Nordson Corp (NDSN) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Nordson Corporation webcast for the second-quarter fiscal year 2011 earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) As a reminder, today's conference call is being recorded.

I would now like to turn the conference over to your host, Mr. Jim Jaye, Director of Communications and Investor Relations. Please go ahead.

Thank you, Ellie. This is Jim Jaye, and I am here with Mike Hilton, our President and Chief Executive Officer, and Greg Thaxton, Vice President, Chief Financial Officer.

We would like to welcome you to our conference call today, Friday, May 20, 2011, on Nordson's second-quarter fiscal year 2011 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, May 27, by calling 1-800-642-1687. You will need to reference ID number 65262375.

Our attorneys have requested that we open this call with a cautionary statement under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. During this conference call, forward-looking statements may be made regarding our future performance based on Nordson's current expectations. These statements may involve a number of risks, uncertainties, and other factors as discussed in the Company's filings with the Securities and Exchange Commission, that could cause actual results to differ. After our remarks we will have a question-and-answer session.

I would now like to turn the call over to Mike Hilton for an overview of our second-quarter fiscal year 2011 results and Nordson's future outlook. Mike?

Thank you, Jim. Good morning, everyone. Thank you for listening to Nordson's second-quarter 2011 conference call. I am pleased to report that our second quarter was an exceptionally strong one. Our update this morning will describe several of the highlights from our record-setting performance, and we will also provide some perspective relative to our outlook for the third quarter of the fiscal year 2011.

Let me begin by offering some comments on the second quarter. Specifically I want to congratulate and thank our global team for delivering the strongest quarter in Nordson's history, as net income and earnings per share doubled the levels of a year ago. We are driving these results by delivering real value to our customers in the form of innovative technology, applications expertise, and direct worldwide service. At the same time we are maintaining our disciplined approach to spending, and we are continuing to expand our operational efficiencies.

Looking at a few of our numbers more specifically, strong order rates and our compelling value proposition enabled us to grow sales by 27% in the second quarter compared to the same quarter a year ago. This growth continues to be broad-based, as we delivered double-digit percentage year-over-year volume increases in all three business segments and in every geographic region for the second consecutive quarter.

In addition to the strong top-line growth, operating margin grew to 29%, an improvement of 600 basis points over last year's second quarter. Overall sales, operating profit, net income, and diluted earnings per share were records for any Nordson quarter.

In terms of our outlook, order rates as compared to the prior year remain positive in all segments and most geographies. Orders remain strong overall, though year-over-year growth is transitioning towards the more sustainable long-term range we have expected and discussed in recent conference calls.

I will offer additional comments relative to our outlook later in the webcasts. 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 of 2011 financial results as well as some comments on our guidance for the third quarter of 2011. Greg?

Thank you, Mike, and good morning to everyone. As Mike noted, our financial results in the second quarter were the strongest quarterly results for Nordson in our history. Let me start by talking about our sales performance, where in total sales are up 27% over the prior year's second quarter.

This growth is comprised of 23% volume growth, and positive currency translation makes up the balance of the increase. The growth continued to be broad-based both in terms of operating segments and geographies.

The Adhesive Dispensing segment delivered volume improvement of 18% over the prior year's second quarter, where sales volume grew by double digits in all of the segment's product lines, demonstrating strength in consumer nondurable end-markets such as packaging and nonwovens, as well as durable end-markets such as general product assembly.

In Advanced Technology, volume improved 23% in the second quarter over the prior year, with double-digit demand in nearly every product line and particular strength in emerging regions. Consumer electronics, particularly mobile devices, continue to drive this demand.

The Industrial Coating Systems segment continued to capture returning demand in consumer durable markets, where volume was up 44% over last year's second quarter. Strong double-digit growth occurred in every geography and product line.

Moving down the income statement, gross margin in the quarter was 62%, up 100 basis points from the prior year's second quarter due primarily to increased cost absorption.

As we look at operating performance in the quarter, we have an operating profit leverage ratio of more than 2 times our sales growth, where operating profit increased by 60% over the prior year's second quarter to $92 million. Our operating margin of 29% is 6 percentage points higher than the level in the second quarter of the prior year, where all segments delivered significantly improved operating margins by capturing returning demand with a more efficient cost structure. To this point, this is the eighth consecutive quarter Nordson has improved its quarterly operating margin over the previous year.

