Nordson Corporation (NDSN) Q2 2023 Earnings Call Transcript

Nordson Corporation (NASDAQ:NDSN) Q2 2023 Earnings Call dated May. 23, 2023

Corporate Participants:

Lara Mahoney — Vice President, Investor Relations and Corporate Communications

Sundaram Nagarajan — President and Chief Executive Officer

Joseph P. Kelley — Executive Vice President and Chief Financial Officer

Analysts:

Jeffrey D. Hammond — KeyBanc Capital Markets — Analyst

Saree Boroditsky — Jefferies — Analyst

Christopher Dankert — Loop Capital Markets — Analyst

Matt J. Summerville — D.A. Davidson & Co. — Analyst

Michael Halloran — Baird Equity Research — Analyst

Allison Poliniak-Cusic — Wells Fargo Securities — Analyst

Walter S. Liptak — Seaport Global — Analyst

Presentation:

Operator

Good morning, and welcome to Nordson Corporation’s Second Quarter Fiscal Year 2023 Results Conference Call. All participants are in a listen-only mode. After the speakers’ presentation, we will conduct a question-and-answer session. [Operator Instructions]. As a reminder, this conference call is being recorded.

I would now like to turn the call over to Lara Mahoney, Vice-President of Investor Relations and Corporate Communications. Thank you. Please go ahead.

Lara Mahoney — Vice President, Investor Relations and Corporate Communications

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, May 23rd to report Nordson’s fiscal 2023 second 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, May 30, 2023.

During this conference call, references to non-GAAP financial metrics will be made. A reconciliation of these metrics to the most comparable GAAP metrics 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 second 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 earnings performance. He will conclude with an update on the fiscal 2023 full-year and third 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.

Sundaram Nagarajan — President and Chief Executive Officer

Good morning, everyone. Thank you for joining Nordson’s fiscal 2023 second quarter conference call. During the second quarter, Nordson continued to experience a macro-environment that can be described as a multi-speed economy. Customer demand in industrial, consumer non-durable, and medical interventional end-markets were solid. Alternatively, electronics dispense product lines are being negatively impacted by the downside of the semiconductor cycle and sales of biopharma product lines in our medical fluid components division continues to normalize against challenging prior year comparisons as customers continue to work through excess inventory. These factors balance themselves out and the team delivered organic sales growth of 1% compared to prior year’s second quarter.

During the quarter, the teams also took targeted cost actions in areas where we are seeing weakness in customer demand. We believe this will enable us to effectively navigate the current business environment and strengthen our long-term position for profitable growth. Overall, we remain invested in our competitive differentiators including our direct sales force, product innovation, and the training and execution of NBS Next growth framework. In a few moments, I’ll speak more about the business and what we’re 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.

Joseph P. Kelley — Executive Vice President and Chief Financial Officer

Thank you, Naga, and good morning to everyone. On Slide number 5, you will see second quarter fiscal 2023 sales were $650 million, an increase of 2% compared to the prior year’s second quarter sales of $635 million. The increase was driven by organic growth of 1% and a 3% benefit from the CyberOptics acquisition offset by unfavorable currency impact of 2%.

During the quarter, sales were strong in Asia-Pacific with 7% growth partially reflecting the timing difference related to the Chinese New Year. Gross profit for the second quarter of fiscal 2023 totaled $352 million. Excluding severance costs, gross profit totaled $354 million or 55% of sales comparable to first quarter 2023, profitability, as the team continues to actively manage the price-cost dynamic in these inflationary periods. When compared to the prior year, adjusted gross margins are down a 180 basis points resulting from sales mix changes and factory inefficiencies at site dealing with reduced volumes.

Operating profit totaled $173 million in the quarter. During the quarter, we recorded one-time severance costs totaling $3 million. Adjusted operating profit, excluding these non-recurring items was $176 million in the quarter, or 27% of sales. 4% below the prior year adjusted operating profit of $184 billion. EBITDA for the second quarter was $203 million or 31% of sales, which is in line with our long-term target profitability level. However, $6 million below the prior year EBITDA of $209 million. The decrease was primarily driven by a $4 million currency translation headwind plus unfavorable sales mix, offset by the CyberOptics acquisition growth.

Looking at now operating expenses. Interest expense increased $5 million associated with higher borrowings and increased interest rates. Other net expense decreased $38 million primarily related to the prior year’s non-recurring non-cash pension annuitization charge of $41 million. Tax expense was 34 million for an effective tax rate of 21% in the quarter, which is in line with the prior year’s second quarter rate and the forecasted full-year rate for 2023.

Net income in the quarter totaled $128 million or $2.21 per share. Adjusted earnings per share excluding non-recurring severance costs totaled $2.26 per share, a 7% decrease from the prior year’s adjusted earnings. The decrease is primarily driven by lower operating profit and higher interest expense.

