Nordson Corp (NDSN) 2008 Q3 法說會逐字稿

Good morning. My name is Wes, and I will be your conference operator today. At this time, I would like to welcome everyone to Nordson Corporation third-quarter fiscal-year 2008 results conference call.

(Operator Instructions). After the speakers' remarks, there will be a question and answer session. (Operator Instructions). Thank you.

I would now like to turn the conference over to Ms. Barbara Price. Please go ahead, ma'am.

Thank you very much, Wes. Good morning, everyone. This is Barb Price, Manager of Shareholder Relations, along with Ed Campbell, Chairman, President and Chief Executive Officer, and Greg Thaxton, Vice President and Chief Financial Officer. We would like to welcome you to our conference call today, Friday, August 22, 2008 on Nordson's third-quarter fiscal 2008 results.

Our conference call is being broadcast live on our Web page at www.Nordson.com and will be available for 14 days. There will be a telephone replay of our conference call available until midnight, Monday, August 29 by calling 1-800-642-1687 and you will need to reference ID number 59750313.

Our attorneys have requested we 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 and Exchange Commission that could cause actual results to differ.

After our remarks, we will have a question and answer session. I would now like to turn the call over to Ed for an overview of our third-quarter fiscal 2008 results and Nordson's future outlook.

Thank you all for attending Nordson's conference call discussing our third-quarter 2008 results. My comments this morning will provide highlights of what turned out to be another very strong quarter for Nordson, both in terms of revenue growth and operational performance. In addition, I will provide some guidance relative to our outlook for the fourth quarter.

Our third-quarter performance generated record sales of $288 million, up 12% from the prior year, driven by a volume increase of 6% and favorable currency impacts of 6%. Of the volume increase, the first-year effect of acquisitions added approximately 3%.

This quarter's performance included very strong results from two of our segments and, as expected, a decline in revenue for the Industrial Coating and Automotive segment.

Regarding the Adhesive segment, this is the second consecutive quarter with growth of 20% or more, which is very impressive for this segment. Favorable movements in exchange rates were significant contributors to the Adhesive segment's growth in the quarter. However, the underlying 9% volume growth is very impressive performance and reflective of the success we're enjoying globally in the Adhesive segment.

Following four consecutive quarters of revenue growth in excess of 20%, the Advanced Technology segment turned into another solid quarter with growth of 18%. Excluding currency and the first-year effect of acquisitions, organic growth within this segment was 8%.

Within the Industrial Coating and Automotive segment, the 18% decline in revenue is primarily centered in the US and the Americas. I will remind you that a large component of this segment is large dollar engineered systems, and this is the Nordson segment most sensitive to general economic softness and any associated pause in capital spending.

On a geographical basis, Europe and Asia Pacific continue to grow at a very rapid pace, where we experienced growth of 28% and 19%, respectively, driven by demand for both Adhesive and Advanced Technology system sales and with Europe benefiting from weakness in the dollar. The sales decline in the US and the Americas are attributable to economic conditions impacting the Industrial Coating and Automotive segment and are most notable within our powder engineered systems and automotive systems product lines. Japan's volume decline is also attributable to Industrial Coating and Automotive, but is more related to the timing of large shipments versus any economic impact on this region's results.

The overall gross margin rate of 56.3% in the quarter was in line with our guidance.

Operating profit increased 25% to a third-quarter record $51 million or 18% sales, equaling our margin performance of the second quarter. This level of operating margin is at a level that we have not seen since 1989 on a full-year basis.

On a segment basis, I am very pleased with the operating margins in the Adhesive segment, again demonstrating the leverage that revenue growth has on our operating performance.

Advanced Technology's operating margin declined from the rate that we had achieved in the second quarter of this year, due to number of factors that came together in the third quarter. Of the 3 point decline in operating margin from the second quarters, 20%, approximately 1% is associated with transient costs that we do not expect to see repeated. The other 2% is attributable to mix. That is mix across Advanced Technology products in geographic and end markets where net margins are lower than the mix of sales that we had in quarter two.

Looking forward, we believe Advanced Technology operating margins will improve in the fourth quarter from third-quarter levels and over time will average in the range of the 20% level we saw in the second quarter. Our guidance that we intend to share for the fourth quarter is based on an 18% operating margin in Advanced Technology.

With regard to Industrial Coating and Automotive, this segment's performance is clearly reflective of the difficult economic environment and the associated impact on certain consumable durable end markets. The decline in operating margin is directly related to lower sales and production volumes. Our management team is sharply focused on taking the steps necessary to improve this segment's performance and profitability.

