Nordson Corp (NDSN) 2014 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Nordson Corporation webcast for fourth quarter and FY14.

(Operator Instructions)

As a reminder, today's conference is being recorded.

I would now like to turn the conference over to your host, Mr. Jim Jaye, Director of Investor Relations. Sir, you may begin.

Thank you, Candace, and good morning and happy holidays to all those listening. 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'd like to welcome you to our conference call today, Friday, December 12, 2014, on Nordson's fourth-quarter results and first-quarter outlook.

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 December 19, which can be accessed by calling 404-537-3406. You will need to reference ID number 38856478.

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

I'd now like to turn the call over to Mike Hilton for an overview of our FY14 fourth quarter, and full-year results, and a bit about our first-quarter outlook. Mike, please go ahead.

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

Nordson's global team continued to meet our customer needs at the highest level, and delivered record fourth-quarter sales, operating profit, and earnings per share. I'm particularly pleased with the 13% organic sales volumes growth we delivered in the quarter, compared to the same period a year ago. This growth was broad-based across all segments and geographies.

Operating margin in the quarter was 23%, 2 percentage points higher than the prior year's fourth quarter. And diluted earnings per share grew by 23%, compared to the fourth quarter a year ago, a rate significantly outpacing the strong top-line growth. Free cash flow in the quarter was strong; and from a balance-sheet perspective, we remain very liquid, with significant capacity for appropriate capital deployment.

We continued to create value for our shareholders through our balanced approach to capital deployment. During the quarter, we closed on the acquisitions of Avalon Laboratories and Dima Group to expand our positions in medical and electronic end markets. We increased our annual dividend, and we continued to prudently invest in the repurchase of Nordson's shares. Our Board of Directors recently authorized a new $300-million share repurchase program, effective December 16. We'll provide more details on our share repurchase activities later in the call.

For the full fiscal year, Nordson set Company records for sales, operating profit and earnings per share, while executing on a variety of strategic initiatives that will help sustain our success. Full-year organic sales growth was 6% compared to last year; relatively strong performance against a weak macroeconomic environment. Looking ahead, our current backlog and order rates are solid, leading us to expect a solid first quarter, in line with normal seasonality of our Business.

I'll share additional comments about our current business trends and our near-term outlook momentarily. But first, I'll turn the call over to Greg Thaxton, our Chief Financial Officer, who will provide a more detailed commentary on our current results and our first-quarter guidance. Greg?

Thank you, and good morning to everyone. Sales in the quarter were $469 million, an increase of 14% over the prior-year fourth quarter. This sales improvement included a 13% increase in organic volume, a 3% increase related to the first-year effective acquisitions, and a 2% decrease related to the unfavorable effects of currency translation.

Looking at sales performance for the quarter by segment, adhesive dispensing segment sales volume increased 9%, as compared to the prior-year fourth quarter. Organic volume growth was 7%, and the first-year effect of the Kreyenborg acquisition added growth of 2%. We generated organic growth in every product line, led by strength in disposable hygiene, polymer processing, and general product assembly end markets; and in every geography, with the exception of the Americas.

Sales volume in the advanced technology segment increased 28% over the prior-year fourth quarter. Organic volume growth was very strong at 21%. And the first-year effect of the Avalon and Dima acquisitions added 7% growth.

The organic growth was robust in all of the segment's product lines. In electronics end markets, demand for our automated dispensing, test and inspection, and surface treatment equipment was driven by a diverse set of applications in mobile devices, advanced semiconductor packaging, and automotive electronics.

Demand also remained very robust in our medical and industrial end markets, where we continued to see excellent growth in our semi-automated dispensing systems and single-use fluid-management components. Geographically, this segment delivered double-digit organic growth in every region, with the exception of the United States.

Sales volume in the industrial coating segment increased 16%, compared to the fourth quarter a year ago. The growth was driven by demand for our cold material dispensing equipment in automotive and industrial applications, coating equipment for food and beverage can applications, and UV curing equipment for electronics applications. The US, Europe and Asia-Pacific regions drove the segment growth, which was partially offset by softer conditions in Japan and the Americas.

Gross margin for the total Company in the fourth quarter was 55%, equal to the level delivered in the prior year, despite a higher mix of system revenue, where systems comprised 60% of revenue in the current quarter. Operating profit in the fourth quarter was $106 million, an increase of 22% over the prior year; and operating margin was 23%, as Mike noted, an improvement of 2 percentage points over the prior year's fourth quarter.

Looking at operating performance on a segment basis, adhesive dispensing delivered operating margin of 25% in the current quarter. On a normalized basis, to exclude non-recurring costs in both years, operating margin in the current quarter was 26%, compared to 27% in the same period a year ago, the difference largely attributable to product mix, and the negative effects of currency translation. For the full year, the adhesive segment's operating margin in FY14 was 26%, equal to the level of a year ago, and inclusive of a full year of the Kreyenborg acquisition.

Within the advanced technology segment, operating margin was 26% in the fourth quarter, an improvement of 5 percentage points as compared to the same period a year ago. On a normalized basis, to exclude non-recurring costs, the current quarter's operating margin within this segment was 27%, up 6 percentage points over the prior year's fourth quarter. The improvement reflects our ability to leverage increased sales volume, and ongoing continuous improvement efforts.

