Earnings Call Transcript - NDSN Q1 2025

Operator, Operator

Good morning, ladies and gentlemen, and thank you for standing by. My name is Kelvin and I will be your conference operator today. At this time, I would like to welcome everyone to the Nordson Corporation First Quarter Fiscal Year 2025 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.

Lara Mahoney, Vice President of Investor Relations and Corporate Communications

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 Dan Hopgood, Executive Vice President and Chief Financial Officer. We welcome you to our conference call today, Thursday, February 20, to report Nordson's fiscal 2025 first 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 Thursday, February 27, 2025. During this conference call, we will make references to non-GAAP financial metrics. We provided a reconciliation of these metrics to the most comparable GAAP metric 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. I also want to take a moment to highlight that effective November 1, 2024, which is the beginning of our fiscal year, the Measurement & Control Solutions division formally reported as part of the Industrial Precision Solutions segment has been realigned to the Advanced Technology Solutions segment based on a reassessment of our portfolio. Our segment reporting reflects this change and prior year financial information has been revised to be comparable. Please refer to the appendix in our earnings press release for comparative segment data by quarter for fiscal 2024. Now moving to today's agenda on Slide 3, Naga will discuss first quarter highlights. He will then turn the call over to Dan to review sales and earnings performance for the total company and the three business segments. Dan will also discuss the balance sheet and cash flow. Naga will then share a high-level commentary about our enterprise performance and provide an update on the fiscal 2025 second quarter guidance. We will then be happy to take your questions. With that, I'll turn the call over to Naga.

Sundaram Nagarajan, President and CEO

Good morning, everyone. Thank you for joining Nordson's fiscal 2025 First Quarter Conference Call. We're starting the year with sales of $615 million, which is at the low end of our guidance range due to soft demand in key end markets, particularly electronics and industrial, and foreign exchange headwinds that were slightly worse than expectations. This more than offset the solid performance of our Atrion acquisition as well as organic growth within our consumer non-durable product lines. Positively, order entry rates accelerated throughout the quarter, growing double digits above the prior year order entry run rate. You can see this growth in our backlog, which increased sequentially from fiscal year-end by approximately $85 million, ending at approximately $670 million as we exit the first quarter. The improvement in order entry rates and backlog is particularly encouraging to see in our electronics businesses. Our continued focus on top customers and products, coupled with leveraging NBS Next to drive factory efficiencies and manage costs led to another strong quarter of operational performance. The team delivered a 56% gross margin, a 26% operating profit margin, a 31% EBITDA margin, and converted free cash flow at nearly 150% of net income. We achieved adjusted earnings per share of $2.06, slightly above the midpoint of our guidance despite weaker sales. As the growth compounder, we remain steadfast with our balanced capital deployment strategy, repurchasing approximately $60 million in shares during the quarter. In addition, we paid $45 million in dividends and decreased our net leverage ratio to 2.4x, comfortably exceeding the first quarter within our targeted range. Our consistently strong operating performance quarter-over-quarter positions us well to capitalize profitably on growth as demand improves throughout fiscal 2025. I'll speak more about enterprise performance in a few moments. But first, I'll turn the call over to Dan to provide a detailed perspective on our financial results for the quarter.

