Nordson Corp (NDSN) 2008 Q4 法說會逐字稿

Good morning. My name is Katherine, and I will be your conference operator today. At this time, I would like to welcome everyone to the Nordson Corporation fourth quarter fiscal year 2008 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 session. (OPERATOR INSTRUCTIONS). Thank you.

Mr. Jaye, you may begin your conference.

Thank you and good morning. This is Jim Jaye, Director of Corporate Communications for Nordson, 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, Thursday, December 18th, 2008, on Nordson's fourth quarter and fiscal year 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 Friday, January 9th by calling 1-800-642-1687. You will need to reference ID number 76441871.

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 Campbell for an overview of our fourth quarter and fiscal year 2008 results, and Nordson's future outlook. Ed?

Thank you, Jim, and good morning to all of you on the call. And thank you for attending Nordson's conference call discussing our fourth quarter and fiscal year 2008 results. My comments this morning will provide highlights of what turned out to be another very strong quarter and year for Nordson, in terms of revenue growth, operational performance, and earnings.

In addition, I will provide some perspective relative to our outlook for the first quarter of fiscal year 2009. Regarding fourth quarter results, we ended the year with a very strong quarter, generating record sales of $298 million, up 2.4% from the prior year. And I would add that the prior year's fourth quarter was a very strong quarter, with record sales at the time, and total growth of 20% in the quarter. So we were up against very difficult comparisons in each of our segments.

Regarding the current year performance, fourth quarter sales volume increased 2.8%, of which 0.6 percentage points of this increase represented the first year effective acquisitions, and unfavorable currency effects reduced sales by 0.4%. The sudden strengthening of the US dollar against most major currencies which began in August, and accelerated with the September finance turmoil impacted our results, as currency became a headwind in the quarter. Fourth quarter's revenue performance included strong results from our two largest segments, as well as solid revenue for the Industrial Coating and Automotive segment.

Regarding the Adhesive Dispensing segment, prior year's fourth quarter performance generated sales growth of 16%, a very impressive growth number for the segment, and again establishing a very difficult comparison for the current year. Over this we generated sales growth of 2.3%, driven by strong results in our non wovens and paperboard converting product lines.

The Advanced Technology segment turned in another solid quarter, following six consecutive quarters of sales growth in excess of 18%, Advanced Technology grew 10% during the quarter. Excluding currency and the first year effect of acquisitions, organic growth within this segment was an impressive 11%. Within the Industrial Coating and Automotive segment, again up against a difficult prior year comparison, the 9% decline in sales from the prior year's fourth quarter is primarily centered in the US, and is associated with the economic conditions impacting consumer durable spending.

On a sequential quarter basis, sales in the current quarter represented an increase of 24% over third quarter results, primarily driven by volume growth in powder system sales in all regions. On a geographic basis, all regions except the United States generated solid sales volume growth rates in the quarter. The US performance as noted previously is associated with the weakness in Industrial Coating and Automotive performance. The 10% volume growth in the Americas was driven by increased demand in all segments, most notably in Advanced Technology and Industrial Coating and Automotive.

Asia-Pacific and Europe also experienced growth in all segments, with most pronounced growth within the Adhesive segment in Asia-Pacific and the Advanced Technology segment in Europe. Japan's growth was also led by demand for Advanced Technology systems. Operating profit as reported is 16% of sales, and this includes $5 million of restructuring charges associated with our spending reduction program announced in September.

Excluding these restructuring charges, operating margin was 18% in the quarter, equaling our margin performance of the past two quarters. As I noted during our third quarter earnings conference call, I am encouraged by the operating margin improvement that we have delivered during the last few quarters. These operating margins are at the highest level that the corporation has delivered on a full year basis in nearly 20 years. And the spending reduction initiative that we announced in September will allow us to continue to improve operating margins over what they would otherwise be, by approximately 2 percentage points in 2010.

On a segment basis, the Adhesive segment has once again delivered very strong margins in the quarter, of 25% of sales. Advanced Technology's operating margin of 17% reflects the negative impact of currency, and weakness in non-Dispensing product lines. With regard to Industrial Coating and Automotive, the 10% operating margin is reflective of strong sales volume in the quarter, and profit enhancement initiatives we have implemented over the last couple of years.

