Nordson Q4 2023 Earnings Call Transcript

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Provided by Quartr
December 14, 2023

There are 12 speakers on the call.

Operator

Good morning.

Speaker 1

My name is Dennis, and I will be your conference operator today. At this time, I would like to welcome everyone to the Nordson Corporation 4th Quarter and Fiscal Year 2023 I would now like to turn the conference over to Laura Mahoney. Please go ahead.

Speaker 2

Thank you. Good morning. This is Laura Mahoney, Vice President of Investor Conference Call. We welcome you to our conference call today, Thursday, December 14, 2023, to report Nordson's fiscal year 2023 Q4 and full year results. I'm here with Sundaram Nagarajan, our President and CEO Joseph Kelly, Executive Vice President and Stephen Shamrock, Interim Chief Financial Officer.

Speaker 2

While Joe recently took a new role as Executive Vice President, Industrial Precision Solutions segment, he was CFO for the as well as our webcast slide presentation that we will refer to during today's call on our website at nordson.com conference. This conference call is being broadcast live on our investor website and will be available there for 14 days. There will be a telephone replay of the conference call available until December 21, 2023. 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.

Speaker 2

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, that could cause actual results to differ. Moving to today's agenda on Slide 3, Naga will discuss 4th quarter and full year highlights. He will then turn the call over to Joe to review sales and earnings performance for the total company and the 3 business segments. Joe also will talk about the year end balance sheet and cash flow.

Speaker 2

Naza will conclude with high level commentary about our enterprise performance, call, including an update on the Ascend strategy as well as our fiscal 2024 Q1 and full year guidance. We will then be happy to take your questions. With that, I'll turn to Slide 4 and hand the call over to Naga.

Operator

Good morning, everyone. Thank you for joining Nordson's fiscal 2023 Q4 and full year conference call. In 2021 Nordson launched its Ascend strategy to achieve top tier growth with leading margins and returns. We set a goal to deliver $3,000,000,000 in sales and greater than 30% EBITDA margins by 2025. As we complete the 3rd year of our strategy, We are on track toward achieving these objectives.

Operator

This is a testament to our employees who have in the last 3 years In 2023, we also managed the unique period of biopharma destocking as well as the cyclical electronics end markets. The core elements of our business model has enabled us to deliver profitable growth throughout these challenges. This includes a fundamental focus on our customers, commitment to innovation, diversified geographic and end market exposure and a high level of recurring revenue through aftermarket parts and consumables. Since launching the Ascend strategy, we've added new capabilities to our model, including the NBSNEXT growth framework and a division led structure which has empowered our teams to respond Combining all of these factors with our capital deployment strategy to strengthen our precision technology portfolio, We delivered record sales, 31 percent EBITDA margin and record cash flow in fiscal 2023. I'll speak more to this in few moments, But I'll now turn the call over to Joe to provide more detailed perspective on our financial results for the Q4 fiscal 2023.

Speaker 3

Thank you, Naga, and good morning to everyone. On Slide number 5, you'll see 4th quarter 2023 sales were $719,000,000 an increase of 5% compared to the prior year's 4th quarter sales of $684,000,000 record. The increase included 7% growth from acquisitions of AIREG and CyberOptics and favorable currency translation of 1%, offset by an organic sales decrease of 3%. The organic sales decrease was primarily volume offset by price as we continue to pass through year over year cost inflation. In line with our expectations, the volume decline was concentrated in the electronics, dispense and our biopharma businesses.

Speaker 3

This pressure was largely offset by double digit growth in medical interventional solutions, industrial coatings and polymer processing product lines compared to the prior year. Gross profit, excluding the non recurring amortization of acquired inventory totaled $389,000,000 or 54% of sales, a 7% increase over the prior year Q4 of $363,000,000 or 53 percent of sales. The gross profit dollar increase was driven by sales growth and the gross margin expansion of 100 basis points was driven primarily by improvements in factory efficiency. SG and A in the 4th quarter increased to $199,000,000 versus $186,000,000 in the prior year Q4. Excluding $6,000,000 in non recurring transaction fees Related to the Air Ag acquisition, SG and A increased 4% over the prior year, representing 27% of sales consistent with the prior year.

