Nordson Corp (NDSN) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Nordson Corporation webcast for the second-quarter fiscal 2012. 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, Allie. This is Jim Jaye and I am here with Mike Hilton, our President and Chief Executive Officer, and Greg Thaxton, our Senior Vice President and Chief Financial Officer. We would like to welcome you to our conference call today, Tuesday, May 22, 2012, on Nordson's second-quarter 2012 results.

We are also joined today by Peter Lambert, Nordson's Senior Vice President with global responsibility for our Adhesive Dispensing Systems segment. Peter will be providing some additional comments later in today's call regarding our just-announced agreement to acquire EDI Holdings, a leading provider of extrusion dies and related equipment for the flexible packaging and plastic processing industries.

Today's 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 Tuesday, May 29, by calling 404-537-3406. You will need to reference ID number 75534738.

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 over 2012 second-quarter results and a bit about Nordson's future outlook. Please go ahead, Mike.

Thank you, Jim, and good morning, everyone. Thank you for attending Nordson's second-quarter 2012 conference call. Overall, we delivered strong performance in the quarter, and I want to thank our global team for their ongoing focus and execution. Their passion for our customers continues to be a true differentiator for Nordson.

In addition to our comments on the second quarter, we will also provide some perspective relative to our outlook for the third quarter of fiscal 2012.

The second quarter played out much as we expected, with revenue slightly down compared to the second quarter a year ago. Conditions remain challenging in some end markets and geographies, and currency comparisons to a year ago were negative. I note also that our prior year's second quarter was a standout quarter from a top-line perspective and overall operating metrics, so our comparisons in this quarter are more difficult.

Overall, order rates did gain momentum during the quarter as evidenced by the 14% growth in sales over the first quarter. We continue to feel good about the overall strength of our business model and our durable end markets, as well as the timing of customers' buying patterns -- excuse me, excuse me. Got a little off track there.

We continue to feel good about the strength of our business model and our prospects going forward. More specifically, second-quarter sales volume was up a little less than 0.5% with the positive first-year effect of acquisitions being offset by a decrease in organic volume. Operating margin in the quarter was a strong 26% on a normalized basis, where we exclude one-time charges, which in this quarter are primarily associated with our previous announced Adhesives US facility consolidation efforts. And our ability to leverage the sequential sales growth generated a 4 percentage point improvement in our overall first-quarter normalized operating margin.

Earnings per share in the quarter excluding one-time charges was $0.84.

In terms of our outlook, order trends over the last 12 weeks are up 9% from the same 12-week period a year ago, with very strong order growth in the Advanced Technology and Industrial Coating segments, offsetting the impacts created by continued challenge of the European sovereign debt issues. The fundamentals of our business remain solid; and based on recent strength in orders we are forecasting sales growth for our third quarter in the range of 8% to 12% over the prior year's third quarter.

The persistence of macroeconomic uncertainty leads us to be cautious about the ongoing pace of growth. However, as we have suggested in previous earnings calls, assuming the consensus of economists' views that GDP will grow in the 2% range globally for the year, we should see year-over-year growth driven by improvement in the second half of our year.

Now let me turn the call over to Greg Thaxton, our Chief Financial Officer, who will provide more detailed commentary on our second-quarter financial results as well as some additional comments on our guidance for the third quarter for 2012. Greg?

Thank you, Mike, and good morning to everyone. As Mike noted our financial results for the second quarter were very solid.

Sales in the quarter were $315 million, a decrease of 1% over the prior year's second quarter. This change in sales included a 3% increase related to the first-year effect of acquisitions, offset by a 3% decrease in organic volume and a negative 1% impact from the effects of currency translation as compared to the prior year. On a sequential basis, we gained momentum as second-quarter revenue increased 14% over the first quarter of 2012.

Looking at segment performance, Adhesive Dispensing sales volumes decreased by about 1% is compared to the prior year's second quarter. Organic volume decreased by approximately 3%, while the first-year effect of acquisitions added about 2% growth.

As you would expect, given the macroeconomic backdrop, growth in our packaging product lines serving consumer nondurables was offset by weakness in our general product assembly equipment sales associated with durable end markets, as well as the timing of customers' buying patterns of our nonwovens product line, which tends to be larger-dollar systems, where the timing of a few significant orders can impact quarterly growth. Overall, emerging markets continue to generate stronger growth than mature markets.

Sales volume in the Advanced Technology segment was up about 3% over the prior year's second quarter. The first-year effect of acquisitions increased volume by 6%, while organic volume decreased 3%.

The organic volume decline relates primarily to softness in demand in the non-dispense portion of our product line, primarily our test and inspection and surface treatment product lines, where demand was impacted by softness in printed circuitboard end markets.

Within the Industrial Coating segments, sales volume decreased by 2% compared to the prior year due to softness in certain durable goods end markets. This segment's performance is impacted by larger-dollar engineered systems, where the timing of customer order patterns can swing performance in the short term, as evidenced by the strong growth in recent 12-week orders.

Moving down the income statement, gross margin in the quarter was about 60%, or 61% excluding one-time costs associated with the Adhesives facility consolidation project that we have talked about in previous calls.

From an operating perspective, as Mike mentioned, we leveraged the strong sequential increase in sales to drive operating margin to 26% in the quarter, excluding one-time charges. We delivered this strong performance while continuing to make strategic investments that will drive future growth and performance, including investments in headcount, largely in emerging regions, as well as incremental product and market development investment and investment in our continuous improvement initiatives.

