Thank you for standing by and welcome to the Nordson Corporation Third Quarter Fiscal Year 2024 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] Thank you. I'd now like to turn the call over to Lara Mahoney. Please 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 Dan Hopgood, Executive Vice President and Chief Financial Officer. We welcome you to our conference call today, Thursday, August 22nd, to report Nordson's fiscal 2024 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 30 days. There will be a telephone replay of the conference call available until Thursday, August 29th, 2024. During this conference call, we will make references to non-GAAP financial metrics. We've provided a reconciliation of these metrics to the most comparable GAAP metric 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 materially differ. Moving to today's agenda on Slide 3, Naga will discuss third quarter highlights as well as yesterday's close of our Atrion Medical acquisition. He will then turn the call over to Dan to review sales and earnings performance for the total company and the three business segments. Dan will also discuss the balance sheet and cash flow. Naga then will share a high-level commentary about our end market and provide an update on the fiscal 2024 full year guidance. We will then be happy to take your questions. With that, I'll turn the call over to Naga.

Good morning, everyone. Thank you for joining Nordson's fiscal 2024 third quarter conference call. Before I begin, I'm pleased with the closure of the Atrion Medical acquisition as we announced in a press release issued yesterday morning. I would like to welcome our new colleagues from Atrion into the Nordson family. Atrion's products will expand our current portfolio in medical fluid components and interventional solutions by adding a category leader in infusion fluid delivery and niche cardiovascular therapy products. Atrion expands Nordson's fluid components addressable market by more than 50% by adding products and solutions for infusion therapies and drug delivery. This also extends our current offering to top medical device customers and broadens Nordson's exposure to higher growth medical end markets with significant single use consumables with recurring revenue streams. Going forward, Atrion will be part of our Medical and Fluid Solutions segment. Now let's shift to our third quarter earnings results on Slide 5. At the outset, I would like to recognize the dedicated Nordson team who had leveraged the NBS Next growth framework to deliver strong operating results. Sales of $662 million were in line with our expectations, driven by IPS segment, which delivered strong organic growth of 4% in addition to increased sales from our ARAG acquisition. This growth was partially offset by continued softness in electronics compared to prior year, as well as lower demand impacting our medical businesses. In addition, our focus on top customers and differentiated products improved consolidated product mix. This strategic focus and a commitment to managing costs led to improvements in gross margins and top quartile EBITDA margin of over 31%. In the quarter, we delivered adjusted earnings per share of $2.41, which is up $0.08 from the midpoint of our guidance. Finally, I'd like to highlight our third quarter free cash flow of $143 million, which was 122% of net income. We continue to generate strong cash flow and execute a balanced capital deployment strategy with $39 million in dividends paid, $25 million in share repurchases and $40 million in debt reduction during the quarter. I'll speak more about the enterprise performance in few moments, but first, I'll turn the call over to Dan to provide a detailed perspective on our financial results for the quarter.

Thank you, Naga, and good morning to everyone. On Slide number 6, you'll see third quarter fiscal 2024 sales were $662 million, up 2% from prior year third quarter sales of $649 million and in line with the midpoint of our quarterly guidance. This was driven by a 4% increase from the ARAG acquisition, partially offset by an overall organic sales decrease of 1% and unfavorable currency translation of 1%. As Naga mentioned, we saw growth in our IPS segment organic sales during the quarter, in particular our packaging and nonwovens divisions, which were offset by softness in certain electronics and medical product lines. Gross profit during the quarter remained strong at 56% of sales. Deploying our NBS Next growth framework, we're focusing on top products, driving a favorable product mix, while also continuing to improve our manufacturing efficiency. EBITDA adjusted for special items in both periods, totaled $208 million for the quarter or 31.5% of sales, slightly below the prior year by about 50 basis points, which was driven by higher selling and administrative costs, including the first-year impact of the ARAG acquisition. Looking at non-operating expenses, net interest expense increased approximately $6 million associated with higher debt levels tied to the ARAG acquisition. Other income on a net basis decreased by $2 million, primarily reflecting certain foreign exchange transactional variations compared to the prior year. Tax expense for the quarter was $32 million or an effective rate of about 21.5%, which is in line with the prior year rate and our guidance range for 2024. Net income in the quarter totaled $117 million or $2.04 per share, excluding $8 million of non-recurring costs related to the Atrion acquisition and selected restructuring charges, as well as $19 million in amortization of acquisition-related intangibles. Adjusted earnings per share for the…

