Nordson Corp (NDSN) 2010 Q3 法說會逐字稿

Good morning, my name is Mason, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Nordson third 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'll now turn the call over to Mr. Jim Jaye. You may now begin.

Thank you, Mason. And good morning, this is Jim Jaye, Director of Communications and Investor Relations, with Mike Hilton, President and Chief Executive Officer, and Greg Thaxton, Vice President and Chief Financial Officer. We would like to welcome you to our conference call today, Friday August 20, 2010, on Nordson's third quarter fiscal year 2010 results.

Our conference call is being broadcast live on our webpage 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, August 27, by calling 1-800-642-1687. You will need to reference ID number 92710270.

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 followed by a few closing remarks.

I would now like to turn the call over to Mike Hilton for an overview of our third quarter fiscal year 2010 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 third quarter of fiscal 2010. Let me begin by offering some general comments on the quarter. Once again, our strong performance was driven by our global team's focus on meeting customer needs. Our direct sales and service model, coupled with our innovative products, application expertise and global footprint enabled us to win new business in all three segments, in every region during the quarter. In addition, our team is to be commended for maintaining the structural improvements implemented over the past year, and for ongoing prudence in managing spending. This combination of growth and operational excellence is enabling Nordson to deliver increasingly profitable results.

With these general observations in mind, let me now move to more specific comments regarding our third quarter performance, and our fourth quarter outlook. We continued to build on our first half momentum, and delivered outstanding performance in the third quarter. Sales in the quarter significantly exceeded the level of a year ago, and with our lower operating cost structure, operating margin in the quarter improved to 24%, surpassing the very strong level we delivered last quarter. Operating profit, net income, earnings per share were all records for any quarter. From a year-to-date perspective, operating margin, operating profit, net income, and earnings per share in the first nine months have exceeded the first nine months of the levels generated in 2008, which is a record for Nordson on many financial measures.

In terms of our outlook, order trends remain positive in all segments and geographies, as compared to the prior year. At the same time, these rates have begun to moderate towards more sustainable levels, as expected, and as noted in previous calls. In addition, there is quite a bit of macroeconomic data being reported that continues to create uncertainty about the trajectory of the global recovery. I'll speak more directly to these macroeconomic 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 third quarter results, and the outlook for the fourth quarter. Greg?

Thank you, Mike, and good morning to everyone. As Mike noted, our financial results for the third quarter are very strong, in fact, records on several measures. Sales in the quarter were up 35% over the prior year, with volume growth of 38% partially offset by unfavorable currency effects. This quarter's sales volume represents a 13% improvement over the current year's second quarter results, which is a bit stronger than our normal seasonal pattern. This overall top line growth was driven by strong growth in all three segments.

Within the Adhesive Dispensing segment, our largest and most stable segment, sales volume in the quarter was up 23% over the prior year's third quarter, and was up 7% on a sequential basis. Growth in Consumer Non-durable end markets was supplemented by the return of demand in general product assembly end markets. Sales volume growth in the Advanced Technology segment was up 56% over the prior year, and up 14% on a sequential basis, the fifth consecutive quarter of volume growth for this segment. This year-over-year growth has compared against the relatively strong third quarter in 2009, as we began to see returning demand in the second half of last year.

Growth was broad-based for our manual and automated dispensing product lines, as well as our surface treatment, and test and inspection product lines. We continue to succeed in capturing returning demand in core end markets, as well as generating incremental revenues from new applications.

In the Industrial Coating Systems segment, we noted in last quarter's conference call that we were starting to see the return of systems orders. As a result, this increase in durable end market demand led to a 54% sales volume growth over the prior year's third quarter, and 39% sequential growth. This improvement was driven by increased powder and liquid coating system sales, along with excellent growth in our container coating and automotive product lines.

On a geographic basis, each segment generated double-digit growth in all geographies, and growth continued to be most pronounced in Asia Pacific.

Moving down the income statement, gross margin in the quarter was 59.4%, in line with our guidance, and reflective of a higher level of system sales in our overall product mix. As we look at operating performance in the quarter, our operating margin of more than 24% exceeds the very strong level of our second quarter, and is significantly improved over the 18% delivered in the same period a year ago. The ability to grow the top line, while maintaining structural improvements and controlling spending, led to operating profit of $68 million, a record for any quarter.

