Nordson Corp (NDSN) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Nordson Corporation webcast quarter for second-quarter fiscal 2014 conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time.

(Operator Instructions).

As a reminder this conference is being recorded. I would now like to introduce the host, Mr. Jim Jaye, Director of Investor Relations. Sir, you may begin.

Thank you, Amanda, and good morning to all who are listening. I am here with Mike Hilton, our President and Chief Executive Officer, and Greg Thaxton, our Senior Vice President, Chief Financial Officer. We would like to welcome you to our conference call today, Friday, May 23, 2014, on Nordson's second-quarter results.

Our conference call is being broadcast live on our webpage 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 June 6 by calling 404-537-3406. You will need to reference ID number 41277438.

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

After our remarks we will have a question-and-answer session. I would now like to turn the call over to Mike Hilton for an overview of our second-quarter 2014 results and a bit about our 2014 third-quarter outlook. Please go ahead, Mike.

Thank you, Jim, and good morning, everyone. Thank you for attending Nordson's second-quarter 2014 conference call.

Nordson delivered strong performance in the quarter with sales at the top end of our guidance and earnings per share a few cents above our top end. I want to thank our global team for delivering both the top line and bottom line while continuing to execute on strategic initiatives, continuous improvement projects, acquisition integration and targeted cost reductions.

Given the soft macroeconomic environment I am pleased with the solid organic growth of 4% in the quarter. This growth was broad based and included the majority of our product lines and regions.

On a sequential basis sales increased by 16% over the first quarter which we leverage to generate incremental operating margin of 67% in the second quarter. We also executed on our strategy of returning value to our shareholders by investing $53 million for the repurchase of shares and by distributing approximately $12 million in dividends during the quarter.

Looking ahead based on our current backlog, order rates and customer projects we are anticipating continued strong performance in our third quarter. In a few moments I'll share additional comments about current business trends and our near-term outlook but first I will turn the call over to Greg Thaxton, our Chief Financial Officer, who will provide more detailed commentary on our second-quarter financial results and our third-quarter guidance. Greg?

Thank you, and good morning to everyone. Sales in the second quarter were $417 million, an increase of 9% over the prior-year second quarter. The sales improvement included a 4% increase in organic volume and a 5% increase related to the first-year effective acquisitions. The effect of currency translation compared to the same period a year ago was not material.

Looking at sales performance for the quarter by segment, adhesive dispensing sales volume increased 18% as compared to the prior-year second quarter. Organic growth was 8% and the first-year effect of the Kreyenborg acquisition added growth of 10%.

Organic growth was driven by rigid packaging, general product assembly, disposable hygiene and polymer processing end markets and we saw strength in every geography with the exception of Japan. Sales volume in the advanced technology segment decreased 3% from the prior-year second quarter. Solid organic growth in products for electronics, tests and inspection, fluid management and surface treatment end markets was offset by softness in demand for automated dispensing equipment and selected mobile electronic device end markets.

As noted in our press release we have begun to see an increase in orders and projects for these automated systems in recent weeks which will benefit the second half of the year. Geographically organic growth in the US and Europe during the second quarter was offset by softness in other regions.

Industrial coating systems sales volume increased 4% compared to the second quarter a year ago. This organic growth was driven by demand in consumer durable and industrial end markets, food and beverage end markets and UV curing systems for industrial and electronics end markets. The growth was broad based with increases in all regions except the Americas as compared to the same period a year ago.

Overall gross margin in the second quarter was 56.4%, an increase of more than 200 basis points from the level we delivered in the first quarter of 2014 driven by better absorption and product mix. Moving down the income statement, operating profit was $93 million and operating margin was 22% in the second quarter, or 23% on a normalized basis that excludes the nonrecurring charge related to targeted restructuring activities. This normalized margin is an improvement of 100 basis points over the same period a year ago inclusive of a dilutive effect of the Kreyenborg acquisition and an improvement of 700 basis points on a sequential basis reflecting the leverage we generate on additional sales volume.

Looking at operating performance on a segment basis, adhesive dispensing delivered operating margin of 27% in the quarter, up 100 basis points over the second quarter a year ago and up 400 basis points on a sequential basis. Within the advanced technology segment operating margin was 24% in the quarter, or 25% excluding nonrecurring restructuring charges. This normalized margin of 25% represents an increase of 14 percentage points compared to the first quarter of fiscal 2014.

In the industrial coatings segment operating margin was 16% in the second quarter, an increase of 100 basis points over the prior-year second quarter and 700 basis points over the first quarter of fiscal 2014. As Mike noted previously, on a total company basis we were able to leverage strong sequential sales growth to generate incremental operating margin of 67%, or 69% excluding the one-time restructuring costs incurred in the quarter.

