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Nordson Corp (NASDAQ:NDSN)
Q2 2019 Earnings Call
May 21, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen. Thank you for standing by, and welcome to Nordson Corporation Second Quarter Fiscal Year 2019 Conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference is being recorded.

At this time, I would like to turn the conference call over to Lara Mahoney, you may begin.

Lara L. Mahoney -- Vice President of Investor Relations & Corporate Communications

Thank you, Olivia. Good morning. This is Lara Mahoney, Vice President of Corporate Communications and Investor Relations. I'm here with Mike Hilton, our President and CEO and Greg Thaxton, Executive Vice President and CFO. We welcome you to our conference call today, Tuesday, May 21st, 2019 to report Nordson's fiscal year 2019 second quarter results.

Our conference call is being broadcast live on our webpage at nordson.com/investors and will be available there for 14 days. There will be a telephone replay of the conference call available until June 4th, 2019, which can be accessed by dialing (404) 537-3406. You will need the reference ID number 6423748.

During this conference call, forward-looking statements may be made regarding our future performance, 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. After our remarks on the quarter, we will be happy to take your questions.

With that, I'll turn the call over to Mike.

Michael F. Hilton -- President and Chief Executive Officer

Good morning, everyone. Thank you for joining Nordson's Fiscal 2019 Second Quarter Conference Call. The Nordson team delivered a solid second quarter. One of Nordson's greatest strengths is the diversity of our end markets and our ability to execute on our growth initiatives. This was evident in the second quarter as we achieved total Company organic sales growth of 3% with all three segments contributing organic sales growth.

I'll speak more about our fiscal 2019 annual guidance in a few moments. But first, I'll turn the call over to Greg to provide some more detailed perspective on the second quarter.

Gregory A. Thaxton -- Executive Vice President and Chief Financial Officer

Thank you, Mike, and good morning to everyone. Second quarter 2019 sales decreased less than 1% compared to the prior year's second quarter. This change included an increase of 3% organic volume and a decrease of 4% related to the unfavorable effects of currency translation. Growth in the quarter related to the first-year effect of the fiscal 2018 acquisition of Clada medical devices was not significant.

Within the Adhesive Dispensing Systems segment, sales decreased 1% compared to the prior year's second quarter, inclusive of an increase in organic volume of 4% and a decrease of 5% related to the unfavorable effects of currency translation as compared to the prior year.

Growth was solid across most all product lines. Advanced Technology Systems sales decreased approximately 1% compared to the prior year second quarter. Organic volume growth of 2% was offset by a decrease of 2% related to the unfavorable effects of currency translation, again, as compared to the prior year.

Double-digit growth within the Fluid Management product lines was offset by product lines serving electronics end markets. Industrial Coating system sales increased approximately 2% compared to the prior year second quarter. These results included organic volume growth of 4%, where growth was solid for most product lines and a 3% reduction related to the unfavorable effects of currency translation as compared to the prior year.

Moving down the income statement, gross margin for the total Company was 55% in the quarter. Operating profit was $129 million with reported operating margin of 23%. On a segment basis, Adhesive Dispensing Systems delivered strong operating margins of 30% in the quarter. Within the Advanced Technology Systems segment, reported operating margin was 23% in the second quarter which was in line with the prior year on lower sales.

Industrial Coatings segment reported operating margin of 22%, an increase of 340 basis points compared to the prior year, driven by volume leverage and improved sales mix. And as with performance in all segments, this segment's performance is also the result of continued emphasis on the Nordson Business System.

On a total Company basis, net income for the quarter was $92 million and GAAP diluted earnings per share were $1.58, inclusive of a $0.04 per share discrete tax benefit related to share-based compensation. We delivered second quarter EBITDA of $156 million or 28% of sales. Free cash flow before dividends during the quarter was $93 million, resulting in cash conversion of 102% of net income.

Our press release includes financial exhibits, reconciling net income to free cash flow before dividends and adjusted free cash flow before dividends, as well as EBITDA and adjusted EBITDA. From a balance sheet perspective, net debt-to-EBITDA was approximately 2.1 times trailing 12-month EBITDA at the end of the second quarter.

I'll now turn the call over to Mike for a few closing comments.

