Nordson Corp (NDSN) 2010 Q2 法說會逐字稿

Good morning. My name is Mason and I'll be your conference operator today . At this time, I'd like to welcome everyone to the Nordson Second Quarter Fiscal Year 2010 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. I'd now like to turn the conference over to Mr. Jim Jaye. You may now

Thank you, Mason. This is Jim Jaye, Director of Communications and Investor Relations, and I'm here with Mike Hilton, President and Chief Executive Officer and Greg Thaxton, our Vice President and Chief Financial Officer. We would like to welcome you to our conference call today, Friday, May 21, 2010, on Nordson's Second Quarter Fiscal Year 2010 results. Our conference call is being broadcast live on our web page at www.Nordson.com/investors and will be available for 14 days. There will be a telephone replay of our conference call available until midnight Friday, May 28, by calling 1-800-642-1687. You will need to reference ID number 73268174.

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 like to now turn the call over to Mike for an overview of our second quarter fiscal year results and Nordson's future outlook. Mike?

Thank you, Jim, and good morning, everyone. Thank you for attending Nordson's conference call discussing our results for the second quarter of fiscal 2010. Before I begin my comments on the quarter, I would like to share some general observations about the organization. I've just completed my fourth month on the job. Recently, I had the opportunity to visit most of Nordson's major operations in the United States, Japan, China, Germany and the UK. I'm very pleased with the caliber of our senior leadership and our global employee teams. The primary focus for the team in the near term has been to ensure we meet our customer needs. With this focus, our team has continued to gain new business during the quarter through our innovative products, applications know how, our direct sales and service model.

In addition, I'm pleased that we are maintaining the structural improvements that we enacted over the past year. This is allowing us to serve increased demand from a lower cost chassis. With these general observations in mind, let me now move to more specific comments regarding our second quarter performance and our third quarter outlook. Like our first quarter, Nordson's second quarter was very strong. Sales, operating profit, net income and earnings per share all significantly exceeded the levels of a year ago. Clearly, our global team has done an excellent job of executing as the economic recovery continues. We are winning in the marketplace and capturing new business through our continued focus on technology differentiation, application expertise and emerging market penetration.

Strong top line is being supported by our lower cost operating structure, which enabled operating margin in the quarter to reach 23%, the highest level in more than 20 years. This translated to excellent earnings per share performance, more than double the level of the previous year's quarter. From a year-to-date perspective, operating profit, net income and earnings per share in the first half have exceeded the first half levels of 2008, which was a record year for Nordson on many financial measures. In terms of our outlook, order trends remain very positive, especially in emerging markets and the technology space. That said, we are continuously monitoring the macroeconomic environment. There are a number of factors that may cause the pace of orders to begin to moderate towards more sustainable long term levels. I'll speak more directly to these factors in a few minutes. But before that, let me turn the call over to Greg Thaxton, our Chief Financial Officer, who will provide more detailed commentary on our second quarter results and the outlook for the third quarter. Greg?

Thank you, Mike, and good morning to those listening. As Mike noted, our financial results for the second quarter were very strong, driven by sales growth of 33% over the prior year, which is comprised of 28% volume growth and favorable currency effects of 5%. This performance was led by continuing strong demand within our Advanced Technology segment, where sales were up 88% over the prior year. This marks the fourth quarter of sequential sales growth within this segment as we continue to capitalize on strong demand from our base business supporting various consumer electronics end markets, as well as the new market opportunities such as LED lighting, where we are able to leverage our technology to provide application solutions. All product lines in this segment have experienced growth including both manual and automated dispensing, as well as surface treatment and test and inspection. Growth in the Adhesive Dispensing segment was also strong at 17% in the quarter. Growth occurred in every geographic region and was most pronounced in Asia Pacific.

While sales within Industrial Coating Systems were essentially flat compared to a year ago, we are encouraged that durable goods manufacturers continued the renewed order activity that began late in our first quarter. Based on these improved order trends, we expect to see reasonably strong sequential improvement from second quarter to third quarter sales within this segment. Moving down the income statement, gross margin in the quarter was 61% which is very strong on a historical basis. We continued to benefit from a high composition of spare parts and consumables in our product mix, as well as the cost reduction efforts taken in 2009. For the quarter, spare parts and consumables represented 48% of total sales which is equal to quarter one's composition, and several percentage points higher than where we trended back in 2008.

As we look at operating performance in the quarter, operating profit of $58 million is a record for any quarter and is more than triple that of the prior year. Mike previously commented on the 23% operating margin being the highest level in more than 20 years, and this compares to 10% in the same period a year ago. This level of operating profit and operating margin highlights the additional leverage on earnings from our cost reduction efforts. On a segment basis, the Adhesive Dispensing segment delivered outstanding operating margin in the quarter of 34%, up from 28% in last year's second quarter. Advanced Technologies operating margin increased to 22% in the quarter, as compared to 10% for all of 2009 when excluding impairment charges.