Now let’s turn to Slide 6 to review the second quarter 2023 segment performance. Industrial Precision Solutions sales of $336 million increased 6% compared to the prior year’s second quarter driven by strong organic growth of 9% partially offset by unfavorable currency impacts of 2%. The organic growth was driven by robust demand in the polymer processing product lines as well as products sold into consumer non-durable end-markets across most regions.

Operating profit for the quarter was $112 million or 33% of sales, which is an increase of 9% compared to the prior year’s adjusted operating profit of $102 million despite some unfavorable currency translation impacts. As mentioned last quarter, IPS remains our most globally diverse segment, and, therefore, most exposed to currency translation changes and the timing difference with the Chinese New Year.

Looking on a constant-currency basis and year-to-date, this segment has delivered 5% organic growth and incremental margins of 60% ahead of our targeted 40% to 45% incremental margins. This segment’s continued strong performance demonstrates the power of the NBS Next growth framework.

On Slide 7, you’ll see Medical and Fluid Solutions sales of $167 million decreased 3% compared to the prior year’s second quarter. This change included a decrease in organic sales of 2% and a 1% decrease related to unfavorable currency impacts. Strong demand for Medical Interventional Solutions product lines, primarily in the Americas was more than offset by softness in the medical fluid components serving biopharma applications and fluid solutions product lines in Europe and Asia. These factors drove a net 2% organic sales decrease.

During the second quarter, we took targeted cost actions in businesses responding to volume pressure that resulted in $1 million of non-recurring severance costs. The second quarter adjusted operating profit was $49 million or 30% of sales, which is a decrease of $9 million compared to the prior year operating profit of $58 million. The decrease in operating profit was driven by the meaningful sales mix changes within the medical product lines and related factory inefficiencies due to reduced volumes. It is noteworthy that the segment profitability sequentially improved 400 basis points over the first quarter of 2023, and is again running more in line with the profitability levels of the prior two years.

Turning to Slide 8. You’ll see Advanced Technology Solutions sales were $148 million, a 1% increase compared to the prior year’s second quarter. During the quarter the CyberOptics acquisition contributed 12% growth. Organic sales volumes were down 10%, an unfavorable currency impact during the quarter was 2%. The organic decrease was driven by electronics dispense products serving the semiconductor end markets in the Americas and Asia slightly offset by continued growth in the test and inspection product lines.

Cost reduction actions during the second quarter of fiscal 2023 to address the significant decrease in electronics dispense product lines are structural in nature and resulted in $2 million of non-recurring severance costs. The second quarter adjusted operating profit was $28 million or 19% of sales, which was below the prior year second quarter operating profit of $40 million. The decrease in adjusted operating profit was driven by the organic sales decrease, partially offset by the profitable acquisition growth.

Finally, turning to the balance sheet and cash flow on Slide 9. Our second quarter balance sheet includes cash of $129 million and net debt was $820 million, resulting in a one times leverage ratio based on the trailing 12 months EBITDA. We continue to have significant available borrowing capacity to pursue organic and inorganic growth opportunities. Free cash flow in the quarter was $159 million, bringing the year-to-date cash conversion rate on net income to 118% as working capital efficiency improved during the current quarter. During the second quarter, we made $37 million in dividend payments and spent $47 million on repurchasing approximately 221,000 shares of company stock at an average price of $212 per share. For modeling purposes. in fiscal 2023, assume an estimated effective tax rate of 20% to 22% in capital expenditures of approximately $45 million to $50 million.

I will now turn to Slide 10 and I will turn the call back to Naga.

Sundaram Nagarajan — President and Chief Executive Officer

Thanks, Joe. Going into fiscal 2023, we knew we would be dealing with a dynamic environment. As the year progresses, we gain better visibility to our customers and I would now like to provide an update of what we are seeing in our end markets. The Industrial Precision Solutions segment will continue to see steady demand in industrial and consumer non-durable product lines. Investments continue to be made in automotive product lines. Notably, electric vehicles. We’re also seeing continuing strength in our polymer processing product lines related to recycling and battery applications. These diverse end-markets and applications combined with our direct sales and the combination of both systems and parts revenue is driving the strong year-to-date profitable growth for this segment which Joe reviewed.

Turning to the Medical and Fluid Solutions segment. We continue to experience double-digit growth in our Interventional Solutions product lines and the backlog is strong. These products include balloons, cannulas, and catheters that are integrated into medical devices for a variety of procedures, including at valve replacement, stent delivery, angioplasties, and ECMO for blood oxygenation. The fluid solution product lines within the MFS segment serve a diverse set of end markets including industrial, construction, electronics assembly, animal health, and medical. The construction and electronics assembly end markets within this product line continue to see soft demand, particularly in Asia and Europe.

