Nordson Corp (NDSN) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Nordson Corporation webcast for first quarter fiscal year 2013. At this time all participants are in a listen-only mode. Later, we'll conduct a question and answer session and instructions will follow at that time.

(Operator Instructions)

As a reminder, this conference is being recorded.

I would now turn the call over to your host, Jim Jaye. Please go ahead.

Thanks, Stephanie. This is Jim Jaye, Nordson's Director of Investor Relations. I am 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, Friday, February 22, 2013, on Nordson's first-quarter 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 March 1 by calling 404-537-3406. You will need to reference ID number 95637110.

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'd now like to turn the call over to Mike Hilton for an overview of our 2013 first-quarter results, and a bit about our outlook. Please go ahead, Mike.

Thank you, Jim and good morning, everyone. And thank you were attending Nordson's first-quarter 2013 conference call. Let me start by thanking all the members of our global team for delivering a solid quarter, one that was in line with our expectations and reflective of the normal seasonality of our business. I'm particularly pleased with the strong top line organic growth we delivered in the quarter. This growth was broad based in terms of product lines, applications and geographies, and out paced the levels we've seen reported recently by a number of other industrial companies. Customers continue to respond to the value we provide and we remain focused on meeting their needs better than our competitors. The first year effective acquisitions added to the top line to bring total sales growth in the quarter to 26%, compared to the same period a year ago. We also delivered on the bottom line where diluted earnings per share were $0.65, a 12% increase over the prior year. Both sales and earning per share are first quarter records for Nordson.

Looking forward to our second quarter, our current order rates our positive compared to last year, and we should see significant leverage on operating margins from the sequential volume growth we are expecting. We expect to deliver a solid performance in the quarter, while also funding planned incremental investments that we believe will drive growth and performance over the long term. From a macroeconomic perspective, most economists are forecasting 2013 global GDP growth slightly above 2%. Nordson delivered a record year in 2012 in a very similar environment with organic sales growth of 8%. Should current macro projections hold, we think it's reasonable to deliver another full-year of profitable growth.

In a few moments I'll share additional comments about the current business trends and our outlook. But first, I'll turn the call over to Greg Thaxton, our Chief Financial Officer, who will provide more detailed commentary on our first-quarter financial results, as well as some comments on our guidance for the second quarter of 2013. Greg?

Thank you and good morning to everyone. As Mike described we delivered solid first quarter results with sales in the quarter of $347 million, an increase of 26% over the prior year's first quarter. This growth included an 8% increase in organic volume and an 18% increase related to the first year effective acquisitions. Overall, currency effects were minimal in the quarter, compared to the prior year.

Looking at performance within the segments, Adhesive Dispensing sales volume increased 33% as compared to the prior year's first quarter. The first year effective acquisitions drove the growth, as organic volume growth in legacy consumer nondurable end markets was offset by softness in plastics processing and consumer durable goods end markets. We'll speak more about the performance of recent acquisitions later in the call. Sales volume in the Advanced Technology segment was up 8% over the prior year's first quarter; all organic growth. Most -- all product lines within the segment experienced solid growth, as demand remains strong in mobile electronic devices, medical, and other niche end markets.

Within Industrial Coating segment, sales volume increased 51% compared to the prior year's first quarter. Inclusive of a 38% increase in organic volume and 13% growth from the first your effect of the Sealant Equipment acquisition. The segment delivered strong double-digit percentage growth in every region and product line. Similar to our comments from last quarter, the growth continues to be driven by well-capitalized customers in all geographies investing in production efficiency and plant expansion programs.

Moving down the income statement, gross margin in the quarter was 57%, as compared to the prior year's first quarter, gross margin was impacted most in the quarter by the dilutive effect of acquisitions. A combination of product line mix and geography mix, along with unfavorable currency effects reduced gross margin in our legacy adhesive business from a strong prior year level, which also impacted the total Company gross margin. Operating profit increased 9% in the quarter as compared to the prior year's first quarter and operating margin for the quarter was 18%. Again, reflecting the impact of acquisitions. And given the seasonality of our business, our first quarter's performance from a margin perspective is typically our lowest such that sales volume growth in future quarters should provide considerable leverage on operating margins.