Continuing down the income statement, net income for the quarter was $65 million for a return on sales of 20%. Second-quarter diluted earnings per share are $0.95 per share, more than double the $0.47 per share in last year's second quarter.

Earnings in the quarter include a gain of $0.01 per share related to a one-time tax benefit and a charge of $0.01 per share related to an operational improvement initiative within our Adhesives organization, whereby we plan to consolidate four operations in the US to two. This particular impairment charge relates to the write-down of two buildings to estimated fair value.

We do expect to incur a gain of about the same amount on another building we intend to sell; but this amount will be booked when we have a sales contract. We will incur some additional costs in the near term associated with this initiative. However, this is part of our ongoing effort to optimize our supply chain to better serve our customers and to improve our competitive position.

Also on earnings per share, we have included a reconciliation schedule in our press release to help reconcile between GAAP earnings and normalized earnings per share to exclude certain one-time items. Let me also remind you that all earnings per share numbers reflect the 2-for-1 stock split which was effective April 12 of the current fiscal year.

The current quarter's EBITDA excluding the impairment charge was $102 million, and second-quarter free cash flow before dividends was a strong $51 million. As an additional comment regarding cash flow in the quarter, we continued our share repurchase program where we bought $7.8 million of shares at an average post-split price of $48.11 per share. An additional $7 million was returned directly to shareholders during the quarter in the form of dividends.

Our balance sheet remains strong, with debt to trailing 12-month EBITDA of well under 1 and sufficient capacity for strategic investments.

Before moving on to our third-quarter outlook I will provide some comments on recent order trends. As we typically do, we provided our most recent order data both on a segment and geographic basis with our press release. These orders are for the 12-week period ending May 8 as compared to the same 12 weeks of the prior year on a currency neutral basis.

Total Company orders are up 12% compared to the same 12-week period in the prior year. This rate, while still strong, reflects more challenging comparisons with the strong recovery that began to gain momentum in the second quarter a year ago. Overall, order rates for systems continue to outpace orders for parts and consumables.

Looking at orders by geography, I will make a few comments about both Europe and Japan, where order growth is lagging the other geographies. On Europe, where orders are up 2%, this is the region along with Japan that had the earliest recovery from the recession and the steepest recovery. This ramp-up in orders occurred during this particular 12-week period of the prior year, so we were up against our most challenging comparisons at this point in the year for this region.

In Japan, the cutoff of May 8 happens to be a holiday week, where the holiday occurred a week later in the prior year. So current year 12-week orders both at the total Company level and for that particular region contain 11 weeks of orders for Japan. Looking at the 12-week period of the prior point, which is the week ending May 1, orders for that region were down 7% as compared to the down 12% as reported in our press release.

In addition to the comment I made regarding last year's ramp-up in orders, where we are up against more challenging comparisons at this point in the year in this region as well, we are seeing some effect of the earthquake and tsunami in our order rates in the most recent quarter. This is most pronounced in our larger systems businesses, particularly in Advanced Technology and Industrial Coating segments. Some customers seem to be in a holding pattern as they sort out their facility and supply chain issues.

Looking at orders on a segment basis, Adhesive Dispensing orders were up 10% from the prior year, with particular strength in Asia-Pacific and the Americas, with growth balanced between nondurable and durable end-markets.

Advanced Technology orders over the latest 12 weeks are up 11% from the prior year, with particular strength in Asia-Pacific and the Americas and within both our automated and semiautomated dispensing platforms. Again, this rate reflects the return to a more normal pace within technology end-markets which we have commented on in previous quarters.

Within the Industrial Coating statement, the latest 12-week orders are up 22% as compared to the prior year. Growth was strongest in Asia-Pacific, the US, and the Americas.

Turning now to the outlook for the third quarter, we are expecting sales to be in the range of $315 million to $326 million. As compared to the prior year's third quarter this sales outlook represents an increase in sales volume of between 6% to 10% with an additional 7% currency translation benefit based on the current exchange rate environment. This represents a total sales increase of 13% to 17% as compared to the third quarter a year ago.

