Nordson Corp Q4 FY2024 Earnings Call

Thank you for standing by. And welcome to the Nordson Corporation Fourth Quarter Fiscal Year 2024 call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone pad. If you would like to withdraw your question, again, press star one. Thank you. I would now like to turn the call over to Lara Mahoney, Vice President of Investor Relations and Corporate Communications. You may begin. Thank you.

Good morning. This is Lara Mahoney, Vice President of Investor Relations and Corporate Communications. We welcome you to our conference call today, Thursday, December 12, 2024, to report Nordson's fiscal year 2024 fourth quarter and full year results. I am here with Sundaram Nagarajan, our President and Chief Executive Officer, and Dan Hopgood, Executive Vice President and Chief Financial Officer. 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 nordson.com/investors. This conference call is being broadcast live on our investor website and will be available there for fourteen days. There will be a telephone replay of the conference call available until December 19, 2024. During this conference call, references to non-GAAP financial metrics will be made. A complete reconciliation of these metrics to the most comparable GAAP metric has been provided in the press release issued yesterday. Before we begin, please refer to slide two 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 three. Naga will discuss fourth quarter and full year highlights. He will then turn the call over to Dan to review sales and earnings and the three business segments. Dan also will discuss the year-end balance sheet and cash flow. Naga will conclude with high-level commentary about our strategy including an update on the Ascend strategy, as well as our fiscal 2025 full year and first quarter guidance. We will then be happy to take your questions. With that, I'll turn to slide four and hand the call over to Naga. Good morning, everyone.

Thank you for joining Nordson's fiscal 2024 fourth quarter and full year conference call. In fiscal 2024, we continued to make progress on our Ascend strategy, delivering record sales of $2.7 billion and record EBITDA dollars of $849 million or 32% of sales. This is a testament to our employees who have, in the last four years, deployed and delivered results with NBS Next, our growth framework, despite dynamic global macro conditions, end market changes, supply chain disruptions, and more. The core elements of our business model have enabled us to deliver profitable growth throughout these challenges. This includes a steadfast focus on our customers, commitment to innovation, diversified geographic and end market exposures, and a high level of recurring revenue through aftermarket parts and consumables. Since launching the Ascend strategy in 2021, we've added new capabilities to our business model including the NBS Next growth framework and a division-led structure which have empowered our teams to respond rapidly to changing market conditions. I will speak more to the enterprise performance in a few moments. But I'll now turn the call over to Dan to provide more detailed perspective on our financial results for the quarter and fiscal year 2024.

Thank you, Naga, and good morning to everyone. I'll start on slide five, which summarizes our overall results for the fourth quarter. Fourth quarter 2024 sales were $744 million, up 4% compared to the prior year's fourth quarter sales of $719 million. The increase included 6% growth from acquisitions, primarily from the recent Atrion acquisition but also the final weeks of contribution from the AirAg acquisition we completed in the prior year. Currency translation was favorable by 1% and organic sales were down 3% compared to the fourth quarter of the prior year. The organic sales decrease was driven by challenging year-over-year comparisons in our Industrial Precision Solutions segment and year-over-year declines in selected product categories within our Medical and Fluid Solutions segment. These were partially offset by a return to growth in our Advanced Technology Solutions segment, and I'll cover a bit more on each of our segments in a moment. Adjusted operating profit, which excludes $26 million in non-recurring costs related to the Atrion acquisition and one-time restructuring costs during the quarter, was $205 million, up 30 basis points from the prior year on a percentage of sales basis. This was driven by gross margin improvements of about 110 basis points reflecting factory efficiency gains, and a higher mix of parts revenue. Selling, general, and administrative expenses as a percentage of sales increased about 80 basis points year over year, reflecting the addition of Atrion, and continued investment in front-end growth initiatives. All in, this represents a 35% incremental operating margin for the company, which is on the high end of our targeted performance. EBITDA for the fourth quarter increased 6% over the prior year to a record $241 million or 32% of sales. This is 200 basis points above our long-term profitability target as articulated in our Ascend strategy. This also compares to $227 million also at 32% of sales in the prior year fourth quarter. That translates into a 56% incremental EBITDA on our 4% overall sales growth for the quarter. A really strong quarter of both operational execution and the initial integration of the Atrion acquisition.

