Nordson Q3 2023 Earnings Call Transcript

There are 9 speakers on the call.

Operator

And welcome to the Nordson Corporation's Third Quarter Fiscal Year 2023 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. I will now turn the conference over to Lara Mahoney. Please go ahead.

Speaker 1

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 Joseph Kelly, Executive Vice President and CFO. We welcome you to our conference call today, Tuesday, August 22, To report Nordson's fiscal 2023 3rd 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 forward slash investors.

Speaker 1

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 Tuesday, August 29, 2023. During this conference call, references to non GAAP financial metrics will be made. A reconciliation of these metrics to the most comparable GAAP metric was provided 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.

Speaker 1

These statements may involve a number of risks, uncertainties and other factors as discussed in the company's filings with the Securities and Moving to today's agenda on Slide 3, Naga will discuss 3rd quarter highlights. He will then turn the call over to Joe to review sales and earnings For the total company and the 3 business segments. Joe will also discuss the balance sheet and cash flow. Naga will then share a high level commentary about our enterprise performance. He will conclude with an update on the fiscal 2023 full year and We will then be happy to take your questions.

Speaker 1

With that, I'll turn to Slide 4 and hand the call over to Naga.

Speaker 2

Good morning, everyone. Thank you for joining Nordson's fiscal 2023 Q3 conference call. While sales were at the low end of our expected guidance range for the quarter, I would like to recognize the dedicated Nordson team To actively control costs in divisions where it was necessary and leverage the NBS MEX growth framework To deliver strong growth in divisions where the market demand was strong. This resulted in adjusted earnings per share of $2.35 which was at the high end of our Q3 EPS guidance. Going into the Q3, we expected to be pressured by the ongoing weakness in our electronics and biopharma product lines.

Speaker 2

We understand the macro factors impacting these end markets and we have the line of sight to returning to growth. This quarter's electronics end market softness is particularly visible when looking at our results in Asia Pacific, which declined 20%. This reflects decreased demand from semiconductor customers in our ATS segment And electronics assembly customers in our MFS segment. These markets are cyclical And we anticipate them turning in the middle of 2024. The diversification of our business Offset some of this pressure.

Speaker 2

From a product perspective, we continue to experience double digit Organic growth in Medical Interventional Solutions and Polymer Processing product lines, as well as high single digit growth in the Test and Inspection business. Recently, We experienced mid single digit organic growth in both Americas and Europe as our customers in both these regions Are rebalancing their supply chains to be closer to the markets they serve. I'll speak more about the enterprise And our exciting new acquisition of Vireg in few moments. But first, I'll turn the call over to Joe to provide A detailed perspective on our financial results of the quarter.

Speaker 3

Thank you, Naga, and good morning to everyone. On Slide number 5, you'll see Q3 fiscal 2023 sales were $649,000,000 a decrease of 2% compared to the prior year's Q3 sales of $662,000,000 This was driven by an organic decrease of 5%, partially offset by the favorable benefit of the CyberOptics acquisition. During the quarter, sales were negatively impacted by the end market pressures that Naga referenced. Gross profit for the Q3 of fiscal 2023 Total $360,000,000 Excluding severance costs, gross profit totaled $362,000,000 or 56% of sales, which is comparable to the prior year Q3. SG and A in the 3rd quarter was elevated to $189,000,000 Above the $181,000,000 we have been averaging for the last 6 quarters.

Speaker 3

3rd quarter SG and A was impacted by notable non recurring items that I'd like to highlight. Our teams advanced 2 separate $1,000,000,000 global acquisition targets Through the comprehensive due diligence process all the way to the final stages. As a result of these 2 significant and strategic projects, we incurred $7,000,000 and non recurring cost from 3rd party service providers. We ultimately chose to move forward only with IRAG, which included an additional $1,000,000 for the fairness opinion. In total, We incurred $8,000,000 in non recurring costs for acquisition related activity in the 3rd quarter.