On a segment basis, the Adhesive Dispensing segment delivered operating margin in the quarter of 32%, up from 29% in last year's third quarter. The modest decline from the second quarter's margin is reflective of mix differences. Advanced Technologies' operating margin increased to 26% in the quarter, as compared to 18% a year ago.

As expected with the return in demand for systems, operating margin within the Industrial Coatings segment was strongly improved, increasing to 12% as our restructured organization took advantage of improving global demand. This is an improvement of more than 17 percentage points over the third quarter a year ago, and up more than 8 percentage points sequentially. For all segments, the improvement in operating margin is clearly the result of sales growth, and our ability to meet this demand with an improved cost structure.

I'll remind you that during the quarter we announced the sale of our UV graphic arts product lines. These product lines represented an immaterial portion of our consolidated revenues and profitability, approximately 1.5% of revenues, and an even smaller percentage of net income, and they were not part of our long-term focus from a strategic perspective. This sale closed at the end of June. The only significant income statement impact in the quarter related to this transaction is a $10.7 million tax benefit.

Net income as reported is $55 million, a record for any quarter, and more than double the $24 million of a year ago. Excluding the UV tax benefit, and an additional $200,000 one-time tax benefit booked in the quarter, net income was $44 million, or 16% return on sales.

Third quarter diluted earnings per share were $1.61, the highest quarterly level in Company history. We have included an earnings per share reconciliation schedule in our earnings press release to help reconcile between GAAP earnings and normalized earnings per share to exclude the one-time items. For the current quarter, earnings per share, excluding one-time items, were $1.30. This is a record for any quarter, and compares to $0.69 per share, excluding one-time items, in the prior year third quarter.

The current quarter's EBITDA was $75 million, which is $30 million more than the amount generated in the prior year's third quarter. And third quarter free cash flow before dividends was a strong $44 million.

As an additional comment regarding cash flow in the quarter, we did activate our share repurchase program, where we invested $10.8 million in share repurchases, at an average price of $58.73 per share. And finally on cash flow, with our confidence in the sustainability of this high level of cash generation, we announced a 10.5% increase in our quarterly dividend, the 47th consecutive year of dividend increases. Our balance sheet remains very solid with debt to trailing 12 month EBITDA of well under one, and sufficient capacity for strategic investments.

That concludes my comments regarding third quarter results. And before moving on to our fourth 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, and adjusted to exclude orders for divested UV graphic arts product lines.

Looking at orders for the 12 weeks ending August 15, they are up 30% compared to the same 12 week period in the prior year. This is strong order growth across all segments, and against more challenging comparisons in the prior year. Within the Adhesive Dispensing segment, orders are up 16% from the prior year, with improvement in every region, and most pronounced in Asia Pacific. These orders reflect a continued pattern of broad demand for product lines supporting both consumer durable and non-durable end markets.

Orders in Advanced Technology continued at a strong pace, where 12 week order rates are up 60% from the prior year. While we are very pleased with the order rates in this segment, we have seen the expected moderation in run rates that we have talked about in previous earnings calls, where 12 week sequential orders are off the all-time peak by 8%. However, it is not unusual to see a slowdown in orders within this segment during this period of time, as customers are ramping up delivery of systems in our second and third quarters for the build of products for the holiday season, then followed by a pause in spending in our fiscal fourth quarter.

Given the various macroeconomic uncertainties Mike mentioned, we continue to monitor trends within these end markets. However, our strategic focus is on long-term growth opportunities within these end markets, and our ability to respond to our customers' requirements.

Within the Industrial Coating segment, the latest 12 week orders are up 23% as compared to the prior year, with double digit improvement in every geography, and particular strength in Asia, Japan and Europe, as we see customers investing to support returning demand. Across the business, we see a continuation of the overall trend we saw in quarter two, where demand for new systems out-paced very solid continuing demand for spare parts, reflecting customer needs for new product and application solutions, and additional capacity requirements.

Turning now to the outlook for the fourth quarter, we are forecasting sales to be in the range of $283 million to $293 million. As compared to the prior year's fourth quarter, this is an increase in volume of 22% to 26%, offset by a negative 3% currency translation effect, based on the current exchange rate environment. We expect gross margin to be about 58.5% in the quarter, down slightly from the current year's third quarter, as we expect a higher mix of system sales.

Selling and administrative expenses should be in line with the third quarter in nominal dollars. And we are forecasting a 33% effective tax rate for the quarter, resulting in estimated earnings per share for the fourth quarter of $1.30 to $1.41 per share.