Looking at non-operating income and expenses in the quarter, interest expense in the quarter increased nominally to $27 million.

This modest increase is driven by higher net debt levels due to acquisitions compared to the prior year. As a reminder, in September, we accessed the public debt markets raising $600 million in five-year notes at 4.5% in order to finance the Atrion acquisition. The balance of the purchase price was funded with our revolver, which we expect to pay down in the near term. Other expense on a net basis increased $5 million year over year primarily due to currency fluctuations and some reduction in pension income year over year. Tax expense was $26 million for the quarter, an effective tax rate of 17%. Our fourth quarter tax rate reflects changes in our mix of earnings due to acquisitions and other structural changes. It reflects a full-year effective tax rate of 20%. This improved mix is expected to continue going forward and you'll see this reflected in our 2025 guidance that Naga will cover a bit later. GAAP net income totaled $122 million or $2.12 per diluted share, while adjusted earnings per share excluding nonrecurring acquisition and restructuring-related expenses totaled $2.78 per share, a 3% increase over the prior year. Adjusted earnings per share were $0.19 above the midpoint of our guidance for the quarter reflecting equal contributions from strong operating performance during the quarter and the favorable tax rate differential I just mentioned. Now let's turn to slides six through eight to review our fourth quarter segment performance. Industrial Precision Solutions sales of $392 million decreased 3% compared to the prior year fourth quarter. Organically, IPS decreased 5% in the quarter, with the AirAg acquisition adding 1% and currency providing a favorable impact of another 1%. You'll recall that IPS delivered record sales in the fourth quarter of fiscal 2023, driven by record sales in the industrial coatings product line, and elevated deliveries in our polymer processing products. These create tough year-over-year comparisons for the segment, and are driving the overall organic decline in the IPS segment for the quarter. For the full year, IPS organic sales were flat with the prior year. EBITDA for the quarter was $143 million or 37% of sales reflecting consistent operational performance on slightly lower sales. Turning to Medical and Fluid Solutions sales of $200 million increased 19% compared to the prior year's fourth quarter. This increase was primarily driven by the Atrion acquisition and a minor currency benefit offset by a decrease in organic sales volume of 3% or $5 million. The organic volume decline reflects some softness in medical interventional solutions product lines, partially offset by modest improvement in our fluid components and fluid dispense product lines. Fourth quarter EBITDA was $72 million or 36% of sales, which is an increase of 17% compared to the prior year EBITDA of $62 million or 37% of sales. EBITDA margins were slightly lower than the prior year due to the inclusion of the acquired Atrion business. We expect Atrion EBITDA margins to improve over time as we continue to integrate the business and implement our NBS Next growth framework. Turning to Advanced Technology Solutions sales of $152 million increased 5% compared to the prior year's fourth quarter. This change included an increase in organic sales volume of 4%, as well as a small currency benefit. Growth in the quarter was driven by improvement in selected test and inspection product lines, as well as modest improvement within our electronics dispense product lines. Our sales in ATS reflect continued sequential improvement from the third quarter and a return to nominal year-over-year growth in this segment for the first time since the first quarter of fiscal 2023. We've seen electronics and semiconductor end markets continue to show signs of stable improvement. Fourth quarter EBITDA was $41 million or 27% of sales, an increase of $6 million from the prior year fourth quarter EBITDA of $35 million or 24% of sales. We're really pleased with the segment's EBITDA performance, particularly in a down cycle as the 27% EBITDA margin performance represents a significant step up from historical performance. It's a testament to the team's efforts to improve the structure of the base business. And it positions us well when the electronics markets return to more meaningful growth. Now turning to slide nine, I'll share a few comments on our full year results. 2024 full year sales were a record $2.7 billion, an increase of 2% compared to the prior year's previous record sales result. This was driven by a 5% impact from acquisitions, offset by an organic decrease of 3%. On a full-year basis, the organic sales decrease is essentially all driven by our Advanced Technology Solutions segment, although we did see orders and sales continue to improve in our ATS product line as we exited 2024. The Industrial Precision Solutions and Medical and Fluid Solutions segments were essentially flat organically on a combined basis with industrial up slightly and medical down slightly for the year. Adjusted operating profit was $713 million or 27% of sales, which was comparable to the prior year. EBITDA for the full year increased 4% to a record $849 million or 32% of sales. This represents a full-year incremental EBITDA margin of 49% and it marks the fourth consecutive year of the Ascend strategy delivering solid EBITDA growth. GAAP diluted earnings per share were $8.11 for the year, and adjusted diluted earnings per share were $9 per share, a 1% decrease from the prior year, reflecting the higher interest costs associated with the AirAg and Atrion acquisitions. On balance, we're pleased with how we finished the year despite some near-term weakness in certain end markets. And we remain confident in our five-year targets established at our October 2024 Investor Day. Finally, turning to the balance sheet and cash flow on Slide ten. We had another strong cash flow year generating $492 million in free cash flow at a conversion rate of 105% on net income. While still strong, cash flow conversion was down from 2023, and this was due to higher capital investments and additional use of working capital both of which we expect to normalize going forward. While our debt balance increased in the quarter due to the Atrion acquisition, we continue to deploy cash efficiently. During the quarter, we increased our annual dividend by 15% marking our sixty-first year of consecutive annual increases. On a full-year basis, excluding the impact of the Atrion acquisition, we repaid approximately $315 million of debt, paid out $161 million in dividends, and repurchased $28 million of shares on the open market. Through our strategic capital deployment, we ended the year with a strong balance sheet, with cash balances of $116 million and net debt at $2.1 billion resulting in a leverage ratio of 2.5 times based on trailing twelve months EBITDA. This is within our targeted long-term range, and also in line with our expectations for the year. So in closing, just to summarize, our fourth quarter sales were in line with our previous guidance. And we came in better from an overall profit conversion standpoint. We're very pleased to see our Advanced Technology segment continue to show signs of positive improvement in demand. And our IPS and MFS segments continue to deliver strong operational performance despite some near-term demand weakness in selected product lines. We closed fiscal 2024 with a strong balance sheet, and we've steadily reinvested in the business, positioning ourselves well for a dynamic 2025. I'll now turn the call back to Naga.