Speaker 3

Operating profit, excluding these non recurring items, was $181,000,000 in the quarter or 28% of sales, 4% below the prior year adjusted operating profit of $188,000,000 Despite the lower sales volume, we held on to decremental margins On adjusted operating profit of 56%, reflective of our cost controls and improved pricing, which can be attributed to our team's dedication to the NBS NEX framework. As we execute the Ascend strategy and scale through strategic acquisitions, EBITDA remains a Key profitability metric. EBITDA for the Q3 was $208,000,000 or 32% of sales, which is above our long term profitability target. However, dollars 5,000,000 or 2% below the prior year EBITDA of $213,000,000 The decrease was primarily driven by lower sales volume in the quarter. Looking at non operating expenses, interest expense increased $6,000,000 associated with higher borrowings and increased interest rates.

Speaker 3

Other net expense decreased $2,000,000 related to a combination of changes in pension and deferred compensation plans as well as foreign exchange gains and losses. Tax expense was $34,000,000 for an effective tax rate of 21% in the quarter, which is in line with the prior year Q3 rate and the forecasted full year rate for 2023. Net income in the quarter totaled $128,000,000 or $2.22 per share. Adjusted earnings per share, excluding non recurring acquisition and severance costs, totaled $2.35 per share, a 6% decrease from the prior year adjusted earnings. The decrease was primarily driven by higher interest expense and lower operating profit.

Speaker 3

Now let's turn to Slide 6 through 8 to review the Q3 2023 Segment performance. Industrial Precision Solutions sales of $338,000,000 decreased 1% compared to the prior year Q3, driven by softness in our product assembly and nonwoven product lines In Asia, this was partially offset by continued strength in polymer processing product lines And growth in the Americas and Europe. Year to date, the IPS segment has delivered 3% organic sales growth following 2 consecutive years of double digit growth. EBITDA for the quarter was $122,000,000 or 36% of sales, which is a decrease of 3% compared to the prior year EBITDA of $126,000,000 The biggest driver of the decrease is lower sales volume and unfavorable sales mix due to the higher sales volume in polymer processing product lines. EBITDA in the current quarter Has improved compared to the prior two quarters of the current year and year to date is $4,000,000 higher than the prior year.

Speaker 3

On Slide 7, you'll see Medical and Fluid Solutions sales of $171,000,000 decreased 4% compared to the prior year's Q3. The decrease was driven By continued softness in the Medical Fluid Components division related to destocking in single use plastic components for biopharma applications and fluid solution product lines specifically for electronic assembly, primarily in Asia Pacific. This pressure was partially offset by double digit growth And our Medical Interventional Solutions product lines. 3rd quarter EBITDA was $68,000,000 or 40 percent of sales, which is a decrease of $8,000,000 compared to the prior year EBITDA of $76,000,000 EBITDA continued to be impacted by meaningful sales mix changes Within Medical Product Lines, it is noteworthy that the segment EBITDA margin sequentially improved 200 basis points over the Q2 of 2023 and back To the profitability levels, this segment delivered in 2021 2022. Turning to Slide 8, you'll see Advanced Technology Solutions sales were $140,000,000 a 3% decrease compared to the prior year Q3.

Speaker 3

During the quarter, the CyberOptics Acquisition contributed 11% growth. Organic sales volume was down 13%. The organic decrease was driven by electronics dispense product line serving semiconductor end markets, predominantly in Asia Pacific, slightly offset by continued growth in Test and Inspection Products. The cyclical downturn of demand in the semiconductor market will anniversary in the Q2 of fiscal 2024, which aligns with the historic down cycles lasting approximately 4 to 5 quarters. Structural cost reduction actions were taken during the Q3 of fiscal 2023 To address the volume decrease in electronic dispense products.

Speaker 3

For example, they've chosen to outsource their fabrication shop To focus on more value added precision dispense technology, resulting in a $2,000,000 of non recurring severance costs. 3rd quarter EBITDA was $33,000,000 or 24% of sales, which was an improvement compared to the prior year Q3 EBITDA of $30,000,000 The improvement in EBITDA during the quarter It was driven by favorable sales mix and continued realization of cost savings actions. Despite the double digit organic sales volume decrease, this segment is delivering quarterly profitability Only 100 basis points below 2022 levels. Finally, Turning to the balance sheet and cash flow on Slide 9. We had a very strong cash flow quarter, generating $181,000,000 in Free cash flow, bringing our year to date cash conversion rate on net income to 126%.