Daniel Hopgood, Executive Vice President and Chief Financial Officer

Thank you, Naga, and good morning to everyone. On Slide 5, you'll see a summary of our overall operating company results. First quarter 2025 sales were $615 million, down 3% from the prior year first quarter sales of $633 million. This was driven by an 8% increase from the Atrion acquisition, offset by an overall organic sales decrease of 9% and unfavorable currency translation of about 2%. Demand was choppy to start the year, and we experienced headwinds in several end markets as we exited the calendar year, particularly in selected systems and medical businesses. Coupled with a 2% FX headwind, this drove sales at the bottom end of our guidance range. As Naga mentioned, we were encouraged to see order entry rates accelerate throughout the quarter, which is reflected in our backlog growth since the start of the quarter. In addition, organic growth in packaging, nonwovens, optical sensors and measurement and controls businesses helped soften the revenue decline. Gross profit remained strong in the first quarter at 56% of sales, and EBITDA adjusted for special items in both periods totaled $188 million or 31% of sales. While overall EBITDA was down 4% from the prior year, driven by lower sales volume, EBITDA margins were flat year-over-year, inclusive of the newly acquired Atrion business. Looking at nonoperating expenses, net interest expense was $26 million, an increase of $5 million versus the prior year driven by higher debt levels tied to the Atrion acquisition. This was partially offset by a $2 million improvement in other income and expense, primarily reflecting foreign exchange transactional variations compared to the prior year. Tax expense for the quarter was $22 million or an effective tax rate of 19%. This is in line with our guidance range for fiscal year 2025 and 200 basis points lower than the prior year. Net income in the quarter totaled $95 million or $1.65 per share. Excluding $10 million of nonrecurring costs related to the Atrion acquisition and selected restructuring actions as well as $19 million in amortization of acquisition-related intangibles, adjusted earnings per share totaled $2.06 per share, slightly above the midpoint of our quarterly guidance, but a 7% decrease from the prior year adjusted earnings per share of $2.21. The decrease in year-over-year earnings reflects the impact of lower organic sales volume and higher acquisition-related interest expense I referenced just a moment ago. Now let's turn to Slide 6 through 8 to review the first quarter 2025 segment performance. Starting with Industrial Precision Solutions. They had sales of $300 million, a decrease of 11% compared to the prior year first quarter, down 8% organically and 3% due to unfavorable currency impacts. Weaker system sales in our industrial coatings and polymer processing product lines were partially offset by growth in packaging and nonwovens product lines. Both our industrial coatings and polymer product lines are coming off a strong system delivery years in 2024. And you may also recall that we're in the midst of transitioning selected industrial coating manufacturing to our new South Carolina plant, which should be substantially completed in the second fiscal quarter. EBITDA for the segment was $113 million in the quarter or 38% of sales. This is a decrease of 10% compared to the prior year EBITDA of $126 million, driven by lower sales volumes in the quarter. EBITDA margin improved 1% despite lower sales year-over-year due to a higher mix of parts and consumables versus the prior year. Turning to Slide 7. You'll see Medical and Fluid Solutions sales of $194 million, increased 21% compared to the prior year's first quarter. Growth was driven by the acquired Atrion business, which delivered $53 million in revenue during the quarter. This was offset by double-digit declines in our medical interventional product lines where destocking trends continue to impact demand and we completed some strategic program rationalization to reposition the business for profitable growth. It's important to note that these destocking trends began in our second quarter of fiscal 2024, impacting the year-over-year decline on a comparative basis. We expect our interventional product lines to return to sequential growth heading into the second quarter of this year. EBITDA for Medical and Fluid Solutions was $64 million or 33% of sales, which was an 8% increase from prior year EBITDA of $60 million. The increase was driven by higher sales from the Atrion acquisition. EBITDA margins were down 400 basis points, reflecting the lower contribution from Atrion. But as a reminder, we expect our EBITDA margins to improve sequentially for the Atrion business as we continue to integrate and implement NBS Next to improve manufacturing efficiencies and overall profitability. Importantly, Atrion's first quarter performance was actually well ahead of our initial targets for this business. Turning to Slide 8. You'll see Advanced Technology Solutions sales were $121 million, an 11% decrease compared to the prior year first quarter. The decrease included a 10% organic volume decline as well as an unfavorable currency translation of 1%. The decrease in sales was driven by double-digit declines in electronics processing and x-ray product lines, partially offset by growth in our optical sensors and measurement and control businesses. Despite weaker Q1 performance, we continue to see improvement in order intake as the semiconductor and electronic applications we serve continue to show signs of improvement. Orders were up double digits in the quarter versus the prior year, and backlog grew double digits sequentially from the end of the year for this segment. In short, we continue to see encouraging signs in ATS for the balance of 2025 despite a slow start to the year. First quarter EBITDA was $23 million for the segment or 19% of sales, in line with the prior year first quarter EBITDA of $23 million or 17% of sales. The improvement in EBITDA margin was driven by continued emphasis on cost management and improved manufacturing efficiencies. The margin enhancements we've implemented position the ATS segment well as demand continues to improve. Finally, let's turn to the balance sheet and cash flows on Slide 9. At the end of the first quarter, we had cash on hand of $130 million, and net debt was $2.1 billion, resulting in a leverage ratio of 2.4x based on trailing 12-months EBITDA. This is a slight improvement from year-end and within our long-term target leverage range of 2 to 2.5x. Our free cash flow generation continues to be a compounding strength at $138 million during the quarter, resulting in a 146% conversion rate on net income. And we continue to strategically deploy the strong cash flow. During the quarter, we repurchased approximately $60 million in shares in addition to our quarterly dividend of $45 million, which, as a reminder, we increased by 15% at the end of last year. We also reduced net debt by $20 million during the quarter, while continuing to invest in our base businesses, spending $21 million on capital investments during the quarter. All in all, we had a solid operational quarter despite a slower sales start, and we're well positioned to capitalize on profitable growth as demand normalizes in selected key end markets. With that, let's turn to Slide 10, and I'll turn the call back to Naga.