Thank you, Dan. As I reflect on the past four years since we launched our Ascend strategy, we started from a position of strength with many competitive advantages. Leadership position in diversified niche end markets. High recurring parts revenues, a direct-to-customer model, and differentiated products built on deep knowledge of our customers' demanding applications. In the past four years, we have added two new advantages to expand our competitive model. The first is a renewed emphasis on our growth bias portfolio that has positioned us to accelerate profitable growth. Over time, we have strategically increased our mix of recurring revenue, and we have expanded into the high-growth end markets of medical and electronics. This mix has been strategically driven through organic and acquisitive means. In the short term, end market cycles and unique macro conditions have slowed organic growth in these segments. This increases the importance of balancing organic growth with acquisitions. Our recent Atrion acquisition is a great example of this strategy. This acquisition expands our fluid components addressable market by more than 50% by adding products and solutions for infusion therapies and drug delivery. It also expands our current offering to top medical device customers and broadens Nordson's exposure to significant single-use consumables with recurring revenue streams. Atrion was a solid contributor to our fourth quarter revenue and will be a growth driver in fiscal 2025 and beyond. The second advantage that we have added is the NBS Next growth framework. It drives profitable growth and creates value in our acquisitions. I'm very pleased with the implementation of NBS Next which is becoming a competitive advantage. Throughout 2024, I traveled to many of Nordson's sites including Europe, China, and India in October and November. It is clear to me that the NBS Next growth framework is now how we run our businesses. You can see it evidenced in the fourth quarter results of our ATS segment. As Dan noted, ATS achieved 27% EBITDA margins while still in the downside of the electronics cycle, due to its strategic repositioning. They will be very well positioned to respond when the market turns. At our Investor Day in October, we shared several examples of how NBS Next has driven improved performance in on-time delivery and product quality, allowing Nordson's divisions to protect and grow market share. I encourage you to listen to the Investor Day webcast recording which is available on our investor website. As we work towards our new financial performance targets, NBS Next and the Ascend strategy have ample runway to enable the Nordson team to be successful in the next five years.