Michael F. Hilton -- President and Chief Executive Officer

Thank you, Greg. We continue to believe the diversity of our business, including geography, applications, and end-market diversity, along with our ability to innovate and deliver on growth initiatives will allow us to achieve our long-term growth targets. As we look at the remainder of the fiscal year, we continue to forecast organic growth for the year though the impact of macroeconomic trend suggests our organic growth will likely be in the low-single-digits for fiscal 2019.

Based on current exchange rates, we still expect unfavorable currency translation effects of 2% compared to the prior year. With this sales outlook, we remain confident in our ability to generate approximately 100 basis points of operating and EBITDA margin improvement over the prior year as we continue to focus on continuous improvement throughout the businesses.

As always, thank you to our customers, employees and shareholders for your continued support. With that, we'll pause and take your questions.

Questions and Answers:

Operator

(Operator Instructions) And our first question is coming from the line of Chris Dankert with Longbow Research. Your line is now open.

Chris Dankert -- Longbow Research -- Analyst

Hey, good morning, guys. Thanks for taking my question.

Michael F. Hilton -- President and Chief Executive Officer

Good morning, Chris.

Chris Dankert -- Longbow Research -- Analyst

I guess, as we kind of move into the back half of the year here and then '20, can you just kind of breakout any kind of synergistic benefit from the plant consolidation. I know we've got some of the duplicate costs reduction, maybe it's $6 million on fiscal '19, but just kind of what is the synergistic benefit beyond just removing those costs?

Michael F. Hilton -- President and Chief Executive Officer

Well, I think as we've said before, we expect to see some efficiency improvements as we go into 2020. We didn't necessarily expect to see them this year as we lined out all of the new equipment there. We haven't put a number on that yet and so I think we're not really ready to do that but we would expect to see some efficiencies in 2020 coming from optimizing operation as a result of the consolidation.

Gregory A. Thaxton -- Executive Vice President and Chief Financial Officer

And Chris, this is Greg, I'd add in 2019, that is part of the margin expansion we expect to see is, as we kind of wind down the consolidation efforts, we expect to see some of that benefit in the current fiscal year.

Chris Dankert -- Longbow Research -- Analyst

Got it, got it, thanks. And then on the last call, you guys had mentioned we didn't need to see an upward inflection necessarily in mobile to kind of hit the prior organic guidance range. I guess kind of what's baked into the new range and just kind of how you're thinking about mobile particularly within that guide?

Gregory A. Thaxton -- Executive Vice President and Chief Financial Officer

Yes, I would say, one of the things that's sort of affected us a little bit in this quarter and will affect the Q3 in particular is we really haven't seen our customers introduces any significant level of innovation into this cycle of phones. So we're not counting on that going forward for the rest of the year. And quite frankly that has impacted our forecast and moving that down a bit. So for the rest of the year, we're not really counting on any kind of significant step-up related to innovation in our customer base.

Chris Dankert -- Longbow Research -- Analyst

Got it. Go it, if I could just sneak one in, on top of that I guess, I don't expect so, but have you seen any impacts from kind of the Huawei tension, just any comment there would be helpful?

Michael F. Hilton -- President and Chief Executive Officer

I didn't catch the last part, what did you -- of what you said there Chris? On the impact of...

Chris Dankert -- Longbow Research -- Analyst

Apologies, just kind of impact from the tension between China and the US as it relates to Huawei?

Michael F. Hilton -- President and Chief Executive Officer

I would say, in general, I think some of the slowness in our Electronics Equipment business is a function of the -- just the current trade tensions. I think some people are holding off on investment. As it relates to Huawei, I think we'll need to see how that plays out. Obviously, we've said before that the Chinese mobile players are our customers, so we'll have to wait and see how that plays out. But again, we're not expecting a significant step up in any kind of innovation across the board in that segment for the rest of the year and that's been a key focus of bringing our guidance down.

Chris Dankert -- Longbow Research -- Analyst

Understood, thanks so much guys. I'll hop back in queue.

Michael F. Hilton -- President and Chief Executive Officer

Okay.

Operator

Our next question is coming from the line of Matt Summerville from D.A. Davidson. Your line is now open.

