and more. While our test and inspection businesses are positioned to improve the yields and ensure quality of these critical and expensive CHIPS, our X-ray business, which experienced double-digit growth in fiscal 2023 is dealing with challenging comparisons in the second half of the year. Our ATS leaders continue to do an excellent job of implementing the NBS Next Growth Framework and positioning themselves for future growth. This includes positioning operations closer to the customer, introducing differentiated new products and making strategic cost adjustments. ATS ability to outperform their decremental targets again this quarter is a testament to this work. Turning now to our outlook on Slide 12. We enter the third quarter with approximately $700 million in backlog. This backlog remains concentrated in our systems businesses while customer order entry patterns have returned to historical norms in the rest of the businesses. Based on the current visibility I just shared and order entry trends, we are updating our previously issued full year revenue guidance in the range of flat to up 2% over record fiscal 2023. Full year fiscal 2024 earnings are forecasted to be in the range of down 5% to down 1% per diluted share. This full year guidance assumes a neutral impact from FX rates and the ARAG acquisition contributing approximately 3.5% growth at the midpoint of our guidance. Investors should keep in mind that we anniversary the acquisitive growth impact of ARAG in the fiscal fourth quarter. For the third quarter of fiscal 2024, sales are forecasted to be in the range of $645 million to $670 million with adjusted earnings in the range of $2.25 per diluted share to $2.40 per diluted share. Third quarter guidance considers weaker electronics and agriculture end-markets. Even as we face more challenging market conditions, Nordson's core strength remain a diversified portfolio close to the customer business model, high level of recurring revenue, NBS Next Growth Framework and a commitment to innovation. All of this positions Nordson well to deliver long-term Ascend Strategy goals. As always, I want to thank our customers, shareholders and the Nordson team for your continued support. With that, we will pause, and Steve and I will take your questions.

The first question is from Mike Halloran with Baird. Please go ahead.

Hey, good morning, everyone.

Good morning.

Good morning, Mike.

So a couple of questions here. Naga, maybe you could just talk to what's assumed in guidance as you work through the year from an end-market recovery? I certainly understand the electronics piece and the ag piece. You look at the implied fourth quarter ramp, it's still probably a little above seasonality. So wondering if you still have some of those systems and projects hitting in the fourth quarter or if that's been pushed to next year? And thoughts about any sustainability of the packaging piece and how you think the biopharma is going to recover? So basically just maybe lay out how you think the end-markets track as we work through the remainder of the year and what's assumed in guidance?

Yeah, let's get started with IPS. Regarding guidance, let's start with the first two big hits and then we'll go through the end-markets, Mike. The two factors you highlighted are that we're not seeing the pickup in orders for electronic systems that we had expected with the implied second-half ramp, and the agriculture cycle is having a greater impact on ARAG than we expected. Timing is simply insufficient to achieve the ramp we had originally expected. In terms of end markets, for IPS excluding ARAG, we expect flat to slight growth following two record years. ARAG continues to contribute to the business's growth. For ATS, growth is below our long-term rates and we're not seeing the pickup we had anticipated. For Medical Fluid Solutions, we expect the fluid components business to be slightly up and the fluid solutions business also slightly up, offset by tough comps on the interventional components. In summary, IPS flat to slightly up, ATS down, and MFS returning to slight growth.

So thanks for that. Following up on that then, are you assuming any sort of pickup in some of those stressed markets or any sort of backlog let out in any of those stressed markets in the fourth quarter? In other words, just trying to understand how derisked some of those stressed points are in the guidance as we work through the rest of the year?

If you think about our fourth quarter, it neither expects nor requires electronics to come back, nor does it expect ARAG to come back. So for those two stressed markets, the guidance does not assume a recovery. What is expected, though, is sequential, continued improvement in both markets. We saw that in the second quarter, with both electronics and ATS sequentially up, and that's our expectation going forward.

So in other words, the sequentials from here are relatively stable versus a normal sequential pattern in your mind in those markets?