In summary, our strong third quarter performance reflects our ability to capture and serve growing demand with a lower cost structure. Our current order trends remain strong, and we expect to deliver a very good fourth quarter as well.

Thanks, Greg. Before moving to your questions, I'd like to provide some additional comments on our recent order trends and outlook. As Greg described, our recent order trends remain strong. Analyzing our latest 12 week order volume puts us at a run rate of approximately $1.1 billion, a significant recovery from where we were just a year ago, and a recovery, as Greg said, that started in the second half of 2009. As we noted last quarter, we expected order rates to moderate to a more sustainable level. We saw a little bit of this moderation occur in the most recent order rates.

At the moment, there is a lot of noise on the macroeconomic front, much of it conflicting. Most economists expect slower growth in the second half of the calendar year, given the lack of an inventory build, and fiscal stimulus, and with China attempting to reign in growth. Yet, they still project growth, and not a double dip.

In our Advanced Technology order area, orders have begun to moderate, and we expect them to continue to moderate based on normal seasonal patterns, ultimately transitioning to a more sustainable long-term growth rate. For this segment in particular, there is a lot of conflicting data. Mobile phones and smartphones continue to grow robustly, while notebooks and LEDs, to a lesser extent, seem to be pausing momentarily. Our customers are a little more cautious, but continue to place orders at a high level.

The concerns around consumer confidence haven't affected order rates for durable goods in our Industrial Coating segment. The pent-up demand for more than two years is finally starting to come through in customer buying decisions. Obviously, if consumer confidence drops significantly, we'll see an impact in this segment. The Consumer Non-durable markets remain steady, and as a result so do our Adhesive segments.

All of this macroeconomic data doesn't necessarily add clarity. Consequently, the shape of global recovery continues to remain uncertain. However, as we've demonstrated in the first three quarters of the year, we are well-equipped to capture business in every region in the world, however this demand picture plays out, and we have maintained our more efficient model at the same time.

Let me pause here, and take your questions.

(Operator Instructions) And your first question comes from the line of Walt Liptak from Barrington Research. Your line is open.

Hi. Thanks. Good morning, everyone, and congratulations, guys, on a great quarter.

Thanks, Walt.

Good morning.

I'd like to talk a little bit about the macro concern that you've got out there and maybe talk about Advanced Tech and what you think the long-term growth rate might be? And perhaps look out 12 to 18 months, and given the pipeline of business and the new products coming out, what you think the growth rate could be?

Walt, we've said for a while now that we think for our Advanced Technology segment, the underlying markets are strong, particularly with the drive to new technology. And we think that's a double- digit opportunity, from a growth perspective, for us. Both with the large footprint that's focused on electronics, but also diversifying into some other segments like medical equipment. And so our view of that has not changed. I think what we're seeing right now is a strong recovery from a big dip, as well as some new technologies taking hold like the LED market space that's transitioning at the moment in the television area with LCD backlights.

Okay. Did you mention that the LED was a little bit slower along with notebooks or was that another product class that you talked about?

There's some noise out there that suggests in July there might have been a little bit of a slowdown in the LED space. Obviously, to the extent LEDs are used in notebooks and if notebooks are seeing a momentary pause, you would see that. Our view is, as we've said before, that we'll see a conversion that will last a couple of years in the LCD market backlight space and then longer term as general lighting first in the industrial space, then ultimately in the commercial space, we'll see continued growth in the five years and beyond time frame. So, we think long-term it's a very good story. We think in the near term it's a good story. In the very short-term, there's some noise that say people might be pausing just momentarily.

Okay. And in Advanced Tech, the operating margins had a very nice recovery. I wonder if you could talk about product mix, anything that impacted it besides cost out and leverage that might be sustainable or might not be?

Well, I think first of all, as a Company as a whole, we've been able to do a very nice job of maintaining the cost improvements and perhaps have done a little bit better than we thought overall. I think when we talked last year, we suggested that we made $40 million to $45 million of structural change and we thought we could maintain that. We're running at a pace that's a little bit better than that, so that's affecting all of our business from a margin perspective. I think right now with the strong growth that we see in the Advanced Technology space, in all of our platforms, but particularly in the Asymtek and EFD platforms that's playing well in terms of the leverage we're able to get from that increased demand. So, we have very high margins at the moment.

Okay. Okay, are we sustainable at this level? I guess it depends on what happens to EFD and Asymtek.

