Nordson Corp (NDSN) 2013 Q3 法說會逐字稿

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

(Operator Instructions)

As a reminder, today's conference is being recorded. I would now like to introduce your host for today's conference call, Mr. Jim Jaye. You may begin, sir.

Thank you, Kevin, and good morning. This is Jim Jaye, Nordson's Director of Investor Relations. I'm 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, Friday, August 23, 2013 on Nordson's third quarter results. Our conference call is being broadcast live on our web page at www.Nordson.com/investors, and will be available there for 14 days. There will be a telephone replay of our conference call available until August 30, 2013 by calling 404-537-3406. You will need to reference ID number 26582072.

During this conference call, forward-looking statements may be made regarding our future performance based on Nordson's current expectations. These statements may involve a number of risks, uncertainties and other factors, as discussed in the Company's filings with the Securities and Exchange Commission that could cause actual results to differ.

After our remarks we will have a question-and-answer session. I would now like to turn the call over to Mike Hilton for an overview of our 2013 third-quarter results and a bit about our fourth-quarter outlook. Please go ahead, Mike.

Thank you, Jim, and good morning, everyone. Thank you for attending Nordson's third-quarter 2013 conference call. Let me begin by thanking our global team for delivering a solid quarter in a tough macroeconomic environment and a comparison to a particularly strong period of demand a year ago. We continued to meet our customers' needs at a high level during the quarter, while also making investments and executing on continuous improvement initiatives that will drive our future success.

Sales in the quarter grew by 6% and were primarily driven by the first-year effects of acquisitions. Earnings in the quarter were $1.01 per share. On a sequential basis, third-quarter sales, operating profit, operating margin, net income and earnings per share all increased over the levels reported in the second quarter. During the quarter we continued our investments in new products and applications and emerging market expansion. And we enhanced customer-facing capabilities. We are balancing these investments, as always, with a prudent approach to discretionary spending. During the quarter we also announced an agreement to acquire two businesses of Munster, Germany-based Kreyenborg Group that will add to our position as a premier supplier of engineered melt-stream components to the polymer processing customers worldwide. We'll provide more details on this acquisition later in the call.

In addition, our Board reiterated its continued confidence in the long-term strength of our Company and ongoing commitment to providing value directly to shareholders by recently announcing a 20% increase to our dividend and the authorization of a new $200 million share repurchase program. Looking forward to our fourth quarter, global macroeconomic growth remains modest, and has not increased at the pace anticipated by many forecasters earlier this year. Our current backlog and guidance reflects this challenging environment.

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

Thank you, and good morning. As Mike described, we delivered solid third-quarter results, with sales in the quarter of $403 million, an increase of 6% over the prior-year third quarter. This growth included a 7% increase related to the first year effective acquisitions, and a negative 1% impact related to unfavorable effects of currency translation compared to the period a year ago. On a sequential basis, performance in the quarter represents a 5% increase over second-quarter sales.

Looking at sales performance for the quarter by segment, Adhesive Dispensing sales volume increased 13% as compared to the prior-year third quarter, with nearly all of the increase coming from the first-year effective acquisitions. Organic volume growth in legacy packaging and general product assembly product lines was offset by some softness in our non-wovens and polymer processing product lines during the quarter. On a regional basis, Asia Pacific, Japan and Europe all delivered organic volume growth. Sales volume in the Advanced Technology segment decreased 2% in the quarter from the prior year's third quarter, a period in which we delivered organic growth of 33%. Growth in automated and semi-automated dispensing product lines and fluid management components was offset by softness in test and inspection product lines during the quarter. Softness in Asia Pacific offset organic volume growth in the US, Europe and Japan. Within the Industrial Coatings segment sales volume in the current quarter increased 10% compared to the prior-year third quarter, driven mainly by the first-year effective acquisitions. Organic volume expanded in powder and liquid coating product lines and in Asia Pacific, Europe, and the Americas. But was offset by softness in other product lines and regions, mainly large dollar cold material systems serving automotive OEMs.

Gross margin in the quarter was 56%, down 1 percentage point from the second quarter due to a higher mix of systems revenue. Operating profit for the third quarter was $93 million, up 13% from the second quarter. Operating margin was 23%, an improvement of 160 basis points over what we delivered in the second quarter of this year, with 53% incremental operating margin on the increased sales volume.

Looking at operating performance on a segment basis, Adhesive Dispensing delivered operating margin of 26% in the current quarter, equal to the performance in the second quarter of FY13 on slightly lower revenue. And up 2 percentage points from the first-quarter performance, with volume leverage driving this increase. The prior year's third-quarter performance did not include a full quarter of acquisitions so sales mix has an impact on operating margin year to year. Within the Advanced Technology segment, operating margin for the third quarter was 28%, a 3 percentage point improvement over the level generated in the second quarter, as strong sequential sales growth generated incremental margins of 46%. Excluding the $2 million of incremental spend within this segment associated with the two strategic initiatives we've called out in previous quarters, operating margin in the quarter was 30%. As compared to the prior year's third-quarter operating margin of 33%, customer mix and product mix, where we have successfully penetrated new applications requiring less sophisticated solutions and therefore lower average selling prices, are impacting margin. The Industrial Coatings segment generated operating margin of 13% in the quarter, relatively strong performance given the high mix of engineered systems in the quarter.