We expect gross margin of around 60% in the quarter reflecting a higher mix of systems versus parts as well as a change in segment mix. Total selling and administrative costs are expected to be up about 1% from the second quarter, and we are forecasting a 30% effective tax rate for the quarter, resulting in estimated earnings per share for the third quarter of $0.84 per share to $0.91 per share. The midpoint of this guidance represents an increase of 34% over the prior-year normalized earnings per share amount.

In summary, we have continued to capture returning demand and have been effective in doing so with a strong focus on operating efficiency, resulting in record performance in the second quarter. Our current order rates remain at a very high level, and we expect to again deliver strong results in the third quarter of 2011.

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 remain solid and have us at an annualized run rate of approximately $1.3 billion, which is up from the $1.2 billion reported in our last conference call.

From a macro perspective the global economy has now begun to lap the recovery that began to gather real strength a little over a year ago. Though the recovery continues to solidify, the early and most rapid portion of the cycle has likely given way to sustained and more normal growth. Nordson's current order rates and third-quarter outlook are strong but also reflect this moderation.

We will continue to monitor ongoing macroeconomic issues and adjust if and when necessary. However, our focus continues to be on the long term, and we will continue to invest as appropriate to support growth.

Overall, our customers continue to demonstrate their willingness to invest, especially in emerging markets. We will maintain and grow our business with these existing customers while also attracting new customers based on the advantages provided by our global footprint, innovative technology, direct sales, and service capability. We remain well positioned to take advantage of multiple growth drivers and trends.

Within Adhesives, we continue to be market leaders in consumer non-durable markets such as packaging and nonwovens that present solid and long-term growth opportunities in the rapidly expanding middle-class populations of emerging regions. The return in demand for general product assembly applications provide numerous other opportunities for us to grow as well.

In Advanced Technology, we are well positioned to capitalize on the continuing demand for smartphones, tablets, and other electronic devices and accessories. We will continue to supplement our core electronics positions with newer applications in areas like life science, where our MICROMEDICS business has just introduced the first product in their new OsteoXpress line of bone grafting devices. These devices facilitate the mixing of bone graft material used in orthopedic surgical procedures.

Good growth opportunities also exist in our Industrial Coating segment, as the global recovery continues to drive ongoing demand in consumer durable end-markets. As demand improves we continue to expand our tiered product offering to more effectively meet the differing needs of manufacturers in varying regions.

In all segments our initiative to move our existing continuous improvement efforts to a higher level have gained momentum as evidenced in particular by current efforts to optimize our supply chain in Adhesives and add additional focus on segmentation. We also continue to enhance our acquisition focus as we evaluate the best opportunities to augment profitable growth.

Going forward we will maintain vigilance on productivity and cost control while continuing to fund growth opportunities that fit our strategic interests. In closing, I would like to thank our team again for delivering outstanding results in the second quarter. I am confident they will continue to perform at a high level in the third quarter and beyond.

At this time, we would like to take your questions.

(Operator Instructions) Jason Ursaner, CJS Securities.

Good morning. Congratulations on a great quarter.

If I look at the operating margin of 29% in the quarter and I take the midpoint of guidance, it implies almost a 200-basis-point sequential decline. Is this just the expectation that less incremental volume growth -- the 6% to 10% range versus 23% in the quarter -- that it's going to lead to less SG&A leverage and a little less gross margin? Or is there something else in there?

I think as we have noted in the call here, Jason, we do have a very favorable mix this quarter in terms of mix between systems and parts and also in terms of mix between segments, and even within segments in terms of the specific market niches that we are selling into. So what you see there is probably primarily driven by that shift in mix rather than anything else.

Okay, but in terms of capturing that leverage -- for Greg, I think when you have talked about SG&A in the past it has been your expectation that you will hold it relatively flat in nominal dollars. So is it safe to assume this has been the case, since currency was a 4% benefit to sales, which was about the same as the sequential SG&A increase? And we can assume that with currency going forward, since you have built that into the guidance there?

Yes, we have built that into the guidance, Jason, where currency is going to have an impact. It is a net benefit to the P&L; but as we look at spending, it will have an impact by increasing our SG&A.

