Ladies and gentlemen, good morning. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to the Nordson Corporation First Quarter Fiscal 2023 Conference Call. [Operator Instructions] Thank you. And I will now turn the conference over to Lara Mahoney. You may begin.

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 Kelley, Executive Vice President and CFO. We welcome you to our conference call today, Tuesday, February 21, to report Nordson's fiscal 2023 first quarter results. You can find both our press release as well as our webcast slide presentation that we will refer to during today's call on our website at www.nordson.com/investors. This conference call is being broadcast live on our investor website and will be available there for 14 days. There will be a telephone replay of the conference call available until Tuesday, February 28, 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. These statements may involve a number of risks, uncertainties and other factors as discussed in the company's filings with Securities and Exchange Commission that could cause actual results to differ. Moving to today's agenda on Slide 3, Naga will discuss the first quarter highlights. He will then turn the call over to Joe review sales and earnings performance for the total company and the three business segments. Joe will also discuss the balance sheet and cash flow. Naga will then share a high-level commentary about our earnings performance. He will conclude with an update on the fiscal 2023 full year and second quarter 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.

Good morning, everyone. Thank you for joining Nordson's fiscal 2023 first quarter conference call. I want to thank our team for delivering another strong first quarter performance. There were a lot of bright spots in this quarter. To begin, it was the first quarter of contribution from our CyberOptics acquisition. The integration of the business is going well, and we are pleased with energy and engagement of our CyberOptics team. Test and inspection is a long-term growth focus for Nordson and we are very excited about the differentiated optical precision technology that CyberOptics adds to our portfolio. Next, we had a solid regional performance in the Americas and Europe, which collectively delivered 9% organic growth. This was partially offset by declines in Asia Pacific which saw weakness in China relating not only to the Lunar New Year shutdown, but also labor shortages due to the unfortunate spread of COVID-19 in the region. Once again, the diversification of our business and our steadfast dedication to the needs of our customers ensures we deliver results. Finally, I remain pleased by the ongoing deployment of the NBS Next growth framework. Each division is gaining momentum towards achieving top-tier growth, quality and on-time delivery performance. In this dynamic environment, NBS Next ensures we are focused on our greatest opportunities for profitable growth and it also clarifies where we can simplify so we can better focus resources on those opportunities. In a few moments, I will speak more about the business, and what we are seeing in our end markets, but first, I'll turn the call over to Joe to provide a detailed perspective on our financial results for the quarter.

Thank you, Naga, and good morning to everyone. On Slide number 5, you'll see first quarter fiscal 2023 sales were $610 million comparable to the prior year's first quarter sales of $609 million. The increase was primarily related to 1% organic growth plus the CyberOptics acquisition, offset by unfavorable currency impact of 4%. The organic growth, as Naga referenced, was driven by strong demand in Europe and the Americas, offset by weakness in Asia Pacific, primarily China. Gross profit for the first quarter of fiscal 2023 totaled $329 million. Excluding the amortization of acquired inventory step-up, gross profit totaled $333 million or 55% of sales, a 3% or 150 basis point decrease compared to the $342 million or 56% of sales in the prior year first quarter. The team continues to actively manage the price/cost dynamic in these inflationary periods in addition to unfavorable currency impacts. Similar to the fourth quarter of 2022, the impact of passing along the significant year-over-year cost inflation while slightly positive in gross profit dollars squeeze margins approximately 100 basis points. Additionally, the sales mix in the quarter was slightly unfavorable, with biopharma, fluid dispense and product assembly in Asia being down offset by growth in plastics processing and medical interventional solutions. On a sequential basis, comparing first quarter to fourth quarter 2022, adjusted gross margins improved approximately 150 basis points. Operating profit totaled $144 million in the quarter. During the quarter, we reported onetime transaction fees, inventory step-up and other nonrecurring items associated with the CyberOptics acquisition totaling $10 million. Adjusted operating profit excluding these nonrecurring items, was $155 million in the quarter or 25% of sales, 2% below the prior year adjusted operating profit of $157 million. Foreign currency translation negatively impacted operating profit 6%, offset by 4% constant currency operating profit growth.…

