Nordson Corp (NDSN) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Nordson fourth-quarter and fiscal year 2011 webcast 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, this conference call is being recorded. I would now like to turn the conference over to your host, Jim Jaye, Director of Investor Relations. Sir, you may begin.

Thank you, Shannon. This is Jim Jaye and I'm here with Mike Hilton, our President and Chief Executive Officer, and Greg Thaxton, our Senior Vice President and Chief Financial Officer. We'd like to welcome you to our conference call today, Thursday, December 15, 2011, Nordson's fourth-quarter and full 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 Thursday, December 22 by calling 855-859-2056. You will need to reference ID Number 33011535.

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

After our remarks we will have a question-and-answer session. I would now like to turn the call over to Mike for an overview of our fourth-quarter and fiscal year 2011 results and a bit about Nordson's future outlook. Go ahead, Mike.

Thank you, Jim, and good morning, everyone, and thank you for attending Nordson's fourth-quarter 2011 conference call. We delivered strong performance in the fourth quarter to conclude what was truly an outstanding year for Nordson. I want to thank our customers for their business and our entire global team for continuing to execute at an extremely high level.

In addition to our comments on the quarter and full year today we will also provide some perspective relative to our outlook for the first quarter of fiscal 2012. Let me begin by offering some highlights on the fourth quarter.

Our success continues to be driven by focusing on what we do best, delivering value to our customers. We continue to meet their needs better than anyone else through innovative technology, applications expertise, a highly effective direct sales and service model and our global capability.

Sales grew by 14% in the quarter over the previous year with double-digit improvement in all three segments and every geography. We matched this strong top-line growth with continued emphasis on operating efficiency to deliver operating margins of 25% in the quarter excluding nonrecurring items. Sales, operating profit, net income and diluted earnings per share all exceeded the levels of the fourth quarter a year ago and are all records for any fourth quarter.

Other highlights in the quarter included the increase of our dividend for the 48th consecutive year, the continuation of our share repurchase program and the acquisition of Value Plastics, a high-performing company that is an ideal addition to the Nordson portfolio.

On a full-year basis sales grew to $1.2 billion, an increase of 18% over 2010. We leveraged the increased sales with more efficient global organization to deliver operating margins of 26%, a full 300 basis points higher than the very strong level of a year ago. Overall sales, operating profit, net income and diluted earnings per share all exceeded our previous full-year records.

In terms of our outlook organic order trends over the last 12 weeks were off slightly, down about 3% from a very strong period of recovery in the same 12 week period a year ago. Clearly some end markets and geographies have been impacted by the near-term economic uncertainty resulting in a slower start to our fiscal year than we normally would expect.

Still the fundamentals of our business are strong and we anticipate better year-over-year performance as the year progresses for several reasons which I'll describe later in the call. But before that let me turn the call over to Greg Thaxton, our Chief Financial Officer, who will provide more detailed commentary on our fourth-quarter and full-year 2011 financial results as well as some comments on our guidance for the first quarter of 2012. Greg?

Thank you, Mike, and good morning to everyone. As Mike noted, our financial results for the fourth quarter were very strong with sales in the quarter up 14% over the prior year including an 8% increase in organic volume and a 3% increase from acquisitions with the remainder coming from positive currency translation effects.

The Adhesive Dispensing segment delivered sales volume improvement of 10% over the prior year's fourth quarter, inclusive of 2% acquisitive growth with growth in most all product lines and most pronounced in packaging and nonwoven end markets. We experienced robust organic sales volume growth in all geographies except the US which was impacted by the timing of some larger dollar system sales in prior year comparisons.

Sales volume in the Advanced Technology segment was up 14% inclusive of 7% acquisitive growth in the fourth quarter over the prior year. Growth was strongest in our automated and manual dispensing product lines and was positive in all geographies. We also delivered significant growth in our industrial coatings segment where sales volume improved by 10% over the prior year's fourth quarter. This growth was strongest in our automotive and powder coating product lines and by region was strongest in the US, Asia Pacific and the Americas.

Moving down the income statement, gross margin in the quarter was 59.3%, in line with our guidance and 60 basis points over the prior year due to a lower cost structure and better absorption. From an operating perspective we continue to perform at a very high level and delivered reported operating margin of 24% in the quarter, or 25% excluding one-time charges for short-term purchase accounting and restructuring charges recorded in the fourth quarter.

Operating profit increased to $79 million from $73 million in the prior year. Excluding one-time charges in both years operating profit increased 13% over the prior year to $84 million.

On a segment basis all three segments continue to perform at a very high level as a result of our more efficient cost structure and our continuous improvement initiatives. Excluding one-time charges in the quarter that impact both the Adhesive Dispensing and Advanced Technology segments, operating margin was 34% in Adhesive Dispensing, 25% in Advanced Technology and 15% in Industrial Coating.

I'll note that the Industrial Coating margin, as compared to this year's third-quarter margin, is reflective of strong growth in our powder product line, particularly engineered systems that tend to carry lower gross margins than other product lines within this segment. Nevertheless we are very pleased to have sustained this mid- to high-teens level of operating margin performance over the last three quarters.