Continuing down the income statement, reported net income for the quarter was $65 million. And GAAP diluted earnings per share were $1.01, a 20% increase over the second quarter. 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 items. The current quarter's earnings per share include a $0.02 gain related to an asset sale, a $0.01 benefit related to certain tax items, and a $0.01 charge for transaction-related fees associated with the Kreyenborg acquisition. Excluding these items, normalized earnings per share in the quarter was $0.99. The current quarter's EBITDA was $109 million, a 2% increase over the third quarter, and a 15% increase over the second quarter of fiscal 2013. We have included a table within our press release reconciling net income to free cash flow before dividends. Cash flow from operations in the quarter was $92 million. And third-quarter free cash flow before dividends was $85 million. Which represents a cash conversion ratio of 130%.

As Mike mentioned, during the quarter we announced an agreement to acquire the polymer processing businesses of Kreyenborg Group which is expected to close during our fourth fiscal quarter. These businesses are highly complementary to our other recent acquisitions in the polymer processing space. And fit our strategy of providing our customers with high value, mission-critical melt-stream components that will enhance the performance of the systems they supply to end users. These businesses also immediately strengthen our relationships with key OEM customers, deepen and expand our product offering, enhance our overall application expertise, expand our addressable market, and add recurring revenue opportunities to the portfolio. We expect to build on the current strong performance of these companies by leveraging Nordson's scale, global footprint, and continuous improvement competencies.

As we've described in our July press release, the businesses had sales of approximately EUR62 million in Calendar 2012, and employ about 270 people. For competitive and commercial reasons, we are sensitive to discussing specific financial performance of the businesses. In general, we would describe these properties as high-performing businesses with EBITDA margins similar to the levels we have previously described for other recent acquisitions in this space. The businesses are headquartered in two facilities in Germany, close to key OEM customers, with three additional smaller support operations in the US, China, and Malaysia. Most of the leadership team is expected to remain in place. And more than 50% of the sales are to the Europe and Middle East region, with about one-third in Asia, and the remainder in North America. About 35% of sales are to plastic extrusion end markets where we have a strong presence, with the remaining portion serving plastic compounding and recycling end markets, which are new spaces for Nordson. Approximately 25% of sales are replacement or recurring revenue.

CapEx is similar to Nordson's as between 2% to 3% of sales. We expect the acquisition will be neutral to fiscal year 2013 results, including estimates for non-recurring charges for short-term purchase accounting related to the step-up in value of acquired inventory. Over the first full year of ownership, Nordson expects the acquisition to be accretive by about $0.07 to $0.09 per share, again including estimates for short-term purchase accounting charges. We are excited to add these excellent properties to our portfolio.

Our strong cash flow also enabled us to continue returning value directly to shareholders through dividends and share repurchases. As Mike noted, on August 16, our Board of Directors approved a 20% increase to our cash dividend, making this the 50th consecutive year Nordson has increased its annual dividend. Since the start of fiscal year 2011, we have increased our dividend 71%. The Board also authorized a new $200 million share repurchase program. This new program replaces the Board's March 2012 100 million share repurchase program under which approximately $41 million in Nordson shares have been purchased. Since the start of fiscal 2011, we've purchased approximately $246 million, or 8% of Nordson's outstanding shares, at a discount of approximately 35% compared to our third-quarter closing price. Even with our investments in acquisitions and share repurchases, we remain very liquid, with net debt at 1.22 times trailing 12-months EBITDA as of the end of the third quarter. And we have $292 million available from cash and our revolving credit facility.

Before moving on to the outlook for the fourth quarter of fiscal 2013, 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, and with all fiscal year 2012 acquisitions included in both years. Looking at orders for the 12 weeks ending August 18, 2013, they are flat as compared to the same 12 weeks in the prior year. As the second half of fiscal 2012 was particularly strong for Nordson, most notably in the Advanced Technology and Industrial Coatings segments, we are up against very challenging comparison. Within the Adhesive Dispensing segment, orders over the last 12 weeks increased 6% compared to the same period in the prior year. Order rates increased in the majority of the segment's product lines including polymer processing. Order growth was strongest in the Americas, Europe and the US.

Advanced Technology is the segment with the most challenging comparisons to the prior year. And here orders over the latest 12 weeks are down 7% compared to the same period in the prior year. Positive order growth in consumable single-use plastic dispensing and fluid management product lines, serving a variety of industrial and medical end markets, was offset by slower activity in automated dispensing and tests and inspection product lines. Strong order rates in the US were offset by softness in other geographies.

Within the Industrial Coatings segment, the latest 12-week orders are flat as compared to the prior-year period. Order growth over the prior year in the powder coating, container coating and cold material product lines was offset by softness in other product lines. Order growth was positive in the US and the Americas. Backlog at the end of the third quarter was down 21% compared to the end of the third quarter a year ago. This change reflects the current macroeconomic environment, which has caused some customers to delay placing orders for larger-dollar, platform-driven systems that helped drive backlog in the third quarter a year ago.