Continuing down the income statement, reported net income for the quarter was $62 million and GAAP diluted earnings per share were $0.96, an increase of 14% over the second quarter a year ago. The current quarter's earnings per share including $0.01 charge related to restructuring costs 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 items.

On a normalized basis to exclude one-time items in both years, second-quarter earnings per share increased 15% over the prior-year second quarter. The current quarter's EBITDA was $107 million, up 13% as compared to the same period a year ago. Cash flow from operations in the second quarter was $55 million and free cash flow before dividends was $46 million.

We have included a table with our press release reconciling net income to free cash flow before dividends. Mike previously commented on our execution during the quarter of returning value directly to shareholders whereby we invested $53 million for the repurchase of shares and distributed $12 million in dividends. We have approximately $141 million remaining on our current share repurchase authorization at the end of the second quarter and do expect to remain active in the market as the year progresses.

From a balance sheet perspective we remain very liquid with net debt to EBITDA at 1.6 times trailing 12-month EBITDA as of the end of our second quarter. We have approximately $280 million available from cash and our current revolving credit facility for strategic investment opportunities.

I'll move on now to comments regarding our outlook for the third quarter and I will note that we begin the quarter with strong order trends. As we typically do, we have provided our most recent order data both on a segment and geographic basis with our press release.

These orders are for the latest 12 weeks as compared to the same 12 weeks of the prior year on a currency neutral basis and with the Kreyenborg acquisition included in both years. For the 12 weeks ending May 18, 2014, order rates are up 9% as compared to the same 12 weeks in the prior year. Order rates were robust in all segments and most all geographies with the exception of Europe which was impacted primarily by slower demand in electronics and durable goods end markets.

Within the adhesive dispensing segment order rates over the last 12 weeks increased 7% compared to the same period in the prior year. Order rates increased in all regions and nearly every product line. Strength and rigid packaging, disposable hygiene and general product assembly end markets was offset by softness in certain polymer processing end markets.

In the advanced technology segment order rates over the latest 12 weeks are up 14% compared to the same period in the prior year. Order rates increased for every product line and included the return of solid demand for automated dispensing systems related to mobile electronic device applications.

Within the industrial coatings segment the latest 12-week order rates are up 4% as compared to the prior year. This order growth was driven by strong demand for cold material dispensing and liquid painting product lines. Order growth was strongest in the US and Asia Pacific within the segment.

Backlog as of April 30, 2014, was approximately $247 million, an increase of 25% compared to April 30, of 2013, and inclusive of 10% organic growth and 15% growth due to the Kreyenborg acquisition. Backlog at April 30, 2014, increased 7% compared to January 31, 2014. Backlog amounts are calculated at April 30, 2014 exchange rates.

Let me now turn to the outlook for the third quarter of fiscal 2014. We're forecasting sales growth to be in the range of 9% to 13% as compared to the third quarter a year ago. This range is inclusive of organic growth of 3% to 7%, 5% growth from the first-year effect of acquisitions and a positive 1% currency translation effect based on the current exchange rate environment.

At the midpoint of our sales forecasts we expect third-quarter gross margin to be between 56% and 57% and operating margin is forecasted to be approximately 24%, or 100 basis points higher than the same period a year ago. We are estimating third-quarter interest expense of about $3.5 million and an effective tax rate of approximately 30.5% resulting in third-quarter forecasted GAAP diluted earnings in the range of $1.06 per share to $1.16 per share.

The midpoint of this range for diluted earnings per share represents an increase of 10% over the prior-year's third-quarter reported earnings per share, or 12% excluding certain nonrecurring items reported in the prior year. In summary, our global team delivered solid second-quarter results and based on our current backlog and order rates our outlook represents strong performance in the third quarter.

In addition to this third-quarter outlook the following fiscal 2014 full-year data points may be helpful for modeling. We are forecasting a full-year tax rate of approximately 30.5% based on current tax law. For capital spending in 2014 we are forecasting normal maintenance capital spending to be about $40 million.

In addition to this maintenance capital spending, we will be making a capital investment over the next several quarters as part of our global footprint optimization activities. Specifically, we have begun the construction of a manufacturing facility to support growing demand in our advanced technology fluid management product line supporting medical end markets. The new facility will be built in Loveland, Colorado and we will exit a leased facility in nearby Fort Collins, Colorado.

This investment supports our strategy of owning our critical manufacturing facilities and will provide us with configurable space to minimize expense and disruption as business needs may change. We anticipate total capital investment for the project to be $26 million with approximately one-half of this investment to be incurred during fiscal 2014 and the remainder during the first half of fiscal 2015 and full-year operations are anticipated to begin in the first half of 2015. With that I will turn the call back over to you, Mike.