Drew Haroldson -- D.A. Davidson -- Analyst

Hey, good morning. This is Drew Haroldson on for Matt. First off, I'm wondering...

Michael F. Hilton -- President and Chief Executive Officer

Good morning, Drew.

Drew Haroldson -- D.A. Davidson -- Analyst

Good morning. First off, I'm wondering what performance in ADS was between the four main buckets in the second quarter and what its go forward outlook is?

Michael F. Hilton -- President and Chief Executive Officer

I would say across the Core Adhesives business, most of the businesses performed well. You know the nonwovens were still little softer, but we're starting to see some improvement from an order perspective there. So we're encouraged, I'd say for the second half of the year across all of those product lines. And some of those, like in the TPS area are longer lead projects, it will have more of an impact in the fourth quarter.

Drew Haroldson -- D.A. Davidson -- Analyst

Got it. And then second off, I'm wondering how the three individual segments compared to the low-single digit organic outlook for the whole Company?

Gregory A. Thaxton -- Executive Vice President and Chief Financial Officer

For the year, we still expect all of the segments to grow some marginally and some a little bit more but we still expect them all to growth for the year. Individual product lines aren't likely to grow. So for example, our Electronic Systems product line is likely to be down.

Drew Haroldson -- D.A. Davidson -- Analyst

Got it, thank you.

Operator

Our next question is coming from the line of Jeff Hammond with KeyBanc Capital. Your line is now open.

Jeffrey D. Hammond -- KeyBanc Capital Markets -- Analyst

Hi, good morning guys.

Michael F. Hilton -- President and Chief Executive Officer

Good morning.

Jeffrey D. Hammond -- KeyBanc Capital Markets -- Analyst

So just to be clear on the guide, is the guide -- the lower revenue guidance, is that isolated to the electronics piece or are there other areas of softness that you're seeing, and maybe just within that speak to what you're seeing out of Europe and out of your automotive end markets?

Michael F. Hilton -- President and Chief Executive Officer

Yes, I'd say it's largely the electronics piece. Most of our other product lines are doing well and we expect them to continue to do well. Our run rate businesses in particular, like medical and EFD and our packaging businesses are particularly strong. The auto business is kind of choppy. It's been a drag for a couple of years. We don't see it having a big effect net-net on the year, although it was more of a drag in the first part of the year.

Jeffrey D. Hammond -- KeyBanc Capital Markets -- Analyst

Okay. And then just on the margin ramp, it looks like your margins were down a little bit 1Q, flat in 2Q, and then you still think of a 100 basis point margin ramp. So can you just talk about how you ultimately get there given where you see incrementals to get to that number?

Michael F. Hilton -- President and Chief Executive Officer

Yes, I would say, if you look at it, there is a piece of that that is related just to improving the performance in our polymer business and so eliminating some of that duplicate costs and some efficiencies there. And then our Nordson -- through Nordson Business Systems, we have a bunch of projects that we're working on that are -- I would call in the singles category, so projects that generate several hundred thousand dollars a year of improvement. So that may be through automation and may be using our ability to insource some things that we outsource. There's a variety of things at each of the businesses that when you add them all up are significant. And so it's really driving the Nordson Business System piece along with improvements in our Polymers Business.

Gregory A. Thaxton -- Executive Vice President and Chief Financial Officer

And then Jeff, this is Greg. Of course, the volume growth will generate some with an incremental that we generate on that volume.

Jeffrey D. Hammond -- KeyBanc Capital Markets -- Analyst

Okay. And then just you mentioned in the (inaudible), I think if you look, I think you had the really tough comp in 1Q, and I think that comps get easier into 3Q, but maybe just talk about cadence in that tech business as you see it into the back half of the year?

Michael F. Hilton -- President and Chief Executive Officer

Yeah. So I think when we look at the next quarter with my earlier comments, we really haven't seen innovation on the customer side. The electronics piece is going to continue to struggle in the fourth quarter -- or in the third quarter. In the fourth quarter there is maybe some easier comps, but maybe just some commentary on the overall Company looking through the rest of the year. We expect Q3 to be up modestly from a revenue perspective and we expect Q4 to be up more substantially, and the Q4 -- I think Q3 piece is really continued drag from electronics.