Speaker 3

Cash ended the quarter at $143,000,000 and net debt was 695,000,000 resulting in a 0.9 times leverage ratio based on the trailing 12 months EBITDA. We continue to have significant available borrowing capacity to pursue organic and inorganic growth opportunities, such as our upcoming acquisition of ARRIG. We expect to close the ARRIG acquisition by the end of August And exit the year with a net debt to EBITDA leverage ratio of approximately 2 times. During the Q3, we repaid $111,000,000 of debt, paid $37,000,000 in dividends And spent $23,000,000 on repurchasing approximately 107,000 shares of company stock at an average price of $2.17 per share. Our Board approved a 5% increase and our annual dividend effective in the Q4 of fiscal 2023.

Speaker 3

This marks the 60th Consecutive year, the company has increased its dividend, an impressive accomplishment only enabled by maintaining a truly differentiated precision technology portfolio and serving diverse end markets. For modeling purposes, in fiscal 2023, assume an estimated effective tax rate of 20% to 22% and capital expenditures of approximately $35,000,000 to $40,000,000 as several of our investment timelines have pushed out. With our upcoming acquisition of ARRIG, I want to provide you with some assumptions for modeling purposes. For revenue, assume approximately $20,000,000 to $30,000,000 in fiscal 2023. EBITDA margins are expected in the high 30% range.

Speaker 3

We expect ARIK to be slightly dilutive to GAAP EPS In Q4 2023 due to increased amortization of acquisition related intangibles and interest expense associated with the acquisition. Excluding acquisition costs and related intangible amortization, EPS should be neutral for the Q4. Due to the expeditious nature of the close, The acquisition will initially be financed with a short term loan and revolver borrowings. We anticipate Following up with a bond issuance in the public markets later this year, and we are currently working through the ratings process. Based on current market conditions, assume a weighted average interest rate of approximately 5.5% For total Norton debt in 2024.

Speaker 3

We will now turn to Slide 10, and I'll turn the call back to Naga.

Speaker 2

Thanks, Joe. Our team continues to execute the Ascend strategy, which is clear in the strong profitability delivered in this quarter. While we are managing the short term sales weakness related to the biopharma end market In electronics cycle, we're getting closer to anniversarying that pressure in fiscal 2024. Related to the biopharma product lines in our Medical Fluid Components division, we believe We have seen the bottom of the customers' unique supply chain destocking trend and will anniversary this pressure in the Q1 of fiscal 2024. Following this period, we cautiously expect The Medical Fluid Components business to return to its historical mid to high single digit growth rate over time.

Speaker 2

Moving on to electronics end markets. I visited our Electronics Processing Solutions leadership team In Carlsbad, California earlier this month, our team's expectation is that electronics CapEx spend cycle We'll begin to turn in the second half of the calendar twenty twenty four. We expect to benefit from customer investments In automation, memory, AI and electronics new product innovation. In the meantime, this division is successfully managing costs, while staying invested in profitable growth opportunities identified through the NBSNEXT Growth Framework. In fact, the EPS division exceeded its targeted decremental margins during this low volume period.

Speaker 2

We also continue to be pleased With the growth of our Test and Inspection division, which mutes the volatility of the electronic cycle. Geographically, we are closely monitoring the pressure in Asia Pacific region, specifically in China. The regional sales weakness was largely related to the electronics exposure, though There was weakness in demand across all three segments, some of which was due to the timing of large system orders. Nordson has a well established footprint in China with long tenured and knowledgeable employees. We will remain close to our customers and support them appropriately.

Speaker 2

Simultaneously, Nordson's business model positions us Well to support customers, if they decide to diversify their supply chain to other regions of Asia or into the Americas and Europe. Our customer intimate business model ensures We are prepared to fully participate as global supply chains rebalance. Finally, I'd like to share an update on the Ascend strategy. Acquisitions A very important part of our goal to achieve $3,000,000,000 in revenue by 2025. Of the $500,000,000 acquired revenue target we set at our 2021 Investor Day, We are now nearly 80% of the way there.