Sundaram Nagarajan, President and CEO

Thanks, Dan. I also want to thank the Nordson team for delivering strong operating performance in a challenging demand environment. While the first quarter was a slow start to the year from a revenue perspective, I'm encouraged by our ability to deliver best-in-class profitability in varying market scenarios while remaining invested in our best growth opportunities. Among our bright spots is the ongoing integration of the Atrion acquisition. During the quarter, I had the opportunity to visit our three new Atrion manufacturing sites. I'm excited about the strong product portfolio that we acquired as well as the energetic colleagues quickly embracing and starting to deploy the NBS Next growth framework. We're also seeing growing acceptance of Atrion's newest-generation Myocardial Protection System, which is used during open-heart procedures. Positive market acceptance is accelerating sales for this product, including an attractive opportunity to recapitalize its installed base. Also during the quarter, several of our product lines were celebrated with notable industry achievements. Nordson's SpinSAM Acoustic Inspection system won three awards for its industry-leading wafer inspection throughput and best-in-class image quality, defect capture, and footprint. Our QuadraPro manual X-ray System received the Productronica Innovation Award for its exceptional image clarity and defect detection capabilities within back-end semiconductor and SMT applications. Our precision agriculture division's new Orion Pro product was recognized for technical innovation at the EIMA 2024 International Agriculture Machinery Exhibition. The Orion Pro is an integrated system for regulating and measuring the actual amount of product sprayed by liquid fertilizer distribution systems. Two notable electronics customers also recognized our market leader collaboration. In December, we received supplier awards from both TSMC and Jabil, recognizing our product performance and support of critical underfill applications, as well as our dedicated, responsive, and talented local Nordson teams. We remain committed to product innovation, tracking strong vitality metrics in our packaging assembly and nonwovens product lines. This is reflected in the strong performance of those product lines in the quarter. We also have new products currently being launched in our medical fluid components and polymer processing product lines. In all cases, these new products are designed to solve the unique needs of our customers. Regardless of the dynamic environment, Nordson remains steadfast in our commitment to innovation through differentiated products, our customer-intimate sales model, and protecting the diversified niche end markets we operate. These competitive advantages secure our position as a high-quality growth compounder even in challenging macro environments. Our division-led organization provides our teams with a clear view of our end markets, and they know where we need to focus and where we're doing well. We will continue to manage costs in a weaker sales environment while balancing investments that support the increasing order entry trends we experienced throughout the quarter. Turning now to our outlook on Slide 11. We are entering the second quarter of fiscal 2025 with approximately $670 million in backlog and order entry that continued to improve throughout the quarter across all three segments. Based on these factors, as well as current foreign exchange rates and end market expectations, we anticipate delivering second quarter sales in the range of $650 million to $690 million and adjusted earnings in the range of $2.30 to $2.50 per diluted share. At this point in time, we're not updating our full-year guidance range, although we would now expect our sales for the year to be on the lower end of our full-year expectations given the slower start to the year and broad geopolitical macro environment dynamics. 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.

Operator, Operator

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Your first question comes from the line of Matt Summerville of D.A. Davidson. Please go ahead.