Speaker 3

Adjusted operating profit Excluding $11,000,000 in non recurring acquisition costs and step up inventory amortization was $196,000,000 in the quarter, a 10% increase from the prior year. We generated very strong incremental operating profit margins of 51% on the 5% sales growth, which can be attributed to our team's continued dedication to executing the NBS Next Growth framework and their related ability to rapidly respond to changing market conditions. EBITDA for the 4th quarter increased 12% over the prior year to a record comp. We expect to be approximately $227,000,000 or 32 percent of sales, which is 200 basis points above our long term profitability target as we articulated in our Ascend strategy. This compares to $202,000,000 or 30% of sales in the prior year Q4.

Speaker 3

As we continue to execute the Ascend strategy and scale through acquisitions, EBITDA will be a key metric for profitability and cash flow generation. Looking at non operating income and expense, I am happy to report that in September, We successfully accessed the public bond market with our inaugural issuance of investment grade rated debt. We raised $850,000,000 in 5 10 year bonds to repay the short term borrowings used to finance the Airig acquisition, with the balance of the funds coming from our revolver. Interest expense in the quarter totaled $26,000,000 an increase of $21,000,000 over the prior year quarter. $7,000,000 of the increase is non recurring financing costs associated with the repayment of the short term borrowings.

Speaker 3

The remaining $14,000,000 increase is a result of higher debt levels and increased interest rates. Comp. Other net income decreased $3,000,000 due to significant currency fluctuations that generated a $4,000,000 currency exchange gain in the prior year that did not repeat in the current year. Tax expense was $33,000,000 for an effective tax rate of 20% in the quarter, slightly below the full year and within our guidance range. Net income totaled $128,000,000 or of $2.22 per share.

Speaker 3

Adjusted earnings per share, excluding non recurring acquisition related expenses, totaled $2.46 per share, a 1% increase over the prior year. Comp. This improvement despite the increase in interest expense is reflective of consistent application of the NVS Next growth framework, which leads to steady profitable growth with attractive incremental margins. Turning to Slide number 6, I'll now share a few comments on our full year results. An increase of 2% compared to the prior year's previous record sales results.

Speaker 3

This increase was driven 4% from the CyberOptics and AIREG acquisitions, offset by an organic decrease of 1% and an unfavorable currency impact of 1%. Adjusted operating profit was $707,000,000 or 27 percent of sales, which was comparable to the prior year. On a constant currency basis, adjusted operating profit grew year over year 1%. EBITDA for the full year increased 1% to a record $819,000,000 or 31% of sales. This marks the 3rd consecutive year of the Ascend strategy and adjusted diluted earnings per share were $9.03 a 4% decrease from the prior year.

Speaker 3

The decrease in adjusted earnings is primarily a result of higher adjusted interest expense of $30,000,000 associated with both the CyberOptics and the AIRAG acquisitions and higher borrowing rates. Overall, the company's performance remains strong and in line or ahead of targets established as part of the Ascent strategy. Now let's turn to Slide 7 through 9 to review the Q4 2023 segment performance. Industrial Precision Solutions sales of $405,000,000 increased 14% compared to the prior year 4th quarter. Comp.

Speaker 3

Organic growth in the quarter was 4% with the AirEgg acquisition adding 7% and a favorable currency impact of 2%. It is noteworthy that the 4% organic growth is over a very strong Q4 of 2022 and represents an all time quarterly sales record for the segment, excluding ARIK. Robust demand in the polymer processing, industrial coatings and packaging product lines combined with the execution of the Ascend strategy drove this quarter's results. Geographically, growth was strong in the Americas and Asia Pacific regions. EBITDA for the quarter was $148,000,000 or 37% of sales, which is an increase of 26% compared to the prior year EBITDA of $118,000,000 This growth was driven primarily by leveraging organic sales growth at incremental margins well in excess of our target, plus the benefit of the AIREG acquisition.

Speaker 3

Medical and Fluid Solutions sales of $169,000,000 decreased 7% compared to the prior year's 4th quarter. This change was primarily driven by a decrease in organic sales volume of 8%, offset by a modest 1% currency benefit. The volume declines were the result of continued softness in medical fluid components related to the biopharma end markets as well as the fluid solutions product lines, offset by double digit growth in our medical interventional solutions product lines. 4th quarter EBITDA was $62,000,000 or 37 percent of sales, which is a decrease of 4% compared to the prior year EBITDA of $64,000,000 EBITDA margins continue to be negatively impacted by the sales mix changes within the medical product lines, but improved factory efficiencies within the Fluid Solutions division enabled profit margin expansion. Turning to Slide 9, you'll see Advanced Technology Solutions sales of $145,000,000 decreased 1% compared to the prior year's Q4.