In the industrial coating segment, operating margin was 22% in the fourth quarter, an improvement of 5 percentage points over the same period a year ago. This is outstanding performance for this segment, which generally has a higher mix of larger-dollar, lower-margin engineered systems than the other segments. The improvement over the prior year's fourth quarter reflects our ability to leverage increased sales volume, and our continuous improvement initiatives.

Continuing down the income statement, net income for the quarter was $72 million, and GAAP diluted earnings per share were $1.13, an increase of 23% over last year's fourth quarter. As in previous quarters, we have included an earnings-per-share reconciliation schedule in our press release to reconcile between GAAP earnings and normalized earnings per share to exclude certain one-time items. On a normalized basis, that is to exclude one-time items in both years, fourth-quarter earnings per share increased 24% over the prior year's fourth quarter.

The current quarter's EBITDA was $123 million, up 20% as compared to the same period a year ago. Cash flow from operations in the fourth quarter was $105 million; and free cash flow before dividends was $90 million, an increase of 46% over the prior year's fourth quarter. And free cash before dividends was 124% of net income, reflecting very strong cash conversion in the quarter. We included a table with our press release reconciling net income to free cash flow before dividends.

We continued our balanced approach to capital deployment during the quarter, investing $72 million for the repurchase of shares, distributing approximately $14 million in dividends, and closing on the acquisitions of Avalon Laboratories and Dima Group BV.

From a balance-sheet perspective, we remain very liquid, with net debt to EBITDA at 1.8 times trailing 12-month EBITDA as of the end of the fourth quarter, and we have approximately $167 million available from cash and our current revolving credit facility.

As we announced earlier this month, Nordson's Board of Directors approved a dividend for the first quarter of FY15, and authorized a new $300-million share repurchase program effective December 16. As of today, we will have nearly exhausted the $200-million authorization from August of 2013, where approximately 2.7 million shares have been repurchased. We expect to maintain our disciplined approach to repurchases, offsetting the dilutive effect of benefit programs first, and buying additional shares opportunistically. We will use a pricing grid within a 10b5 repurchase program, whereby we will not repurchase shares over a certain price. Over the last four fiscal years, we have repurchased approximately $414 million, or 11% of Nordson's outstanding shares, at a discount of approximately 28% compared to our October 31, 2014, fourth-quarter closing price.

I'll provide a few comments on our full-year results. Sales for FY14 were a record $1.7 billion, an increase of 10% compared to FY13. This increase included a 6% increase in organic volume, a 5% increase related to the first-year effect of acquisitions, and a negative 1% impact related to unfavorable effects of currency translation, compared to the prior year.

Full-year operating profit was $367 million, net income was $247 million, and GAAP diluted earnings per share were $3.84, all of which are full-year records for Nordson. On a normalized basis to exclude non-recurring items in both years, diluted earnings per share for the year were $3.88, compared to $3.38 a year ago, an increase of 15%. Full-year EBITDA was $427 million, a 12% increase over the prior year, and free cash before dividends was $245 million, or 99% of net income; again, reflective of strong cash conversion. Dividends paid in FY14 were $48 million, and shares repurchased under the repurchase program were $164 million.

I'll now move on to comments regarding our outlook for the first quarter of FY15. 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 Avalon and Dima acquisitions included in both years.

For the 12 weeks ending December 7, 2014, order rates are up 10% as compared to the same 12 weeks in the prior year. Within the adhesive dispensing segment, order rates are up 1% over the last 12 weeks, as compared to the same period in the prior year. Strength in rigid packaging, disposable hygiene, and general product assembly end markets was offset by mixed demand in other end markets.

In the advanced technology segment, order rates over the latest 12 weeks are up 23% compared to the same period in the prior year. Demand remains strong for our automated dispensing equipment, supporting diverse applications in mobile devices, advanced semiconductor packaging, and automotive electronics. Demand was also strong for fluid management products related to medical and industrial end markets.

Within the industrial coating segment, the latest 12-week order rates are up 18% as compared to the prior year. Orders were strongest for cold material dispensing systems, supporting automotive and general industrial end markets. On a geographic basis, total Company orders were strong in Asia-Pacific, Europe and the US, and softer in the Americas and Japan.

Backlog at October 31, 2014, was approximately $223 million, an increase of 6% compared to October 31 of 2013, and inclusive of 4% organic growth, and 2% growth due to the Avalon and Dima acquisitions. Backlog amounts are calculated at October 31, 2014, exchange rates.

Let me now turn to the outlook for the first quarter of FY15. We're forecasting sales growth to be in the range of 5% to 9%, as compared to the first quarter a year ago. This range is inclusive of organic growth of 6% to 10%, 3% growth from the first-year effect of acquisitions, and a negative 4% impact related to the unfavorable effects of currency translation. At the midpoint of our revenue forecast, we expect first-quarter gross margin to be 55%, and operating margin is forecasted to be 16%.

We're estimating first-quarter interest expense of about $4 million, and an effective tax rate of approximately 30%, resulting in first-quarter forecasted GAAP diluted earnings in the range of $0.60 per share to $0.70 per share, inclusive of a $0.01-per-share charge related to the step-up in the value of acquired inventory. The midpoint of this range for diluted earnings per share represents an increase of 20% over the prior year's first quarter.

In addition to this first-quarter outlook, the following FY15 full-year data points may be helpful for modeling purposes. For our effective tax rate, we're forecasting the full-year rate to be about 30%, based on current tax law. For capital spending in 2015, we're forecasting normal maintenance capital spending to be between $45 million to $50 million, slightly lower than 3% of 2014 sales. In addition, we estimate approximately $20 million in capital expenditures associated with our previously announced investment for a new facility in Colorado, supporting our fluid management product lines.