Thanks, Dan. I also want to congratulate the Nordson team for delivering strong operating performance under a challenging demand environment in select businesses. Let's spend a few minutes talking about our end markets as we move into the fourth quarter of fiscal 2024. Starting with our Industrial Precision Solutions segment, we continue to see steadiness in industrial and consumer non-durable end markets with nonwovens starting to pick up in the third quarter. After two years of record growth, our full year guidance implies IPS, excluding ARAG, is about flat to modestly up versus prior year. ARAG sales appear to be normalizing at lower levels at this point in the agriculture cycle. In general, we feel confident about the diversification of this segment, its mix of recurring revenue and customer intimate business model. Within our Medical and Fluid Solutions segment, medical device customer supply chain teams are being far more cautious with their inventory purchases after a very unique few years. While we are starting to see lower demand in the interventional solutions and certain fluid component product lines outside of biopharma, we are confident in the long-term growth drivers in this end market, including aging of the population, rising chronic health conditions, trends toward non-invasive surgical techniques, and increased healthcare spending and procedure volumes. We have a robust pipeline of longer-term customer project activity and we are comfortable with the future outlook of this business. Near term, we expect softness in certain medical product lines, particularly in light of challenging year-over-year comparisons for medical interventional solutions product lines. Staying close to our customers, we are working our way through what has been a one-of-a-kind demand environment over the past few years. The ATS segment will benefit from increasing demand for advanced chips in support of AI, automotive electronics, onshoring, CHIPS…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Saree Boroditsky from Jefferies. Your line is open.

Hi. Good morning. I want to focus a little bit on the acquisition. So the margins at Atrion, they've come down rather significantly from since 2022. Could you just talk about the right margin profile for this business and the steps you're taking to get the margins to Nordson levels?

Thank you, Saree. The business has gone through supply chain issues and certainly have had to go through some issues, and so the margins have degraded for them in the last couple of years, as you can see in the public information. We fundamentally believe if you look at past track record of this business, their EBITDA margins are in line with Nordson-like margins. And so we're fully confident that we would be able to return the business back to those same margins over time.

Appreciate that. And then you noted that you saw year-over-year growth in some of the test and inspection products on an order basis. Could you just quantify this and then provide some additional color on what's driving this improvement and how you see that expanding into 2025? Thank you.

Yeah. Thank you, Saree. We see some pretty strong momentum in our optical and acoustic product lines. So optical is our CyberOptics business. What you find there is a lot of these applications are in the front end of the semiconductor manufacturing business. But also this is the business in terms of cyclicality was the first one to experience a downturn early last year, right. So you have the cycle helping us. But in addition, you have some exciting new products like our WaferSense that is used in the semiconductor processing manufacturing steps. And so you have a combination of new products, cycle and where our products are used in the semiconductor manufacturing process. So the momentum is pretty good. This business continues to have a pretty nice year-on-year growth from last year. So we're pretty excited about what we see in this business.

Appreciate the questions. Thank you.

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

Good morning. You've got Canyon Hayes on for Matt Summerville today. So I just wanted to start with a quick review on implied guidance in the fourth quarter. And I was curious how your thoughts might have progressed relative to the prior quarter on IPS, ATS and MFS organic growth?

So thanks for the --

Yeah, could you --

Go ahead. I guess as far as our thoughts, if you look at our underlying guidance, we pretty much -- we're holding the base business. And so I would say our thoughts are things are playing. The year is playing out about as expected for the fourth quarter. But maybe you can give me a little bit more color behind your question.

I apologize. I think I might have cut out there, but I think I got what I needed there. Okay. Across the broader industrial space, we've seen project activity get pushed out a little bit as a function of rates, macro, geopolitical election concerns. I'd be curious if we could get a little bit of color on how or how that is not affecting Nordson and how we should think about how that implies into the 2025?

Yeah. Obviously, we're not talking about 2025. So I want to make sure you know we will have a chance to talk about it in a couple of months from now. But as we think about end market conditions within the company as it stands today, it's good to remind ourselves Nordson has a very diversified portfolio, diversified in end markets, diversified in geography, diversified in systems and consumables or recurring revenues, right? So that's an important piece of the puzzle here. So if you think about segment by segment, what we see here in IPS is a business non-ARAG without our ag business. Think of that as a slight growth to flattish after two record years, 13 out of 15 quarters year-on-year organic growth, right. So I think that's an important context to remember. We see order entry to be pretty steady. And so our expectation is this part of our business remains steady. There are a couple of things that if you want to add a little bit more color to our IPS segment, our recurring revenue is pretty high here, right. It is north of 50%. And you expect when folks are sort of deferring CapEx spend, they are going to increase their recurring revenues, right. So that's one piece of it. The other piece of it is you have a couple of our businesses like the nonwovens, where we see some pretty good order entry pickup. And so that is certainly helping this business. One thing to remember is that you do have other sort of large CapEx spends around big trends looking like electric battery vehicles still activity, although the overall market is down. You have automotive electronics, fabric bonding, recapitalization of our base, reshoring, e-commerce packaging. So a number of trends that are helping…

Your next question comes from the line of Jeffrey Hammond from KeyBanc Capital Markets. Your line is open.