Speaker 3

This change included a decrease in organic sales volume of 16%, offset by the CyberOptics acquisition, which contributed 15%,

Speaker 4

the highest

Speaker 3

quarter. The organic sales decline was primarily driven by continued softness in our electronics dispense product lines that serve the cyclical semiconductor end market. And by way of reference had a difficult comparison as the prior year 4th quarter had 28% organic growth. Based on customer conversations and historic trends, We continue to expect demand in the semiconductor market to anniversary in the Q2 of fiscal 2020 4 and begin to recover in the back half of calendar 'twenty four. 4th quarter EBITDA was $35,000,000 or 24% of sales, a decrease of $5,000,000 from the prior year Q4.

Speaker 3

Noteworthy, however, for this segment is the increased profitability level in the down part of the cycle when you compare the 24% EBITDA margin to the 14% EBITDA margin in fiscal 2020. Finally, turning to the balance sheet and cash flow on slide 10. We had another very strong cash flow quarter, generating $153,000,000 in free cash flow at a cash conversion rate of 120% on net income. For the full year 2023, Nordson generated a record free cash flow of 6 $107,000,000 at a cash conversion rate of 124%. With our record free cash flow, we were able to repay approximately $425,000,000 of debt and return capital to our shareholders.

Speaker 3

Dividend payments were $39,000,000 in the quarter, reflective of the 5% increase in the annual dividend. In addition, we purchased $10,000,000 of shares at an average price of $2.16 per share. Through our strategic capital deployment, we ended the year with a strong balance sheet. Our cash balance was $116,000,000 and net debt was $1,600,000,000 resulting in a leverage ratio of 2 times based on the trailing 12 months EBITDA, well within our targeted range. For modeling purposes, in fiscal 2024, assume an estimated effective tax rate of 20% to 22%, capital expenditures of approximately $40,000,000 to $50,000,000 and interest expense of approximately $75,000,000 to $80,000,000 In summary, our segments effectively responded to dynamic conditions throughout fiscal 2023 by using the data driven NBS Next Growth Framework.

Speaker 3

This led to segment financial performance exceeding our targeted incremental and decremental profit targets. We are also seeing nice contributions from our recent acquisitions, which is indicative of the strength of our capital deployment strategy and the differentiation we are adding to our precision technology portfolio. I want to congratulate the team on achieving record sales and EBITDA as well as the record cash flow performance this year. I'll now turn the call back to Naga.

Operator

Thank you, Joe. During last year's conference call, As we set the stage for fiscal 2023, I noted that Nordson was well positioned to perform during periods of economic uncertainty. It certainly proved true for all the reasons I listed earlier in the call. Fundamental focus on our customers, commitment to innovation, diversified geographic and end market exposure and a high level of recurring revenue. Ascent's strategy has added to these core strengths.

Operator

Our NBS Next growth framework is becoming a competitive advantage as it is deployed holistically across the company. Put simply, NBS Next is a data driven segmentation framework that drives choices, focus and simplification. In fiscal year 2022, we had 2 divisions that achieved market leading business performance. That number expanded in 2023 with all divisions making tremendous progress. They're using the framework to guide their focus on best growth opportunities and deliver on time quality products, winning business and growing market share.

Operator

Our Medical Interventional Solutions business by focusing on its best growth opportunities and simplifying elsewhere. Our Electronics Processing division leveraged this period of weaker end market demand to carefully curate its product portfolio based on the best growth opportunities. The team recognized through segmentation analysis that the extreme customization we offered created complexity and resulted in longer lead times. Applying NBS Next methodology With our deep voice of customer research, the team reduced complexity, improved lead times and is gaining market share. The Electronics division has used the downside of the cycle to implement NBS Next achieving its target decremental margins in the second half of fiscal twenty twenty three.