Also, at our Investor Day,

we announced our 2025 to 2029 performance targets. In 2029, when we look back on our financial results, we expect to leverage the Ascend strategy to deliver average annual growth of 6% to 8% in revenue, balanced between organic and acquisition growth, and 10% to 12% in adjusted EPS growth. As this is an average annual growth target for that period, growth can be higher in some years and lower in others. We are entering 2025 prudently with conservative expectations for many of our end markets. We also recognize the level of change in the global macro environment, which could cause our customers to be judicious in their spending in the near term. In our Industrial Precision Solutions segment, although our current order entry trends are encouraging, we are expecting large capital investments to be muted in the near term, based on customer conversations, and reduced backlog levels. For our large system businesses, particularly polymer processing product lines, reduced investment in areas such as recycling will be a significant headwind after two record sales years. Additionally, although the European agriculture end market seems to have stabilized, we are cautiously awaiting meaningful growth. Within our Medical and Fluid Solutions segment, medical device customer supply chain teams are being far more cautious with their inventory purchase patterns. We currently see this impact in weakness within our interventional solutions product line, which is approximately 47% of this segment's sales. Long-term project pipelines remain solid and we continue to stay close to our customers and ensure we understand their post-COVID supply chain product needs. Modest growth from our fluid components and fluid dispense product lines will somewhat offset this pressure. But we expect MFS growth to largely come from the Atrion acquisition in fiscal 2025. Positively, we expect to see continued steady improvement in sales from our electronics customers. That said, we do not expect that a significant ramp in capital spending is imminent as customer purchasing patterns have been more cautious compared to prior electronic cycles, particularly in semiconductor applications. We remain close to our customers particularly given geopolitical issues in play. Now turning to the financial outlook. On slide fourteen, we enter fiscal 2025 with approximately $580 million in backlog. The sequential backlog reduction is reflective of a pace return to more normalized levels. Based on the combination of order entry, backlog, current foreign exchange rates, and anticipated end market expectations we anticipate delivering sales in the range of 2% to 7% above fiscal 2024 sales. Full year 2025 adjusted earnings are forecasted to be in the range of neutral to 8% growth per diluted share. For modeling purposes, in fiscal 2025, assume an estimated effective tax rate of 19% to 21%, capital expenditures of approximately $50 to $60 million, and interest expense of approximately $90 to $100 million. This full-year guidance assumes a negative 1.5% impact from foreign exchange rates, no significant recovery or ramp in electronics or agricultural end markets, and the Atrion acquisition contributing approximately 6% growth at the midpoint of guidance. If we see improvements in our end markets, we will adjust. Based on seasonality, we expect our fiscal first quarter to start modestly.

As you will see on slide fifteen,

first quarter fiscal 2025 sales are forecasted in the range of $615 to $655 million and adjusted earnings in the range of $1.95 to $2.15 per diluted share. Even in uncertain times, our team delivers operational excellence and strong cash flow due to our strong competitive advantages. As a growth compounder, we will continue to reinvest in the business while returning cash to our shareholders. Again, I want to thank our employees, customers, and shareholders for your continued support. We will now open the phone lines for questions.

Thank you. We will now begin the question and answer session. If you would like to withdraw your questions, simply press star one again. Your first question comes from the line of Mike Halloran from Baird. Your line is open.

Hey. Good morning, everyone.

Morning.