In summary, our global team delivered record fourth-quarter and full-year results; and our outlook for the first quarter of 2015 is strong, given the current macroeconomic environment. With that, I'll turn the call over back to you, Mike.

Thank you, Greg. Before taking your questions, I'd like to provide some additional comments on our recent performance and outlook.

First, I want to thank our global team again for their hard work. Their commitment to our customers, and to continuous improvement, propelled Nordson to an excellent fourth quarter and another record year.

At the midpoint of our first-quarter guidance, we are expecting organic sales volume growth of 8% over the prior year's first quarter. We expect to leverage this growth to deliver improvement in operating margin and in earnings per share, as compared to last year's first quarter.

From a broader perspective, Nordson's future remains very bright, as we begin FY15. While the short-term trajectory of the global economy is hard to predict, our long-term strategy remains the same. We are focused on delivering top-quartile shareholder returns over the long term by growing and extending our high-value business model, focused on precision dispensing and adjacent technologies. That model includes leading technology, extensive applications know-how, and unparalleled global support and service.

Our specific priorities for 2015 are an extension of our recent efforts; clear and straightforward. First is to drive organic growth; our goal remains to outpace global GDP. Next is a continuous focus on innovation; this includes products and processes.

Third, we aim to further improve and integrate recent acquisitions. In addition, our acquisition pipeline remains robust, and we look to add additional pieces to the portfolio as well. Fourth, we want to further ingrain continuous improvement via the Nordson Business System. And finally, we continue to enhance our leadership and employee development initiatives.

Overall, the many applications we touch every day give us a great opportunity in the years ahead. Nordson's global team remains committed to creating the best customer experience, and helping our customers succeed. We expect to be continuing to provide excellent returns for our shareholders over the long term.

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

(Operator Instructions)

And our first question comes from the line of Joe Radigan of KeyBanc. Your line is now open.

Maybe let's start with advanced tech. How much of the organic growth in the quarter there, and maybe some of the strength in your order growth, is coming from new products? I know you've talked about the in line x-ray product, you thought that could be pretty significant over time. Are you seeing a significant uptake in that or, can you maybe bucket around mobile, traditional back end, and the other niches, where you're seeing growth in advanced tech?

Yes. Maybe I'll start with that last, last point first, Joe. Mobile continues to be a strong part of the equation, but we did see some significant uptick in the quarter, and certainly in the order rates, in terms of advanced semiconductor packaging.

And quite frankly, with the general improvement in the auto market, we're seeing more and more electronics go into there and a lot of our applications around things like conformal coating support, that auto market, and then we've seen some increase in other niches as well. So it's starting to be a bit more broad based, at least in this recent quarter with the orders than maybe it has been over the last year and a half. We'll see if that's sustainable but that's certainly an encouraging sign, and in line with what folks like Gartner are starting to predict for next year.

As far as new products, we have a number of new products coming out this year. We had some traction with some new dispense products in the electronics side of things.

I think we mentioned last time we got our first order in terms of the new wafer inspection tool. We expect another one to come through here shortly, and we have a nice prospect list that should fill out the rest of the year.

And of course, we are adding capability to address the tiering side of things in that business, with expanding our capability in Suzhou, and quite frankly the Dima acquisition is a product line extension for us, that will give us a mid tier product to support that activity. And then finally in that area, our medical business is doing really well. We're expanding our product lines.

We're getting good traction with those expanded product lines, and our [chorio feed] business has also been very solid, both in electronics and in the general markets. So pretty good story all around at this point. A little different than the beginning of the year.

Yes. Okay. And then in industrial coatings, I mean, a very impressive margin performance there. Kudos to Doug and his team there, but how much of that is mix versus, productivity improvements, favorable raw materials? I know that's a volume based business, and then going forward, orders are up 18% for the second quarter in a row.

How do you, what's the typical order to revenue conversion time there? Do you expect that strong order growth to carry into revenue growth into the first quarter, which is typically seasonality slower?

Yes, so a couple of things. As you know, the industrial coating has been team has been working hard over the last few years to drive continuous improvement, improve the overall cost performance of that business, not only on the current day-to-day activity, but as we introduce products into the marketplace, and so they've done a really nice job there. And like all of our businesses, there's good volume leverage, and we've saw an extraordinary large quarter, probably $8 million to $10 million higher than anything that we've seen before. That's on the strength of things like strong auto, some appliance type activity in the US, a good container recapitalization business.

And then going forward, the orders continue to be strong in those areas as well as a couple of others. The typical lead times for those systems-related businesses are longer than most of our businesses. They're in that 8 to 12-week time frame, but obviously, they factor into our expectations in the first quarter.

Okay. And then maybe lastly for Greg, corporate expense was a little elevated in the quarter. I'm assuming there's some deal cost in there from acquisitions that you did, but how should we think about the run rate going forward for corporate expense?

Yes. I think the run rate, if we think about FY15 will be in that $40 million range, similar to what we saw in FY14.

Okay. Thank you.

Thank you and our next question comes from the line of John Franzreb of Sidoti. Your line is now open.

Just going back to advanced tech. Mike, it sounds like the growth here is more coming from maybe new market opportunities in automotive rather than a major shift in customer product development time in mobile. Is that the case, or am I not hearing this correctly?