Net income for the quarter increased 4% over the prior year to a fourth quarter record of $31 million, and fully diluted EPS increased 3% to a fourth quarter record of $0.90, versus $0.80 in the prior year's fourth quarter. Excluding the restructuring charge in this year's fourth quarter, EPS growth would have been 15% over the prior year fourth quarter.

Let me provide some perspective on cash flow for the fourth quarter. In addition to net income and non-cash charges of $10 million, other long-term assets added $4 million. Regarding uses of cash, working capital increased by $18 million, net capital expenditures were $8 million, and dividends were $6 million in the quarter. This resulted in adjusted free cash flow of $13 million in the quarter. Current quarter's EBITDA was $57 million, and our debt leverage measured as debt to total capital ended the quarter at 33%. Net of cash, this ratio would be 32%.

In summary, this fourth quarter performance provided a strong finish to what was an impressive year for Nordson Corporation. Overall, I am pleased with the sales volume achieved during the quarter by each of our segments in light of the difficult comparisons to the prior year, as well as the global economic conditions we faced during the quarter, particularly in September and October. In addition, I am pleased with the continuing strength in our operating performance, where operating margins excluding restructuring costs were 18%.

On a full year basis, we achieved new milestones for sales, operating profit, and earnings per share. Sales reached a record of $1.1 billion, an increase of 13% over the prior year. Operating profit increased 25% over the prior year, to a record $190 million inclusive of restructuring charges.

Fully diluted EPS for the year also a record increased 29% over the prior year to $3.43 per share, inclusive of restructuring charges of $0.10 per share. The full year's EBITDA was $227 million, up 24% over the prior year. In summary, fiscal 2008 was another outstanding year for Nordson, and positions us well for what I expect to be a very challenging fiscal 2009 for all capital goods suppliers. I would now like to turn to come brief comments about our outlook for the first quarter of 2009. But before I do, I would like to add some perspective on the outlook that we will share.

I believe the US and global economies are dealing with a set of challenges more difficult than in any time during my business career of over 30 years. And yet, as difficult as these times are, and in every scenario that we believe is reasonable, Nordson remains profitable with positive cash flow during 2009.

Okay, let me start with orders. We have provided in the press release information on recent demand as measured by orders, both on a segment and a geographic basis. Adding a few comments to these order trends, I will start with reminding you that our order rates at this time one year ago were very strong, and led to what became a record first quarter sales for Nordson.

But our outlook is less about the prior year, and more about the uncertain economic environment we are now facing. We are operating in unprecedented times, where global conditions have continued to deteriorate, and major economies have slipped into recessions.

Even China, a significant driver of growth over the last several years, is experiencing a deceleration of growth not seen in many years. Against this economic backdrop, companies on a global basis are also operating in an environment, where liquidity is either non-existent or at a minimum, and very expensive, and although liquidity is not a concern of Nordson's, we nevertheless sell capital goods, and like other capital good suppliers we are seeing a pause in spending by our customers, at a rate indicative of a singular focus on cash preservation.

For the last 12 weeks ending December 7th, measured in constant currency, our orders were down 21% from the same 12-week period in the prior year. Within Adhesives, orders are down 14% from the prior year, primarily due to a reduction in those product lines associated with larger dollar systems, such as Product Assembly and Coating.

Coating orders in the prior year's 12-week period contained two large dollar orders, one in excess of $3 million, so the lumpiness of these orders create somewhat of a distortion in order rates. In this product line, which is the smallest within the Adhesive segment, does contain the most volatility in order rates due to these big dollar systems. Excluding the Coating product line, orders from this 12-week analysis, Adhesive orders would be down 11% from the prior year, due to softness, primarily in the US and Japan.

Regarding Advanced Technology's 12-week order rates which are down 29% from the prior year, there is a mix of activity within the product lines that comprise this segment. For the most part, we are seeing softness, again within the larger dollar systems businesses, and this is related to the global economic weakness, rather than market share. This weakness is most pronounced in Europe and Asia-Pacific, where many of our customers are putting orders on hold, as they assess the severity of this downturn.

Within the Industrial Coating and Automotive segment, the latest 12-week orders are down 27%, driven mostly by softness in the Powder and Automotive product lines, again, those associated with larger dollar system serving consumer durable end markets, where like the other segment's order rates, we are seeing deferrals and postponements in our customer's buying behavior. With this perspective on order rates, we currently have an outlook for a sales volume decline from the prior year's first quarter of between 15 to 19%.