As we called out, we had some call it one-time charges that we did incur in the second quarter, and to a certain extent we will have some of those as well in quarter three.

The other thing I would comment on, Jason, is we have talked about continuing to grow particularly in emerging markets and ultimately at some point needing to add some additional resources to support that growth. So you would see a little bit of that going forward; nothing that is substantial, but really to make sure that we continue to take advantage of winning in those emerging markets and building our capability and skill set there.

Sure. In terms of the guidance for volume growth, how do I reconcile that 6% to 10% range with the 12-week year-on-year order rates of 12%? Is it lead times changing on new orders? Are delivery times changing? Or is it that 40% parts and consumable piece just isn't growing as fast as some of the new equipment?

Yes, I would say, Jason, what we are seeing there again is we are heading into this period of more difficult comps. I think what we are projecting there is perhaps a continued moderation in the order growth rate as we move through the quarter, with a pretty quick turnaround in that lead time from where current order rates are to the volume growth; we are expecting to see some moderation in the order growth.

Okay. Just last question, would you have assumed the moderation would be more noticeable from some of the cyclical recovery to the areas of secular growth? Just because as I listen to the commentary it sounds very broad-based and you mentioned double-digit growth, for example, in all ADS product lines. So would you have expected more of a divide as you reach the sustainable growth rates?

I am not sure we understand exactly your question, Jason.

Well, certain areas of your business or more of a cyclical recovery and others are in new applications and geographies or secular growth. It doesn't quite sound like this is happening as much.

All right, well let me try to make some high-level comments. I would say each of our businesses are in different places with regard to the overall recovery. So I think as you are well aware, the first element of our business that came back from a recovery standpoint was the Technology segment, really starting to come back as early as second half of 2009. So I think in that business we are starting to get to the point where we are going towards more long-term, sustainable growth in that business.

The Adhesives was next, and that continues to be solid. What we saw happening two or three quarters ago was that general product assembly coming back from a systems standpoint; and we are still seeing strong activity there. So maybe a little while before we get to a more normalized growth in that particular business.

Then our Coatings business, we really were delayed in the recovery and really it has only been the last three quarters now that we've started to see significant investment coming back in durable goods. So very different places.

So what we tried to do is provide a picture that gives you an accurate and aggregated view of all three of those. But recognize that third quarter last year was a very, very strong quarter for us, so we are providing good, strong orders against a very strong comparable.

Okay. Thanks a lot for taking all my questions. Appreciate that commentary.

Charlie Brady, BMO Capital Markets.

Thanks, good morning, guys. I apologize if I missed this, but can you just -- on the mix of parts, did you delineate specifically the mix of parts? And maybe specifically what that was in Adhesive Dispensing?

Charlie, we didn't provide that. But I will tell you that in the quarter total parts for the Corporation were about 43% of sales.

Wow.

Which was slightly higher than what we had anticipated when we provided our guidance. So that is part of the upside in the gross margin, and getting back to a relatively more normal level for Nordson.

Yes. I am assuming that Adhesive Dispensing was probably a good bit higher than what you would have anticipated too, specifically for that segment.

Yes, Adhesives tends to be a bit higher than the Corporate average, so we did have some upside surprise there.

And you are expecting given your commentary -- but you are saying that the systems are being stronger than the parts. The incoming orders are now stronger than they are for parts. So you are expecting now in the second half that to trend back down; correct?

That's correct. Some of that is, to Mike's earlier point, where some of these later cycle recovery end-markets that we have -- some of the durable spaces within Adhesives as well as in Industrial Coatings -- where they lag the recovery from some of the other product lines, and so we are seeing more outpaced growth for those systems product lines.

Okay. In your commentary you mentioned as part of your guidance a change in segment mix. Does that relate to -- if I look at the orders obviously the Industrial Coating Systems had the greatest order growth. Is that the reason? Is that the kind of segment mix change you are alluding to?

Correct.

Okay. Then in Advanced Technology, you talked about -- I think your commentary was most product categories saw double-digit order growth. Was there any product growth that maybe saw meaningfully weak order growth? Or was it just maybe not -- something didn't hit double digits?

Yes, that's right. More the latter.

Okay. Thanks very much.