Thanks, Joe. I want to thank our teams or continuing to respond to the needs of our customers and deliver the strong first quarter performance. I'm very thankful that our operations in China are returning to normal as employees have returned to work following the spread of COVID-19 in the region. We will always prioritize the health and safety of our employees and we are so glad that they are well. Throughout the first quarter, I had many opportunities to engage with our employees and travel to sites in North America and Europe. I'm very pleased with the ongoing deployment of NBS Next, which continues to help us prioritize our greatest opportunities for profitable growth. In this dynamic environment, the accelerated deployment of this growth framework will guide our decisions on where to focus and where to simplify. Going into fiscal 2023, we knew we would be dealing with a dynamic environment as we have limited visibility into the full year. Turning to Slide 11. I'd like to spend a few minutes sharing what we are now seeing in our end markets. In the Industrial Precision Solutions segment, we are seeing increasing demand in automotive and steady demand in industrials and consumer nondurable product lines. Packaging and product assembly end markets continued to perform well in Americas and Europe, and there is softness in China. Within the Advanced Technology Solutions segment, we have started to see a softening of semiconductor orders over the past 45 days. Electronics is known for being a cyclical end market, and we benefited from the boom in investments over the past two years. Now our customers are starting to reevaluate near-term capital spending, which is having an impact on orders for electronic dispense product lines. In some cases, it's been a matter of pushing out…

[Operator Instructions] And we will take our first question from Mike Halloran with Baird. Your line is open.

Hi, good morning, everyone.

Good morning.

Good morning.

So Naga, obviously, a lot of moving pieces here. Maybe help understand the change in 2Q and call it, a little bit more stability in how you're thinking about the back half of the year here. It seems like the outsized 2Q that we were -- you were talking about in the last quarter has been pushed in the back half. So maybe talk a little bit about the backlog, why you think it's sustainable risk in cancellations, what kind of seasonality you're assuming front half versus back half versus a normal year? And just any of the puts and takes to help understand those moving pieces a little bit better?

Yes. Mike, what I'll do is I'll take you through segment by segment, the end market trends. And then, Joe, if you could sort of bridge some of the questions that Mike has, will be great. So first and foremost, in the last 45 days what we have really seen, orders have fallen off approximately 9% versus the prior run rates. And portions of this could be attributed to Chinese New Year, some of it could be are softening in the electronic process solutions business, which essentially does fluid dispensing for semiconductor and back-end electronics. What you also are seeing is that in these end markets, in addition to softer orders, we have had customer requested pushouts of order delivery, right? So that's -- those are the two things that are happening. Broadly, let's go segment by segment. If you look at our industrial precision solutions, we're running at or above our long-term growth rates, increasing demand in automotive, steady demand in industrials and consumer nondurable product lines, packaging and product assembly, particularly pretty -- doing fairly well in Americas and Europe with some softness in China. So IPS in general, we feel really good about where the orders are, where the backlog is and how we're thinking about Q2 and the rest of the year. If you come to Advanced Technologies, this is below our long-term growth rates. One thing to remind you is that the growth rates we are looking for in this segment, particularly, because we have diversified the volatility in the segment is suddenly muted than what we have seen the past. So a couple of things happening here, as I said, softening semiconductor orders over the past 45 days. Electronics traditionally being cyclical. We benefited in the first two years. And what we are now…