Alright. Appreciate all the thoughts at the end there on the outlook and the conservatism in the first quarter and some of the variable order patterns. Maybe you could frame up how you're thinking about growth as it works through the year. It doesn't sound like you're embedding any fundamental improvement. Is the guidance assuming relatively normal seasonality? And maybe just give some thoughts on what your customers are saying or how you see these end markets cadencing as we work through the year. Mike, thank you for the question. We'll do it this way. Let me first give you what we're seeing in the end markets. Then Dan can walk you through the guidance and how we built the outlook. Let's start with IPS. In IPS, our consumer non-durable end markets seem to have a steady outlook. There are parts that are really good, and parts that are steady. Further, recurring revenue in this business is fairly high and has grown over the last year. We expect it to contribute nicely in the year. On the headwinds, we are expecting large capital investments to be muted in the near term, based on customer conversations and reduced backlog. Particularly, in the polymer processing product line, we have seen reduced investments after two record sales years. Reduced investment in recycling and some delayed investments in virgin polymer in Asia are headwinds. We are also seeing slowness in automotive. In our industrial agricultural business in Europe, things have stabilized, and we're cautiously awaiting the return there. If you look at MFS, we do see modest growth in our fluid components business, which has some exposure to biopharma. We're seeing order entry modestly pick up there. Fluid dispense business is also steady. These two businesses will offset pressure we are seeing in our medical interventional business. In our medical interventional product category, OEM supply chain teams are more conservative about their inventory purchases, and hence we're seeing weakness in this product line. This product category is about 47% of the segment's revenues. Long-term project pipelines look strong for this product category. The Atrion acquisition meaningfully expands our addressable market and is a positive development. Growth in this segment will primarily come from Atrion acquisition in fiscal 2025. For ATS, we see steady improvement and positive order entry similar to the growth rates we saw in the fourth quarter. Our assumption is that there is not a significant ramp in capital spending. We see recovery order patterns as choppier than in past cycles. We remain close to our customers, and geopolitical issues are at play. That gives you a broad overview of what we are experiencing in the end markets. Dan will walk you through how that plays into our outlook.

Thanks, Naga. And the only thing I might add just on the market overview is on our agricultural business: while we've seen our book-to-bill and order rates stabilize, we still have one quarter of tough comparables in Q1, as Q1 of last year we were working off a large backlog in that business. So we've seen the underlying business is in a very stable place but we've got one more tough comparable in Q1 in the ag business due to the backlog work off last year. That said, just to give you some color, if you think of the overall market outlook and basically think of flat organic growth for the year, the sales profile in our Q1 guidance and full year is pretty much right in line with the seasonality we typically see. Q1 is always our lowest quarter, typically around 23% of our annual sales, excluding acquisitions. The only anomaly this year is the timing of Chinese New Year: it hits our first quarter this year whereas it hit our second quarter the last couple of years. If anything, that means Q1 will be slightly weaker than normal because we lose that production in Q1 that would typically hit us in Q2. Other than that, it's right in line with our historical seasonality.

Okay. That was really helpful. Thanks for that follow-up. On the electronics side in the fourth quarter, was there anything unusual? Was there an element of finally getting some of those projects pushed through? Would you consider that the right run rate? And then related, what are you seeing that gives you confidence that there's some modest improvement coming on the electronic side even if it is modest?

There are a couple of things I'd point to. First, we are seeing strong continued conversations with our customers around projects. Second, those conversations are beginning to translate into order entry, and that order entry is allowing us to deliver the growth we did in the fourth quarter. We are seeing parts revenue in that business also be steady. The caution is that we're not seeing significant capital spend. We are being conservative in calling this a significant uptick, but the positive order trends give us confidence that this will be modest growth for ATS in 2025.

And then just the fourth quarter piece, anything in the fourth quarter order that you felt was an anomaly or is that relatively normal?

Pretty normal.

Your next question comes from the line from Jefferies. Your line is open.

Hi. Thanks for taking the questions. A couple of small items. You cited the backlog including Atrion at $580 million but could you just help us understand the backlog excluding this acquisition?

Yeah. Dan, you want to take that, please?

Sure. Atrion added about $35 million to the backlog. So excluding Atrion, you'd be in the $550 million range.

Ben, I'd add that the company's recurring revenue continues to expand. Today, it is north of 55%, more like 57%, and a significant portion of that is book and ship. Put that in context while you're thinking about backlog production.

Appreciate that. You mentioned the impact of the Chinese New Year on Q1. Historically you've put this at a $15 million to $20 million sales impact. Would that be similar this year, and does this just get pushed to the second quarter?

Typically in the $10 to $20 million range. That still seems appropriate, and yes, it's just a timing shift between Q1 and Q2.

