Nordson Corp (NDSN) 2009 Q2 法說會逐字稿

Good morning. I will be your conference operator today. At this time, I would like to welcome everyone to the Nordson second quarter FY 2009 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 the conference.

Thank you, and good morning. This is Jim Jaye, Director of Communications and Investor Relations; 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 May 22, 2009, on Nordson's second quarter fiscal 2009 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, May 29 by calling 1-800-642-1687. You will need to reference ID number 99033879.

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 second quarter fiscal 2009 results and Nordson's future outlook.

Thank you, Jim. And good morning to all of you on the call and thank you for attending Nordson's conference call discussing our 2009 second quarter results. Our comments this morning will provide highlights of our second quarter performance and some perspective relative to our outlook for the third quarter.

Relative to the second quarter and as expected, our performance was impacted by the weak global economy and although one could make the case for continued pessimism, there are external indicators that would suggest that the pace of deceleration has slowed and that the global economy appears to be leveling off. The easing of credit markets, a slowing in the growth of unemployment trends in the United States and the expected benefits from global stimulus packages provide reason to believe that perhaps the worst is behind us. I will be speaking more directly about current trends and our outlook for the third quarter, but before that, I will turn the call over to Greg Thaxton, who will provide a summary of our second quarter financial results.

Thank you, Ed, and good morning to those listening. Regarding second quarter results, sales were $189 million, down 36% from the prior year, with volume down 29% and unfavorable currency effects reducing sales by 7%. Given the current economic environment and the fact that Nordson's fiscal 2008 results were all-time records, perhaps a comparison of sequential performance is more useful. Where second quarter sales volume is up approximately 3% over the first quarter of 2009.

In terms of segment sales performance in the quarter, adhesive dispensing volume was down 19% compared to the prior year second quarter and industrial coating and automotive and Advanced Technology volume were down 39% and 41% respectively as compared to the second quarter of 2008. On a sequential basis, both the adhesives and industrial coating and automotive segments experienced sales volume increases of 8% while the Advanced Technology segment's volume declined 10% from the first quarter.

As a general comment to portions of our business that are associated with consumer nondurable systems, as well as consumables and aftermarket demand in all segments have continued to perform comparatively better during the quarter. Low softness was seen in the larger dollar systems businesses within each of the segments. The Advanced Technology segment was impacted by reduced spending across most of the end markets served, including semiconductor and consumer electronics. However, as we will address later in the call, we have begun to see strength return to several Advanced Technology end markets. Operating profit as reported was 10% of sales, including $5 million of restructuring charges associated with our spending reduction efforts. Excluding restructuring charges, operating margin would have been 13% in the quarter, which highlights our management team's ability to respond to the external challenges with appropriate actions to reduce spending. In fact, we have surpassed the pace and scope of our previously announced spending reduction targets.

In the quarter, our selling and administrative expense volume declined by 18% from the prior year. Currency further reduced the spending by 7%. Excluding restructuring charges, selling and administrative expense volume declined by 22% from the prior year. On a segment basis, the adhesive segment once again delivered very strong operating margins in the quarter of 28%, up from 25% in last year's second quarter and in the first quarter of 2009. This segment's operating margin benefited from both reduced spending and a higher mix of standard systems and aftermarket parts that carry higher gross margins. Both the Advanced Technology and industrial coating and automotive margins were impacted by sales volume declines that more than offset the reduction in spending generated in these segments.

Net income from the Company in the quarter was $14 million, or 7% of sales and an increase of 24% over the first quarter of 2009. Fully diluted earnings per share was $0.41 in the quarter, inclusive of a one-time tax benefit of $0.07 per share. Excluding the two nonrecurring items, which were the restructuring charges of $5 million, or $0.10 per share, and this tax benefit of $0.07 per share, adjusted earnings per share would be $0.44 for the quarter and the return on sales would be 8%.

Cash measures in the quarter were very strong. In addition to protecting profitability with spending reduction activities, the organization has reacted appropriately to the priority to conserve cash. Sources of cash included net income of $14 million. Depreciation and amortization of $9 million, and working capital of $29 million. Uses of cash included capital expenditures in the quarter of $2 million, a reduction in long-term liabilities of $4 million and dividends of $6 million, resulting in adjusted free cash flow after dividends of $40 million in the quarter. This quarter's performance is slightly ahead of last year's second quarter performance and up 60% over the first quarter of 2009.