Yes. Maybe if I could reconcile those comments to your questions around the guidance and the change in the guidance. So if you think about our revenue guidance at the midpoint, we brought it down by about $65 million from the prior guidance. The majority of that decrease is what Naga referenced and what we're seeing in a change in orders around the semiconductor and back-end electronics market. The remainder is the delay in the timing of the biopharma recovery and I would tell you also a little bit of the softness that we saw here in Q1 in China. From a timing perspective on the guidance, Mike, your question there, the timing is adjusted, not just for the order entry, but it's also given customer the pushouts of their delivery dates. And we're seeing that in electronic end markets. These are large system orders where we have prepayments from the customers. But we're seeing it in electronics, a little bit in the industrial coatings and in the plastics end markets where they're pushing out Q2 delivery dates into the back half. And again, we have prepayments on these, and so there's limited risk of cancellation. And then as it relates to your comments, as we think about the guidance in the back half versus Q2, when you think about the back half, first of all, last year's back half was very, very strong. As you know, for Nordson, a record Q3, followed by record Q4. And so the guidance, when you look at the back half, FX is going to become favorable on a year-over-year basis if we maintain the current exchange rates. So that would be would be favorable about 2%, acquisitions about 3%. And so it basically implies at the midpoint, the organic would be down about 2% in the back half based on comments Naga just made.

That's a lot of great color. I really appreciate it. So follow-up then on the fluid component side. What do you guys think the destocking is going to be behind you and maybe more normal order patterns start coming through, at least relative to underlying demand. And should we think about this as the right run rate for the margins of that segment until that mix is more balanced out versus normal?

Let me just comment on the order rates and, Joe, you can pick up on the margin for the segment. Order rates, what we are seeing is the customer order patterns have stabilized and might there be some green shoots in terms of a recovery of order rates from these customers. Long term, 7% to 8%, high single digits is how you want to think about this business. I'd love tell you that I know exactly when this is going to come back. From what we can see is we feel good about the stability in the orders and a slight pickup in orders that we're beginning to see if you push me to give an exact date, it's going to be difficult. But definitely, this is a recovery that has already begun is probably the best way to put it.

Mike, on the margins, the segment, as you know, in '21 was running at about 31%, '22 at about 32%. So this 26 that we did in Q1 is not the new normal, we would anticipate to recover back to the historical run rate as we move forward in '23. And the logic there is this initial drop off and then the comment I made on inefficiencies of -- within the individual factories as they adjust for this volume drop and adjust their variable cost that efficiency will improve as we move forward.

Great. Really helpful. Thank you so much.

And we will take our next question from Allison Poliniak with Wells Fargo. Your line is open.

Hi, good morning.

Good morning, Alice.

Just turning to IPS, it seems pretty stable. Asia Pacific was a headwind this quarter. Do we assume that headwind starts to mitigate here for Asia Pacific where that growth may be is a slight improvement from quarter-to-quarter. Just trying to think through that between 2Q and 3Q? Thanks.

Yes. Allison, I would tell you, as you know, our IPS business has a large China presence and Chinese New Year fell into Q2 last year versus in Q1 this year, so you will see sequential improvement in that segment, just given that. And then also within that business, I referenced the Industrial Coatings division as well as the Plastics division where there are large systems businesses. Those businesses are seeing some of those Q2 push-outs in the back half. And again, prepayments for all of those systems locked in. It's predominantly our customers, their projects are being delayed. Their projects are still taking place, but they're being delayed for other reasons, and they're asking those businesses to delay shipment in the back half, so sequential improvement and then sequential improvement first half into second half.

Got it, thanks. And then Naga, you had talked about NBS Next in the innovation side. How are you thinking about that investment this year? Are you starting to tighten the lens a bit more? Are we looking for an increase there as you look to position the company coming out of this, just any thoughts there?