No, I would say we've had, this quarter and the order rates looks like a more balanced portfolio than maybe we saw in the last quarter or two, where mobile was the primary driver. So auto, the auto business globally has been improving for a number of years, and what you're seeing is an increased penetration of electronics type products into auto. And that's just -- that started more recently to translate into capacity, and so as it translates into capacity, we see some opportunities. I mentioned conformal coating, that's just one application where we support that activity. So I think that's good.

And then on -- the mobile remains strong and everybody is trying to come up with wearable products so we're seeing some opportunity there. And I think as we mentioned last time, we started to get in traction penetrating the Chinese mobile market. It's early yet, and it's not 100% clear what degree of automation they'll go to, but we got our first orders there. So that's encouraging as well.

Okay. And --

Just not to lose track, it's not all electronics. Our general industry fluid management, the components business has been strong, and the medical business has been particularly strong. So right now there's a nice balance, it was little bumpy earlier on -- as the mobile waves come through, but, in this latest quarter and the near term, it's a little bit more balanced.

Right. I mean, that's how I figured it, that side of the business would be more steady state, but the variance would largely come from what we're seeing in mobile, and having mobile strong this time of year seems counterintuitive to me.

Yes, it's a little bit different than just the phone launches because, there are a whole bunch of people trying to do more and more wearables, so we're seeing some orders from that as well. But the more traditional advanced semiconductor packaging, we started to see that tick up as well, and as I mentioned, Gartner's forecasting a pretty robust year for next year, it's never 100% correct, and then, some of those local Chinese wins are helping a bit, so.

Okay. Fair enough, and in adhesive dispensing, it sounded like in your press release that the polymer processing business was again improving for the second consecutive quarter, but the margin profile may suggest that's not the case. Is [Biex] still a drag, can you just walk us where we are in the recovery of that business?

Yes, I would say, maybe I'll just touch on the overall margin fees for adhesives first and then I'll answer the second part of that question.

Okay.

The overall margins for adhesive in the quarter were impacted by two things: one, currency, without currency on a normalized basis, we'd be flat year-over-year. We also took a bit of a write off as we wound down part of our historical web coating business in Europe, and so those two things impacted the margin in the short-term.

Currency first, and then that write down, and that's with a greater mix of systems versus parts in general. And a greater mix of things like nonwovens product assembly and the polymer area that tend to be more systems-oriented than packaging, which tends to be more components.

I'd say if you look at polymer processing, right now the injection molding end markets are solid, the film side of the business is still sluggish, and still a drag. In general I'd say the slowdown in Europe, the slowdown in China, the slowdown in the Americas are not helping that from an order perspective, because it's really impacting the capital expenditure side of things. And on the demand side, it's not chewing up the capacity fast enough, so that's still a little bit of drag on the film side, the injection side is pretty solid.

Okay. And one last question, since you opened the door, Greg, could you walk us through the currency impact on the P&L? Just some of the puts and takes we should be cognizant of given some of the recent moves in the Euro and the Yen?

Yes, what you see in the quarter and clearly that's embedded in our guidance for the first quarter, is the translation effect primarily Euro and the Yen, and so in the, in the current quarter as Mike mentioned, we've got a heavier exposure within the adhesive dispensing segment, so X the currency effect, we would have been neutral, as Mike mentioned to prior year, and in the current quarter, it was a drag on EPS by about $0.04 per share.

Now, when we guide to a currency impact of 4% on the top line for the first quarter, we've provided some modeling that coordinate between the percentage impact on sales, and percentage impact on prior year EPS. And so we see that to be in the mid cents to high single digit cents per share impact in the first quarter. That's our rule of thumb that we use, and we include some of that in our investor presentation.

Yes. So if you look at a, 1% revenue hit, you might be, rule of thumb, 2.5% on the earnings side.

Right.

Perfect. Thank you very much guys. Thanks for taking my questions.

Thank you. And your next question comes from the line of Kevin Maczka of BB&T Capital Markets. Your line is now open.

Can we, again going back to advanced tech, considering the deals that we've just done here, the Avalon and the Dima, and the growth rates that we've seen in all these various components, Mike, can you size for us where that mix stands now in terms of mobile and auto and fluid management, medical, some of the big buckets there? What does the mix look like now?

Yes. If you look at, if you look at the total segment, roughly half of it would fall into what we call our systems business, and that's electronic systems business, that's largely electronics and about half of it would fall into more of the component or semi automated side of things, which has a bit of electronics overall in it.

And that's what we refer to as fluid management.

That's what we refer to as fluid management. So, roughly half and half. Within fluid management side of things, we have an electronics piece, we've got a general industry piece, and we have a medical piece. The medical piece is growing, probably next year we'll be somewhere in the range that's, I don't know, $70 million, $80 million, $90 million range on the medical piece alone.

The general industry piece is a broad-based set of applications, everything from materials that are packed and filled that go into caulking applications to herbicide, pesticide dispensing to a variety of different manufacturing activities, largely related to plastic components. On the mobile side, we're still, on the electronics side we're still more heavily weighted to the mobile. Going back several years it might have been a third mobile, a third components. Sort of mixed markets and a third traditional semiconductor packaging. It's considerably more skewed to the mobile, so closer to 50% or so.