I'd like to add a couple of additional comments on operating margins. No doubt there are pluses and minuses in the performance of the individual segments. But overall, I am encouraged with the operating margin improvements that we have delivered during the last couple of quarters. Since 1997, we have pursued a continuing and persistent strategy of improving operating efficiencies. Over the past ten years, we have improved the ratio of SG&A expenses to sales by 5 percentage points. This has directly translated to improving operating margins by 5 percentage points as well, with the average through the first nine months of 2008 at 17% and the last two quarters at 18%. I believe that, over the next 18 months, we have the opportunity to improve operating margins to 20% of sales, all other things being equal. Although we have not yet finalized our detailed plans around the actions we will be taking, and I am therefore unable to provide much specificity at this time, I would expect to update all of you at an appropriate time, certainly within the next few weeks.

Net income for the quarter increased 32% over the prior year to a third-quarter record of $32 million, and fully diluted earnings per share increased 29% to a third-quarter record of $0.93 versus $0.72 in the prior year's third quarter.

Let me provide some perspective on cash flow for the quarter. In addition to net income, non-cash charges added $14 million. Regarding uses of cash, excluding $7 million of stock option tax benefits that show up as both a use of cash from operations and a source of cash from financing activities, working capital increased by $5 million and other long-term liabilities decreased by $12 million.

Net capital expenditures and dividends were each $6 million in the quarter, resulting in adjusted free cash flow of $17 million in the quarter.

The current quarter's EBITDA was $62 million, a 27% increase over last year's $49 million.

Our debt leverage, measured as debt to total capital, ended the quarter at 31%. Net of cash, this ratio would be 29%.

In summary, the third quarter's strong performance follows a very solid first half of the year with sales, operating profit and earnings per share at record levels through nine months.

Let me now turn to some brief comments about our outlook for the fourth quarter of 2008. Recent demand, as measured by orders, both on a segment and geographic basis, has been provided with our press release. In summary, orders for the last 12 weeks ending August 17, measured in constant currency and including acquisitions in both years, were up 3% from the same 12 week period in the prior year.

To add some perspective to the segment order rates, Adhesive's 5% growth in orders is a good rate for the segment and reflective of solid growth rates across most of our geographies.

With regard to Advanced Technology's 1% growth in orders, we continue to see double-digit growth rates in those of our businesses that are associated with material deposition. This growth has been offset in the recent order period by weakness in our other Advanced Tech businesses, such as test and inspection equipment.

To put our numbers and perspective, Gartner Group is forecasting the test and inspection equipment for semiconductor markets will be down 20% in 2008 but will rebound in both 2009 and again in 2010 with growth rates of between 16% and 17%.

Regarding the Industrial Coating and Automotive segment, we're encouraged with the 1% increase in order rates. This increase in the second quarter's weak order rates is driven by strong powder system orders in recent weeks.

With this perspective on order rates, we currently have an outlook for a sales volume change from the prior year's fourth quarter of down 3% to up 1%. I'll add that the prior year's fourth quarter was very strong with revenue growth of 20%. So we're up against very difficult comparisons in each segment.

At current exchange rates, currency effects should contribute a 2% benefit to year-to-year sales. I might comment I think we did our outlook at approximately $1.47 per euro. Today, it's a little bit above $1.48. This currency, together with volume, results in overall sales for the quarter of down 1% to up 3% as compared to the prior-year record for fourth quarter. Obviously, this revenue guidance is below the preliminary estimate for the fourth quarter that I shared during our second-quarter earnings conference call, and I would like to provide some insight as to what changed.

First, currency rates have clearly moved of late with the US dollar strengthening against the currencies that impact us the most. Also, with another three months behind us, we have a better understanding of how the current economic environment is impacting our Industrial Coating and Automotive segment. While our preliminary estimate in May had forecast a rebound in Industrial Coating and Automotive sales, we're now projecting a further decline for the fourth quarter. There are some positives, however, as demonstrated by the backlog we built during the third quarter and the improving order trends we've seen in recent weeks.

Given the mix of products, we should see gross margins around 56%. This outlook results in earnings per share for the fourth quarter in the $0.84 to $0.94 range versus the prior year's $0.87. This outlook does not include any nonrecurring charges associated with operating improvement activities that I commented on previously.