Yeah.

Mike. What I'll add is if you also look at sequential growth, we had 11% growth last year from Q3 to Q4, and our midpoint basically implies around 8% growth this year. So Q4 is usually seasonally our strongest quarter. So I think that aligns with how we're thinking about it.

Great. Really appreciate that. Thank you.

Your next question comes from the line of Saree Boroditsky with Jefferies. Please go ahead.

Good morning. This is James on for Saree. Thanks for taking the questions. I just wanted to kind of follow up on the ARAG. So can you kind of provide more color on kind of increased pressure? Because I know you guys said that you guys have a high recurring revenue here. And kind of when do you expect to see an inflection point in the ag market? Thank you.

In general, this market is expected to be down this year. And we expect this turnaround sometime in '25, but we're not really giving any guidance on '25. So difficult to tell you exactly when that will happen. But our guidance does not imply any pickup in ag, agriculture markets this year.

Got it. And kind of wanted to follow up on the, like the strong gross margin performance here, like despite flat revenue growth. So how should we think about like gross margin for the remainder of the year? Thank you.

So what I would tell you, and that ties back to our very strong Q2 performance, is that from a sales standpoint we came in where we expected. We had $651 million of sales in Q2. When we gave guidance for Q2 we assumed currency neutral, so if you add back about a $5 million unfavorable FX impact, we basically came in spot on near the midpoint of our guidance. We were actually at the high end of our guidance in Q2 because of the gross margin performance you referenced. We had strong margin performance for several reasons: a very favorable mix in Q2, including parts versus sales, good customer mix and even mix within product lines, and, as we noted earlier, manufacturing efficiencies and cost controls. Looking ahead, we're not focused on expanding gross margins; our long-term focus is to maintain our current gross margins. I do think Q2's mix was better than normal, so I would not expect as favorable a mix for the remainder of the year.

Got it. Thanks for taking the questions.

Your next question comes from the line of Matt Summerville with D.A. Davidson. Please go ahead.

Thanks. Just a question on ARAG. I remember back to when you did the call, is it related to the acquisition? You seem pretty convinced that this business would be less impacted by a down ag cycle, and clearly, that's not the case here. So what I guess have you learned over the last couple of quarters about ARAG and how indeed tied to the cycle that business seemingly is? And to that point, you mentioned inventory destocking. I assume that's at the OEM level. But correct me if I'm wrong. How long do you think that destock lasts?

Yeah, you're right, Matt, in that, our expectations that this business would have been less muted because of the precision ag exposure, certainly did not play out the way our expectations were. But look, what is really important to remember is, we still like the technology. We like the people we have added to the organization. Certainly a very interesting end-market. If you look at expectations of some of the OEMs, the precision ag itself is down or expected to be down 20%, 25%. So even if you think about our expectations where precision AG was going to continue to grow through the cycle, that has not worked out the way it is. In terms of inventory destocking, remember, 40% of this business is aftermarket parts. And those aftermarket parts go through distribution. They're not direct sale. So they don't go through the OEM, they go through a distributor, and there is some level of inventory destocking that is going on in ARAG.

Got it. With respect to, you'd mentioned kind of last conference call, the Canary businesses, and I mean that in a positive light, with respect to electronics showing some signs of life. Are you concerned that maybe those are no longer good leading indicators for a broader upturn in the electronics side? And could you maybe put a finer point on how those businesses, those Canary businesses, if you will, performed in the second quarter and how inbound order activity has been looking there? Thank you.

Yes. Both businesses continue to strengthen in the trends we mentioned in our first quarter. We remain convinced both are very good leading indicators. I'll tell you the reason: they are two separate indicators. For example, one we talked about is the UV lamp business, a niche product line in one of our businesses. That is in the front end of the semiconductor process where we sell to large machine builders. That continues to strengthen and the forecasts have actually increased. That aligns with what you see in front end semiconductors growing nicely. But you also see, in finished electronic products, greater usage of existing lines. So the consumables from EFD continue to strengthen. Both remain strong. I think what is not getting translated is that you would immediately see a system business pickup, and that translation is being delayed. We're not concerned that this indicates the cycle is going to turn. It is more an uncertainty in CapEx spend in electronics that we are seeing, so it is more related to CapEx investment than to whether the cycle has turned. Hopefully that helps you.