Matt Summerville, KeyBanc.

Hi, good morning. This is actually Joe Radigan in for Matt. On Japan, do you have a sense of when those deferred orders come back? Do you think they just get pushed out a quarter or two, where you will see maybe an outperformance in the back half? Or is it more indefinite, longer-term recovery?

Yes, what I would say, Joe, is the crystal ball is not completely clear here. I think our customers are just trying to sort through what they do overall from a supply-chain perspective.

So we would anticipate ultimately the orders will come back; whether they come back in the next quarter or two or early into next year is not clear at this point. There is potential that actually there will be some additional orders associated with equipment that was damaged, provided it is not permanently moved to another location.

But the actual timing, we don't have a clear view from our customers. We are in touch with them all the time, but they are not 100% sure. So we do anticipate them coming back, whether it is within the next two quarters or not is not 100% clear for us.

Okay. Then in terms of your emerging market growth, are you seeing any change in the tone of conversations that you are having with customers? I mean are there any concerns of slowing in China or the other emerging markets?

I know they have talked about it for a while. It is not really materializing. You guys have a direct sale model, so you are close to the customer. Do you see any concerns there?

Yes. So Joe, we see the same kind of macroeconomic commentary that you see and certainly a resolve by the Chinese government in particular to counterbalance inflation, with a potential impact on growth. That said, from a customer-specific perspective in terms of either our conversations of what we are seeing from an order perspective, we are not seeing that translate into an impact at this point.

Okay. Then on the supply-chain side, you are seeing strength. You're not the only one. There are other industrial companies that are talking about seeing this ongoing momentum.

Do you have any concerns that the supply chain is going to be keep up? Not necessarily just from a potential Japan impact, but from capacity that was taken out during the downturn throughout the supply chain. Are there any worries there?

Are you talking about our supply chain, Joe, or the customers'?

No, your supply chain.

Yes, within our supply chain, we have a very focused effort in our sourcing activity. We have been out with a heads-up to our suppliers on what we think the opportunities are going to look like and have I think vetted pretty strongly that we feel comfortable that they can meet our needs.

As it relates to our own production capability, we have the flexibility to ramp up and support the growth. So we don't at this point see any constraint from our supply chain.

Okay. Thanks, Mike.

Liam Burke, Janney Capital Markets.

Thank you, good morning, Mike. Good morning, Greg. Mike, you talked about on the ATS side you had strength in the electronics sector, particularly mobile. Is there any particular segment in ATS that is beginning to mature within the cycle?

Well, I think it is more around, Liam, the technology mentioned. So right now mobile devices in general are very hot, so whether that is the smartphones in particular themselves -- if you look at the statistics that are quoted by the various folks that follow the industry, very strong expectations for growth for this year and next.

And the whole tablet phenomena is having a real impact and that is good for us. Now it does potentially have some cannibalization impact on PCs. So I think what we are seeing is very strong growth in that kind of fundamental activity.

The one area that has been very soft this year for us and for the industry is around the LED side, and particularly LED going into LCD backlight. That is a function of, I would say, efficiency improvements on the customer base in terms of the use -- numbers of LEDs they use, as well as perhaps a little bit of overinvestment last year.

On the upside, though, we are starting to see more activity in the longer-term key driver for that business, which is basic lighting. So we are seeing more product go out from a sampling perspective. But from an order perspective for us, that has been a fairly soft area this year.

Okay, thank you. Staying with ATS, on the biomedical side, A, is that still a focus of your acquisition strategy?

And B, within -- I know it is a small part of ATS. Is that still developing the way -- are you satisfied with the development there?

Yes, so it is an area that we are interested in to grow, and we see a lot of synergies in terms of the product portfolios that we can bring over from our Advanced Technology side.

Our acquisition of MICROMEDICS is on track. As we mentioned, we launched a new product within that particular business, and we have a couple other things that are coming out as well in parallel.

As you said, it is a more modest piece. We would like to grow that to be a more significant piece, and it is a focus -- one of the areas of focus -- from an acquisition perspective for us. There are a number of others, but that is one that is key that we are looking at.

Okay. Just to finish up on that statement, on the acquisition front you did mention obviously biomedical is one. What are some of the others?