Hi. Good morning, guys.

Good morning.

Good morning.

So I want to start with this kind of medical interventional, I guess, it's normalization or destocking, it seems like that's kind of a newer dynamic. And I'm just wondering how long you think that persists before inventories are kind of or supply chains are back to normal?

Yeah. As we talked about, there are two things going on here a) in our biopharma business that has stabilized, that is starting to come back. In terms of our interventional business, last year, these businesses were up 15%, 16%. And so you have -- you're dealing with some tough comps. Certainly, supply chain is something that we find our customers to be a lot more cautious today than they were a year ago. Growth drivers remain the same. So it is kind of tough to call when this changes, but the procedure volumes are up, so there is nothing going on there. We see some in-sourcing, but look these projects and products when they are given to a company, there is regulations, there are approvals, FDA approvals and all of these things that are associated with winning a project, it is very difficult for -- these businesses tend to be a lot more sticky let's put it that way. And so if you think about this, it is tough to call this when this is going to turn. We have strong -- these are small set of customers. This is not a broad thousands of customers. These are a handful of medical device customers that we have strong relationships with and we are in touch with them. We understand where things are. So I'm trying to paint the picture for you of the overall environment, but not giving you an exact answer I recognize that.

No, that's okay. And then Atrion I just want to kind of unpack the deal impact. It seems like they did $169 million in '23. They were seeing high-single-digit growth. We only have kind of a stub quarter in the fourth quarter. But just what's kind of the next 12 months run rate of revenue we should think about? Where do we snap lines on EBITDA margins? How should we think about incremental interest, the amort add-back, D&A, et cetera? Just a little more color there.

So let me get -- paint some broad pictures and then Dan can take you through a little bit more detail, right. Broadly, you want to think about this as a mid-single-digit company. That's what this business is. You also want to think in terms of EBITDA margin performances, it is below their historical performance, mainly because of supply chain issues and some operational issues that they have had. We fully expect and our model recognizes and the synergies we have signed up for are based on the fact that we resolved many of these and over two years, right. Over the period of time, we have said we would achieve these synergies over a period of two years. We see a good path to achieving these synergies using NBS Next. I want to say somewhere in '26, this business gets back to Nordson-like EBITDA margins, which is what this business historical performance was. So let me give, with that sort of high level, Dan, if you want to add a little bit more color to the question Jeff has.

Yeah. And I guess what I'd say is a) there's no surprise based on their second quarter results versus what we expected to see in the business. I think it's right in line with our modeling. I think I would say as far as specific guidance for next year, give us a quarter, we've owned the business for a day. We know what we know, which is largely public information that you have access to as well. But again, nothing that we've seen surprises us. And in fact, we're very comfortable with the model that we had for the acquisition. We'll give a little more color on that as we give color to next year, next quarter.

Okay. Appreciate it.

Yeah.

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

Hey. Good morning, everyone. This is Pesen for Mike. I want to go back to the conservative order comment from the interventional side of the business. To be clear, is this incremental to the tough comps that we're expecting in the back half of this calendar year, is this simply a cost to carry inventory discussion? And then consequently, should we be expecting destocking in the near-term and a more normal cadence as customers kind of get to that new desired level of inventory. Is that how we should be thinking about that?

Yeah. What I would tell you is that is what we are experiencing right now. If you think about last year, this business grew in the teens. Typically, this business grows anywhere from 6% to 8%. So growing at mid-teens, that's pretty high, right? And so what we are experiencing today in the orders is really in some adjustment to that. If you look at procedure volumes, look at our project activity, look at our product development work, we fundamentally believe that the long-term thesis of growth in this business is intact. Certainly, it is difficult to time. We see a certain amount of -- we do see some amount of slowness, right. So I want to be clear about what we're talking about. It is tough comps, but it also, we see slowness. And when -- as you think about when do we get out of this, certainly, there are some amount of device manufacturers thinking about their inventory levels and adjusting them to reasonable levels. Could that be an impact from interest rates? It's difficult for me to guess any of that. But I would say we do see a conservative, cautious order pattern from our medical device customers.