Our prior goal was 20% for the segment. Obviously, we've kind of blown through that.

Right.

We're in the process of assessing what a more sustainable goal is for that business. At the kind of run rates we have right now, our volumes are -- if you annualize our quarterly volumes, you're well above the peak we saw in 2008. We think we'll moderate more back to sustainable long-term growth and so we'll need to come back with new goals for that business. But certainly, we're doing very well at the moment. We'll also need to continue to reinvest in that business to transition to build more capability in emerging markets and that's something that we'll see play out through the next few quarters.

Okay. Good. All right. Thank you.

And your next question comes from the line of Matt Summerville from Keybanc. Your line is open.

Hi. Good morning. This is actually Joe Radigan in for Matt today.

Hi, Joe.

Hi. Just a couple of questions. Sticking with the order trends, can you talk about how orders trended within the quarter? Did you see any unusual unevenness or volatility? I know you mentioned noise on the macro front, but did you see any of that in your order book and order patterns during the quarter across all three businesses, but particularly with respect to Advanced Tech?

I would say that the orders were strong throughout the quarter. Perhaps a little stronger in July than we might have anticipated, but generally strong throughout the quarter. We are taking advantage in the technology space of some LED orders to support the ramp and the conversion. And also with the advent of things like the iPhone 4 and the iPad and some of the other competing mobile devices, we saw some nice orders in the quarter to allow customers to ramp up. So, we have seen those kinds of things specifically, but relatively smooth pattern through the quarter, perhaps a little stronger in July than we might have anticipated.

Okay. And then are there any concerns outside of normal seasonality that you're seeing a pull forward in orders so that to ensure capacity and that that could lead to overcapacity eventually? Are there any concerns around that, based on your conversations with your customers and what you're seeing?

Yes, so I think when you look, I would say across our three businesses, we are just starting in this quarter to see the orders come through in the coating -- Industrial Coatings business, and that really has been a function of pent up demand and finally releasing some capital spending dollars that have been pent up for more than two years. So -- and we see that as just getting started and certainly not an overbuild from any perspective. And similarly, when you look at our adhesives business, most of what we supply there we get an order and ship within a week and so we see that as underlying demand. Our customers aren't building the inventory. In the technology space, there is a lot of noise right now about inventory build. So, inventory levels are higher than they were last year, but in the third calendar quarter last year they were at all-time lows. So some folks are a little concerned that people have built too much inventory.

On the other hand, if you look at the inventory levels relative to say the 2006-2007 peak, end market PCs for example are higher by 20% from a demand standpoint and inventory is something like 13% lower. So, I'd say there's conflicting information out there and not as much clarity as we'd like in the supply chain. So, we're being cautious about that. And monitoring, as Greg said, the indicators closely. So, in the very short-term, could there be a little bit of a pause? There could be. Right now customers are still placing orders but as Greg said, we've seen that rate moderate. Some of that is seasonal, some of it might be a momentary pause.

Okay. And then lastly, on your mix of spare parts, the last couple quarters that's been trending well above historical norms in the upper 40% range I believe. Has that started to normalize? I know you mentioned more system sales, but are we back to the low 40% on spare parts or what's the mix there?

Yes, this is Greg. Through six months, we were running at about 48% of mix of spare parts versus systems and in third quarter it was about 44%. So, still a relatively high mix but trending more toward what we would say are more sustainable levels.

Okay, great.

Just a further comment there. Parts are still growing so it's really a nice growth in the systems orders that have changed that mix.

Okay. Great. Thanks, guys.

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

Good morning, everyone.

Hi, Jason.

Good morning, Jason.

Congratulations on the results. First, if I just look at revenue given the outperformance relative to guidance, I think it was $15 million higher than the midpoint. You mentioned this return in demand for systems, should we be surprised though, that gross margin remained above 59% or is this just the mix in spare parts really?

Yes. I think it's more just the mix. We had guided to that -- pretty close to where we ended up at mid-59% range. So, we're not surprised.

Well, then I guess I'm asking because the guidance, in terms of revenue, was so much better, I'm assuming that is part of the systems and looking at it at least we're about 300 basis points higher than where we were in '08 when we were doing similar revenue levels.

Yes. And there's a couple things going on there. You have to be careful with how currency might impact it. But I would say also some of it's related to the actions we took in 2009 with our cost reduction efforts. We've quantified that the targets for the SG&A reduction, but clearly as we've said in the past, we also did take costs out of manufacturing overhead, so we're getting some benefit there as you compare from year to year. But I think in terms of where the margin came in, it's an element as well, of product mix.

