As a reminder, this conference is being recorded. At this time, I would like to turn the conference call over to Lara Mahoney. You may begin.
Thank you, Livia. Good morning. This is Lara Mahoney, Vice President of Corporate Communications and Investor Relations. I'm here with Mike Hilton, our President and CEO, and Greg Thaxton, Executive Vice President and CFO. We welcome you to our conference call today, Tuesday, May 21, 2019, to report Nordson's fiscal year 2019 second quarter results. Our conference call is being broadcast live on our webpage at nordson.com/investors and will be available there for 14 days. There will be a telephone replay of the conference call available until June 4, 2019, which can be accessed by dialing 404-537-3406. You will need to reference ID number 6423748. During this conference call, forward-looking statements may be made regarding our future performance 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. After our remarks on the quarter, we will be happy to take your questions. With that, I'll turn the call over to Mike.
Good morning, everyone. Thank you for joining Nordson's fiscal 2019 second quarter conference call. The Nordson team delivered a solid second quarter. One of Nordson's greatest strengths is the diversity of our end markets and our ability to execute on our growth initiatives. This was evident in the second quarter as we achieved total company organic sales growth of 3%, with all three segments contributing organic sales growth. I'll speak more about our fiscal 2019 annual guidance in a few moments, but first, I'll turn the call over to Greg to provide some more detailed perspective on the second quarter.
Thank you, Mike, and good morning to everyone. Second quarter 2019 sales decreased less than 1% compared to the prior year's second quarter. This change included an increase of 3% organic volume and a decrease of 4% related to the unfavorable effects of currency translation. Growth in the quarter related to the first year effect of the fiscal 2018 acquisition of Clada Medical Devices was not significant. Within the Adhesive Dispensing System segment, sales decreased 1% compared to the prior year's second quarter, inclusive of an increase in organic volume of 4% and a decrease of 5% related to the unfavorable effects of currency translation as compared to the prior year. Growth was solid across most all product lines. Advanced Technology System sales decreased approximately 1% compared to the prior year's second quarter.
Organic volume growth of 2% was offset by a decrease of 2% related to the unfavorable effects of currency translation, again, as compared to the prior year. Double-digit growth within the Fluid Management product lines was offset by product lines serving electronics end markets. Industrial Coating Systems sales increased approximately 2% compared to the prior year's second quarter. These results included organic volume growth of 4%, where growth was solid for most product lines, and a 3% reduction related to the unfavorable effects of currency translation as compared to the prior year. Moving down the income statement, gross margin for the total company was 55% in the quarter. Operating profit was $129 million with reported operating margin of 23%. On a segment basis, Adhesive Dispensing Systems delivered strong operating margin of 30% in the quarter.
Within the Advanced Technology Systems segment, reported operating margin was 23% in the second quarter, which was in line with the prior year on lower sales. Industrial Coating Systems segment reported operating margin of 22%, an increase of 340 basis points compared to the prior year, driven by volume leverage and improved sales mix. As with performance in all segments, this segment's performance is also the result of continued emphasis on the Nordson Business System. On a total company basis, net income for the quarter was $92 million, and GAAP diluted earnings per share were $1.58, inclusive of a $0.04 per share discrete tax benefit related to share-based compensation. We delivered second quarter EBITDA of $156 million or 28% of sales.
Free cash flow before dividends during the quarter was $93 million, resulting in cash conversion of 102% of net income. Our press release includes financial exhibits reconciling net income to free cash flow before dividends and adjusted free cash flow before dividends, as well as EBITDA and adjusted EBITDA. From a balance sheet perspective, net debt to EBITDA was approximately 2.1x trailing 12-month EBITDA at the end of the second quarter. I'll now turn the call over to Mike for a few closing comments.
Thank you, Greg. We continue to believe the diversity of our business, including geography, applications, and end market diversity, along with our ability to innovate and deliver on growth initiatives, will allow us to achieve our long-term growth targets. As we look at the remainder of the fiscal year, we continue to forecast organic growth for the year, though the impact of macroeconomic trends suggest our organic growth will likely be in the low single digits for fiscal 2019. Based on current exchange rates, we still expect unfavorable currency translation effects of 2% compared to the prior year. With this sales outlook, we remain confident in our ability to generate approximately 100 basis points of operating and EBITDA margin improvement over the prior year as we continue to focus on continuous improvement throughout the businesses.