The Q4 piece is really a function of long lead projects that we already have in-house or expect to come in, in the near future. And then our, the strength of our run rate businesses which would include things like medical, our EFD business and our packaging business, so that combination gives us some comfort that we'll see a stronger fourth quarter that ultimately when you integrate them across the year, gets us to that sort of overall low-single-digits.

Gregory A. Thaxton -- Executive Vice President and Chief Financial Officer

And Jeff, I'd just add a little commentary. In a year where it plays out as Mike suggested where we don't have the innovation in the electronic end markets you would typically see our fourth quarter being stronger, the strongest quarter in the fiscal year. So it kind of plays out that this is in line with that type of year and as Mike characterized, you're likely to see continued growth as we move through the year.

Jeffrey D. Hammond -- KeyBanc Capital Markets -- Analyst

Okay. So there's a step up in growth in all the segments into the fourth quarter or would that be isolated events?

Gregory A. Thaxton -- Executive Vice President and Chief Financial Officer

No, not just event stack, I mean we see real strength in the -- as I said in those run rate businesses. I mean, we've talked about that medical has been particularly strong. Key parts of our EFD business, we expect it to be strong. Our packaging business has been really solid. We have long lead orders in place in things like our coatings and our polymer business that gives us some comfort and then we are seeing some improvement in the near-term in our nonwovens business.

So that combination I think is helpful. And then, outside of the dispense side and the electronics piece; the other parts of the business are solid. So that's the sort of the combination that when you look at it, adds strength to the fourth quarter and the electronics piece is probably a bit of a drag in the third quarter still.

Jeffrey D. Hammond -- KeyBanc Capital Markets -- Analyst

Okay, excellent. Thanks guys.

Operator

Our next question is coming from the line of Walter Liptak with Seaport Global. Your line is now open.

Walter S. Liptak -- Seaport Global -- Analyst

Hi, thanks, good morning guys.

Gregory A. Thaxton -- Executive Vice President and Chief Financial Officer

Good morning.

Michael F. Hilton -- President and Chief Executive Officer

Good morning.

Walter S. Liptak -- Seaport Global -- Analyst

So, wanted to ask about Huawei directly, so I don't think, one of these calls we've ever talked about a specific customer. And I know you sell to the mobile device makers and some of the Chinese mobile phone companies become more important over the last few years. But I wonder if you can give us some insight into what's happening. You have a fair amount of business out of China and obviously with trade war and a lot of the things that are in the press right now. I wonder what your view is on how that's impacted the business in the quarter and what that might do you know in the coming quarters.

Michael F. Hilton -- President and Chief Executive Officer

So I'd say at a high level, Walter, we do think, and if you look at our geographic numbers, they're down in Asia. We do think that the trade issues back and forth are creating some delay in investment in Asia. A lot of that linked to the electronics part of the business. From a mobile perspective, in general, as we've said, it's not been a year with a lot of innovation, where it had some promise in the beginning year that's really not played out.

I think as we said before, we support all of the -- the larger and the Chinese players. So I'd say there is some concern with the latest sort of rounds of discussion and even last night there has been some relaxation as it relates to Huawei. But no one customer is significant enough that kinds of drive what we see going forward. And so our forecast is assuming pretty modest year from a mobile business, in general. So we're not counting on it. Does this -- do these tensions make it potentially worse? It could. I mean, we're trying to account for that, but it could.

Walter S. Liptak -- Seaport Global -- Analyst

Okay. Okay, and the comments about innovation. I wondered if you can just go a little bit deeper on that. I know in the past, we've talked about 5G, and it seems like 5G is moving forward in some parts of the world. What do you think the timing is of that and what other kind of innovation were you thinking could be happening that maybe has pushed out a little?

Michael F. Hilton -- President and Chief Executive Officer

Yeah, so we typically work on a lot of projects from the November through sort of the February timeframe, and typically, some of those go forward in a year where you see significant changes in models. You see a lot of that being incorporated in a year where it's pretty incremental. You don't see as many. I'd say this is the year, we haven't seen much at all in the way of innovation, and I think some of that's related to just sort of a lower demand for mobile phone. Some of that is, I think, related to the trade issues that are ongoing right now. So we haven't seen a lot of new investment incorporated into innovation.