What we're seeing here more recently is that more traditional packaging piece starting to come back. We've seen a few starts and stops before, people are a little bit more optimistic right now that's going to continue, and we're certainly seeing orders in those areas like advanced semi packaging and some of the traditional packaging. And then, we're also supply components that go into a variety of different devices, a lot led by mobile, but some others.

And the auto piece is really, that's a big MEMS type market where you're taking electronic signals and converting to mechanical actions, so you can think about almost nothing is mechanical these days completely, in terms of linkages and things like that, it's all electronic signals to the final endpoint, so that's growing. You know we see that particularly, where auto is strong in US and Europe, and quite frankly even in China now as the auto market grows there. So still weighted to the mobile side, but some of those other things are coming on. Hopefully that will sustain itself.

Okay. Great. Shifting back over to adhesives margins, I guess if I understood you right, currency was the biggest drag there in the quarter. That will be an issue we face as we go into 2015 as well. I'm just wondering, I know you don't guide the full year, but it seems like it will be hard to grow adhesive margins, even with some volume leverage from organic growth here, if we still got that currency headwind, unless the mix dynamic gets much better. Is that a fair way to directionally think about that?

Yes. I think it's going to be, who knows where the currency is going to go. I mean, I don't, I don't know that anybody predicted the dramatic change recently here in the Yen and the Euro, but if nothing changed from where we are today, we'd probably have another quarter or two of impact on a year-on-year basis that will create a headwind, and will challenge the margins, particularly in that business. It's not exclusive in that business, but if you look at the size of that business in Europe, and if you look at the size of the business in Japan, and quite frankly we haven't talked about it, but it's a nice part of the business in Brazil, all of those are under pressure, and so there's probably at least another quarter or two of impact, if nothing changes.

Now, if the Europeans get aggressive with the quantitative easing approach, and help to do something to boost the economy there, that may change. Certainly the Japanese are trying to figure out what to do, but it's not obvious that change is in the next quarter, and maybe it's another quarter or so beyond that, we'd see that impact, and yes, it would be a headwind.

Got it. And just finally for me. From a macro standpoint, with Europe soft, China slowing and Japan in recession, you had very strong order numbers in both Europe and Asia-Pac. I guess Asia-Pac is probably explainable by the strength in advanced tech, but can you speak to the Europe portion, and the plus 10 order number there?

So part of that is a function of the market segments we're in and the particular products. So we're seeing some, and quite frankly surprisingly, we're seeing a good order book, even though the economy looks like it's struggling. Each of the businesses are pretty strong.

The coatings business, we're still seeing some strong activity on the container side of the business, and on the auto side of the business, those two things are solid. On advanced tech, in Europe, it's mostly related to those auto type applications, and some other back-end packaging. On adhesives, we do export out of Europe to other countries for things like nonwovens and so forth, because there's a large OEM base there. So some of it we're benefiting from that,.

And quite frankly in very short-term, there are some projects that have come through that, maybe more timing than anything else, so there's a little bit of a bump there from timing. Clearly in a number of our businesses, we're taking share as well. So there's a variety of things there that make that look a little different than what you would expect, given the softness as you've described.

Yes. Okay. Great. Thank you.

Thank you and our next question comes from the line of Mark Douglass of Longbow Research. Your line is now open.

Greg, if there aren't any significant, well first of all, do you expect any significant investments going into 2015, I mean, like you did in 2013, you had some new products you were investing heavily in, say tech, anything we should anticipate for 2015? And taking that into consideration, if we still saw a mid single digit organic growth here, what incremental margin should we apply in a range to 2015?

Yes, on your first question, incremental to 2014, I wouldn't see any, anything to call out, with the exception on, as I mentioned, the CapEx side, where we've got the completion of the facility in Colorado.

And let me just comment and I'll let Greg answer the rest of this. On new products, we do have a lot of new products coming in, but I would say they are more in the normal course of business rather than the step outs, like particularly the wafer project that we talked about last year.

Yes. Then on the, on the incremental margin, Mark, it's going to, it now gets to what's the -- we talked about a mid single digit organic. It's where, by segment, what's the mix impact of that going to be, what are going to be the growth drivers of that total top line growth.

If you look at what we delivered in the fourth quarter here, on a normalized basis, it was about 36% normalized incremental margin. Of course, we've got the currency impact that's having an impact on the margins embedded in there. So tough question to answer without knowing what's going to be the driver of the top line growth.

Yes. And if you look at historical, and take currency aside, the coatings business just by the nature of that business being all engineered systems, with a lot of buyout. Incremental margin in those businesses tend to be in the, pick a number, 30% range plus or minus, advanced tech a little bit better, adhesives generally considerably better. But as we said, that's where the currency impact is going to effect us.

So overall, in a non-fluctuating currency market, somewhere in that 30% to 50%, depending on the mix is what we expect. Currency is going to weigh on that.

Right. Okay. And looking at adhesives again, good, very good growth in 2014. With, what, 6% organic growth.

Can you talk about what some of the more significant end markets were that drove that? You mentioned market share, can you peg how much was share gains or, if you think different markets grew at? How much was it Freedom? Is that material yet or is that still trying to gain traction?

So if you look at it in the packaging, really in packaging, nonwovens and product assembly, they were all good. I'd say this year we saw probably more of a step up in the nonwovens and the product assembly area, which tend to be bigger-ticket items and packaging was solid.