As always, thank you to our customers, employees, and shareholders for your continued support. With that, we'll pause and take your questions.
Ladies and gentlemen, at this time, if you have questions, please press the star then the number one key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. To prevent any background noise, we ask that you please place your line on mute once your question has been stated. One moment for our first question. Our first question coming from the line of Chris Dankert with Longbow Research, your line is now open.
Hey, morning, guys. Thanks for taking my question.
Morning, Chris.
I guess as we kinda move into the back half of the year here and into 2020, can you just kind of break out, you know, any kind of synergistic benefit from the plant consolidation? I know we've got some duplicative cost reduction, maybe it's $6 million on fiscal 2019. Just kind of what is the synergistic benefit, you know, beyond just removing those costs?
I think as we've, you know, said before, we expect to see some efficiency improvements as we go into 2020. We didn't necessarily expect to see them this year as we lined out all of the new equipment there. We haven't put a number on that yet, and so I think we're not really ready to do that. We would expect to see some efficiencies in 2020 coming from, you know, optimizing the operations as a result of the consolidation.
Chris, this is Greg. I'd add in 2019, that is part of the margin expansion we expect to see as we kinda wind down the consolidation efforts, we expect to see some of that benefit in the current fiscal year.
Got it. Thanks. On the last call, you guys had mentioned, you know, we didn't need to see an upward inflection necessarily in mobile to kinda hit the prior organic guidance range. I guess, kind of what's baked into the new range? Just kinda how you're thinking about mobile, particularly within that guide?
Yeah, I would say, you know, one of the things that sort of affected us a little bit in this quarter and will affect the, you know, Q3 in particular is we really haven't seen our customers introduce any significant level of innovation into this cycle of phones. So we're not counting on that going forward for the rest of the year. And quite frankly, that has impacted our forecast in moving that down a bit. So for the rest of the year, we're not really counting on any kind of significant step up related to innovation in our customer base.
Got it. Thanks. If I could just sneak one in on top of that, I guess. I don't expect so, but have you seen any impact from kind of the Huawei tension? Just any comment there would be helpful.
I didn't catch the last part. What did you say of what you said there, Chris.
Oh.
The impact of?
Apologies. Just any kind of impact from the tension between, you know, China and the U.S. as it relates to Huawei?
I would say in general, I think some of the slowness in our electronics equipment business is a function of just the current trade tensions. I think some people are holding off on investment. As it relates to Huawei, I think we'll need to see how that plays out. You know, obviously, we've said it before that the Chinese mobile players are our customers, so we'll have to wait and see how that plays out. But again, we're not expecting a significant step up in any kind of innovation across the board in that segment for the rest of the year, and that's been a key focus of bringing our guidance down.
Understood. Thanks so much, guys. I'll hop back in queue.
Okay.
Our next question coming from the line of Matt Summerville from D.A. Davidson, your line's now open.
Hey, good morning. This is Drew Haroldson on for Matt.
Morning, Drew.
First off, I'm wondering what performance in ADS was between the four main buckets in the second quarter and what its go-forward outlook is.
I would say across the core ADS business, most of the businesses performed well. You know, the Nonwovens were still a little softer, but we're starting to see some improvement from an order perspective there. We're encouraged, I'd say, for the second half of the year across all of those product lines. Some of those, like in the PPS area, are longer lead projects, so will have more of an impact in the fourth quarter.
Got it. Second off, I'm wondering how the three individual segments compared to the low single digit organic outlook for the whole company?
You know, for the year. We still expect all of the segments to grow. You know, some you know marginally and some a little bit more, but we still expect them all to grow for the year. Individual product lines you know aren't likely to grow. For example, our electronic systems product line is likely to be down.
Got it. Thank you.
Our next question coming from the line of Jeff Hammond with KeyBanc Capital Markets. Your line's now open.
Hi, good morning, guys.
Good morning.
Just to be clear on the guide, is the lower revenue guidance isolated to the electronics piece? Or are there other areas of softness that you're seeing? Maybe just within that, speak to what you're seeing out of Europe and out of your automotive end markets?
Yeah, I'd say it's largely the electronics piece. Most of our other product lines are doing well, and we expect them to continue to do well. Our run rate businesses in particular, like medical and EFD and our packaging business are particularly strong. You know, the auto business is kind of choppy. It's been a drag for a couple of years. We don't see it having a big effect, you know, net-net on the year, although it was more of a drag in the first part of the year.