Industrial Coating's operating margin was positive in the quarter and has improved significantly from the prior year. And with the expected sales volume growth in the third quarter, we expect operating margin within Industrial Coating to continue to show solid improvement. For all segments, the improvement in operating margin is clearly the result of sales growth and our ability to control spending. Net income was $32 million in the quarter or more than double the $14 million of a year ago and at 13% of sales, this level exceeds the 11% return generated in the second quarter of 2008. Second quarter diluted earnings per share were $0.94, more than double the prior year's $0.41. We have included an earnings per share reconciliation schedule in our Earnings Release to help reconcile between GAAP earnings and normalized EPS to exclude the one-time items. For the current quarter, earnings per share, excluding a one-time charge of $0.15 per share related to recently enacted changes in the tax treatment of Medicare Part D and the $0.01 per share charge for restructuring, resulted in adjusted earnings per share of $1.10. This compares to $0.44 per share, excluding one-time items in the prior year second quarter. The current quarter's EBITDA was $65 million, more than double the amount generated in the prior year's second quarter. And we continue to maintain a very solid balance sheet with debt to trailing 12 month EBITDA of well under 1 and sufficient head room within our existing credit facilities for strategic investments.

That concludes my comments regarding the second quarter results and just a quick comment on our year-to-date, or first half performance, where our operating profit, net income, and earnings per share all exceeded the record levels of the first half of 2008. Before moving on to our third quarter outlook, I'll provide comments on recent order trends. As we typically do, we have provided our most recent order data, both on a segment and geographic basis with our press release. These are orders for the latest 12 weeks, as compared to the same 12 weeks of the prior year, on a currency neutral basis. Looking at orders for the 12 weeks ending May 16, they are up 43% compared to the same 12 week period in the prior year. Within Adhesive Dispensing, orders are up 21% from the prior year with the greatest improvement in Asia Pacific, Japan and Europe. Continued strength in product lines serving consumer non-durable end markets was joined by strong and broad demand for our product line supporting durable end markets.

Orders in Advanced Technology continued at a strong pace where 12 week order rates are up 85% from the prior year. As we reported last quarter, this demand is broad-based and is inclusive of all product lines in the segment. The momentum is being driven by customer needs for additional capacity and our expertise in meeting new applications. In particular, we are seeing strength in our technology supporting PC micro processors, Smartphone applications and LED applications. While we are very pleased with the order rates in this segment, we emphasize that we also expect some moderation to occur. Within the Industrial Coatings segment, order trends continued their upward trajectory. The latest 12 week orders are up 46% as compared to the prior year, with strong double digit improvement in nearly every geography.

Demand for new systems outpaced very solid continuing demand for spare parts, reflecting customer anticipation of additional capacity requirements. For the Company as a whole, although we are up against somewhat easy comparisons at this time, I'm encouraged with the current order rates in all segments. On a geographic basis, we are seeing double digit or better growth rates in every region. Orders in Asia Pacific are double that of the prior year, led again by demand in Advanced Technology, as this is where much of the manufacturing for these end markets occurs. In addition, the Adhesive and Industrial Coating segments also showed strong order growth in Asia Pacific. Growth in Europe improved 35% over the prior year with all three segments reporting strong gains. Asian demand is also a factor in this improvement as a portion of our European sales are to OEMs that eventually include our equipment in systems destined for Asian end-users.

The 29% growth rate in the Americas and the 25% increase in the United States were broad-based across all three segments. Especially encouraging was the substantially improved demand for Industrial Coating products from durable goods manufactures in these geographies. Order rates also improved significantly in Japan. The 25% increase over the previous year was lead by Adhesives and Advanced Technology. Turning now to the outlook for the third quarter, based on the solid improvement in order trends, we are forecasting sales to be in the range of $259 million to $267 million. As compared to the prior year's third quarter, this is an increase in volume of 29% to 33%, offset by a negative 4% currency translation effect based on the current exchange rate environment. We expect gross margin to be about 59.5% in the quarter, down slightly from the current year's second quarter, as we expect unfavorable mix and currency impacts to more than offset the benefit we get from better absorption.

We are forecasting slightly higher selling and administrative expenses than the quarter just completed in nominal dollars where the spending increase associated with the forecasted sales growth is mostly offset by currency effects. This outlook results in estimated earnings per share for the third quarter of $1.08 to $1.18 per share. In summary, we are encouraged by the improvement in orders which began in the second half of 2009 and has continued through to this point in the year. With this improvement in orders, coupled with our lower cost structure, we are pleased with our second quarter performance and we expect to deliver very strong third quarter results.