Looking at operating performance on a segment basis, Adhesive Dispensing continued to perform at a very high level and delivered operating margin of 33%, or 35% excluding one-time costs.

Within Advanced Technology, sequential volume growth and operating efficiencies drove operating margin to 25%, an improvement of 9 percentage points over the first quarter of 2012. Industrial Coating's operating margin in the quarter was 12%, or 13% excluding one-time charges related to severance. On a sequential basis, operating margin for this segment excluding one-time costs in the quarter improved by 10 percentage points over the first quarter, as our team effectively leveraged existing resources to meet a strong increase in sequential volume.

Continuing down the income statement, reported net income for the quarter is $52 million or 17% of sales, and inclusive of $2.6 million in one-time after-tax charges. Diluted earnings per share were $0.80 in the quarter.

As in previous quarters we have included an earnings per share reconciliation schedule in our press release to reconcile between GAAP earnings and normalized earnings per share to exclude certain one-time items. Earnings per share excluding one-time charges related to severance and restructuring charges were $0.84 per share in the quarter.

The current quarter's EBITDA was $85 million, and second-quarter free cash flow before dividends was a strong $49 million. Our balance sheet remains very strong with net debt to trailing 12-month EBITDA of less than 1 time, providing sufficient capacity for the EDI acquisition and other strategic investments.

Before moving on to the outlook for our third quarter, I'll provide 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 latest 12 weeks as compared to the same 12 weeks of the prior year on a currency neutral basis, with fiscal 2011 acquisitions included in both periods.

Looking at orders for the 12 weeks ending May 13, 2012, they are up 9% compared to the same 12 weeks in the prior year. On an annualized run rate basis, current 12-week orders are about $1.5 billion.

Within the Adhesive Dispensing segment, orders are down 5% against challenging comparisons of a year ago. The softness is primarily related to Europe, and within this region most notably in the general product assembly product line serving durable end markets, which had a very strong year in 2011.

Advanced Technology orders over the latest 12 weeks are up 22% from the prior year. Most all product lines grew at very healthy rates, driven largely by robust demand by producers of mobile consumer electronic devices.

Within the Industrial Coating segment, the latest 12-week orders are up 29% as compared to the prior year. We generated strong double-digit growth in nearly every product line and region.

Turning now to the outlook for the third quarter, which does not include any impacts associated with the EDI acquisition, we are forecasting sales to be in the range $337 million to $349 million, an increase of 8% to 12% as compared to the third quarter a year ago. This range is inclusive of organic volume up 9% to 13%, 3% growth from the first-year effect of acquisitions, and a negative 4% currency translation impact based on current exchange rates.

We expect gross margin to be about 61% in the quarter and operating margin to be approximately 28% for the quarter at the midpoint of our sales range, reflecting strong operating profit leverage. We are forecasting an effective tax rate for the quarter of approximately 30.5%, resulting in forecasted diluted earnings per share in the range of the $0.96 per share to $1.04 per share.

Our Adhesive facility consolidation initiative is largely behind us, so we are not expecting any significant one-time costs to be incurred in the third quarter. In summary, our second-quarter performance was solid and played out much as we expected. Our team continued to execute worldwide, and we have continued to make strategic investments to drive ongoing growth and enhance performance. And, finally, current order rates are driving our outlook for a very strong third quarter.

Thank you, Greg. I would like to make a few additional comments on our current order rates and outlook. First, our recent order rates are encouraging and exceed the levels we reported in our two most recent conference calls, with annualized 12-week orders, as Greg said, of approximately $1.5 billion. And as Greg noted, we expect to leverage top-line growth in the coming quarter to generate operating margin performance several percentage points above the strong level we generated in the same period a year ago.

While we are encouraged with what we are currently seeing and we are optimistic that we will continue to see order growth over the prior year, several elements of uncertainty remain in the macroeconomic environment. The European picture remains far from clear, and its effects are impacting global demand.

In addition, the availability of credit remains an issue for some smaller customers. For these reasons, the pace of growth that we may experience beyond the third quarter remains difficult to forecast, and we would caution against extrapolating current order rate growth to the outlying quarters.

I am pleased with the very high level of execution our team continues to demonstrate on a day-to-day basis. At the same time, we are continuing to move forward on a variety of initiatives that will sustain our success over the long term.

In summary, we remain confident in our fundamental strengths, including best-in-class technology, direct global sales and service, application know-how, significant recurring revenue derived from parts and consumables, and excellent positions in consumer nondurable spaces, rapid growth opportunities associated with mobile and other electronic devices, and multiple avenues for expansion. Above all, we have an outstanding global team and I am confident they will continue to deliver at the very high levels.

With that, let me turn the call over to Peter Lambert, who will provide some color around our just-announced agreement to acquire EDI Holdings.

Thanks, Mike. EDI, or Extrusion Die Industries, is a provider of slot coating and flat polymer extrusion dies for the growing global flexible packaging and plastic processing markets. From a strategic viewpoint, EDI is a great fit with our philosophy of acquiring companies that provide precision technology at a key part in the supply chain to deliver profitable, long-term growth.