Finally, in the MFS segment, our medical fluid component product lines which makes single-use plastic connectors top cast and valves for the medical and biopharmaceutical markets. Over the past two years, this division benefited from strong double-digit organic growth in biopharma applications. As we shared in the last quarter, our customers in this end-market are continuing to work through inventory destocking. As this business normalizes, the patient can [Indecipherable] patient within fluid components such as blood pressure comps and IV bags remain stable. That said, the normalization within the biopharma market continues to provide a significant growth headwind for this segment.

Within the Advanced Technology Solutions segment, we are in the midst of the downside of electronics cycle. This has impacted sales in our electronics dispense and CyberOptics product lines. We firmly believe in the long-term growth of the electronics end-market. We have not just seen the benefits from investments related to the CHIPS Act as we all know that the investment in automation, memory, and electronic new product innovation will continue. While the teams took targeted actions to adjust cost structure for current volumes, we remain invested in product innovation that will serve this end market.

Growth in our X-ray Test and Inspection product lines successfully building the historic volatility of this cycle. Even in the downside of the cycle, customers continue to invest in T&I systems to ensure quality and efficiency in their manufacturing lines. Our CyberOptics acquisition has more exposure to the memory end-market, so its product lines have experienced weakness. Regardless, we remain excited about the long-term growth opportunities in the optical end market and we are pleased with the ongoing integration of this business. I remind investors that past two years, this segment delivered 17% organic growth on average. This multiple-quarter depth is simply the cycle of semiconductor capital expenditures, and we continue to be encouraged by our differentiated technology serves this long-term attractive growth markets.

Overall, the diversification of the Nordson product portfolio, end-market, and geographic exposure enables sustainable profitable growth. However, we are in a period where two divisions are seeing significant market corrections, semiconductor equipment, and biopharma connectors. The remaining line divisions are approximately 80% of Nordson is delivering 5% organic growth year-to-date at targeted incremental profit levels. Considering the combination of these end-market headwinds and tailwinds as well as current order entry. We are maintaining our previously provided 2023 revenue guidance of zero to 3% growth over fiscal 2022 and narrowing our adjusted earnings to the range of $8.90 to $9.30.

Looking specifically at the quarterly sales and earnings split, Q2 2023 was stronger than anticipated as some sales previously forecasted for Q3 were pulled into Q2. Therefore, we are now forecasting third quarter fiscal 2023 sales to be comparable to the prior year third quarter. Third quarter earnings are forecasted in the range of $2.20 to $2.35 per share. We expect fourth quarter sales to be the strongest of the year increasing low-to mid-single-digits over the prior year’s fourth quarter. Our full-year guidance range sustains a record 2022 sales performance, which is a testament to our dedicated employees, our customer-focused business model, the diversification of our end markets, and the solid execution of NBS Next, and the Ascend strategy.

As always, I want to thank our customers, shareholders, and the Nordson team for your continued support. With that, we will pause and take your questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions]. Our first question comes from Jeff Hammond from KeyBanc Capital Markets. Please go ahead. Your line is open.

Jeffrey D. Hammond — KeyBanc Capital Markets — Analyst

Hey, good morning, everyone.

Sundaram Nagarajan — President and Chief Executive Officer

Good morning, Jeff.

Joseph P. Kelley — Executive Vice President and Chief Financial Officer

Good morning, Jeff.

Jeffrey D. Hammond — KeyBanc Capital Markets — Analyst

I just want to focus on the biopharma piece. I know you talked about inventory destock and I think you had thought maybe by 2Q would be wrapping up, but it sounds like its lingering. So just trying to get a better sense of your visibility for that business to kind of either hit easier comps or re-inflect positive.

Sundaram Nagarajan — President and Chief Executive Officer

Yeah, thank you, Jeff. Overall, I would start with biopharma secular growth drivers all intact. There is no negative impact to what we have always thought about this business. So this is a strong single-digit growth business. In terms of the short-term destocking, what we had expected was maybe we would be in the second quarter recovering from it, but it doesn’t look like it as we have indicated. Our expectations are, by the end of this year, we should be back to normalized order patterns from our customers, and so also by this time, you would have the comps, the growth comps would also be anniversaried by that time.

Jeffrey D. Hammond — KeyBanc Capital Markets — Analyst

Okay, great. And then, just can you give us a little more color on where you saw the systems pull forward in terms of segment or business detail? And then just a little more color on your level of visibility for that strong fourth quarter ramp. Thanks.