Looking at operating performance on a segment basis, Adhesive Dispensing delivered operating margin of 24% inclusive of the anticipated dilutive effect of fiscal 2012's EDI and XALOY acquisitions. The segment's legacy product lines continued to perform at a high level, but as noted above, operating margin was impacted by some dilution in gross margin as compared to the same period a year ago.

I'll add a few comments relative to the performance of the EDI and XALOY acquisitions. First, there is a seasonal impact much like Nordson's legacy business, where the first fiscal quarter tends to be the softest, therefore you see a volume leverage impact on operating margin. But more specific to market trends, we are seeing softness in demand related to a slower global economy and a near-term mismatch in capacity relative to demand. The combination of these two factors resulted in weaker operating performance in the plastics processing area relative to expectations. We remain optimistic that our growth strategy within this plastics processing product line, including the development of new applications, will drive both near and long-term sales growth, such that operating margin in 2013 will improve well above the current quarter's performance. This improvement would be incremental to the expected volume leverage generated by the legacy product lines within the adhesive segment.

Within the Advanced Technology segment, operating margin for the quarter was 19%. This is an improvement of three percentage points on the level we delivered in the first quarter last year. The Industrial Coating segment generated operating margin of 13% in the quarter, an improvement of 10 percentage points over the same period a year ago. The majority of the increase was driven by strong volume leverage within our base business, where incremental margins for the segment was 33%.

Continuing down the income statement, corporate expenses were approximately $10 million in the quarter, which is the level I would expect for future quarters. Reported net income for the quarter was $42 million, and GAAP diluted earnings per share were $0.65, an increase of 12% over the first quarter a year ago. As in previous quarters, we've 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. The current quarter's earnings per share included a $0.04 benefit related to certain discrete tax items and a $0.01 charge related to restructuring costs. After adjusting for these items, normalized earnings per share in the quarter were $0.62. The current quarter's EBITDA was $73 million, a 12% increase over the prior year's first quarter and first quarter free cash flow before dividends, was $32 million. From a balance sheet perspective we remain very liquid, with net debt to trailing 12 month EBITDA of approximately 1.5 times at the end of the first quarter. And remaining capacity under our existing revolving credit facility of approximately $248 million, along with our strong cash generation, provides adequate liquidity for strategic opportunities.

Before moving on to the outlook for the second quarter of fiscal 2013, I will 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, and with all fiscal year 2012 acquisitions included in both years. Looking at orders for the 12 weeks ending February 17, 2013, they're up 4% as compared to the same 12 weeks in the prior year. Within the Adhesive Dispensing segments, orders over the last 12 weeks decreased 1% from the prior year. Solid order growth in the non-wovens and general product assembly product lines was offset by a modest decline in the packaging product line and softness in plastic processing product lines.

Advanced Technology orders over the latest 12 weeks are up 5% from the prior year. Order growth was strongest in automated dispensing and medical components product lines. Within the Industrial Coating segment, the latest 12 week orders are up 19% over the prior year. Order growth was up significantly in all of the segment's product lines. This segment's order growth increased by double-digit percentages in all geographies except Europe, which was off modestly from the prior year. These strong order rates continue to be driven by investment programs of larger, well-capitalized customers.

Let me now turn to the outlook for the second quarter of fiscal 2013. We're forecasting sales to be in the range of $372 million to $387 million, an increase of 18% to 23% as compared to the second quarter a year ago. This range is inclusive of organic volume growth of 3% to 8%, with the first year effective acquisitions adding growth of 16%. And based on current exchange rates, we expect currency translation effects to reduce sales by 1% as compared to the prior year. At the midpoint of our revenue forecasts, we expect gross margin of approximately 58% in the quarter, and operating margin of approximately 21%. We're estimating second quarter interest expense of about $4 million, and an effective tax rate of approximately 30%, resulting in second-quarter forecasted diluted earnings per share in the range of $0.78 per share to $0.87 per share. At the midpoint of this range, sequential incremental operating margin is approximately 55%, reflecting strong leverage on the sequential sales increase of 10%.