Continuing down the income statement, reported net income for the quarter is $55 million or 17% of sales. And fourth-quarter diluted earnings per share were $0.81, the strongest fourth-quarter performance in Company history.

As in previous quarters we've included an earnings per share reconciliation schedule in our earnings press release to reconcile between GAAP earnings and normalized earnings per share to exclude certain one-time items. Earnings per share, excluding one-time items in both years, increased 15% over the prior year fourth quarter to $0.86 per share.

The current quarter's EBITDA was $88 million and fourth-quarter free cash flow before dividends was a strong $61 million or 111% of the quarter's net income representing very strong cash conversion. As an additional comment regarding cash flow in the quarter we continue to demonstrate our ability to fund multiple strategic initiatives.

We remain active in our share repurchase program as we bought $92 million of shares during the quarter. An additional $8 million was returned directly to shareholders during the quarter in the form of dividends and, as Mike noted earlier, we completed the acquisition of Value Plastics.

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

I'll provide just a few comments on our full-year performance where sales reached $1.2 billion, an increase of 18% over the previous year. Growth consisted of a 15% increase in organic volume and a 3% increase from favorable currency translation. Growth related to the first-year effective acquisitions less sales associated with divested product lines in 2010 was less than 1%.

Excluding one-time items in both years, earnings per share were $3.27 in 2011 compared to $2.32 in 2010, an increase of 41%. Operating margin for the year was 26%, an improvement of 300 basis points over the strong level of 2010. Full-year EBITDA was $350 million, a 32% increase over fiscal 2010, and free cash before dividends was $227 million or 102% of net income, again reflective of strong cash conversion.

As a final point relative to fiscal 2011 I would like to mention two specific lean metrics that are illustrative of our strong performance. Based on average headcount during the year sales per employee and operating profit per employee were up 12% and 27% respectively as compared to the prior year which was also a very strong year from an operating performance perspective. These measures reflect our continued focus on performance improvement initiatives as well as our global team's ability to execute.

Before moving on to our first-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 orders are for the latest 12 weeks as compared to the same 12 weeks of the prior year on a currency neutral basis with acquisitions included in both periods.

Looking at orders for the 12 weeks ending December 4, 2011, they are down 3% compared to the same 12 weeks in the prior year. On an annualized run rate basis current 12-week orders were at $1.2 billion. Within the Adhesive Dispensing segment orders are flat to the prior year where growth in product lines servings consumer nondurable end markets is offset by softness in general product assembly systems sold into durable end markets. This is most pronounced in Europe.

Advanced Technology orders over the latest 12 weeks are down 6% from the prior year where order growth in the automated and manual dispense product lines is being offset by softening demand in surface treatment and test and inspection product lines.

Within the Industrial Coating segment the latest 12-week orders are down 1% as compared to the prior year. Solid growth in Asia Pacific and the Americas was muted by softness in other regions, particularly in the powder systems product line. This segment in particular is tied to manufacturers of durable goods where capital good budgets for purchasing our larger dollar engineered systems are often approved after the first of the calendar year.

Turning now to the outlook for the first quarter of fiscal 2012, we're forecasting sales to be in the range of $270 million to $281 million. This outlook reflects sales growth in the range of flat to plus 4% as compared to the first quarter a year ago and is inclusive of 3% growth from the first year effective acquisitions and an additional 1% currency translation benefit based on the current exchange rate environment. This would put organic sales down about 2% at the midpoint of this range which is in line with current order trends.

We expect gross margin to be about 61% in the quarter inclusive of about $2 million of short-term purchase accounting charges in the quarter and operating margin to be approximately 20% for the quarter at the midpoint or 21% excluding this short-term purchase accounting charge and $600,000 for previously announced restructuring charges related to our Adhesive Dispensing segment.

We are forecasting a 30% effective tax rate for the quarter resulting in estimated earnings per share for the first quarter of $0.54 to $0.61 per share inclusive of the $0.03 in nonrecurring charges I just mentioned.

In addition to this first-quarter outlook, the following fiscal 2012 full-year data points may be helpful for financial modeling purposes. We estimate maintenance CapEx for fiscal 2012 to be approximately $25 million or 2% of fiscal 2011 revenue.

I'll also highlight that we will have some facility capital spending associated primarily with our adhesive restructuring activities in Georgia where we are consolidating from four facilities into two. Although we do expect the proceeds from buildings that will be sold to mostly offset facility spending, this may not all occur within the same quarter.

In terms of our effective tax rate, we're forecasting a full-year effective tax rate to be about 30% assuming Congress extends the R&D tax credit for 2012.

And finally, regarding short-term purchase accounting charges and costs for our restructuring initiative within Adhesive Dispensing, the majority of these costs will be behind us after the first quarter with about $300,000 of restructuring charges expected to be incurred during the second quarter of FY'12.

