Nordson Corp (NDSN) 2003 Q1 法說會逐字稿

Good afternoon. My name is Marci and I will be your conference facilitator today. At this time I would like to welcome everyone to the first quarter fiscal 2003 results 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 period. If you would like to ask a question during this time, simply press star, then the number 1 on your telephone key pad. If you would like to withdraw your question, press the pound key. Thank you. Ms. Price, you may begin your conference.

Thank you Marci. Good afternoon, this is Barb Price Manager of Shareholder Relations. And I'd like to apologize for being about five minutes late today but we were having problems with our web cast and they tell me now the web cast problems are solved so we'll cross our fingers and go on. We also have today Peter Hellman, Executive Vice President, Chief Financial and Administrative Officer and Nick Pellecchia, Vice President and Controller. We would like to welcome you to our conference call today, February 26th, 2003 on Nordson first quarter 2003 results.

Our conference call is being broadcast live our web page at www.nordson.com and will be available on our web page for 14 days. There will be a telephone replay of our conference call available until midnight Tuesday, March 4th which can be reached by calling 1-800-642-1687. You will need to reference ID number 8438767. Our attorneys have asked us to open this call with a cautionary statement under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

During this conference call, forward-looking statements may be made regarding our future performance, based on 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 & Exchange Commission that could cause actual results to differ materially. After our remarks, we will have a question and answer session. I would now like to turn the call over to Peter for an overview of our first quarter fiscal 2003 results and Nordson' future outlook. Peter.

Thank you, Barbara and thank you all for attending Nordson conference call discussing our first quarter 2003 results. I'll make some overall general comments before turning it over to your questions. Much like the last year and a half, Nordson's first quarter was affected by the continued slowness in industrial spending. Sales for the quarter were $145m, up slightly from the prior year, something we have not been able to say for the past six quarters. This occurred because of the help of a weakening dollar. As volume was down 3.3%, while currencies added 3.6%. For a net increase of sales of approximately .3%.

Our volume reflects the continuing economic slow down in North America. It is important to note however that our other three geographic regions experienced an increase in volume. On a geographic basis volume was down 19% in North America but was up 3% in Europe, up 42% in Japan, and up 16% in the rest of the world. On a business segment basis, adhesives experienced a volume decline while finishing and advance technology both saw volume increases. The decline in adhesives can entirely be attributed to our fiber business, which last year was in the midst of a relatively large order. Volume in the first quarter by business segment was down 7% in adhesives, down 5% in finishing -- I'm sorry, up 5% in finishing and up 2% in advance technology.

While we are pleased to report increases in business segments and geographic markets, these markets still reflect an environment of relatively slow economic activity. We see this as consistent with the external economic patterns and does not reflect market share or other Nordson-specific issues. In fact it is our view that we have gained share during this downturn. As we have stated in recent quarters, demand is measured by orders, has stabilized over the past year or so. On a year to date basis, orders are running slightly ahead of last year's pace. Over the past 12 weeks, however, order rates are running at 107% of last year's demand.

On a sequential basis, that is, the past 12 weeks versus the 12 weeks before that, we are at 104%. I caution that the prior 12-week period includes Christmas and new year holidays. By segment the past 12-week order rates versus a year ago are 112% in adhesives and 82% in finishing. They are up 16% in advance technology, helped by our UV, plasma and EFD businesses. On a geographic basis, orders over the past 12 weeks in North America are at 116% of the prior year's level while Japan had orders as 114% of the prior year, Europe was equal to last year, and PSD had 87% of the prior year's level. On a sequential basis, the picture is somewhat similar. North America at 108%, Europe at 100%, Japan at 92%, and Pacific South or the rest of the world at 105%.

We ended the quarter with $60m in backlog. That is up from the beginning of the quarter, $14m . While we continue to focus on cost control in this environment, on a year to year basis, gross margins in the quarter decreased from 55% to 54.5%. Last year's gross margin was positively affected by estimates of overhead absorption and engineered systems costs. Without the year to year effect of these items, gross margin would have improved by a half of 1%, reflecting foreign exchange benefits. On the operations side, we are pleased with the rollout of our hot melt adhesive product line Problue (ph). The adoption rates for this new line of products is higher than we planned. At this stage in our rollout and at this level of manufacturing volume, we see slightly higher unit costs. We are working on manufacturing cost reductions, and would expect to see efficiencies as we manufacture higher volumes.

