Nordson Corp (NDSN) 2016 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Nordson Corporation webcast for fourth quarter and FY16

(Operator Instructions)

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

Thank you, Kaylee, and happy holidays to everybody listening. I'm here today with Mike Hilton, our President and CEO, and Greg Thaxton, our Senior Vice President and CFO. We welcome you to our conference call today, Wednesday, December 14, 2016 on Nordson's FY16 fourth-quarter results and our FY17 first-quarter outlook.

Our conference call is being broadcast live on our web page at Nordson.com/investors and will be available there for 14 days. There will be a telephone replay of our conference call available until December 21, 2016, which can be accessed by calling 404-537-3406. You will need to reference ID number 25973581.

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'll have a question and answer session.

Now I'll turn the call over to Mike for an overview of our FY16 fourth-quarter results, and a bit about the first-quarter outlook. Mike, please go ahead.

Thank you, Jim. Good morning, everyone. First I'd would like to thank our global team for their outstanding work, not just in the fourth quarter, but for the whole year where sales, operating profit, and earnings per share were all full year records for Nordson.

Looking at the fourth quarter, our record sales were driven by organic growth of 13%, compared to the same period a year ago. All three segments and most geographies contributed to this growth.

Our team did a great job leveraging this increased volume, and focusing on continuous improvement initiatives to improve operating margin by 5 percentage points compared to last year's fourth quarter. Diluted earnings per share increased 56% over the same period.

Other highlights in the quarter include the acquisition of LinkTech Quick Couplings which adds to our medical offering, and an increase to our annual dividend for the 53rd consecutive year. Overall, our fourth-quarter performance was a great way to end the year, and one that was a very strong year for Nordson.

Nordson's momentum continues as we began the new year. Our backlog is up significantly from the same time year ago, and our 12 week order rates are positive in all geographies and segments.

In a few moments, I'll offer some additional perspective on our performance, the macro economic environment, and our outlook for the first quarter of FY17. But first, I'll turn the call over to Greg, who'll provide more detailed commentary on the fourth quarter and our first-quarter guidance. Greg?

Thank you, Mike, and good morning to everyone. I'll first provide some comments on our fourth-quarter and full-year results, before moving on to our outlook for the first quarter of FY17. Sales in the fourth quarter were $509 million, a 14% increase from the prior year's fourth quarter. This change in sales included organic volume growth of 13%, and a 1% increase related to the first year effect of acquisitions.

Looking at sales performance for the quarter by segment, adhesive dispensing segment sales volume increased 3%, as compared to the prior year fourth quarter. Our general product assembly, rigid packaging, and nonwoven product lines led the growth in the current quarter. Asia Pacific, Europe and the United States were the strongest regions.

Sales volume in the advanced technology segment increased 32% from the prior-year fourth quarter, including a 30% increase in organic volume, and a 2% increase related to the first year effect of the LinkTech acquisition. Organic growth was robust across this segment's electronic systems and fluid management portfolios, led by demand for our automated and semi-automated dispensing product lines. The growth was positive in nearly all geographies, and was strongest in Asia Pacific and Japan.

Organic sales volume in the industrial coatings segment increased 12% compared to the fourth quarter a year ago. Demand for our cold material dispensing and automotive and other durable goods end markets drove the growth. Growth was strongest in the Americas, the United States, and Japan.

Gross margin for the total Company in the fourth quarter was 54%, a 1% improvement over the prior year driven primarily to favorable mix. As part of our previously discussed margin enhancement initiatives, we incurred one-time costs during the fourth quarter of approximately $6.4 million, mostly related to restructuring and severance as we worked through rationalizing our footprint within the adhesive segment. Restructuring costs associated with our margin enhancement initiatives are largely behind us at this point.

We also incurred $211,000 of short-term purchase accounting charges in the quarter, related to acquired inventory within the advanced technology segment. Operating profit in the quarter including these one-time charges was $111 million, and operating margin was 22% or 23% on a normalized basis to exclude one-time charges. Reported operating margin in the quarter improved by 5 percentage points compared to the prior year through the combination of volume leverage, mix, and the net effect of continuous improvement initiatives.

Looking at operating performance on a segment basis, adhesive dispensing delivered operating margins of 24% in the fourth quarter, inclusive of approximately $5.6 million of restructuring charges. Normalized operating margin within the segment to exclude these one-time charges was 26%.