Understood. That's helpful, Naga. And then maybe if we could stay on MFS a little bit. I think I may have missed it earlier on the call. Could you help me on the fluid components side? And then on EFD?

Yeah, EFD.

Could you help me out a little bit on the trends there?

Sure. EFD is doing well. Order entries are returning. We do see, I think we commented maybe a couple of quarters ago that this was one of those businesses where we're seeing early indicators of electronics customers starting to order more. This business is -- the order entry in this business is pretty encouraging and a lot of the work that they're doing in Asia-based electronic customers is pretty encouraging.

Understood. Thanks. I'll pass it on.

[Operator Instructions] Your next question comes from the line of Andrew Buscaglia from BNP Paribas. Your line is open.

Good morning, guys. This is Ed on for Andrew. Thanks for taking my questions. In the prepared remarks, you mentioned the mix of cash and debt to finance the deal, which puts you about 2 times to 2.5 times leverage closing 2024. With the strong free cash flow profile, leverage manageable, can you refresh us on how you're thinking about M&A? And more specifically, what remains in the pipeline? Thanks.

Let me start first and then Dan will sort of take over for a couple of other comments around capital deployment. Look, our commitment to organic growth and having a balanced acquisition-led growth remains the same. There's no change there. Our strategic and financial criteria for acquisition remain the same. We feel strongly about how we have been able to be disciplined around the strategic criteria for what acquisitions we're adding to the portfolio and pretty disciplined around the financial rigor on what we need to do with a particular acquisition that will allow us to deliver the returns we target. So our pipeline remains this you know remains pretty healthy. And we are open to many different types of deals and you've seen that over the past year and we continue to work the pipeline. Let me have Dan talk to you a little bit about leverage and capital deployment.

Yeah. Maybe just to add a couple of points. Our stated target has been 2 times to 2.5 times leverage long-term. And obviously with just completing the acquisition for Atrion, we'll be at the higher end of that, but that will be temporary. And maybe the best example to give you is we saw a similar thing happened last year when we acquired ARAG. And then as of the end of this quarter, we're back down to 1.6 times leverage. So we've got, obviously, plenty of capacity. And with our cash flow profile, as you point out, we can quickly delever. And as Naga mentioned, we have an active pipeline. And when the right deal comes along, we'll be ready to move forward.

Great to hear. And then, Dan, back to you for this one. You've been CFO for about a quarter now. You come to a company which is at great progress and margin expansion. From your initial assessments, what areas are you seeing in the business as opportunities for further improvement from here?

I appreciate the question. I guess I'll say this and Naga and I spend a lot of time on our best opportunity as a company is continuing to grow organically, which is our major focus, right? Our margins are very healthy. Our cash flow is very healthy. Squeezing margins is not the best use of our time. Our time is better spent figuring out how to continue to grow the company organically and inorganically.

Very helpful. Thanks.

Your next question comes from the line of Walter Liptak from Seaport Research Partners. Your line is open.

Hey. Good morning, guys.

Good morning.

Good quarter. Good morning. I want to ask kind of a follow-on to the IPS segment question and get some color around the stable sort of low-single-digit outlook for IPS. And I guess what I'm trying to get to is that we have seen other similar industrial companies kind of pauses in their industrial goods businesses, especially longer term kind of project businesses. So I wonder if you could provide just some more color around geographic regions, China, Europe versus North America. And you called out some growth areas, and I wonder how much of the focus from NBS Next helps you to gain market share in some of those growing markets as opposed to maybe some others that might be weaker.

Yeah. Let's maybe give you some you know a little bit color into a couple of the divisions and where we're thinking. First and foremost, this is year four of NBS Next. Clearly, within our businesses, and IPS being one of those businesses, which where we first implemented and a couple of other MFS businesses to be implemented next. What you find here is, we operate in a diversified set of end market niches. And in some of these cases, particularly in IPS, what you find is certain end markets are have high demand or growing and having investments at a particular time. But over six quarters or 12 quarters, what you find is another end market application getting more demand and becoming more important for the growth of the business. So for each of our division leaders, understanding each of these end markets, end market niches and being agile and entrepreneurial in shifting resources from one end market to another to another is a great way for us to continue to participate in markets that are growing and the resource, for a period of time, markets that are not growing, right. So it is a dynamic set of end market niches that the teams are operating in. NBS Next allows them to be able to have clarity around those applications and be able to shift one to another. So that is, that certainly helps us, that allows us to have the steady performance, which you see on the outside. But within the company, within the divisions, you do see some markets doing well, others not doing so well. So that's one sort of dynamic that we've you know that's important to recognize. The second is, certainly, there are certain end markets like plastic processing, for example. We've had an…