Our focus on spending can be seen by the fact that in constant currency terms, spending was flat year to year, but was up 2.7% with currency effects included. While there were little in the way of restructuring costs for this quarter, we anticipate as much as $2m of restructuring cost for the full year 2003. These will be targeted at specific businesses which continue to see volume declines and will not be widespread actions. Our interest expense continues to reduce, reducing $900,000 year to year, or 17% from a year ago, reflecting our reduced debt levels and low interest rate environment. Nordson's net income for the quarter was $5m versus $5.7m the prior year and fully diluted earnings per share was 15 cents a share which was 4 cents better than consensus and compares to 17 cents a share last year.

Our operating cash flow for the quarter continued to be relatively strong, in a quarter that typically is not a period of cash generation. Specific cash flow items are non-cash charges that generated cash flow of $8m, working capital, capital expenditures, and dividends each required cash, $10m for working capital, $1m of capital expenditures, $5m of dividends were paid. We also had cash inflow of $4.4m from other items such that net cash flow was a generation of cash of $1.5m. Cash related measures reflected relatively good performance in this environment. The quarter EBITDA or earns before interest, taxes, depreciation and amortization was $19m or 56 cents a share, versus $20.5m or 61 cents a share in the prior year.

In summary, the quarter reflected the soft economy and lower sales. We continue to watch cost closely, yet despite the environment we continue to generate good cash flow that has been used to reduce our debt levels.

Let me turn to some brief comments about our outlook for the second quarter. As we saw in our discussion of orders, we see some signs of improvement from the environment experienced for the past year or so. We also take some comfort from the fact that we have been operating at somewhat a stable level, and a level which we have aligned our costs, a level to which we have aligned our costs. This, coupled with the recent decline in the dollar, should be positive for the second quarter. This outlook would result in a volume decline of approximately 3% from last year.

However, should foreign exchange rates hold at today's level, there would be a 6.3% benefit from foreign exchange resulting in an increase in sales of 3.3%. This sales outlook will result in earnings before charges of approximately 29 cents a share. That is equal to the consensus of wall street analysts. This estimate would also represent an increase in earnings before charges of approximately 16% over the prior year.

In summary, we are continuing to be affected by the economic condition of industrial weakness. Our cost restructuring over the past two and a half years have helped position our cost structure for just such a downturn and should benefit us when recovery occurs. While the economic conditions continue to affect our current financial performance, there has been no deterioration of our leading market positions or the outlook of Nordson's longer term prospects. And with hose opening comments let us now turn to your questions.

Marci, hello?

Yes, ma'am.

Are there any questions?

At this time I would like to remind everyone in order to ask a question please press star and the number 1 on your telephone key pad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from Robert McCarthy of Robert W. Baird.

Good afternoon, everybody.

Hi, Rob.

Let me ask a handful of little housekeeping questions first. Do you have -- I'm struck by the fact that inventory increased only slightly, compared with the end of the year, in contrast, you know, in past years it's typically a period of inventory building seasonally. And I'm guessing that currency would have increased, reported inventories. Do you have a figure for receivables and inventories excluding the impact of currency translation? I

I can give you some -- yes. Hold on here for a minute, Rob.

All right.

Okay, now, inventories before currency effects, decreased $900,000 from the beginning of the year. That's the decrease I could give you.

Okay, that's fine.

Okay, before currency effects. As you could see, the difference is going to be the currency translation. And that accounts receivable decreased $10.8m.

Okay, terrific. Let's see, what else do I have on the housekeeping? Your depreciation level is a little bit higher than I sort of expected in the first quarter. Any change in your forecast for full year for depreciation or CAPEX which was also a very low number.

No. No, I think -- I mean, it's -- nothing unusual in either of those cases. So I wouldn't -- I wouldn't expect to see any major changes from full year assumptions.

Okay.

But I would say that the first two questions you've asked, inventory and capital expenditures, reflect a change in culture at Nordson as we adopt lean. And we continue to find ways to bring inventory down to increase turnover, if you will. And also, find that there are other ways to improve our manufacturing other than spending capital. So we would expect improvement in both turnover of inventory as we go ahead, as well as the lower capital intensity.