In summary, our excellent fourth-quarter performance concludes a very strong year for Nordson. Our team continued to execute at a very high level throughout the year and capture growing demand while maintaining an efficient cost structure. The fundamentals of our business model are strong and, although our start to fiscal 2012 is softer than what we would otherwise expect, I'm confident that our team will continue to deliver solid performance going forward.

Thanks, Greg. Before moving on to your questions I would like to provide some additional comments on our recent order trends and outlook. While recent orders are not as strong as we would hope to see, there are some positive takeaways.

First, our recent order trends put us at a full-year run rate of approximately $1.2 billion or $1.1 billion excluding recent acquisitions, which is not far off the $1.2 billion pace we experienced one quarter ago. At this time of the year it's generally our softest from an orders perspective due to the impact of holidays on plant operations and the end of the capital cycle for many of our customers.

And at the same time the macroeconomic picture is certainly impacting the current behavior of our customers. Europe's debt crisis has yet to be resolved, unemployment remains stubbornly high and emerging regions continue to struggle with how to best manage growth. This ongoing uncertainty has caused some customers to take a cautious approach in the near term.

However, most economists still expect global GDP in 2012 to grow at or slightly ahead of 2011 rates reflecting the impact of moderate growth in developed markets and continued strong growth in emerging markets. This macroeconomic outlook for 2012 combined with Nordson's level of participation in emerging markets, niche applications and some still recovering end markets provides encouragement that as the year progresses we may see more favorable comparisons to the prior year than our outlook for the first quarter.

In Advanced Technology, for example, our solutions are critical to niches like Smartphones, tablets, notebook PCs, flat-panel televisions where strong growth is being forecast. Technology trends like flip chips and more complex wafer packaging architectures play to our strength. Growth is also forecast in areas such as LEDs and MEMS where Nordson already has a solid foothold and room to expand.

We've also expanded our presence in the medical space with the acquisitions of Value Plastics and Micromedics which should provide additional growth and stability.

In the Industrial Coating segment demand for manufacturers of durable goods in emerging markets continues at a solid rate. In more developed regions near-term economic uncertainty has caused some customers to take a more cautious approach to ordering large dollar systems. And in Adhesives consumer non-durable markets such as rigid packaging and nonwovens remain steady.

While we're optimistic about the balance of 2012, Nordson is well-positioned to endure macroeconomic headwinds should they continue. We started off the year being very prudent from a spending perspective. We've added some additional resources but only to support key strategic imperatives.

We are focused on continuous improvement efforts to accelerate productivity and help solidify performance. We are also adept at reacting quickly and adjusting our cost basis on a global scale if necessary.

As we begin 2012 our teams remain focused on growth and performance. Overall our priorities are clear and largely unchanged from 2011. As a reminder, these priorities include the following -- enhancing and maintaining our core business; further penetration of emerging markets through new products, applications and tiering approaches; accelerating growth in market adjacencies such as medical -- the medical space we've talked about and flexible packaging; supplementing organic growth through strategic acquisitions; ongoing optimization of our business through continuous improvement; re-investing in technology to expand our market leading positions; and continuing to build out our global organizational capability to support this growth.

Even with the slower beginning to our new fiscal year we are optimistic about 2012. And I'm confident we'll continue to benefit our shareholders by providing value to our customers through our applications expertise, differentiated technology and our global direct sales and service capability. I'm confident in our global team and I know they will continue to deliver at a very high level. At this time we would be happy to answer your questions.

(Operator Instructions). Liam Burke, Janney Market Capital (sic).

Greg, you mentioned in first-quarter guidance 20% operating margins. Normally that looks like about the pre-recession levels; you had been running comfortably in the 25% plus range. Could you help us what that delta is?

Yes, Liam. Again, there are some one-time costs in there that would -- that are suppressing that margin slightly. And I think the other aspect of it is, as we talked about, we've had some strategic investment that we've undertaken, some of that in support of growth in emerging markets, some of that in support of technology.

We've got some investment that we're making along the lines of continuous improvement that are going to provide some benefit in the out quarters. So generally I'd say what we're seeing is some increase in the base spending, we've got a merit increase of course finding its way in there and a fairly soft top-line at this point.

Liam, I'd say it's consistent with what we said last year that in the second half of the year we would pick up our spending to support strategic initiatives. One key one for example is moving the center gravity of our technology capability more towards Asia. So we're opening some additional centers of excellence, we're expanding our manufacturing capability and what comes with that is engineering support to customize and service our customers including some of our tiering initiatives.

So these are sort of strategic imperatives that we're investing in kind of in line with what we've seen step up being in the second half of the year as far as additional -- any additional increases in the first quarter, we are very prudent amount that. But this is really in support of strategic initiatives.

Well, at the risk of asking you to go beyond the first quarter, it's still your stated goal to keep those margins above 25% or is there any way we can look at that?

Yes, so, just to -- if you look at it, what we've said is -- and this goes back to the beginning of last year that we felt we had an opportunity structurally to add a couple of points to margin and we still feel that we can do that. Some of the things that we're doing through our continuous improvement effort are continuing to structurally change the business.