Thank you, Greg. Before taking your questions I'd like to provide some additional comments on our recent performance and outlook. And again, I want to thank the global team for the value they provide our customers and a high level of execution.

The midpoint of our sales guidance represents organic growth of 5% over the prior-year third quarter and 7% total sales growth over the second quarter of 2014. We expect to leverage this growth with both a year-over-year and sequential improvement in operating margin and strong growth in earnings per share.

As we mentioned in our last conference call, swings in the external environment can and do occur from quarter to quarter. At the same time we do not intend to alter our basic objectives and we remain confident that the Nordson business model is intact and will continue to create value over the long term. The model rests on a global team that can be counted on to continue executing at a high level and their passion for providing our customers with differentiated technology and superior global support.

In the near term the team will remain focused on driving top-line growth from targeted initiatives, continuing the integration activities of recent acquisitions and using continuous improvement initiatives to enhance operating performance. At this time let's turn to your questions.

(Operator Instructions).

Christopher Glynn, Oppenheimer.

Thanks, good morning. I was just looking for some initial color on how you are seeing the engagement by customers around your Suzhou efforts, how that is going?

We are just in the process of continuing to transfer products there so we don't have everything transferred yet. But we have completed our first round of development on our mid-tier product and we will be launching that very shortly in the marketplace.

We've had some interesting engagement with a number of the mobile players in the Chinese market and had some of our first sales come through. So at this point we are trying to assess their needs just to fine tune our offerings there out of the Suzhou facility. But we still have a little work to do to transfer some other capability there.

Okay. Then on the polymer processing markets, would you characterize that as largely over the hump of capacity absorption or still a little ambiguity hanging around?

I would say it's not too much different than what we said last quarter. If you recall it's really been the extrusion part of that market and the biaxial film that had the overcapacity and we expected to see orders come in towards the tail end of this year as OEM projects evolve. And so we expected really tail end of this year to see some orders come through and a step-up in the next couple of orders and that is still what we expect.

In the interim as we mentioned last time, when pursuing other markets like blown film, cast films and have had some good success with our new offerings in those spaces and we've gotten some traction as we have built out our facilities in Asia and improved lead times in a number of our product lines there. So I would say it's encouraging based on what we see today but the capacity issue on the biax film is not cleared yet and we kind of expect that as something that starts to clear up at the tail end of this year.

Great. Thanks for the help.

John Franzreb, Sidoti.

Good morning, Mike and Greg. I wondered if you would talk a little bit about AT. The order rebound you saw in the quarter.

You mentioned that you are seeing some traction in the mobile side of the market. How much of that year-over-year rebound can you attribute to the mobile side coming back?

Well, if you go back to some of our comments last quarter and they continue here, when you look across the whole technology space so far this year medical has been very strong, our general fluid management markets have been solid. Our other electronics areas like the surface treatment and test business have been solid and it really was the more sophisticated dispense piece that was struggling a little bit out of the gate.

As we said last quarter, typically we see orders come in second quarter, third quarter, maybe even into the fourth quarter and I would say what we've seen here is really the tail end of the second quarter, significant orders start to come through and we expect that to continue in the third quarter. So a significant improvement in the step-up on the order trends has come from the high-end, high-speed dispense in the mobile space.

And what is the sustainability of that kind of an order trend, Mike? Do you think it's just a one- or two-quarter trend, do you think after a couple years of being down we might have a little bit more legs to it?

What I tried to paint a picture of last time was what we see as a long-term situation here in the mobile space. One, the penetration of smart phones in general has moved from a relatively low number, I think we threw out 15%, 20% if you went back a number of years to a pretty high number, say 80%.

So we see that trend slowing a bit and moving ultimately more towards smart phone overall growth. But by the same token we see some players today who are upgrading their capability and moving from say less smart phones to the smart phone space and we saw an opportunity for our mid-tier products, which is what we're really trying to do out of the Suzhou. That hasn't changed.

So the question really is what is the timing of those two things and do they match up and line up, and not 100% clear yet. I mentioned a minute ago that we have got some orders now with some of these folks and we are trying to feel out both the sophistication of their end product and the processes that they will use, so we will have to see how that plays out over time.

I would say there will be continued growth; it might be a little lumpy from time to time. And then I would say within the year we clearly have a seasonal pattern within the year where things start to pick up in the second quarter and third quarter and slow down in the fourth and are pretty soft in the first.

That varies from time to time. This year it seems to be fairly concentrated.

Okay, and the expansion on the medical side, can you give us a little bit more color of what business line that is or what's driving the expansion?