Speaker 2

In June, we announced the acquisition of ARAG, A global market and innovation leader in precision spraying technology. Precision dispense technology is core to Nordson. Over nearly 70 years, we have expanded that expertise Beyond our beginnings in industrial applications and to dispense for packaging, product assembly, nonwovens, Electronics, medical and more. Through it all, we adhere to disciplined strategic acquisition criteria, Differentiated technology, generated Nordson like gross margins, high growth end market applications and a customer centric business model. The acquisition of ARAG meets all of these criteria And expands our technology expertise into the high growth end market of precision agriculture N is the largest single acquisition in our history.

Speaker 2

Today, ARAG is a market leader in precision agriculture technology in Europe and South America. ARAG Fluid Components are sold to implement manufacturers who in turn sell to the tractor manufacturers or OEMs. ARAG closely works with all of the customers within these channels to ensure its innovation pipeline Supports the customers' goals of improving crop yields and minimizing the use of expensive fertilizers and chemicals. It is also important to note that over 40% of AirAg's revenue is recurring Aftermarket sales sold through distributors. We were attracted to the continued growth opportunity In ARAG's existing geographic markets, the opportunity to invest and grow ARAX Technology in North America presents an attractive proposition beyond the existing core market growth, upon which we value the company.

Speaker 2

I'm very excited about the ARAG acquisition And the long term profitable growth opportunities in our business. We have a winning team who's focused On the customer and managing through unique market headwinds, while delivering solid profitability and cash flow. Turning to the outlook for the remainder of the year on Slide 12, we are narrowing our previously provided 2020's revenue guidance, 0% to 2% growth over record fiscal 2022 And narrowing our adjusted earnings guidance to $8.90 to $9.05 Looking specifically at the quarterly sales and earnings split on Slide 13, we expect 4th quarter sales to be the strongest of the year, increasing low to mid single digits over the prior year Q4 at the midpoint. This guidance includes approximately $20,000,000 to $30,000,000 of sales from the ARROG acquisition that we expect to close in late August. 4th quarter earnings are forecasted in the range of $2.34 to $2.49 Embedded in our forecast is strong profitability and cash conversion performance, Which is a result of Nordson's operational excellence, a clear competitive advantage created through the execution of the Ascent strategy by winning teams with an owner mindset.

Speaker 2

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

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

Speaker 4

Hey, good morning, everyone.

Speaker 3

Good morning, Jeff. Good morning, Jeff.

Speaker 4

So just really want to unpack the guidance change. I mean, I hear kind of Asia Pac and Electronics kind of weaker and then the ARIG impact. So maybe just unpack kind of What drives the lower end? And it seemed like the revenue was lighter in 3Q, but 4Q seems kind of in line, but Maybe just a little more help on the moving pieces. Thanks.

Speaker 3

Yes. Let me take a start with that, Jeff, if I could. So At the midpoint of the guide, it's roughly 3.5% growth. And so when you think about that for Q4, The acquisition should contribute about 6%. FX will be favorable about 2.5%.

Speaker 3

And from an organic standpoint, it's negative 5%, which is consistent with what we just delivered here in Q3. And then when you think about the range, appreciate on the ARRIG acquisition, the timing of the actual close will contribute to that. And the 1st 2 months post acquisition, we have that range there of 20 to 30. So that drives some Volatility, I would say, reflects expands the range on the revenue guidance a little bit there. The other is, as I would tell you, is The timing of some large system shipments, Q4 last year was our strongest quarter of the year, as you recall, And Q4 this year is forecasted to be the same.

Speaker 3

And so there are large system deliveries in there. And so Sometimes those get pushed in, pulled out, so that contributes to a little bit to the how wide the range is on revenue. And from an end market standpoint, Naga, you can comment.

Speaker 2

Yes. From an end market perspective, if you think about the 3 segments, IPS, we feel pretty good about where we are at in comparison to our long term as well as sequentially. We expect the system to continue to be at or above our long term growth rate. So that's what is embedded in the growth. Certainly, electronics and biopharma continue to get the levels they are today.