Thanks, Greg. Before moving on to your questions, I would like to provide some additional comments on our recent order trends and outlook. As Greg described, our recent order trends are certainly very encouraging. Annualizing our latest 12 week order volume puts us at a run rate of approximately $1.2 billion, a strong recovery from where we were just a year ago; recovery that began for us, as Greg said, in the second half of 2009. And while we are very pleased with our current order activity, these rates reflect the rapid return of demand often seen in the recovery period of an economic cycle. For Nordson so far, this feels like a V-shaped recovery, and yet macroeconomic indicators might suggest otherwise. Nordson's experience in previous cycles, coupled with a variety of macroeconomic factors, leads us to expect that the current order rates will moderate to a more sustainable level at some point in the coming quarters. As we survey the market environment, it appears that inventories have returned to more normal levels, fiscal stimulus programs are slowing or ending, unemployment remains high, and European sovereign debt issues are persisting. All of these factors may have a dampening economic effect, though it is difficult to predict when and what the collective impact will be.

At the same time, many emerging markets are still demonstrating considerable strength. Given the nature of our product offering and typical lead times, we do not have much visibility beyond about one half of a quarter. With that in mind, let me briefly characterize our view on each of our three segments. The segment where we continue to see the most dramatic improvement in order trends is within our Advanced Technology segment. As we described last quarter, this segment operates on a different cycle than the traditional GDP or industrial production cycle. A rapid and dramatic downturn is often followed by an exceptionally strong and rapid recovery, after which markets settle into more normal and sustainable levels of demand. I believe we are still experiencing the rapid recovery portion of the cycle and that more moderate level demand will begin to appear at some point in the second half of 2010.

The Adhesives Dispensing segment is our most stable as it serves consumers not in the non-durable space end markets such as packaging and non-wovens and also has a large base of recovering parts revenue. As we discussed last quarter, any improvement in Industrial Production should bode well for this segment. The pick up in Industrial Coatings orders that began at the end of the first quarter and continued into our second quarter should translate into growing sales and improving margins in the second half of the year. Consumer confidence will remain the driver for purchases in the durable goods market served by this segment. As we have demonstrated in the first half of the year, we are well equipped to capture business in every region of the world, however the demand picture plays out. Let me pause here and turn to your questions.

(Operator Instructions) Your first question comes from the line of Kevin Maczka from BB&T Capital Markets. Your line is open.

Good morning, everyone.

Good morning, Kevin.

I guess, Mike, I'd like to touch on that comment you just made on the tech cycle. And we're in, obviously, this rapid growth period now, but if you look back to prior cycles in your advanced tech space, can you give us some color in terms of how long these typically last? Are we talking quarters or years and what is a more sustainable long term level for orders? I think you mentioned that in your prepared remarks.

Yes. Let me just make a couple comments there. Typically, what you might see in a cycle is a pretty quick drop, so read that in the matter of two or three quarters and then a pretty quick recovery, also in a matter of two or three quarters. I think what we've seen here is something that's both a little faster on the downside if you think about what happened from the Summer of 2008 to March of 2009. Over a period of about six months, we dropped to sort of the bottom and then start a pretty rapid recovery. So, it might be slightly faster than a more typical cycle which might be top to bottom in kind of an 18 month period of time. I'm not necessarily suggesting we're at the top because we really don't know, but on the longer term basis for our Advanced Technology business, we expect to see growth in the 15% range. What I would say is right now, when you look at some of the indicators that we follow from an industry perspective, they are still very bullish. So, for example, during our last call, I think we quoted some numbers from Gardner around assembly, packaging and assembly and test and inspection that were year on year in the range of 50% improvement. In March, they came out and adjusted that to, in each case, above 70%. So, what they were seeing we actually also were experiencing in the quarter. And if you look at more recent data around things that Greg mentioned like mobile phones, we're seeing, I think in the quarter, reports of demand in the high teens and Smartphones maybe as much as 50%. I think as you know, Smartphones that have more capability in them play into some of our strengths on Advanced Technology standpoint. But when you look across PCs and flip chip conversions to support that and even PCBs and LEDs as Greg talked about, the near term demand is very strong in the 20% plus kind of range. So, we're seeing that in the short-term but in the long term we'd expect something more in the mid-teens kind of range out of the business.

Okay, great, and you obviously don't have visibility for three years down the road, but is there anything that you've seen so far that would suggest there's a more of a secular growth story here than a normal tech cycle? And I know these are typically product driven cycles and now the products that are hotter, things like you mentioned, Smartphones and LEDs and microprocessors, but is this just another product driven cycle or is there something perhaps different there?

I think certainly the industry has historically been driven by product innovation and I think we're seeing it here. I think one of the things that if you think about and look at the commentary that's coming out around PCs, I think I've seen some things that suggest that 90% of the growth over the next three years are going to be in notebooks or netbooks. Well, that's good for us because mobile devices play right into the capabilities that we have. Smartphone growth continuing and the flip chip conversion is still relatively modest in terms of penetration and that creates an opportunity for us. But again these are product driven sort of innovations. I think longer term, we'll finally get back to thinking about some of the changing world demographics that will support our business as well. So, read that as things like China's middle class, India's middle class and improving economy ultimately in Russia for example, as opportunities. And Greg mentioned the LED space where, at the moment in the short-term what we're seeing is the back light conversion, again a product innovation around LCD TVs, but we are seeing some early mover sales in the general lighting area too, which is probably more of a three, four, five year kind of opportunity down the road. So, we see both the near term driven recovery, but longer term some of these demographic issues and some other changes being opportunities.