Yes, we are seeing very good growth both in the value plastics business that we bought, sustained double-digit growth in that business as well as solid growth in the dispense syringe related business of MICROMEDICS. We added product lines last year in the stopcock arena that is also growing.

So that business is growing nicely and as we continue to expand the product line both organically and with these tuck-in acquisitions we see really good growth opportunity there. We also took a holistic look at all of our other fluid management facilities and we do think we can serve some of their expansion needs as well through this investment. So it's sort of an overall supply chain look beyond just the medical piece to support growth over say the next three to five years in those areas as well.

Okay, one last question. In Europe, what is a flat year-over-year, a lot of lumpiness in the order patterns to look backwards but electronics had good orders. Can you kind of reconcile what is going on in Europe that we are having good orders in electronics but flat in the overall book in Europe as a region?

Yes, I think Europe parallels in general what you see going on in the economy. If you think back last year we are still in a recession in Europe. Over the last couple of quarters things have gotten considerably better but by the same token if you look at the latest data coming out of Europe it's backwards again.

And so we're seeing a little bit of that fits and starts I think overall from an order perspective, particularly for the larger engineered systems that tend to be capital related. And then with electronics specifically it really is linked into what's going on in the auto industry, the penetration in the auto industry more than anything else in Europe. And so that is what we are seeing continued penetration there, which is an encouraging sign.

And then I would say our core adhesives business is finally coming back in Europe and that looks encouraging. Even though orders in this quarter are softer we do have good prospect list there. I think it really comes down to what is the macro environment that we see and with continued mix signals that we could be up and down a little bit here just depending on how the economy plays out.

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

Kevin Maczka, BB&T Capital Markets.

Thanks, good morning. Mike, did adhesives order rates accelerate as the quarter progressed or even beyond the quarter as well? And this may be kind of an apples-and-oranges comparison but we are seeing better organic growth there and to the extent that that is the pent-up demand finally being released it sounds like your demand was fairly broad based but lots of other industrials are just not seeing that, they are seeing continued push outs and delays. So I'm just trying to understand maybe where you are different and if it's maybe a function of you being shorter cycle and seeing acceleration more recently.

Yes, so if you look at the business, Kevin, I think the consumer non-durable-related piece is what has been the strongest, so the packaging side of the business in particular and non-wovens as well. I would say the product assembly which tends to be more durable construction related has been up but not nearly to the same extent as the other two.

And as you recall we had, as you kind of alluded to here, we had a softer year last year in those consumer non-durables and I think we are seeing that pent-up demand come through. And we are trying to drive new opportunities through technology and applications and we are seeing some traction there. And I would say the one that is not as robust is the product assembly piece that goes into those two areas, construction and durable goods although it was up.

How much of the strength in the order book there is related to new products like the Freedom product versus just the demand, the tone of demand in the end markets being better?

It's primarily driven by the end markets. I would say we are on track with where we thought we would be on Freedom and in fact we just introduced in May a next-tier-down version of Freedom we call Liberty to address a little bit broader aspect of the market. I think as you know we mentioned we target Freedom at the high end and the customers at the high end really appreciate that.

But where there is some opportunity for some tiering structure we have come out with another offering there. So I would say we are generally on track with the new initiatives but the biggest driver is really a pickup in the market and quite frankly us winning in the marketplace and taking advantage of that.

And we also, as you know, have a large installed base. So we are continuing to push user technology to help improve and update our customers' capability.

Okay. And just finally from me, we had a small restructuring charge this quarter. Now you've got the tech expansion coming in Colorado.

I think in terms of your footprint you're usually able to cycle up and down pretty easily given the assembly nature. How are we doing in terms of capacity elsewhere? Should we expect other additions will be required here as we go forward and grow?

No, we are in pretty good shape elsewhere. I think we have talked over the last couple of years about the first physical expansion in places like Suzhou and the buildout of the product line there. With some of the acquisitions we got additional capability in China and Thailand and we have built up capability there.

Here we had a leased facility that quite frankly we outgrew given the significant growth that we've had in that business. And in some of the discussions we had around some of the newer facilities and capability that have come with acquisitions, there is some opportunity to optimize, so I would say we are in pretty good shape here.

This was something that from day one we knew if we hit the growth rate targets in the business we would need to expand. And as Greg said, wherever we can we prefer to own the manufacturing facilities as opposed to lease, in particularly for businesses where we see the long-term future looking bright.

Okay. Thank you.

Charley Brady, BMO Capital Markets.

Thanks. Good morning, guys. Could you just give us the breakdown of the parts percentage by the individual segments, in particular adhesive dispensing in the quarter?

Yes, overall I think the parts, we are just looking for a number here Charley, in the quarter overall parts were about 41%, adhesives generally tends to be higher than that. But I think with the significant step-up in systems orders that we've seen really in that business all year it's not too different from that 41%.

