Hello, 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. [Operator Instructions] I will now turn the conference over to Lara Mahoney. Please go ahead.

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, August 22 to report Nordson's fiscal 2023 third 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, 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. These statements may involve a number of risks, uncertainties and other factors as discussed in the company's filings with the Securities and Exchange Commission that could cause actual results to differ. Moving to today's agenda on Slide 3, Naga will discuss third quarter highlights. He will then turn the call over to Joe to 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 enterprise performance. He will conclude with an update on the fiscal 2023 full-year and fourth 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 third quarter 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 who has actively controlled cost in divisions where it was necessary and leverage the NBS Next 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 third quarter EPS guidance. Going into the third quarter, we expected to be pressured by the ongoing weakness in our electronics and biopharma product lines. We understand the macro factors impacting these end markets and we have 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. 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. Regionally, 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 ARAG 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.

Thank you, Naga, and good morning to everyone. On Slide number 5, you'll see third quarter fiscal 2023 sales were $649 million, a decrease of 2% compared to the prior year's third quarter sales of $662 million. 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 third quarter of fiscal 2023 totaled $360 million. Excluding severance cost, gross profit totaled $362 million or 56% of sales, which is comparable to the prior year third quarter. SG&A in the third quarter was elevated to a $189 million above the $181 million we have been averaging for the last six quarters. Third quarter SG&A was impacted by notable non-recurring items that I'd like to highlight. Our teams advanced two separate $1 billion global acquisition targets through the comprehensive due diligence process all the way to the final stages. As a result of these two significant and strategic projects, we incurred $7 million in non-recurring cost from third-party service providers. We ultimately chose to move forward only with ARAG, which included an additional $1 million for the fairness opinion. In total, we incurred $8 million in non-recurring cost for acquisition-related activity in the third quarter. Operating profit, excluding these non-recurring items, was $181 million in the quarter or 28% of sales, 4% below the prior year adjusted operating profit of $188 million. 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 Next framework. As we execute the Ascend strategy and scale through strategic acquisitions, EBITDA remains the key…

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 and electronic 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 first quarter 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. Moving onto 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 will begin to turn in the second half of the calendar 2024. 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 NBS Next growth framework. In fact, the EPS division exceeded its targeted decremental margins during this low-volume period. We also continued 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. Simultaneously, Nordson's business model…

Thank you. [Operator Instructions] One moment for your first question. Your first question comes from the line of Jeff Hammond of KeyBanc Capital Markets. Your line is open.

Hey. Good morning, everyone.

Good morning, Jeff.

Good morning, Jeff.

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 ARAG 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.

Yes. So 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% 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, I appreciate on the ARAG acquisition, the timing of the actual close will contribute to that. And the first two months post-acquisition, we have that range there of $20 million (ph) to $30 million. So that drive some volatility, I would say, or flex 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. And so, there are large system deliveries in there. And so, sometimes those get pushed and pulled out, so that contributes to little bit to the how wide the range is on revenue. And from an end-market standpoint, Naga, you can comment.

Yeah. From an end-market perspective, if you think about the three segments, IPS, we feel pretty good about where we are at in comparison to our long-term, as well as sequentially. We expect this system to continue to be at or above our long-term growth rate. So that's what is embedded in the growth. Suddenly, electronics and biopharma continuing at the levels they are today, we don't expect them to recover here in the fourth quarter. 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 first quarter 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 to be cautious here as to when that fully recovers to its high single-digits kind of growth rate. But nothing in biopharma long-term secular trends have been impacted. 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 fourth quarter, we continue to do so. Our polymer processing businesses are doing incredibly well, and they are expected to do well in the next quarter. And we've got a couple of system businesses that are -- that have strong backlog we expect to do well as well.