I would like to comment on what's changed since our preliminary estimate for fourth-quarter earnings per share that we shared during our May conference call. Our reduced outlook for the fourth-quarter sales in Industrial Coating and Automotive, coupled with a more modest [benefit] from currency, accounts for all of the $0.14 per share change in our earnings guidance for the fourth quarter. The strong performance delivered through the first nine months of the year, coupled with this outlook for the fourth quarter, will generate another very strong year for Nordson with revenue exceeding $1.1 billion in record earnings per share.

Let me now turn to your questions.

(Operator Instructions). Kevin Maczka, BB&T Capital Markets.

Good morning. Ed, I just want to touch on visibility in general, because I think, last quarter, you did something that you don't normally do, which is provide a more detailed outlook two quarters out instead of just one. Then obviously some things changed and you just described some of those. Could you just comment on visibility in general that you have in your three major businesses?

Across the 17 businesses we have and product lines across the 3 segments, it does vary greatly. I'll just put a caveat right out front around my comments. At EFD, for example, substantially everything that we sell we ship the same day we get the order. So we have literally no visibility. At the other extreme, we have one business in the Adhesives segment where the average lead times are well in excess of six months. So we have quite a bit of visibility. But more generally, if we look across the businesses, our backlog averages --

45 days.

-- 45 days, so that is obviously less than a quarter. As we look out one quarter at a time, there is not a small degree of forecast but we're relying on not just the backlog, but the quoting that we're doing for some engineered systems. We look at momentum factors around spare parts kind of purchases and the like, as well as standard systems. So we, over time, have done reasonably well with our forecasting for the near quarter.

When we go out beyond that, we're now delving into economic analysis as to the pace of end market growth and we're getting outside our comfort zone. As a matter of practice, we don't believe it's helpful for us to project more than one quarter.

The reason we did give the extended preliminary look back in May for the fourth quarter of this year is that we were concerned that the momentum that we had announced in the second quarter and was embedded in our third-quarter guidance was not going to be extending into the fourth quarter. So, we did in fact have a volume underlying the specific numbers, a volume forecast in Quarter 4 back in the May guidance for Quarter 4, that was down considerably from what we shipped in Quarter 2. We thought, if we gave our best estimate, it would be helpful for analysts and investors to at least have some perspective on the outlook that we were seeing. But I don't expect us to continue to do that.

On the industrial an auto segment, the weakness there, you commented a little bit geographically that was mostly related to the US and the Americas. But I'm wondering. Can you give a little more color around the three buckets there, the container coating, powder coating and liquid finishing business? Was there any relevant strength or weakness between the three of those?

Sure. If I look -- Greg, you can probably help me pull up some of the specific numbers. The principal area of weakness that we have seen in ICA, or Industrial Coating and Automotive, over time, has been powder coating, primarily North America and Latin America as well, but primarily in those areas. And it's also been associated with declining demand for automotive systems and just as significantly automotive spare parts, which are proportionally more profitable than the engineered systems. The automotive spare parts has been a function run rates and the quantity of vehicles being produced. We've seen significant drop-off in the use of spare parts for our systems that are involved in the production of light trucks and SUVs, but we're also seen, if you will, some reduction in the scale and scope of the systems demand there. Likewise, in the powder coating business, we've seen, frankly, fewer people being prepared to make big systems investments in the domestic market. A significant -- not insignificant piece in this market are sales associated with systems being used to manufacture products that would find their way into housing end markets, like appliances and the like.

We have seen some recovery here of late. We've had some nice orders in recent weeks. I think, frankly, we're beginning to lap ourselves some of the comparisons in certain markets; they are probably getting a bit easier as we saw some softness in some of these markets filter in the over the last few quarters. But those have been the principle areas.

The container business has been one that is generally steady. It does have its own peaks and valleys that are associated with investment cycles more than anything that's tied to the economic cycles. So we had good demand in the latter part of last year. We had good system sales in the first half. We have seen a little bit of weakness in container orders of late. But I don't think that is anything other than the same kind of -- the volatility and lumpiness that we see in demand for those kind of systems.

Okay. If I could just ask one more and I'll get back in line -- on the Advanced Tech side, the revenues and the order growth continues to outperform these Gartner forecasts for the semi cycle. I'm just wondering. I'm sure a lot of your new product introduction has a lot to do with that. Can you just talk about what else is driving that, if there's big market share gains or something else going on there? Because I'm assuming you expect to continue to outperform that forecast.