Matt Summerville, Analyst

Thanks. A couple of questions. Help me understand a little bit more about what played out in your electronics-related business in the quarter? I guess I was under the impression that you had seen order inflection supporting a returned and sustained sort of pathway to organic growth in that business. So help me understand kind of how the quarter played out and then how incoming orders inform the go-forward view on semi/electronics? And then I have a follow-up.

Sundaram Nagarajan, President and CEO

Thanks, Matt. The miss of our ATS business really was largely due to the timing of orders, particularly in our x-ray and electronic processing product lines. In short, we expect that more of our backlog to ship at the beginning of the quarter is what happened. But that said, order entry throughout the quarter progressed very positively, and we expect that sales or shipments of ATS to continue to be strong through the year. In this segment, order entry is up double digits, and backlog is up double digits, probably the strongest we have seen in this part of the cycle.

Matt Summerville, Analyst

And then as a follow-up, just getting over to the interventional side of your medical-related business, I'm trying to get a gauge on the anniversary that destock; you mentioned you expect to see quarter-on-quarter growth. When do we start to see year-on-year growth more aligned to the long-term trajectory you lay out for that business?

Daniel Hopgood, Executive Vice President and Chief Financial Officer

Yes. I think the inflection of that, as we said, the destocking really started in earnest in the second quarter of last year. And so from a year-over-year comp, I think we'll continue to see tough comps through the first half of the year, and then we would see that inflection point starting in really Q3 and heading into Q4.

Operator, Operator

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

Andrew Buscaglia, Analyst

Good morning, guys.

Sundaram Nagarajan, President and CEO

Good morning.

Daniel Hopgood, Executive Vice President and Chief Financial Officer

Good morning.

Andrew Buscaglia, Analyst

In the ATS segment, if you were to exclude the movement of that Measurement & Control Solutions, what would organic growth have been? And then what's the rationale behind moving that out of IPS and into ATS?

Sundaram Nagarajan, President and CEO

Yes. I'll address that question first. There is a significant overlap in customers between MCS and IPS. However, from a product and technology standpoint, MCS aligns more with test and measurement, making it a better fit within our ATS business.

Daniel Hopgood, Executive Vice President and Chief Financial Officer

Yes. To be honest, the impact is not substantial. Organically, they contributed positively to the segment. However, when considering the significance of the MCS business in relation to the total segment, it does not greatly affect overall growth or year-on-year organic impact. MCS did see year-over-year growth, which slightly countered the decline we observed in certain areas like electronics processing and x-ray, but it’s still not a significant factor.

Andrew Buscaglia, Analyst

Okay. Yes. And a slower start to the year than you expected and you're trending towards the low end of that guidance for the top line for the full year. Are there things you're working on to still achieve at least the midpoint of EPS, whether it's further restructuring or some sort of margin enhancement?

Daniel Hopgood, Executive Vice President and Chief Financial Officer

Yes, that's a great question. I would say that as we consider the entire year, we're not changing our guidance range because it's still a bit early to determine how the year will unfold. The environment is quite dynamic, with headlines shifting daily. Based on the slower start to the year, we believe our sales will be on the lower end of our range. However, as shown in Q1, we remain confident in our ability to meet our earnings commitments even with sales at the lower end of that range. For these reasons, we won't be tightening our guidance right now. As we complete the second quarter and reassess our backlogs and order rates, which have been strong, we will look at the full year again and adjust if necessary. We're comfortable with our sales range and confident in our earnings commitments despite the slow sales start, which is evident in our first quarter profit delivery.

Sundaram Nagarajan, President and CEO

Let me add to that. If you take a broader look at the market and where the company stands for the full year, I can say that on a positive note, order entry is increasing in all three segments, and we are building backlogs across the board, with ATS significantly contributing to these increases. Our operational performance is strong, even amid a challenging environment; we saw a robust operating income performance and are well-positioned for growth. Additionally, our innovations in several businesses are starting to drive growth. For instance, our adhesive segment's Harmony applicator is positively impacting our growth. Although SpinSAM and the new emission have not yet contributed to growth, they put us in a strong position for future expansion. On the medical side, our fluid components business is launching a new product line called PharmaLok, which is also promising. Overall, innovation, operational performance, and order entry are three positive indicators for our outlook. However, one downside is the broader challenges within the geopolitical and macroeconomic environment. Ignoring these difficulties, our order entry and backlog would give you confidence in our performance, but we are facing some turbulence in the current environment.