We've said that the Adhesives piece would start to play out in the second half of this year from our supply chain optimization and what we're doing in the technology piece probably plays out in 2013. But we have a number of things that we feel on an annualized basis will continue to be in those high levels.

So we don't see this as any kind of a structural shift at all. What we are seeing here is first-quarter typically is a softer quarter. Last year it was a pretty strong quarter, but we had subsequently decided to make some of these strategic investments that we talked about and we still feel that we will have margins in excess of that. We expect the top-line to come back.

So this is in line with our longer-term plans. And, no, we don't see any reason to believe that we, in the long run, would be below those kinds of margins.

Liam, I'd add to that to a point Mike touched on there. If you think about the seasonality in our business, the first quarter is laden with a lot of holiday period and, of course, that affects both our customers' capital cycle as well as our spare parts revenue trends. So typically for us the first quarter is the softest and it builds through the year and that allows us to then capture some of that volume leverage in the margin.

Great. And just quickly on orders, Asia Pacific -- I mean, Europe was pretty understandable; Asia-Pacific was down 11% year over year. Were there any large orders or any one-time that occurred a year ago to affect that number?

No, not really, but let me make a couple of comments. One thing that we are hearing from I'd say the broad base of customers in Asia is given that Chinese New Year has moved up a couple of weeks and it falls before the end of January, a number of our customers, particularly the OEM customers that would build some of the bigger systems, basically said they're delaying some of their orders until post then.

So you have kind of the US Western holiday piece and then a much earlier Chinese New Year, so the timing effect that some of our customers are talking to us about. But secondly, from a technology perspective on the electronics side, there is a softening on the back-end packaging and test area and most of those folks are located in Asia and I think they're waiting to see how the first few months of the New Year play out with the uncertainty there.

And that said, the things where we have a significant niche exposure to we're still very encouraged about like Smartphones, tablets, [alter] books -- those kinds of things. And I'd say the other thing in the short-term is with the things going on in Europe in particular, but the slower growth in the short term in the US, the export business from Asia has softened a bit. You see it in the trade numbers and that's affected some of our broad-based customers.

So the biggest impact is in technology, the next biggest impact is around sort of the timing of the Chinese New Year. But then there is some export impact we would say coming in there that's not typical.

Thank you, Mike. Thank you, Greg.

Mark Douglass, Longbow Research.

Can we talk about the restructuring you're taking in ADS right now? You touched on it briefly, but what can we expect as far as savings? Are you going to start generating some of the cost savings there in 2012 or is it going to take a little longer for those to come in and have you quantified those yet at all?

So let me just give you an idea, Mark, of what we're doing. In the US at a high level we're moving from four manufacturing facilities to two, so we're expanding to two and shutting down two and we're realigning our business with products that need more engineering support in one location and the ones that are more standard in another location and we're doing some other things to optimize supply chain.

And we're making some smaller moves in Europe, some of that helped by the acquisition of the Verbruggen business that we bought. The US piece should all be wrapped up in the June time frame, so post June we should start to see the benefits that come about by an approved and a lower supply-chain cost there. The European piece is probably later in the year.

Similarly we're doing some things in our technology business where we're expanding our Suzhou facility fairly significantly. The benefits there are likely to be more of a 2013 time frame. But these are significant enough that you'll be able to notice them in the context of the improvement that we see.

We haven't specifically quantified the benefits out there, but they all have very, very good paybacks. And that's just one element of a much broader continuous improvement in activity we have underway. We're doing some things in segmentation, we're looking at our logistics costs, we're amplifying our low-cost sourcing initiatives in a variety of ways, we're doing some things around new product development.

So we have a whole slew of things that we're working on that will play out over the next two, three, four years which is why we feel confident we can continue on a long-run basis to move margins up.

Can you kind of give us order of magnitude -- are we talking tens of bps or hundreds of bps?

What we said is that we hope to get at least 200 basis points of improvement in the margin through these activities. We continue to find new ones, so we'll continue to challenge ourselves to push that beyond that, but we hope to get at least on an ongoing basis 200 basis points of expansion.

But that's after a couple years, right?

Yes, it's going to phase in though. We're going to see each of these things phase in as we continue to do it. And we're not stopping there; we're looking for other opportunities. We're, I want to say, turbo charging our Lean/Six Sigma activity to drive the improvement culture that's already strong at Nordson even further.

Okay. And then again, kind of looking past 1Q, do you feel pretty confident in keeping gross margins above 60%, assuming there's not a huge drop-off and (multiple speakers)?

Yes, we think we're at a good level there and we feel pretty confident in that kind of gross margin performance. I think, as Greg said, as the volume ramps up we'll offset the strategic spend at the technology and emerging market sales resource level to leverage that to the bottom line.

And where are you at now with parts replacements as a percentage of sales?

The total in the quarter was about 43%, trending about a percentage point higher than the third quarter. Some of that is associated with the volume from acquisitions. So if I took the recent acquisition of Value Plastics out it was about 42%, and 43% with that partial quarter in.

Great, thank you.

Charlie Brady, BMO Capital Markets.