Just on the margin ramp, you know, it looks like your margins were down a little bit, 1Q flat and 2Q, and then, you know, you still think of a 100 basis point margin ramp. Can you just talk about, you know, how you ultimately get there, you know, given and where you see incrementals to get to that number?
Yeah, I would say if you look at it, there's a piece of that that is related just to improving the performance in our polymer business, and so eliminating some of that duplicate cost and some efficiency there. You know, our Nordson through our Nordson Business System, we have a bunch of projects that we're working on that are, you know, we'd call in the singles category, so projects that generate, you know, several $100,000 a year of improvement. That may be through automation, it may be using our ability to insource some things that we outsourced. There's a variety of things at each of the businesses that, you know, when you add them all up, are significant.
It's really driving that Nordson Business System piece along with improvements in our polymers business.
Jeff, this is Greg. Of course, the volume growth, you know, will generate some with the incremental that we generate on that volume.
Okay. Then just, you mentioned the electronics and advanced tech. I think if you look, I think you had the really tough comp in 1Q, and I think the comps get easier into 3Q. Maybe just, you know, talk about cadence in the advanced tech business as you see it, you know, into the back half of the year?
Yeah. I think when we look at the next quarter, you know, with my earlier comments that we really haven't seen innovation on the customer side, you know, the electronics piece is gonna continue to struggle in the fourth quarter or in the third quarter. In the fourth quarter, you know, there's maybe some easier comps. Maybe just some commentary on the overall company looking through the rest of the year. We expect Q3 to be up modestly from a revenue perspective, and we expect Q4 to be up more substantially. The Q4, Q3 piece has really continued to drag from electronics. The Q4 piece is really a function of long lead projects that we already have in-house or expect to come in in the near future.
On the strength of our run rate businesses, which would include things like medical, our EFD business and our packaging business. That combination gives us some comfort that we'll see a stronger fourth quarter that ultimately, when you integrate them across the year, gets us to that sort of overall low single digits.
Jeff, I'd just add a little commentary. You know, in a year where it plays out as Mike suggested, where we don't have the innovation in the electronic end markets, you would typically see our fourth quarter being stronger, the strongest quarter in the fiscal year. It kind of plays out that this is in line with that type of year. As Mike characterized, you're likely to see continued growth as we move through the year.
Okay, there's a step-up in growth in all the segments into the fourth quarter? Or would that be isolated to advanced tech?
No, not just advanced tech. I mean, we see strength, you know, real strength in the, as I said, in those run rate businesses. I mean, you know, we've talked about it. Medical has been particularly strong. You know, key parts of our EFD business, we expect to be strong. Our packaging business has been really solid. We, you know, we have long lead orders in place in things like our coatings and our polymer business that give us some comfort. We are seeing some improvement in the near term in our Nonwovens business. That combination, you know, I think is helpful. Outside of the dispense side and the electronics piece, the other parts of the business are solid.
That's the sort of combination that when you look at it, you know, adds strength to the fourth quarter, and the electronics piece is probably a bit of a drag in the third quarter still.
Okay. Excellent. Thanks, guys.
Our next question coming from the line of Walter Liptak with Seaport Global. Your line's now open.
Hi. Thanks. Good morning, guys.
Morning.
Morning.
I wanted to ask, you know, about Huawei directly, 'cause I don't think on one of these calls we've ever talked about a specific customer. I know, you know, we know you sell to the, you know, the mobile device makers, and some of the Chinese mobile phone companies become more important over the last few years. I wonder if you can give us some insight into, you know, what's happening. You have a fair amount of business out of China and obviously with trade war and a lot of things that are in the press right now, I wonder what your view is on, you know, how that's impacted the business and the quarter and you know, what that might do, you know, in the coming quarters?
What I would say at a high level, Walt, we do think and if you look at our geographic numbers, they're down in Asia. We do think that the trade issues back and forth are creating some delay in investment in Asia, a lot of that linked to the electronics part of the business. You know, from a mobile perspective in general, as we said, it's not been a year with a lot of innovation, you know, where it had some promise in the beginning of the year that's really not played out. You know, I think as we said before, we support all of the larger, you know, and the Chinese players.
I'd say there is, you know, some concern with the latest sort of rounds of discussion, you know, and even last night there's been some relaxation as it relates to Huawei. But, you know, no one customer is significant enough that's gonna drive what we see going forward. Our forecast is assuming, you know, pretty modest year from a mobile business in general. We're not, you know, counting on it. You know, does this do these tensions make it potentially worse? It could. I mean, we're trying to account for that, but it could.