Okay, great and just finally on margins. I'm wondering, just from a high level, Mike, if you can comment. You've talked about the potential for 20% EBIT margins long term, and of course 23 this quarter and maybe you'll be north of 20 for the full year already. So, and with Adhesives north of 34 and it sounds like from your commentary by segments, some of these margins trending even higher in the back half. Can you just address that longer term goal at all?

Yes, so I'll just make a couple of comments here and then maybe Greg will weigh in as well. But, so, a couple things. Our mix is very positive here in the short-term so read that in a couple of ways. One, we still have a very high parts to overall business mix in the high 40s and long term, we would expect that to be closer to the low 40s. So, that does have an effect in that -- our cost to serve on the parts basis is a little bit better than on the systems basis number one. Number two, we are getting tremendous leverage out of the current loading and we've been very prudent to add costs back to support that growth. We are really stretching the limits of our capability at a production level and our salesforce at our customer service area, so we are probably going to have to add some resources to support that growth. So, I think those two things in the short-term are giving us very good results and the team's doing a terrific job on that.

We got to our view of the sort of 20% margin or so based on the structural changes that we made over the latter part of 2008 and through 2009, and we thought that would give us about a 3 point or so margin improvement off of our peak in 2008. I still think that's a good standard to think about in the long run, because remember too as our coatings business comes back that will have an overall mix effect as well on the business. It's going to improve on its own, but its margins will necessarily be lower than the others, in part given the nature of engineering systems versus standard products versus parts, and so right now, we're not ready to change our goal. We're very pleased with the short-term performance, but obviously I think as we've said before, if we can improve beyond where we're at, we're not stopping because there's something magic about 20%. We have a focus in this Company to continuously improve and one of the things I've seen in my travels is that's very ingrained in our organization and if there's an opportunity to continue to do better we're going to do that.

Okay, thank you.

Your next question comes from the line of Jason Ursaner from CJS Securities. Your line is open.

Good morning everyone. Congratulations on the strong results.

Thank you.

Given your presence in Europe representing about a third of sales, the euro is just viably making some noise. Can you possibly give us additional details on your manufacturing base in the region and what you source there versus other geographies to give us a better sense of the transactional impact of the euro?

Yes, Jason, this is Greg. Our manufacturing base in Europe is primarily centered around, if you will, some more custom engineering for our Adhesive systems and I'll remind you that within Europe, it certainly is an important geography in terms of the percentage of sales. But a fair amount of what we sell that's reported in our results as a European sale would be sold to customers that we would put in the category of OEMs that then would incorporate our systems into a line, if you will, a diaper line for example, or a packaging line that may be then destined for an emerging market. So although the geography in itself is an important one, a portion of those revenues are then destined for emerging market geographies.

So, how much of the decline in the euro would be offset by appreciation in some of the various other Asian currencies?

Well, we've modeled that into our outlook and what we do for our guidance is we look at where rates are as of within the last couple of days and we don't try to forecast currency. We just pick that spot rate and use that as our forecast then for those local currency denominated sales and that's what's driving our outlook. So in total, pulling into where the yen as well as the euro and other currencies sit, we're expecting about a 4% negative impact as compared to the prior year second quarter.

Okay.

I'm sorry, prior year third quarter.

Sure, and I think you've been pretty clear that we should expect current trends and order rates to moderate at some point. You mentioned mid-teens more normalized growth for ATS, but for the other two segments maybe on either an absolute basis or relative to domestic GDP or some other benchmark, how do you begin to characterize more sustainable growth rates?

I think in general for -- let's just talk about the two other businesses. For the Adhesives business, we tend to have somewhat of a multiple above the GDP in the areas that we operate. So, obviously in the West, those tend to be lower GDP forecasts going forward, you can pick your number around the US and Western Europe. And in emerging markets, China, other parts of Asia, other emerging markets considerably higher and again, we tend to have certainly more than one but in somewhere in the one to two times that GDP is expected growth. On the coatings business, it's probably in general closer to GDP, with again the exception of the emerging markets where there continues to be some opportunities of penetration. So, naturally speaking, those businesses are going to grow a little bit slower with the exception of the emerging market piece.

Okay, and given your cautious economic outlook and currency issues, guidance appears very strong. My sense is one of the strengths of your business model is your deep customer relationships driven by the direct sales model, so more anecdotally, how is your customer's confidence and visibility relating to, I guess the cautious optimism implied by guidance?