Just going back to the Asia-Pacific region, can you talk about what if any impact on Thailand flooding is having on the impact in this quarter and into what you're still seeing going into Q1 and Q2?

You know, it's not really had a big impact in this quarter. There may be some modest upside on some replacement units that might play out over the next quarter or two, but it really hasn't had a big impact. Customers have been pretty adept at moving production other places and we've participated in that.

And then just back on the parts mix question, can you split it out just the Adhesive Dispensing business?

I think we've said in the past, Charlie, that's been pretty consistent with the overall number, maybe slightly higher than the overall number. I'm not sure -- Greg's looking to see if he has something here. We typically haven't disclosed the individual pieces. Typically it's slightly higher.

Yes. It is -- it's slightly higher. There isn't a broad range really between the three segments, but Adhesives tends to track slightly above the corporate average.

And did you not have some large systems going through shipping this quarter into next quarter that would have altered that mix? I'm wondering is the mix still at an average or slightly above average level despite large systems going through this quarter.

No, it's a pretty consistent average in that segment, Charlie.

Okay. Any update on the LED market and LCD screen market?

Yes, I would say from an LED perspective, we went through a period of, on the TV side, kind of absorbing excess capacity. I think we're starting to see a bit of the early phase of penetration on the lighting side, so we're encouraged particularly that the lighting side is going to pick up in the next several years. And I think as we've talked about in the past, we've got equipment out to all the major suppliers there and we're working with them on some technology investment.

Second one was on the LCD? On the flat-panel piece, I think we've gone through a fairly tough period this year and we think we're going to get back to kind of more normalized growth going forward in the next year. Obviously the consumer spending in the West has an impact on that. And so if Europe continues to be soft there may be some impact there.

I'd say one area that's really kind of taking off as a bright spot for us has been the MEMS area where you've got particularly a lot of sensor technology that goes into the mobile devices -- accelerometers, gyroscopes, those kinds of things -- that with a push on not only tablets, Smartphones, but now the sort of whole line of ultra books that are starting to come out, that should be encouraging for us.

All right. I wonder if you can just speak to the M&A strategy. It sounds as though over the past 12 months maybe it's become a bit more focused, but it sounds as though you've got some pretty specific ideas of where you want to go, how you want to proceed on the M&A relative to maybe historically what the direction of the Company has been.

Yes, I think that's fair, Charlie. We historically, I would say, have been kind of opportunistic and episodic. And that's not a criticism, that's just saying we'd do a couple of acquisitions and then digest them and five years later we'd do a couple more. And they generally were in areas that made sense for us.

But we've gone back and looked at four areas that we thought were good areas for us to focus on because they were close to what we do today, that we think we understand the markets, that we think there's a good technology position, we think there's leadership opportunities, and in some cases we think it's fragmented where there potentially could be opportunities for organic share growth.

So those areas in adjunct to our adhesives as in the flexible packaging space, that's plastic packaging and that's where Verbruggen fits in, but there are some other things that we'll look at there. In our technology space we've talked about medical and it's around dispensing and it's around components and some selected areas of manufacturing.

In the electronic space we're still interested in broadening our footprint in the test inspection area; there are some things that are kind of clear adjuncts to what we do today. And then in the coatings segment there's an area that kind of bridges coatings and adhesives around cold material dispensing, you think about that as silicon and one and two component mixtures.

And those are kind of the four areas at the moment that we have interest in and we're trying to build up the proprietary deal flow there and we're looking at a number of opportunities. I'd say with the noise in the marketplace from a macroeconomic standpoint in the last few months, some folks that might've been interested in moving on are pulling back a little bit.

And so we could go through a period here of a couple of quarters where people are waiting to see how the economy plays out because they're worried about valuations or they're worried about what happens to their earnings or whatever and we're looking at that closely as well.

All right. A couple clarifying points, because I think I missed it. Can you just give me again the volume growth X acquisitions for Adhesive Dispensing and Advanced Tech? And also, in your guidance are you -- you're embedding about -- is it $600,000 of structuring in the first quarter in Adhesives?

Correct on the latter point, Charlie. And then so you're talking about fourth-quarter --?

Yes, fourth-quarter organic growth X acquisitions for Adhesives and Advanced Tech.

Yes, so let me go back to that. So Adhesives was -- had by improvement of 10% and that included about 2% acquisitive growth. Advanced Technology was -- sales volume was 14% and that included about 7% acquisitive growth.

Great, thanks very much.

Kevin Maczka, BB&T Capital Markets.

Greg, I may have missed it, but did you quantify -- on the strategic investment you're making in Q1 did you quantify that at all or could you? And can you talk about the timing? Did you say that that's mostly done after Q1 or is that something that continues throughout the year to fund your continuous improvement and other initiatives?

Yes, Kevin, so the comment there is on SG&A, right, and so what we've said there is there's a couple components -- if you look at SG&A levels as compared to our fourth quarter and our third quarter they're less than quarter four primarily because quarter four has some year-end volume-related accruals that hit SG&A. If you look at the spend as to where we were trending in Q3 of 2011, it's pretty much in line.