Let me now turn to the outlook for the fourth quarter of fiscal 2013. Note that this outlook does not include any impact from the Kreyenborg acquisition. As we have now lapped the anniversary date of acquisitions, we no longer report fiscal '12 acquisitions as acquisitive growth. We're forecasting sales to be in the range of $391 million to $408 million, a decrease of 7% to 11% as compared to the fourth quarter a year ago. This range is inclusive of organic volume growth down 6% to 10%, and a negative 1% currency translation effect based on the current exchange rate environment. On a sequential basis, the mid point of this guidance reflects a slight decline from the third quarter. At the mid point of our revenue forecast, we expect operating margin of approximately 22%. We're estimating fourth-quarter interest expense of about $3.3 million, and an effective tax rate of approximately 30%, resulting in fourth-quarter forecasted diluted earnings in the range of $0.87 per share to $0.98 per share. With regards to capital spending, we are estimating about $45 million for the full year, in line with our beginning of the year guidance, and higher than normal due to specific investment programs in the year.

In summary, we have delivered solid third quarter performance, continued to invest in strategic initiatives, executed on our acquisition strategy, increased our dividend, and expanded our share repurchase program. Our fourth-quarter outlook reflects the macroeconomic environment that has gained little to no momentum, and is in comparison to a particularly strong fourth-quarter performance a year ago.

Thank you, Greg. Before taking your questions I'd like to provide some additional comments on our year-to-date performance and fourth-quarter outlook. Let me begin by thanking our global team for serving our customers and capturing demand to drive an extended period of very strong growth. Nordson generated organic growth of 8% in the fiscal year 2012. And continued that pace through the first half of fiscal 2013, far exceeding performance of most other industrial companies and global GDP. Through the first nine months of our fiscal year we've delivered organic growth of more than 4%, which has also outpaced global GDP. On a sequential basis, sales, operating income, operating margin, net income and diluted earnings per share have improved in each quarter of fiscal year 2013.

Despite the solid performance we're not immune to what is going on in the global economy. Global macroeconomic growth remains modest at this time, and has not increased at the pace anticipated by many forecasters earlier in the year. Uncertainty in the macro environment is not new. What is new at this time is the more pronounced softening of demand we are now seeing in some emerging markets. Part of this softness is being driven by economies transitioning from export- and infrastructure-driven growth to consumption-driven growth. Over the long term, we expect emerging markets will continue to provide excellent growth opportunities for Nordson in all three segments.

Our current 12-week order rates reflect these near-term conditions, and are flat to the prior year's strong performance. The current economic uncertainty has caused some customers to delay the purchase of new systems, especially those requiring larger dollar investments, which has negatively impacted our backlog compared to the end of the third quarter a year ago. As a result, our fourth-quarter outlook is disappointing. Near term we're responding through more aggressive management of discretionary spending and the delay of non-strategic initiatives to help offset the current softness in our top line.

At the same time, we remind investors that the current outlook is for a single quarter. We are reacting accordingly while maintaining our strategic focus. The fundamentals of our business are intact and we continue to pursue the strategic objectives that will drive shareholder value. These include market leadership positions; enduring, long-term customer relationships; innovative and different technology; direct sales and service; global reach; strong margins and cash flow; and a high level of recurring revenue from parts and consumables; and a talented workforce and a culture of continuous improvement. We will continue to apply our strengths to meet the needs of our customers better than our competitors to deliver superior returns over the long term.

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

(Operator Instructions)

Liam Burke with Janney Capital Markets.

Good morning. Mike, you talked about the test on the ATS side being a little weaker year over year. If we could flip over to the end markets, could you just give us some sense as to how the mobile and medical markets are looking for you on the ATS side?

Sure. I'll start with the medical piece. The medical markets have continued to be strong for us across both the dispense platform and the components platform. Good progress year to date. And we're driving growth going forward with a broadening product line and new applications. So that has been pretty solid.

I'd say on the mobile side of things, the mobile part of the business has also been pretty strong. We're up against some really tough comparisons relative to last year. So as we got further through the quarter, our order rates didn't quite keep pace with last year. But I'd say a very strong year in the mobile business. Some different applications driving growth there than what we might have seen last year. And we're still looking for some additional growth to come from changes in features and form factor. I'd say what hasn't come back at all really, and this has affected the test and inspection piece, is the more traditional desktop server kind of applications. That, if you went back into the beginning of the year, most of the industry forecasters expected the second half of the year to pick up. We've really not seen that pick up at all and that's really been the main thing that's affected test and inspection.

Okay. And you touched on emerging markets as a shift from an infrastructure export to more internal consumer consumption. That should fit in well for adhesive systems where a lot of the systems that you sell into are for consumer applications. Are you seeing a lag there as that transition occurs? Are you seeing any pick up or anything over the next few months or quarters?

Yes, I would say we're not seeing the pick up as strongly as we would have anticipated. Now, part of that is a function of certain end markets, like food and beverage consumption, which has really been globally pretty flat this year. But I'd say we're not seeing quite the pick up that we would have anticipated, particularly in China where there's a strong focus there. So, I think what we're looking to see is when that demand comes back, that we'll see the growth there. And I think in the transition, I think you've seen some things recently, for example, where the Chinese consumer is saving more money than spending more money. We're feeling that a little bit.

Great. Thank you.

Kevin Maczka with BB&T Capital Markets.

Good morning. First question from me on margins. It looks like based on your guidance for the year now, EBIT margins are going to come in 300 basis points or more lower than they were last year. And I'm just wondering, I don't think that was the expectation entering the year. And I know we had some margin dilutive M&A and some mix and some increased tech spending. I'm just wondering, can you give a little color on those major buckets that impacted that, particularly the M&A side? And where I'm going with this is trying to get a sense for next year in terms of what will be better or not recurring, such as the M&A or the tech spend.