In addition, and as we described a quarter ago, our selling and administrative expenses in the quarter will include planned incremental investments of about $2 million within the Advanced Technology segment, that are expected to generate organic revenue growth in fiscal 2014 and beyond. Similar investments are anticipated in the third and fourth quarters of 2013. On a full-year basis, we are estimating maintenance CapEx to be about 3.5% of 2012 revenue, and the tax rate for the remaining quarters is estimated at 30% based on current tax law.

In summary, we delivered record first quarter performance for revenue and earnings per share, our global team continued to deliver at a very high level in a challenging macroeconomic environment, and we anticipate continued solid performance in the second quarter.

Thank you, Greg. Before taking your questions I'd like to provide some additional comments on our outlook for the second quarter. Our order rates our positive and we are forecasting solid, sequential and year-over-year top line growth relative to the global economic environment. While the nature of our business does not provide us with tremendous visibility beyond the next quarter, I'll make a few general comments about the full year.

As I mentioned in my opening remarks, the overall macroeconomic backdrop this year looks a lot like last year. In that environment we delivered 8% organic sales growth for the full year. Current global GDP forecasts for 2013 are estimated to be a bit above 2%, in line with 2012. We do think it is reasonable for Nordson to generate mid to high single-digit organic sales volume growth in 2013, provided this macroeconomic forecast materializes.

At the midpoint of our second quarter forecast, Nordson's first-half organic growth is within this range. Assuming Nordson's full-year organic growth in fiscal 2013 will be in line with fiscal 2012's organic growth, we could see full-year operating margins in line with our reported fiscal 2012 performance, reflecting strong volume leverage effect on operating margin and earnings. We continue to be optimistic about the long-term growth aspects of many end markets we serve. We are still see strong activity in mobile electronic device end markets. Our presence in medical applications continues to grow. We are the leaders in the consumer nondurable space, such as packaging and non-wovens, which are resistant and have significant growth opportunities in emerging markets, and in consumer durable markets, order rates for our solutions are very solid.

We expect to continue winning in our markets through our combination of outstanding direct sales and service and our commitment to innovative products that provide the best value to our customers. One example we are particularly excited about is Freedom, our next-generation hot melt adhesive system for packaging, which we expect to launch by the end of the quarter. Freedom has been operating successfully in field tests for several months, and customers responded enthusiastically to our preview of the system at last October's Pack Expo, one of the industry's largest packaging trade shows. We expect the benefits of this new system will cause customers to upgrade a portion of our large install base over the next several years. And we will also attract new customers and clearly reinforce our position as the industry leader in packaging solutions.

In terms of an update on the integration of last year's acquisitions, we are making solid progress. As Greg mentioned previously, we're experiencing a short-term supply demand mismatch in certain applications within the plastic processing space. However, we continue to be excited about the growth prospects for EDI and XALOY and the synergy potential. With regard to Sealant Equipment, our other acquisition in 2012, we see good growth opportunity within and outside the US and are moving quickly to capitalize on Nordson's global infrastructure. For each of these acquisitions our continuous improvement initiatives are on track.

In closing I want to thank our global team again for their continued hard work. Their passion for our customers continues to make us the preferred choice in the industries we serve and to generate excellent results for our shareholders.

At this time, let's turn to your questions.

Thank you.

(Operator Instructions)

John Franzreb, Sidoti & Company.

Good morning, guys.

Good morning John.

Just wanted to touch Europe, down 7% in the order book. At first glance it looks like that might be just proportionally based on demand in Industrial Coatings. Is that the case or is that something going on in the segment mix that we should be aware of?

I would say at a high level, we are seeing some softness there in Industrial Coatings, but we're actually encouraged by what we are seeing terms of bid activity. But were also seeing impact in our larger ticket items that follow in the adhesive segment, so our general assembly, product assembly applications there tend to be larger ticket items that go into construction and consumer durable goods and we're seeing softness there. And, as we mentioned in the plastic processing side, again the bigger ticket items, particularly in the dye side we are seeing some softness there. So I think it really falls into a hesitancy around investment on larger items that we're seeing based on the general economic environment you're seeing in Europe.

Mike, you mentioned the supply demand equation imbalance in the plastics and that softness was going on a couple quarters now. When would you expect that to play out?