Thanks. Lastly for me, you've talked a lot about entering this year with conservative estimates. What would get you to the higher end of your full-year guidance? How do you think about potential upside to guidance in a more positive scenario?

Great question. The upper end of our guidance anticipates a stronger recovery in some end markets. If you think of Precision Ag and our ATS and technology businesses, stronger recoveries there would drive us toward the higher end. So a stronger recovery in semiconductor and electronics markets and stronger recovery in general industrial markets versus the status quo would move us up.

Your next question comes from the line of Christopher Glynn from Oppenheimer. Line is open.

Thanks. Early in the call, you talked about factory efficiency gains. Could you give a little more color on that?

As we continue to deploy NBS Next, we're seeing product mix become helpful. When we have higher-volume products, we are producing them more efficiently. It's a combination of product choice and improved manufacturing processes. On-time delivery has significantly improved in all of our businesses, which helps efficiency. We're pleased with the progress.

Great. With Atrion, it looks like the revenue trends are solid and growing if we prorate to a full quarter. Are EBITDA margins back in that high-20s range and what is the operating profile now that you've owned it and accounting has settled?

We're very pleased with the integration. We're excited for our Atrion employees who have joined Nordson. Integration is going well, revenue is progressing as expected, and synergies are being realized. Dan can provide some specific financial data.

The acquisition is off to a very good start and is performing in line or slightly ahead of early expectations. From an EBITDA standpoint, they are absolutely in that upper 20% range right now, and we are comfortable with our path toward more Nordson-like margins over a two-year integration period. From an accounting perspective, their DNA is a little higher than ours when you factor in acquisition accounting, but not materially. Overall, we're comfortable with the trajectory toward sustained margin improvement.

Thanks. One more on ATS: the implementation of NBS Next helps mix leverage. The revenue run rate today was healthy in the quarter. Does that include anything you've treated conservatively in the NBS Next process?

The team has strategically repositioned ATS and invested during the downturn, which is why you see strong margins even in the downside of the cycle. We opened a new manufacturing and distribution location in India to support customers pursuing a China-plus-one strategy; growth from that location will begin to impact in 2025. The team has also invested in new products and innovation; several new products have won industry recognition. The strategic repositioning and these investments are beginning to make an impact.

Your next question comes from the line of Matt Summerville from DA Davidson. Your line is open.

Thanks. Can you talk about the monthly order cadence you experienced in fiscal first quarter? What you're seeing thus far in fiscal Q1 and any discernible trends pre or post the election with respect to order patterns? And I have a follow-up.

If you look at our guidance, it's reflective of what we're seeing in the near term. On the ATS side, we had 4% organic growth in Q4 and order patterns suggest that looks sustainable. We're not seeing a big uptick beyond that, but there's ongoing support for the return to nominal growth. Similar stories in other segments: order patterns support our guidance. One key difference year over year is that we've worked back to a normalized backlog. We haven't seen any discernible shift post-election; it's a bit early and some customers are waiting to see how things play out. Some of the near-term uncertainty will likely settle as decisions are made.

It's an uncertain macro environment and that uncertainty informs our conservative outlook. This could be significantly better or more challenging than we expect, but we have taken conservative steps based on what we know today. The company has a strong operating model: direct-to-customer, differentiated products, high recurring revenue, diversified end markets, and NBS Next as our growth framework. If you combine these strengths and our operating track record, we have confidence we can operate well and deliver cash and strong EBITDA margins even in uncertain conditions.

As a follow-up, based on Dan's commentary, it sounds like you expect modest organic growth in ATS in fiscal 2025. Can you outline baseline expectations for organic at the segment level for IPS and MFS?

We typically don't give specific guidance by segment. If you look at Q4, it can be a precursor for what to expect. IPS is pretty stable and MFS has pluses and minuses with the interventional weakness offset by other areas. Overall, if you peel back our guidance, it essentially implies zero organic growth year over year with growth coming from Atrion and a slight FX offset. Factor in low single-digit growth in ATS and that gives you a sense of the other segments' performance.

Your next question comes from the line of Jeff Hammond from KeyBanc Capital Markets. Your line is open.