Got it. Appreciate it. Thanks, Naga.

Your next question comes from the line of Christopher Glynn with Oppenheimer. Please go ahead.

Yeah. Thanks. Good morning.

Good morning.

Good morning.

Well, I wanted to follow up on a little different cross section for the electronic cycle. I'm curious if you could speak directly to the differences you're seeing in electronics processing versus T&I broadly? And then if any interesting nuances in the different test and inspection modalities?

Okay. All right. First, let's start with EPS and T&I. EPS systems continued to be lower in the quarter, in line with ATS levels, down about 20% or so. In the T&I business, I’ll remind you that last year we had some significant growth, so we are facing a tough comparable, particularly in our X-ray business. Among the other T&I offerings, in our optical business we have sensors that go into the front end of the market, called the wafer sense product line, which is continuing to grow nicely. It is a small part of the business, but it is growing. The acoustic test and inspection part of the business is also growing, focused more on the front end and some new memory applications. On the optical side, parts are fine but systems are behind. We still believe the test and inspection business will see smaller declines compared to our dispense business. What you’ve got mixed in there are some tough comps in our X-ray business. In all of these areas, the teams are doing an incredible job on three fronts. First, they are strengthening delivery and quality performance. Second, they are moving manufacturing closer to our customers; we have a new manufacturing and distribution location coming up in India to support electronic customers shifting focus there. Third, we have very exciting new products coming from our test and inspection business. Our new MXI Liner products are being well received in the marketplace, and we have updated software for our AXI business that is hitting the market. In our dispense business, you can see our Vantage product as well as new coating product lines also coming to market. We’re using this time to really position the business for growth.

Great. Thanks. And then a similar one in IPS. Wondering if you could go into the state of phasing of demand and comparisons for the polymer and adhesives general assembly pieces. I think coatings stood out as maybe the strongest piece in the quarter for non-ARAG IPS.

Yeah, our coatings business is experiencing incredible market demand and really delivering on growth opportunities, so we're very happy with its performance. Our adhesives business has grown in 12 of the last 13 or 14 quarters, so it has shown pretty strong growth. We expect to finish the year flat to slightly up, which is a good position. Our packaging segment is doing particularly well. Our plastics business had record growth over the past two years, but it will face tough comparisons this year and will be slightly lower than those record levels. We don't disclose sales by individual divisions, but generally our plastics business will be slightly lower than its record performance over the last two years. Hopefully that gives you enough color around the different businesses.

Yeah, terrific. Thank you, Naga.

And one last thing I would add: in our adhesive business, parts are significantly up compared with our system businesses. This is one of the reasons, and when Steve talks about sales mix, this was very helpful.

Yeah, you're saying less system sales in the quarter was sort of neutralized by really strong recurring revenue growth?

Yes, recurring revenue growth.

Your next question comes from the line of Chris Dankert with Loop Capital. Please go ahead.

Hi. Good morning. Thanks for taking the question. I guess just return to ARAG for a moment. Given that agriculture markets kind of come off peak here, is there any risk around the expected synergies for that deal? And maybe just how do we think about the cost structure of that business in the context of the current slowdown here?

Yeah, I think there are, if you remember, when we acquired ARAG, this is a complete new division for the Company. Hence, there were no cost synergies baked into our valuation model. It was mostly based on our ability to continue to grow with the market. Clearly, with the market being down and our own expectations that it wouldn't follow the market, not panning out the way we had expected, certainly puts the sales part of our plan behind. But I'd still remind you, great technology, great end-market with precision agriculture, long-term solid growth opportunities for us as a Company, market leader in Europe, market leader in South America, two big geographies. Certainly, we have opportunities as we think about North America. We fully acknowledge that our existing competitors will do a nice job in North America, but we do believe that is an opportunity for us to continue to think about it.