Okay. And just to follow-up on the order rates in the Tech segment, the moderation from the first half obviously is pretty well understood but as I look at 85% year-on-year growth in Q2 to 60% in Q3, I could say this is moderate or I could look at this as a more steep dropoff. So, do you think you can comment any more quantitatively on your expectations for the moderation going forward and into fiscal year 2011?

I think the only comment that I think we'd make is that we have -- we do see a normal seasonal pattern as Greg described and we expect to see that continue. And I think as we get further into 2011, I mean, nobody's crystal ball is clear and quite frankly, we give one quarter guidance because that's as far out as we can really see in this type of business. But I think most of the industry forecasters out there would suggest a return to a more sustainable growth rate. But even there, there is a wide band on some who feel pretty confident of that and others who feel that maybe it'll be a relatively modest growth year next year just based on how strong this year has been. So, I'd say there's -- for us, there's still not a lot of clarity beyond what we can see in the orders that come in for a quarter, and we will expect to see the fourth quarter be softer, just based on the seasonal patterns. I think as you get further into 2011, you'll be back to more sustainable levels. That's my personal opinion. I would say the pundits are all over the place, as typically is the case.

And just, as we think about sustainable levels for this segment, given the cyclicality of Tech and the semiconductor cycle, the normalized growth in this business, is it more related to the Tech cycle where we would see it moderate over time and even maybe dip as the cycle goes down and then when the new cycle picks up?

So, certainly there's a tech cycle that's different than the natural sort of macroeconomic cycle, so our business does tend to link to the tech cycle. It's supplemented by the continued advance of technology, whether that's in the continued advance in the underfill types of applications, things like flip chips, et cetera, or the LED space coming in. So, you'll see a continued technology advance that supplements what you see in terms of the end market growth. But the end market is cyclical on its own cycle, different from the macroeconomic cycle.

Okay. And then in the coating segment, obviously revenue improved dramatically and it's back over double-digit operating margin. Even with order rates still strong, where do you see this segment going longer term? Can you speak a little bit about its long-term sustainability and maybe some of its emerging opportunities?

Our goal for this segment from a margin perspective is 15%. What we've said is we needed to get back to the kind of revenue levels that we saw in 2008, which were in the $170 million, $180 million range. If you annualize this quarter, you wouldn't quite be there yet, but I'd say we're on path to getting to those kinds of margins. The opportunities for this business continue to be growth in the emerging markets and to continue to refine our business model to sustain our position in the developed markets and so we feel good about the plans that we have in place to do that. Obviously, consumers have to continue to want to buy durable goods and if we see that slow down or waver a little bit we could see an impact here. But we feel good about the ability to get this business to that mid teens with the plans that we're on and we see growth in the emerging markets and key segments within the business.

And the opportunity in colored glass, is there any update on that or is it really still in its real infancy?

We're still in the customer acceptance stage there. We've, I'd say, got some test equipment out there. We've got some good results, but we're still in the beginning phases of that activity. And then near-term our growth is focused around our powder business in emerging markets.

Okay. And then last question just for Greg, can you give us more details on the free cash flow generation and working capital requirements going forward? Just because I noticed about a $40 million sequential increase in receivables and just trying to understand how much is seasonal versus maybe as sales are growing, how that flows through?

Yes. Most of that is just sales growth, Jason. And some of it is related to perhaps slightly longer terms with the return of engineered systems volume versus the standard system or spare part turns. But most of it's just the return of sales volume.

And when will the Q be available?

Well, we file that 40 days after the quarter.

Okay. All right. Thanks a lot.

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

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

Good morning.

Hey, Liam.

Mike, Asia Pacific was strong on a year-over-year growth rate of 80%. Is that primarily driven by Advanced Tech or is there other -- are there other products making a meaningful contribution to the mix?

Across the board, we've seen good performance from the Asia Pacific standpoint. So, it's not limited just to one business. Certainly with the concentration of technology customers in Asia, technology has been a strong driver. But quite frankly, the -- China leading the way and other parts of Asia leading the way in the overall recovery and given our good position in China across all of the businesses, we've been able to take advantage of that. So, it's more broad-based than just technology, really strong in all of our businesses.

Thank you. And Greg, CapEx year-to-date was roughly $8 million. Is that a run rate to the end of the year, accurate run rate?