So what we're saying there is during 2011 is when we made some of these investments, some of it's R&D related, some of it's investment in growing out our operations in emerging markets, it's people-related. So I think that that spending is in the P&L. We'll continue to make some of those decisions going forward, but I wouldn't suggest that you'd expect to see a big step-up from where we are now.

And it is a step up from last year's first quarter for several reasons, Kevin. One, the merit increases for the first quarter; and then in the second half of the year as we kind of telegraphed all the way along, we were going to support some step-up in some strategic initiatives.

So this is not back-office, this is focused commercial resources to drive emerging market growth; it's some specific technology investments to introduce the next levels of technology across our businesses. And then it is to support some of the supply-chain restructuring and other things that we're doing from a continuous improvement that will benefit over the next several years, so there are some up-front investments there.

But that's really been in the P&L since the second half of last year. It looks a little more stark here on the year-to-year comparison because it wasn't in Q1 last year and you didn't have the merit increases in Q1.

Well, you also have -- -- we've got the entities that we've acquired that were not in Q1. There's some FX increase in spending quarter over quarter and then, of course, restructuring charges in the quarter.

Right. So in terms of run rate what we've said is the spending for those key strategic initiatives are in. There's some other things that we'd like to do this year, but we made the decision in Q1 we're not doing them in Q1 and we want to see how the year plays out. And if the year proves like we hope that it will, then there's certain selected other areas that we will look to add some resources. But we will also see the top line that comes with that, that will be leveraged significantly to the bottom line. So we're being prudent.

Okay, so I think if I understood all that right, you're saying some of these investments you're making you've already made and the costs are in there. They continue into Q1, but they don't step up dramatically from what we've seen in Q3 and Q4.

Correctly.

But that is the key driver, if you will, of the step-down in margin to 21%.

There's about a -- yes, that is correct.

Yes. It's that and then when you flow through some merit increase, and again we're looking at what generally is our softest quarter. So with that, that volume spend increase, that is suppressing the margins.

Yes, and quite frankly we are hoping for more top-line growth, and what's going on in Europe is not helping that in the short term. And the US hasn't helped that in the short term. So we haven't quite got as much top-line as we hoped, but were more optimistic as the year goes on.

Got it. I didn't hear you really point to mix as a driver of any even short-term margin compression. Is there anything going on with mix that might weigh on that Q1 margin as well?

No. You look at gross margins, they're pretty strong and in-line with prior year, in fact ahead of prior-year even inclusive of the short-term purchase accounting that's in the quarter. So gross margins are pretty strong; it's really an element of the trended SG&A and a softer first-quarter top-line.

Got it. And then coming back to the order commentary, you pointed to macro uncertainty there, that's fairly obvious; we've got a softer seasonal period right now. Is your -- the macro uncertainty presumably will stay with us for a while, but is your message on orders that we ought to see them accelerate from here as we come out of this seasonal softer period, or that we ought to continue to see some negative numbers here given what's going on in the world?

Yes, so let me make a couple of comments there. What I would say is in most regions the bid activity is still pretty strong. What we mentioned last quarter is we started to see, particularly in the bigger systems orders like coatings and our product assembly and adhesives, customers delaying the commit to make that investment.

We saw that continue in this quarter and if things remain soft we could see that continue going forward. But our teams are encouraged by a couple of things, the level of bid activity that we see in most areas and some of these niche opportunities that we play in.

I think one of the things we are seeing this year though combined with that macro piece is the early Chinese New Year in Asia in particular. Our customers have notably pointed out to us that they're just waiting to get through that early Chinese New Year and not really stepping up their buys by until after that. So that is a timing issue particularly in Asia.

And then further to your comment, Kevin, there is just the natural -- the holiday impact in our order rates. When we think about seasonality this tends to be the soft quarter.

Right. Okay and then finally from me, I think your pricing is normally fairly stable and strong. Is that still the case as you've seen some negative numbers on orders here or has anything changed in that front at all?

No, pricing is solid.

Got it. Okay, thank you.

Matt Summerville, KeyBanc.

A couple questions. First, with regards to your business in Europe, are you seeing any issues at the customer level in their ability to get financing at this point? Have they brought that up to you as a reason that maybe they're pushing stuff off or has that not really hit the radar screen as of yet?

No, I would say that's a good comment, Matt. I'd say the smaller- and medium-sized customers are bringing that up. Yes, it could be that that's a real issue or it could be that they're just talking about adding the context of general uncertainty. But the small and medium customers, particularly the ones that would buy some of the bigger systems, are bringing that up as a concern in the short-term.

And then if you look at your order rates being down 3%, can you maybe comment on the linearity of that rate or the volatility maybe that you've seen? Is there a tremendous amount of up-and-down from week to week there given what's going on in the environment? Did orders start out the 12-week period at a better year-over-year rate and ended at a not as good year-over-year rate? Can you help fill in those blanks?

Yes, I would say that each week is a little different, so there's not necessarily a direct pattern there because it can be influenced by big systems shipping one week and not another. But I wouldn't say that we saw something that started out strong in a steady decline.