We do, and in fact -- and I'll tell you that embedded in our guidance for the fourth quarter is another quarter of rounding double-digit volume for the Advanced Technology segment at Nordson. The particular strengths that we've enjoyed, as I mentioned, in the order rates that we had in the most recent 12 weeks has to do with our dispensing product lines, so that would be Asymtek, EFD, TAH, Picodostec; these are products that it we have enjoyed the benefit, in the case of Asymtek, with good demand arising not only from new products that we've introduced that have had a positive reception, but also a steady and growing demand for the kind of dispensing capability that we have as a company that's being used in a whole variety of end markets like cellphones and other handheld devices. There is -- contemporaneous with that same Gartner forecast that talks about a decline in the demand for semiconductor capital equipment is a forecast by them that handheld devices, the demand for those, cellphones in particular, will grow by 11% this year.

So what we're seeing in the Nordson end markets is good demand generally for assembly systems that are used for these consumer electronic handheld devices, but there is, in the broad and generalized market for semiconductor capital equipment, a decline. That area of decline is more centered in the demand for tools to make memory chips, whether it's been an overcapacity of both chips and production capacity. Our dispensing equipment does not particularly rely on demand for those systems but really is strong elsewhere. Some of our general test and inspection equipment probably has broader and less focused application for some of the strong areas and would have some exposure to some of those memory markets. So I think what we're seeing here is industry typical softness in the demand for some of the test and inspection equipment, but a lot of forecasters all coalescing around a view that 2009 is going to be a very handsome snapback in demand.

Thanks for the time.

Charlie Brady, BMO Capital Markets.

Good morning. Ed, can you give us any kind of color regarding the comment on the adjustments and the operating improvement activities to improve operating performance? You talked about it in the release, and sort of what kind of costs or charges we might expect from that and the timing of this process?

Yes, I can't really, Charlie, just because if we're going to launch a program, there's a lot of audiences that we need to be sensitive to. I think I'd like to just leave it at the comments I've made. But I would want to reemphasize that we will be back in a few weeks to be able to talk about these things. The next time we have officially scheduled to be, if you will, on the record with FD is going to be our investor day on the 12th of September. I look forward to having an opportunity to talk by then, if not sooner.

Just to clarify, your comments on the Industrial Coating and Automotive Systems business going into Q4 -- when you talk about further deteriorating, are you talking about a sequential or are you talking about on a year-over-year basis?

Year-over-year. When we talked about the fourth quarter back in May, we indicated that we expected a rebound from a forecasted decline in Quarter 3. We no longer believe that we will rebound, by that I mean have a quarter of growth over the prior year as compared to a quarter of decline over the prior year in shipments. So our current forecast is following the decline we had in Quarter 3 compared to the prior year of sales decline, and additional decline or another quarter of declining sales, Quarter 4 this year compared to Quarter 4 last year. That spread in the forecast from the May guidance for Quarter 4 to the current guidance for Quarter 4, coupled with slightly less currency, about 1 percentage point less currency benefit, accounts for all of the $0.14 per share decline between the $1.03 we talked about three months ago and the $0.89 we're talking about now.

Would you expect a sequential improvement in that segment on both margin and sales from Q3?

I will get back to you on that during this call. I just don't have it at my fingertips.

On Adhesive Dispensing business, that order growth of 5%, I mean, pretty I would say respectable for that business. Any kind of lumpiness in big systems orders in that 5%?

Actually not. I am particularly pleased by the fact that it's broad-based. It is centered in the product lines within Adhesives that have good margin and have, if you will, less of that long leadtime lumpiness. So the Adhesives segment is performing very nicely.

Great. Thanks, Ed.

Now, I will say that, in the fourth quarter of last year, we did have some of those big shipment -- those big system shipments that were very long leadtime and probably were in backlog all of the way through 2007 and shipped in the fourth quarter. I would say, directionally, this year's fourth quarter doesn't have some of those big shipments as much. It has a few, but it has very -- the demand that we've seen in the orders is the kind of demand that we would like to see.

Charlie, this is Greg. We are looking at a sequential improvement in the Industrial Coating and Automotives segment fourth quarter versus third quarter.

In terms of margin and sales?

Certainly in terms of sales, and I think, with that volume growth, there would be some margin improvement as well.

Thanks for that clarification. That's helpful.

John Franzreb, Sidoti & Co.

Good morning, guys. The first question is I'd like to talk a little bit about the growth in Europe, nearly 15% in volume. Can you talk a little bit about what the driver was in the growth in Europe, and also about your concerns about potential deterioration on the continent what are you hearing as far as quotation activity?