The current quarter's EBITDA was $28 million and our debt leverage measured as debt to total capital ended the quarter at 29%. Net of cash, this ratio would be 27%.

In summary, I'm pleased with the way the organization has responded to this challenging economic environment. We have maintained reasonable profitability in a quarter where results continue to be impacted by a general pause in global capital spending. In addition, we have generated excellent cash flow with the focus on working capital management, allowing us to maintain a very strong balance sheet.

Thank you, Greg. I will now turn to some brief comments about our outlook for the third quarter of 2009. But before I do, I would like to add some perspective on this outlook. The US and global economies continue to operate against a very difficult set of challenges, yet externally there are indicators that broadly suggest the pace of deceleration has slowed and perhaps the global economy is poised for a recovery, the shape of which is still very uncertain.

Specific to Nordson, I do believe we are beginning to turn the corner. I am hearing from many of our businesses that customer activity is picking up, both in terms of project dialogue, as well as project quotes. Also, our recent order trends point to an improvement as compared to the pace of business at the beginning of the fiscal year. We have provided recent demand data as measured by orders, both on a segment and geographic basis with our press release. As a reminder, these are orders for the latest 12 weeks as compared to the same 12 weeks of the prior year on a currency-neutral basis.

Regarding the orders for the last 12 weeks ending May 17, measured in constant currency, our orders overall were down 25% from the same 12-week period of the prior year. At the time of our last conference call, these order rates were down 31%. Within adhesives, orders are down 16% from the prior year, primarily due to a reduction in those product lines associated with durable end markets, which tend to be larger dollar systems such as product assembly. Within this segment, orders associated with consumer nondurable end markets and spare parts have held up fairly well.

Regarding Advanced Technology, 12-week order rates, which are down 33% from the prior year, we are seeing most softness, again, within some of the larger dollar systems businesses. As in other segments, orders associated with the consumable product lines within this segment have fared better than the systems product lines. Within the industrial coating and automotive segment, the latest 12-week orders are down 35%, as this segment continues to be challenged by the weakness in consumer durable end markets. I would, however, like to add more color to our order trends.

First, as compared to our last earnings conference call in February, our 12-week order comparisons have improved in all segments. Also, given the vastly different economic environment between last year and the current year, we have begun to focus more on the sequential change in order rates. Looking at the average value of weekly orders for the months of March, April, and the first two weeks of May, our orders are up 9% over the pace of weekly orders for the months of January and February. Most of this improvement is coming from Advanced Technology segment where orders were up sharply, particularly in the last four weeks. Although there are continuing challenges to the global economy, overall I am pleased with this improvement in orders. I'm optimistic that overall business conditions seem to, at a minimum, be leveling off. Things do not appear to be getting worse.

As we look at the third quarter, we currently project a sales decline of between 30% to 34% as compared to the prior year, inclusive of a currency head wind of 6%. On a sequential basis, the midpoint of this guidance represents sales volume growth of 1% and a 3% increase due to exchange rates. Given the mix of products, we should continue to see gross margins around 55%. Selling and administrative expenses in the quarter including restructuring charges of approximately $1.5 million will be down approximately 24% from the prior year, reflecting the very aggressive spending controls.

Although a few additional comments or adding a few additional comments to operating expenses, we have continued to take action to size our business to current conditions, resulting in additional head count reductions, as well as further reductions in other spending. During our first quarter conference call, we talked about a reduction in selling and administrative expenses of approximately $60 million in the current year versus last year. Based on latest estimates, we now see a volume reduction closer to $80 million, as we have quickened the pace and expanded the scope of our spending reduction efforts. This outlook results in earnings per share for the third quarter of $0.39 to $0.50. This range is after restructuring charges that are estimated to be approximately $0.03 per share.

In summary, the current business environment continues to be very challenging. As such, we have taken significant steps to mitigate the effects on our business by responding very quickly and aggressively to controlling spending and focus on cash flow, which has remained relatively strong. Our strong balance sheet provides a competitive advantage against much of our competition. Furthermore, we believe we have the products, organizational talent, resources, and liquidity to leave us in a stronger position relative to our competition when markets return. Let us now turn to your questions. So, operator, we're ready to take questions.