Yes, I think that's a pretty accurate run rate.

Okay. Great. Thank you very much.

Just one comment on that, one of the things that the team has done a nice job of is continuing to squeeze more product out of our existing capacity. So, our need to add capacity has been very modest given what the teams have been able to do from a productivity standpoint.

Great.

And your next question comes from the line of Kevin Maczka from BB&T Capital Markets. Your line is open.

Good morning.

Hi, Kevin.

Good morning, Kevin.

I want to ask a question on the SG&A line, Greg. I think we've talked for a couple of quarters now about this expectation that as revenues come back, some costs will come back and that line item has ticked up a little bit, but not too much. And it sounds like it'll be fairly flat sequentially in Q4 as well. So, can you just comment a bit there? Are those costs still -- is that still a coming attraction that we should expect maybe as revenues further grow or is that just not going to happen like maybe we first thought?

Yes, Kevin, as Mike mentioned earlier, we had articulated that of our about $90 million of SG&A reduction, about half of that would be, call it permanent and the other half would find it's way back as the business was recovering. And I think what we're seeing to this point, and if you just work on that assumption that Q4 spending will be in line with Q3, that'll show you that we are ahead of the target of $45 million reduction in SG&A. So, I think we are ahead of the targets that we initially talked about, but there's also the point to say now as we continue to grow, and we think long-term about these things, so even through this year we've continued to make strategic investment. Although we're ahead of the target, we're investing in new growth opportunities, whether that's new product, new application or new geographic markets. So, we'll continue to invest. I wouldn't say that I would expect we'll have a significant step-up in spending as the business continues to grow. But certainly, we're going to make the prudent investments where it makes sense on a long-term basis.

The other thing I would add is that there are specific areas in certain emerging markets where we're going to target some additional resources and continue to maintain and extend our leadership position from a product standpoint. So, you'll see some of that come through, but I think at the end of the day the team has done a very good job of being even more prudent than we expected and being more able to leverage the volume than we thought. So, it's probably a little bit of mix of both, that we'll see some more targeted spend to support growth and product -- continued product renewal, but we'll probably also be a little bit ahead of where we thought we were going to be.

Okay. And then just a question on market share. I would assume you've got to be taking share with this level of revenue growth. Are you able to identify that? Can you speak to that point a little bit or maybe even give some examples where you might have taken some meaningful share in the last few quarters?

Well, I think in some of the applications area, like the LED space, I think we're doing very well in the short-term. So, we've been able to do well with some key players there with our technology that's adapted for that particular space. I think with some of the multi-national packagers to support some of the mobile phone growth, we've done well to take a bit of share here in the near term. Are there huge changes in share across our total product line? Probably not. But in selected areas based on application, yes, we're probably taking some share here in the short-term.

And just finally on LED, you mentioned that, is that of size yet that it's becoming meaningful, however you want to define meaningful? I'm just wondering if that's an industry that is still in a relative infancy? Is it a meaningful contributor yet?

No. I think it's still relatively modest. It's in the millions of dollars, not the tens of millions of dollars, but it's something that I think over the long haul will be a nice significant adder, particularly as things expand beyond this conversion space for LCD into more general lighting. And I think that'll go, as I said in, two ways, one being industrial applications like the Walmarts of the world and then ultimately, probably longer term, in the home. But near term, more industrial applications and so that's a function of getting the price point right and the technology getting there. But we see it still relatively in the modest phases and the early part of the growth stage there on the broader based applications.

Okay. Great. Thank you.

And your next question comes from the line of Charles Brady from BMO Capital Markets. Your line is open.

Hey, thanks. Good morning, guys.

Good morning.

Good morning, Charlie.

I wonder if we could go back and clarify something for me, because I think I just missed it in your comments. When you were talking about the orders in Advanced Tech being off from their peak, did you say that you're off 8% from the peak order level or how do I understand that?

Charlie, this is Greg. The comment there would be, as we compare on a sequential basis the most recent 12 weeks to the prior 12 weeks, we're off 8%. And the point there, was that prior 12 weeks for us has been a peak.

Okay. So, it's just a sequential change is what you're talking about?

Sequential change.

Okay. Thanks for clarifying that. Was any of the UV business, the divested UV business, was any of that in the sales or margin numbers for Industrial Coatings in the quarter?