Yes. First of all, our European business is disproportionately associated with sales of adhesives systems and in particular adhesives systems that are targeted at packaging in nonwoven end markets. The reason for that is that many of the OEMs that make the integrated packaging and nonwoven assembly lines are based in Europe, and they export from that location to places around the world. But our sales get booked as European sales. So, that tends to have a little less volatility than perhaps the Industrial Coating and Automotive segment that is more dominant in that US as a percentage of our US sales. But nevertheless, we do have all of the segments represented in Europe. I think where we see the biggest demand softness is Industrial Coating and Automotive. There is, I would say, some deferral in customers' attitudes and the like, but -- and Greg you might want to comment on some of these numbers (multiple speakers).

Yes. As Ed mentioned, certainly some improvement within the Adhesives segment and his comments on industrial coating, some softness there as well. We're seeing as well some pickup in Advanced Technology in Europe as well current quarter versus prior-year third quarter.

So you anticipated Europe remaining strong in your outlook?

Hold on one sec. Your own view in terms of volumes in Europe is continued double-digit performance. I grabbed the wrong number. I just looked at the wrong column. Continued positive growth, but I will be tracking -- eliminate that double-digit adjective.

Fair enough, Ed. Remind me, your initial restructuring of what was then the finishing and coatings business, if I remember correctly, it was kind of designed so that, during downturns, you wouldn't have as much of a margin deterioration as we just saw. What happened to that initial restructuring compared to your expectations?

First of all, the decline that we've seen within that segment has been directly attributable to less revenue with fixed costs existing both in the manufacturing operation and the selling organization. It just flowed right to the bottom line. You look at revenue minus material cost, and it fell at the bottom. We did nothing in this quarter to address spending rates; it's not where our focus has been.

Our original strategy around the restructuring of the organization in Europe and North America had to do with moving away from some product lines that were not performing, moving some of our fixed cost to variable cost in Europe, all towards an eye that we would have operating margins well in excess of our capital, cost of capital across the business cycle. I think, as we've said in a couple different quarters, we're not finished with the things we think we need to do in that segment. The management team is focusing not only at spending issues, but also looking at the products that we have, and paring product lines and really looking to make sure the investments we're making on an ongoing basis are targeted at high return activities. That continues and obviously we will have more to talk about that in the future.

Okay, and one last question -- in the Advanced Technology segment, we're seeing a drop in the order rates this year. Have the Gartner expectations of growth deteriorated since May, or is it still for a drop of 20%? Could you give us some color as to why your order rates seem to be dipping, dipping and dipping and what's going on out there?

Well, first of all, I think some of the dipping we're seeing is frankly lumpiness. As I mentioned in the last quarter, order rates for Advanced Technology products were 10%, stripping out currency. While we talked about 1% this quarter, I shared a double-digit outlook for production volume or sales volume rather in the fourth quarter. This is not a segment that has huge and long backlogs. It is one that I think we have some estimation of what people are going to expect from us. So obviously embedded in that 1% are some areas that are disappointing.

To answer your specific question around Gartner, I'm going to grab a number here. I may not grab it while I'm actually trying to answer this call, this question, but before we hang up, I'll give you what it was three months ago.

Sure, okay, great. Thanks a lot.

Actually I have it right now. Automated test equipment for 2008, back in a report published in May by them, was down 13% as compared to today's down 20%.

Okay, so the end markets deteriorated since that time line. Okay.

Yes. Now, what's interesting is that they still kind of end up with a strong outlook in all scenarios for 2009 and 2010.

You're comfortable with that outlook?

I don't have the ability to, one, go out all the way into 2009 and 2010. I think we view that the information we're seeing from a number of pundits is that the atmosphere is going to get better. It's directional in nature. I don't believe that a 20% versus a 13% directly translates into a different set of conditions for Nordson.

But I believe the market generally for capital goods in some of these segments of semiconductor assembly are not good right now. If you center it around memory, we do have some memory exposure in some of our test and inspection equipment companies. In the areas where our dispensing technology plays there is very good demand. I think that's reflected in what we're doing. I think we have some of our own initiatives, relative to expanding geographic reach of some of our products, changing some of our distribution patterns within Advanced Technology where some of the acquired companies are now going to begin to get exposure in Asia and Europe compared to what they had in the past. Those things give me some Nordson-specific optimism on top of what I think is going to be an improving environment next year.

Great, thanks, Ed. It's very helpful.

Bob Schenosky, Jefferies & Company.

Good morning. I've got three questions here. First off, Ed, how much of the EPS change -- I had to jump off for a second -- how much to the EPS change in the fourth quarter is a function of FX? Can you remind us how much of the total EPS this year is FX, including your fourth-quarter projection?