With appreciation of the US dollar against other global currencies, as compared to where exchange rates were last year, currency effects are expected to be a headwind of approximately 5%, resulting in overall sales for the quarter of down 20 to 24%, as compared to the prior year's first quarter. Given the mix of products, we should see gross margins around 55%. Spending in the quarter, excluding restructuring costs, will be down approximately 14%.

We are estimating a tax rate of 35% for the quarter, and indeed for the full year up slightly from the prior year's first quarter rate of 34.3%. Excluding restructuring costs associated with our previously announced spending reduction effort, this outlook results in earnings per share for the first quarter of $0.27 to $0.38. This range includes an anticipated gain of $0.09 per share on the sale of real estate assets. Restructuring charges in the first quarter are not included in this range, but are estimated to be approximately $8 million, or $0.15 per share.

Let me say a few things about the effects of currency on our first quarter outlook. The dollar has been very volatile over the last several months. We started the first quarter of fiscal 2009 with the Euro at $1.27. The dollar is now 13% weaker, just over $1.46. Likewise with the yen, we started the quarter at 98 yen to the dollar, and the dollar is now 10% weaker at 88 yen to the dollar. And I will mention that the numbers in our outlook are based upon the final six weeks of the quarter, averaging about $1.41 at the Euro.

In light of what we believe will be a very challenging year ahead, we have taken significant steps to mitigate the effects on our businesses. These include investments made towards our spending reduction program announced in September, will generate annual savings of $30 million, and we are well on our way to implementing those savings. We have put in place very tight controls on headcount additions and capital expenditures.

I anticipate operating capital expenditures to be well below run rates of the last couple of years. We have initiated a worldwide freeze on wage increases. We will experience lower operating cost in fiscal year '09, associated with planned facility consolidation efforts. And finally, to comment on Nordson's liquidity position, even in a down year in revenue, our businesses throw off a lot of cash.

This cash flow, coupled with the available free board under our $400 million revolving credit agreement, ensures that we can continue to utilize our financial strength as a competitive advantage. These efforts, as well as the fundamental strength of Nordson's businesses and the quality of our organization, will provide the ability to navigate these challenging times.

I would like to step back and talk a bit about the outlook for the full year. Today the US and global economies are at a very low point. Business and consumer confidence is extremely low. Forward visibility is limited. Business decisions are being driven by two forces, uncertainty and liquidity concerns. Nordson's orders from customers over the past 12 weeks bear the full impact of these forces.

However, there are also powerful forces in play that push the other way. Energy prices, interest rates, central bank loan guarantees, the stimulus packages, and many other actions governments have been putting, and are continuing to put in place, are all individually and collectively unprecedented. The stimulative effect of these actions are enormous, and at some point we will see the results. I can't say when that will be, and our visibility is no better than others.

But I do expect, however, that economic conditions during the second half of the year to be better than the first. My personal view is that we are going to look back at this time and be amazed at asset pricing and spreads, and I believe the distortions in the market are extreme, unprecedented, but temporary.

Let's now stop and turn to your questions.

Thank you. (OPERATOR INSTRUCTIONS). Our first question comes from the line of Charlie Brady with BMO Capital Markets. Your line is open.

Thanks, good morning, Ed.

Good morning, Charlie.

Could you just speak speak in terms of your supplier base, and given the liquidity issue, are you reaching out to your suppliers, to make sure that they in fact are in a financial situation where they can keep supplying you? How are you addressing that?

We are. We have been proactive in that regard. Obviously, the financial well-being of anybody in the supply chain and customer chain are things that we are paying very close attention to, and the same kinds of analysis that we would do with regard your to customers, are things that our purchasing department is taking a close look at. And that includes suppliers in places like China, and let me just say that nothing has risen to my level of attention in the investigations that have been done. Our folks are on it.

Okay. Thanks. In regards to the orders and the prior 12 weeks, looking at your individual businesses, and I know you don't want to get into that kind of granularity, but are there any particular standouts, either generally much worse than the overall trend, or maybe not quite as bad, doing better than the overall trend?

Well, I think what you see as you go across the businesses, those businesses that are associated with large portions of spare parts or selling consumable components that are used once and disposed, our packaging business, other businesses that are related to consumer non-durables like non wovens, those are all, if you will, large businesses that are doing well.