Yes, what we see is -- we expect improvement really throughout the year, starting in the next quarter. And that's based on some longer lead orders we see coming in, as well as a number of new applications that we spent a fair bit of time -- the last year prior the team did prior to the acquisition and continued in the acquisition after we owned them to qualify new applications. So, we're quoting and starting to receive orders in some other new applications that we expect a pickup as the year goes on. So we expect a solid year from both of these businesses.

Okay. And Greg, I don't recall you ever mentioning geography when you about the gross margin mix. I recall currency, product, but you called out geographies as an impact on gross margins. What's the impact on geography on the product mix or on the gross margins? Could you talk about that a little bit?

Yes, you know generally our gross margins are not too different across the geographies within each of the segments. But there is some slight differences from one to the other and there was an impact in the quarter when you look at the weighting of one particular geography sales versus another, as compared to last year. It's, as I said, generally not a big difference but there was some impact.

Any more color as to which geographies are helping or hurting?

Well, I give for example, Japan. In Japan we generate very strong adhesive margins. Now of course, adhesive margins globally our very strong, but if there is kind of a revenue mix by geography within a particular quarter that's going to have an impact.

Okay. And one last question. Could you just give us a sense of what the order trends, how they progressed throughout the quarter?

I'd say they're pretty steady. So, we haven't seen a big spike. Obviously they softened a bit around the holiday piece and pick up after the holiday piece in the normal pattern. So they were pretty consistent with our normal pattern which is they start to decline in our fourth quarter and decline through kind of the holiday period and pick up in January. So, that is what we have seen but nothing unusual there.

Okay. Thanks very much guys. I'll get back in the queue.

All right.

Christopher Glynn, Oppenheimer.

Thanks, good morning. Just with respect to EDI and XALOY, it looks like they were dilutive to EBIT dollars in the quarter. And, I'm wondering, are you kind of absorbing some fairly heavy pay-as-you-go integration expense here, that kind of fades away the second half?

Yes, there's certainly some of that. An example would be, we moved fairly quickly to rationalize some sites in Europe and we're seen some impact associated with that in the quarter, as an example. But, as Greg mentioned, we also have sort of the impact of kind of volume de-leveraging that we think is going to come back as we move throughout the year. And based on bid activity and what we're seeing in terms of orders in the new applications areas, we feel like that's going to progress throughout the year. But, yes, you are correct, we did have some impacts as part of the integration in the first quarter.

Okay. And, diving into the guidance framework, conditional on the macro. If we take the low end of mid single to high single top line and even have margins down about 1 point, for the year, we're looking at the second half margin up 2 points year over year, versus the first half down about four points. So I just wanted to help understand that transition and that bridge with some more specifics, if possible? Maybe rank the pieces of integration benefits, mix reversion, seasonal leverage? However you want to take it.

Yes. So, if you look at it first quarter is always softest so we see volume step up, second if you look at it historically, second, third and fourth quarter are not dramatically different for volume, but first quarter is. So that's going to weigh down the year and is probably the biggest single factor. I think from a mix perspective, though, we do anticipate for example, our adhesives area picking up throughout the year. And, relative to sort of the strong mix we had in the first quarter from the coating segment, that will be more balanced throughout the year.

Third item is we do have costs to come in the first part of the year from the normal increases around merits and so forth and as we've noted, we have some specific spending in the technology sector that plays out throughout the year, which gets absorbed more easily with the volume leverage that comes back in. So, those are some of the things that we see, but it starts with the volume leverage and then the ability to absorb the costs that we've talked about as these things come back. And then some mix benefits that we anticipate throughout the year to get to a more normal mix of business.

Yes, and Chris, this is Greg. I'd add, tying back to your first point there's also some benefit of some of these integration costs being behind us in the first quarter and as that volume levers as well, we'll get some lift in margins.

Yes, and to follow up. I think to get to the Company target for the year of sort of in line with last year, you probably need to see ADS pop firmly into the low 30%s for the second half. Is there anything off about that thinking?

Well, I think we would anticipate, in general, margins for all the businesses to pick up in the second half assuming the volume comes through. So, I think you're going to see general rising tide much like we saw happen last year.

Okay, thanks.

Okay.

Matt Summerville, KeyBanc.