Sure. First of all, the change in the fourth-quarter projection is $0.02 per share. It's basically going from a 3% tailwind to a 2% tailwind. That rounds out to be $0.02 per share.

In terms of the entire year for fiscal 2008, based on our current projections, it's $0.33 per share. This is at the midpoint of our guidance. Volume, just the increased volume we have in products, is $0.46 per share. We've got some change in tax rates. We've got some benefits from the expiration of the inventory portion of purchase accounting and the like, but $0.33 is the answer to your question.

Okay, thanks. As we think into next year a little bit, given where currency is right now, it certainly fair to assume that this will flatten out and potentially even turn negative for your own '09 results as compared to '08 as it relates to currency. Is that correct?

That is correct. If you look at where rates are right now, against for example using the euro, we're at $1.48 this morning. If you go backwards in time, it was -- it has been higher than $1.48 beginning around 1 of March. So our first quarter is November/December/January? It should be probably a push roughly from where we are right now. As we move into the second quarter, assuming things don't change, it would then be negative for the second and third quarters.

Could you assume, given you're using Europe or your European customers are using that as an export base, if the euro does weaken versus the dollar, could you see a little bit of that offset potentially in terms of increased orders because of the currency?

Probably not, Bob. We don't price based upon our cost, or we don't gain volume or lose volume as a result of exchange rates. We'll price to whatever the local market will bear, so to speak. What we see with currency is that it flows through, offset by local spending. So it is a net -- sort of like a price increase or a price decrease. Where we do sometimes see volume impacts that are associated with currency is that our customers and the currency in which they operate may be influenced by economic activity more generally.

Fair enough. I'm sorry; I actually have two more. The first was forgetting the Gartner forecast for a little bit, but more so your view and your customer interactions, the 1% new orders that you had in Advanced Tech, was this in line with expectations coming out of the second quarter? How does that relate in terms of your potential views looking into '09? Is this a concern or do you think that it, broadly speaking, will bounce back?

Well, you know, if I look at how those numbers have looked, those numbers bounce around. Just to put it in perspective, two weeks prior, where we have -- this is a rolling 12-week average and two weeks role in, two weeks roll off. The two weeks before it was up 1%, it was up 10%. Two weeks before that, it was up 13%. It's that kind -- it bounces around, and I don't want -- the 1% is real. During the 12 weeks compared to a year ago, orders were up 1%. But I think, because we only share these once every three months, 1 data point sometimes gets fixed in people's mind in an exaggerated way.

For the whole corporation three months ago, it was 0; now, it's up 3%. If I look at where it's moved around that period, it's been up more than three sometimes. It does bounce around, and I guess, when we look at the specific forecast that we have for the Corporation for the fourth quarter, it sort of reflects our judgment as to what we're going to have shipped.

Finally, I recognize the coatings business is certainly not one of the key components when we think about the Company and the stock price compared to the other two businesses, but what specific end markets are worse than you had anticipated? Is it specifically auto and auto related, or are there other surprises in terms of your forecasts?

I would say that, first of all, powder is by far the biggest business in that segment. So as powder goes, so go the numbers generally because the other pieces -- liquid is quite small. Our container business is generally stable and not tied to economic cycles. It's more just the recapitalization cycles of our customers. So you come back to automotive and powders being the ones that are moving.

The powder painting systems are used to paint metal. When you think about what is manufactured in factories around the world that are metal, it tends to be generally durable products, both for industry as well as for consumers. So, we see the demand from office furniture manufacturers, from appliance manufacturers as being two very large end markets that use powder painting that are important to our revenue, and these businesses are not very active right now. Some of the other end markets we might sell to that would, say, be in China, for example, continue to move along at a reasonable pace. But our powder systems business worldwide is proportionately stronger in the US than our other two segments. US economic activity plays a bigger role in that segment than it does in the other two segments for Nordson.

Right. As we look at the [ABI] index, we're seeing a dramatic fall as we get into '09 for commercial construction. So is that a surprise for you, or at least a surprise in terms of the significant drop-off in office furniture?

This early?

Yes, the office furniture market has been pretty weak for quite a long time. It's not really been as active as it was, say, in the '90s before the real bubble burst back in -- after the .com boom. What's been more important to us I would say generally is a whole variety of end markets that have everything to do, you know, store shelving to racking and other industrial tools and then of course all the various products that go into consumer durable products. The consumer is an important element to what goes on within our Industrial Coating and Automotive.

Right, so it's just more reflective then of the general economic malaise then?