I think that was the crux of my question. When you brought it on board, there was no real expectation of a slowdown and no cost side to the economics. Has that changed? It doesn't sound like it has. It sounds like we'll manage through this and aren't contemplating any adjustment to the decrementals on that business.

No. If you think about this business, even with the reduction in revenue, their profit margins are north of the Company's margins.

Got it. Got it. Perfect. Thank you so much for the color there. And I think just for my follow-up, on the electronics side of the business, particularly on the electronics processing within ATS, the shorthand, at least for me, has always kind of been that's the handset cycle. Is there anything else that's kind of weighing down that business right now beyond handsets or is that still kind of the main driver there?

Yeah. Chris, I mean, over the last four years, five years, we certainly have moved away from the handset as an important driver in that business. Handset is still a small part of the business, but really, semiconductor advanced packaging is where this business is growing, and in components such as camera modules and things like that. Automotive electronics also has become a bigger part of the business. So it's no longer just a handset business, it is semiconductor, automotive electronics, and a small handset presence still.

Got it. Yeah, well, thanks so much for the color, Naga.

Your next question comes from the line of Walter Liptak with Seaport Research. Please go ahead.

Hi. Thanks for taking my question. And, yeah, I just want to try a couple of follow-ups on ARAG. You talked about the market in Europe, Latin America. Are all the markets getting hit the same way by the cycle?

Yes. If you look at some of the market reports that are out there, pretty much across the world, the market cycle seems to be in that down 20% to 25%, and that is North America, that is Europe, that is South America and even precision ag, which was typically a growth engine.

Okay, thanks for that. A follow-up: is the precision ag market slowing in this cycle? What’s different about it, and is the slowdown related to destocking or something?

Yeah. I think there is some destocking, but our knowledge of agriculture is not as deep as our knowledge of electronics or industrial non-durables because we have been in this business for a short time. Our understanding is that there is some destocking, but there is also hesitancy to invest in large implements, which is driving the reduction in OEM demand. This is unique compared with prior cycles; when we evaluated the business we did a lot of work to understand the relationship between the cycle and performance, and this behavior seems different. We're still figuring it out, but it is impacting us more than we expected. We still like the products and the people, and integration of the business is going very well. That’s where we are with ARAG.

Okay. That sounds great. Thank you.

Your next question comes from the line of Andrew Buscaglia with BNP Paribas. Please go ahead.

Hey, guys.

Hello.

I wanted to go back to the ATS segment. Just given the nature of Nordson having a more direct sales model, it gives investors a lot of confidence in what you guys are saying. But what is that these customers are saying to you that's making it so difficult to predict when the spend is going to move forward?

Yeah. I think it's a great question, Andrew. What I will tell you is that none of the projects we are working on with our customers that somebody come to us and said, look, this is all off the table, it is canceled. That is not the case. We continue to work with our customers on projects and opportunities as they bring on new technologies for AI, as they bring on more technologies for much smaller, much more complicated chips than we had. So that work, the project work continues, but what it is not translated is from that project work into system orders, it is not translated yet, nor have people completely canceled projects either, right? So we are sort of in this middle time, call it uncertainty, and I can only talk to you about what we're seeing in terms of customer sort of actions rather than what is the broader trend here. There seems to be a reluctance in translating work that they're doing into systems sales or systems orders, right? We continue to do well on our parts, but there seems to be some reluctance, and not exactly understand the core reasons as to why our customers have reluctance, but there is reluctance.

Maybe to dig in a little bit deeper, regionally is there something unusual going on like, is one region worse than the other? And I'm thinking China here. I don't know just, what are you seeing by geography, I guess?