And that's really true across the segments. They're not too far off from that total company average.

Clearly more systems sales in the second quarter versus first quarter so the mix has moved a couple, 3 points from the first quarter.

Right. And can you discuss, were there any large non-wovens, big large systems, the lumpy stuff in the quarter?

I think we've had a steady inflow of new orders in the non-wovens side. I'd say nothing that we would call out in that regard.

Typically in the adhesive segments the product assembly is the area where we could have some also some bigger systems. And in the first quarter we had some comparisons that were tough versus last year because we had some big solar orders last year that didn't recur yet this year they may well come later in the year.

I'd say nothing that we would point out significantly, just a nice steady improvement in the packaging area which tends to be smaller systems and improvement nicely in the non-wovens that tend to be bigger systems. But nothing that I would call out as a notable difference.

Right. Okay. And just, when you look at the value plastics business for a second, can you just give us an update on the non-medical part of that business?

It is a small piece, obviously, but that was an area I think when you bought that company you thought that maybe you could leverage that and accelerate that because it was underinvested by the prior owner.

Yes, I would say that's an area probably that hasn't grown as fast as we would have expected. We've had some additional traction on the industrial space. We've segmented it into certain markets we think are most attractive to the level of sophistication in the components but that's not moving as fast as we would've anticipated.

On the other hand, the broadening of the product line organically and taking advantage of geographic penetration has probably moved faster than we thought, so overall I think we are probably on track. But the industrial piece has not grown as fast as we would have anticipated and the segments that are high end are doing better than some of the others that maybe don't buy the sophistication that we have to offer there. So that's an area we are not as good as we would've thought.

All right, just wanted one more from me then. Any update on the LED market? Any acceleration of investment activity going into that space for you guys?

We haven't really seen that step-up in a big way. As I mentioned last quarter we started to see orders increase in that space from a lighting perspective but nothing that would say, hey the wave has hit. And I think that's still where we are at.

Great. Thanks a lot.

Jason Ursaner, CJ Securities.

Morning. Congrats on a strong quarter.

Just following up on some of the questions you got for the tech segment. One of the big challenges you had talked about in mobile and then the issue of form factor and that there really hasn't been any change with some of the major flagship models for some time.

We are obviously seeing a lot written about changes coming in terms of form factor. Do you think that is driving some of the strength in mobile or is it simply the industry working through the installed capacity for the high-speed, high-dispense underfill that put in two years prior?

I would say that it's a little bit of both. The element that tends to be consistent and steady are sort of the components. So things like camera modules, speakers, microphones, gyroscopes, accelerometers, those kinds of things. And everybody kind of does that the same way and tends to use the same set of vendors that we are well positioned with.

Beyond that it's the features of the phone. So one manufacturer came out last year with the, here's an example of the fingerprint sensor.

Others are following suit, that is an example of features that tend to drive new applications. So I would say what we are starting to see here is kind of a work through, maybe some sluggishness in the first quarter around the supply versus capacity and then some additional features coming through and still some potential for form factor changes. It's not just things like screen size, thickness is also something that plays a part here and helps with the level of sophistication needed.

Okay. Appreciate that commentary.

Margin in adhesives was back to 27%. When you look at the polymer and plastics businesses are those starting to pull up closer to the segment average and how big a gap do you see still relative to the traditional core packaging and adhesive systems and modules?

Yes, they are improving but not where we need them to be at this point. I think we've said that it was going to take us a while, three to five years to get it to that sort of mid- 20%s kind of margin and we are on that path.

The big item that we need is obviously more robust revenue to start in the short term. We are starting to see that improve. I think when the biax piece comes down, comes back, we will see that improve more significantly.

We've got good improvement from a continuous improvement standpoint. But there are some things around supply chain optimization that will take a little bit longer term to optimize. And so I think we are on the right path there but we are not where we need to be yet.

Okay. And is incremental margin on the overall business for the polymers, is that good enough to get you there or do you really need biaxial to start coming back? Is that higher margin part of it?

No, so the incremental margin is good in that business like it is in all of the businesses. We just need the revenue to come back at a reasonable level. And it's not where we anticipated and quite frankly as we mentioned last year it fell off instead of moving up because of the biax piece.

So end of the day it's really the volume leverage that you typically get on the infrastructure. Combined with we are doing from a continuous improvement standpoint a lot of the benefits of which we will see when the volume comes back through.

So you will see incremental margins improve as a result of that, on that incremental volume. So it's sort of a double whammy there. The volume come back, in the short-term you don't see some of the improvements that we've made because the volume has not been strong as we would like.