Okay. Your comments, Peter, about the adoption rates for Problue, help me understand exactly what you're telling us. Adoption rates better than expected, are we talking about the mix between the new product versus the legacy product or --

Yeah, I'm -- what I specifically didn't want to do is say we're selling more units, because of the introduction. We don't know that to be the case. But what we planned on is number of Problue units versus number -- the mix between that and the legacy products. And what we're seeing is a stronger demand at Problue products than we anticipated in a mix sense. We may be pulling ahead orders but we're not saying that. What we are saying is just people are ordering more Problue than the old Vista series.

Does that have anything -- you noted that your units costs are up and of course reflect -- you're comparing against a very mature product and you're also talking about relatively low production rates.

Right.

But I'm wondering if that mixed shift has also created any short term issues that would have also been reflected in margin.

The margin effect is actually quite modest for a rollout, we did want to noted and we think we can improve upon it, as we point out at the manufacturing number of units goes up we should be able to get some efficiencies. We are working on that both in a manufacturing context as well as a purchasing context. But at this stage, we're very pleased with the rollout. We're very pleased by the acceptance of the product by the marketplace. This is a product that was first introduced or first announced and demonstrated in November, and you know, we're ahead of plan on all regards.

Okay. Despite -- I mean, you explained that you had the, in effect, the lack of some large fiber systems ordered business in the first quarter that you had last year. Did I understand you correctly to say that that's responsible for the entire 7% volume decline in adhesives?

Yes. Now, there were other ups and downs. So you would have to attribute it all. I mean, it's like any variance analysis.

that's what I want you get you to do. Would you kind of walk through the puts and takes for us?

Nick, why don't you.

Packaging was slightly up. Product assembly was down a few percent. These are all pretty tight bands, Rob. Packaging was up about 1%, product assembly was down about 2% to 3%. Non-wovens were up about 3%. That basically is the core of the adhesive group other than fibers. But you know, further what Peter said, if you just simply remove the fiber revenue issue away from it and just subtract it out and for all other adhesive businesses combined it was flat.

And is that the largest driver as well in the 19% decline in North America?

Yes. Because it was -- it was North American business.

Okay. And do we see the same effect in the second quarter? I mean, you know, when do we anniversary this not being a major issue?

Yeah, well, the timing of the fiber revenue last year, you know, the total fiber revenue was about $20m or so with this, and over $7m of it was in the first quarter. So it was -- you know, first quarter had a significant impact. It will start going away as the year goes forward. But there's still more to come, sure. This is a fiber revenue that we were counting on a percent of

You'll see a little of it in the second very little of it in the third and very little in the fourth.

It will diminish as you go forward. Of that major project over $7m was booked in the first quarter last year.

Okay I'll let somebody else go.

Thank you. Your next question comes from Bob Shenosky (ph) of CIBC.

Good afternoon. Question and follow-up if I could. The first question was on backlog. Peter, could you discuss it by division and also by domestic versus global?

We typically haven't broken backlog out that way. We could -- and since we report at the end of the quarter, the --

Peter, I guess what I'm trying to get after is, where you're beginning to see a little bit of improvement in the backlog data?

Well, I would say that the backlog increase reflects the typical seasonal improvement. I mean, backlog's at it's lowest year end. We're comparing to beginning of quarter or year end on a quarter-to-quarter and so this is the rebound that one would expect. Nick, do you have any --

Yeah, I would say that the -- across the three segments, Bob, the, you know, backlog increase in -- there's backlog increases in both adhesives and in advance tech. It's more pronounced than adhesives, the backlog increase is about $10m in adhesives. And then the balance was -- of that increase is basically in advanced tech area with finishing being roughly the same.

Okay. But beyond seasonal factors, you wouldn't attribute it to anything else but that?

Well, yeah. I mean, the -- you know, backlog builds in the first quarter. And we had a backlog build even last first quarter -- you know, first quarter other than this fiber situation, had a small backlog build. I think it mirrors itself in the order rates that Peter had referred before, in terms of the 12-week order rates. I mean, orders are up over a year ago. And you know, shipments were down, or flat, in certain businesses. And you know, that's the resulting build in backlog. So we do build backlog in the first quarter and order rates are up first quarter this year over last year at a better pace than, you know, the year prior. So I think you referred to, you know, some slight improvement in those 12-week order rate numbers and it's reflected in backlog.

Right. Because what I'm trying to get to on the question is, are you getting any additional confidence that your customers are finally coming back to the market and spending some capital this year compared to, say, the last two or three? Or is it still too early to tell that?