I think it is.

Okay, thanks for your time, Ed.

Walt Liptak, Barrington.

Good morning, guys. Most of my questions have been asked already but let me ask this one. Your margins in two of your three segments are, for an industrial company, very enviable. But in the Industrial Coating and Automotive, for quite some time, I think these have been lower margins, they've struggled from time to time. Is this -- and you've demonstrated you can do acquisitions. Is this core business at this point? What's the long-term strategy for C&A?

As we've talked in many occasions, the things that we focused on within the other two segments has been to be best-in-class operating organizations, take care of the present set of customers with best-in-class products and services and find ways to grow the revenue by identification of new end markets and new application.

In Industrial Coatings and Automotive, it's been different. We have paid less emphasis on that third, which is growing the top line, and we set our priorities to get the bottom line right. Profitability in that segment has not been adequate. I think the management has done a very nice job and the team that runs these businesses is fully engaged in doing all of the things that they can to improve results. As recently as a quarter ago, we had operating margins of 9%.

Clearly though this is a business that is at the intersection of the weakness that we're seeing in the US economy, and that has affected demand. There is not much we can do to persuade customers that are concerned about capital spending and their own well-being to induce them when we are involved in this kind of an environment. But while we're down as much as we are, we still are moving along at a pace that is 80-some% of where we were a year ago when business was very strong.

You've got a long way to go to get to 20% operating margin in that business. Do you think you can get there over the next couple of years?

No, I don't. That is not a number that we've ever described that business as doing. What we've talked about here is what do we need to do to get it to be 15%? And anything north of 10% -- we don't have a lot of capital invested in this business. Anything north of 10% is providing a full return on our cost of capital for what we have invested but -- that I and the leadership there think that this business can do better than that and we have set at least an interim target to say get this thing to 15%, not at every point in the business cycle, but at an average through the cycle. That's the basis upon which we're making the improvements that we are today.

Okay, and then just a couple other quick ones -- what's the tax rate assumption for the fourth quarter?

35.5%.

Okay. Is there any thought of share repurchase?

Well, I saw some of the after-hours trading last night, and that started across my mind. I'm probably being a little bit facetious here. I'm not trying to make any broad announcement here. Let me give you a more serious answer. We do have a share repurchase authorization. We, as I know is obvious within our SEC quarterly filings, that we did buy shares back in the early part of the year as the stock began to move sharply upwards. It moved outside of the brackets that we had established in our 10B5 repurchase program, so we have not bought shares in the most recent quarter. But our ongoing belief is that share repurchases are one of the avenues by which we can use our excess capital, and we will do it from time to time so that we, at a minimum, offset the dilution that might otherwise occur in connection with our various stock-based employee benefit plans.

Very good. Thank you.

Matt Summerville, KeyBanc.

Ed, I know you kind of talked about this already, but if you could just go over it again to help close the loop for me -- if you look Advanced Tech volume trends, relevant order activity recently, they haven't been too far off one another. Now we have 1% order growth, and you're kind of talking about double-digit volume growth moving into the fourth quarter. Are you assuming test gets better? Has test actually gotten worse than how it had been trending? I guess I'm trying to put all those pieces together. Can you go through that in more detail again?

Sure. As I mentioned to Bob Schenosky a few minutes ago, there is a certain amount of volatility around the orders. We had -- frankly, the last couple of weeks were somewhat weak. If I look back 14 weeks ago, we had a very strong order period. As we look at a moving 12-week average, our most recent results no longer include that two-week period where we had a real big jump in the scale of our orders.

Have you started to see, Ed -- sorry to interrupt you. Have you started to see any of your major semi customers start to commit to major recapitalizations as you've launched the 900 series?

Part of -- and now we're talking Asymtek. Part of what has driven Advanced Tech this year has been really excellent performance by the Asymtek organization. What's interesting about their particular success is that, in launching the 900 series, they had expected they would have an opportunity to quickly move from some prior generations' products into an order pattern that would be highly centered around the 900 series. What they found it that the 900 series has attracted a lot of new customers that have not in the past made the kind of investments in the capital equipment that they could with this product line, and of course some of the new customers as well. But we also have seen a real surge in orders this year compared to last year in the demand for the older products. Those have been more centered in customers that already have sizable investment in those older product and are not prepared, if you will, to switch from an operator familiarity point of view and from other reasons that they like the products that they have. So we're seeing high levels of demand for both the old and the new products at Asymtek.