Okay. And just less question for me, looking at the part sales, how high a market share of the aftermarket spend of your customers do you think you are capturing? You guys do a great job there but just wondering is there a big opportunity to increase share, not necessarily in H2 but next year and beyond in addition to just natural growth on the installed base?

So I think we have said in the past we don't have 100% of the aftermarket parts for the business, particularly because we've got a huge installed base out there and many of the items have been out there for a long time. And so part of our focus from a technology standpoint has been to upgrade the technology and retrofit, and the retrofit can take a number of approaches.

We talked in the past about things like our MiniBlue and SureBead dispense offerings in adhesives, which are a relatively simple upgrade for customers that give them more efficient use of in the adhesive dispense but also the potential to stitch and dot. There's more extensive things from an operating standpoint which would be things like the new Liberty product line or the new Freedom product line as an example in adhesives.

So I would say there is opportunity there. We are focused on that. It's not like we've got a huge opportunity in the short term there but we think it's a nice complement. And we are trying to reintroduce where we can on these older systems proprietary technology to give our customers the performance benefit but also have intellectual property protection as well as challenging in the manufacturing that limit the ability to copy.

Okay, great. Appreciate all that. Thanks.

Walter Liptak, Global Hunter.

Hi, thanks. Good morning, everyone and nice quarter.

I think you started answering this question, or maybe you didn't, I just didn't get it. Just the trend in orders throughout the quarter, your orders are up 9% but your revenue guidance is a little bit higher than that. Was your exit rate for orders stronger at the end of the quarter?

It certainly picked up. If you look at our normal pattern I would say it's in line in general with our normal pattern which tends to grow from a late January standpoint and continue to grow to peak sometime in the third or maybe early fourth quarter.

So we saw it near the trend. I would say in a couple of areas in particular the mobile space we saw more of the orders come in towards the tail end of the quarter.

I think as we said last quarter we were not sure how much would come through in the second quarter versus the third quarter and we saw orders step-up significantly there. So certainly in that space it was towards tail end and the rest followed pretty closely our normal pattern.

Okay. I guess what I'm trying to get to, and maybe everybody else is too, is orders have been pretty choppy for the last year or so. They pick up and then they slow again and so is this something where we think a lot of your end markets are beginning to improve and the regions are improving we get to more sustainable, less volatile order trends?

Yes, and I would say if you look at it there is not necessarily a common theme across each business in each region. And so some of the volatility that we have seen is a function of one particular business or one particular region. And the good news when you aggregate it all up it is generally less volatile than if we were focused just on one segment in one region, but I think part of it comes back to what do you see from a macroeconomic perspective.

I think we've always said that we will outperform the macro economy but we are not immune to it, so we kind of float on top of that. I think if you look at the last couple of years you've seen a lot of variability in the macro economy and in the macro economy relative to expectations.

And even this year as you look to where we are right now you will hear two pieces of good news and one piece of bad news. Everybody expects the second half of the year to be stronger than what we've seen so far in the first half of the year but the most recent data in the major areas around the world has not been particularly strong.

So I think where that impacts us the most that we talked about a little earlier here is in the bigger investments, the bigger systems orders, the things that are more construction and consumer durable related where people step back when they see this kind of uncertainty. So we can have, I think, some volatility. It is just a function of what is going on in the global economy right now.

And I would say in each of our businesses the markets are a little bit different. So last year the consumer and nondurable part in our adhesives business, the overall consumption in that marketplace was pretty weak. And this year it has improved nicely and we are seeing the benefit of that and we are very well positioned everywhere to take advantage of it and we are.

Okay. Great. Thanks for that answer.

And kind of along those lines, you mentioned again the polymers business should get a pickup in the fourth quarter. Was it your fiscal quarter, or the December year and why was that, or why is that expected to pick up then?

So I would say we are seeing some improvement in orders now based on introducing new technology based on building out facilities in emerging markets so we've got enhanced capability and lead time. What we are particularly referring to is the biggest impact on that business is in what they call the biaxially-oriented film.

And so think about that as the multilayer film that is used in all of these plastic packages that you see in the grocery store for everything from drinks to detergent to motor oil. That's an area where there was substantial investment in 2011 and 2012.

I think based on a protection of a more robust economy at the time globally and they overshot the mark. We really expect to see that business be strong in the next couple of years. We will start to see some orders this year.

And we are basing that on what we are hearing from the OEM channel which tends to give us some insight into orders that would come to us based on projects that they are starting to work on. So that's really what is giving us some encouragement.

Overall consumption on the plastic side has remained in sort of the 5%, 6% even in the up-and-down short-term macro environment. And the projections from the folks in the industry that follow this are for pretty robust 2015 and 2016. And so that's why we are making the commentary and I would say our customer base would support that.