(Operator Instructions) Your first question comes from Kevin Maczka.

Good morning. Ed, first on the upsizing the SG&A goals from 60 to 80 can you talk about -- a little more detail on what kind of buckets those are coming from? Is this all further head count reductions and discretionary spending control, or are there some more structural type things involved in there as well?

Kevin, this is Greg, and I think the answer to your question is it's a little bit of both. First of all, in terms of the targets we talked about previously, we were able to get at some of those activities sooner than what we might have originally expected, so that's going to contribute to more savings during the year. And beyond that, we did look at further reductions in head count as well as other, what we've been calling discretionary spending, which are things like travel and trade shows and marketing expenditures. We phrase it to say we've broadened the scope and quickened the pace and the answer is it's really a combination of all of those factors.

Okay, and it sounds like to Ed's comments, you're possibly turning the corner, you're seeing stabilization, order rates sequentially are a little bit better. But yet you're upsizing the cost cutting goals and dropping CapEx to very low levels. So I guess just generally, how do you view the whole kind of fat versus muscle approach? How do you know if you've done enough or if you've even gone too far perhaps?

Kevin, this is Ed. Obviously there is no hard answer to a thing like that. It's a function of the view that we take to the pace of activity that we have today, a basis of conservatism to say that we're not betting that this recovery is going to come at any particular date or in any particular magnitude or returning growth rates, so we've been conservative no doubt. I will tell you that we have prioritized the preservation of the high valued activity that are close to customers, customer contact people are the last people to be effected, particularly in those markets where there's dynamics among customer investment and faster growing economies, which happily, often times come with a cost of incremental hedge that's less than you might find in western economies. But we have also looked at structural changes within the organization that have to do with taking advantage of cost reduction synergies that we've been able to realize across some of the acquired companies that we did in 2007. The acquisitions being in 2007, as well as looking at opportunities within even some of the more mature businesses or longer owned businesses, where we've been able to combine operational and staff units to realize benefits from that.

When you make reductions in things like marketing expenditures or step back from the number of trade shows you go to, with that comes potentially a risk that you have not touched customers this year in the way you might have done in the past, but frankly, I think that with evolving means of communications, being electronic and web-based and so on, I think some of these things are really precursors of longer-term trends and how people touch customers and convey their capability.

Okay, great. And just finally, ED, it sounds like Advanced Tech is really improving in terms of the order rate and helping to drive that overall stabilization in the order rate. Can you give us a little more color there on what's driving that? Because I still see semiconductor forecast coming down. Is this more of a market share gain that's happening perhaps related to flip chip or something else?

I would say that what we've seen obviously in 2008 and continuing through the numbers that we produced in the first half of 2009, this -- in the terms of our fiscal years, very soft end markets in Advanced Technology that would cut across a variety of specific markets like semiconductor and electronic assembly, cell phones and the like, and there is a certain amount of pent-up demand. Customers continue to introduce new products that require the investment in new capability and if you use a third party forecaster as a basis of reference, and we oftentimes look at Gardner because it's readily available on their websites, they talk, for example, on semiconductor cap equipment about 2009 for packaging and assembly equipment, which would be a good part of what we do, of demand globally being down 47%, automated test equipment being down 34%, bigger numbers than 2008. But they also talk about a sharp bounceback in 2010 with growth rates of 30% and 33% for those two segments respectively. And I think what we're beginning to see is some of those activities in broad electronic assembly markets, life science. I think we've seen some things from military. We've seen some things from cell phones and with certain other large customers, spending programs that benefit us specifically.

So our sense is that this is not just a four-week pop or something like that, but rather that we're going to see a stronger second half than we've had in the first half in terms of customer demand and the corresponding shipments that we'll be able to book. We don't normally give guidance on a segment basis, but I guess I would want to take advantage of your question to note that we did have a negative operating margin in the Advanced Technology in the second quarter and it would be my expectation, at least, I'll put it this way, I would be disappointed if we don't see for the second half of the year that those operating margins return to positive territory and for the full year as well.

Okay, great. Thanks, Ed.

Thanks, Kevin.

Your next question comes from John Franzreb.

Hello, am I live?

Yes.