Speaker 2

We don't expect them to recover here in the Q4. They certainly are our expectation and we'll talk a little bit more about it later. In that, electronics, we expect sometime in middle of calendar 2024 is when we expect that to turn And biopharma, sometime in the Q1 of 2024 is when we anniversary. But the growth on biopharma is going to be, as I indicated in my initial comments, that is going to be we're going Akash is here as to when that fully recovers to its high single digits kind of growth rate. But nothing in biopharma long term secular trend have been impacted.

Speaker 2

So we fully expect we will get to it. It is just a matter of How long it takes for us to get back to it. And then if you think about our medical IS business, that is growing double digits. We fully expect that in the Q4, we continue to do so. Our polymer processing businesses are doing incredibly well And they are expected to do well in the next quarter.

Speaker 2

And we've got a couple of system businesses that are That have strong backlog, we expect to do well as well.

Speaker 4

Okay. And then just Some housekeeping questions on the Eric deal one. So I think you said high-30s EBITDA margins. Just wondering what the if you've done the purchase accounting, what the D and the A component is that would kind of get you to an Kind of ongoing operating margin for that business at least in year 1. And then just a clarification on the interest expense at 5.5 Is weighted for the total company or is that for the ARRIG deal?

Speaker 4

And if so, just kind of how to think about The interest costs associated with funding ARIK would be? Thanks.

Speaker 3

Yes. So let me take a stab at that, Jeff. First of all, on the purchase accounting, We'll hold off and I'll give some clear guidance on that when we do our full year 2024. And so right now, the guide with the amortization just is really looking at historical trends for acquisitions of this nature and a percentage of the purchase price, but we will firm that up. And when we issue the 2024 guide for Nordson, which will include purchase accounting assumptions on ARIK.

Speaker 3

On the interest expense, Given the current market conditions depending on where the bonds will price later this year, Our estimate currently is that total Nordson interest expense will be roughly 5% to 5.5% based on current market conditions and that's for our weighted basket of debt.

Speaker 4

And what would that have been kind of pre the bond offering or pre Hering?

Speaker 3

If you look from a year to date standpoint, we're slightly below 5% in terms of our weighted average interest cost.

Speaker 4

Okay. Appreciate it. I'll get back in queue.

Speaker 3

Thanks, Jeff.

Operator

Your next question comes from the line of Allison Poliniak of Wells Fargo. Your line is open.

Speaker 5

Hi, good morning.

Speaker 2

Good morning.

Speaker 1

I want to go back

Speaker 5

to your comments on China. Is there any way that I know there's some cyclical aspects to it, but you did talk to sort of maybe a potentially structural. Are you starting to see some, I would say, industry Minimizing that region, because you did talk about maybe the offsets in another regions for you. Just I don't know if there's any way to decide for what you're seeing in terms of cyclical versus structural over there at

Speaker 2

Yes. If you think about China itself, right, majority of our Electronic Businesses, if you look at our Electronic Business divisions, more than 75% of their revenues is in Asia, Right. And significant part of that is in China. So if you think about our China, Asia Pac impact, what you find is the majority of the China impact is due to Got it. And so that is more cyclical and we fully expect that it follows the cyclicality.

Speaker 2

What we do see is our major global customers. So if you think about our China Our China exposure is following large international global customers to China. And We do have some mid tier Chinese customers that we serve, but across the segments, mostly it is global customers. What we find with most of our global customers, there is some amount of rebalancing of supply chain going on, But we don't see anybody making significant moves out of China. It seems From our work with our customers in other regions, be it in North America or be it in Europe or in other parts of Asia, we do see customers building, Let's say, additional capacity or new capacity in different regions other than China.

Speaker 2

So that's why you begin to see in our regional numbers a nice growth in Americas and Nice growth in Europe and a decline in Asia Pac in some ways, a big part of it is China. Japan in general is doing really well for us. It's Smaller business, but it is doing well. So from what we can see, majority of the decline that we see today is Cyclicals related to electronics, we do see some large system misses, which are It could be up and down given in any quarter. So we

Speaker 3

don't see anything structurally

Speaker 2

changing, but we do Surely changing, but we do see investments happening in other places, if that makes sense.

Speaker 5

It does. That was helpful. Thanks. And then backlog still relatively strong. There's been a lot of supply chain rebalancing this year.