We are anticipating a softer tail-end of January in Asia because of that early Chinese New Year that we wouldn't have expected last year. But I would say, no, we don't have a pattern that we would point to here.

What we would say is the areas where we have the bigger cost items, so product assembly and adhesives, some of the coatings, the powder coating systems areas, those are areas where we typically would slow towards the end of the year as the capital from the prior year on a calendar basis is being spent, we're seeing that, but we're also seeing people delay making the buy decision and I think that's a function of the economic uncertainty.

And then as we think about your comments in the press release about things improving on a year-over-year basis, comps getting positive again as the year goes on, this sort of gets back to a previous question I guess. As you're talking to your customers and you're looking at some stuff maybe pushing out, you look at the Chinese New Year dynamic, as you mentioned, I guess when -- it sounds to me like it will probably be a little tough to see volume and earnings growth in the second quarter.

And I don't want to put words in your mouth, Mike, but is it more that you guys are looking for those comps to begin to turn positive in the back half of your fiscal year? And then if we can work into that, which adds another sort of dimension of -- it complicates it a little bit, FX has been very volatile. How much of a hit could that be for you guys this year if current rates would be maintained?

Okay, so I'll let Greg talk about that second one in a minute. The way we kind of look at things -- if you step back, we've done some look at sort of global GDP and what do we think we should expect from global GDP going forward. In the European region we're talking like a point plus or minus. In the US it's probably 1.5 to two, in the broader emerging markets it's probably 4 to 5 and in China it's probably 8 to 9.

When you add that all up you get kind of 2.5 to 3 global basis, which is not too different from what we saw this year. But when you think about the global GDP forecast and if they're right they strengthen as you go through the year.

I'd say if you look at our order patterns, people get their budgets in place for our coatings business sort of in the first fiscal quarter, so we start to see the orders get strong second and third quarter and into the fourth quarter. We see the second -- tail-end of the second and third quarter being strong quarters typically on the tech side and we tend to be more steady in the adhesive space. Other than that sort of general product assembly which probably follows more along the lines of what we see from a coatings perspective.

So our typical pattern is we would expect things to get stronger throughout the year. What we don't have a good feel for is how long is the overhang, for example, of Europe and the debt situation there going to impact the year. If the macro forecasters are right we should have a similar year to last year in terms of the macro environment which probably means it's stronger in the second half than it is in the first half.

Matt, just to comment on currencies, as you know, we benefit from a weak dollar and certainly had some tailwind in 2011. We've guided to some slightly favorable tailwind in our first quarter of 2012. We've got a month and a half or so behind us now and so what we're doing is looking at where rates are as of just a couple days ago and saying if they hold for the balance of our quarter that gives us the expectation for that slight tailwind.

But nevertheless, where rates go and how they react for the balance of the year will have an impact. For 2011 the euro average rate for us across the year was about a 139. So clearly if rates stayed where they are today we'd have a headwind in the euro; we'd have a tailwind still in the yen where the full-year average was about 81. So we've got a tailwind there in the yen.

The way things model out for us is that for every let's say 1% change in sales due to the translation effects of currency it's about a 2.5 times impact on the change in earnings per share.

Great. Thank you for clarifying that stuff. Appreciate it.

Jason Ursaner, CJS Securities.

Realize the call is getting a little long at this point, but just two questions. You both spoke about the normal seasonal pattern for a soft first quarter, and if I go back and look at the revenue contraction for fiscal Q4 to Q1 in the two years before the downturn and then the two years after the downturn, in the two years before you saw a 16%-ish sequential decline and then only about a 7% sequential decline in the two years after the downturn.

So if I'm looking at the 17% sort of midpoint sequential decline you're implying, how much of this would you characterize really as slow down versus how much would you more characterize as just a reversion to a more seasonal -- a normal seasonal pattern after two years of very difficult comps?

Yes, so what I would -- so that's a good point, Jason. What I would say is in the last two years we still had sort of recovery from that strong downturn. And so I think it muted the seasonal translation that you normally see. I'd say this is moving more towards a more typical seasonal pattern. But it is probably a little bit worse just given what's going on in Europe and to a lesser extent the US.

So there is some clear impact from the uncertainty that's there in the last few months that I wouldn't consider to be normal. So it's probably a little worse than we would expect to see on a normal -- back to kind of fully recovered environment, whereas in the last two years in the first two quarters you still had strong recovery, two years ago it was a technology lead thing and last year it was broad-based.

Okay. And normally Q2 to Q1 you normally see this mid-teens sequential increase as customers get their budgets approved. Would you not expect to necessarily see that if you are seeing this uncertainty and weakness?

So I think hold that question for a second. I think we've got a pretty track record of what the normal seasonal pattern is. We don't have any better crystal ball than you do, though, on what the overhang is going to be and that was my previous comment.

I'd say what's encouraging is lots of activity in the niche areas that we're focused in that should step up. And still bid activity in many of these areas is very encouraging, but there clearly is an overhang and we just don't know how long that overhang is going to last.