Okay. And then just some housekeeping questions on the ARAG deal one. So I think you said high-30s EBITDA margins. Just wondering what -- if you've done the purchase accounting, what the D&A component is that would kind of get you to -- to an kind of ongoing operating margin for that business in -- at least in year-one. And then just a clarification on the interest expense at 5.5% is weighted for the total company, or is that for the ARAG deal and if so, just kind of how to think about the interest cost associated with funding ARAG would be? Thanks.

Yeah. 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, when we issue the 2024 guide for Nordson, which will include purchase accounting assumptions on ARAG. 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.

And what would -- what would that have been kind of pre the bond offering, or pre-ARAG?

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

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

Thanks, Jeff.

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

Hi. Good morning.

Good morning.

Good morning.

I want to go back to your comments on China. Is there any way that -- I know there are some cyclical aspects to it, but you did talk to sort of maybe potentially structural. Are you starting to see some, I would say, industry minimizing that region because you did talk about maybe the offsets in other regions for you? Just -- I don't know if there's any way to decide or what you're seeing in terms of the cyclical versus structural over there at this point.

Yeah. If you think about China itself, right, a 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 electronics. And so, that is more cyclical and we fully expect that it follows the cyclicality. What we -- what we do see is our major global customers. So if you think about our China exposure, 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. So that's why you begin to see in our regional numbers a nice growth in Americas and a nice growth in Europe and a decline in Asia Pac. Asia Pac, in some ways, a big part of it is China. Japan in general is doing really well for us. It's a smaller business, but it is doing well. So, from what we can see, the majority of the decline that we see today is cyclical related to electronics. We do see some large system misses which are and could be up and down given in any quarter. So, we don't see anything structurally changing, but we do see investments happening in other places, if that makes sense.

It does. That was helpful, thanks. And then, backlog is still relatively strong. There's been a lot of supply chain rebalancing this year. Do you feel like a lot of that's out of the backlog at this point and it's really just sort of backlog growth as we look forward or projects being pushed out? Just any color on that backlog number would be great.

Yeah. I'll give you some color and Joe can help me with some additional detail, but the way to think about is our backlog is so historically high. And that historically high backlog is driven by couple of system businesses and our medical interventional business, where we get longer-term orders, which kind of 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. So, you can think about supply chain normalizing in 60%, 70% of the businesses, these elevated targets mainly related to large system businesses, be it our polymer processing business or our ICS business and our medical IS business, which is sort of our -- where customers give us blanket orders. Joe, would you add anything more to that?

No. I would just -- I would be just repeating what you said. I mean if you think about our backlog worth of $1 billion, it used to be balanced across all the divisions. It has migrated over the last, I would tell you six months, maybe nine 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.

Great. Thank you.

Your next question comes from the line of Matt Summerville of DA Davidson. Your line is open.

Yeah, thanks. Couple of questions. If we kind of think about fiscal '24 at a high level with the electronics piece seemingly turning in the second half, does that -- is that going to line up or coincide with a continued strength in T&I, or is there a little bit of give and take here? And I basically has the same question for the medical side of the business. As biopharma begins to reaccelerate, does medical interventional begin to rollover or decelerate? And I guess at the end of the day, I'm trying to conclude whether or not we can see a thinking, if you will, of organic growth between all four of those different pieces of the business, such that we see pretty good things out of Nordson towards the latter part of next year.

Yeah. So let me -- I'll give you some color around the end markets and what our expectations are, and Joe, maybe you could add some numbers next to with -- to the extent that we can. So first of all, we're not giving guidance for '24 yet. So that's the perspective I'd give you, but in terms of end-market color, Matt, that's a really good question. Our expectations in -- let me start with electronics. My expectations are that our electronic cycle sort of rebounds calendar 2024 -- middle of calendar 2024. And at that time, our expectation is that you're going to see growth both in T&I and EPS. All along, we've talked about T&I yielding the amplitude of the cycles. That's really what T&I is doing for us. It is not -- it is not like T&I is not cyclical, it's just the cycle amplitude. It's smaller in T&I when compared to EPS, based on the business, as we -- based on the customers and the end applications we serve. 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&I will benefit from this as well. So it is not -- T&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 elective surgery all getting back to normal. What you find is this pretty big uptick in demand for medical interventional compartments. That certainly, as we get into '24 and later, you would expect that 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 these current levels. By the end of first quarter, what you begin to see is we anniversary the growth rates that we have enjoyed for two years -- two full (ph) 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. 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?