Speaker 2

Do you

Speaker 5

feel like a lot of Out of the backlog at this point and it's really just sort of backlog growth as we look forward or projects getting pushed out. Just any color on that backlog number would be great.

Speaker 2

Yes. I'll give you some color and Joe can help me with some additional detail. But the way to think about it is, our backlog is so historically high. And that historically high backlog is driven by a couple of system businesses and our medical interventional business where we get longer Term orders, which cannot go into our backlog, right? So if you think about majority, about 60%, 70% of our business, We fundamentally believe our backlogs have normalized to the pre pandemic levels.

Speaker 2

So you could think about supply chain normalizing in 60%, 70% of the businesses. These elevated log is mainly related to Large system businesses be our Polymer Processing business or our ICS business and our Metal IS business, which is sort of our where customers give us blanket orders. Joe, would you add anything more to that?

Speaker 3

No, I would just I would be just repeating what you said. I mean, if you think about our backlog of $1,000,000,000 It used to be balanced across all the divisions. It has migrated over the last, I would tell you, 6 months to maybe 9 months. And today, it's disproportionately heavy weighted heavily weighted on the large systems businesses and medical IS Where the remaining, which is the majority of our business, has normalized to historical levels.

Speaker 5

Great. Thank you.

Operator

Your next question comes from the line of Matt Summerville of D. A. Davidson. Your line is open. Yes,

Speaker 6

thanks. Couple of questions. As we kind of think about fiscal 2024 at a high level with The electronics piece seemingly turning in the second half, does that going to line up or coincide with Continued strength in T and I or is there a little bit of give and take here? And I basically have the same question For the medical side of the business, as biopharm begins to reaccelerate, does medical interventional begin to roll over or decelerate? And I guess at the end of the day, I'm trying to conclude whether or not we can see a sinking, if you will, Of organic growth between all four of those different pieces of the business such that we see pretty good things on the Nordstrom towards the latter part of next year.

Speaker 2

Yes. So let me I'll give you some color around It's and what our expectations are. And Joe, maybe you could add some numbers next to it to the extent that we can. So first of all, we're not Giving guidance for 2,040 yet. So that's the perspective I'd give you.

Speaker 2

But in terms of end market color, Matt, that's a really good question. Our expectations, let me start with electronics. My expectations are That our electronics cycle sort of rebounds calendars 2024, middle of calendar 2024. And at that time, our expectation is that you're going to see growth both In T and I and EPS, all along we have talked about T and I yielding The amplitude of the cycles, that's really what T and I is doing for us. It is not like T and I is not Cyclical, which is the cycle amplitudes are smaller in T and I when compared to EPS based on the businesses we based on the customers and the end applications we serve.

Speaker 2

So clearly, ATS from a historical perspective is muted, But as it comes back, you're going to see EPS bounce back nicely like the traditional way we've done. But T and I will benefit from it as well. So T and I is not going to benefit. So that is the electronic piece of it. If you think about our biopharma and medical, what you're going to find is medical has some very Strong double digit growth here for the last couple of quarters, mainly because as you're coming off of backlog and as you have Selective surgery all getting back to normal, what you find is this pretty big uptick in demand For medical interventional components.

Speaker 2

That certainly as we get into 2024 and later, You would expect that to start to go to its historical mid to high single digits growth rate. On the biopharma, we fundamentally believe that it has bottomed out and it's sort of settling in at this current levels. By the end of Q1, what you begin to see is, it will be anniversary, the growth rates that we have Enjoyed for 2 years, 2 full years of double digit growth in Fluid Components that anniversaries itself. But I would caution us in terms of how fast we get back to the high single digit growth on biopharma. We fundamentally believe we'll get there.

Speaker 2

What we are not sure right now is how long it takes For us to get to that high single digit growth rate, we believe nothing is impaired, but we're also cautious in terms of how fast the ramp happens. Hopefully, that gives you color on both those questions. Joe, anything else to add on the numbers?

Speaker 3

Yes. I would just say, Matt, when you think about it, the electronics, the EPS division is down like roughly 20%. When you study the T and I, given the diversity of that end market and those applications, while it may go through ups and That end market and those applications, while it may go through ups and downs and it's been growing the last several years, I wouldn't anticipate a scenario. We don't see a scenario where that's down 20% offsetting some recovery in EPS. And similarly, I would tell you if you go to the medical mix, the destocking going on there and the biopharma is Quite unique where it's down 30%, 40%.