First one, Ed, I want to touch on Europe, it looks like the order rate ticked down in Q2 versus Q1, 29 versus 21. Could you talk a little bit about what's going on on the continent?

Yes, first of all, for us, Europe represents both a big export market out of Europe to other territories, as our customers tend to be exporters of systems more globally, and then of course there's the domestic demand in Europe itself. And it is an area that is more heavily dominated by our adhesive dispensing systems in terms of mix across segments. And, the economy in Europe is, if you will, trailing that of the US, both in its decline. And while the absolute measure of GDP growth in quarter one in Europe was not as bad as the US, I should say decline, not growth, it is, it is a worsening environment and I think we get influenced by a bit of that and so sequentially the pace of orders for us in Europe, I say that Greg, correct me if I'm wrong?

Yes, that's correct. And the absolute is probably down sequentially in Europe.

I guess what I would announce to that is those order rates are a snapshot at a point in time, so they are going to be impacted by the timing of any particular larger dollar system order, if you will.

Okay. Now, you touched on the sequential side of this, Ed, and you pointed out that as a good thing that the order's up sequentially, but isn't that the normal pace of your business? For all the years I've been following you, the backlog ticked up as the year progressed and dropped down in Q4. Is this -- is that an anomaly that you're pointing out, that it's up sequentially, or is it just the normal course of business?

I would -- we made an effort to carve out the holiday season and so we talked about January and February as being months that had significantly weaker order than did March, April and the first half of May.

Right.

And that's that 9% comparative. I would say once we get past the Christmas holidays and in the standard year, there is a resurgence of activity, no doubt, and oftentimes March would be a relatively strong month for us in any year. But I would say that the pattern that we're talking about here is significantly more than that, materially more than that. And I think if you step away from the specifics of our numbers, I think it's consistent with everything that we would hear more globally, it's what you would hear in another company's pronouncements. Things just seem to be going better at this particular time than they did back in January and February. Liquidity is much more real. Spreads have come down. I think there's some evolving confidence in the way people are approaching these types of spending things.

I would comment, though, what we're, what we're not seeing is a broad-based every geography, every customer ordering 9% more, if I could use that oversimplify, but rather we're seeing well capitalized, strong companies stepping out and making some big commitments to do things. And so we're seeing a resurgence of large orders from big customers in meaningful ways and what we're -- I would compare that to is the many, many very small companies that we also sell to, many of them on a comparative basis are a bit more conservative still.

Great. That's helpful. And one last thing, Greg, is the restructuring charges, is it allocated in any of the segment results, or can you talk a little bit about that?

It's in the corporate manage number, John.

Okay. So when I look at the segment by segment, it's not in there at all?

Correct.

Okay, great. Thanks a lot.

Your next question comes from Matt Summerville.

Good morning. Couple questions. First, just on the cost savings, and Greg, I want to make sure I have this right. The 60 moving to 80 is just relegated to the SG&A line on the P&L, is that correct? And then based on the head count you've taken out, the savings there aren't just in SG&A. I mean there's actual structural cost reductions that will come out of the cost of goods sold line. I guess what I'm trying to get a feel for is all things considered, how much do you believe you've -- you will reduce your overall cost and expense structure by in 2009? And then if we assume a low single digit just for our units sake, GDP environment in 2010, how much of that cost comes back?

Okay, Matt. First of all, to your question on where the $80 million is, you're correct. That's all on the SG&A line. So that $80 million is a reduction from prior year volume in SG&A. We have had some reductions as well that we've done to offset our manufacturing variances with our volumes being down as well. So we have taken some costs on the direct side. Butt $80 million target is all SG&A.

And if we, if we think about your question being how much of that comes back in a recovery, I would estimate about half of that number may be slightly more than the $80 million would be -- yes, so half of that number, would be costs that would not come back in, costs associated with head count, in addition to other structural changes we've made to keep costs out of the P&L. Now, if you say the other half of that number is variable, if you will, that may come back with volume, clearly not all of that number would come back if we're talking about a low single-digit type of GDP improvement. But costs such as merit increases and bonuses that we would like to pay our troops and as you start to incur more travel expenses, clearly some of that will come back. But it wouldn't all come back in a recovery that I would expect in 2010.