Much like Nordson, EDI provides industry-leading products that are critical, enabling technologies for end users to optimize productivity and uptime; yet these products represent just a fraction of the total cost of the extrusion systems and coating lines on which they operate. EDI's strong customer relationships and installed product base also provide a high level of recurring revenue and includes upgrades, replacements, and maintenance for existing customer equipment.

In addition, EDI complements Nordson's existing extrusion die product line, providing scale, product breadth, and geographic reach to the Verbruggen business. The company serves the global plastics processing equipment industry, which is estimated to be about $8 billion, with the extrusion segment estimated to be close to $2 billion with growth around 6% over the next several years.

Key end markets for EDI include flexible packaging, food and beverage, and personal care. Others are electronics, optical films, batteries, solar, medical, building products, and paper products. Overall approximately 70% of sales are related to consumer nondurables.

Like Nordson, the largest portion of EDI's current sales are outside the US. About one-quarter of sales go to Asia, about one-third go to Europe, the Middle East, and Africa, and the remainder to the US and the Americas. No single customer accounts for more than 2% of sales.

Lead times for most EDI products are about 18 weeks.

One of EDI's most valuable and differentiating resources is the proprietary library of engineering designs that it has amassed over the past 40 years, which includes approximately 30,000 designs and an intellectual-property portfolio of dozens of pending or issued product and process patents. EDI employs 317 people, has additional operations in Cologne, Germany, and Shanghai, China, and will operate as part of Nordson's Adhesive Dispensing Systems segment.

In terms of synergies, on the revenue side we believe there is opportunity to leverage both our global infrastructure and existing customer relationships to outperform overall market growth. From a cost perspective, this is a well-run business and it will take some time to fully understand the scope of opportunity; however, we do believe we can leverage our low-cost country sourcing program as well as continuous improvement strategies employed in other Nordson operations that have helped drive operating margin improvement.

The terms of our purchase agreement prevent us from disclosing detailed financial information. In general, EDI's 2011 revenue was approximately 6% to 7% of Nordson's fiscal 2011 revenue. And 2011 adjusted EBITDA as a percentage of revenue was just a few percentage points below Nordson's 2011 performance.

Sales and operating profit have grown at double-digit rates over the last four years; and over the same time period CapEx has averaged less than 1% of sales. EDI's operation include its March 2012 acquisition of Premier Dies Corporation, a complementary provider of slot coating and flat polymer extrusion dies that expands EDI's product and technology offering.

We expect the acquisition of EDI to be accretive to our earnings in the first full year of operation. The $200 million purchase price represents an EBITDA multiple that is in line with what you would expect for a traditional industrial business. The purchase price is subject to adjustment as provided in the purchase agreement and will be financed with availability under our existing $500 million revolving credit facility.

The transaction is expected to close during our third quarter, pending customary regulatory reviews and conditions. We are looking forward to fully welcoming all EDI employees to Nordson at that time.

Thank you, Peter. Let me iterate what a strong strategic fit we believe EDI will be to our organization. The flexible packaging space provides solid growth opportunities and has certain adjacencies to our traditional Adhesives business. And this particular property brings all the strategic benefits that Peter highlighted, including being a value-added supplier of technology solutions.

As Peter noted, I am looking forward to welcoming the EDI employees to the Nordson family. And once again I would like to thank the Nordson team for delivering another strong quarter and positioning us well for the future. At this time, let us turn to your questions.

(Operator Instructions) Liam Burke, Janney.

Good morning, Mike. Good morning, Greg. Mike, on the Adhesive Dispensing, operating margins were strong; down year-over-year. Was there a higher percentage of systems sales in Adhesives even though you saw a weakness in the durable end markets?

That's really -- the difference is largely two things. If you recall last second quarter we talked about a very, very good mix within the overall Company and within certainly the Adhesive segment; and we felt that was probably worth a point or point and a half just in the strong mix between the different product lines.

And then the volume is actually down a bit here. While we like it when volume goes up, we do have significant incremental line leverage and when it goes the other way we see that.

Okay. On the acquisition front, you have had quite a few being integrated into the business. How has the progress been with bringing on these acquisitions into the firm?

Progress has been good. We laid out pretty solid integration plans upfront with specific goals around each of the acquisitions, and I would say we are generally on track with those acquisitions. We feel as good as we did at the time we made the acquisitions about the fit and opportunity for the three that we made over the last year.

I guess lastly on EDI, you mentioned that the operating margins are at or slightly below the firm operating margins. Are there any benefits you can get -- or financial benefits on the operating side that you can get by integrating EDI into Nordson?

Yes, when we look at -- yes, the comment was, yes, the EBITDA margins are a little bit lower than our overall Company average. And as Peter mentioned, we see both opportunities from the cost side, revenue synergies, as well as we think there will be some opportunities from cost synergies.

We are pretty well established, as Peter mentioned, in our low-cost sourcing initiative. We have been reinvigorated over the last year and a half or so, our continuous improvement activities. We are starting with a very well-run company that has improved nicely over the last four years.

But we do think there are some things that we can apply that relate to some of the things that we're working on from continuous improvement that would further help to grow and expand the profitability of the EDI business.

Great. Thank you, Mike.

Jason Ursaner, CJS Securities.

Good morning. Just first on the orders in the Tech segment, surprisingly strong. You mentioned broad-based strength and I think you noted the mobile devices.