Okay, got it. Okay, thank you.

Greg Halter, Great Lakes Review.

Think you and good morning. I wondered if you could discuss the current M&A environment and what you guys may be looking at there, if it's more focused on the dividend and the share repurchase or if you are still looking for additional companies?

I would say we always want to have a robust pipeline and we do. I would say we have a goal to have a significant amount of that activity be proprietary and we are working on a number of things that fall into that category.

As we said last quarter and coming into the year we kind of expected this year to be a year focused on completing the integration of the latest acquisitions, delivering on the synergies and getting ourselves positioned to take advantage of this growth we expect coming back, as I just mentioned in the plastics space. And that we would probably be looking at more bolt-on kinds of things like we did with the product line addition in the medical space towards the tail end of last year.

But we have a robust pipeline. So from a priority standpoint in the near term it is more likely to be share repurchase, which we talked about in this quarter, and we indicated last quarter that we expected to this year to be largely through our Board commitment, which was around $200 million. And so I think we still have about $140 million left on that but we were active through the whole quarter in the second quarter.

And we have a strong dividend policy. We have mentioned in the past that we like to get that payout ratio up into the low to mid 20%s and we are probably hovering around the high teens. And so we would expect going forward to continue to see strong dividend increases like we have done the last three years.

So I would say that the priority in the short term is probably more around, obviously number one is support the organic growth of our business. But it will be more around probably the share repurchase and dividends and the M&A activity is likely to be more bolt-ons in the short-term.

All right. And of that $53 million spent on the repurchase, how many shares were bought and do you have a share count at the end of the quarter?

Yes, the share repurchase activity I believe was about $700,000. And in terms of the share count at the end of the quarter, we've got average shares and common share equivalent at the end of the second quarter of just under of about 64.5 million. And that compares to close to 65 million at the end of the second quarter of the prior year.

All right. And relative to the four larger acquisitions, Kreyenborg, XALOY, EDI and Value Plastics, I wonder if you could run through each of those in regards to where you think you are in the integration of those companies?

So if you look at the Value Plastics is done and we are running that in accordance with the strategy that we have developed to run the product line, globalize the business, add some tuck-ins to it. And as we mentioned earlier, we need to expand capacity to support the growth in that business.

In the polymer processing or plastics area, over a period of 18 months we made four significant acquisitions, the latest of which is the Kreyenborg BKG acquisition. And I would say we are through all of the critical integration steps from a back-office standpoint, from a run-the-business standpoint to make them part of Nordson.

I'd say we feel, as we talked about in the past, there are some things that are longer term. So optimizing our sales channels. We prefer to go direct as much as we can.

Some of those companies had direct in certain places and agents or distributors and others and we are going through a thoughtful process of doing that. We also want to optimize the total offerings that we have now across that full melt stream concept and that takes some time because we have to cross train, align engineering organizations, things like that.

And then on the supply chain, optimizing the supply chain, I think we're making good progress on things like our sourcing initiatives. But there is other things that we need to do to further optimize that and that will take some time as well.

So I would say we are good with all of the critical run-the-business kind of activities and done with the formal integration with the latest acquisition. And now it's really moving that total capability to the vision that we had when we made these four acquisitions. And that's a multiyear activity that we've talked about in the past.

Great. Thank you very much.

Liam Burke, Janney Capital Markets.

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

Mike, can you give us a profit profile of both as the Freedom and Liberty products ramp up, do you anticipate having profit margins similar to what the traditional adhesive products were?

We do. I think our overall strategy as we've talked about in that business has continued to be the technology leader to introduce the latest, greatest best capability and to price that in a way that we get paid for the capability but at the same time are conscious of the position we have in the industry. So, yes, we would expect those products to be equally profitable or maybe a little more profitable than our current product line based on the fact that they are the newest, greatest technology with the most to offer.

Okay. And staying with adhesives, the numbers were strong on the revenue side, orders were healthy. Are you seeing any change in the competitive front there?

No, not really. We've got good competitors in that space and I think as you know it kind of varies. Packaging is a little bit different than non-wovens, is a little bit different than product assembly and it varies by geography.

But we haven't seen any significant change in the competitive landscape. We've got good competitors and our goal is to continue to enhance our business model which means both investing in technology but also trying to be the best out there from an applications, sales and support and service offering.

I think we do a very good job of that. Our team does a great job of that and so we are conscious that we've got good competitors and we want to stay ahead of them.

Great. Thank you, Mike.

Matt Summerville, KeyBanc.

Good morning, guys, this is a Joe Radigan on for Matt.

Can you give some more color on what you are seeing in China? You have called out softness there in recent quarters.