Operator

They're well positioned for the incremental earnings growth that will come when the semiconductor end market start to recover in the second half of calendar twenty twenty four. In 2023, we also made progress on the acquisition front of our Ascent strategy, which is a key priority of our strategic capital deployment. We closed the ARROG acquisition on August 24, 2023. The integration is going well and we are impressed by Areg's precision agriculture technology and the energy excellence our new employees bring to Nordson. Since the launch of the Ascend strategy, we have acquired approximately $400,000,000 in revenue and are 80% of the way toward our acquisitive revenue target.

Operator

We see ample opportunity in the pipeline to achieve this target, particularly in the medical and test and inspection platforms. That said, We will remain focused to acquire differentiated position technologies that meet our strategic and financial criteria. To enable acquisitive growth, we went to the public markets this summer. As a first time issuer, we achieved investment grade ratings from both Moody's and S and P. Both ratings agencies cited Nordson's strong cash flow and healthy financial profile as key reasons for the strong ratings debut.

Operator

We appreciate the flexibility that public debt will afford us as we continue executing on the acquisition and capital deployment portion With the progress of our Ascent strategy and believe we are well positioned entering fiscal 2024. I'm also pleased that we have made this progress while sustaining our culture and values. For example, in fiscal 2023, our employees, company and the Nordson Corporation Foundation to support education, human welfare services and other charitable activities. Turning now to the outlook on Slide 12. We enter fiscal 2024 with approximately of strong system sales in the 4th quarter as well as a paced return to normalized levels.

Operator

Based on the combination of order entry, backlog, customer delivery timing requests of 4% to 9% above fiscal 2023 sales. Full year fiscal starting in fiscal 2024 to exclude acquisition related amortization. As acquisitions will continue to be a critical part of our strategy, we believe this is prudent and more reflective of how we and investors think about our business in terms of earnings and cash flow growth performance. This full year guidance assumes a neutral impact from foreign exchange rates, and the Air Ag acquisition contributing approximately 5% growth at the midpoint of our guidance. As you will see on Slide 13, Q1 fiscal 2024 sales are forecasted in the range of $615,000,000 to $640,000,000 and adjusted earnings in the range of $2 to $2.10 per diluted share.

Operator

Before we open it for questions, I want to take a moment to thank Joe for its leadership as CFO over the past 3 plus years. Joe, I've appreciated your partnership and we are all excited to see you develop your career as the new leader of our IPS segment. As we move forward into fiscal 2024, Steve Shamroz will take over as Interim CFO while we conduct our search for a successor. Joe's move and Steve's seamlessly stepping in during the transition are examples of Nordson focusing on developing winning teams, an important success factor in building a scalable high quality growth engine. Again, I want to thank our employees,

Speaker 1

We'll pause for a moment to compile the Q and A roster. And our first question comes from the line of Allison Poliniak with Wells Fargo. Please go ahead.

Speaker 5

Hi, good morning.

Operator

Good morning, Allison.

Speaker 5

Nagi, you touched on the EBITDA margin that You posted in 2023, certainly strong and well ahead of your target. How do we think of that EBITDA margin from here as How does it evolve over the next say 2 to 3 years?

Operator

Yes. Alison, as we launched the Ascend strategy, our target was to we have 50% of our growth come from organic and 50% from acquisitions. And we also Set the stage for our organic growth obviously comes at a higher incremental margins when compared to our acquisitions. So as we move forward, we fundamentally believe this 31% is a sustainable level at which we are operating. Depending on the mix of organic and acquisition, this is a sustainable level that we are able to maintain.

Speaker 5

Got it. And then could you touch on the biopharma market, just sort of the cadence of recovery, just how you're thinking about that Specific market in 2024 just given the challenges it had in 2023 around the inventory side?

Operator

We start to by the end of the Q1, we start to anniversary the decline in biopharma due to destocking. Longer term, we fundamentally believe that this is a great marketplace for Nordson and will return to The high single digit number. In the interim though, we are taking a conservative and Definitely a realistic view of saying the recovery is going to be slower.

Speaker 5

Okay. But I guess, I think you just touched on it, there's no real structural impediment for that market in your view to not reach that sort of high single digit growth rate that it historically achieved?

Operator

Absolutely not, right. If you think about this, One of the key areas of focus for us is the use of single use plastics, which essentially go to replace the Stainless steel nectars and stainless steel four lines. And that transition is still in its early stages. So we fundamentally believe that there is nothing here that is impaired. It's a matter of timing and it's certainly a matter of recovery, Certainly.