Thanks. Good morning, guys. This is actually Joe Ratigan on for Matt. Just a couple questions. First, on the guidance, sequentially you're guiding to 7% to 12% revenue growth, last year you did 14%. You've mentioned a couple times this is a very similar environment to last year. FX is a little bit more favorable, not much, but orders our still relatively positive, what's driving the conservatism there? Is it just what you're seeing in the plastics processing business that's kind of gives you some pause in guiding that sequential growth?

I'd say first, we actually start a little bit better in the first quarter from a volume growth perspective than we did last year. So, we're not anticipating quite the steep a step up in the second quarter, that's kind of number one. I mean, number two, quite frankly, we're still dealing with a pretty soft Europe and the whole discussions sequestration, I think could have an impact and have people hold back on the coming quarter a little bit. So, I think those are probably the two main things. That -- we're seeing decent order intake but we still hear sort of a cautious environment in a very short term from customers around, and well may hold off a little bit. So were seeing some of that factors in. I think a little bit better start than last year, at the beginning of the year and a little bit of caution around things like the sequestered here and hopefully that gets cleared up in some way in the next month or two.

Okay. And then, on the capacity issue you talked about at EDI and XALOY, can you give a little more color on where utilization rates are now? And then, is there capacity you can take out in that footprint that you've acquired? Or, how are you thinking about that? Do you think the volumes rebound and there's no need to adjust that or, what --

Let me talk first about high level, our view on the plastics market is strong growth in the long run. And even solid growth right now from a demand standpoint. So I'd say 6% to 7% underlying market growth. So, we don't really see that change and what we saw is fairly heavy investment in '10 and '11 in a couple of sub-segment markets that are particularly important markets for us. And that's not something we didn't anticipate, it's maybe a little bit more of an imbalance in the short term than we thought, but we're thinking within a couple of quarters you're starting to see that get back to more normal investment patterns. So it's really investment versus underlying demand and the timing of that. So we are not overly concerned with it, number one.

Number two, we did spend a lot of time last year, as I said, the folks did, particularly at EDI prior to acquisition, and then we continued post-acquisitions to qualify new opportunities for us and we're starting to get orders for those new opportunities now. Particularly in the premium coating market, which aligns pretty well with our own adhesives coating business, so we see upside there. So, long run we felt good about it. We think this is a couple quarter kind of thing and we have other applications that we are getting traction with that we think will be helpful.

Great. Thanks, Mike.

Jason Ursaner, CJS securities.

Good morning. Just -- first couple questions on the adhesive segment. In the plastics piece, can you just remind us what percent of sales both businesses is replacement versus new equipment sales?

Yes. Roughly about 50%, I think or slightly less than that is generally replacement. The timing of that -- there's two elements that drive that. One is wear, normal wear, and the other is sort of more catastrophic type of thing. But the main driver is the normal wear. So, it's in the mid- 40% to 50% is typically what we would see.

And is that piece seeing any of the softness? Or is it just purely on the new equipment sales to machine OEMs?

It's more on the new systems, side of things.

Just roughly, if the whole thing is seeing some softness and it's 50/50 in general terms, compared to the prior cyclicality in the industry -- does that still have farther to go? Or, I guess how much lower could that be?

I think we're sort of starting on the uptick again here in terms of absorption. Again, we don't see this as a long term issue. We see this as mainly a kind of a first quarter kind of issue then things picking up and we expect to see good progress in the next couple of quarters. Quite frankly, we -- assuming the macroeconomic environment plays out in that sort of couple percent GDP we expect to be nicely positive for the year. So, we're not overly concerned about what we're seeing in the first quarter. We're probably a quarter behind where we thought we were going to be.

Okay. And the seasonal impact in those businesses. Was that just implying part of the softness in Q1, that there was a specific benefit last year in first year effect or just to expect (multiple speakers)?

What we're trying to say is it's seasonal like our businesses because we're talking about the holiday period.

The capital investment cycle for that space is similar to the rest of Nordson, where both from our customers capital cycle as well as the holiday period, their volumes tend to be softer in the first quarter than the remaining quarters of our fiscal year.

Okay. Is it more second half weighted though than the other piece -- just because it looks like the guidance for Q2 is pretty flat?