Okay. And then looking at orders, obviously the softest area is in the tech segment and it looks to be coming out of Asia in part. You mentioned weakness in the device testing and package equipment market and that's going to be driven by the fab utilization coming down. And then you also mentioned customers holding off timing wise with the Lunar New Year.

Do you also think, though, that you so any impact in October/November from tightness in the credit markets there? And have you seen it open up at all since the country lowered reserve requirements on the 1st of December?

Yes, so I would say not a big deal from our credit requirements, particularly on the tech side. I'd say generally speaking though more broad-based in Asia, China specifically, with the move to start to loosen things a little bit again, that's viewed as very encouraging by the folks on the ground, sort of the smaller customers and even some of the OEMs. So not tech specific but more broad-based.

There was a tightening impact from that and people are more encouraged now. There's argument about whether it's enough, but certainly directionally the move is encouraging for the folks on the ground.

Okay, thanks a lot. That's it for me.

Walt Liptak, Barrington Research.

I wanted to ask about the Value Plastics. If I backed into this right it's about $7 million in revenue this quarter, is that about right?

Well, in acquisitions for the year you have both Value Plastics, you have Micromedics that affects the Advanced Technology segment and then Verbruggen in the Adhesive segment.

Okay. So it was a little bit --.

And if you recall, Value Plastics was not in the quarter for a full quarter.

Okay, I guess my first question is, the level of run rate in revenue for the quarter, I wonder if we can separate Micromedics from Value Plastics.

Yes, I'd say Value Plastics is -- when we made the announcement we had sort of -- the last 12 months kind of run rate was around $27 million. We're on track with that kind of run rate and we have expectations obviously for that to step up as the year goes on, in part based on growth in the market but in part because of the other things that we talked about in terms of diversifying globally, taking the industrial product line out, that's probably further on in the year. But we're basically on track with that acquisition where we thought after the first couple of months.

Okay. And with the purchase accounting charges of about $3 million, Value Plastics was dilutive during the quarter?

Yes, they were.

Okay. And in the first quarter is it going to be dilutive again with that $2 million charge?

No, we're not expecting it to be dilutive in the first quarter.

Neutral then?

Yes, in that range.

Okay.

Because we will have another about equal size impact on the short-term purchase accounting, but they'll be in for a full quarter.

Okay. And then I wanted to ask about the tax rate for the full year 2012. I'm sorry, not tax rate, interest expense. I've got my estimate, but I wonder if you could just help by providing a number for your estimate of interest.

Well, we entered into a new credit facility, if anybody caught that, was announced on Monday. And I'm pleased with the facility we have and want to congratulate our team on a great job of negotiating that facility. It expands our revolver from what was a $400 million to a $500 million revolver. It's a five-year deal and it's about -- at our current pricing grid the margin spread is about 50 basis points over our prior facility.

So where we were borrowing at about 28 basis points over LIBOR it's now close to 77 basis points. So whatever our outstanding debt is for the year it's going to be slightly more expensive. But again, I'm very pleased with the terms that we were able to negotiate.

Okay, got it. And then in the prepared commentary you talked about manual dispensing in Advanced Tech being a little bit weaker and I presume that's the EFD business?

No, I think what we said was that those spaces -- the manual and automated were holding up fairly well.

Oh, they were holding up, okay.

Yes.

Okay, that makes more sense. And then just as a final question, you talked about $1.2 billion in revenue for next year, are you expect -- and that's with the acquisitions?

No, just to be clear, Walt, what we said is that current rate. If you take the orders and you annualize them that's what you would get. We didn't necessarily project that that was a number for the year, just if you -- like we do each quarter we kind of annualize that current run rate.

Okay, all right. Let me just take a shot at this one then. For 2012 are you expecting -- as you look at your EBITDA or EPS are you expecting it to be a flat year, up, can you -- do you expect that the Company is going to be able to grow considering the headwinds?

Yes, as you know, we only guide a quarter out because that's the best clarity that we have.

Yes, I guess I was hoping just to get some trajectory.

What I would say is if we have an economic environment where the overall GDP and industrial production growth is similar to this year then we would expect that to be a year where there is growth. So the question is whether you believe that or not.

I mean, our view when we use this in some of our modeling [in a conference] is we feel most comfortable with the Global Insight IHS forecast, but their forecast is not dramatically different from others. So if you believe that that's going to come through at a 2.5% to 3% global growth then we should see a positive year there. But our crystal ball doesn't go out that far. So if that's not right then it will either be more or less depending on what actually plays out.

Okay. I understand. Appreciate it.

Shannon, we have time for maybe about one more question.

Mark Douglass, Longbow Research.

Just real quickly, I think there's some confusion here. Guidance right now includes the $0.03 of nonrecurring charges?

Correct.

So ex the charges we're looking at $0.57 to $0.64?

That's correct.

Okay, that is all.

Thank you. I would now like to turn the conference back over to Jim Jaye.

Thank you, Shannon, and just to wrap this up, thank you all for attending the call. We wish you all Happy Holidays. Thanks for your interest in Nordson. I'll be around today if you have additional questions. Thank you.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day.