I think it's still too early to tell that. Last year this time, the numbers speak for themselves. We've seen some improvement in order rates both sequentially and year to year. And last year at this time, we saw the same sort of improvement. And it -- there was no follow-through if you will. It kind of waned during the second quarter. Keeping that in mind, it's too early to tell.

Okay. The second question I had the better volume you had in coating and technology, is this really just a -- because of easy comps or any of the EFD type business in tech, again looking for any bright spots or just easy comps?

We are encouraged by the EFD order rates. They're up and they're up pretty consistently. And to some extent that gives us some comfort even broader than the EFD product line in that that would, you know, given the nature of their products, that really speaks to industrial production, since it's largely an aftermarket business.

Right as velocity is improving. Could you give us a sense of the velocity, single digits, double digits?

Double digits, about 10%.

And in the coating section --

Just to complete, in UV and plasma we're encouraged but it is, as you pointed out, a comparison between kind of on a low base.

Okay. And then could the same thing be said then finally for coatings, is it easy comps or because of the multicolor changeover systems?

I think the coating systems, some of it is color change systems. But the demand we had good demand in the first quarter in the Pacific South region, as well as Europe and Japan. And the geographic numbers that Peter had quoted before reflected a good demand for finishing systems in those -- in those regions.

I say last year, when we talk about easy comps, yeah, you know, last year's numbers were depressed from the year prior. And there is some of that in those comparisons too, obviously. But where we are -- where we did see the improvement in the first quarter was outside the U.S.

Okay, great. Thanks for the help.

Your next question comes from Walt Lidpack(ph) of McDonald’s Investment.

Good afternoon, guys.

Hi, Walt.

You're commenting on the weak dollar situation and how that should be impacting sales. At this point are your products becoming more competitive and what are competitors doing in terms of lowering price to match, you know, Nordson's product price?

Well, you know, foreign exchange has had very little effect on our competitive pricing overseas. You know, to a large extent we compete against people who also have dollar-based cost. Let's first of all talk about the mix of our business. A lot of advanced technology is sold in dollars. EFD records its sales in dollars, distributors sell in local currency. But EFD it's a dollar transaction. Sintec(ph) sells in dollars.

So foreign exchange is less of a factor than it used to be for Nordson taken as a whole given the size of those relative businesses in our portfolio. But foreign exchange does have an impact in adhesives and in finishing. And to some extent our businesses compete with other businesses who have, you know, dollar content in their products. We really haven't seen that big an impact to competitive pricing caused by exchange. But it's had an effect on our margins. And so we're seeing the benefit of the weakening dollar from that extent. Do you have any other --

As I say our packaging business in Europe which is the most wide suppress of our businesses with currency fluctuation, all of those prices, you know, we are competing against euro based companies and our prices in euros and theirs in euros. We haven't increased or decreased our prices, we've kept them the same and we're benefiting from the translation of those prices in, you know, more U.S. dollars. So we are getting the benefit in our margins. But I don't think it's created a pricing situation to our competitors in that case because you know, prices have been relatively stable.

Okay, all right, fair enough. You also made comments about the low interest rate environment being good for product or for product sales. What is kind of like the general pay-back on your product, typically I remember it being a year and a half or something like that pay-back.

What I was referring to in low interest rates was our interest costs.

Okay.

Given the percentage of our floating rate debt. But you know, customers also are seeing a reduction in interest rates. But I don't see -- we don't see that being as large an effect to customer behavior. Sure, it improves the pay-back, and there's even some tax incentives now under the fiscal recovery act of last year, that helped customers who buy capital goods. But we don't see those being drivers. It really comes down to capacity requirements, new product lines, new production lines, and industrial confidence being greater factors than interest rates.

Fair enough. And then just on the balance sheet, could I get the amount of the total debt? The amount of the note payable?

Yes, I could give that to you. Short-term debt at the end of the quarter is $117m. Long-term, $171m.

Okay. And how about for accounts payable?

Do a quick subtraction here for you. I've got the --

I can back into it.

You can back into that one.

Okay, thanks.

Your next question comes from David Jaroe (ph) of T. Rowe Price.

Hi, David.

Just a couple of questions. One, I was hoping you could talk a little bit about more on the gross margin issue I guess it impacted you by an aggregate 100 basis points, you were down 50 base points you would have been up 50 basis points, could you elaborate on that and I have follow up to that.