So the nonwovens are things like, the consumer non-durables like, diapers and continence products and feminine hygiene products and the product assembly is construction-related activities as well. And then we saw an uptick, also in the polymer side, both in the pelletizing stuff that came with Kreyenborg, and then the general injection side of the business there.

There is, there is a share element to all of these, to all of these businesses as we continue to direct and introduce technology. I would say that's not the biggest driver of things.

And then I'd say Freedom and then Freedom Liberty combination, we probably delivered where we thought we were going to be from a revenue and profitability standpoint, not quite where we thought we were going to be on the unit side of things. I think we're encouraged by what we, what we see there.

One of the things that's a little bit of a gating item that we've talked about is, the new adhesives that were going to increase the mileage, and were more difficult to melt, are still not readily available and this has to do with some things in the ethylene supply chain. All the suppliers are saying, next year we're going to see those, but they said we were going to see those this year, so I'm not trying to throw those guys under the bus, it's just they don't control the full supply chain, and there's some other issues upstream of them that are impacting that.

So I'd say revenue and profit-wise we were on track, and that contributed to things. But I think we also did well in the emerging markets with our tiering products. So we've got done really well in particular on the adhesive side of our tiering products.

And then the mix with nonwovens products, product assembly growing a little faster than packaging, that explains, that's when you're talking about the mix impacting the margins?

Yes, those tend to be, if you look at the most component only looking types things are in the packaging side, and you have, as you go to nonwovens, and then really certainly to product assembly, you've not more of partial system type sale there, that tend to be good margins, but lower than the packaging margins.

Right, and you said parts were about 40% of sales?

Yes. They were about a percent or so higher systems than parts, year on year.

Right.

Okay. Thank you.

Thank you and our next question comes from the line of Christopher Glynn of Oppenheimer. Your line is now open.

So I had a question about the acquisition pipeline, and wondering how much of your focus and pipeline is in that medical components space, and what your expectations might be there?

Well, we like the space, the acquisitions that, that we have made, prior to this past year. I've had nice double-digit growth as we've continued to penetrate the market, expand the product line. The little product line acquisition that we bought from Covidien exceeded our expectations this year.

We really like the new business coming in with Avalon, that gets us more broadly into cardio and pulmonary type of services. And as we've said in the past, it's a pretty fragmented market in terms of the folks that make a number of these, particularly plastic-oriented highly-engineered components that go to the big OEMs, and that's the place we like to be. And so there's still opportunities out there that run the gamut of just the simple product line extension, to something that's a little bit bigger and maybe even a little bit bigger than the acquisitions we made today from a revenue standpoint.

So we're working a list there. We like it. We like the opportunity to consolidate. The new facility in Colorado is not only helping the medical business, but some of our other EFD businesses.

With Avalon, we've got a manufacturing capability in Mexico that we'll likely expand and take advantage of that, for more of our assembly type operations. So we feel good about that, and the opportunities that are out there. Timing's never clear and you don't necessarily everything you look at, if it ends up being an auction.

Okay. Thanks for that. You ever think much about hedging on the FX side?

Yes. Chris, this is Greg. Hedging for us on the FX side, if we were trying to anticipate where our source of foreign revenues would be, it's challenging to forecast that, and then to do anything to hedge it can create quite a bit of volatility in the P&L, if you're wrong. We do hedge some of our intercompany volumes where it's more, there's more surety around those volumes, so we do some of that, but to try to get in front of hedging the third party revenues, I'd be concerned about the volatility that could create in the P&L.

Okay. And then lastly, you've had a nice string of quarters of good growth at ADS, and then the last two quarters, pretty flattish on the orders. Do you think that might level out on organic for a while here, or you see that staying positive on the organic for FY15?

Well, our overall long-term view of that business is 5%, 6%, 7% growth. Last year, 2013, it wasn't much growth. This year, we saw pretty nice growth. I think part of this comes down to what do you think the macro assumption is?

Our view is this year, global GDP is probably going to come in at a little over 2%, 2.2%, something like that, 2.3%. We're anticipating next year looks similar, so we should get some leverage over and above the GDP. But again, that business, on a revenue line, will be impacted by the currency in the short-term.

So we think we can grow that at a multiple of GDP. We don't think next year is going to be super robust, I mean, the US looks strong, but every place else doesn't look stronger than this year, unless something turns around in Europe and Japan, which could happen with policies. But we're not any better than anybody else forecasting that.

So we should outpace the GDP. I think with some of the things like nonwovens and product assembly you're into more of an investment cycle than a day-to-day operating upgrade and improvement cycle, and that can vary year to year, depending on where people, where people are.

So we saw a good year this year at, I think the US, we expect to see strength going forward. China we think will pick up, although not at the rates that may be it's been. Worried mostly about Europe.

Thanks for the color.

Our next question comes from the line of Allison Poliniak of Wells Fargo. Your line is now open.

Just back on the comments about Freedom, I know you cited adhesives as being one of the reasons that volumes haven't necessarily picked up, but is there any concerns about competitive reaction holding that volume down?

No. No. We have placed hundreds of units out there and markets plus through OEMs, and our Liberty market was, was the next tiered opportunity geared more at the OEMs. So if you went to the packaging show in Chicago, you'd be impressed with just this last month, you'd be impressed by what you'd see on the OEM side of that.

So no, from a competitive standpoint, we have good competitors out there. We do think we have the best model, that's a combination of technology and service out there. As we have talked about in the past, part of this is a function of what's the overall riding benefit here and when's the last upgrade that our customer base have gone through?