Overtime -- two points. Overtime, I'm confident that what we will see a continuing shift away from the old to the new, and that brings not only greater simplification within our production processes and supply chains, but it also gives us an opportunity to expand margins from where they are today.

The other point, to answer your specific question, yes, we have seen some investment programs by large customers in the 900 series. These are ramping up gradually rather than you just get this monumental order all at once. You sell a few, and then they get those, get familiar with them, they buy some more and so on.

Then the other businesses within Advanced Tech, with the extension exception of test, just to be sure I'm clear, are performing well? Then has test actually gotten better or worse I guess recently? How should we start to think about organic growth potential of Advanced Tech in 2009?

Yes. Well, first of all, there is an environmental change that a lot of forecasters are saying we're going to have a more favorable operating environment. I am repeating their forecast; I don't have independent ability to be able to look at the ebbs and flows of capital investment in that industry, so I am relying on that somewhat.

Within the specifics of some of our businesses where we do have technology roadmaps in front of us in terms of what they intend to do and when they plan to make investments, our expectation is that we're going to have a very good 2009, better than 2008, as we've said in the past, and that external environment shares with that.

Back to the non-dispensing businesses, they didn't have a very -- they didn't have a real good third quarter. It was some of the mix within some of those businesses, both in terms of the geographies where they sold, where there was geographic strength versus geographic weakness, and some of the specific products within their product lines came with lower margins than the product lines that they might have sold in the other geographies. So it was less about volume, because the volume in this segment was pretty good, but it was more about negative mix. That was a big factor in that -- not the revenue, but it was a big factor in the difference in our operating margin.

So if we're looking at double-digit volume growth in Q4, I guess why are we only -- or why are you only anticipating roughly 100 basis points, maybe a little less of sequential margin improvement there, if we can account for that entire 100 basis points from what you described as transient expenses, and then if you can also kind of describe what exactly you mean by that?

Yes. You know, one-time charges could be anything from establishing reserves for inventory that we do periodically or special charges like that. It's those types of things that are nonrecurring that are in the production portion of the income statement. What we have based our assumption on in Quarter 4 is another Quarter 3. Are we going to use all of our energies and efforts to do better than that? Of course. But we haven't forecasted it and we have not asked you to plan on it.

Switching over to the Adhesive business, I mean, obviously organic growth has been excellent, the margin performance probably at or very near record levels. How should we think about margins going forward? How was the mix in the third quarter? Is there still upside to that 26.5% run rate, so maybe I'll kind of leave it there, on that question.

I think, as we look at Quarter 4 in Adhesives, we're probably going to see -- and embedded in the guidance we had given for the overall company is essentially a flat Adhesives quarter compared to a quarter a year ago that was very high and had a lot of large engineered systems. I think this quarter is going to have a different kind of a mix; it's going to have a mix of more standard systems and that generally come at reasonably good margins. I don't know, Greg, if there's any particular guidance you want to share with regard to operating margins in the segment this quarter versus next, but I think the direction and my sense is good operating performance is expected again from this segment, but perhaps not revenue growth.

As you look at order tempo, I guess as the last 12 weeks or so progressed, just through Adhesives, can you talk about what you have seen from a geographic standpoint? I guess specifically I just want to delve into more around if you have seen any major changes in Europe. I know a lot of that stuff gets exported that you sell there, but have you seen any change, any major changes in Asia, specifically in China?

We continue to -- talking adhesives, we continue to have double-digit growth rates in Asia. We have strong high single digit growth rates in Europe most recently, so it's interesting. The only place we have a little softness in adhesive order rates is in Japan, and frankly, that's lumpy. It's a smaller territory; it can bounce around week-to-week. We're quite balanced.

Greg, what was in Other Income in the quarter? I think it was like $2.6 million. What were the big components of that?

The biggest component of that, Matt, would be unrealized currency gains not in our balance sheet.

Should we be looking at something similar in the fourth quarter? How should we think about that?

Well, it depends on how we release some of those liabilities, but a lot of that was in Asia as well and as Europe as the dollar continued -- as the currencies reversed course, we got some benefit out of that. I would say, in Quarter 4, we may have less of a benefit.

Okay, great. Thanks, guys.

At this time, I'm showing no further questions.

Okay. I appreciate the interest everyone has had. I won't go any further in terms of looking for questions. We all look forward to speaking to investors again at our investor day on September 12 and having an opportunity to update you on all of the programs and activities that we're about. Thanks again.

Ladies and gentlemen, that concludes the Nordson Corporation third-quarter fiscal-year 2008 results conference call. We appreciate your time. You may now disconnect.