Yes, I think - the way to think about it is our NBS Next deployment is accelerating, gaining momentum within the company. And it is becoming more holistic than it was maybe two years ago. So what does that all mean? That means that our businesses are really sharp on what are the best opportunities, division-by-division, not the entire company in total, but division-by-division. And staying invested in innovation in our core strong businesses. That is a top priority for us. And we are also accelerating capital investments in businesses where we have pretty strong growth. For example, our interventional business, very recently, we have signed off on a significant capital to expand product lines, right? So I feel really good about where we are. I think it is really important to remember, not only are we staying invested in our core businesses where we have strong positions. But we're also investing in businesses that are - have a growth potential for us. In some cases, where the order entry has declined, we are adjusting cost more from a variable perspective. But even in those cases, we stay invested in our innovation in our electronic businesses, because that's - that is the source of our differentiation. Our customers count on us. These are not three-month kind of thinking process. This is multiyear because in our electronics business, most of customers long- term, we are going to see significant capital investments to expand capacity for semiconductor in North America and in Europe. And we need to stay relevant in those, continue to participate in those and fully leverage our technologies.

Great, thank you.

We'll take our next question from Matt Summerville with D.A. Davidson. Your line is open.

Thanks. Is there any way that you guys can sort of parse out and try and quantify what the China-related impact was as it, pertain to COVID and the associated labor shortages? How much may be pushed at the end of the quarter due to the New Year - and do you think all of that gets recaptured in Q2 or is that also now become part of this just push out into the latter half of year? And then I have a quick follow-up.

So, let me take a stab at quantifying that. I would tell you, when we study the timing of the Chinese New Year is probably just $15 million to $20 million, depending on what quarter that falls into. And so that's consistent on our full year basis and has no impact. The COVID issues that they experienced right before the New Year and the lockdown at some of customer and supply chain challenges. I would characterize that as closer to about a $10 million disruption in the quarter. And I don't know that, that recovers in the full year. And so that was what I would tell you, part of our reduction in full year guidance was that about $10 million miss in Q1 in China, anticipating that, that doesn't recover itself within the year or make itself up in the year.

Got it. And then maybe can you just comment on CyberOptics and what you're sort of expecting, if I recollect annualized revenues around the time you announced the acquisition were a little more than $100 million. You look at the contribution in Q1, clearly, nowhere near that run rate. So can you talk about maybe what you're seeing in that business and what a reasonable kind of year one, revenue in accretion outlook might be for that business? Thank you.

Matt, thank you for the question and follow-up. And on CyberOptics, we're incredibly pleased with the team, incredibly pleased with the technology that we are adding to company, incredibly pleased with the long-term prospects of this optical inspection capability positions the company for long-term in a really good way. In the short term, however, as you've noticed that what we see really is the memory market, which is sort of one of those areas where they're really strong in, is not near-term capital investments have been delayed. And because of that, they have not at the same run rate as what we had expected, right. And Joe, if you could spend a little time talking - that would helpful?

Yes, so I mean, as we highlighted in the first quarter, $17 million of sales. I can tell you - as a favorable - contributed favorably to our operating profit. And from an EBITDA standpoint, it's running in the mid-teens. And so, when you think about our forecast going forward, we have that contributing on the full year, approximately 3% to our year-over-year sales growth and to be contributing to operating profit growth on an adjusted basis.

Understood, thank you guys.

Yep.

[Operator Instructions] And we will take our next question from Saree Boroditsky with Jefferies. Your line is open.

Thanks for taking my question. Just kind of sticking on the electronics for a second, there's been some concern, I think, from investors on this space for a while. So was the softening in semi orders a surprise to you? And how have conversations with customers changed?

In terms of - is this a surprise? Certainly, the last 45 days, our order dropped off or it changed. It's not surprising, but more in line with what you're, hearing our customers sort of report on the outside. So if you think about semiconductor customers or memory customers, all of them very bullish about their investments in the long-term, but certainly reevaluating what they spend in the short-term as they manage through their P&L. So in line with what you would expect in the marketplace. But if you think about in the longer term, and if you compare with our volatility in the past, this is certainly muted. And what we are hearing from them is very bullish about the longer term, 24.5. Certainly, in the short-term, they're reevaluating spend. And is sort of how I would think about it, is that a surprise? Yes, the order rate decline in the 45 days was certainly surprised. But what is also strong is T&I excluding Optical, it is pretty strong and strong and continues to remain has a very strong backlog, and we think we'll do really well there. So I think this diversification and expansion into T&I has certainly reduced the company's historical volatility or muted the cyclicality. Saree, did I answer you?