Sure. the two issues we have, this results from our analysis of exactly, you know wham what we're the major transactions in first quarter last year compared to this year. The one issue just deals typically with our engineered systems. Where we accrue cost on an ongoing basis relative to engineered systems, and as time goes out, evaluate you know the level of those costs, and the requirements to, you know, if those accruals were necessary or not. It's done on a routine basis.

It turns out that unique to the first quarter only, and it happens this way in the first quarter many times because of the low activity, and these numbers get magnified. But in the first quarter last year, we had favorable adjustments to accrued contract -- these accrued contract costs more so than we have this year, these favorable adjustments. Favorable adjustments were unique to last year's first quarter. And the second item, deals with normalization of annual overhead cost. And this basically is that we have an annual plan for production, our costs are basically ratable throughout the year. We incur you know, basically fixed throughout the year.

And what we do on a continuous basis is, if in the first quarter typically we capitalize certain of our overhead costs on the basis that as production continues through the year, and we reach our higher level productions throughout the year, those costs are going to be absorbed against those higher levels. And the capitalize in the first quarter and then cost out in these higher -- in the quarters when the production reaches those levels.

What happened last year was that these costs were capitalized in the first quarter with our outlooks at that time, you know, based on everyone's outlook at the beginning of last year. And as the year went on, both in terms of the economic situation dropping down, the economic activity, plus the fact that our efforts to reduce our inventory, we had significant absorption cost, you know, that we had absorbed in the P&L through the year as the year went on. Yet in the first quarter outlook was that a bit brighter than it was as the year progressed. So a year ago, we capitalized more overhead cost using this routine than we did this year.

And those overhead costs were absorbed through the year as you saw margin rates through the remaining part of the year. I would say if you'd looked at the remaining nine months of the year and compared them to our first quarter margin rates this year, you would see some improvement. That's what it is, is just strictly, you know, we did the same routine this year, the question was, is there more capitalized cost last year than this year, the relationship of the first quarter to our annual plan.

I appreciate that. It appears to me if I understand this correctly that in theory you under accrued a little bit last year based on a little bit better volume assumptions the last. The hit you got this year in Q1, you guys are going to recognize some year over year benefits in the same as you corrected that under accrual in later quarters, so that after a full year basis you should recover whatever it is the 100 base points?

Yes.

Okay.

That's a good way of looking at it, that's correct.

Could we also talk a little bit about the, originally when you provided Q4, 2003 guidance, you said $1.20, $1.30. Obviously you had better volume in Q1 than you originally thought and the euro has strengthened pretty materially since then. Are you going to update that $1.20 to $1.30 guidance to those favorable adjustments or are you sticking to the $1.20 to $1.30 or revising that from $1.20- $1.30?

We specifically didn't comment on the full year just because there's a lot of factors that, when we came up with the $1.20, $1.30, word is evident, you're right about certain factors. We did better in the first quarter than we anticipated. We did better than the consensus. Order rates currently are probably a little better than we anticipated they would be. Foreign exchange is helping us. But there's some kind of overcast of some other factors that we have no control over.

Both economic and political. And so, you know, we're aware of the consensus, $1.20. If we didn't feel that that was inside of the forecasting range, we would comment about it. So I guess I'm saying we're comfortable with the consensus. And it -- you know, could do better than that. If certain things come into play it could be worse than that but we're comfortable with it.

I guess the only question I would have is there anything besides If we are going to war the prices will be very high, and then we'll see modestly positive trends reverse themselves. Is there anything cost inflation greater than you thought, is there weakness in a couple of businesses that we don't -- we can't see externally, that are maybe offsetting some of those positive developments on the volume side, and form exchange side? Or is it simply -- is it simply just conservatism?

You know, I think it's probably conservatism, in the macro effects, not any internal effects to Nordson.

Okay, two other quick questions. Obviously you mentioned within the advance technology segment that EFD had been strong, UV process strong. Could you submit what you're seem with Sintec (ph) as well as the strength of Japan in the quarter which was very nice.

Yeah. You know, Sintec is over the last 12 weeks at about last year's level. They've had orders that have been somewhat volatile, and so we really, while they're equal to last year, and you know, they kind of come up and down, depending on which two-week period you look at. I think that a floor has been established in that business. We don't see a trend off that sort of level we've experienced now for a while. In turning to Japan, I think that while we're certainly encouraged by the improvement that they reflected in the quarter, again, I think it's, as we cited earlier on the call on a different question, it more reflects a low prior period than a tremendous current quarter. But we'll take it in any event.