Andrew Buscaglia, Analyst

Okay, thank you.

Operator, Operator

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

Jeffrey Hammond, Analyst

Great, good morning.

Sundaram Nagarajan, President and CEO

Good morning.

Jeffrey Hammond, Analyst

So just real quick on the guide. It sounds like you think right now, lower end of the sales guide, but you're still kind of closer to the midpoint. One, is that correct? And two, what are kind of the drivers that are offsetting the weaker sales?

Daniel Hopgood, Executive Vice President and Chief Financial Officer

Yes. So I appreciate the question, Mike. And I think that's the right way to think about it. And I would say the best indicator is look at our performance for the first quarter. We were at the low end of our sales guidance and still delivered the midpoint or slightly above the midpoint of our earnings guidance. That's not a fluke. We think that's replicable in the balance of the year. Again, the sales outlook, I think it's too soon to call. Typically, I'll remind you guys, we typically see a much stronger second half in general. If you look at our history across the company in a market where we see accelerating orders, that trend could be even exacerbated. And so it's a bit of a wait and see and continue to monitor how demand continues to play out for the year. Indicators today are very good. If that continues, we'll see how the second half plays out. But what I would say in general is even if we don't see any continued acceleration, we're comfortable with our sales on the lower end that we can still deliver on our profit commitments by simply managing our operations and our cost structure to ensure that we can deliver on those commitments.

Sundaram Nagarajan, President and CEO

If we go through each segment, starting with ATS, we have positioned this business well in terms of costs during the last downturn. In the first quarter, despite facing challenges with organic revenue growth, the segment maintained its dollar income compared to the previous year, showing solid performance. Moving on to IPS, we also see strong results there, as this is a robust business where we have successfully implemented NBS Next. Both segments are in good shape. Regarding MFS, specifically with Atrion, we have a mix issue that affects our operating margin performance. However, it's important to note that Atrion operates at a lower margin compared to our core MFS businesses. When we consider this, our core MFS business also exhibited strong performance. This gives us confidence as we move forward. For areas where sales are weaker, we are taking steps to cut costs. This isn't a widespread action across all our businesses but is focused on specific areas experiencing weak sales. This adds further context to Dan's comments about our expectations.

Jeffrey Hammond, Analyst

No, that's very helpful. I wanted to follow up on that medical margin dynamic. Can you give us a sense of how much of the margin dilution was just Atrion coming in and what the decrementals were on the base? Because and then how it looks from a dilution perspective as we go forward? And then just on the medical destocking, I mean, I understand that the comps get easier, but just any update on kind of where we're at in that process? Is it still the view that that carries through the first half and then abates?

Daniel Hopgood, Executive Vice President and Chief Financial Officer

Yes, our core medical business is largely in line with our year-end expectations. Most of the overall EBITDA is associated with the growth in MFS, which comes from Atrion, a segment with lower EBITDA margins compared to our core business. Our decrementals in the base business are consistent with our expectations. Additionally, Atrion contributed about $53 million, yielding mid-20s EBITDA, which accounts for most of the margin dilution year-over-year.

Sundaram Nagarajan, President and CEO

Let me repeat some of what Dan mentioned here. Let's start with our core MFS business. Our core MFS business EBITDA margins are clearly better than Atrion. Atrion's margins are in the mid-20s, and we have a strong outlook for that business to continue improving, aligning with our valuation model expectations of high-20s to low-30s. So, Atrion should continue to enhance MFS in the long-term. Regarding MFS core decremental, these were consistent with our expectations for the company. For us, the performance of MFS was primarily affected by mix issues, with Atrion contributing while the core business is experiencing an organic decline.

Jeffrey Hammond, Analyst

And then just the destocking.