We do like the test space within the electronics area. That is an area we are looking at to see if there's other opportunities. Beyond electronics there may be some things that might be close enough in the test and inspection area that would make sense.

In our Adhesive space, we're looking at some things in the flexible packaging area. We are also looking at some things that might fall into the cold adhesive space. So those are a number of areas that we have focused attention on and are developing our thoughts around what would be interesting properties to bring in.

Great. Thank you, Mike.

(Operator Instructions) Walt Liptak, Barrington Research.

Hi, thanks. Good morning, guys, and it looks like a great quarter to me.

So your stock is down about 7% in the pre-market, and I think it is probably because of the revenue guidance. So I wonder if you could just review it again.

This quarter you had really nice volume growth; and going into the quarter you had good order growth, and it stayed consistent. The order growth is good this quarter. But then your revenue guidance shows that deceleration.

Where exactly -- why are we being so conservative on the revenue?

Yes, well, what I would say, Walt, is if you look at where we are at, go back historically. Typically our second and third quarters are pretty comparable from an overall strength standpoint. So what we are suggesting going forward is they are going to continue to be relatively comparable.

So on our top-line revenue basis, we are not seeing a lot of change. What we're really I think seeing is more of an interaction with what happened last year.

We had a very steep run-up in the third quarter last year, so I think we're getting hung up a little bit on the quarter year-over-year comparison as opposed to the absolute high level of revenue that we are proposing to deliver this next year. So since we provide the orders on a year-over-year basis, you are seeing some of that impact.

Yes, I would just add to that, Walt, there is some impact that you might see in the lead time of systems orders that might -- orders may be coming in at this point and not getting out within the quarter. But I think it speaks more to Mike's latter point. Last year from our second to third quarter we had about 11% increase over quarter two.

So, we are comparing ourselves as we talk about sales growth over a very strong Q3 of the prior year.

Okay.

And we do, as we said, we are seeing some impact in Japan that is going to continue.

Right, okay. The margins looked great in Adhesives -- well, across-the-board, but notably in Adhesives. You talked about the parts mix.

Can you talk about sustainability of margins? What would be a margin goal for Adhesives at this point?

Maybe we start at the overall level, when we did our investor conference last year we expected that on a sustainable basis we would be able to add a couple of points over and above what we were delivering last year, which was around, I think, 23% or so. So obviously we are well above that in this quarter.

But you know we also have a pattern for the year where the first quarter is a little softer, and then second quarter etc. seems to be a little bit better. We probably have 1 point to 1.5 point in the current margins that is a function of a very friendly mix, a variety of things.

So our view over time is that is going to come down as we see Industrial Coatings come up, and as we see things like elements or submarkets within each of our segments moving into a different mix. So we see probably 1 point, 1.5 point just coming off on the mix effect.

I would say that we are still -- that would suggest we are still performing better than we thought with our guidance. I think part of what we are seeing is we are getting leverage in the first half of the year here on the volume. But we also say we need to continue to invest in emerging markets in the future.

So I am not exactly answering your question because I think we need to rethink what our goal needs to be yet again, just because it seems like (multiple speakers).

Okay, and when you are talking about later cycle businesses, I think about the Industrial Coating part; and the margins are the best items I think I have ever seen or close to, especially for a second quarter. Where do you think that you can get the margins now as that business sees the recovery?

Well, our goal is to get to a 15% level and then sustain it there over the cycle. So obviously in the upturn we'd hope to be above that; in the downturn we'd hope to be modestly below that; so on average we'd sustain that 15%.

But the team has done a great job. We are on a very good track there delivering what we said we were going to deliver.

And Walt, this is Greg. I just had a couple comments that pertain both to your question on the Adhesive margins as well as Industrial Coating. It is not an attempt to be vague, but to a large extent it depends upon volume and what the mix of that volume is. Because as you know there's different gross margins by product line.

So if I had a clear picture on what the revenue growth was going to be in either one of these segments and a good view of what the product-line mix was, I could be more crisp on what the longer-term margin is within both of those segments. Generally, as you know, we don't have a high cost to serve. So it is a lot about -- especially as you look quarter-to-quarter -- what is the particular mix within the segment.