Can you just provide a little more detail? If I tried to break it down between organic growth in life science from the acquired businesses, recovery off the bottom in the semi cycle, and then secular growth in certain applications like flip-chip assembly, if you can just try and I guess talk a little bit more about how each of (multiple speakers).

Yes, I will give you a little bit more color commentary. I am not sure I heard all the points that you had there, Jason.

I would say our medical business is on track for the kind of growth that we expected in that business, targeting double-digit type of growth. I think what we said last time in the electronics-related piece, which is about 75% of that segment, is in our last call we talked about how the mobile device piece, particularly smartphones, tablets, was very strong; but the more traditional desktop, server-type market was pretty soft. And that played through our different businesses in different ways.

What I would say -- what we have seen in this most recent order data is the mobile piece continuing to be very, very strong, and so that plays through in a lot of our systems businesses. And for the first time I would say we are starting to see orders from the more traditional customers on things that support desktop, server type of applications starting to come through in the last few weeks, so that is an encouraging sign.

Now, I think we also talked in the past about how our order pattern could peak in the second or third quarter, depending on the timing of launches of various product lines. So as it relates to the mobile devices we have had a very, very strong quarter here this time with some key customer launch cycles. That may slow down a bit going forward, but we are encouraged by the fact that we are starting to see orders on the more traditional back-end packaging piece. So depending on how they play out, order rates may ameliorate a little bit going forward.

Okay, great. Then you acquired Verbruggen in mid 2011, sort of dipped a toe into the flat die market with flexible packaging. What have you learned since then that I guess makes you think that this is really the right market for Nordson to be in?

I will make a couple comments and then if Peter wants to add anything, he can go ahead. What we said is we had four areas that we were interested in expanding our portfolio in, and one of those was flexible packaging, in part because we see that growing at perhaps a slightly higher rate than our rigid packaging, in part because we have a lot of customers who participate both in the rigid and flexible packaging, and in part because we thought the business model was similar to our current portfolio of business.

I think the Verbruggen acquisition was a nice regional acquisition for us, and it gave us a better view as to confirming that that business model does in fact make sense and that we were looking for opportunities to expand that globally and to link into continuing to drive businesses where we have technology leadership positions.

I guess I will just add to that that we looked at the development of the Verbruggen dies. Part of our hot melt coating business today is wide dies of hot melts. And as we look into the technology, the development and engineering of these, they are very similar; and we have become appreciative of how similar they are.

There can be a two-way technology transfer from what we know in hot melt and what the extrusion die companies know around essentially warm plastic, that we think there is additional leverage there on the technology side.

Jason, this is Greg; I would add a point too. It is kind of within Mike's comments on the business model. It is consistent with where we operate in some of our Adhesive businesses in that we were providing a pretty key technology component that is relatively low cost in relation to the overall cost tax. So we like the thought that it is kind of that component supplier of high value.

Right. When it did change hands in 2010, had you guys bid on it or been part of the process at that time?

Yes, we took a look at it at that time, yes.

Can you disclose how below the cover bid you made at that time?

I don't want to comment. We didn't win, and we were disappointed we didn't win.

Okay. Just last question. The business -- you know, I will jump back in the queue. I appreciate the color. Thanks, guys.

Kevin Maczka, BB&T Capital Markets.

Hi, good morning. Mike, on Industrial Coatings, I know these order rates can be lumpy. It sounds like maybe there were some large systems orders this quarter. But can you just say a little bit more about how we went from negative 10% to plus 29% Q1 into Q2? And how we should think about that going forward?

Were there in fact some big orders that you wouldn't expect to repeat going forward? Any more color there would be helpful.

Yes, the first thing I would comment on is, generally in the first quarter, orders in that business are soft because typically these are capital investments so they have to go through a customer capital cycle. Most of our customers are on a calendar year. So we are really starting to see them get through their approval process at the tail end of January.

So when you think about our whole first quarter, they have basically finished up their previous calendar year and really typically don't let as many orders in the first quarter because they are going through the next round of capital budget cycle.

I would say also, quite frankly, the uncertainty in Europe played a big role. I think we mentioned in the last call that while we had good bid activity and we were encouraged by the bid activity, that the bid-to-award time frame was stretching out because people were looking to just wait and see as to how the economic environment was going to play out, particularly with the sovereign debt issues in Europe.

I would say what we saw is customers got their projects approved and we saw at the time a number of projects that were already approved that people just weren't letting the orders, and they started to let the orders, in part because there is a fairly significant pent-up demand.

That said, there is still uncertainty in Europe. And some of the smaller customers, as Greg and I mentioned in the prepared remarks, are still not getting funded. It's the medium-sized folks are comfortable enough that we are starting to see orders flow through. And there is still a bit of pent-up demand from a recovery in this segment, in contrast to what I would say is in the other two businesses where we are sort of past the recovery from the downturn.

So as it relates to Europe, none of these big-picture macro uncertainties are going away. In fact, it seems like they may be even arguably getting worse.

But you are saying pent-up demand is kind of trumping that and you're still seeing customers increasingly let out orders where there has been great -- or solid bid activity; but not so much in terms of actual orders and turning those into revenues. But you are seeing more of that now; is that what you meant?

Yes, what I am saying is the time frame is still a little longer, but we are continuing to add projects to the list. So some of those are coming through.