Sundaram Nagarajan, President and CEO

Yes. Destocking began some time last year. There are two aspects to consider: we experienced an organic decline of 11% in MFS, with half attributed to destocking. The other half is due to a strategic repositioning of some of our finished device programs, which is largely complete. Consequently, we expect to see sequential growth starting in the second quarter, and destocking should diminish around the third to fourth quarter. We are also beginning to notice an increase in order rates. It is important to highlight that order rates in our medical interventional component business are improving, and we have seen strong order rates in our medical fluid components. This segment, which faced significant destocking from the biopharma and surgical markets, is recovering well, and we are observing sequential improvement in MIS.

Daniel Hopgood, Executive Vice President and Chief Financial Officer

Yes, I think that's an important point, Naga. Our medical business is contributing to both order growth and backlog growth. As I mentioned, all three of our segments are showing potential for sequential improvement. The year-over-year comparison will be challenging until the second half.

Operator, Operator

Okay, thank you.

Your next question comes from the line of Mike Halloran, Baird. Please go ahead., Analyst

Hey, good morning everyone.

Sundaram Nagarajan, President and CEO

Good morning.

Michael Halloran, Analyst

Not to overly harp on the guide. I just want to make sure I understand what's embedded on the revenue side of things. Obviously, the first quarter, as you said, was a little lower than expectations, FX a little worse. Is that a majority of the move for the revenue to be at the low end? And maybe I suppose, what is the assumption then for end market recovery curves, normal seasonality, backlog conversion that's embedded in that lower assumption? Is it pretty normal sequentials from here, pretty normal backlog outlay? Any kind of color around those things would be super helpful.

Daniel Hopgood, Executive Vice President and Chief Financial Officer

I appreciate the question. To start, regarding our backlog, while I can't say for certain due to some unique items, most of our backlog is expected to ship in 2025. We are not taking multiyear orders, and this situation is different from the COVID period when we had long-term orders. These are current year deliveries. Looking at the ongoing book-to-bill and backlog, it's essential to view this as normal recurring orders rather than long-term preorders like we experienced after COVID in some of our businesses. Considering the full year, if we account for the first quarter shortfall in sales, it will likely lead us toward the lower end of our sales guidance for the year. We anticipate some recovery in the second half, primarily due to our typical business cyclicality, which usually sees stronger performance in that period. This optimism is also bolstered by the uptick in order intake we’ve experienced in the first quarter and into early second quarter. In terms of revenue assumptions for the year, the low end of our guidance implies low single-digit growth in ATS, flattish to slightly decreased sales in IPS and our medical business, along with contributions from the Atrion acquisition. The higher end of our guidance expects a more robust recovery in our ATS segment and some improvement in capital investment cycles in industrial, as well as a more considerable bounce back from destocking in medical. However, we are not counting on these significant recoveries, even though they could happen. For now, we are guiding based on current observations, suggesting that the first quarter shortfall will carry through, but the remainder of the year appears to be aligning well with our expectations.

Michael Halloran, Analyst

All right. Super helpful there. And then just kind of a question on once that recovery happens in these markets? I know earlier Naga was talking about the positive decremental margin performance, particularly in the ATS side? And I suppose as well on the MFS side. What does the torque look like to the upside? Obviously, the IPS are already really healthy levels; I know aided by mix, but still really strong levels. What kind of torque would you expect to see in those margins or incremental margins as the volume recovers and normalizes to more historically normal patterns?

Daniel Hopgood, Executive Vice President and Chief Financial Officer

So let me make sure I understand your question. You're asking from an incremental margin performance, what we would expect going forward. Is that the question?

Michael Halloran, Analyst

Correct.

Daniel Hopgood, Executive Vice President and Chief Financial Officer

Yes. My best guidance is consistent with what we've shared in the past, which is that we expect about a 35% incremental mix between acquisition and organic growth. As you consider this, it's important to note that organic growth typically involves a higher incremental acquisition, while Atrion's margin suggests a lower incremental. Therefore, I believe that the blended rate of 35% remains a solid long-term planning target. The organic growth will exceed that, and the inorganic growth will fall short, but the 35% mix is still a useful range to consider.