So let me just make a couple of comments. One of the things that we've said is our visibility is about one quarter out and in reality our backlog and our order strength are about half a quarter visibility and so that's why we don't go beyond one quarter. But as you can see from the order numbers that Greg quoted and are in the information that we've submitted they remain very strong. When you look out across-the-board and talk to our customers, I would say they are still optimistic. In the technology space, given all the sort of macro numbers that I quoted, our customers are seeing that and they're still optimistic. Now, that's a space where things can change fairly quickly for our customers as well as ourselves, but they're certainly seeing that end market demand in Smartphones and PCs and PCBs and LEDs at very high levels and so they're optimistic. I'd say our customers in our adhesives business, as well, are optimistic at this point with high run rates and operating rates in their systems and making new investments. And in the last quarter, we've really, as we noted at the tail end of the first quarter, saw the bid activity for our engineered systems in our coatings business really tic up nicely and the order rates followed those through and they still remain strong. So, I would say our customer base is still pretty optimistic in the short-term.

Beyond three months, their visibility isn't much better than our visibility. So, I think what you're hearing is everybody is looking at things like the European sovereign debt crisis and is that going to spill over into something more broad. They're looking at just the torrid pace that we're seeing around the technology space and saying that while we aren't seeing anything in the short-term, we're perhaps a little cautious that that just can't continue forever. So, I'd say our customers aren't raising big red flags. I would say they are optimistic, but at the same time, given their lack of visibility beyond a quarter, are a little bit more cautious because they just see a lot of economic news on a macro level that's not as positive. I think if you look for example, at GDP in the US, the first quarter for the US, first calendar quarter, I think was 5.7% something like that. Most folks are predicting the second half of the year is going to be 2% plus or minus based on the fact that there won't be stimulus, there won't be an inventory rebuild, things will slow down. Who knows whether that's right or not, but our customers look to that as we do and if that happens we'll see an impact. So, that's really where the degree of caution is coming from, not because we've necessarily seen anything yet that would indicate that, but because there are signals out there that we are just watching closely and monitoring to see how that translates into impact on us. Which also has us monitoring our cost additions and our resource additions still prudently even though we've seen terrific demand in the first half of the year.

Understood. And Mike, now that you've had a couple of months with the Company, can you speak a little bit more about your integration with the firm and on the acquisition front, as an outsider, what direction do you see the Company headed as we look towards the future?

So I'm not sure what integration with the firm means. I feel like I've been here for quite a while even though it's been only four months. I think traveling around the globe, meeting some customers, meeting our team, getting a better understanding of the differentiation that we bring, you highlighted a couple of points. But I think certainly it starts with technology innovation and plays through our applications expertise and our direct sales and service business that creates a business model that's very sustainable. So, I think that's really positive. We are generating significant cash and we are looking for the best organic and inorganic opportunities to apply them. Not really ready to talk about where we might go in terms of M&A other than to say that it's a clear part of our history in terms of what we've done to grow and that we are looking at the opportunities that we have and determining which ones might make sense going forward. But we still have significant organic growth opportunities in a variety of different areas that we're putting resources on as the first level of focus.

Okay, sounds great. Thank you very much for taking my questions. Congratulations again on the results.

Thank you.

Thank you, Jason.

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

Thanks, good morning guys.

Good morning, Charlie.

Good morning, Charlie.

With respect to Industrial Coatings, if we could just dig into that a little bit more. The revenues there were about even where they were last year, but obviously the margin performance is significantly better. And I'm just trying to understand, was there anything in this quarter mix-wise that would have skewed the margin maybe better than normalized basis, or has in fact the breakeven point of that business really been pulled down that dramatically?

So, I think both of those comments are true, Charlie. We still have a fairly significant level of parts in that business as a part of the mix. So, if you think about what we saw happening in that business first is not much for most of last year and then kind of starting at the tail end, operating rates of our customers coming up. Naturally they've pushed the operating rates to the limit before they look to spend capital and what that's done for us is improved our parts orders significantly to the point where it's a pretty high part of the mix, maybe slightly higher even than the average for the Company and so that certainly does help in the short-term. But I think as we've talked about before, the structural changes that we started to make in the tail end of 2008 and into 2009, while we looked at that across the Company, there was a significant portion or maybe a disproportionate portion that was focused on this business in particular and so you're starting to see that play out here in the short-term. I think, as you know, we have a goal to get that business to 15% operating margin as we get our volumes back closer to that 2008 level. But it starts with moving that breakeven point down and we're pretty close to the breakeven point here, slightly positive this quarter. We were somewhat negative last quarter, but the level we're operating at right now is kind of close to that breakeven point as best you could call it. Going forward with the order intake that we've seen, we have expectations for the top line to improve nicely over the next quarter and so we should expect to see our margins improve as well.

Can you just talk about the business on the order, in terms of the, not necessarily the parts side but the systems side of that business, what markets are you seeing that from?

Yes, so we are seeing fairly significant engineered systems come in and it's really across all of the different end markets. But probably more concentrated in the powder part of the business. So in each geography we're seeing the typical power applications step up and so that's all durable-related kinds of activities, everything from washing machines to grills to lawn mower decks, to a whole variety of other things. We're starting to see some furniture applications as well. So, across the end markets that are more consumer durable, we're seeing improvements there, little improvements in auto and coatings and so forth, but probably the largest improvement in terms of the orders are in the powder and systems area.