Okay, got it. Okay. Thanks, guys. Congratulations on a nice quarter.

Charlie Brady, BMO Capital Markets.

Thanks. I wonder, just going back to the margin and the parts, can you quantify in this quarter how much the parts mix helped the margin? Specifically on the Adhesive Dispensing business and maybe for the Company as a whole.

And then as a follow-up to that, can you give us some idea of what you think on incremental margin, what you think the normalized incremental margin might look like going forward?

Yes, Charlie, this is Greg. I would say that the impact on margins was more attributable to absorption. There's other elements below that that relate to currency. There is some pricing that finds its way in there. As opposed to thinking about the big driver was the difference in our assumption on spare parts versus where it actually came in.

We were fairly close with our estimate of spare parts at about 43%. And for the balance of the quarter it is probably going to be in that range on a total Company basis, in that 43% of total sales range.

There is more of a segment-to-segment mix and even within a segment mix that is having an effect here, Charlie.

Okay, well if I look at Adhesive Dispensing, at a 37.4% margin, which is a fantastic margin for that business, I guess I am trying to really wrap my head around sustainability of that kind of margin level. Even given the fact that even if you take sales -- even if sales decline a little bit out of that business, and you lose a little on absorption, obviously that business has stepped up to a different margin level than it has been in the past.

I am trying to technology understand to what level have we stepped up the sustainability of that margin in that business? If parts have not played a big swing factor in the margin, the base level of that business is obviously on a new platform. I am trying to really understand what the base level of that business is going forward, particularly in the back half of this fiscal year.

Yes, Charlie, this is Greg again. Some of that relates to my comment to the previous question. Within a segment, we have different product lines that have different profitability levels. So within Adhesives, specifically, as you roll through the quarter that 37% operating margin may be impacted if we have a mix shift between our packaging levels versus our nonwoven or product assembly levels.

Okay. All right. Thanks.

Walt Liptak, Barrington Research.

Thanks. Mike, you mentioned investment in growth in the future.

Yes.

I wonder where -- if you can be a little bit more specific about that, about the incremental cost and where you are making the investments.

Yes, so what we have talked about in the past is that as the recovery has come back we have added resources, primarily in two areas, in the sales activity and in the production activity. In the emerging markets -- that is China, that is Latin America, to a lesser extent India, and so China is a big driver of that.

As we go forward, we will look to add some additional resources there as we go after certain other market niches in those emerging markets with the new products. As well as we mentioned I think a couple quarters ago that we had now built the capability to build some of our powder systems within China and design and engineer those. We are doing some similar things to expand our footprint in capability in our Technology area to support the growing electronics business.

So there is going to be some modest growth I think in those areas to support not only the business trends that we see long term, but also building our overall capability.

Okay. Can you talk about the costs and where the costs show up? Do they go through the business segments or do they go through corporate expense?

Most of those will go through the business segments. What you would see in corporate expense were some initiatives that we have underway in our continuous improvement activity, for example. But most of the other things that I am talking about would show up in the business line expense.

Okay. Greg, can you give us an idea of the corporate expense for the full year?

Yes, Walt. I think that this quarter was a bit higher than what you should expect to see in the out-quarters because some of these one-time initiatives -- we were at about $7 million or so in Q1. That is probably a reasonable level to assume in the out-quarters.

Okay, great. Okay, thanks very much.

Gentlemen, I am showing no further questions at this time and would like to turn the call back over to Mr. Mike Hilton for any closing remarks.

Thank you, Ellie. Let me end today's call with just a few summary comments. First, Nordson continues to deliver. Our performance in the most recent quarter and the first half is evidence of the innovation and value we bring to our customers and our ability to execute at a very high level.

Second, our outlook is strong for the third quarter. Though year-over-year growth is transitioning to a more sustainable, long-term range -- and particularly based on what we saw as a very strong third quarter last year -- we are continuing to operate at a very high level.

Last, I would like to personally thank our team once again. They are committed to innovation. They are committed to continuous improvement in all aspects of our business everywhere in the world. And they continue to deliver quarter after quarter.

Thank you all for joining our call today and your interest in Nordson.

Ladies and gentlemen, this does conclude today's conference. You may all disconnect and have a wonderful day.