But then within businesses, we see bright spots that would include things like Life Sciences, continuing on without impact, and in a number of our businesses we have a number of projects surrounding Solar, that despite energy prices where they today, those seem to be going forward without any deceleration.

Also in technology markets, we are seeing some areas like LEDs and low cost computers, and a variety of spots where either there is something about the economics in our customer's world, or alternatively where we have been able to gain share, examples would be in corrugated or folding carton markets, where we have been able to gain share. New technology to automate the high speed application of labels on packages.

We continue to be able to win with some of our technology-driven activities, but I guess another area that has been interesting is within technology, smartphones, for example, the shift away from a traditional cell phone to those that can do all of the things that we are now dependent upon like e-mail and other web browsing.

The investment in the technology to make those phones, or the investments to move to the next generation of architectures for things like memory, continue to make progress. And they are offsetting broader declines where we see, is it sort of a general description, you see a lot of organizations that are taking the advantage of the Christmas shutdowns that are traditional, in certain industries and geographies you see more of those being extended. You see customers saying that they are going to wait until after the holidays before they make any judgments on various investment projects.

In Asia, where Chinese New Year is a very big period of time, you sort of get that let's wait until after the Chinese New Year before we make a decision whether we are going to proceed with various projects. So the counterforce to a lot of the good things we are doing, is that general wait-and-see attitude.

Thanks. One more, and I will get back in the queue. In regards to cash flow and preference of use, you have a share repurchase, a new one in place. The preference, I am assuming is to share repurchase relative to acquisitions right now?

The share repurchases that we have historically done, have had as a base load if you will, the offset to the dilution that might otherwise occur from employee benefit plans. And then we have been opportunistic over time, and this dates back over multiple years to buying on dips.

Either to do what I just described, offset those benefit programs, but we exhausted the other program in the early days of 2009, and so what we have is just simply a replacement in capability. There is no change in strategy to be inferred by the establishment of the new program.

Thanks.

Thank you.

Our next question comes from John Franzreb with Sidoti & Company. Your line is open.

Good morning, everyone.

Good morning, John.

I might have missed this number, but you said you were pulling back on your capital budget. Did you say what the CapEx plans were for the year ahead?

I did not. Let me turn it to Greg.

John, this is Greg. We had in fiscal 2008 about $15 million of operating capital, and I would anticipate in 2009 we are going to be below that number. I would estimate around $12 million.

That is your base maintenance level of spending there, Greg?

Right.

I might add, there would also be in that some capital associated with new products, particularly in our plastic components businesses, where there is a certain amount of investment required to introduce new molded products.

Okay. I was just wondering, given the difficult operating environment you are kind of painting there, Ed, are there any covenants that we need to worry about in your debt structure, that may be stressed any time in the near term?

We have very traditional bank covenants. I might mention that we have a very attractive revolving credit agreement that doesn't expire until the middle of 2012. And it's got in the principal component is the ratio of debt to EBITDA at 3.5:1, and we are, I don't know, just over 1 right now.

Right.

Okay. And one last question. Adhesive Dispensing, I guess I'm a little surprised about the magnitude of the order dropoff, given that business is supposed to be the most stable of the three. Could you just talk a little bit about what your customers are telling you about their spending plans for the balance of calendar 2009. Not so much what we are seeing in the near term, but what kind of spending ramp you expect to see, or don't expect to see next year?

My observation, and we have reached out to our front line salespeople to get a very comprehensive look of what they are hearing from customers, and if I could generalize, I would say across all of Nordson's businesses, there are no 12-month plans that are operative right now.

I think as you can imagine, I imagine everybody on this call would share the same sets of questions about what kind of global economy are we going to be looking into six, eight months from now. And I think you can have a wide array of opinions. So there is not a lot of visibility.

I would say that what we do see within the Adhesive segment to come back to your specific question, is that obviously the purchasing of spare parts is continuing. On new capital programs, they are really tied to the specifics of customer plants in the consumer non-durable areas, like packaging and non woven and some of the paper products, and so on.

We are beginning to hear things about new discipline on tangible paybacks, in terms of the returns they get for new equipment. And some of the new products we have introduced have been very helpful in that. But frankly, as the new methodologies get approved, it has added steps in the selling and evaluation and improvements sequences. I would say as a general notion, approvals are occurring at higher levels in organizations, with less delegated authority down the front lines that you might see in more normal times.