Yeah. 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&I, given the diversity of that end-market, 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 -- in our -- the destocking going on there in the biopharma is quite unique, where it's down 30%, 40%, 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 in the, 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 '24.

I think...

Got it.

And just in addition to that, I would say, is medical fluid components flattens out, maybe picks up a little bit. And our interventional component grows high-single digits is sort of how I would...

Got it. That's helpful. And then, just as a follow-up, can you maybe talk about -- it sounded like you were running two concurrent $1 billion M&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 won out over the other potential candidate?

Yeah. 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 want it 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 want it to be and we pursue both of them equally, yeah. And so, what 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 it's financially make sense for the company, has a 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 from it.

Thanks, Naga.

[Operator Instructions] Go ahead, Naga.

Yeah. 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 two 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. It really showed there were some challenges on the topline, but the team did an incredible job. And that showed during the bottom line, right? And one to look at it and say that's operational excellence and you could simply walk away. But from my vantage point, what really shines through is the work we've been doing inside the company around Ascend strategy and the competitive advantage we are 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? That's the competitive advantage we are building and that shows up in three different ways. One, it shows up in divisions where end-market conditions are challenged, the team really takes an owner 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 have strong market opportunities and really fully participating in that growth through incredible customer service and delivering really strong incremental margins, right? And then on the third side, the company not sitting idle, certainly looking at what are the growth opportunities through acquisitions. And so, the team really -- the three different themes and end of the day, that's what we're talking about here. That's in my mind is what is coming through in our results in the quarter.

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

Thanks. Good morning, Naga and Joe, Lara. I was curious about the polymer markets, if there is 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 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, 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. 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 an pretty strong secular trend that is going on. And that business has some pretty strong backlog going into next year, significant part of next year.

Chris, I would add when you think about that polymer processing you go back in time and remember the divestiture of the Xaloy 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 fallen through some of these numbers.

Makes sense. Thanks. And just going back to Jeff's question on the D&A for ARAG, you referenced kind of rule of thumb metric informing the 4Q guide in terms of percentage of sales D&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 year of global supply chain volatility. So just curious how you view the inventory levels the channel kind of balances and equanimity across that stock and flow sort of business.

So maybe help me. So you want to take the D&A question first, and then I can maybe make a comment around the inventory piece.

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

Thank you.

And in terms of inventory, remember, the recurring revenue here are parts. They're not significant systems are 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 are at. But my expectation would be that, that is not a significant issue for us in that business.

Great. Thanks for the extra color.

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

Hey. Good morning, everybody. This is [indiscernible] 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 in the Asia Pacific region. And then obviously, some of the -- some of the businesses are bouncing along the bottom. Can you maybe talk about some of the puts and takes that kind of got you to study? 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 said, that would be great.

All right. Let me start with where we're 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 are currently performing, they have come to a place where 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 is at the bottom. In terms of our businesses that are performing incredibly well and contributed to the growth, medical interventional business and our polymer solution business on the other end of the spectrum have done well and the order entry remains pretty robust. And then 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 has 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.

Got it. That's super helpful. And then following up on the question differentiating between T&I and the dispense side within the electronics business. Naga, you mentioned that the amplitude of the cycles is different between T&I. But can you maybe talk about the length? I know, for instance, we kind of refer to a typical four to five quarter slowdown in dispense. When the paper comes for the T&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?

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

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

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

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 Ascend strategy will position us well for long-term growth. Thank you for your time and attention on today's call. Have a great day.

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