Yeah, we're not seeing significantly different behavior by geography. We still work with all of the major semiconductor manufacturers. It's not like we're continuing to decline or flat at the bottom — we continue to grow sequentially and have better order entry. We're starting to come out, but it is not as fast as we had hoped. The takeaway is that our reduction in guidance is mainly because we had expected a far steeper ramp in the second half, and that's not happening because orders are coming in at a flatter rate than we anticipated. We don't see a whole lot of regional differences. Compared with last year, activity in Asia has picked up. For us, Southeast Asia is better than China. Our automotive electronics customers in Mexico are significantly better. Europe is okay. Broadly, that's how we think about the ATS business.

Okay. Thanks, Naga.

Your next question comes from the line of Jeff Hammond with KeyBanc Capital Markets. Please go ahead.

Hey, good morning, everyone.

Good morning, Jeff.

Hey, so just if we step back and think about capital allocation, I think you guys have kind of been on the wrong side of cycle timing around CyberOptics and ARAG now. And I'm just wondering how you think about cyclicality and timing as you kind of look at deals going forward?

Yeah. I think that's a fair question and we've spent time thinking about it. We have to include that in our equation when evaluating acquisitions and deals. That said, the technology behind each of these transactions aligns well with our strategy to expand our portfolio of precision technologies. We are facing short-term pressure because of market conditions, but we believe the long-term drivers in both areas are solid, and we like the technologies and the people we've added. I won't offer this as an excuse, but we really don't control when high-quality assets come to market. We remain focused on our strategy of building a strong precision technology portfolio, continuing to deploy NBS Next, and we believe these businesses are a strong strategic fit. As market conditions improve, we'll be very glad they are part of the Nordson portfolio. So I think that's a fair question, but that's what we're working on.

Okay. Appreciate the color there, Naga. Just on decremental margins in the second half, I mean, you guys have done a pretty good job with NBS Next kind of limiting the decrementals, but I think at least in our model initially, we have pretty severe decrementals. So just maybe how you're thinking about decrementals and holding the line?

Yeah. If you think about decrementals, we think about them mostly within the company for our core businesses, which is the best apples-to-apples comparison. Our core-business decrementals were pretty strong this quarter. At the total company level, ARAG's performance, with lower sales but the full SG&A load, skews the decrementals. Excluding ARAG, we had some pretty strong decrementals. If you're looking for a specific number, sorry Steve, do you want to take that?

Yeah, I was just going to say, Jeff, that I'd also focus on our EBITDA margins. We've been very successful at generating strong EBITDA margins. Even Q2 was the fifth quarter in a row with EBITDA margins of 31% or higher. Over the last three years we've delivered 30% or more EBITDA margins, and I think we're well on our way to do that again in 2024.

And in the core businesses, Jeff, if you're asking what a target decremental is, it is about 50 to 55. I would use 55, which is roughly in line with our gross margins, because we want to stay invested in our precision technology innovation and our direct customer model. That is what we have done in the past and what we will continue to do. Putting this in perspective, for the full year our midpoint essentially implies about 1% growth over a record 2023. We still expect to deliver EBITDA margins above 31% and to convert net income to free cash flow at a strong rate. In the quarter, we converted about 92%. From an operational perspective, the teams are managing market conditions, and the company's operational performance is in a good place and will continue to be so in this environment.

Okay, great. I'll leave it there. Thanks.

I will now turn the call back over to Naga for closing remarks. Please go ahead.

Our solid second quarter operating performance reflects the strength of our diversified markets, close to the customer model, differentiated precision technologies and rigorous implementation of NBS Next Growth Framework. We remain focused on the deployment of the Ascend Strategy that positions us well for long-term profitable growth. With that in mind, we are excited to announce that we will be hosting an Investor Day in New York on Thursday, October 3rd, 2024. We'll be sharing more information about the details of the event this summer, but please save the date on your calendars for the afternoon of October 3rd. Again, I want to thank Nordson's employees for their commitment, which makes these results possible. Thank you for your time and attention on today's call. Have a great day.

Ladies and gentlemen, that concludes today's call. Thank you all for joining and you may now disconnect.