Operator

So long term, no issues. We expect we'll probably get to high single digits.

Speaker 1

Your next question is from the line of Mike Halloran with Baird. Please go ahead.

Speaker 6

Hey, good morning, everyone.

Operator

Good morning, Mike. Good morning, Mike.

Speaker 6

So just want to help me understand a couple of questions on guidance here. First, what's the organic assumption embedded in the growth rate? And I know you gave the FX side already, but maybe just some help on what you're assuming for organic growth? Conference.

Speaker 4

Yes, this is Steve. So for the full year guidance, as Nachik pointed out, we're forecasting growth of 6% and our RAG is at 5%. So that would imply organic growth of about 1% because We would say based on current rates we're FX neutral. So that's how we're thinking about the overall growth rate of 6%.

Speaker 6

Thanks for that. And then on the electronics assumptions, you mentioned back half recovery. What informs that? Certainly sounds like part of its comparisons, part of its historical recovery curves. Is there anything customers are saying or build rate forecasts or anything else that you would point to?

Operator

What I would tell you is the 2 things that you already which is really historical trends. Certainly, we have a direct sales model. Hence, our teams are comp. Spending a lot of time with our customers understanding what their requirements are and when they would show up. If you were to point to anything, you would say the pipe line of opportunities continue to be to point towards that timeline of recovery.

Speaker 6

Comp. And then last one just on the IPS side. Are you assuming relatively normal sequential patterns from here? Any thoughts on how you're looking at the end market cadencing, demand levels, things like that? I mean, packaging was strong this quarter, which felt a little pricing.

Speaker 6

So any context on that would also be helpful.

Operator

Yes, sure, Mike. IPS has been running What our expectation is that we don't see anything in the order entry that gives us a pause. Good backlog and good order entry that we expect to sustain growth in the coming years. A significant contribution on IPS growth for the coming year would be through the ARROG acquisition.

Speaker 6

Got it. Really appreciate it. Thank you for your time.

Operator

Sure.

Speaker 1

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

Speaker 7

Hey, good morning, everyone.

Operator

Good morning, Jeff. Good morning, Jeff. So

Speaker 7

maybe go back to the organic. It looks like the range is kind of minus 4 to plus 1. Do you see all the segments at the midpoint growing or are there some segments that Clearly have growth in others that are maybe down.

Operator

Yes. We just talked about IPS. IPS today at or above our long term growth rates continue to sustain modest growth in the year coming up. ATS is going to be flattish in that what I would tell you is that first half we're going to be continuing down second half continue to improve and so that will be flattish to slight growth. MFS though, we have Medical interventional components continuing to be pretty strong growth for us.

Operator

Our biopharma business Overall, our expectation is that MFS returns to a pretty nice growth next year, modest growth for that segment.

Speaker 7

Okay, great. Thanks for that color, Naya. Just ARIG, there's been a lot of commentary about ag slowing. I'm just wondering if Eric has seen that pressure. It seems like the math maybe suggests a little bit lower revenue contribution Then maybe when you first bought it, just speak to what you're seeing there real time?

Operator

Yes. Let me start it and then Joe, in his new role, can certainly give you some color on Air Ag as well. What we see remember, 45% of our Air Ag revenues are recurring revenue and they're typically products are short life replacement cycles, so mostly nozzles and things like that. So we will benefit from that and that is not going to see the pressure you're going to see. The other thing what I would tell you is that ARAG's components much like Nordson that we're going to see limited impact from that.

Operator

And so let me maybe have Joe talk about where we finished the year for ARAG in Nordson fiscal year and then talk a little bit about our expectation for next year. Yes.

Speaker 3

So Jeff, if you think about Air Ag, they finished the Nordson, what I'll call fiscal And so despite some of the news that you're hearing in the ag space, when you look at the components that they provide, The 45% that's run rate parts and consumables that Naga mentioned, we have it moderated the growth rate from what was previously articulated, but it's still growing when

Operator

you look at it on a year over year basis.

Speaker 7

Okay. And then just a housekeeping. Amortization in 2024, is it $20,000,000 a quarter, dollars 80,000,000 Is that kind of the right run rate or how should we think about that?