The other comment I would make is if you look at the parts business, the parts business is solid which is suggesting that operating rates are strong. What I would say is that customers are continuing to look for shorter payout projects. So the ones that have shorter payout projects, because they are creating more efficiency or there is a consolidation activity associated with it, are the ones that are going through.

The list continues to be strong. I would say the timing hasn't shortened up, but we have continued to add to the list and people have let orders come through. So that is what we are seeing here.

We have a number of projects that are going through, as I mentioned, that are a consolidation or in the case of the US we are seeing some onshoring from offshoring, that kind of thing. I would say more of that middle tier who had money is confident enough that they are moving forward; and the lower tier doesn't have money, and that is not happening yet.

Got it. Shifting over to margins in Industrial Coating, the big sequential increase we saw there, was that just volume leverage and your execution there? Or was there something else unusual driving that in terms of mix or pricing or what have you?

No, it is primarily volume leverage there. What we suggested here is that we are making -- in the first quarter, we saw some impact from our traditional merit increases without the volume, and we had some postretirement costs hit in as well. What we are seeing now is volume loaded against that.

We also has some specific initiatives that we're funding. We are continuing to fund those. But it really is just the volume coming back to a level that is still down year-on-year a little bit but coming back. And then obviously with the order rates stepping up, that is an encouraging sign going forward.

Okay. Thank you.

Walt Liptak, Barrington Research.

Hi, thanks. Good morning, everyone. I wanted to ask a follow-on on the margin. I think you said in your guidance a 28% operate margin for the third quarter. Is part of that strong margin -- I understand volume is coming through and some of the things you just mentioned. But can you talk a little bit about just the benefits from the Adhesive restructuring and how much dollar savings you think you will start to see in the third quarter?

Yes, Walt, this is Greg. Most of that improvement that you are seeing in the operating margin is volume leverage. And specific to the facility consolidation, we do expect that we will start to see some benefits in the third quarter, and that number is likely to grow then in the out quarters as that production workforce gets fully efficient, if you will, as they are coming up to speed on operating new equipment etc.

So we will see some benefit in the third quarter. We will start to see more noticeable benefits in the fourth quarter and then into 2013. It might equate to maybe a 50 basis point improvement in the Adhesive operating margin when we get to 2013.

Okay. Did you say 50 or 15 basis points?

50 basis points.

50 basis points? Okay. I want to talk a little bit about the cautionary note on the fourth quarter. It sounds like there is a chance the third quarter could be the peak for sales, operating margin, and EPS. Is that what you are thinking at this point?

Well, as you know, we don't have great visibility beyond one quarter. What we are really trying to comment on is a couple of things.

When we look at the order pattern and the order flow, we have got things like the mobile piece that is linked a lot to timing of introduction of technology that might in fact be a little bit of a pull forward into the third quarter. On the other hand, we have -- starting to see some general improvement in the more traditional space in the electronics area that I talked about.

Typically, our order patterns would peak in either the second or third quarter and then start to decline from there on. Our revenue typically would be modestly higher in the fourth quarter.

The only point we are really trying to make is the recent additional concern around Europe and its effects potentially outside of Europe, and folks taking down the global macro growth numbers a little bit, we are saying that we're not quite sure what the fourth quarter is going to look like; but we have had very strong third-quarter orders and some of that might be timing pulled forward, particularly on the Technology segment.

Okay, well, I would just comment that I think it was probably at the beginning of the year when you provided the first-half weak, second-half recovery; I think we were all a little bit skeptical of that, but it is clear that that has showed up in your order rates.

The European (multiple speakers) you are talking about, is that primarily related to Adhesives?

I'm sorry, Walt, go ahead, I interrupted you.

No, no. Is the Europe issue that would show up in Adhesives?

That is about what we are seeing right now. It could show up in Coatings too. But I guess what I would say is if you step back, what we said in the beginning of the year is if the overall macro economy was in that 2.75% GDP kind of growth rate, we would have a positive year. The second half would be better than the first half; first half would be kind of flat.

I would say right now if you look at the -- integrate all the macro points of view, most people probably don't think it's going to be 2.75% kind of growth. But it is not a lot less than that; maybe it is 2.5%.

So if that plays out we should still continue to have a strong second half of the year. And obviously, where we have visibility, which is the next quarter, the order rates are really strong. The only cautionary point we're trying to make there in certain places, particularly in the technology space and particularly on the systems side, the orders are very, very strong, stronger than we have seen historically second to third quarter; and that may not continue because of timing of launches of new technology.

That said, some of the other things are improving. You see some global impact now potentially on China and other places from Europe. On the other hand, you have the Chinese government reacting and reacting quickly, so we think that will mitigate that.

So our view is still the second half of the year is going to be stronger, presuming the macro economy grows at those kind of rates. We are just suggesting that there is a pretty solid order rate, probably higher than we have ever seen before. And while we don't have visibility beyond the 12-week period of time, we are just suggesting there's other things in the macro environment that might be prudent not to fully extend that going forward.

Okay, okay, great. Appreciate your comments. I will get back in queue.

Charley Brady, BMO Capital Markets.

If we look at the Advanced Tech Systems orders -- I'm sorry, the sales in the second quarter, and I'm sorry if I missed this; but can you give us what the organic sales were? In the table you put the volume in there, but obviously puts in the acquisitions you owned last year.