Saree Boroditsky, Analyst

Thanks for taking the questions. So maybe building on the last question, as we think specifically on ATS, that business has seen margins decrease substantially over the last few years. So how should we think about incrementals in this segment once demand inflects? And what would it take to get back to that 23% plus margins you saw in 2022? Or is that sort of a one-time event? Thanks.

Sundaram Nagarajan, President and CEO

Yes. In general, we expect that as the sales recover, we get back to where the margins were in 2022. There may be some upside, but it is. Remember, this is a business where our R&D investments are critical to our growth. And so you're always going to see this business have higher R&D investments. But as the sales recover, I have every confidence that we get back to the margins we were at in 2022.

Saree Boroditsky, Analyst

That's helpful. And maybe just on the weaker growth in IPS. How much of this is related to underlying demand versus the challenging comparables that you had from the strong incoming backlog from last year?

Sundaram Nagarajan, President and CEO

I think the IPS has some broader issues within our system businesses. Our two main system businesses, PPS and ICS, experienced shipments due to previous significant backlogs. However, if you consider our consumer non-durable business and our adhesive business, they are performing well and aligning with our expectations.

Daniel Hopgood, Executive Vice President and Chief Financial Officer

Yes. I would like to provide some additional insights on the industrial coatings and polymer sectors. Compared to last year, the large multiyear backlogs we were managing have now normalized. This creates some challenging comparisons year-over-year. However, when discussing the strengthening of orders and growth in backlog, we are also observing this in those sectors. We are optimistic about the potential for rebuilding and improvement. You can expect to see this reflected in sequential growth in those areas moving forward, although we will need to address the year-over-year comparisons due to the substantial backlog we had over the past couple of years.

Saree Boroditsky, Analyst

Appreciate the color.

Sundaram Nagarajan, President and CEO

One additional point to make here is we're starting to see modest sequential improvement in our ARAG business. The overall ARAG agriculture market is still down, but there are signs of modest improvement in order entry and backlog in that business.

Chris Dankert, Analyst

Hey, good morning guys.

Daniel Hopgood, Executive Vice President and Chief Financial Officer

Good morning.

Sundaram Nagarajan, President and CEO

Good morning.

Chris Dankert, Analyst

I have a conceptual question. If we look at the medical segment, Atrion has performed really well organically. Is there anything we can learn from Atrion's operations regarding why they didn't experience destocking to the same extent as legacy interventional? Is there a difference in their customer base or in how they manage their inventory? How should we think about this?

Sundaram Nagarajan, President and CEO

Yes. That's a great question, Chris. There are two main aspects to consider. Atrion focuses on fluid components and can be divided into two segments: the consumable component part and the system part. In their system segment, they are launching the Myocardial Protection System, their new third-generation product, which is gaining good market acceptance, as I mentioned earlier. This involves both a new product launch and a review of existing systems, which is distinct and does not relate to our medical interventional business. On the component side, specifically with their Halkey Roberts business, they experienced destocking much earlier than we did in our medical interventional segment, indicating a timing difference. Additionally, our fluid component business aligns more closely with Atrion’s component business than it does with our medical interventional business. There are different products and end markets involved. We are observing similar trends in Halkey Roberts' component business as we are in our medical fluid component business. I hope that clarifies things for you.

Chris Dankert, Analyst

That's extremely helpful. Thank you, Naga. To revisit the discussion from October, it seemed you were quite optimistic about the potential acquisition deals you were seeing. Do you still feel that same level of optimism today?

Sundaram Nagarajan, President and CEO

Yes. We continue to be active. We continue to look at deals. But we're going to be pretty strategically and financially disciplined. And so we continue to work the pipeline. Our pipeline continues to build. The number of inbound may be lessened, but we still have a pretty good pipeline. So what you read in the papers around inbound is lesser, but the activity level continues to be pretty good for us. But we're going to be thoughtful in what we choose to do.

Walter Liptak, Analyst

Hi, good morning guys.

Sundaram Nagarajan, President and CEO

Good morning.

Daniel Hopgood, Executive Vice President and Chief Financial Officer

Good morning.