Hi. Good morning, everyone. On backlog, backlog got elevated during COVID as lead times increased. Is this backlog normalization largely done and which businesses have seen the most backlog normalization over the last year that would create a tough comp?

Mostly it is our large system businesses. We've seen reductions in backlog in polymer processing and industrial coatings, and to some extent in parts of our adhesive business. Those are where we've typically seen order normalization, which has been ongoing for about a year.

On polymer processing, is that just a tough comp dynamic or are there regional issues such as reduced recycling activity that are driving this?

It's a couple of things: tough comps after two record years of sales, and reduced investments in recycling in Europe as well as reduced investment in virgin polymer production in Asia, particularly China. This business was a major contributor to growth in recent years and will be down this year.

Another contextual point: our percentage of parts and service business continues to increase with our parts versus systems mix. Some of that is due to acquisitions and some organically. We're approaching 60% overall — around 57% — in parts and services, which matters when you consider backlog comparisons.

On the interventional destocking, what are customers telling you about where inventories are and what is built into the guide for when that runs its course?

It feels like we're in the middle innings of working through these supply chain changes in interventional. We've seen some return to normalization but we think there's still some way to go. We expect this to play out over another quarter or two before returning to normal.

Using NBS Next and a portfolio approach, over the past 12 to 18 months we've been investing in additional capacity in new areas of growth within interventional where we had modest positions pre-COVID. These investments will help as we come out of this stocking situation.

Your next question comes from the line of Andrew Buscaglia from BNP. Line is open.

Good morning. On the full-year outlook, you're implying low or no organic growth at the midpoint, but EPS at the midpoint is still up. How are you getting to margin expansion despite the mix? Is there additional cost savings coming or other factors?

If you look at our sales guidance and a normal incremental view, part of NBS Next is running the company better. We've taken actions including restructuring to improve the cost base, which will deliver additional performance year over year. We're starting the year with higher debt and we plan to delever through the year, which creates leverage. Finally, we expect a year-over-year improvement in our tax rate. Those three factors — operational actions, deleveraging, and a better tax rate — drive the EPS conversion.

Are you talking specifically about MFS and Atrion in relation to margin dynamics?

Integration is going well. We made adjustments in cost structures early. Our model calls for realizing synergies over the next one to two years, and we're off to a good start. Margins in MFS are tracking in line with our expectations.

Your next question comes from the line of Walt Liptak from Seaport. Your line is open.

Hi. Thanks, good morning. Regarding orders and your comment about not calling recoveries, at what point will we know that a recovery is not happening? Do you find that out in the December quarter or in the first quarter? And how important are early-year orders for large systems that you deliver later in the year?

What we're seeing now supports our current outlook. As Q1 and Q2 play out, we'll have a much better viewpoint on how the second half will look. There are many discussions underway but also hesitance. As Q1 and Q2 proceed, we'll have clearer visibility on the year's trajectory.

This assumption is based on what we know today. If conditions change, we will adjust. IPS and large system orders are areas of concern. For ATS, current order entry momentum supports the growth rate we delivered in the fourth quarter.

Are customers mentioning interest rates, tariffs, or other specific factors that are causing hesitancy?

Customers don't always spell out a single reason. We can assume interest rates, tariffs, geopolitical issues, and policy uncertainty all factor into hesitancy. We hear project discussions, but also caution. The macro environment is leading to hesitancy, and that has manifested in slower decision-making.

Regarding ATS margins being strong on the downside of the cycle, where do you think ATS margins can get in a normalized market two to three years from now? Where is the operating leverage as revenue improves?

ATS at 27% EBITDA is strong and arguably best-in-class among peers. ATS requires significant investment in new products and technologies; we typically invest 14% to 15% of revenue in this area to stay ahead. We would prefer to grow ATS rather than focus solely on expanding margins. For the overall company and ATS, we want top-line growth at strong incrementals rather than just margin expansion.

We have reached the end of our question-and-answer session. I will now turn the call back over to Naga for some final closing remarks.

Thank you for your time and attention on today's call. We're making great progress on the Ascend strategy and are positioned well as we enter fiscal 2025. I wish you a happy holiday season.

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