Okay. Excluding I guess -- well, let's actually talk about product mix for a second. Can you give us some sort of feel during the quarter, during the first six months of your fiscal year what the mix has been between systems and aftermarket/spare parts and what that relative mix would have looked like last year?

The mix is clearly higher, higher weighted toward parts in the current year versus the prior year. Our comments, as we talk about both orders and revenues, talk about the, a large portion of the volume shortfall is associated with the systems orders and larger dollar systems orders. Adhesives tends to have a higher mix of spare parts, approximating 50% and, that mix is up and in terms of the parts versus system and that's up as well in the other segments. I don't have a number for the total Company, but clearly it's, it's up significantly from where it would have been last year at this time.

Greg, if we look at FX rates now versus where they were heading into your fiscal year and based on I guess the experience you've had through the first six months, and where spot rates are now, how much of a head wind to EPS do you see from FX in fiscal '09 and how does that number compare to the head wind you faced heading into the fiscal year, what that estimate would have looked like?

Yes, I'll talk about it a couple relationships here, Matt. We -- when we give our guidance for quarter three, we're looking at where spot rates are at this point in time. So this would have been rates actually two days ago and the dollar's actually weakened since then. But we were using for quarter three a euro at $1.37. And we had the yen at about $0.96. Last year at this time, the euro was about $1.56 and the yen was about $1.06. So that's baked into our guidance for the currency head wind in quarter three. Last year in -- during the fourth quarter is when we saw the dollar strengthen fairly significantly. The euro during quarter four last year was about $1.42, so clearly that head wind, becomes a lot less strong, if you will, in our fourth quarter.

Okay. As far as -- Ed, maybe you can comment. You mentioned a sequential improvement, especially over last couple of weeks in your prepared remarks has been largely driven by Advanced Technology. Can you talk about in the other businesses the underlying trend you've seen in the last few weeks? And just maybe provide more high level macro color than maybe some of your previous comments across the three or four major geographies in your three segments?

Sure. First of all, with regard to the segments, as I mentioned, the Advanced Tech orders were up sharply. It is concentrated in systems-type orders is where we've seen the change. The consumable orders continue sort of on pace as they have been, perhaps a little bit better as factory run rates are a little bit higher, but it's the, it's the return of systems orders in Asia, in particular, that has been interesting for us in Advanced Tech. I would say that industrial coating and automotive is, is on a 12-week to 12-week basis is up somewhat. It's performing a little better than it was, but it's -- its change is not significant. And adhesives has got mix shifts. It continues to be stronger comparatively in the US and in Asia Pacific and weaker in Europe. And it is a much more stable business. It's not shown any kind of significant bounce, but generally it is doing better in current days than it was in January and February.

Great. Thanks a lot.

You're welcome.

Your next question comes from Walt Liptak.

No one said it yet, but good quarter considering the bad environment we're in.

Thank you, Walt.

Ed, you've been working for a long time on improving the business with Lean and Six Sigma and obviously we're early taking cost out, so I guess the nice surprise with the SG&A coming down, looks very nice. So follow-up to the discussion that you had about, or I guess Greg with the $40 million of permanent costs out, if I can say it that way, it looks like that would get you to an SG&A to sales somewhere in the 35% range. Is that about right?

For what period of time, Walt?

Well, if you just take a level of revenue, say from '07 or '06 and pull out $40 million, it looks like it will take you to a mid-30s SG&A and would improve your EPS, by a little bit north of $1.

Yes.

I mean is it okay to analyze it that way?

Well, let me use 2000 to 2006 as a point of comparison. We had the same businesses basically from 2000 to 2006 -- or if I use 2001, perhaps, because we bought AFD in the first day of 2001. The revenue in those two periods of time improved somewhat, maybe 2005 was roughly equal to 2001 restated for EFD. And we made a number of structural changes during the early days of this century and we're able to sustain those changes because of Lean and because of structural changes and the like and we expanded operating margin significantly from maybe it was high single digits or whatever it was, 11% perhaps up to 17%. And I think what we'll find coming out of this, as we make some permanent changes in terms of how we operate the business, that when we get back to revenue levels like 2007, I would expect to see operating margins down -- operating margins improve by another whole material amount. That's our objective. That's what we are trying to drive the business to do. I think what remains to be seen is how long it's going to take us to get from where we are in revenue today back up to those 2007 levels.