No. Other than a $30,000 item, there's no P&L impact associated with the sale of that product line in the current year except on the tax line. Now up to the point of the sale, which was through June, that business would have been in the Advanced Technology segment.

Sorry. I misspoke. I meant Advanced Tech, not Industrial Coatings. And I guess on the parts mix, if I heard you correctly, Q3 as a percentage is less than your first half, is that correct?

Correct. We had been trending about 48% spare parts through six months, which is higher than normal. And if you went back into 2008 and earlier years, spare parts would have been in the low 40%. So, at 48%, it's still relatively high. The third quarter was about 44%.

And that business is more profitable than systems business, correct?

Correct.

But yet your margins are still improving despite that mix shift down? That's what I'm trying to get at. Is there a rule of thumb where you can look at it and say, for instance, every 100 basis point shift in parts mix, either one way or the other, equates to X percent of a margin, whether it's a gross or an operating? I guess I'm trying to understand the sensitivity, because it would sound as though on the base level of your overall business, the profitability there has -- and some of it obviously, is volume absorption but excluding that even, it sounds as though your base business is more profitable on a go-forward basis. And I understand some of that is cost cutting, but I guess I'm trying to drill down to that a little bit better.

Well, Charlie, the point that I'd make with the spare parts mix is, for example, in the second quarter gross margins were 61%, where spare parts were 48% of revenues. In this quarter, they were 59.5%. So, they have trended down with the return of system sales. Your question on how to model that becomes more complex because it really gets to what's the mix both by segment or by product line within the business, that would make it more difficult than just to say model it on the percentage of spare parts. But in general, as we see the return of systems volume coming into the P&L, we're seeing an erosion of gross margins, and we saw that second to third and we're guiding that as well third to fourth. If you compare gross margins in 2010 to perhaps 2008, there I'd say a portion of that improvement overall in gross margins is both spare parts, but also our cost reduction efforts.

Okay. Thanks very much.

And your next question comes from the line of John Franzreb from Sidoti. Your line is open.

Good morning, guys.

Hello, John.

Hello, John.

First I'd like to move back to the Industrial Coating side of the business. You carved out that certain geographies, Asia, Japan and Europe are doing well. I'm actually curious as far as end markets, what is doing well? Is it the automotive side, is it appliance, office, can you give us come color as to which end markets are doing well in IC?

We're actually seeing orders across all of our product lines. So, if you think about our power business, it tends to go into the more durable goods, whether that's appliances or office furniture or recreational kinds of items like lawn mowers, decks. That's been very solid and particularly in the emerging markets. And when you look at the auto business, that's been down for a long time, so we're coming off a low base, but seeing some improvement there, we're seeing improvement in our container business as well. So, if you look across all of the product lines, we've seen improvement.

Seasonally, the way this typically works is capital budgets get approved in the January time frame and people spend in what amounts to our Q2 and Q3 and a little bit into Q4 and so that's the progression that we're seeing. In the past two years, people weren't spending at all. And so that's what we've seen based on the big downturn in a lot of pent up demand there. But we're seeing improvement across all of the product lines, it's not just one single end market.

Now, Mike, if I remember correctly, the Industrial Coatings business was the one that was most susceptible to pricing competition. Given the margin recovery and your order book, does that suggest that there's sufficient demand out there or that the competition has become more rational in pricing? What's going on as far as the pricing environment in that sector?

Well, I think the space that we operate in is competitive and we have some good global competitors. So, I don't see a significant change there. We are clearly seeing demand come back, so that obviously is helpful. But this is an area also where we made the most significant structural change to our business and we're seeing that come back and this is why we've said we think we've got the right change in the business, we just need to load some volume on that to get back to reasonable margins. And so I think that's -- what you're starting to see is that structural improvement play through as we add the volume back. So, I don't think there's any wholesale change in the competitive landscape, it's always competitive. Obviously, we try to compete through technology and not price and we've made some structural change in cost. But improving demand helps everybody.

Okay. Now, shifting back to the Advanced Technologies order book, you've highlighted that you would expect a drop in orders just based on normal seasonality of the business. So, when I'm viewing that 8% sequential drop in the 12 weeks, is that in line with the normal seasonality or is that above or below the normal seasonality?