It will be more second half weighted and that's based on what we see in terms of bid activity and order transit. And quite frankly, assuming an improvement from where we are today in the sort of the US side of GDP and global GDP, in general.

Okay. And then just quickly in the advance tech piece, order rates are still showing pretty solid growth. Do you think there was any impact from the timing of the Chinese lunar new year on year over year order rates? And then also could you talk about whether you saw any bounce in that traditional PC server market?

Yes. I would say there's a little bit of benefit just on a year over year where the new year hits, but not much. I would say, encouragingly, we've started to see, particularly in our (inaudible) coating applications, some new orders come in that will be in the more traditional space. If you look at the industry forecast, there's still more second half weighted for that to tick up after really probably a year, year and a half of being fairly soft. But we have in our recent order rates seen some nice orders come into support that kind of activity. So that's an encouraging sign.

I'd say another encouraging sign we saw in our coatings business is really sort of in some uptick in the office furniture side that we wouldn't have necessarily expected. And some leisure products. Those are things that have been soft for quite awhile and we've seen a little bit of an indication of an uptick there. And I think there's a lot to go there yet, but it's encouraging.

Okay. Appreciate the commentary, thanks.

Mark Douglass, Longbow Research.

Hi, good morning, gentlemen.

Morning.

Mike, looking at, again going to your comments on fiscal '13. You mentioned short cycled nature of your business, some of the order rates in your new product rollouts giving you some confidence. However, when you look at tech, there's some very challenging comps. So it seems like tech is still implied to have very solid growth throughout the rest of the year though it has very tough comps. Do you have a longer view into the tech pipeline, with mobile device manufacturers? Maybe getting you involved early in the design -- manufacturing development so just you just better even though that order isn't in hand? Like get some wins later in the year? Can you talk about how you overcome such tough comps?

Yes. So, first of all, we like the mobile area. We like the mobile area because there's always new devices and features coming out and it's at least an annual cycle and sometimes more frequently than that. And yes, with some device suppliers we are working on several next-generation opportunities as we speak. And we've been working on those. And, we're looking to expand and broaden applications in that particular space as they put new devices in there, some newer opportunities so we see some broadening there. Obviously the smart phone growth rate is continuing to be strong but moderating a little bit as the penetration occurs.

And then, I would say in the electronics side, we're hopeful that we will see it start back up in the second half of the year, so some of the things that we talked about earlier in terms of the more traditional applications. And then finally, we have very nice growth in our medical business, which our medical and general assembly in that space is about 25%, so we're see nice growth there in the medical piece of that, in particular.

Was the growth in medical on a year over year basis? Was it not very strong last year?

No, it was solid last year too. I'm just saying, you ask about going forward, we're seeing good growth now and expect to continue to see good growth in that space going forward. So a quarter of that business is not electronics, so, we see that is a continuation. And then we see the mobile as being strong and then certain niche applications like [NIMS] or solid as well. So that kind of continuing from last year, we see as important and given the potential -- I think the potential upside is more of the desktop, server markets picking up in the latter half of the year.

Okay. Thank you. That's helpful.

Mark, I'd just make the point, this is the point last year where we started seeing that ramp up, if you will, in the Advanced Technology order book.

Right.

But yet at to this point -- our latest 12 weeks, we're still up 5% over a pretty robust set of numbers last year.

Right.

So, the trends our still moving in our favor.

And then Greg, just the $2 million per quarter investments in ATS, what was it in the first quarter?

It was about $1 million in the first quarter.

Okay, so it steps up a little bit to 2Q?

Yes. Steps up in Q2 and we expect the same $2 million in the out quarters of the year.

Thank you.

Charley Brady, BMO Capital Markets.

Good morning, guys. This is Andrew on for Charlie.

Andrew, good morning.

Kind of just on the last question -- is there kind of an expectation still for the high teens to 20% growth in the mobile tech market?

Are you making a statement, Andrew, or is that a question?

It was a question. I think you mentioned it on the call last time.