Speaker 3

Whereas the medical interventional solution, yes, it's growing nice double digits Now, but if you go back during the pandemic, the COVID, that was only down, I would say 10%, maybe 15%. So it just doesn't have the magnitude of the swings that we're seeing in the current down cycle. So I wouldn't anticipate That to offset the recovery in those in 2024.

Speaker 2

I think, just in addition to that, I would say is, medical Fluid components flattens out, maybe picks up a little bit and our Intervention component grows high single digit is sort of how I would.

Speaker 6

Got it. That's helpful. And then just as a follow-up, can you maybe talk about it sounded like you were running 2 concurrent $1,000,000,000 M and A processes over the last few months. Maybe talk about what made you kind of halt or walk away from the other deal and why ARAG maybe One out over the other potential candidate?

Speaker 2

Yes. If you look at both the deals, we were excited Strategically for both those opportunities, they fit right smack dab in the middle of where we wanted to be. Highly differentiated Precision Technologies, very attractive growth rates in end markets we really like In places we really understand and do well and have a customer centric business model. So strategically, both of them were exactly where we wanted to be And we pursued both of them equally. Yes.

Speaker 2

And so what it really when we came down to Final due diligence, we exercise financial discipline. We've always talked about, look, We first go through the strategic criteria and if we like it, we go to the next step. And then when we financially Makes sense for the company, has the returns we'd like, then we do it. So what I'm telling you is that On ARAG, we hit both of them. In the other deal, in the final analysis, we couldn't get there and we were financially disciplined and so we walked away

Operator

Go ahead, Naga.

Speaker 2

Yes. One thing I would add, as we were talking about the end markets, Matt, in your question, The end market challenges and the upsides and we talk about the 2 acquisitions, I would kind of step back And think about this quarter and if you think about this quarter, what Nordson's team really did was Have an operational excellence that kind of came through in the results that really showed there were some challenges on the top line, But the team did an incredible job and that showed through in the bottom line, right? And one could look at it and say that's operational excellence and you could simply walk away. But what from my vantage point, what really shines through is the work we've been doing inside the company around our SENSE strategy And the competitive advantage we're building. And this competitive advantage of Ascend strategy, really what it is, is You've got strong winning teams with an incredible owner mindset that are executing the NBS Next Growth framework and delivering results, right?

Speaker 2

That's the competitive advantage we're building and that shows up in 3 different ways. 1, it shows up in divisions When end market conditions are challenged, the team really takes our own mindset and figures out What kind of cost actions we need to take and deliver decremental margins that we've talked about in the 55%. Then you have a set of divisions That has strong market opportunities and really fully participating in that growth through some incredible customer service And delivering really strong incremental margins, right? And then on the third side, The company is not sitting idle, certainly looking at what are the growth opportunities through acquisitions. And so the team really The 3 different things and end of the day that's what we're talking about here.

Speaker 2

That's in my mind is what is coming through in our results in the quarter.

Operator

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

Speaker 7

Thanks. Good morning, Naga, Joe, Laura. I was curious about the polymer markets, If there's any sort of interesting structural dynamics, what you're seeing in terms of A typical timing around a recap cycle or market penetration momentum, just curious for a higher level view Of that

Speaker 2

market? What we're seeing is this is a set of businesses that we've gone through, Some pretty good work around setting the business up for taking advantage of the growth opportunities. Really The biggest growth opportunity that is out there that this team is pursuing really is the recycling. And what we find is Given this whole issue around plastic usage reduction, and I don't know whether I go as far as to say plastic ban, But in certain parts of the world, those words get thrown around. But we do find Incredible demand for recycling.

Speaker 2

And we have some unique technology in our BKG Business in Germany that allows us to serve that particular market and I would highlight that as in Pretty strong secular trend that is going

Speaker 3

on.

Speaker 2

And that business has some pretty strong backlog going into next year,

Speaker 8

Yes. Okay.