So we, between the last major product launch and this one, we didn't stop. We were out selling feed systems and upgraded nozzles and dispense equipment, so somebody just bought that combination, they're not going to be ready to buy it right now.

So our big driver was the higher mileage adhesives, and what that means is you use less adhesive for the same bonding properties, and that, they're just not available yet. So I'd say we've got, we did pretty well, as I said, on revenue, where we expected, and profit, probably where or better than we expected. Volume was a little short but it's not a competitive issue.

Great. And then I guess just broadly speaking, a lot of positive momentum heading into 2015. Whether reason or business, is there anything that you're overly concerned about at this point for this year?

I don't know that I would say overly, but as you think about where we're at right now, the US looks strong. It looks like it's continuing to get strong. That's good for us.

Europe has gone backwards at the moment. It wasn't block buster this past year and it's going backwards. We're not seeing that in our order rates yet because some of the markets that we're involved with, and doing well.

I think China will be okay, but it's at the new normal, so it's not that double digit growth that you saw. Asia outside of China, doing pretty well. Japan is going to struggle this year. Latin America is not going to come back.

So I would say globally, the mix will look a little different, that's why I think it's going to be a more modest growth. Quite frankly, in the short-term, the biggest concern is the currency side of that, and particularly given the dramatic moves in the Euro and the yen, and we bypass that later in the year. It would be great to see some monetary fiscal policy out there that would help modify that, before we get out to say the third quarter or so.

And we'll certainly do what we can on pricing actions, and others to try to mitigate some of the impact of currency, but we recognize that's a headwind.

Great. Thanks.

Thank you. And our next question comes from the line of Charley Brady, of BMO Capital Markets. Your line is now open.

Just a clarification on the parts mix. That 40%, is that Company-wide or is that adhesive dispensing?

Yes, that was total company, Charley.

You have it for adhesive?

And adhesive dispensing, as we've said in the past, the segments are, they pretty much overlay that total Company. On any given quarter, adhesive might tend to be a bit more in the parts than total Company, but all the segments are very close to that total Company number. Yes, and my comment Charley, is just year-over-year adhesive is probably 1% more systems than parts.

Yes. And it was.

Okay. All right. So that obviously had at least some impact on the margin, as well, I guess?

Yes. It does.

I just want to go back and look at the adhesive dispensing orders in the quarter, just so I understand it a little better. I mean, 1% this quarter, zero last quarter, how much of that is a currency headwind? You framed it in terms of global GDP, but, that would obviously be below global GDP, so I'm wondering how much of the impact the currencies hit you this quarter, or was there something else going on that's maybe a headwind to that order?

Yes, I would say it's not, it's not a currency issue from an order perspective. I think really what we're starting to see is are things like, if you look at certain economies and what's going on, mainly outside the US. And a little bit, the Americas for example are soft, Japan we saw an impact, a pretty sizable impact here from an order perspective, and even a little bit in the US, which could be timing-related issues, so not overly concerned with what we're seeing there, but, because it could be just timing year on year.

Okay. Thanks.

Thank you. And our next question comes from the line of Walter Liptak of Global Hunter. Your line is now open.

I wanted to ask, you've touched on this already, but and maybe just to frame it this way. With the organics last year at plus 6%, in your 2014, as you look, it looks like heading into this year, things are a little bit slower. What's the tone that you're getting from customers in terms of budgeting for 2015?

And if it is a little bit more cautious, and we're going to expect organics, and something lower than 6%, is there something that you do to mitigate? Is there a cost focus or is that some restructuring? You mentioned, Avalon and taking some manufacturing down to Mexico. I'm just wonder if you can address that cost side?

Yes, just so just to clarify. Coming into the year, at least with the first quarter, we're -- the midpoint of our guidance is about 8% organic, so still at least to start is reasonably solid. And from a customer perspective, we in Europe, I would say across the businesses, the prospect was, bid activity dialog is, considerably more encouraging than the macro number that you're seeing from an economic perspective.

I'd say, if you go to a place like Japan, we've got project activity there, but it's not quite as, as robust if you look at it, so that's a little bit different. I'd say if you look at China, you have a solid prospect list and good expectations, but they're at a new, a new normal, so we think that probably looks a little bit like this year, or maybe even slightly less than this year from a macro standpoint, so it's a mix.

On a global GDP basis, we're still expecting a two-plus number. I think if you went back a couple, three months, people might have expected a three plus number. That wasn't our expectation.

So we looks like next year is like this year. So on a volume basis, we'd expect solid volume growth. On a revenue basis, we are going to see some impact at least in the short-term, unless something changes on the currency side.

From an overall cost perspective, we have a pretty robust continuous improvement plan. We've got a number of things that we're working on across all the businesses, from the day-to-day activity that we embrace in our Nordson Business System to some project activity, so we're constantly focused on that.

In the earlier part of the year, you know we can respond pretty quickly, in the earlier part of this year, when things were a little bit soft, we did also some restructuring in certain businesses, to lower our cost base, and that's played out in improved earnings and margin, as the volume has come back. So we can respond pretty quickly. We look at things pretty closely.

The Avalon addition or benefit we got with the facility in Mexico, and we probably will expand that facility, both because of the demand and then the opportunity maybe to optimize our supply chain is a good thing that we're looking at across our other businesses, as well, in terms of improving footprint efficiency and supply chain efficiency, so there are opportunities there. But in the short-term --

Okay. We're still here. If you can hear us.