Joseph P. Kelley — Executive Vice President and Chief Financial Officer

Yeah, Jeff. I guess as it relates to the second part of that question, the visibility. I mean, what I would tell you is our backlog remains very elevated level in your $1 billion but the mix is very different. If you think about our business and our backlog pre-COVID we typically ran with a backlog that was 80% to 90% of quarterly sales but today I would tell you 65% of our business as roughly normalized for the backlog is about 1% of quarterly sales but there is 35% of our business where the backlog remains elevated at call it two and a half quarters worth of sales in backlog and the majority of this is our large systems business, particularly in the coatings and plastics processing, which to answer your question is in the IPS segment. Here, these are discrete large system orders, where we have customer prepayments and we have clear visibility to customer request dates.

That being said, they can move depending on how the customer request dates and our ability to ship within the quarters. The remainder of the heavy backlog is in our Medical Interventional Solutions business. and here these are large blanket orders placed by our customer’s perspective and product and then they routinely communicate to delivery quantities. So when you think about it in our strong Q4, it’s predominantly driven by these heavy systems businesses, where we do have backlog and but it could fluctuate on any given quarter. As you saw here in Q2, some of the ITF, the coatings, particularly in the coatings and the plastic processing, which was quite strong. The plastic processing was where we saw the pull-in from Q3 to Q2.

And so that’s, it’s really the large systems business within IPS that’s driving our clear visibility. I would say to Q4 and customer timing but also results in our ability to pull in or push out on any given quarter for these large systems.

Sundaram Nagarajan — President and Chief Executive Officer

Okay. Let me add something to that color is that we feel really strong about the systems businesses as Joe indicated it is also a strong testament of NBS Next growth framework in action. What you find here is that the businesses are truly focused on our best products and have the agility and flexibility to respond to customer demand in a market-leading way, so we feel really-really strongly about it, and we also feel good about our Medical Interventional business, which is showing some pretty strong strength. I would say, those two things drive our optimism for the fourth quarter.

Jeffrey D. Hammond — KeyBanc Capital Markets — Analyst

Okay. I appreciate the color.

Operator

Our next question comes from Saree Boroditskaya from Jefferies. Please go ahead. Your line is open.

Saree Boroditsky — Jefferies — Analyst

Hi, good morning.

Sundaram Nagarajan — President and Chief Executive Officer

Good morning, Saree.

Saree Boroditsky — Jefferies — Analyst

So, again the weakness in ATS services and while Tallgrass, but there’s also a lot of government funding going towards SMAs. You mentioned a little bit about the CHIPS Act. So when would you start to see that benefit and then how long do we think about this down-cycle, given that?

Sundaram Nagarajan — President and Chief Executive Officer

Yeah. All right. The way to think about it, if you look at historical semi-cycle, okay, expect that the normal cycle expects about four quarters of the downturn, and so we are in-quarter two is really where we are. So any, what we expect is somewhere middle of next year for sure, we’ll be in a place where these expenditures will start to come back, the capex expenditure start to come back.

Our conversation to our customers, I’m pretty bullish, but the long-term prospects for this business as you know given geopolitical considerations, given that CHIPS Act is going to come in. What you will find our businesses benefit from capex expenditures that are unallocated from this kind of investments our customers are making it typically towards the end of their construction. So right now, people are constructing plants. They would eventually start putting in equipment, ours would come in at sort of the backend of that expenditure that goes towards packaging of semiconductors. That’s where you would see us benefit.

Saree Boroditsky — Jefferies — Analyst

That’s helpful. And see you in ATS margins there have been rather volatile. I know some of this is mix-related but what is normalized mix and how do we think about margins here in 2024 and over the long-term?

Sundaram Nagarajan — President and Chief Executive Officer

Yeah, Saree, when you think about the ATS business, as I mentioned in the quarter, we were responding as you saw to the lower volumes for semiconductor and some of those cost actions were structural in nature, which will help us going forward in terms of the margin profile, but a portion of that, I would tell you at the consolidated level over 100 basis points was big impact responding to the lower volumes both in semiconductor and in the medical fluid component business but specifically on the ATS segment when you think about the profitability over the last several years that has improved quite significantly from what just say 11% operating profit margins up to ending last year at 29%. So right now running at these volumes, it’s roughly 19% in the quarter and that’s how I would think about it for this year at these volumes with this mix.

Saree Boroditsky — Jefferies — Analyst

And then as you think about 2024, is there anything like mix-related that we about the benefit, or is this really a question of volume at this point?

Sundaram Nagarajan — President and Chief Executive Officer

Yeah, I see no reason we recovered that we wouldn’t get back to the 2002-type margins for this segment.

Saree Boroditsky — Jefferies — Analyst

Great, thanks for taking my questions. Our next question comes from Chris Dankert from Loop Capital. Please go ahead. Your line is open.

Christopher Dankert — Loop Capital Markets — Analyst

Hey, good morning guys, thanks for taking the question. [Indecipherable] — I guess as I look at the guide for fiscal third quarter here, is the reason for the kind of below seasonal failed expectation, is it just the timing of backlog, is it that semiconductors are actually getting weaker? Can you kind of give us a little more color on how to think about the third quarter sales guide?