Speaker 4

Yes. Jeff, I would tell you the guidance on amortization is in the range of $74,000,000 to $78,000,000 for the full year and about $19,000,000 in Q1.

Speaker 3

Okay. Thanks so much.

Speaker 1

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

Speaker 8

Thanks. I was hoping maybe you gave a little bit more granular detail on expectations for MFS. I was hoping you could talk through the same thing for IPS, how you're thinking about rigid, flexible packaging, nonwovens, product assembly, coatings as we move into 2024?

Operator

Yes. Hey, let's generally, we don't I'll answer the question, Matt. So let's start with packaging, right. Packaging is doing fairly well. It is a The order entry rates and things like that suggest that the backlogs have returned to normal.

Operator

The parts part of the business is doing fairly well. And so we expect packaging to continue to be steady as we have experienced thus far. So that is packaging. As you think about system businesses like coatings or polymers, as we enter the year, we enter the year with some pretty Strong backlog. And so we fundamentally believe that that is one that will help us in the growth there.

Operator

Nonwovens has been a business that continues to has not declined any further. We'll continue to be tracking in the same place where we are. We certainly have a number of product applications. This is sort of Applications such as battery, think about applications in e commerce, This is the part of the business where it is application by application and This one is doing well as well. Hopefully that gives you a little bit more color and hopefully answers the question you're asking Matt.

Speaker 8

Yes, I appreciate the detail there. Maybe just over to ATS, two quick things. Are you actually seeing an inflection in CyberOptics business pointing out the The fact that you had the strongest quarter for that business since the acquisition. And then if you can comment a little further on How you're thinking about test and inspection for 2024?

Operator

Yes. As you think about test and inspection, we've had Strong, strong years here now going even last year when our dispense business was down a bit, you also found them to be doing fairly well. But as you go into next year, we expect that we would have challenging comps for our X-ray business. We certainly expect that our optical business and our acoustic business, which is We've not talked about it in the past. It's an area that we feel there is some strength.

Operator

And Too early to say we have reached an inflection point, but certainly telling you that this is an area Customer conversation, pipeline activity, all still indicating second half of the year, calendar year that we have a good recovery. But I think we feel good about where we are, Particularly on cyber optics, we've had now a year of experience with this. Cyber optics is exactly what we thought was Incredibly fantastic technology that has added to the portfolio. So our The thesis around expanding our precision technology portfolio with cyber optics is certainly strong and our expectations are that we continue to that is expected to come. Thank you.

Speaker 1

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

Speaker 9

Thanks. Good morning. I Just curious about the ATS foreground, spend another moment on that. You said your team is very engaged talking customers. So that sounds like everyone's on the same page in terms of expecting a recovery.

Speaker 9

Are you just seeing like materialization

Speaker 3

of pre RFP activity?

Speaker 9

Is there Like improving breadth month to month, just curious how the cadence is there?

Operator

Yes. I would go back to what we were talking Which is really great customer conversations, historical trends all pointing towards second half of calendar twenty twenty four. Clearly, our pipeline activity continues to be pretty good conference. And our expectation is that, that translates into order entry and translates into shipment. Beyond that, our expectation for ATS is it's going to be flat with first half down, second half up.

Operator

And if you look historically, that has been a fairly good indicator and we believe that comp. So our guidance is based on ATS being flat, not significant growth.

Speaker 9

Yes, yes, I understand the timing. Thanks for that. And then a quick one on MFS, the kind of non medical fluid solutions portion. I think you Talked about some significant manufacturing and productivity benefits there from Cost actions and MBS next. Curious how that Industrial Fluid Solutions business.

Speaker 9

I think it's short cycle oriented. How's that? A little more detail on how that's behaving, please?

Operator

And the business starting to return to where it typically operates. Significant pickup in this business is going to be tied to the electronic customers in Asia as well, right. And so this is a business that has some electronic exposure and that they will benefit from that as the I can have picks up for them. But overall, on the industrial side, it seems to be steady.

Speaker 6

Thank you.

Operator

Thanks, Naved. Yes. You're welcome.

Speaker 1

Your next question is from the line of Walt Liptak with Seaport Research. Please go ahead.

Speaker 10

Hi, thanks. Good morning. Good morning, Rob. Good morning. You guys haven't talked too much about pricing yet.

Speaker 10

And there's still some inflation out there even though it's come down. How are you thinking about systems pricing and component pricing as you start going into the New Year.