Within the advanced technology segment, reported operating margin was 26%, including the $211,000 of short-term purchase accounting adjustments for acquired inventory, and $373,000 of one-time restructuring charges. The industrial coatings segment delivered operating margin of 23% in the fourth quarter, including $468,000 of one-time restructuring charges.

Net income for the quarter was $76 million. Fourth quarter GAAP diluted earnings per share increased 56% compared to the prior year to $1.31 or $1.39 on a normalized basis to exclude one-time items. We've included an earnings per share reconciliation schedule on our press release to reconcile between GAAP earnings and normalized earnings per share to exclude certain one-time items.

The fourth quarter's EBITDA was $128 million, and cash flow from operations was $136 million. Free cash flow before dividends was $121 million reflecting strong cash conversion of 160% of net income. We've included a table with our press release, reconciling net income to free cash flow before dividends.

Capital deployment during the quarter included acquiring LinkTech to add to our advanced technology segment's medical offering, increasing our annual dividend for the 53rd consecutive year, and reducing notes payable and debt by $59 million.

I'll now provide a few comments on our full-year results. Sales for FY16 were $1.8 billion. Organic growth for the year was a robust 7% compared to the prior year. This is outstanding growth, given the challenging macroeconomic environment of 2016.

Full year gross margin was 55%. Full-year operating profit was $388 million, and reported operating margin was 22%. This operating margin is an improvement of 3 percentage points compared to the prior year, with full-year incremental operating margin of 59%. Net income for the full-year was $272 million, and GAAP diluted earnings per share was $4.73, a 37% improvement over FY15.

Full year EBITDA was $459 million, and free cash flow before dividends was $272 million or 100% of net income, again reflecting strong cash conversion. In addition to funding organic and acquisitive growth initiatives during the year, Nordson invested $32 million to repurchase shares all during our fiscal first quarter, paid $56 million in dividends for a full-year payout ratio of 21%, and reduced leverage on the balance sheet from approximately 2.8 times trailing 12 month EBITDA at the start of the year to approximately 2 times at the end of the year.

I'll now move on to comments regarding our outlook for the first quarter of FY17. As we typically do, we provided our most recent order data, both on a segment and geographic basis with our press release. These orders are for the latest 12 weeks, as compared to the same 12 weeks of the prior-year on currency neutral basis, and with acquisitions included in both years.

For the 12 weeks ending December 4, 2016 order rates are up 17%, as compared to the same 12 weeks in the prior year. Within the adhesive dispensing segment, the latest 12 week orders are up 8%, as compared to the same period in the prior year. Orders were up in all product lines, and were led by polymer processing and rigid packaging. Asia Pacific, Japan, and the US were strongest geographically.

In the advanced technology segment, order rates for the latest 12 weeks are up 34%, as compared to the same period in the prior year. Order rates were up in all product lines and all geographies, most by double-digits.

Within the industrial coatings segment, the latest 12 week order rates are up 11%, as compared to the same period in the prior year. Cold material dispensing equipment for automotive and industrial applications, and powder coating equipment for consumer durable end markets drove this growth. The US, Europe, and the Americas were strong geographically.

Backlog at October 31, 2016 was approximately $274 million, an increase of 20% compared to the prior year, with less than 1% of the increase due to the LinkTech acquisition. Backlog amounts are calculated at October 31, 2016 exchange rates.

Let me now turn to the outlook for the first quarter of FY17. We're forecasting sales to be in the range of up 4% to up 8%, as compared to the first quarter a year ago. This range is inclusive of organic volume of up 6% to up 10%, offset by negative 2% unfavorable currency translation effects, based on the current exchange rate environment. Relative to current order rates, this sales outlook reflects expected moderation in order rates as we move through the quarter, and some of the recent orders will benefit our second quarter.

At the midpoint of our sales forecast, we expect the first-quarter gross margin to be about 55%, and operating margin to be approximately 18%. We're estimating first quarter interest expense of about $5 million, and an effective tax rate of approximately 29%, resulting in first quarter forecasted GAAP diluted earnings per share in the range of $0.74 to $0.84.

In addition to this first-quarter outlook, the following 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 29% based on current tax law.

And finally, for capital spending in FY17, we're forecasting normal maintenance capital spending to be approximately $50 million. This capital spending forecast does not include spending associated with our previously announced US polymer product line footprint consolidation, where we will be exiting two owned and one leased facility, and consolidating into one newly leased facility in Ohio.

Thank you, Greg. Our strong fourth quarter capped an excellent year where we outperformed relevant indices and most of our industrial peers. We're clearly seeing the benefits of prior investments in growth and margin enhancement initiatives, and we continue to focus on these in FY17.