Joseph P. Kelley — Executive Vice President and Chief Financial Officer

Yeah, as it relates to the semiconductor and we commented, order entry appears to have leveled off as it relates to those particular product lines. And so while we saw sequential deterioration in semiconductor sales, the guide for Q3 does not imply further sequential deterioration from the Q2 levels for the semiconductor, specifically. The timing issue between Q3 and Q4 and actually Q2 is predominantly on those large systems sales, Chris, particularly in the plastics and in the coating space where we do have the backlog and there were cases where some got pulled forward. I would estimate roughly about 10 million got pulled forward from Q3 into Q2, and now roughly speaking, probably 10 million got pushed out from Q3 to Q4. That’s how I would think about the guidance.

Christopher Dankert — Loop Capital Markets — Analyst

Got it, that’s very-very helpful. And then maybe just kind of a housekeeping thing here. Could you quickly remind us about the mix within that at MFS segment the Interventional versus Life Sciences versus EFD, I think there’s a little bit of confusion there.

Joseph P. Kelley — Executive Vice President and Chief Financial Officer

Yeah, so the way, I would think about that. You’re correct. So the medical biopharma, which is roughly, I would tell you $100 million business, and then there’s the interventional solution, which is roughly a $300 million annual business, and then the remainder is your EFD, which is your fluid dispense and as a reminder that business serves a diverse set of end-markets, some of which are medical, some of which are construction, some of which are industrial, and some of which are actually electronics, electronic assembly from semiconductor and so it’s a very diverse set of end markets served by that business.

And so in the quarter, we saw significant strength in the Medical Interventional Solutions business as Naga has mentioned and that order entry there continues to be strong growth is strong, the biopharma has been talked about, but within that EFD business, I would tell you, the electronics, semiconductor component of that was pressured within the quarter and contributed to the performance.

Sundaram Nagarajan — President and Chief Executive Officer

Let me add some, a little bit more color to the fluid component business. Of those $100 million, not all of it is biopharma, a portion of it is, biopharma, but you also have other medical fluid connector applications in that business. And so, what you find is biopharma is the one that is sort of normalizing but you have other connectors that have been pretty stable, but the biopharma organization was fairly significant to show up at the division level. And as I indicated in one of my answers, we expect that this normalizes by the end of the year.

Christopher Dankert — Loop Capital Markets — Analyst

That’s helpful. Thank you, guys.

Operator

Our next question comes from Matt Summerville from DA Davidson. Please go ahead. Your line is open.

Matt J. Summerville — D.A. Davidson & Co. — Analyst

Just to get a couple of quick questions, just to put a finer point on third quarter EPS guidance relative to last year, roughly at $0.20 delta on flat revenue currency is going to be probably a somewhat material tailwind in the quarter. Can you kind of parse out, what’s driving the year-over-year reduction in earnings on flat sales?

Joseph P. Kelley — Executive Vice President and Chief Financial Officer

Yeah, there’s two components offset to that earnings guide is one is interest expense is clearly up on a year-over-year basis in the quarter and the full year it’s going to be up about $20 million so that contributes, and then also last year there was some FX hedge gains in the quarter, which benefited which are not forecasted to repeat and so those are below the OP, which I would tell you are having an impact on the year-over-year earnings guidance.

Sundaram Nagarajan — President and Chief Executive Officer

And then, Saree sorry, Matt, just this above the line to add, I think it’s important to remember that in the quarter, we delivered 31% EBITDA margins. So about all of these above the line operationally all the earnings are pretty strong at 31%, our expectation is that we are at that level going into the second half of the year.

Matt J. Summerville — D.A. Davidson & Co. — Analyst

Got it. That’s helpful. And then maybe just spend, I’m going to let Naga talk about any sort of evolution in your M&A funnel backlog relative to coming out of last quarter, how you’re thinking about actionability etc there in.

Sundaram Nagarajan — President and Chief Executive Officer

Yeah, our acquisition pipeline remains healthy. We continue to work on projects. Our focus areas remain the same, which is sort of continuing to expand our test and inspection, continuing to add to any core businesses around dispensing if we run into that, or continuing to scale up our medical businesses. So those three things strategically have not changed.

Pipeline, pretty healthy, but we remain financially disciplined and we’ve talked about those criteria and so we continue to work it but you’re going to expect to see us be disciplined but our work continues. So there is, I know, I can only tell you that this is top of mind and it’s an important piece of our growth strategy. Just as a reminder, we committed to delivering $500 million in acquisitions for over the planned period and we have acquired up to $225 million in revenues already and fully expect that we will deliver on that plan for $500 million in the planned period. And so, good work and we have demonstrated, we are flexible in type of deals we’re able to do. We have completed CyberOptics, which is sort of and public company deal, last year we did a public company carve-out but we continue — we remain invested in this process and feel good about where we are.