Okay. You know, the comments about innovation, I wonder if you can just go a little bit deeper on that. I know in the past we've talked about 5G, and it seems like 5G is moving forward in some parts of the world. You know, is it, you know, what do you think the timing is of that? You know, what other kind of innovation were you thinking could be happening that maybe is pushed out a little?
Yeah. We typically work on a lot of projects, you know, from the November through sort of the February timeframe. Typically some of those go forward in a year where you see significant changes in models. You see a lot of that being incorporated in a year where it's pretty incremental, you don't see as many. I'd say this is a year where we haven't seen much at all in the way of innovation. I think some of that's related to just sort of a lull of demand for mobile phones. Some of that's, I think, related to the trade issues that are ongoing right now. We haven't seen a lot of new investment incorporated into innovation.
As it relates to 5G, there are headline news out there around 5G and 5G capable phones, but really, there's not much incorporated in the phone at this point. The driver for that is gonna be less on the phone side and more on the infrastructure side. For 5G to work effectively, to get the benefits of it, you need a lot more localized infrastructure in place. That's gonna play out, you know, from 2020 through 2020, 2021 and beyond because the range of 5G is very short, and so you need a lot more physical antennas in and outside. Then within the phones, you need fairly significant changes. I think it's 2020 and beyond in terms of having a real impact, and it's gonna be somewhat linked more to the broader infrastructure play.
Now, there's some opportunities for us in that infrastructure play too, but these require high density transmission towers. Not like we necessarily have today. You know, you can hang all this stuff on lampposts and everything else, but it's an investment that has to happen. Until that happens, you're not really gonna get a benefit on the phone side. I'd say while you see advertised 5G, and in fact, I think even some of the U.S. phone companies had to withdraw their comments because they're not really 5G at this point.
Okay, thanks for that. Just one last follow on from one of Jeff's questions about Europe. You know, the volume growth of 4.6% looked very good. I wonder if you could talk about, you know, any of the trends that are going on there, either by segment or, you know, 'cause we hear about EU slowing and Brexit, and maybe anything on like new orders or backlog that can help us understand what the trends are like in Europe?
Yeah. I would say, you know, if you look at, you know, Europe in general, coming into the year, we thought it was gonna be a pretty modest growth year, maybe a little bit less than last year from a broader economy. You know, I think that's in fact what's playing out, although there was some more encouraging news most recently, I think, out of Germany. You know, for us, it's really a function of, you know, specific parts of our business like packaging that, you know, continue to remain solid. But we expect overall for Europe to be a modest growth year from an economic perspective.
Okay. Okay, thank you.
As a reminder, ladies and gentlemen, to ask questions, please press the star then the number one key on your touchtone telephone. Our next question coming from the line of Jason Rogers with Great Lakes Review, your line's now open.
Yes, I did have one follow-up on the mobile side. Just wondering, based on your past history, if you've seen back-to-back years where mobile customers did not innovate, just thinking about next year and, you know, the outlook for the mobile side.
Yeah. What I would say is this is a little atypical, 'cause you typically have a tick and a tock year as they describe it, and we really saw last year being relatively incremental and this year being fairly weak. I do think, you know, the trade side of that is having an impact, and I think it's affecting overall demand and then investment for it. I think that's unusual. I do think, you know, Walt's prior question around 5G is what's gonna be the next big driver around mobile.
You know, for us, the other thing that we've been doing is diversifying our business, you know, within the electronic space and, you know, doing more and more, for example, in auto electronics and in the semiconductor side, as well as driving growth in the non-electronics pieces in general industry and the medical side. That certainly helped, you know, that overall segment, you know, helped in the quarter. It'll help for the year because the other things, those run rate kind of businesses are doing well.
Okay, thanks.
Thank you. At this time, I'm showing no further questions. I would like to turn the conference call back over to Mr. Mike Hilton for closing remarks.
Thank you. Thank everyone for participating on today's call. Just as one final summary point, we do expect to grow this year, as we said, low single digits. We do expect to improve our margins 100 basis points. Despite some of the challenges that are out there from a macro perspective and some of the industry specific challenges, the diversity of our businesses can allow us to grow and improve margins this year. I wanna thank all of our team for being focused on delighting customers and making that happen. Thank you.