I also, frankly, have some questions of ourselves in that we did do a very good job of driving sales in the fourth quarter of 2008, and while we don't have and won't ever have crisp answers, as to whether there is a degree of the softness that we see in orders in the 2009 outlook, whether some of those actually got sold, due to great performance by our front line people at the end of 2008.

But as a general notion, the softness that we are seeing is in systems businesses, it is in areas that are away from the consumer non-durables, and they tend to be directionally projects where customers are changing the manufacturing process, as we sell them new methodologies to manufacture their products, and that whole change is one that is being confronted with greater caution by customers.

Okay. Thanks a lot, Ed.

Our next question comes from the line of Matt Summerville with KeyBanc. Your line is open, sir.

Good morning. Couple of questions. With respect to the order declines in Advanced Tech, would you say that that is in fact, Ed, centered on more the capital intensive larger dollar purchases versus consumables, and if so, can you give us a sense just how well the consumables piece of that business is holding up, and then if you can provide similar color to the Adhesive business, with regards to what you're seeing on the replacement parts side?

Sure. First of all, the assumption that is behind your question on Advanced Tech is exactly correct. The Plastic consumables businesses that sell both to material suppliers, that in turn sell on to their customers, or are direct sales to end users that use our plastic dispensing components were holding up very well, and have positive comparisons in the most recent periods, or not down, depending upon the sub-unit, and we are very encouraged by that of course, and these are high gross margin, high operating margin business units.

With regard to those areas that are soft within Advanced Tech, they are the larger systems, and they tend to be sold in those that have been sold into areas that are, if you will, more traditional aspects of technology markets. The non-smart cell phone activities, those customers, the contract manufacturers in Asia, are taking very extended shutdowns over the New Year holidays and up to Chinese New Year.

And those activities, those shutdowns in and the lack in some of the traditional cell phones, as an example, are causing the need to make capacity, or capability investments slower than we have seen in prior periods. I mentioned earlier some of the bright spots that we are seeing that offset some of those areas.

With regard to the spare part components in the Adhesive businesses, which is a big part of that segment, those are holding up well. They vary somewhat by customer to customer, in some cases as customers are anticipating in durable good end markets, like kitchen cabinets, if I could use that for an example, some of those areas might be suffering from extended shutdowns, manufacturers of doors and windows, and some of those markets are very soft, and they would be down big percentages, offsetting some of the stability that we would see in the non-durable areas.

Ed, with regards to what you have contemplated in terms of cost reduction measures, you kind of laid out the framework, I believe back in August, when you reported Q3 for what you intended to do.

Given the degradation you have seen just in general across the businesses, as measured by orders in the most recent 12 weeks, is there more you think you need to do there? And then can you remind us how much of the anticipated savings you anticipate capturing in fiscal '09 versus fiscal 2010?

Sure. First of all, with regard to whether we need to do more, that is a dynamic issue, and there are levels of activity that would cause us to re-examine where Nordson is. But we are not at that point today. We have announced a series of actions, and the implementation of those actions are well on their way.

Of the, and what we announced was a cross reduction in cost of $30 million, and a net reduction of $25 million that would be fully realized in the full fiscal 2010. But I would tell you that of the gross 30, we are basically $20 million through that by the end of this calendar year. So that starting in January, our continuing month to month operating results will be reflective of two-thirds of the total work that we need to do. There are some other systematic things that we will do to take cost out. Some of those are related to the real estate changes that are implied by the things that we have just talked about.

I will also mention that the original $30 million that we talked about did not contemplate a wage freeze that we have put in place here in recent days. As a matter of fact, internal announcement only went out today. And so that will on an annual rate add another $6 million or so. The duration for which this wage freeze extends I think we will wait and see. But that is a step that we have taken here most recently, beyond those that we have previously announced.

Okay. Going back over the last 12 weeks in terms of orders, can you give us a little bit of color, in terms of what your enter versus exit rate was? I guess what I am trying to get a better feel for is more of the current tempo you are seeing in regards to order activity?

Sure. I will tell you, when the liquidity markets should shut down on whatever that day was, September 17th, we were having positive order comparisons to last year, and it happened quite suddenly, when large commercial paper borrowers were unable to roll their paper, and Treasury rates went negative, and it was a sudden stop, and we saw a dramatic change. It turns out that our 12-week order rate that we are sharing with you is after that date, so the 12 week orders that we have shared with you, encompass a period that is inclusive of when all of that started.