Matt J. Summerville — D.A. Davidson & Co. — Analyst

Got it. Thank you.

Operator

Thank you. Our next question comes from Mike Halloran from Baird. Please go ahead. Your line is open.

Michael Halloran — Baird Equity Research — Analyst

Hey, good morning, everyone.

Sundaram Nagarajan — President and Chief Executive Officer

Hi, Mike.

Joseph P. Kelley — Executive Vice President and Chief Financial Officer

Good morning.

Michael Halloran — Baird Equity Research — Analyst

So a couple of here. First, how are you guys thinking about backlog normalization, still very elevated sounds like you don’t expect that to get more normalized until probably next year/ And then related any in your guidance, is there any change in assumptions for underlying demand at this point from current levels or is the run-rate you’re seeing kind of what’s embedded in the guide something on?

Joseph P. Kelley — Executive Vice President and Chief Financial Officer

Yeah, I guess, let me take the first part on the backlog question, Mike, I would tell you, if you look at 65% of our business that backlog has — it’s getting close to historical pre-COVID levels, if you say pre-COVID levels we ran that business at about 80% to 90% of quarterly sales in backlog heading into any given quarter for 65% of our business, we’re at about one quarter worse in the backlog. So it’s almost at historical levels. The piece that hasn’t reverted and I don’t know that it is going to revert to historical practices is 30% — about 35% of our businesses, which is the large systems business, the coatings business, the plastics business, and the medical — the Medical Interventional Solutions business. There, where we continue to have a backlog at an elevated level. Orders continued to be strong and it’s about two-and-a-half, a quarter’s worth of backlog that we’re running in those businesses, and so we’re not seeing that portion of our business revert to historical norms while the remainder, yes.

Sundaram Nagarajan — President and Chief Executive Officer

The second part of the question is.

Joseph P. Kelley — Executive Vice President and Chief Financial Officer

And sorry, could you repeat the second part of the question, please?

Michael Halloran — Baird Equity Research — Analyst

Yeah, just within the guide is there any assumption for improvement or deterioration of underlying fundamentals and [Technical Issues]?

Sundaram Nagarajan — President and Chief Executive Officer

Yeah.

Michael Halloran — Baird Equity Research — Analyst

So avoiding backlog normalization in there.

Sundaram Nagarajan — President and Chief Executive Officer

Yeah, yes. So if you look at our assumption and order entry, we do feel that it has stabilized at the level we saw that stabilization throughout Q2, and so we continue to guide assumes that we remain at the levels and then what you have on that within the quarters is the timing of the systems deliveries, and so that’s what drives the quarterly fluctuations.

Michael Halloran — Baird Equity Research — Analyst

And then within the medical business, the fluid business there, should that just correlate more with ATS at a high level on a forward basis, and how are you guys thinking about the normalization of that piece because the biopharma piece, you give them a lot of context to the other parts of our medical side of things, you’re feeling pretty healthy about. So just more of the timing on that remaining piece and how you think about that normalizing.

Sundaram Nagarajan — President and Chief Executive Officer

The biopharma part of MFSm, I would say normalizes by the end of the year, right. And so going into next year, we do — we are back to the 7% to 8% year-on-year growth, that’s our expectation for medical fluid component business. And as you think about ATS, that’s going to be a little bit in the middle of 2024, so I must add our fluid component comes in first, our ATS business comes in, next. And some of this normalization of comps to so. All right. No-no-no yeah, Naga, I think you mentioned that earlier in the call more specifically referring to that in the parts of that segment. I don’t want to construction, the itemize cetera-type pieces. Okay, Joe, I want to take that. Yeah, I’d tell you that the fluid. This management piece of MFS that’s not on the Medical Interventional and not on the medical fluid component side that piece of the business, EFD. I would tell you, roughly. half of that business has the exposure end-market exposure similar to our broad ATS segment. And the other half is more industrial construction. There’s animal health medical. So that’s how we think about it.

Michael Halloran — Baird Equity Research — Analyst

And then okay, I’m sorry, go ahead, Naga.

Sundaram Nagarajan — President and Chief Executive Officer

Certainly, Mike. So for the portion that is — has the electronics into construction exposure in Asia. You are right, we got to think about it like the ATS, the covenant.

Michael Halloran — Baird Equity Research — Analyst

Great. I appreciate it. Last question, you guys mentioned some actions internally to normalize for demand, is there any way you could quantify what that — those cost actions look like or how are you thinking about more this just run-rates with demand and helps to mitigate what those detrimental margins would look like?