Okay. Great. Yeah, no doubt, the margin improvement has been there and it's good to see you're getting some, you're able to shift around to these different markets. Okay. Yeah, I guess maybe just to see if we can get some geographic thoughts, how you're seeing some of the Asian markets or Europe. I wonder if we can get any comments there.

If you think about different regions, still the US based markets have been the best and have been the strongest. If you near-term look at our businesses in Asia specific, particularly, they are benefiting from what we see in our electronics business. Our electronic businesses are coming back and so you see our Asia-Pac markets are recovering nicely. China is also doing well, but you also have some of our nonwoven customers, our OEM customers in China have been a source of strength for our businesses. So Europe is still in -- our organic growth there is a little weaker than our own -- but you have OEM customers there. Our parts revenues are pretty good, our system revenues a little bit. You also see in Europe is our ARAG impact is also -- because Europe ARAG is mostly a European business.

Okay. Great. Appreciate the color.

Your next question comes from the line of Chris Dankert from Loop Capital Markets. Your line is open.

Hey. Morning, guys. Thanks for taking the questions.

Morning.

I guess first, I guess, first off, if we could kind of look at backlog a little bit more. Can you just maybe give us some comments on how you see the complexion there, how the systems are kind of normalizing as a part of that mix? Would you agree there's still about $100 million or so left of kind of elevated backlog versus normal? Maybe just some commentary around how you see that piece of the business and then how that's progressing.

Yeah. If you think about our backlog, it's important to level set where the business was historically, right. Historically, it was around $400 million, $450 million. Of course, in this incredible period of time, the business has grown. So the scale at which we would expect a normalized or historically normalized backlog is different, right? But the other thing that has also changed is customer order patterns are different. In one example I would give you, in our medical businesses in the past, we used to get large blanket orders that go into our backlog. Well, that doesn't happen anymore. Our delivery performance has significantly improved. And so we certainly have customers starting to have an expectation that we can ship things much faster than we have ever in our history. So a couple of different dynamics. What we do see in our $640 million, $650 million backlog is, it is still weighted to our system businesses. But if you think about our regular businesses, which are book and ship type businesses, they've all returned to normal order entry, normal backlogs now for several quarters. So this is nothing new for us. We continue to, as our backlog comes down, it is really our system business backlog coming down.

Got it. That's helpful color. Thank you, Naga. And then maybe just quickly on ARAG, forgive me if I missed it. Again, obviously, a little bit more weakness in that end market from a sales perspective. But just curious how you are seeing the margin performance in that business, how is the team handling the lower volumes? Any color would be great.

Yeah, the margin performance has been really good. The company is performing at Nordson-like EBITDA margin levels. And so we couldn't be more pleased with the team. I think we are focused on making sure we reinforce the things that we liked about the business and we like the technology. We like the market presence in Europe. We like the precision ag components that we are delivering to some of our largest customers. So it is really important, even in this downturn, staying focused on new product development, staying focused on customers that are going to generate the demand as the cycle comes back is where we are focused on. Most of the integration is pretty much done. We really like the team. The team is doing a wonderful. They're getting to know NBS Next. They're starting to have an enthusiasm on implementing it in their businesses. And we, as a company, are learning to operate in Italy, right. And it is a new geography for us, but we've been in Europe for a long time. We've been in Europe for decades in Germany and in UK. So this is adding a new country to our mix of businesses. So overall, integration going well, love the technology, great people. They are integrating well into the company, learning NBS Next, getting in our cadence of operations. So it's an exciting time. The market is not helping us. But I think that is temporary in my opinion. It will take time to come back. But we are prepared and we are focused on things that we need to be focused on and not letting distracted from a technology development perspective.

Understood. Thanks so much for the detail, Naga.

Sure.

That concludes our question-and-answer session. I will now turn the call back over to Naga for closing remarks.

Thank you for your time and attention on today's call. The long-term profitable growth strategy that fuels our total shareholder value remains strong. We look forward to seeing you in person at our New York Investor Day on October 3rd, 2024. Have a great day.

This concludes today's conference call. Thank you for your participation. You may now disconnect.