Well, our comments are really more forward-looking, what we would expect from here forward. What we've seen up to this point in time is a rapid recovery off of a very steep and unusual fall. So, we had sort of instantaneous operating rates that were well above our fiscal 2008 highs. And so I think what you're seeing in the short-term is just coming off of that high. I think going forward, we expect to see normal seasonal demands that are certainly at least 5% and could potentially be plus or minus that depending on the year. But it's not out of line with that. But I think what we're really talking about in the last 12 weeks is coming off an unusually high peak to something more seasonal.

Okay. I was just trying to get a sense of that. Now, a lot of the talk right now is a shift in technology equipment spending and I don't even know if this applies to you, from consumer to corporate, is that an opportunity for you at Nordson or is that a sector you really don't play in?

Well, to the extent that corporate involves anything that's got the PC or equivalent to it or corporate relates to any kind of a mobile device, that absolutely would be something that we'd play in. So, if you're building servers or you're building -- or your people are buying computers or they're buying mobile phones for the workforce, we absolutely play in that. Certainly, the purse strings seem to be loosened up a little bit from a corporate IT spending standpoint, if you believe the macro press there. So, I think in the long run that'll be positive because most people had stretched back their corporate buying. I know we have at least a year or so to stretch out the current infrastructure. So, that certainly would be a help. I mean quite frankly, in the near term all of the mobile computing is a big driver of business and the kind of convergence of mobile technologies that drive both notebook and the iPad and iPad equivalents and all the smartphones are all good for us too.

Okay. Thank you very much.

Okay.

(Operator Instructions) Your next question comes from the line of [Bill Heiler from Ridgecrest]. Your line is open.

Yes, good morning.

Good morning.

I've been to your website which does an excellent job, but as someone new to this stock, can you provide a little more color on your LED product offering? Maybe discuss dispensing equipment versus consumables, are you equally exposed to both LED backlighting and the illumination market which should start to ramp pretty quickly. And maybe a little bit about who you compete against in the LED area and are there new players entering the space that you're aware of?

Bill, there's a lot of questions there. I'll make a couple of comments.

Okay.

And then what I might suggest is that maybe Jim Jaye gives you a separate call to give you a more detailed briefing there.

That would be good.

But our technology play there is really an adaptation of what we supply in our Asymtek business for underfill applications that we supply to basically do a number of applications around coating and sealing in the LED space, including more recent developments around the actual phosphor doping that turns the blue light into white light. And so, what we've done is taken a platform we've been very successful in, updated and enhanced it and focus on the LED space. We are working with all the folks that are involved in the TV space and TV conversion, as well as the folks that are involved in the general lighting side of things. So, we've got exposure to both places. I think in the short-term, as we've said, we'll see more drive from the LCD backlight conversion and in the long run more drive from the general lighting space.

Our competitors in that space are the typical ones that we see in the dispensing space. They're generally not global in nature, they're generally regionally specific across the geographies. So, we've really not seen new competitors in that space. And I think there's a fair bit of detail that I think Jim could take you through and I'd ask him to follow-up and give you a call. So, maybe Jim, do you want to give him your e-mail or phone number or something?

Yes, Bill, this is Jim Jaye, my contact info is on the investor site and I'd be glad to talk to you at any time about that. So, we can do that off line. And I think, Mason, if we could maybe -- we have time for maybe one more question and then we'll move into some wrap-up comments.

And there are actually no further questions at this time, so I'll turn the call back over to Mike Hilton.

Okay, thank you. Thank you, everyone. Just a few comments to wrap up. We're very pleased with our performance in the third 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 nine months, the strong growth in our top line, coupled with overall low-cost structure have resulted in record operating profit, net income and earnings per share. Business volumes continue to be strong, and at the same time, as we said, there are some high-level macroeconomic factors at play that suggest we may see a pause in the road to recovery. As before, we continue with our cautious approach with regard to managing our cost structure while funding those investments that are important to driving our underlying business. In other words, our goal here is to take full advantage of the growth that comes from recovery, while being prudent and not getting too far ahead of things from a spending perspective. I think you've seen good evidence of how we've been able to manage this through the first three quarters of this year.

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. Again, I'd like to thank our global team for the results they've delivered so far this year. Thank you, everyone.

Thank you, Mike. And let me just take this opportunity to remind you that Mike and Greg and the rest of Nordson's Executive Management team will be providing additional insights about Nordson at the Company's upcoming Investor Day, which is scheduled for September 24, in New York. Details and a registration form are available on our website on our investor section. And with that, we will conclude today's conference call on our third quarter. Thanks again for your interest in Nordson.

And this concludes today's conference call. You may now disconnect.