Speaker 3

Chris, I would add when you think about that Polymer Processing, you go back in time and remember the divestiture of the Exeloid business. The divestiture of that product line, I would tell you, Resulted in upgrading the quality and the degree of differentiation of the product lines that remained in that polymer processing division. And so I think that's what you see also flowing through some of these numbers.

Speaker 7

Makes sense. Thanks. And just going back to Jeff's Question on the D and A for ARAG. You referenced the kind of rule of thumb metric informing the 4Q guide in terms of percentage of sales D and A. Just curious if that rule of thumb sort of correlates around 2.5%, 3% of Purchase price since you kind of put it in generic terms and also on ARAG, just the 40% through distribution, I know it's viewed as recurring, but stocking comes into question, particularly on the heels of a couple of year of global Supply chain volatility.

Speaker 7

So just curious how you view the inventory levels, the channel kind of Balances and equanimity across that stock and flow sort of business.

Speaker 2

So maybe help me, Joe, you want to take the D and A question first and then I can maybe make a comment around the Inventory. Yes.

Speaker 3

Yes. The answer to your question is, yes, that typical 2.5 of purchase price Is our starting point in terms of the annual amortization.

Speaker 2

Thank you. And in terms of inventory, remember the recurring revenue here are parts, they're not significant systems or Big units that are sitting in our distributor shelves that takes a little bit longer time. These are Small sprayers and that sort of component, we're still We still don't own the business. Obviously, we don't have a lot of detailed information around where they're at. But my expectation would be that that is not a significant issue for us in that business.

Speaker 7

Great. Thanks for the extra color.

Operator

Your next question comes from the line of Mike Halloran of Baird. Your line is open.

Speaker 8

Hey, good morning, everybody. This is Paz on for Mike. Hoping you could provide a little bit more color on the order entry comment. It looks like orders were down sequentially. You talked about pressure in China and the Asia Pacific region.

Speaker 8

And then obviously some of the businesses are Can you maybe talk about some of the puts and takes that kind of got you to steady? It just sounded like maybe the commentary was skewed a little bit more on to the negative side. And if you could just provide a little bit of color around order entry so far through August, if you could, that would be great.

Speaker 2

All right. Let me start with where we are at in terms of the businesses, which is our electronics business and our Fluid Components Biopharma business. Both of those Order entry has bottomed out is the best way to put it. So where they're currently performing, they've come to a place We feel good about that it is not any further declines. We've seen as the quarter progressed, we could start to see that this was at the bottom.

Speaker 2

In terms of our businesses that are performing incredibly well and contributed to the growth, Medical Interventional Business and our Polymer Solutions business on the other end of the spectrum have done well and the order entry remains pretty robust. And when you have a group of businesses sort of in the middle, some a little bit high, some a little bit low, In all of those cases, what we truly find is the order entry have sequentially improved. They have improved Through the quarters and that's kind of where we would say the order entry has not significantly picked up or significantly declined. And that's really how we come to saying that it is about steady.

Speaker 8

Got it. That's super helpful. And then following up on the question, differentiating between P and I And the dispense side within the electronics business. Naga, you mentioned that the amplitude of the cycles is different between T and I. But can you maybe talk about the length?

Speaker 8

I know for instance, we kind of refer to a typical 4 to 5 quarter slowdown in dispense. When the piper comes for the T and I business, is it typical to think of the length of the cycle and slowdown In similar terms, or should we be thinking about them differently as well?

Speaker 2

No. From what we know and based on our experience, No, it's about similar. Is there an offset? There could be a slight offset, but nothing significant. We don't believe so.

Speaker 8

Understood. All right. Thank you. I'll pass it on.

Operator

Thank you. There are no further questions at this time. I will now turn the call back to Naga for closing remarks.

Speaker 2

Our strong operating performance Reflects the strength of our differentiated precision technology, customer centric model and diversified end markets. Again, I want to thank Nordson employees for their commitment, which makes these results possible. The continued deployment of Ascent's strategy will position us well for long term growth. Thank you for your time and attention on today's call. Have a great day.

Operator

This concludes today's conference call. You may now disconnect.

Remove Ads
Earnings Conference Call
Nordson Q3 2023
00:00 / 00:00
Remove Ads