Just with respect to the parts consumables mix in the quarter, obviously a bit higher than normalized level. Is it your expectation in basing your guidance in Q3 that Q3 also remains at that elevated above-average level?

No. We're anticipating, so I'm not sure whether that was a comment on the total business or on the coatings business but let me comment on both. On the coatings business, we are seeing a lot of the orders come in are for our engineered systems business and so we expect the mix to change pretty significantly in the next quarter based on the orders that we have in hand. And we would also expect to see that change as well from an overall Company perspective, again as the systems business really steps up from an order perspective. It's probably most dramatic in the coatings business because we haven't seen much in the way of systems orders until now. But we also are seeing that same phenomenon in the other two businesses. So, our comments around what's moving the gross margin in part are related to that sort of change of system versus part specs.

Yes. That's helpful. One more and I'll hop back in the queue. On your comments in SG&A expense in Q3 being up in dollar terms, on a terms of percentage of revenue terms would you expect it to remain at about Q2 level or improved from that?

I'd expect it to remain or slightly improve, Charlie. We'll have some increase in SG&A associated with commissions and other spending items that move with revenue. That's the primary driver, but again, as I mentioned, it's going to be offset by currency translation.

Thanks very much. Great quarter.

Thank you.

Thank you.

Your next question comes from the line of John Franzreb from Sidoti & Company. Your line is open.

Good morning Mike and Greg.

Good morning.

Good morning.

My first question is I want to follow on about the gross margin comments you've made on the next quarter's guidance of 59.5%. Part of it you owed to currency and part of it was to mix. I'm curious, based on the last question, is that mix expectation more system work or is that mix expectation lower parts sales?

So, certainly a big part of it is the systems orders. So, when we look at 12 week order stats that Greg has quoted and we look at our backlog, that mix is more weighted towards systems than parts than it has been over the say prior quarter. So, in general it's largely driven by the systems space. From quarter to quarter we could have some movement up or down on the overall parts piece. That's not a big driver. You could argue that the first move that the customers make will load up their system as far as they can and if they run it a little too hard that helps us from a parts business. But really the bigger driver here is the fact that we've got new systems orders.

Okay. And looking at, Mike, you talked a little bit about bringing back personnel and resources but you're cautious on that front. Could you talk a little bit about the timing of bringing back more people, adding more resources relative to your current capacity utilizations, maybe on a segment basis? Can you give us a little bit of color on what your thoughts are on the second half of the year?

So, if I just step back at a high level, one of the things I looked at just recently was where are we bringing people back and we're bringing them back really in a couple of areas. One from the sales perspective to go out and bring in that new business out of the recovery and then sales-related activities like customer service. And two, at the plant level, to support the production ramp ups that we have seen. In the latter case, we've tried to leverage as much as we could through the appropriate mix between permanent and contract labor there, but we're getting to the point where we've seen sustained gains in volume that we need to add some additional resources. But I'd say beyond that we've been very cautious to add any support back in a variety of other areas. We obviously need to in certain spaces, but we've been very cautious and most of the adds have been sort of in the get new business and get product out of our plant area. So, I think going forward we'll continue to look at those as areas of focus, spending some more time in product development, marketing, new business development areas as well. But relatively modest compared to those other areas and I think if you look at some of the leverage that we're getting in short-term from the volume loading, it's because we're being prudent in that addition. I would say obviously we've had to add more people, relatively speaking, in the technology area just because of the order rate and volume improvement that we've seen there being 78% I think last quarter on orders and 85% I think, I don't remember exactly this quarter but big numbers. And so, we've added more I think proportionately in that area. But in the other businesses we're adding as we need, so for example, in our powder business we have some special focus on China, so we've added specific resources to take advantage of the opportunities in China to support the growth in the powder business there.

All right. That's pretty much it. All my other questions been checked off. Good job guys.

Thank you.

Thank you.

Your next question comes from the line of Walt Liptak from Barrington Research. Your line is now open.

Good morning, gentlemen. This is actually Mike (inaudible) in for Walt.

Hi, Mike.

Good morning, Mike.

Great quarter.

Thank you.

I know you touched on Europe, and I think I understand the business a lot more after your comments and that you're somewhat insulated from what's going on over there, but have you guys seen any slowdown in the past three weeks in Europe?

So, I think the latest order rates that Greg gave you were up through last week.

Okay.

So, based on the order rates there and the comments from a geography standpoint it's still pretty sound. I think my comments around macroeconomic environment is we want to watch that closely.

Yes.

We do sell still a significant part into Europe. It's not re-exported and to the extent that anything that's going on right now has an effect on real demand, that could have an impact on us. But the last order statistics we provided wouldn't suggest that we've seen that yet.

Yes. That's great news. Do you guys expect any shipment delays due to the sovereign debt issue over there?

No. This is Greg. Nothing that's come to our attention.

Okay, and I think you touched on this a little bit before, but how do you see a strengthening US dollar impact sales this year, sales and EPS?

Well, Mike, for us, the impact that we have as a result of currency is more of a translation effect.