Obviously a lot of the -- a material portion of the savings that we have realized this year, though, are, if you will, variable costs that have been cranked out of the business, like travel and some of the marketing and the like and some of those will come back. So I think the way you've done the math is conceptually correct, but I don't think I'm prepared to make specific forecasts. Our focus has probably been a little bit more short-term of late.

All right, fair enough. When you look at the geographies, I wonder which you think is going to recover first when things do start to recover?

I think Europe is sequentially behind the US and I think we will return sooner. I think Asia is a much more hot territory that there's a lot of manufacturing that occurs in Asia that feeds global markets, as well as it's an underlying domestic market in places like China. And so it dropped on some of these variable points of supply on lost orders. In other words, domestic -- using the US as an example, there's a lot of domestic demand that has as incremental capacity outsourced factories in Asia. And those went down early in this particular cycle and I think some of those are going to be coming back. So I would expect that we'll see Asia improving, if you will, somewhat more dramatically than some of the others. If you look at where we were in the February conference call, I think we said orders were down 44% over the prior year and in this conference call, we have shared that Asia Pacific's down 20. I don't have the absolute dollars that equate to the two, but that's a significant difference as year-over-year performance.

Okay. Is there a weighting of a product category in Asia that you think would be recovering first?

Advanced tech is a big chunk of our Asia Pacific business.

Right, okay. Okay. And then you mentioned in your remarks about Advanced Tech margin turning positive and so you started the discussion, so how positive do you think -- are we talking low single digit number? Are you talking about getting back to, you know, more normal double-digit margins?

My comments you are talking about this year.

Right.

I'll borrow a line from myself that I used a couple years ago. I expect the operating margin in the second half to be better than the second quarter and I expect the operating margin in the second quarter to be better than the second half. I don't think, Walt, at this point I can be more specific than that.

Okay, thank you.

Your next question comes from Matt Summerville.

Two follow-up questions. First, sticking with Advanced Technology, at the current pace of order activity, you're seeing -- I guess I'm trying to understand what up sharply means. If you're up 9 sequentially from March through mid-May, most of that being driven by Advanced Tech, Advanced Tech being 30% of your Company's revenue, I would think the rebound there is strong double digits, probably in excess of 20, 30% sequentially, and then I guess if that pace holds true, the weekly order input you're seeing there, in Q3 do you actually see year-over-year order growth in Advanced Tech?

We -- I'll say it this way. Over the last four weeks, our orders are nearly equal to a year ago in Advanced Tech. And the orders during this most recent four weeks are up dramatically high double digits from where they were earlier in the year.

Okay. Turning to industrial coating and automotive, I guess you were willing to step out and say Advanced Tech should see profit again in the second half of the year. Based on what you're seeing in ICA, are you willing to sort of make a similar conclusion there and I guess with all the auto industry-related issues that you're seeing or perhaps is there another leg down in the run rate of business in ICA with all these extended shutdowns coming?

I don't know that that piece of the business could get much weaker than it is. It's obviously -- there is absolutely minimal spending by these customers of ours in that piece, which is a small piece of ICA. Most of ICA is powder painting systems, but the forecast that we've shared for the third quarter and our expectation for this year is that we're not counting on a recovery coming out of that segment. I think it will lag somewhat and so the kind of margin performance that we had in the third quarter, which was negative -- we're not looking for any kind of recovery of that margin this year, but I will tell you is we look at the outlook for this business overtime, this was a business that even with modest improvement in things like spare parts, run rates and the like, with the cost structural changes that we put in place that are now behind us and we're enjoying the benefits of, this is a business that I would expect got positive operating margins next year and with return in business activities that we would -- when it gets back to the 2006, 2007 kind of levels this is a business that can have midteens kind of operating margins given the performance that we've, and structural changes we've put in place.

Moving over to adhesives, similar question just on margins. Given the mix of business, it sounds like the order book most recent period, pretty similar to on a sequential basis in terms of mix of parts versus systems with a declining magnitude of FX head wind as we move into the balance of your fiscal year. Should we think that fiscal Q2 operating margins in adhesives is a high watermark for the year or do they still move higher from here?