Sundaram Nagarajan — President and Chief Executive Officer

Yeah, those, the cost actions in the quarter were 3.5 million roughly to respond to very focused actions within the MFS segment and the ATS segment to adjust our cost structure. I will tell you some of those, Mike were structural, not so it’s not just the variable piece, but we didn’t take some structural cost-reduction actions, particularly in ATS. That will help benefit that segment’s profitability recovers back to this historical level, let’s just say in ’24. And so the savings generated within the quarter, within the year will offset the $3.5 million.

Michael Halloran — Baird Equity Research — Analyst

Great. Really appreciate it. Thanks.

Sundaram Nagarajan — President and Chief Executive Officer

Mike. I think. I know you didn’t ask this question, but one thing I would remind all of us is that. Yes, the business is adjusting to the market demand and I think that was the right thing for us to do, but I’d keep in front of mind for all of you that we have that we stay invested in our customer-centric business model, in our product innovation, in NBS Next deployment. So this is really important and making sure the company is well-positioned. As we adjust for the short-term headwinds we are well-positioned for long-term continued growth, more than 80% of the business is growing and so we want to make sure we stay invested in innovation, stay invested in our customer experience so that we do well in those parts but also even in the parts where we have some short-term headwinds, we are invested in innovation, so.

Michael Halloran — Baird Equity Research — Analyst

Thanks, Naga. And maybe next call we’ll have a smoother back-and-forth. I won’t cut you off.

Sundaram Nagarajan — President and Chief Executive Officer

That’s okay.

Operator

[Operator Instructions]. Our next question comes from Allison Poliniak from Wells Fargo. Please go ahead. Your line is open.

Allison Poliniak-Cusic — Wells Fargo Securities — Analyst

Hi, good morning.

Sundaram Nagarajan — President and Chief Executive Officer

Good morning.

Joseph P. Kelley — Executive Vice President and Chief Financial Officer

Good morning, Allison.

Allison Poliniak-Cusic — Wells Fargo Securities — Analyst

Naga, I’m starting to get some questions on Micron — China’s Micron ban just any comments or color on flow-through to you guys or any risk that you guys see there. Thanks.

Sundaram Nagarajan — President and Chief Executive Officer

Micron is somebody that we work with in our optical business. What we are focused more on the long term so because as Micron has this capacity in other places, we are certainly going to benefit as you have seen, they have made some pretty strong projections on where they are investing here in North America. So as I think about this, we’re going to benefit from alternative investments they make capacity. So as you know, Nordson benefits when people add new lines to expand capacity or make alternate investment. So I feel like, yes, that might have a pressure on — there are questions on what their investment, but I think long-term, the way you want to think about this, this is another reason why they would want to expand their capability.

Yes, there may be some impact on their volumes in China but we’re not — our business is that impacted by volume of chips manufactured. In a lot of other ways we are very close. Our customer-centric business model allows us to stay in touch with our customers in a very close way and allows us to understand where they’re headed and where we’re doing. So this is pretty new news, this is probably we thinking about how does it impact us in the long-term, so.

Allison Poliniak-Cusic — Wells Fargo Securities — Analyst

Understood, thanks. And then you made a comment IPS generating better growth and execution than you have laid out at the Analyst Meeting. Just want to understand kind of where the surprise was for you in terms of division with sort of the development of products, is it execution, just get a better sense on how sustainable you think that is going forward.

Sundaram Nagarajan — President and Chief Executive Officer

Yeah. I think there are a couple of things that I’d like to point to. First point is each of our businesses have been thinking about our NBS Next growth framework and have been using what we call internally strategic discipline, strategic discipline really is about understanding the best growth opportunities and doubling down on those best growth opportunities. So what you begin to see here is a concerted effort by all of our divisions to be focused on the best growth opportunities. Definitely, they benefit from some macro secular trends that we are pretty excited about, first in terms of onshoring or reshoring or fren-shoring, whatever you want to call it what you find is our customers beginning to add capacity moving away from Asia, investing more closer to home, we certainly benefit from it. So that is an important one.

The other thing that we are benefiting from in this business is that there are a number of emerging electric vehicle applications that are, electric vehicle as well as battery manufacturing continues to evolve, so I wouldn’t say the business is fully solidified yet, but these new applications certainly help us and help the company play in some new applications we have not had opportunities but strategic disciplined kind of brings all of that into focus for the business, allows them to invest there.

So those would be the two things that I would point to. Certainly execution inside the business in terms of our factory, dedication to our best products is certainly also playing out. So in most in the businesses, we have holistically implemented NBS Next, you’re starting to see a significantly better customer service that is market-leading. So, I would point to those three things as sort of where we see how NBS Next just helping our teams deliver on growth opportunities.

Allison Poliniak-Cusic — Wells Fargo Securities — Analyst

Great, thank you.

Operator

Our next question comes from Walter Liptak from Seaport. Please go ahead. Your line is open.