Yes.

So, in these local geographies, we're selling in local currency. We don't really manage the business, if you will, around movements and exchange rates except to the point where we try to price where we can appropriately and offset currency. But by and large, we don't manage the business around currency and the impact that we're going to have in the P&L is the translation effect of converting those local sales and local operating expenses back into US dollars.

And that's done on an end of quarter basis or how is that?

Well, the way we do it in the income statement is that's based upon what the average rate for that given month was.

Okay. That makes sense and one housekeeping question. The tax charges and restructuring we saw this quarter, is that -- we're not going to see that anymore? Did you take a whole tax charge this quarter?

Accounting rules would require you to take the full charge in the quarter when the law was enacted, so that $0.15 charge is the full charge associated with the Medicare Part D.

And then the restructuring, are we going to see anymore of that in Q3 and beyond?

Not to a significant amount, no.

Okay. All right, that's all my questions. Great quarter guys.

Thank you.

Your next question comes from the line of Matt Summerville from KeyBanc. Your line is now open.

A couple questions. First, in adhesives, when I just look at the sequential performance in the business, your revenue is up $13 million, your operating profitability up 11.5 or so. Help me understand, because it sounded like the mix in that business actually stayed the same from a parts versus system standpoint, so help me understand how you're seeing that level of operating leverage in that business?

And Matt, is your comparison to last year's second quarter?

No. I'm looking sequentially fiscal Q1 to fiscal Q2, your revenue's up 13, your operating profit's up 11.5 or so.

Yes. Most of that, Matt, is an improvement in mix, so it would be product line mix where we're getting better gross margins as well as better absorption.

Okay. So, then Greg, just to make sure I'm clear on this. As I think about the operating margins and Adhesives and then for the enterprise overall, FX turns from a tail wind to a bit of a head wind in Q3, maybe more so in Q4. Mix sounds like, from a Nordson standpoint, maybe was the most favorable that it will be for the year in Q2, correct me if I'm wrong on that. So, will second quarter be the peak margin quarter in 2010 for Adhesives in the Company overall based on those dynamics or am I thinking about that wrong?

Well, I think it's fair to characterize what we've given as guidance for the total Company applies to Adhesives as well. In other words, the gross margins that we delivered in the second quarter, we're bringing those down slightly in the third quarter, partly because of mix as you say, although we'll have better absorption, but that's being offset by the mix change as well as currency, so it's difficult to predict, is this the high point? A lot of that is a function of a lot of these macroeconomic events that Mike's characterized. But it certainly was a very strong quarter currency, mix and absorption all went in the same direction.

When I look at the advanced tech business, obviously orders and volume there has been phenomenal the last couple quarters. Are you seeing anything, or hearing anything from your customers or salesforce, the possibility that some customers maybe, based on their own concern in being able to get product or add to their capacity fast enough, anything that indicates there's over-ordering, double ordering, whatever you want to call it there and any concern of that in your business right now?

Let me comment there. We talked to the customers and the team. They're still pretty optimistic based on the statistics I quoted there and recall that we've had prior to this year, two years, really starting the second half of 2007, where capital goods orders dropped 40% one year and 30% another year. So, from the peak down 70% plus, so you have I think a bit of pent-up demand there where people were looking to push current operating systems and then you have that combined with an overall strong set of underlying factors across most of the end markets that serve the business. We haven't heard at this point that any customers are in fact double ordering, or we haven't heard cancellations at this point.

I think we are being cautious just to make sure we're watching that closely because the pace is as torrid as it's been here and historically, in the past, you might have seen some of that. I think there is a benefit from higher visibility of information across the supply chain and you do have what amounts to the outsourced manufacturing element here that tends to be the flywheel and they continue to order. So, our leading indicator is whether these multi-national contract manufacturers are continuing to order because usually they're the ones that see the orders dry up fastest and the equivalent of the foundry is on the semi side. So, that's some of the things that we've watched, but our customers I'd say, are still optimistic. In the past they've overshot the target and we've seen demand dry up pretty quickly, much like we saw not much more than a year ago. So, we're watching it closely. We think ultimately it's going to go to a more normalized level, but we haven't had indications yet and we tend to focus on that multi-national outsource contract manufacturer as an early signal for us on whats going on and the ultimate demand.

Appreciate that and just one final question. Could either of you guys comment? All things considered here, as we think about just the seasonality in Nordson's earnings with the different profitability dynamics, it worked from a mix standpoint, an FX standpoint, is there any reason to believe that Q4 would not be the seasonally strongest EPS quarter for Nordson? And then Greg just one housekeeping item, what was the FX contribution to EPS in fiscal Q2? You disclosed revenue.