Yes. So, if you look at smart phones last year were probably more like 30%, 40%. We're expecting them to be more like the high teens to 20% this year. Just because you've had a huge wave of penetration over the last couple of years. We still see that is being very robust. And again, we don't see any change in the sort of cycle of development that people our getting any slower at introducing new products. And, as I said earlier, we do also see there is potential to expand some of the applications that we provide today into a couple of new areas. So, that sort of combination makes us hopeful that we will see continued growth in that element of the electronics part of the business. And we're seeing that right now.

And Andrew, I'd add the point that it's also the features embedded into those smart phones that are a driver as well, to our top line. It may not just be the volume of smart phones, but if these manufacturers are adding features or capabilities within these devices, that's a good thing for us.

Yes, so add another microphone, add another camera, put another accelerometer in there, Bluetooth features, and then more sophisticated chips, all support growth.

Okay. And the other question is, are you still kind seeing that shift -- I think it was in industrial coatings, kind of away from parts?

We've seen -- it's not a shift away from parts, it's really a strong systems set of sales relative to what we've historically seen at this time of year. And our view is there's a lot of pent up demand for the last couple of years is starting to come through. At least with the big guys.

So, in a softer cycle, when customers are pulling back from the investment in new systems we're still selling those spare parts as they're running their production lines. In periods where you get that ramp up in investment, as we're seeing now, it's not that there's less parts is just the weighting is slanted more toward new systems.

Okay, I got you. All right. Thanks, guys.

Okay.

Liam Burke, Janney Capital Markets.

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

Good morning.

Mike, on the adhesives business, was product mix in the traditional adhesives affect the gross margins at all this quarter?

Yes. When you look at the product lines, we do have some variation across the product lines and that did affect things negatively, in terms of the more traditional approach. So, yes, that was a factor. Quite frankly coming off of very, very favorable mix and a very high margin in the first quarter last year.

Okay, great. And, on the coatings business, the step up in operating margins is fairly healthy. You called out the volumes contributing significantly and those were on systems. In terms of directionally, how much more can you eke out of that business, in terms of margin improvement?

We've got a very focused plan, and had a very focused plan over the last several years, in terms of improving the profitability there. And we think there is continuing to be more opportunity to go in that business. Obviously some of it you realize when the volume comes to fruition. But for example, we had a very focused effort around our whole powder coatings business, and we're sort of shipping the newest designs as we speak and we're starting to see the benefit come through from the newest approaches and designs.

So, yes, we see more upside potential as the volume continues to grow there, with the productivity improvements that we have in place there. I think it's a good story. Obviously, as with most of our businesses, volume is important, and that no exception. But it's a good story in terms of what the team has been able to do to improve the overall profitability. And recognizing that's an engineered systems business where we're the OEM. So, there's a lot of stuff in there that's not our stuff and we're doing a good job.

Great. Thank you, Mike.

Okay.

(Operator Instructions)

Greg Halter, Great Lakes Review.

Yes, good morning.

Good morning.

Good morning.

I'm wondering if you could provide some input on the impact that pricing had on your business in the quarter?

I'd say pricing was generally fairly, fairly flat. Maybe slightly up in certain areas but fairly, fairly flat. In a typical year, we might see prices move 1% or 2% over the year. Typically that is as the year plays out. But not huge movement. Our focus is really continuing to be on bringing new technology in, price it appropriately, and then get the benefits from a margin standpoint on that new technology.

All right. And I know you provided free cash flow number but, what was cash flow from operations for the quarter?

Give Greg a second, he's looking that up.

Okay. And while you're looking that up, I presume there were no shares repurchased in the quarter?

No, not under our share repurchase program. No.

Okay.

So cash from operations in the quarter was about $40 million.

$40 million, okay. And one last one. It looked like there was about a $2.3 million swing between other expense and other income on a year over year basis? What was the main factors there? Or what were the main factors there?

The biggest item in there would be currency loss on balance sheet positions. And more specifically, associated with the sharp movement in the yen.

Okay, thank you.

I'm currently showing no further questions at this time. I will now turn the call back over to management for closing remarks.

Thank you very much for participating in our conference today. And, I'd like again to thank our team for delivering a strong quarter and we're optimistic about where we can go from here. Thank you.

Thank you. Ladies and gentlemen that does conclude today's conference. You may all disconnect and have a wonderful day.