I'll make a couple comments and then I'll let Greg take you through the specifics there, Kevin. I think, like most other people, in the beginning of the year, we were hopeful that the second half of the year was going to see global GDP growth in that 3%-plus, 3.5% range. We're not seeing that. We haven't seen the US step up. In our mind the US is struggling between 1.5% and maybe 2%. And China, in particular, is softening and nowhere near in this past quarter the 7.5%, 8% numbers they are targeting. So that in itself has impacted what we've seen in our volume growth, and you see it in our guidance going forward. So we're not getting, in one respect, the volume leverage that we would have anticipated if the second half of the year had come back the way most people had expected. Now, most people are still optimistic that maybe we were delayed a quarter or two but it's coming back. But we haven't seen that yet. So that's an over-arching backdrop, and I'll let Greg talk about the specifics here.

Yes, I think that's certainly one important aspect of the story. And the detail of that is we need to see the top-line growth to help offset what you're going to see on the spend side, with an increasing compensation and other costs from year to year. So, if you don't get that revenue growth you might see some margin compression. The other two aspects, Kevin, for example, if you looked at our nine-month year-to-date, or even within the third quarter, the 3 percentage point change from the prior year, it's really an element of that volume story. But it's also two other aspects, which is the dilutive effect of acquisitions from year to year, and then the step-up in these two Advanced Tech initiatives. So if you factor those out through the nine months, as well as in the quarter, you'd be about neutral to the prior year's margin performance.

Was mix a factor at all, Greg?

Mix is an aspect of that, as well. As I called out, both within Industrial Coating and Advanced Technology, mix was an aspect of overall operating margin. And it would impact gross margin, as well.

Okay. In terms of the Q4 revenue guidance, can you just maybe touch on that again? Your orders in the quarter were flat, same thing flattish year to date. Usually orders become sales fairly quickly here. I'm just wondering why the down 6% to 10% volume in Q4 doesn't seem to jive with flat orders. Can you just comment on that?

Yes, Kevin. It really comes back to the starting backlog. So, the starting backlog, most, maybe not all those orders that are in the starting backlog get converted to revenue. And that's really where we're down 20% relative to a very strong last year. And if you look at it part way through the quarter, where orders last year were continuing to rise basically driven by Technology and Industrial Coatings, they really flattened for four, five, six weeks during the quarter here. And that's really translated into a lower backlog. So it's really the lower backlog that's really driving the estimates on the revenue for the fourth quarter. I think it's encouraging that the order rates are now at where they were last year, which is, as you recall, very strong order rates, up 15%-ish points from the previous year. But it's really been that period of time where the backlog didn't build at the rate equivalent to last year that is impacting our guidance for the fourth quarter.

Okay, I'll hop back in the queue. Thank you.

Charley Brady with BMO Capital Markets.

You guys break down the sales by geographic region and the orders by segment. But I'm wondering, in the volume segment of that, since acquisitions are baked into that, can we extract the impact of acquisitions on the sales by geography to get what your base business sales growth was across the geographies?

And are you talking about the third-quarter or on a year-to-date basis?

Yes, third quarter.

Yes, third quarter. I'd say if we look at just organic volume in the third quarter excluding acquisitions, we did see growth in Europe and Japan in the low single digits. And low single-digit declines in the US, Americas, and Asia Pacific.

And I'd say going forward, Charley, on the orders going forward, the acquisitions are helpful to the rates that we're showing there. The biggest impact has really been around technology and to a lesser extent coatings compared to strong comps last year.

All right. And I don't know if I missed it when you gave mix but can you give us the mix for the business and across the three segments, and most importantly Adhesive Dispensing, between parts and big systems?

Yes, hang on a second. We'll pull that up. I think, generally speaking, the mix is more product line and customer than parts and systems within the quarter. But I'll let Greg pull those specific numbers now. But we do have -- one of the comments that Greg made on the Technology side in this quarter were some new applications for our systems business that are good applications but less sophisticated than, say, our most high-end, leading-edge technology, and so they carry a little different price point, a little different margin point. So we've had some mix effects there like that.

Yes, Charley, if I give you the parts and recurring revenue, and just for your -- you've got a benchmark out there of the legacy product lines for Nordson. For the legacy product lines in the third quarter, spare parts and recurring revenue was about 43%. And that's down 2 percentage points from what it was in Q2. It was about 45%. And if I look in the quarter where the total Company, on the legacy it was about 43%. Adhesives was several percentage points above that, as was Industrial Coating, and then Advanced Technology was a few percentage points below that Company average.

Thanks, that's helpful. Your comment in the release, Mike, about aggressive management on discretionary spending, can you just give us a little more granularity on what you're doing there and what you mean by that?

Sure. If you look at coming into the year, this is a year that we're looking to step up and make some investments, particularly in technology and emerging markets. And emerging markets is mainly the commercial side. Embedded in that was also some step-up to support growth. So, what I would say is, the traditional things that we're managing would be things like travel and living expenses, outside support, and consulting fees. Those kinds of things. But when we haven't seen the volume come through based on the softer macro environment, we've been holding off some of the expansion efforts that are the typical growth expansion piece. And now we're looking a little bit more closely in just this very short term at some other expenses and resources, quite frankly, that we might add. And we may hold off a little bit on adding those resources for another quarter or so. So, looking at that, what I'd say is the strategic things like technology investment, or specific transitions like we're doing in the Technology business to get more capability local on the ground, it's not impacting. But things that would be normal growth support, we're watching pretty closely in terms of what the resource balance looks like.