So let me comment on just our typical seasonal approach and then put just sort of a word of caution because this last year has been anything but typical. But typically, seasonally the pattern would be soft this quarter, first quarter, second and third kind of similar, fourth quarter tend to be the strongest. Now it does vary business by business within that, but that would be the typical pattern that we would see. What we're not quite sure of is how to lay over top of that what might be going on in this overall recovery phase and how that might impact things and taking into consideration the really strong order pattern that we've seen this year. So, we're not really looking to speculate beyond the third quarter where we really do have some visibility around orders in house just because we're not clear on how to overlay the recovery on a typical seasonal pattern and because we really just don't have visibility beyond about half a quarter. So, I don't know that we can provide any more guidance on the fourth quarter.

And Matt, just on your question on currency impact on EPS, currency added about $0.09 in the quarter over the prior year second quarter.

Great. Thanks a lot, Greg and Mike.

Thank you, Matt.

Your next question comes from the line of Liam Burke from Janney Montgomery. Your line is now open.

Thank you, good morning, Mike. Good morning, Greg.

Good morning.

Good morning.

With your metrics so strong, what is the competitive environment like? Are competitors responding with price or has it changed dramatically as you start recovering from what was a pretty deep slump here?

So I think the -- I'm not sure there's been any dramatic change in the competitive landscape, Liam. I think everybody is looking to take advantage of the opportunity and to secure new business. I think what you're seeing play out here is a couple of things. The strength of the business model that we have, which starts with the products that we have and the applications know how, the direct sales and service components and the focus of our team in the short-term that's around capturing new business that's out there. I think you see though, across the chain in many of these areas, other businesses performing well, maybe not as well as we have in the short-term. So, we're not seeing a dramatic change in the competitive landscape. There's always pressure around new business and there tends to be more pressure in engineering kinds of systems than in other businesses that tend to go through bidding activity, but I wouldn't say that there is a step change. And generally speaking, this is a good environment where most people have an opportunity to succeed, I think our strengths play out here nicely in this kind of environment.

Great and Greg, you talk a lot about the expense management as you start recovering but the working capital metrics look pretty strong vis-a-vis the sales growth. Have you done the same thing on working your balance sheet here?

We have. I'd say it's a continuing focus from where we started in 2009 when we were in a generate cash and preserve cash focus, but it's also an extension of really the efforts over the last several years of adopting lean and becoming more effective in how we manage the overall business.

Great. Thank you.

Thanks, Liam.

Mason, we have time for maybe one last question. So if there's any other questions in the queue?

All right, your last question comes from the line of Jason Ursaner from CJS Securities. Your line is open.

Hi, just a quick follow-up to Matt's question. You've mentioned the product mix is a very positive trend in the short-term with parts to overall business in the high 40s and expect this to come down. So, it's easy to see the potential for gross margin compression, but taking a step back, it's my understanding that the gross margin for systems is not, by any means, a massive fall off in profitability. So, given the operating leverage on the SG&A, understanding you don't have a crystal ball with visibility, I guess I'm just unclear why we would necessarily see compression at the EBIT margin level particularly given the incremental sales volume?

Jason, this is Greg. That would be true if you assume that your base that you were launching from was the same mix. And what we're suggesting here is we may see a mix change in that base.

Right, but the incremental volume would still be higher than your EBIT margin?

The incremental margin on the systems would be higher, yes, but you've got three factors really in that gross margin play that are going to have an effect here. And one of the largest is an expectation for a change in the mix where we'll have more systems than parts and those two come at different gross margin percentages.

I think the other thing that happens as you translate down to the operating margin is you do need, generally speaking, more support activity specifically around the engineered systems than you might around standard systems relative to parts. So, as that mix changes, you could see more engineering support and product-related support and bid-related activities as well. The reality is that -- again we've got a quarter of visibility, we're giving you our best feel for that and we do see favorable mix from a product line standpoint within some of the businesses as well that we're anticipating changes a little bit over time as some of the other areas improve and then just natural fluctuation. So, we do see some other mix effects here. Now our crystal ball is not perfect either.

Understood. Thanks for taking the follow-up.

Thank you. Okay, just a few comments from a wrap up perspective here. We're very pleased with the performance in the second quarter. I'm particularly grateful to our global team and what they've been able to do in terms of capturing new business in the marketplace. They're doing a terrific job, and at the same time maintaining the structural improvements that we executed on last year. Through six months, the strong growth in our top line coupled with our overall low cost structure have resulted in a record first half operating profit, net income and earnings per share. Business volumes continued to be strong and at the same time as we've said, there are some higher level macroeconomic factors at play that suggest, over the long run, we may see orders moderate to more sustainable levels.

As before, we continued with our cautious approach with regard to managing our cost structure, and while funding those investments that are important to driving underlying business. So, in other words, our goal here is to take full advantage of the growth that comes from the recovery, while being prudent and not get too far ahead of things from a spending perspective. I think you've seen good evidence of that in the second quarter. And finally, we continue to believe that we have the products, the organizational talent, the resources, and liquidity to respond to the global economic recovery and compete effectively in all of our markets. And again, I'd like to thank our global team for the results that they've delivered in the first half of the year is truly spectacular, thank you.

This concludes our call today and thank you all for your ongoing interest in Nordson. Thank you.

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