Matt, this is Greg. I think as you've kind of characterized that business, I would view this as perhaps a high watermark for adhesives and given the high mix, as well as the fact that in this segment more so than others, we took action on the spending sooner. I think this is a very strong performance for that segment.

And Matt, I would add that any recovery coming in the demand for systems in that business will be incrementally more profitable, meaning bring more dollars of operating income. But as a percentage of revenue, I think it would be dilutive to operating margin because the -- those improving system orders will come in at a lower gross margin.

Thanks a lot, guys.

Your next question comes from Charlie Brady.

Hi, thanks. Good morning, guys.

Good morning, Charlie.

Could you quickly just remind me, in the coatings business, how much of that business is spare parts?

Order of magnitude, Greg, 25%?

Order of magnitude--.

We're checking.

Yes.

While you're doing that, let me just hop to another question. Sort of broader, big picture, as we've gone into this downturn, Ed, and clearly the worst in recent memory, I wonder, as you look across your portfolio of businesses, what has surprised you both in terms of a business that was turned out to be a bit weaker than you might have thought it would have been in a sharp downturn. And the other side of that, what businesses or -- broader than if you have to, performed better in a sharp downturn than you might have expected it to?

Yes, those are interesting questions. What's been unique about this is the liquidity challenges and people in the early -- back in November and December and even into -- depending upon the geography and the size of the customer, people shut down spending wherever they could because of the concern about their own liquidity and so what we saw was that in -- even in something like food packaging, a business that tends to be very stable, and so you have circumstances where our customers -- this is particularly smaller, less global type companies that we might sell to around the world. What you saw is that out of a preservation of cash, there was not the same pace of new full package lines being installed and as a result, some of the OEMs that would sell these entire packaging lines were not getting the demand from their customers because of those liquidity issues. That, we hadn't seen in other economic slowdowns, regardless of whether it was capital goods oriented or not, this liquidity thing was new.

Another thing that we saw in a few businesses were the absolute shutting down of customer factories. And I'll go over industrial coating and automotive, where a collapse in the demand for automobiles in massive shutdowns of facilities, for extended periods of time, and that impacted even the demand for spare parts because if they are not operating, they are not buying spare parts. So that was, if you will, surprising on the downside. So there's a couple negatives. What was interesting, the flipside of that is we had a lot of customers and markets like -- again, I'll come back to packaging again, that while they may not have been installing all new packaging line, they were making direct reinvestment in their own facilities and so we saw mix shift in customers and so we saw less demand for whole packaging lines being installed, but of course offset by nice demand from end user customers that was very strong and drove some of the kind of margin expansion that we've been talking about in terms of adhesive systems.

Thanks. That's good color. I appreciate it.

And Charlie, this is Greg. Back to the industrial coating and automotive spare parts, on historical basis, I would say order of magnitude it's high 20%.

Thanks. Thank you very much. I'll get back in queue.

There are no more questions in queue.

Okay. Well, in case somebody has any, I'll just make a couple closing remarks and we'll take a brief moment to see if anybody has any additional questions before I sign off. So let me summarize what I think the take-aways from today's call are.

First, of course, the recession continues to impact every geographic market in nearly every end market to some degree. We do have our sectors of comparative strength. Our spare parts and used once and disposed components have been very stable and an important part of our performance. In nondurables end markets like packaging and nonwovens generally have been areas of comparative strength and then the systems that we sell into life science, new technologies, and those systems that provide cost savings for customers, things like labeling systems and adhesives or quick cover change powder painting booths or even in things like packaging, hopper feed systems that enable customers to take labor out of their packaging lines have all been areas of strength. And our mix has supported a relatively good operating margin and we've enjoyed continuing excellent cash flow and excellent liquidity.

Our early start to these challenges has enabled us to reduce operating expenses by nearly $80 million this year and finally, the point I would make is that the sequential improvement in order volumes in recent months has been a highlight with that improvement centered on Advanced Technology. And we have the plans and we're fully prepared to adjust as necessary, as the economy moves. So operator, let me just pause here before we sign off to see if there's any additional questions.

(Operator Instructions)

Okay, operator, not hearing any additional questions coming in, so let me again thank all of the participants. This concludes our call. And I would like, as we always do, thank you for your continuing interest in Nordson Corporation. Bye-bye.

This concludes today's conference call. You may now disconnect.