Walter Liptak, Analyst

I wanted to revisit the guidance for 2025 and clarify the sales expectations. Dan, when you were describing the segments, it seemed like you indicated that MFS could fall within the mid to high range of the revenue forecast, while ATS and IPS might be positioned at the low end. Is that the understanding regarding each segment?

Daniel Hopgood, Executive Vice President and Chief Financial Officer

What I was referring to is the range of our guidance. For the lower end, our industrial businesses, or IPS, are expected to decline in low single digits for the year, and MFS is also anticipated to be down low single digits or nearly flat year-over-year, excluding Atrion. At the lower end of our guidance, we expect a very modest recovery in ATS, with growth there also in low single digits. In contrast, the upper end of our guidance would suggest a more typical growth ramp in ATS, which we are not counting on but is possible, and it would also assume a quicker recovery from the destocking we are experiencing in the medical business. So, we could see low single-digit growth in medical alongside a general recovery in the industrial markets. Therefore, the upper end represents a stronger recovery in ATS with low single-digit growth in both medical and industrial, while the lower end signifies very limited recovery in medical and industrial, along with just a modest recovery in ATS.

Walter Liptak, Analyst

I appreciate that information; it's very helpful. Regarding the Industrial Precision segment, I’m glad to hear there’s potential with ARAG. Could you provide more detail about whether this is related to a new product, if it's in Europe, or if it's happening elsewhere in the world where you're seeing some positive signs? Additionally, could you discuss other sectors beyond polymers and coatings, like Naga? I know you have a strong understanding of the automotive sector; what’s happening there and in other areas? Thank you.

Daniel Hopgood, Executive Vice President and Chief Financial Officer

That's a great question. I'll begin and let Naga share some insights as well. In response to the ARAG question, we are actively evolving and introducing new products to the market. We recently received awards for one of these new products. Generally speaking, we've observed stabilization in that business segment, and there’s a positive trend in order rates. We anticipate this business will return to year-over-year growth in the second quarter, as we continue to see strong order rates. I should mention that Q1 is the last difficult comparison for them. Last year at this time, they were managing a significant backlog, making the first quarter their final challenging comparison. We have seen that business stabilize and even improve since Q4, and we are moving back into a growth phase as we have surpassed those tough year-over-year comparisons. Overall, we are seeing good stability, an ongoing improvement in demand, and a solid pathway to regaining growth in this segment in the next quarter.

Sundaram Nagarajan, President and CEO

Let me follow up on that. One additional data point regarding ARAG is that last year, this business excelled on the margin side. This success was partly due to utilizing the short workweek program available in Italy for industrial businesses. Interestingly, in the first quarter, based on their order dynamics, they have fully reinstated their workforce. This readiness allows them to produce goods to fulfill their commitments to customers. This is another indicator that our ARAG business is set to return to growth. Moving on to our broader industrial businesses, we've discussed our plastic business and our ICS business. I’d like to point out that both have new product introductions. On the ICS front, we've launched a new manual powder coating product that's performing well. In the plastics sector, there is a Prodigi die that has received positive market acceptance. While we have these new products, it is challenging to counteract the overall system declines. However, I'd like to share some positive remarks. In our other adhesive businesses, our nonwovens sector is performing exceptionally well with new products. Our Harmony applicator is doing very well and contributing to parts growth. Their system business has thrived through product tiering. After several years of decline, this business is rebounding nicely. Our adhesive packaging business is maintaining stability, and we're developing some exciting new products expected to launch toward the end of the year. There is solid movement across our industrial businesses. It's noteworthy that our parts mix in the adhesive sector is robust and has helped mitigate some system weaknesses. On a positive note, order entry is increasing in this segment, as well as in plastics and ICS, and also in other existing businesses that have seen growth this quarter. I hope this provides you with more insights.

Walter Liptak, Analyst

Okay. Yes, thanks for that detail. Appreciate it.

Operator, Operator

There are no further questions at this time. And with that, I will now turn the call back over to Naga for final closing remarks. Please go ahead.

Sundaram Nagarajan, President and CEO

Thank you for your time and attention on today's call. Have a great day.

Operator, Operator

Ladies and gentlemen, that concludes your conference call. We thank you for participating and ask that you please disconnect your lines.