Operator

Steve, is there something that you want to touch on?

Speaker 4

To answer that question, what I would say is, again, just to remind you and everyone that really when we talk about pricing, I mean, we're selling the value of our products to our customers. So we've not passed through large inflationary price increases as a result of that. I mean, again, our focus is maintaining our Very strong gross margins from that perspective. So as I mentioned earlier with the organic growth guidance of 1% for FY 'twenty four, I would think that that organic growth would be balanced in terms of a little bit coming from volume and price, but again it's not something that we're really focused on from that perspective. Again, our focus is on maintaining those gross margins.

Speaker 10

Okay, great.

Speaker 3

And I wonder if we

Speaker 10

could talk a little bit about the ag markets and just regionally, ARRIG is pretty international in Europe and South America, I wonder if you could talk a little bit, give us some insight on how those markets are trending and we probably have a better view on the U. S. But So maybe the second part of the question is, you guys are looking at kind of a new opportunity in the U. S. Per market share, can you grow the U.

Speaker 10

S. Part of the business next year?

Operator

Yes. Let me start and then Joe can add a little bit more color to the business. As you think about Air Ag, right, what we acquired is a European market leader, Great technology, strong position in Europe, strong position in South America in an end market that is growing, right. So our models and our expectations are that we deliver on that promise around continuing to grow the European business and continue to grow the South American business. We certainly recognize that we have an opportunity in North America, but we also understand the market dynamics in North America.

Operator

And so, we like the technology, we like the market position and the market structure in Europe is uniquely different Europe and our technology. Joe?

Speaker 3

Yes. Walt, you think about just to level set on ARIK, their Precision dispensing fluid components that are predominantly components sold to implement manufacturers, spray manufacturers. And when you look, it's again predominantly a European business, a very broad footprint throughout Europe through their distribution model and selling to implement manufacturers. And so that market again is, I would tell you, the main driver of our forecast, when you think about the Air Ag business and and the growth that we're forecasting for 2024. The U.

Speaker 3

S. And other geographies outside of Europe and South America, where Eric has a strong footprint, represents opportunity. And when you think about Nordson and our broad I think is enhanced as opposed to a standalone Air Ag business. And so when you think about that, we're starting to see In the integration, some of the opportunities start to fill in the pipeline. And so again, we're optimistic that Long term, we can make this a global division within Nordson with a broad geographic footprint.

Speaker 10

Okay. All right. Yes, thanks for that answer. If I could just try one more on the IPS segment For Joe. Yes, I wonder if you could just help us characterize how you're looking at kind of the general industrial systems spending for next year, what the funnel looks like and maybe Some of the bigger sub segments like around automotive or consumer

Speaker 11

goods?

Speaker 3

Yes. So just to level set, the IPS segment is coming off now, I would say, 2 very strong years. If you look Back in 'twenty two, they delivered a 7% organic growth. In 'twenty three, it grew 3% organically. And so as we head into 'twenty four, we're looking to really maintain that from the level of where we are.

Speaker 3

What drove it, if you go back to 'twenty two was a lot of the large systems in the liquid coatings. And then in 'twenty three, it turned there was heavy automotive, actually growth in automotive on the coating side and then on the plastic processing side and the recycling That was strong in the back half of 'twenty two and continued to be strong in 'twenty three. And so those large systems businesses within IPF, They do carry a nice backlog into 2024. That being said, the remaining portion of the IPS business, backlog there has moderated. So when you see the backlog come down to 800, I would tell you That's the elevated backlog moderating back to historical terms for the remainder of that business.

Speaker 3

That being said, the order entry there remained is steady and is supportive of our forecast. So, you're familiar with the business, particularly on the packaging side. When systems come down due to investment, parts typically help offset that in terms of growth of parts. And so, it's really a nice mix And I would tell you we benefited from automotive, liquid coatings and then the polymer processing last couple of years on the system side. But the remaining broad based industry remains steady.

Speaker 10

Okay, great. Okay, thank you.

Operator

Right. I mean, one thing that I would add, Walt, is really, in general, the company is a recession resilient company Right. That's what you saw happen in 2023. As we think about 2024, really what we are our expectation is IBSA is steady, ATS is flattish to slight growth and MFS returns to pretty modest growth and that's kind of how I would think about it. And a pretty strong EBITDA margin in last year and we'll continue to expect to see the same next year.