I would tell you that the first few weeks of the 12-week period, thus being September, were not as severe as the average overall. My own sense is that we are probably in all of our markets seeing a December that is worse, if you will, than September. I think that, and incorporated into our forecast is a weak January.

My personal view is that these stimulus actions, and it is not one, but collectively, there is enormous monetary and fiscal stimulus out there that is tremendous in it's force, and while there is very little monetary movement right now, there will be a point when this starts to go, and I think when it goes, it will go very quickly. I am no expert in terms of when I think this is going to happen.

But I do expect that these actions will have at some point a very significant effect, and it could occur very quickly in the new year.

Great. And then if I could ask just one more question. Greg, this relates to pension expense. What do you anticipate your pension expense being in fiscal '09 versus '08, as it pertains to the P&L, and then any major change in cash pension expense as well, or cash outflow regarding pension?

Sure. In terms of the question on expense, we won't see a significant deviation or fluctuation, if you will, from what we incurred in the current year. That is driven by on the one hand, yes, there is a change in the value of the assets, but there is also a change in the discount rate assumption. So generally speaking it is not a significant change from what we saw in fiscal 2008, and we also won't see a funding requirement in '09 of any significance either.

Great. Thanks a lot.

Our next question comes from the line of Walt Liptak with Barrington Research. Your line is open, sir.

Hi, thanks, good morning, everyone.

Good morning, Walt.

Ed, if we could go back to the cost takeout, and I understand that you don't have a second round of actions that you are doing yet. My understanding is that your manufacturing operations are already pretty leaned out. The question is, if you needed to take more costs out, if this slowdown continues well into '09, are there costs that you can take out?

I mean, we do have flexibility and I think we have shown our ability after the 2001 weakness that we saw in our businesses and the actions that we have taken out. Now, there are always costs that we can take out. We are reluctant to take cost out because frankly, we think that the organizations are filled with, if you will, effective operations and talented people, and we would frankly look at a variety of other methodologies to reduce cost, beyond simply reducing headcount.

But we think have methodologies that can be in place. I would mention that we have really clamped down, on both capital spending and any hiring. I personally approve all expenditures that are being made and hiring that is being done, and just the normal attrition produces savings as well.

Okay. I wonder if you could help with this one. Given the cost savings that you will get from the actions that are done, plus the revenue declines, I wonder if you can calibrate the underabsorption you might be looking at over the next couple of quarters. I guess is a negative leverage number?

Well, clearly it is there, and I would also tell you that we are going to let the demand from our customers drive the velocity of production through our facilities. So to the extent that we are producing less this year than we did last year, there will be negative absorption.

You see the gross margin for the quarter that we forecast at 55% from the, say 57% numbers that we have had in recent quarters. That is driven by that absorption. But some of the costs that we have taken out offset some of that, of course, and so we are looking very keenly at any kind of discretionary spending that can offset that absorption. But we are well aware of it, and some of the actions that we have taken address those issues, and we think we always have capability to do things, we are just going to do it judiciously.

The gross margin that you mentioned, so none of that decline is related to pricing?

That is correct. I mean, I am sure, here or there, somewhere there might be a pricing action taken. On the other hand, we are very conscious of pricing relative to what is happening in exchange rates, any other thing that would influence the whole profit equation, and we have raised prices in this fiscal year at the beginning of the year in a variety of places, and our forecast is reflective of both the benefits of those price increases, as well as the absorption issue that you raised.

Okay. Do you also do a January price increase, or when do you typically raise prices, or has that already passed?

We traditionally raise prices, if there is a tradition, at the beginning of the fiscal year, so that would be November 1, but in recent quarters, as we have had fairly dramatic movements in both directions in currencies, we have had movements in raw material costs, there have been opportunities to introduce new products, and that creates a new opportunity to address the value equation. We have been more dynamic in adjusting pricing in our businesses around the world in the last year, than probably we have been for quite a long time before that.

And these are price increases, not surcharges or raw material cost pass-throughs?

I think we have a few of those, but the predominant thing we do is we just adjust the price.

Okay. Good. Thank you.

Our next question comes from the line of Charlie Brady with BMO Capital Markets. Your line is open.