Yes, thanks for that. And then you talked about, obviously, the push out of systems in the second half in industrial coatings. Could you provide more color on why these systems are being pushed out? And then generally, does your guidance assume any additional push outs across the segments and into 2024?

Let me take sort of what we are seeing with our customers and why the push outs. And then, Joe, if you have any additional color you can add to that. One of the things that I would tell you is, think, about our systems as large subsystems that go in a part of a larger manufacturing line. So typically, that's what we do. We play a - so when you have a large construction project of it, we don't hear any of our customers saying, these capital expansions are going away. That's not what we're hearing. What we are hearing is that in the construction phase of it, they do have other vendors that they are expecting delivery of systems, subsystems from are delayed and hence don't need this delivery in this quarter, right? And so it has been pushed to the second half. And the reason we are confident about this is just the prepayments. So all of these large system orders come with repayments and our prepayment increases are in line with our backlog increases. And so we feel pretty good about it. And that's -- hopefully, that gives you what you're looking for.

Yes. And Saree, if I could add to your question around timing in 2023, 2024, -- it's -- when you look at these large systems businesses in the industrial coating space and the test inspection space and the plastic space, those businesses, combined with our Medical Interventional Solutions, those are the businesses that comprise over 70% of our backlog. And so there are orders already on the books going out into 2024 for those divisions. And so when you think about our backlog and our confidence, it's not so much just '23, but it actually goes into '24 for that subset of the Nordson businesses. And so that means that, that supports, I'd say, less than half of our revenue. And so greater than half of our revenue is supported by only 30% of our backlog -- And so it's that portion of the business where our backlog only price is less than one quarter of sales. And so there is where we're more subject to changing order patterns and we need book and ship business in the quarter for that portion of the business.

One thing I would also just add to that is in these businesses where we have book and ship, our recurring revenues are more than 50% of our revenue. So -- and in those businesses, it's in some cases, a little higher. So our confidence level in these businesses more comes down to the fact that our customer confidence level on the supply chain has improved, and I think that's the good news. The good news is in 50% of our businesses, the customer has begins to believe that supply chain problems have gone away. And hence, their order entry are sort of in line with what you would expect for their real demand is. So that -- for me, that gives me pretty good confidence as well.

Great. Thanks for taking my questions.

[Operator Instructions] We will take our next question from Walter Liptak with Seaport. Your line is open.

Hi, thanks. Good morning. I wanted to ask about the Industrial Precision segment. And just see if I can get a little bit more color on orders in the Americas and in Europe. And specifically about what's going well. I think you called out automotive, industrial and packaging. And I wonder if you could just talk about the last 45 days there and just the tone of the business, how you're feeling about it.

Yes, Walt, thanks for the question. Yes. In that that business, segment I think about it as we see the steady growth in line, as Naga mentioned with our long-term growth rates. And so there, what's driving it is, as we referenced, Americas and Europe, particularly in the quarter. But it's our consumer non-durable has been pretty steady in line growth for us. There, you'll recall is where we have several of our new product launches that were contributed to last year's performance and continue to gain traction. It's also within that, the largest factory within that segment was a pilot site for our NBS next. And so when you think about the traction and the improvement that they're having there with their on-time delivery, it's contributing to that growth as well. So that -- and then if you go to the coating side, as Naga mentioned, we're seeing a pickup, I would tell you, in automotive demand for the Industrial Coatings business there.

Okay. Good. Yes. So just to be clear, there was the steadiness that you were speaking of that was signed throughout the quarter and not just on average, but including in that 45-day period where other parts of the business soften.

Yes. As we said, it's -- the term, as I would say, a multi-speed economy. You have some that are going down, some that are steady and some of that are growing nicely. And I would lump that business into the steady growth in line with our long-term expectations.