I thought maybe we lost you. In the short term, we go into every year starting off cautious until we see the volume playing out. We are encourage by the pretty solid order rates that we see across the businesses right now, but we are concerned in particular about Europe and Japan, I'd say, even though in Europe, we're not seeing that right now. Japan, maybe we are seeing that right now.

Okay. Okay. Just to clarify, so what you're hearing from your customers, what you're thinking about is something similar in terms of organics for 2015 versus 2014?

Yes I'd say the global mix is maybe a little different maybe stronger in the US than it was last year, but I'd say even the European across most of our businesses, European customers are pretty optimistic. That said, from a macro, if you look at it, our business model is strong, our market focus is strong. We're going, we're going to win the battle most of the time, but we float on the general economy.

So we're not going to be impervious what's going on in the general economy, so your guess is as good as mine as to how Europe Japan plays out whether anything comes, whether Europeans can get together and drive more growth there, whether the Japanese latest plan can improve things. I think China will manage their growth and we'll see that and benefit from it. And outside of China and a Japan and Asia, we see a pretty robust and positive set of expectations from the customer base there.

So it's a mixed bag, a little bit different than last year's mixed bag. Our expectation is similar growth. If we see more, we'll benefit from that. If we see less, we'll adjust from a cost perspective.

Okay. Sounds good. The US part of it, is the mix, the margin mix better in the US? Is there more adhesives, or if the US strengthens here, what do you think the margin mix will looks like?

I think as a it continues to strengthen we might see more systems in general to the mix, and so, certainly if you look at the orders, order rate going into the first quarter, we've got really strong orders in our coatings and technology business, and softer in the adhesives to start, so that mix doesn't necessarily help the margin, but we would expect the adhesives to pick up as the year goes on.

Okay. Got it. All right. Thanks for that. And with the accelerated share repurchase, is there a preference that you're signaling for acquisition, or repurchase over acquisitions, or is it just that you've got the cash flow, and you can do both?

Well, we have a balanced program out there and I think we've talked a little bit in the past about our priorities. I mean, number one, to support organic growth. Number two to continue with the dividend approach, and we're getting up into that 20% range, but we would like probably get a little bit higher, the mid 20s so we keep pushing, we keep pushing that.

Number three would be to find the right kind of acquisitions, but we have no control over availability and timing, although we're working it, right? And number four, we need to be opportunistic on the share repurchase, and we always want to have a program in place, so we can take advantage of it. If you look in this last quarter, we had some fairly wild movements where the stock dropped back into the upper $60s, and we were buying much more aggressively as part of our program when that happened, so we always want to the ability out there to take advantage of market movements, and it would seem that at the moment maybe volatility is picking up.

Okay. Got it. Okay. Thanks very much.

And Candace, we probably have time more one more question, and then we'll have to sign off.

Thank you. And our last question will come from the line of Liam Burke of Wunderlich Securities. Your line is now open.

Mike, Nordson Business Systems is a big push of one your strategic focuses. Could you give us a sense of the progress your continuous improvement initiatives, plans have made in the polymer acquisitions?

Yes, so if you look at -- overall the Nordson Business Systems there's probably six to eight areas of focus that we have, and that's everything from new product development to supply, to the overall supply chain, that would include sourcing, manufacturing, distribution, and logistics to things like sales force effectiveness, to pricing and segmentation, a variety of things like that. I would say we have made good progress on the polymer side, on things like, pricing.

I would say we've made reasonable progress in terms of improving the supply chain aspects of it, so think about that as sourcing and manufacturing. The biggest benefits, as we've talked about there, would come from overall optimization of the supply chain, and then leveraging the organizations together, and those are the ones we also said would take a little bit longer. We are doing some things right now to facilitate that supply chain optimization, and over the next couple of years, that should play out.

And then from an organizational standpoint, it comes down to how do we align behind the front lines, the engineering side of things, and then we continue to work through the direct versus distributor versus agent approach there, and so those things have the biggest impacts, but others are still to come. So I would say good progress today. Need more volume to translate that into bigger benefit, and then a couple of the bigger things are going to take another couple of years probably.

Okay. Great. With the Colorado Springs facility at capacity, obviously the necessity to build a new facility was there, but Mike, are there any other economic benefits you're going to get from the new facility, medical facility in Colorado?

Well, we continue to -- for that facility to be our state of the art, in terms of the highest level of automation, and so as we build out, not only to support the demand, we're likely to include the capability to manufacture other products there, and preclude some investments that we need to make, in say, other EFD type facilities and be able to do that there in a more automated way, so we'll get some benefits from that.

And then in the combination of now having this capability for some labor intensive aspects of the business with the Mexico facility, we'll optimize where we do, the more highly automated activity, versus where we do more manual activity. So there's some combined benefits there, but we keep going to more sophisticated capability in these facilities. So an example, maybe a 16 cavity machine becomes a 32 or a 64 cavity machine, where you're doubling or quadrupling the output. Those kinds of things.

Great. Thank you, Mike.

Okay. So this is Jim. I want to thank everyone for attending the call. I do have time today, I do have some calls today, but please get in the queue if you have follow-ups. I'm also around next week and glad to take questions throughout next week as well. So thank you everyone, and very happy holidays to you.

Thank you.

Thank you, everyone.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Have a great day, everyone.