Yes, I think Greg will give those numbers in a second. I think we were down about --

Charley, this is Greg. We said the first-year effect of acquisitions added 6%, and organic was down 3%.

Okay, that's great. Advanced Tech specifically?

That is Advanced Technology.

Okay, and looking at the -- so the acquisition you have announced is EDI. I calculate it's about a 10 times EBITDA multiple. Am I in the right neighborhood on that?

We would look at it as something lower than that.

Okay. Can you quantify what the purchase accounting impact might be? Can you quantify what kind of accretion you might look for in the first year on that acquisition?

Well, Charley, this is Greg. I'll make a couple comments. You know, it depends on timing of when this would close, right? But assuming it does close some time in the back half here of our fiscal year, with the way the short-term purchase accounting charges work related to the step-up in inventory value, it is likely it will be modestly dilutive to earnings a couple, few cents per share in this year and then accretive in 2013.

So if we assume it hits in our third quarter, that is likely what -- how it would play out. And we might think it might be mid-teens accretive in the first -- in 2013.

Great. Thanks a lot.

Matt Summerville, KeyBanc.

Morning. I want to hit on the Adhesive business a little bit here. Were you guys surprised by -- albeit it's only 5%, I get that; but this is also your most stable business. Were you surprised that orders in Adhesives fell by 5%?

And I guess can you talk about equipment being down X, and aftermarket sounded like it was actually up? So can you give us a little more detail around the equipment side versus aftermarket? Because this is also where you have the most aftermarket content.

Yes, let me just make a couple of comments and to start I will take you back to last year. If you recall last year, one of the things that we said for the first time is that we saw a very, very strong rebound in our general product assembly area. Hadn't seen that in 2010. We really saw some very strong orders there; and a significant part of the growth last year, sort of the outsized growth was coming from that product assembly piece.

That is the piece that from a systems standpoint has been I would say hurt the most, and hurt the most in Europe and to a lesser extent in the US. So, if you looked on a year-on-year basis it is really a comparison to an unusually strong last year and the impact, quite frankly, of what is going on in Europe.

Secondly, we can have things move from quarter to quarter particularly around larger, nonwoven orders. They tend to be some bigger buys from key customers.

I would say year-on-year what we have seen is there was fewer sort of nonwoven orders this year than last year. An example would be one of the reasons that we see the Americas down a bit is really timing of bigger nonwoven orders year-over-year.

So from our standpoint, I would say the timing you can never predict. We have been signaling for a while that we were seeing some softness in the product assembly piece, and that has continued.

And you are correct, we are seeing our parts orders continue to grow and continue to be above last year, which says operating rates are generally solid. And certainly packaging has been solid; that has really been timing on nonwovens and the impact of product assembly.

So is it a little more than we might have anticipated in the quarter? Yes, maybe a little bit more. But it is directionally what we expected to see because of the year-over-year comparisons.

So are there multiple elements of timing across the three business segments that -- you mentioned maybe some of this mobile stuff being a little more Q3, at least hitting revenue in Q3, than maybe would be, quote, normal. Are you seeing timing in the other businesses also helping out that Q3 performance, Mike?

I would say if you went through -- just comment on the individual businesses and let me start at a company level. What we have said -- I will make a comment on sales then I will make a comment on orders; then I will comment on some of the individual segments.

Typically, first quarter is soft because of the holiday period. Second, third, and fourth from a revenue standpoint are not all that different typically if you look at our seasonal pattern.

If you look at our order rate pattern, typically you see things start to decline in the tail half of -- or towards the end of our third quarter; and they decline all the way to really middle to late January in terms of order entry. Then they pick up.

And they can either pick up and peak in Q2 or pick up and peak in Q3. And that is where the timing plays in across the Company.

I would say the Technology piece is more likely to have more significant timing effects than the other businesses. But in the Coatings business as we talked about earlier, first quarter tends to be particularly soft because of the capital budget approval cycle. Second and third tend to be strong quarters, and then things tend to step down a bit by the middle of the fourth quarter as people are trying to complete things within the year. So we do have sort of strong Q2 and 3 order piece there and a fall-off.

I would say that Adhesives typically is the more steady of all three of the businesses. That 20% to 25% that is in the product assembly piece is less predictable than the other elements. And the nonwovens can move back and forth, depending on the size of an order one quarter or another. And it's not necessarily that 2 is stronger than 3 is stronger than 4. But I would say what we are seeing this year is typical strength in the Coatings business, maybe a little bit stronger in the bigger systems orders for mobile in the second quarter than we might have seen before and softer product assembly.

So we are just trying to point out some of the nuances of the business, and it can shift around. But the general pattern on orders is start to decline at the tail end of the third quarter through January and then pick up. And it is just a question of whether the peak is at the tail end of the second quarter or well into the third quarter.

Got it. Then you had mentioned in Europe that smaller customers are still having issues with access to credit. Can you provide the same kind of commentary with regards to China and what you are seeing there among your customer base?

Yes, I would say -- we made a comment I think on the last call that we were concerned in the fall in talking with our customers, when the government was in the let's-control-inflation mode and raising bank lending standards and so forth. And our smaller customers were getting nervous. Probably 60% of our business in China is small to medium enterprise customers, so read that as not state-owned customers, and the concern was the money was just going to flow to state-owned.