Great, thanks.

Christopher Glynn with Oppenheimer.

You mentioned the plastics orders are positive. I'm wondering if you could comment on the magnitude, get a sense of your ability to gauge sustainability there. And really same question for the ADS segment overall. You're seeing more breadth. Are you seeing a tide sort of thing or is that tough to call?

Yes, I would say on the traditional adhesives pieces, we're seeing improvement, for example now, in packaging, which is encouraging. And I'd say some modest improvement in product assembly. But, say, in the non-wovens area, which is a little bit more capital intense and bigger projects, we've seen customers push some orders off there. Some had very dramatic plans to convert and increase capacity, and they've slowed those down a little bit in the short term. And we think that's a short-term phenomenon, not a long-term phenomenon. So I'd say it's a mixed bag. Packaging started the year a little soft, has picked up. Product assembly has been flattish. (inaudible), it's probably a bit off, so it's been a mix.

I'd say on the plastic processing side, we talked about the biaxial film and the issues there in terms of supply and demand. And our focus was around other applications. So we've got some new products in on some other film applications that are starting to get some traction. It's early yet but we've got our first units out there and sold with good positive reaction. And we've also seen strong growth in our fluid coatings business, which is a big expansion of what we used to do traditionally in our own adhesives business. So those things are encouraging. I'd say the long-term growth rate there is still encouraging. So we like the business going forward. But I'd say it's been impacted like the other businesses with the softer macro, and the bigger-ticket items in some of the areas, particularly the dies. And that's what's been hurt the most, is customers have delayed some orders and pushed them back into the next quarter or so.

Okay. And then on the overall mobile cycle there, where you had tough comparisons, what's your thought on if that cycles mature as pertains to the volume levels that you've now attained?

Certainly, we expect the growth in the mobile segment because it's really the smartphone piece to mitigate from what we've seen over the last couple, three years because there was a big penetration issue. But last year sometime I think it crossed the 50% mark. And it's probably two-thirds to 75% of what's sold today are some form of smartphone. So you don't quite have the penetration piece.

As we've talked about, the things that we look for are feature changes. So you've got the shrink that puts more computing power in there, which is good. But then the feature changes also drive applications, whether that's things like camera modules, microphones, that kind of stuff. And then form factor, where the size changes, also drives some additional growth. So, it's a function of what the mix is in that area. And then there's some new applications, some conformal coating applications that we've been involved with this year that we haven't in the past. So we're looking for those additional applications.

But I would say this year hasn't been a huge year from a feature-function driven growth. It's been more about penetration. And I think going forward, what we're looking at, and one of the reasons we're making the transition to have capability to design and build all these systems in Asia, is to have the mid-tier products that, as some of the guys that do things manually today with a different maybe lower end phones, or different or lower market share phones today, that we can be in a position to get some of that business, as well. Because today that's either manual or it's, at most, desktop applications. So that's part of our transition.

So, our view is you won't see the penetration continue at the rate it's at. I think from time to time you'll see these feature changes. The shrinkage piece is always a plus. And then we're looking for new applications and broadening the customer base there, as our growth. And then beyond just the mobile piece, we're looking at other areas like MEMS as an area of opportunity.

Great. Thanks for all that.

John Franzreb with Sidoti & Company.

Mike, I'd like you to expand upon your comments about large system delays. You just touched on the non-wovens piece. Could you talk about it in all three business segments? Because it sounds to me that you expected some orders to come in and they're being pushed out. Can you talk about why that's the case and what are you hearing from your customers?

Yes. I would say, number one, the general bid activity out there is still reasonably robust. Number two, if you look at operating rates, operating rates are still reasonably robust. And we see that in our parts business, which is up. Those are both encouraging. From our standpoint, the baseline is pretty solid.

I think two things. What we hear from our customers in North America is an expectation of greater growth that should have come from improved consumer confidence, and we're really not seeing that translate into GDP at the moment. Could be the sequester effects, and have people nervous in the short term. But I'd say in the short term they are just holding off another quarter or two type of thing. It's not -- hey, I'm not going to do this. It's just not right this minute. And particularly with, I'd say, smaller and mid-tier customers.

And then I'd say we've seen that similar feedback from some Chinese customers, in particular. But other emerging markets. Brazil is struggling a little bit right now, as well. We're placing orders, whether that's in the Industrial Coatings space, which tends to be the engineered systems, or whether it's in the back-end traditional electronics space, or, say, the bigger dies that we have. It's really a function of near-term consumer confidence. In China, for example, everybody was cheering yesterday when the PMI got above 50. But that's the first time in 11 months. So I think our view is it's near-term caution, and it's not a long-term issue, and the long-term fundamentals are still strong. People aren't canceling orders, they are just saying -- okay, not this quarter, deliver it next quarter. That kind of thing.

Now, in that kind of environment, does the price competition become an issue or has it not gotten that weak yet?