Okay, so no fundamental strength strengthening in Japan?

No, and you know, you get the GDP numbers. They're up very slightly. But essentially they're flat, too, as they have been for some time.

Okay, I'll get back in line. Thank you.

Your next question comes from John Franzreb of Sidoti and Company.

Good morning. I want to bear down to the North American sales number in the quarter. You said the absence of the $7m fiber sale was the bulk of that year over year. Even X that it is still 9% down. I was wondering if you could give us color as to what businesses are down and why in North America?

In North America. Well, I think the -- you know, beyond the fiber revenues, North America is a region I guess across all our businesses. I'd say the advanced technology businesses still are showing growth in the Pacific rim area. And the North American piece of that is down. Now, some of that is always, you know, we report these numbers as, you know, not shipments. I mean based on where the equipment is going to, it could be the same customer that ordered goods for their Pacific Rim operation versus their North American operation.

And it's hard to distinguish that. But across our advanced tech businesses, I would so would say the North American piece of that business is down. And also in finishing, I'd mentioned before that the strength we saw in finishing specifically the powder business which is the biggest part of finishing, where finishing operations were up, across the world, North American operations were still showing down results. Down comparisons. So beyond that fiber order, you're talking about your large -- the largest piece of the finishing business being powder. And across the advanced tech businesses except for EFD, the other businesses, the growth we're seeing is outside of North America.

Okay so it's finishing and Sintec essentially is what it comes out to in North America. Now, could you just kind of discuss a little bit how come Sintec is not doing better with the adoption of flip chip technology? And our expectation in that end market I would have thought by now we would see better growth coming out of the business. Why hasn't it materialized? Could you just give some color on that side?

Well, it's relative to -- I mean, there are a couple. The business has grown and grown substantially from levels that it had in the mid '90s as a result of flip chip technology. It was a business that was at $20m in sales in 1996. And even at the current levels, its run rate is $45m, $50m , Nick?

Yes, that's correct.

And what we're seeing there is, there continues to be adoption of increased flip chip technology. And we're winning, you know, our share of that business. But there are other factors in semiconductor businesses which are more than offsetting that. So in this period, they're flat. But we continue to be encouraged by the expansion of flip chip, and Sintec's role in that. And when the overall technology market comes back, you'll see a more pronounced recovery because of that.

One more question, this would be fine, historically about a third of the total company's revenues are through replacement parts and other accessory sales. Has that mix changed at all? Have you seen a change in that mix?

I think in the last couple of years, the parts, piece of it is relatively higher portion now. It's you know moving up, you know, above 35%. You know, for sales as a whole. And some of that deals with, you know, the economy in terms of the downturn we see in the large systems, and still, you know, parts being kept at a -- even if they were just at a -- you know, equal year on year pace, it would absorb a larger percentage of the total.

Good, thanks much. Good quarter.

Your next question from Robert McCarthy of Robert W. Baird?.

Hi again. Let's talk about advanced technology. First a technical issue and really you highlighted it Peter by talking about how that business traditionally dollar-based. I was very surprised to see a currency effect in that segment that was measurable. What accounts for that?

UV carrying business. But that's about it. Sintec business is dollar-based.

EFD.

Plasma and EFD is dollar-based. So the only international business we have is UV.

Okay. So that means that we may see some positive currency effect persist in that segment?

Yeah. You know, relatively small. I mean, but it would be consistent with the UV business, correct.

Okay. Nick, in response to an earlier question, you were talking about -- I think the question was about EFD order rates. You mentioned a 10% figure. Were you talking about orders in the first quarter or were you really talking about sales?

Sales it. They're the same. They don't have a backlog. They bring them in and ship them out the same day. So it's above 10.

The thing I'm a little puzzled by is in a segment where your volume was up a couple percent on a blended basis, you had strong growth in what is easily the most profitable part of that segment, you had a small operating income decline compared with prior year.

Yes.

Can we talk about the dynamics here, I mean, what accounts for that?

Um --

I mean the implication is a fairly large decline in the non-EFD businesses and it sounds like it would be concentrated at Sintec.

Well, Sintec had a decline, yes. No question about it. Their revenue was lower than it was you know a year earlier period.

Okay. And the UV and plasma businesses would have done at least as well as last year?