I would say with the changes we saw in the December period and the more recent changes again at least in attitude and desire to go back to stimulate growth again, I would say our customers are feeling more comfortable. If you look at our order rates over the last six to 12 weeks, they certainly have stepped up in Asia, and in China particularly.

So I would say we are feeling more encouraged by the actions that the government is taking compared to where we were probably four to six months ago.

Okay. Then just one final one. Greg, did you guys buy any stock back in fiscal Q2? Can you remind us what is remaining on your authorization and where would you be more active in buying back shares?

Yes, Matt, we did buy back shares in Q2, and we probably have close to $70 million remaining under our authorization. We bought back about $27 million in Q2.

But I think it is likely with the announcement of the EDI acquisition, we will step back and reprioritize capital allocation and may be take a pause for some time here on share repurchases.

Got it. Thanks a lot, guys.

Mark Douglass, Longbow Research.

Good morning, gentlemen. Greg, can you help calibrate the impact of the delays you noted? Were these orders you were expecting in the last call that didn't come in till late in the quarter and now you're going to get the -- realize the sales here? Or were their orders in there and they just delayed shipments?

Then what was the impact versus what you expected to get in second quarter, and then maybe what is actually falling through into 3Q? Is that possible?

Yes. Mark, I think I would -- in general terms say we always have quarters where either the customer delays because their facility isn't ready for our equipment, it is not generally a case where it is an execution issue on our part and we just couldn't get the volume out. But we will have situations in a quarter where our revenue might be impacted because we had a larger-dollar systems sale that just didn't ship in the quarter.

But I wouldn't characterize it in this quarter as being a real significant driver of the quarter's revenues such that next quarter is getting an outsize benefit because of this. That is something that we typically would experience in the quarter; in some quarters it might be a couple million dollars larger than typical. But I don't see it as being a big story in this quarter.

I was just curious. You called it out specifically and I know shipments and orders are delayed. But (technical difficulty) I was just wondering if you could quantify it. It sounds like it was bigger than normal.

I wouldn't say -- it was an impact in our Adhesives business where -- so their volume in the quarter is a little bit lower than what we might have expected, but not a significant --

It was more of a year-on-year comparison. I think the example that I gave around the Americas and where we are at is timing being strong one year in Q2 and maybe stronger the next year in Q3. It's kind of where do they fall year-over-year with some of the larger ones particularly in the geographies where we have maybe a smaller business in general.

So that is more of a timing of the orders perspective. So, you know, if you have a large nonwoven customer that is putting in a diaper line in a particular geography, that is a big-dollar sale for us. So the timing of when that order hits and the shipment hits, especially in a region -- we called out the Americas -- can have a big impact as you look at order trends year-to-year.

Right, okay. Then switching to EDI, what is a typical replacement cycle for these dies? And can you help put in context how much are they a relative percentage of the larger machines?

What typically drives the replacement or the die change is the product changes. So the dies can be refurbished, and that is part of the business. But if you think about end-product changes in the food space particularly, that can be a -- two to four years is typical, where somebody is going to need a different die just because the packaging and the product and the marketing has changed.

The second question was --

And just a comment there. So one of the things that EDI brings with it is a significant installed base of customers who are in the upgrade process or in the change process. So as a result there is a recurring revenue stream there based on the installed base and, as Peter said, some of the changes as well as the wear and tear on parts that gives us a nice recurring revenue there. Then obviously there's new facilities being built as well that require then new dies.

Right.

There was a question on dollar value?

Yes.

What was that again?

Well, what is a typical dollar value, or what is the value in relation to, say, an overall line, extrusion line that they are in?

You know, $50,000 to $250,000 for a die that would go on to an extrusion machine that is maybe $2 million to $3 million, that would go on a converting line that could be $10 million to $25 million.

Okay, thank you. Then finally, you mentioned PCB markets the last quarter were still soft. Have you seen any improvement? And is that what you were in part implying when you mentioned that the test and inspection was picking up?

Yes, we are starting to see -- I would say in probably the last half of the quarter and it is coming through in the orders that we are seeing, we are starting to see orders for both dispense and test and inspection equipment in more traditional applications from more traditional back-end packaging customers that would include the PCB side. So that is an encouraging sign for us because that part of the market was pretty soft for the first couple quarters, and most industry forecasters have the second half of the year being much more solid. So it was encouraging for us to start to see those orders actually come through.

Great. Thank you.

Walt Liptak, Barrington Research.

Hi, thanks. I would like to ask a couple of EDI questions too. The margins that you alluded to in your dialog are really good. I guess I never thought of die molds and the consumable part or the replacement parts or manufactured parts as being that good a margin. So I think I am not understanding something about their technology.

So they had some kind of an enabling technology that was patented. I wonder if you could discuss that a little bit more.

Yes, let me make just a high-level comment then I will turn it over to Peter. But I think the analogy to think about is these folks aren't making products that end up looking like Saran wrap. These folks are coextruding multiple layers of plastic; so think of that as seven to 14 layers of plastic that provide oxygen barriers, UV protection, moisture barriers, that go into high-end packaging applications that might not require any cardboard or boxing and therefore have to be sufficient on their own.

And the magic is not only the resin and so forth that you are using, but it's actually in the coextrusion.