Orders rebounded in Asia-Pacific pretty nicely although that was against a week comp. Maybe what are your folks on the ground saying there about the tone of project activity and visibility because I know it has been pretty choppy?

Yes, I would say it is not too different than what we have been saying the last couple of quarters. We do see good activity. I would say in certain businesses those things have come through so we have seen nice business come through on the adhesives front particularly in packaging and non-wovens.

I'd say with the step-up in the mobile thing we have seen orders come through on the technology space. I'd say in some of the consumer durable side it's a little softer and I think that is just a function of trying to understand where the government is going within China, what level of support they will provide, or won't provide.

The availability of credit, so I still think there's a fair bit of uncertainty there. We have a good robust project list.

I think the bigger ticket items are a little slower to come through from an investment standpoint but we still expect it to be a solid year in China. But it would say it is choppy still.

Okay. Maybe one more on the mobile piece of the business and advanced tech. More of a clarification, really.

The last product cycle in 2012 you saw very strong double-digit order in revenue growth for a couple of quarters. Based on what you talked about in seeing this pickup in momentum here very recently, could you see a similar type ramp based on that, or is this more of a steady improvement given some of the saturation and other stuff you talked about?

Yes, I would say in the longer term it's more of a steady improvement. I would say it seems like we are getting orders concentrated into a more narrow period of time than maybe we have in the past.

So it may be that the cycles of when product offerings are coming out are coinciding a little bit more. But I would say it's more of a steady improvement along the lines of the comments that I made earlier around what we see as long-term trends. But it does appear to get more concentrated from an order perspective in terms of timing within a year.

Okay. Thanks, Mike. I appreciate it.

Mark Douglass, Longbow Research.

Hi, good morning, gentlemen. Can you discuss the dilutive impact of Kreyenborg to EDS margins? Just to get a better idea of how the legacy business was doing year-over-year on incremental margins.

Yes, I would say overall what we said is most of the businesses that we bought in that space had mid-teen or so EBITDA margins and we really needed to get those to operating margins in the mid-20%s and it was going to take some time.

And I think Kreyenborg was in a similar place. They are having a good year. We are ahead of where we thought we would be when we bought them.

So that's certainly encouraging but we have the opportunity over time to improve them just in the way that we have with other businesses by introducing the things that we are good at. The continuous improvement, some of the discipline around the marketing and product management and pricing and then really using them as a nice fit in the portfolio in terms of product capability to leverage the melt stream piece. So end of the day they have the impact like the other businesses did and over time our goal is to get them to that sort of mid-20%s sort of corporate average as we go forward.

Great. In tech, why the restructuring charge in tech? What are you doing there? You invested more in tech last (multiple speakers)

We did. We did and in different places. So what we are really trying to do is a couple of things, respond to the cycles more quickly and figure out how to do that in a better way and two as we optimize our overall global footprint in terms of building up places like Suzhou to support the tiering structure there.

We need to look at our global organization and optimize where we have resources and capability. And so that is part of what we've been doing.

And then finally in the tech ecosystem, I can see the growth in your test platform in plasma. Does that look like it's pretty stable for a while, should be pretty firm for multiple quarters?

I would say the test piece has come back particularly as we talked about last time with bond testers as a good indicator. And that continues to be solid, and the x-ray inspection we are at a good position in terms of the capability that we have there.

So our expectation is for that business to be solid. We haven't yet seen a big step-up in some of the more traditional applications, although some of the things that we are saying in the test side would give us some encouragement to that.

So we are hopeful that that is going to continue to improve. There's some new applications on the surface treatment that we are engaged in that are helping drive that business and we've got a nice set of product offerings there that support that.

Okay. Thank you.

Amanda, we have time maybe for one last question.

John Franzreb, Sidoti.

Yes, just in industrial coatings we haven't touched on much. It seems to me that the margin profile was substantially stronger than a year ago at similar revenue levels. Is there something in the mix or structurally different that drove that margin gains year-over-year?

Yes, Charley this is Greg. There was.

John.

I'm sorry, John. There was, it is a mix story within industrial coating. Not particularly significant difference in parts versus systems but the types of systems were more of a standard system, if you will, than a fully engineered system. So product mix was a big driver there.

What I would say is that we continue to improve the profitability of the business. So we've got a very robust effort in many fronts in that business. And we have made really good progress to date but our goal is still further improvement there.

Great, guys. Thanks for the color.

Okay. So that's going to wrap up our Q&A period for now. This is Jim.

I will be around the rest of the day. If you want to email me or call me we can get some time together if you have follow-ups. Thanks for listening in and everyone have a good holiday weekend.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program.

You may all disconnect. Everyone have a great day.