The EFD and UV businesses would have done better than last year. You know, we're talking about operating profit now.

Right. So is this just a volume effect on a Sintec?

Volume effect on a Sintec. It really isn't --

Does it seem unusually large to you given how low we already are? In terms of --

Yeah. I think we were concerned, and therefore, when we talked about restructuring actions on businesses that have continued to see lower economic activity, we've already affected some further headcount reductions at Sintec in the second quarter.

Okay. So we'll see a significant piece of that incremental $2m show up in the second quarter numbers?

How much would that be?

The total estimate now for the second quarter is going to be about $800,000 and Sintec is the biggest piece of that so far.

Like three quarters of it?

Three quarters of it.

Let me switch gears. Nick, do you have a number that would tell us what the currency impact was on the backlog number at the end of the quarter?

No. Now, what we do, do is the -- I don't. What we do on the backlog, Rob, is we report the backlog numbers based on what we call our budgeted exchange rate. Which is an updated exchange rate environment going into the year which turns out to be relatively close to the actual rates, okay?

So we're not talking about significant difference. As we went into the first quarter and we picked these rates of exchange it is turning out that what we call our budgeted rates and the actual rates is a very small difference. What we do do though is recast last year's ending backlog at the same rate. So the GAAP that Peter quoted you is a currency neutral GAAP in terms of build and backlog.

For the $14m a year?

Right, right. So it's currency neutral. There's no currency, you know, weaker dollar built into that number. That's currency neutral. But the $14m number, the number we quoted for the beginning backlog and the ending backlog, it's internal documents we prepare in this way, and it's done at this, you know, currency rate that we keep constant through a given year, but we fix it, you know, at the beginning of every new year. And right now it's relatively close to the actual rates.

Okay. Could you share with us your, you know, what the currency comparisons were for Euro and Yen in the first quarter? And then, you know, whether there's a different rate that is the rate we're assuming going forward, you know, based on end of quarter as opposed to average?

The first quarter for us, the Euro, the dollar to Euro rate was parity, 1. Remember, you know, the weakening started towards the end of December. The pound Sterling, .64 dollars to the pound. And the yen, 122.6 yen to the dollar. That was our first quarter numbers.

Okay. Year earlier number?

I'm sorry, year earlier for the first quarter, the -- and I'm going to give you a number of Euro to dollar here.

Okay.

Okay? 1.12 Euro to dollar.

1.12. Okay.

It's the other way, it's .69 pounds to dollars.

Got it.

And 123 yen to dollar. So those are the three key currencies behind our results in the first quarter.

Okay. Then is, for example, parity euro, what you're assuming going forward?

Okay, going forward in the second quarter.

Yeah.

That's 95 Euro to the dollar. For a second quarter assumption.

Okay.

Compared to last year when the dollar was strengthening is 114 Euro to the dollar.

Okay.

On the pound .62 pounds to the dollar compared to .70 a year ago. And 120 yen to the dollar compared to 132 a year ago. Those are the rates, if you hear from us then, currency rates, these would be the rates we would be using in that kind of analysis.

Perfect. Peter, again your comments at the outset, you talked about the decline being strictly market-based and in fact you thought your market share was up. Could you talk about where you think it's up? Product geography.

Yeah, well, by product, I think that the Problue is selling pretty well. And if we're not pick up some share given the customer acceptance of that I'd be surprised.

Okay.

I think we're picking up share in powder systems. And in Sintec boy, there is not much share to pick up but I think we're picking up some share there as well.

Last question. Customer based for Sintec or at least a big proportion of it, is moving, has moved to the Far East. Could you talk about what you're doing to better address, you know, not just existing customers that have moved capacity there, but also emerging potential customers there, including Mainland China?

Yeah. Well, we've strengthened our Asian management and we've hired recently in the last three to six months a new general manager of -- for Sintec based in Japan. And so that sphere will be broader than just Japan. We continue to increase our sales and marketing personnel and experience levels in China on all of our product lines, not only just Sintec. So I think it starts with people.

And you have what, one basic office in China or --

No, I think we have four.

Yes.

Okay. Should I infer that that's a different number than it was 12 months ago and 24 months ago?

It may be the same footprint but the staffing is up.

Staffing is up. Okay, all right that's all I got. Thank you.

Your next question comes from David Jaroe of T. Rowe Price.

Could you talk about what the spares was in a year over year basis in the adhesives basis was it up or down and what order of magnitude?