Okay. Great. Great. And then just as a follow-up in IPS, how are you feeling about price cost? It sounds like you were a little bit positive this quarter, how are you feeling about the rest of the year?

Yes. So price cost, again, as we communicated in Q4 and here in Q1, it is net favorable from a gross margin dollar standpoint, but it is dilutive from a gross margin percent standpoint. But we have been successful in passing through the inflation but not passing through the inflation plus the 55% gross margin. So in diluted -- it's diluted our consolidated Nordson margins by about 100 basis points. And I would tell you this division has been successful and they incurred a significant inflation. And so passing that through this division clearly has, I would say, led the way and been successful in that pricing initiative.

Okay. That sounds great. Thank you.

And we will take our next question from Jeff Hammond with KeyBanc. Your line is open.

Hi, good morning.

Good morning, Jeff.

So you guys gave a lot of great color on kind of where the softness is. But I'm just wondering if you can kind of maybe parse out the split between -- it seems like IPS, no change. And then maybe the split between medical and ATS in terms of like the cut? Is it 50-50? Is it heavier one way or the other?

Yes. I would tell you, as I -- if you think about the change in our guidance, and so we dropped the midpoint on revenue, $65 million, the majority of that is simply in response to the semiconductor, what we're seeing in that market. And so -- from a segment perspective, the reduction is greater in ATS than it is in the MFS segment.

Okay. That's really helpful then. And then just -- what are you hearing in terms of how long this medical destocking will take? And kind of what have you built in there?

I think the way to think about this -- and I'd love to be able to give you a more precise answer on when this is going to come back. What I can tell you is the declines have stabilized, and we are beginning to see some recovery in order entry from big biopharma customers. And that is -- that's based on what we see today. I would hate to give you any more detail because it will be more speculation from my perspective. I feel really good about our loan because we feel this is going to be a strong high single-digit growth company. This is -- we have no -- our long-term prospects on secular growth drives of single-use components in this space still holds good. We expect a further more increasing use and less increasing use, but not answering your question on when exactly we will see this fully normalized. I sure hope it will be sooner than later, but -- what I -- what we are beginning to see and we feel confident about is that stabilized beginning to see recovery.

That's great. And just --

I mean, that was part of the change in the guidance. If you think about our Q2 guide before, we thought the recovery might come in Q2, it appears to be delayed about in our guidance a quarter.

Okay. That's great. Just last one on CyberOptics. I don't know if there was seasonality, I don't recall it from their filings is, is the 1Q kind of revenue contribution run rate the right way to think about the go forward? Or is there some seasonal step up? Or -- and maybe just -- I don't know, it seems like that business is softer. Is that business going to be down year-on-year?

Yes, I would I would -- I guess comment, I wouldn't take the Q1 run rate and say annualize that. I think Q1 for that business like many businesses, is light. Again, our Q1 includes Thanksgiving. Our Q1 includes Christmas and our Q1 included the Chinese New Year. So I would think that their Q1 is not indicative of their quarterly run rate but probably $15 million to $20 million -- or 15% to 20% light.

Yes. On a year-on-year basis, yes, they would be lighter, but it's not I wouldn't take our first quarter and run with that.

Okay. Thanks so much.

Thank you.

Thank you.

And there are no further questions at this time. So I will now turn the call back to Naga for additional and closing remarks.

Our first quarter performance was solid, and it reflects the strength of our differentiated position technology, customer-centric business model and diversified geographic and product end markets. While we are seeing some change in order patterns, 2023 remains a strong year with our guidance reflecting our ability to sustain our record 2022 performance. We will remain financially prudent in this environment. We'll adopt a balanced approach that remains invested in innovation and differentiated service experience for our customers in strong core businesses. Thank you for your time and attention on today's call. Have a great day.

And ladies and gentlemen, this concludes today's conference call. We thank you for your participation. You may now disconnect.