Right. You know, you have to think about back to a $10-million-plus line that is running at very high speed with very exacting quality standards and very high-dollar material utilization on a minute by hour by day basis. So that die is absolutely critical to the output of the whole process. And you are either making good product or you are wasting a lot of money every minute if that die is not correct.

So there is a lot of value in it. Then in particular, as I just mentioned, is the product changes. There is a lot of proprietary knowledge associated with how to get these dies correct. So when it comes time to change a product, if you have a die that is already integrated on that $10-million-plus line it is a real high risk for a customer to go somewhere else and decide to start all that with a die manufacturer that doesn't have all that familiarity.

So, very high value and very high risk to the customer to not getting it right compared to the cost of the die.

Okay.

So, Walt, if you go back and say the analogies to our current business, the scale might be a bit bigger, but it really is being a critical part of the performance at a relatively modest part of the cost, and to be in that part of the value chain that really drives the end performance.

So while the unit costs might be a little higher, the systems they go into are also more expensive. It is similar to what we do in our base Adhesives business and what we do in a lot of our businesses at Nordson is -- that part of the value chain is where you create the impact solution for the customer.

Just one other note that is critical in this business is lead time. EDI has very attractive lead times because people don't keep a couple hundred thousand dollar pieces of spare parts sitting around. So if there is an issue and there is a changeover that line is sitting idle until that replacement part gets there.

So just EDI's lead time capability and ability to react quickly helps drive the value of the die in addition to the absolute performance of it.

Okay. Can you hear me?

Yes, we can.

Okay, sorry. You mentioned -- so along those lines with the parts inventory you have mentioned recurring revenue. What percentage of sales is recurring?

I'm not sure.

Well, recurring revenue in this case, we would consider this die replacement or the die refurbishment, and if you include that as part of this recurring revenue it is north of 50%.

Right, because it's not -- we typically talk about recurring revenue in our packaging business as being spare parts. In this case there is service and parts revenue that is not that high; but if you include replacement dies as being recurring revenue, even though it is a brand-new die, we do know they turn over every couple years, including that in recurring revenue drives you north of 50%.

Okay, got it. Greg, I think you mentioned a CAGR of about 6%?

That is where we think the overall market is, 6% or 7% growth rate. We think this business can grow faster than that for a variety of reasons, and over the last four years they have demonstrated that they have been able to grow at more like 10%.

Okay. Do they go through the same tough comp and decelerating growth that the other Nordson businesses did over the last nine months or so?

I'm not sure we want to comment on the specifics. What I would say is that in general they are continuing to build their position globally including opening some new facilities in Asia that has really, I would say, helped mitigate what we might have seen in the short term.

Okay, okay. Thanks, much, guys.

Matt Summerville, KeyBanc.

Just a couple more questions on EDI. Can you talk about the go-to-market in that business? I assume this would likely be a direct business.

And then what kind of customer overlap, if any, this business currently has with Nordson.

Okay, so the go-to-market is similar to our other hot melt businesses. And if there is an OEM channel -- so these are dies that go on to new extrusion machines that are going to be a part of a new converting line.

There is also replacement business for existing dies. As I mentioned before, there is a product change, so this line exists but they need a new die because there is a product change. So there is an OEM channel, there is an end-user channel.

It is primarily a direct business but because of specific industry relationships, there is a significant agent network that we use for contacts into certain applications.

Then I also just -- Peter, maybe you can just spend a minute talking about the competitive environment in this business. How big do you think the addressable market is for EDI? Who are the top three or four players? And what would EDI's relative market share be?

Yes, let me jump in there. I don't know that we want to comment specifically on relative market share. I would say there are probably a couple other players of similar size in the marketplace and then some smaller players.

The market we see really is something that can grow in that sort of mid to high single digit rate and likely will grow faster in emerging markets, where if you take a place like China there is a lot more go to direct plastic packaging than a combination of plastic and paperboard, in part because of the fact that they don't really necessarily have the same paper industry that some of the more developed countries have in play.

So we see this as a good emerging markets story, a growth opportunity, and one that is sort of mid to high single digits.

Just one other comment. You asked about customers. Typically, the people from whom we will get the order are different, that are running the lines. What is important here, though, to understand is the large multinational consumer goods, food, consumer products companies where we have excellent global relationships at the headquarters and all their facilities, they are the ones who are typically specifying down the supply chain what equipment is used.

So we have very good relationships with the real end-users that are the consumer products companies, and we expect to be able to leverage those relationships in specifying Nordson equipment in the die space, as we currently enjoy the benefit of in our other hot melt applications.

Got it. Thanks, guys.

Allie, we have time for maybe one more question.

Charley Brady, BMO Capital Markets.

Hey, thanks. Just on the EDI acquisition, now that you've got that and you're going to roll that in, where does that put you in terms of where you want to be in flex packaging? That was one of the areas you have spoken of where you want to get bigger in.

Does this give you what you need? Or are there other parts of that business that you can eventually over time roll into other acquisitions?

So, just a couple of comments. We do believe that this provides scale and a leading technology position. But as we look at the broader space, we do look at the value chain and see some other opportunities that would also make sense for us. So we continue to look for opportunities that would augment our organic growth in this space.

Thanks.

All right. Well, thank you, very much for participating in the call this morning. We appreciate your support.

This is Jim Jaye. If you have additional comments, I will be around later today and be glad to take your calls. So again, on behalf of our team, thanks very much and we will talk to you next quarter.

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