We've not seen anything significant in the way of changes in the market dynamics. At the end of the day, our value proposition is really around having the best technology and the best support and service to create that value proposition. What I would say is things that would be a no-brainer, like we can give you benefits and a payout in six to nine months, some folks are pushing even some of those off another quarter or two just to wait and see. So that's a little bit unusual. And I think that's really just a reflection of the current environment, and I think particularly where emerging markets are.

Now, some encouraging signs from Europe. It's only one quarter's set of data so we're not jumping real high here on that. But it's one quarter of encouraging data. Certainly the view here in the US is that we would expect to see some things pick up in the next few quarters, provided Washington doesn't get in the way again. And I think China is really focused on trying to move things to the consumer piece. And they may have to do some other things in the short term to hit their target. But right now it doesn't feel like they are on track to hit their target so I think we might see some more action there. So, our view is it's really more short term.

Switching gears to Advanced Technology in particular. The new product development spend you have going on there, can you just give us an update on the timing of revenue recognition from that project? Any update would be great.

Yes, it's going to be a next year kind of revenue recognition piece. What I can say is that we have prototypes built and we're testing prototypes. Typically this would go through an A series and a B series type of prototyping. But we've got the first prototypes out there and we're testing them with a select group of key customers. And I'd say today the technology has been good in terms of meeting all of our milestones. The customers' initial comments are positive. We've got a ways to go yet to get to -- no kidding, we're going to go ahead and buy these and install them. But it would be 2014 probably more towards the second half.

Okay. And, Greg, if you said this I apologize. The sequential SG&A number on the higher revenue, whatever it was, about a $4 million drop down, what was that from?

You're talking from second to third quarter?

Correct.

Yes, some of that's going to be, let's say, performance-related spending. So, as we're moving through the year and now we've tuned our outlook for a softer year than what we might have expected, you've got some true-up in some of your performance-based spending.

So Q4 SG&A should be similar to Q3, given the relatively flat revenue outlook?

Yes, flat revenue outlook. It's likely to be up a bit sequentially as you get back to your normal spending rate on this new outlook through nine months. There's a bit of a true-up of where we are through nine months versus where we had been through six months.

Okay. Thank you very much, guys.

Jason Ursaner with CJS Securities.

I'd like to follow-up on the commentary before for the automated dispense portion of the Tech segment in terms of the penetration versus refresh cycle. From an order perspective, you mentioned last year obviously it was a difficult comp with capacity installations. Expectations had been that, even despite that, growing application demand for flip chip could keep orders at that or maybe even higher levels. But timing of orders was a big question, needing to be in place for product launches. So how has that view changed at all? Is the capacity that's in place being used to fulfill more demand than maybe you'd previously expected? And if orders do materialize, what would lead times look like for that business?

I would say Jason, we did probably expect a bit more robust growth in the mobile segments here this year than we're seeing right now. And I'd say the flip chip piece is doing just fine in terms of the applications. I'd say we haven't seen as much form and feature change as we might have anticipated here. And we supplemented that with some newer applications that we got involved with that we weren't involved with in the past. I'd say the launch cycles this year from the main guys have been more modest, with some, I think, step-up probably in the next year. But we also see some traction coming from a variety of other suppliers, mostly Asian-based, that we're developing relationships with, and today they do things manually. So, our hope is that the tiered product approach will attract some opportunities for them to supplement as they grow and gain share.

And what would the margin profile look like on the more advanced leading-edge top-tier supplier versus this mid-tier product?

They will be higher. It's not like one is 70% and one is 20%. It would be higher, but within a reasonable range. But, quite frankly, the reason we're building out, as we've talked about in Suzhou, both from a design and engineering and manufacturing capabilities, also be able to manufacture locally. So, we think those will be good margin opportunities, as well. But obviously the more full featured the better for us.

Okay. And following up on the questions, with the packaging, was there any clear turnaround from the pressure you'd seen earlier in the year after the Freedom launch? And in hindsight were customers maybe holding off at all there in anticipation of that?

No, I would say in the beginning of the year, I think if you looked at food and beverage consumption, it was actually negative. And so I think people were holding off because the actual consumption was negative. And now that's turned around to be positive. Not largely positive, but positive, and likely it will be modestly positive for the year. So, I think it's really been more of a change in the consumption pattern there.

I'd say with regard to the Freedom launch, we're on track. We expected to sell several hundred here since our launch in May, and we have. We've got a lot in the early install and development, and some going through full shelf life testing with customers. But the feedback is good. And we really haven't launched the product -- we will this fall -- into most emerging markets. It's really been US first and followed about a month later in Europe, and then in this fall it will be launched in emerging markets. So I'd say we're on track but I don't think that's had a huge impact on it. I think it's really been more of the underlying food and beverage consumption as one of the key indicators.

Okay. And for the plastics piece, you mentioned growth. I didn't hear, I may have missed it, if you gave the magnitude of that growth. But, also, how did this break down in terms of replacement versus OEM orders, and the mismatch in capacity that you've previously talked about? Are you still seeing it at all in that market?

Yes, I would say the mismatch in capacity is still there. It's in primarily one application but it's an important one for the dye business. It's the biaxial film, which is, quite frankly, ultimately will be the highest growth part of the business, and the most sophisticated part of the business. But right now that mismatch in capacity, given the softer global demand, is still there, and is probably another few quarters until we see working through that.