Speaker 1

Your next question is from the line of Andrew Buscaglia with BNP Paribas.

Operator

Please go ahead.

Speaker 3

Conference.

Speaker 11

Just one last clarification on your guidance. So The low end, if you look at the organic sales growth, the low end of that guidance, that if you model that out, it doesn't really assume much of recovery at all, is Correct. And then, how much of the recovery is really easy comps versus demand actually picking up?

Speaker 3

Yes. Yes. So what I

Speaker 4

would say, Andrew, from a general guidance perspective, I mean, at the low end of our sales guidance, we're talking about 4% basically from that perspective. So obviously, there what would get us Towards the lower end there is obviously there is the recovery on the ATS side for example is slower than what we would expect It is well just from a comp standpoint with some of the businesses that we were talking about, right, whether it was fluid solutions or on the electronic side within ATS.

Speaker 11

Okay. And then how and then what about the easy comps versus demand picking up? Is that To get to the midpoint, do we need demand to come back?

Operator

Conference.

Speaker 4

No, what I was going to say is, I mean, just from a midpoint perspective, again, I mean, that assumes 1% organic growth overall. So, again, there would be some volume embedded in there. So we would expect it to pick up, right? I mean, just kind of given the by segment like we talked earlier. From that perspective, ATS, again, we'd expect some second half pickup there in the end of Q2 or Q3 and Q4.

Speaker 4

We talked about the fluid components earlier and even fluid solutions. I know Naga referenced that as well, electronic assembly picking up in the back half of the year as well.

Speaker 11

Okay. Andrew,

Speaker 3

I would just add, If I could, the way I think about it is full year, our guidance says we're going to grow 7% or 6% at the midpoint, roughly speaking. And Q1 is growth of 3%. So basically, it implies that the growth rate picks up past Q1 And part of that, as you mentioned, is the comps get easier in Q2 and Q3, particularly because that's when the ATS and the biopharma a pullback really occurred. And so the growth rate is, let's just say, 3% in Q1 and then picks up to 7% And the remaining three quarters, with it being the heaviest in Q2 and Q3, because the comps are easier.

Speaker 11

Yes. Okay. And in ATS, margins kind of move around Historically, so it's hard to gauge a pattern. But what is the main driver here for ATS long term volumes just picking back up? Or are there cost caving potential in that segment to get those up to closer to a corporate average margin?

Operator

Conference? Let me just maybe give you a broad view of how we're thinking about ATS and then maybe Joe or Steve, you guys could add more color to it. What I would say is ATS at 24% EBITDA And you compare them to their competitors in the markets that they play in, it's pretty strong. And one of the reasons is that, Look, the R and D load here is much higher than some of our other businesses. So expectation shouldn't be that APS gets The total company average numbers, it will you're always going to find that you have 14% SG and A cost here in the in our business in APS when compared to IPS, which is a much smaller number.

Operator

So that's the only level setting I want to do is make sure that you're not your expectations for ATS Should be in line with the ATS, not in line with the total company average.

Speaker 3

Yes. And the comment We're quite pleased with what we've done to improve the profitability of that business. And here we are at the low point in the cycle And we're delivering this 2024, 2023 EBITDA margins. And so we're well positioned to participate in the recovery, but that doesn't mean you expected to get to Nordson's the other segments levels of profitability.

Operator

Okay. Yes. Thank you, guys.

Speaker 3

I was

Speaker 4

going to say maybe the only other point I would add there too is we've done a nice job in that segment as well, Andrew, just in terms of our decremental margins being very favorable to our targets, right. So we're really managing costs appropriately based on volumes, so.

Operator

Okay. Thank you.

Speaker 1

And at this time, there

Speaker 3

comp.

Operator

Thank you for your time and attention on today's call. We're making great progress on the Ascent strategy. We're well positioned for profitable growth in fiscal 2024. We remain focused on achieving our long term objective of delivering top tier revenue growth with leading margins and returns. I wish all of you a happy holiday season.

Operator

Thank you.

Speaker 1

This does conclude the Nordson Corporation 4th quarter fiscal year 2023 conference call. We thank you for your participation. You may now disconnect.

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Earnings Conference Call
Nordson Q4 2023
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