Thanks. Just in terms of the spare parts business, I know overall for the firm it has generally been a little less than 40%, but could you just remind us what the sort of aftermarket business is for the three segments?

My second question relates to R&D spending. You have talked about really tightening down the spending. I am wondering what your mind set is on what you are doing with R&D spend.

I'm going to let Greg answer the first question on the spare parts numbers, because I will probably get it wrong. I know generally but I don't know the exact numbers, if you want to drill down. And then I will come back on the R&D answer.

Thanks.

Charlie, on the spare parts, as you say for the corporation it is slightly below 40%. In the Adhesive segment it is closer to a 50% kind of number. Advanced Technology would probably be then, just slightly ahead of that corporate average, and Industrial Coating then would be below that number, to then get you to the average.

Thank you, Greg.

And with regard to the R&D spending, the focus of our spending on building our businesses is both the traditional development of new products, and it would probably in Nordson's case be more tied to the word development than the word research, but it is also investments in business development, where we are looking to introduce new solutions for customers.

And it brings a whole variety of things to introduce new technologies, go into new end markets and the like, and those costs are many times not reported in footnotes as R&D, but they are every bit investments that we make to drive the future of the business, and our pay plans for our executive team are tied to developing these new markets, and to increase the share of our business that is tied to these new applications, new end markets, driven by technology, or just driven by good application development with customers. And that is vital to what we do.

There may be some proportion adjustments that we have made, based upon the performance of some of the initiatives, and whether they are now part of the mainstream or not, but we clearly have not done anything to gut the future of this organization with the actions that we have taken.

Thanks. Appreciate that.

Our next question comes from the line of Matt Summerville with KeyBanc.

Just a couple follow-up questions. Ed, how are you feeling about your own inventory levels relative to demand? And then what do you traditionally do around the holidays, as far as any normal shutdowns and if there are such a thing, what are you contemplating in light of this environment, if in fact your inventories are out of balance with demand?

We have been alert to inventory builds. I actually don't have data with me, I don't know if Greg does, but it is something we are very much aware of. Our production philosophies are tied to reorder point philosophies, that would say you sell 10, you make 10, rather than you do anything that is tied to forecasting, and so on.

And as in various products or subassemblies and the like, if we see diminished demand for certain things, we may even shrink some of those reorder points to be smaller in a proportional way, and these things generally work very well on the upside as well as the downside, but we have alerted our leadership teams to really drill down, and pay close attention to this, because we have no interest --

And then just one other question. As far as, you guys have been somewhat acquisitive over the last 24 months. Have you performed any necessary impairment tests, and if so, is there anything that has come out of that one way or the other?

We do that impairment test as a part of the year-end audit. That work is done shortly before year-end, and there is no impairment in the results that we announced yesterday. With regard to shutdowns, our standard practice is we shut down for a week between Christmas and New Year's, and we will do that again this year with no extension beyond that.

Great. Thanks a lot.

You are welcome.

At this time, there are no further questions in queue.

Okay. Well, thank you, operator and let me summarize, if I could. I would like to leave you with what I think of the take-aways from today's call.

First, Nordson had a tremendous 2008 and fourth quarter, and it was good by any measure, and significantly exceeded expectations, including our own. Second, we are now in a recession that is severe, one that is impacting every geographic market in nearly every end market to at least some degree. Third, Nordson customers are being impacted, and in turn our order rates from them.

Fourth, we believe that year-end holidays and January are going to be an especially weak period of time, due to customer extended shutdowns and customer conservatism until after the New Year, or the Chinese New Year with a wait-and-see attitude. And while visibility is difficult, I believe that the extraordinary government actions are likely to have an impact before too long in 2009.

Fifth, I would like to remind you of Nordson's bright spots, spare parts, use-once and dispense components, non-durable end markets, like packaging and non wovens, new technologies and cost saving systems, like labeling, LEDs, and Life Science, Solar, Smartphones, low cost computer components, and advanced memory packaging architectures.

And sixth, Nordson has started early to deal with these challenges. We have excellent cash flow, excellent liquidity, and cost reductions largely implemented on our way to hitting our $30 million goal. And I thank all of you for your continuing interest in Nordson, and I look forward to talking to you all as we proceed through the quarter.

And lastly, I wish all of you and your families a very Happy Holiday season. Thank you.

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