In the interim, what we focused on is other applications. So, other types of films that we weren't as exposed to. We developed products in the last year, placed them now, and getting good feedback, and continuing to work on orders there. The fluid coatings part of the business, which is basically water-based applications, has been going very strong. And that's one that we'll look to expand geographically. And then I'd say the other side of that is really, in general, globalizing the business a bit more. We've now got production capability in China and Thailand, and we're looking to ramp that up as we're able to reduce lead times on the delivery of a number of these products.

Okay, great. I appreciate it, thanks.

Mark Douglass with Longbow Research.

Hi, good morning, gentlemen. Greg, what are your expectations for gross margins in Q4?

Yes, I think our expectation would be in line with Q3, perhaps up above that 56%. Probably somewhere between 56% and 57%, given the strength and likely mix impact of adhesives.

Okay. And then looking at the Q3 gross margin, I believe you mentioned that a lot of it was weaker than expected. We're talking about 58%, I believe, at the mid point. Were system sales worse than expected? I'm just trying to see here.

No. Mark, the comments that I made regarding segment performance where, for example, in Industrial Coating we had some good growth in our powder systems, those are engineered systems that tend to carry overall lower gross margin. We also had both product and customer mix effect that we talked about within the Advanced Technology segment. So overall weighting of systems versus parts, and then those particular aspects of the types of systems sold had the biggest impact on gross margin.

Because it seems like from the larger systems in ICS, maybe a little longer lead time. So were there several that you shipped in the quarter that you weren't aware of when you gave your initial guidance?

Yes, you'll see that within some of those systems is, from the time that we issued our guidance, if we've got some of those system orders that come in, they may get out within that current quarter.

Okay. It wasn't related to production hiccups and engineering problems of some of these systems?

No.

Okay. And then, Mike, you talked about the last, I think, five or six weeks, the last 12 weeks for your orders. The orders just weren't coming in like you had hoped. Has that stabilized here? Are they still getting a little weaker? Or do you feel like things are pretty -- the orders are coming back now and really is --?

Yes, the way I would characterize it, Mark, is really a function more of the pattern we saw last year, which was continued stronger order growth well into and really to the end of the third quarter. Which is a little unusual from our typical seasonal pattern. It was largely driven by some bigger Industrial coatings projects and some of the mobile launch aspects that went on last year with phones.

So, what we've seen this year is the beginning of the quarter trended along that same line but more flattened out rather than continue to pick up. So the comparison relative to last year, and then the backlog relative to last year, is lower because it didn't continue that trend to pick up. And now we're back to flat with last year. And in certain areas we're encouraged. Like, Adhesives is up a bit. That's encouraging relative to where we were. But I think it's really more of relative to last year as opposed to being absolutely significantly down. But we've got a mix. And when we gave you or order view going forward, Adhesives is up and Technology is down. So we've got some mix effect going on on there relative to last year.

And then if you look at it sequentially it's probably relatively flattish?

Yes, that's the way to think of it -- relatively flattish. Whereas it was continuing to pick up last year.

Okay, thank you.

Matt Summerville with KeyBanc.

A couple questions. If you look, Mike, in the dollar value of orders, if you will, that got pushed to the right in Q2, would you say that dollar value that got pushed to the right in Q3 is similar, greater, less? I'm trying to get a feel for --.

It's probably greater, Matt. Not usually greater but it's probably greater. It's really more of what our customer's telling us as we bid some of these opportunities in terms of -- yes, we want to do this but deliver it not this quarter but next quarter -- type of thing. So I'd say the dollar value of the orders that get pushed out is maybe a few million dollars. But I'd say it's more of what we're hearing around even some of the bid activity, is just a feeling that there was enough uncertainty to push it out a quarter or two. And not across the board, just in some of the bigger systems where it's a bigger capital deal, where people are looking at their capital expenditures a little bit more closely.

China specifically, and if we can just try and exclude the mobile dynamic that's occurred over the last year or so, which you've talked through a lot today, if you look at China, do you feel like your business is still getting worse? Has it stabilized? Do you feel like you have better visibility, worse visibility? And how would you describe customer access to capital?

Yes, I would say we feel like it's stabilized. I'd say the customer access to capital is reasonable. We had some concerns a little over a year ago when, probably this time a year ago, or when the Chinese government was making an about-face in terms of trying to control inflation, that's changed considerably. So it's not so much about access to capital. It's really what they're seeing in terms of local demand. And I think it is tied up in this transition to getting consumers to, no kidding, spend more. What's happening is income is going up in the short term, they're saving more, and they're not necessarily translating that into consumption. That's the macro picture. What our customers are telling us is, I think they more feel like it's bottomed out and stabilized, and are more encouraged going forward.

Okay. And then, lastly, with respect to EDI and XALOY, the new platform within Adhesives, how would you characterize year-one performance in terms of where you were forecasting revenue and EBITDA for the businesses when you bought them, and how that's shaking out? And then maybe some thoughts on whether or not you've been able to generate meaningful revenue synergies there, and how to think about that going forward.

Okay. I'd say, number one, the integration plans went as we expected. Number two, I'd say the cost side of the equation and the continuous improvement side of the equation is on track, and we see more upside there. I'd say on the revenue side we expected this to be a growth year. It's not. Instead of up, we're down. And so, much like our other businesses, we're seeing the negative impact of volume leverage there.