Walter S. Liptak — Seaport Global — Analyst

All right, thanks, good morning guys.

Sundaram Nagarajan — President and Chief Executive Officer

Good morning, Walter.

Walter S. Liptak — Seaport Global — Analyst

I wonder if you might be. Thank you. Thanks. Maybe as a follow-on to the last couple of questions using NBS Next with this strategic discipline. In the ATS segment, I think you guys have been working on trying to broaden some of the applications from traditional semiconductor electronics to automotive sensors, IoT, things like that and I wonder if there is a metric that you’re looking at now or if there’s something you could tell us about sort of the fruits of that effort.

Sundaram Nagarajan — President and Chief Executive Officer

Yeah, within the business, we have got like four targeted KPIs that we measure, which sort of gives us a view of how we are doing in terms of deploying NBS Next, and we call it leadership-level performance. So we have leadership level performance on customer growth as one of the key metrics for the business within the company and what you’re beginning to see is that businesses that are not impacted by significant macro trends that metric is trending towards where we would like to be, right, and it differs from business-to-business. So I can’t give you a specific number, but what I would tell you is business-by-business, the teams at identifying what is the leadership level performance and we are beginning to see some nice progress in businesses on customer growth, certainly on new product innovation, and there are a couple of other metrics around customer service levels that we are very excited about. So, number of internal metrics that allows us to track the effectiveness of the strategy deployment and execution that is leading to some pretty strong customer experience that we believe translates into growth and profitable growth for the company.

Walter S. Liptak — Seaport Global — Analyst

Okay, all right. Great, that’s helpful. And then just switching over to IPS again. The 9% organic, I wonder if you could help us understand how much of that was volume growth and how much was price.

Joseph P. Kelley — Executive Vice President and Chief Financial Officer

Yeah, Wal, this is Joe. I would tell you the price realization for Nordson broadly improved in Q2, and so I would estimate that approximately 4% of that 9% for IPS segment would be attributable to price and 4% will be volume.

Walter S. Liptak — Seaport Global — Analyst

Okay, incremental mark.

Joseph P. Kelley — Executive Vice President and Chief Financial Officer

I’m sorry, go ahead.

Walter S. Liptak — Seaport Global — Analyst

And the 50% incremental margins looked really good too, is that, is there NBS Next in there, we’re now operating at a higher level or is that just catch-up on some of the price-cost?

Joseph P. Kelley — Executive Vice President and Chief Financial Officer

No, I would tell you that NBS Next expressing itself on the price-cost, we got to the point where I would tell you that is no longer a headwind, if you recall the last two quarters that’s been pressuring our gross margins, and so here that is price-cost balance for Nordson is no longer pressuring the gross margins as we have realized the price increase to offset inflation and maintain our margins.

So what you’ll see there in the 6% incremental margin for IPS it’s largely consistent with what we’ve seen over the past couple of years and I would tell you, there’s a host of issues there, but it’s the benefit of NBS Next being broadly implemented throughout those divisions.

Walter S. Liptak — Seaport Global — Analyst

Okay, yeah, congratulations on that. Okay, thank you.

Joseph P. Kelley — Executive Vice President and Chief Financial Officer

I would like to make one other comment. I think it’s back to Matt’s question around the Q3 guide, I spoke to what was assumed in the guide below operating profit but when you look at the operating profit line and the gross margin, our gross margins were roughly 54.5% here in Q2 consistent with Q1. That being said that the drivers of that were a little bit different in Q1, the price realization is no longer a headwind but what you see in Q2, the margins are pressured by the lower volumes that we’ve talked about on those two particular businesses and then offsetting that is the growth, but the growth is coming without less favorable sales mix as it’s becoming and coming in product lines such as plastic processing and others who are delivering double-digit growth. So the profitability when you think about Q2, going into Q3 profitability from a gross margin and OP margin should be comparable. So the mix is comparable.

Operator

We have no further questions. I would like to turn the call back over to Naga for closing remarks.

Sundaram Nagarajan — President and Chief Executive Officer

Our performance reflects the strength of our differentiated position technology customer-centric model and diversified end-markets. Again, I want to thank Nordson’s employees for their commitment, which makes these results possible. The continued deployment of NBS Next, and the Ascend strategy will position us well for long-term growth.

We look forward to the opportunity to talk with you at upcoming investor events. Joe, Lara, and Stephen Lovass, our MFS segment leader will be at the Deutsche Bank Industrial Conference on June 8 in New York; Joe, Lara and Jeff Pembroke our IPS segment leader will be at the Wells Fargo Industrial Conference on June 13th in Chicago; and Joe, Lara, and our Segment Leader of ATS, Srini Subramanian will be participating in a virtual roadshow with Loop Capital on June 14th.

Thank you for your time and attention on today’s call. Have a great day.

Operator

[Operator Closing Remarks].