As it relates to 5G, there are headline news out there around 5G and 5G capable phones. But really, there's not much incorporated in the phone at this point. The driver for that is going to be less on the phone side and more on the infrastructure side for 5G to work effectively and get the benefits of it, you need a lot more localized infrastructure in place. So that's going to play out from '20 through 2021 and beyond, because the range of 5G is very short and so you need a lot more physical antennas outside. And then, within the phones, you need fairly significant changes.

So I think it's 2020 and beyond in terms of having a real impact and it's going to be somewhat linked more to the broader infrastructure play. Now there is some opportunities for us in that infrastructure play too, but these are -- these require high density transmission towers, not like we necessarily have today you can hang all this stuff on a lamppost and everything else. But it's an investment that has to happen and until that happens; you're not really going to get a benefit on the phone side. So I'd say, while you see -- you see advertised 5G, in effect I think even some of the US phone companies had to withdraw their comments because they're not really 5G at this point.

Walter S. Liptak -- Seaport Global -- Analyst

Okay. Okay, thanks for that. And then, just one last follow-on from one of Jeff's questions about Europe, the volume growth of 4.6% looked very good and I wonder if you could talk about any of the trends that are going on there, either by segment or -- because we hear about EU slowing in Brexit and maybe anything on -- like a new orders or front logs that can help us understand what the trends are like?

Michael F. Hilton -- President and Chief Executive Officer

Yeah, I would say if you look at the European in general coming into the year, we thought it was going to be a pretty modest growth year maybe a little bit less than last year from a broader economy. I think that's in fact what's playing out although there was some more encouraging news most recently, I think out of Germany. For us, it's really a function of specific parts of our business like Packaging that continue to remain solid. What we expect overall for Europe -- for Europe to be a modest growth year from an economic perspective.

Walter S. Liptak -- Seaport Global -- Analyst

Okay. Okay, thank you.

Operator

(Operator Instructions) And our next question is coming from the line of Jason Rodgers with Great Lakes Review. Your line is now open.

Jason Rodgers -- Great Lakes Review -- Analyst

Yeah, so I did have one follow-up on the, on the mobile side, just wondering, based on your past history, if you've seen back-to-back years were mobile customers did not innovate, just thinking about next year, the outlook for the mobile side.

Michael F. Hilton -- President and Chief Executive Officer

Yeah. So what I would -- I would say is, this is a little atypical because you typically haven't taken a tack here as they describe it and we really saw last year being relatively incremental and this year being fairly weak. And I do think the trade side of that is having an impact. And I think it's affecting overall demand and then investment for it. So I think that's, that's unusual. I do think Walt's prior question around 5G is what's going to be the next big driver around mobile. For us, the other thing that we've been doing is diversifying our business within the electronic space and doing more and more, for example, in auto electronics and in the semiconductor side as well as driving growth in the non-electronics pieces in general industry and the medical side and that certainly helped -- that overall segment helped in the quarter and will help for the year because the other things, those run rate kind of businesses are doing well.

Okay, thanks.

Operator

Thank you. At this time, I'm showing no further questions. I would like to turn the conference call back over to Mr. Mike Hilton for closing remarks.

Michael F. Hilton -- President and Chief Executive Officer

Thank you and I thank everyone for participating on today's call. Just as one final summary point, we do expect to grow this year, as we've said low-single-digits. We do expect to improve our margins 100 basis points. So despite some of the challenges that are out there from a macro perspective, and some of the industry-specific challenges, the diversity of our business is going to allow us to grow and improve margins this year. And I want to thank all of our team for being focused on delighting customers and making that happen, so thank you.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program and you may all disconnect. Everyone have a great day.

Duration: 27 minutes

Call participants:

Lara L. Mahoney -- Vice President of Investor Relations & Corporate Communications

Michael F. Hilton -- President and Chief Executive Officer

Gregory A. Thaxton -- Executive Vice President and Chief Financial Officer

Chris Dankert -- Longbow Research -- Analyst

Drew Haroldson -- D.A. Davidson -- Analyst

Jeffrey D. Hammond -- KeyBanc Capital Markets -- Analyst

Walter S. Liptak -- Seaport Global -- Analyst

Jason Rodgers -- Great Lakes Review -- Analyst

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