It's largely focused around the biax piece that we talked about. But with softening global consumption, there's the same general types of impact we see in our other businesses. I'd say we feel good about some of the new applications. I'd say we feel good about the key customer synergies. We've got some orders in today as cross-selling, that we're encouraged by that. I think with this latest addition of Kreyenborg, which does a couple things for us in terms of giving us high-end technology in the screen-changer business, which gets us into the plastic recycle market. We're not in there today and they are a leader in that. It opens things up for us.

And then having the pelletizing capability that goes beyond what XALOY had to the key technology that's going to grow, which is the underwater pelletizing, we feel good about that. That also links into actually some of our material partners who are in the adhesive business in terms of the pelletizing the adhesives they use. So there's some interchange there. And I think that we feel the long-term growth rates are really going to be strong. And we're well positioned now with a platform that could be successful.

I'd say we're trying to integrate four companies and now a fifth, and really a fifth and sixth. So that's a challenge and that's a key focus for us over the short term. And some things take a little bit longer. I think the revenue side of that, particularly as you align selling and engineering organizations, and you look to optimize your product lines, take a little bit longer. But I think, other than the fact that the overall economy's a little bit softer and this one particular application is soft at the moment, we feel good about the future, and what we can bring, and how we can be different than other people that are there that are primarily component players.

How much of the business is that biax?

It's a significant part of the EDI business that goes into the extrusion side. Overall extrusion, I think, is maybe 50% of the business. And so it's a significant part of that 50%. But there are other types of extrusion. Biax is one type of film. There are cast films and other types of films that we're introducing into these new products. Biax is the one that's going to grow preferentially the fastest because that's the most sophisticated. When you think about consumer packaging, it's the one with the multi-layer oxygen water, UV protection type barriers that food products need going forward. So that's the one that ultimately probably has the highest growth. It's just in the short term it's a little out of balance.

Very helpful, thank you, Mike.

Walter Liptak with Global Hunter Securities.

Good morning. My questions on the plastics businesses. I'm not sure if it was clear. It sounds like the revenue was down in the quarter but the orders had picked up. Is that right?

Yes.

Okay. Can you talk about the magnitude of both of those, the revenue and the orders?

I'd say the orders are adding to our order growth by 2 percentage points, so that's encouraging. The revenues were down. I probably don't want to really comment specifically on it, but they were down a meaningful amount, particularly in this biax area.

As compared to the prior year.

As compared to the prior year. So, we're seeing a fairly good hit there relative to what we expected.

Okay. And with the acquisitions that you've done, you mentioned that the integration is going well in these five or six companies. I wondered, are these large enough as a group of businesses that could be segmented?

I'd say we still see a lot of synergies that we're trying to work through with our core adhesives business. And we've got a lot to do to integrate and bring out all of the benefits here. So, we see a lot of logic in keeping that together here. When you look at common customers, when you look at the thing I talked about in terms of material supplier relationships and end markets, a lot of this has gone into flexible packaging in the food and beverage piece. So, I'd say our view is that it makes sense to keep it where it's at. And the focus, really, in the short term is taking a bunch of different organizations that all have elements of leading technology and leveraging them across our global infrastructure. And introducing, in many cases, the sophisticated continuous improvement capability we have to get to one set of coherent platforms. And we'll have product lines within these businesses, as well.

Okay. It sounds like you may not want to do this, but I wonder if you could just frame the acquisitions over the last couple years. How much in total revenue including Kreyenborg? What's the annualized run rate that you're at, and the capital that's been put to work?

I think on a revenue basis we're in the $250 million to $300 million range on the revenue. And I think on the capital, it's probably roughly 2 times that, if you look at it. So that's what we're looking at for those businesses today.

Okay, thank you.

Charley Brady with BMO Capital Markets.

Thanks. Just real quick, on the Freedom system, you've had a competitor come out with a competing product that's agnostic to the type of adhesive that gets run through that machine. I'm just wondering -- I just really don't know the business well enough -- how important or not important is being tied to a specific adhesive manufacturer is that customer? Does that matter to them in the sales processor? Or it really more a functionality of the equipment itself?

First, what I would say, Charley, is the Freedom system incorporates a lot of new technology, and incorporates new applicator and dispense technology. It incorporates new feed technology. And that it incorporates the capability to handle a variety of different types of adhesives. The benefits come from the applications, the nozzle, the feed technology. But there are additional benefits depending on the type of adhesive that is used. And some of those adhesives are more difficult to manage and melt and perform than others.

So, when we developed it, we developed the activities with Henkel because we needed a development partner on the new technology. And we're working well with them. But we're also working with other adhesive suppliers to utilize our Freedom system in there. The full package of benefits comes from having the adhesive that translates into delivering more what they call mileage, if you think about that as more sticking power with less adhesive. You get a lot of that with some of the benefits that we have on our application and dispense technology, and our feed technology, which minimizes char and impurities. And our dispense technology, which allows them to dot and stitch and self clean, and some of the things that we've talked about in the past. There's a combination there. So, we feel like we can process the full slate of adhesives there. But the leading edge ones that have higher mileage are more difficult to process than our system is capable of handling that.

Okay, thanks. I appreciate it, Mike.

I'm not showing any further questions at this time. I'd like to turn the conference back over to our hosts for closing remarks.

Yes, this is Jim. Thanks, everybody for joining us on the call. As always, I'll be around today to take questions if you want to reach out to me, and be available to answer those. So, thanks again for joining our call.

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