It was up. I don't have a, you know, low single digits but I don't have a precise number for you David but it was up. Small amount but it was up.

Okay. I don't want to beat a dead horse with regard to Rob's questions on advance tech margins. But if you think about EFD and Sintec as basically being similar size businesses in $45m, $50m, and EFD has got operating margins that are north of the detrimental margins of Sintec, shouldn't we still get margin expansion there or was it something unusual that happened to Sintec margins in the quarter?

No, nothing happened in Sintec's margins per se, nothing other than, you know, with our cost structure and you know, against the drop-off of revenues being reflected in the, you know, lower, you know, overall margins. But you know, Sintec was down by a greater number than you know EFD was up. You know, on a relative basis.

Were EFD's margins down on a year-over-year basis even with the higher sales?

Their margin rate?

Yes.

They were down, it would be very slightly. Hold on there for a minute David.

Okay.

No, they held. I mean, EFD margins were held relative to a year- earlier period in terms of rate profitability.

Okay. Just let me ask you a follow up question on the fiber business, the business was$7m, $8m in Q1, $20m last year. How does -- if memory serves sort of the sales sort of fell off pretty substantially in Q2, Q3 and Q4 in the fiber system sales. What is sort of the fiber systems sales outlook for '03 relative to '02, and will that no longer be on a year over year impact?

Is it only going to be a Q1 event where it really hampers the volume growth in terms of being down two, $3m in Q1 from a comparison standpoint? If we move throughout the year is it more of a flat or even up scenario?

Again, fiber revenue itself was down $7m in Q1 relative to a year ago.

If fiber was down $7m, I mean the adhesive segment because the adhesive segment was only down $3m, wasn't it down 90 to 87?

Go back again.

adhesives was 91 versus 88.

But that had currency in there, David. I mean, I'm addressing the value.

I apologize.

So you do have -- you're right, in reported terms adhesive was down because of the pickup in currency benefits. But the volume itself was down 7%, which was roughly in constant currency terms $7m.

So you basically had no fiber systems sales at all in Q1?

Small components and parts but yeah. It was very small.

What is the outlook for that business for the rest of the year then? Are you looking I mean you did $20m last year in fiber systems sales.

You know, in terms of visibility, that is the most difficult business to forecast. I mean, order levels there, I mean, you know, the pace of orders will come in at, you know, an order would be a $5m order at one point. And so it's tough to forecast preciseness in that business in terms of, you know, with that sort of order. What we are talking about is two or three orders during the course of the year and it's too difficult to predict.

What we have done is co-located manufacturing to some extent with our non-woven business and therefore they are able to shift is the workforce at the same location. But you know, we are actively bidding on projects in the fiber systems business that have not been let and that are hung up with the, if you will, industrial uncertainty. Some of those will likely break loose. We just -- it's very difficult to do a forecast when a year might be one or two systems.

Okay. That make sense.

All right.

Thanks a lot.

We'll have time for one more question.

Follow up question from Robert McCarthy from Robert W. Baird.

Thanks for taking one more.

You're first and you're last.

I'm actually going to squeeze a half a question in here first to follow up David’s question. Do you have any reason to believe that the ongoing litigation is having an impact on when orders are being let?

No.

Anything that you saw in the first quarter that, I mean if we revisit your full-year volume outlook from a quarter ago, you were talking about coating and finishing being up something, you know, 6% neighborhood, adhesives up 1 or 2% for the year, advance tech call it average flat but anywhere from down 3% to up 3%, anything in the performance you saw in the individual segments in the first quarter that would make you tweak those up or down?

No. Again, those are ranges of possibility, you know, as Peter mentioned before I mean in terms of, you know, fixed forecast for the year, we didn't -- you know, we're not commenting on one right now. But I mean, those were ranges of probability in terms of, you know, in various economic scenarios, and nothing has changed.

Okay. What I wanted to hear you say. Thank you.

Okay. Well, thank you for your attention and your interest in Nordson and the quarter. You know, we are pleased with the quarter. And if the economy or when the economy improves, we think we have a lot of operating leverage for that improvement, because of the cost reductions we've taken. And our focus on lean manufacturing, which is also making us more efficient, and we look forward to a continuing improvement during the year. And we'll be here to answer any specific questions you have, all within an FD frame work. So thank you for attending today's call.

Thank you, bye bye.

This concludes the conference call. You may now disconnect.

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