As our performance against our 200 basis points operating margin initiative, I believe we've captured the majority of this in FY16, but we will continue to utilize the Nordson business system to further widen operating margins. Our team deserves credit for serving our customers at the highest level, and for continuing to optimize our business.

Our first-quarter outlook reflects our improved backlog, current 12 week order rates, typical seasonality, and comparisons to prior-year where organic growth was modest. We are very encouraged by our order rates we're seeing in all three segments, particularly in the advanced technology segment where demand for our solutions is strong across electronic and medical end markets. Of course, our comps get more challenging, as we move through the year, and we remain cautious with regards to the overall macroeconomic environment.

Longer-term, we continue to feel good about the multiple opportunities we have to drive growth in all of our segments. Overall, our strategic priorities for the year remain pretty straightforward. We're focused on driving organic growth above global GDP. From an M&A perspective, we continue to target high-quality companies in the spaces we've identified, and we'll continue to use the tools within the Nordson business system to drive operating improvement across the enterprise.

At this time, we'd be glad to take your questions.

(Operator Instructions)

Charley Brady, SunTrust.

Hi, guys. This is actually Patrick Wu standing in for Charley. Thanks for taking my question.

Good morning, Patrick.

Good morning. I wanted to take a quick look at operating margin. I think excluding one-time items, it was around 200 basis points above last year. Can you guys maybe parse out what the contribution is from mix, pricing, volume, and even [NBS]? I just want to get a better sense of that.

Patrick, are you talking for the year or just for the quarter?

Just for the quarter.

Well, for the quarter, we're up about 5 full percentage points. And if you look at that, certainly the volume leverage is a significant contributor. We do have better mix that's associated with, I'd say, more of the high-end dispense products, and particularly in the electronics systems business. And then I would say, as it relates to our initiative to move our operating margins up a couple hundred basis points structurally, now for the whole year, I think we're probably well above 80% of the way there, so that obviously contributed. So it's -- if you look at it, it may be equal amounts across that mix of comments.

Right, and to be fair, I do see the 5 points, but I was just speaking strictly to excluding restructuring, I think --

And it's about -- if we excluded one-time items in both years, it's about a 400 basis point improvement.

Okay. Roger that. Another question I had was, can you remind us whether or not there's any seasonality involved in terms of order [intake] -- and I know 17% is 17%, and that's a great number. But looking back a couple years, I don't think that's the case, but I do want to see whether or not seasonality played an issue there? And if it did, how much of that was part of the seasonality?

I would say no, there's not a seasonality effect. I mean, from an order perspective, seasonality typically would suggest that this time of the year, we would be trending down with the holiday period coming up. I say down, relative to the other three, to the rest of the year.

So peak is typically in the tail end of the third into the fourth quarter, and it trails down. We're seeing that same kind of seasonal pattern, but I would say much more robust orders right now, based on really the things that we've been talking about all year. That is around growth, it's the new products that we've introduced. It's some new applications, and quite frankly, it's recapitalization based on technology improvement that is driving that. But there's not a, I'd say, year-on year seasonal change that we're seeing this year.

Perfect. Thank you.

Peter Warendorf, Wunderlich.

Hi, guys. Thanks for taking my question.

Good morning.

I just had a few quick questions on segments. In the adhesive segment, how specifically was the polymer business in the fourth quarter? And then in the ATS segment, how did the Nordson Medical do?

Okay. So I'd say the fourth quarter, the polymer business was off a little bit, but it tends to be lumpy, particularly with some of the larger projects that we do for the year. It was up, but off a little bit in the fourth quarter. But as you saw from the commentary on order rates, really solid order rates in the first quarter there.

And as it relates to the medical business, another strong year in medical business, a solid and strong fourth quarter in the medical business, a function of continuing to add to the breadth of our product lines, as well as globalizing some of the businesses that were primarily a North America focus. So very strong growth in that segment across the year.

Great. Thank you.

Christopher Glynn, Oppenheimer.

Thanks, good morning, and congratulations on a great year.

Thank you.

Thanks, Chris.

So even with the strong first quarter outlook, the revenue guide indicates a relatively slow backlog conversion multiple. So wondering if anything to understand there about backlog composition trends, and bearing in mind that you have been beating on revenues for several quarters here now?

Yes, I would say, a couple things. As it relates to the backlog, we do have projects that we know are not going to be delivered in the quarter, and sometimes our customers will place large orders with staged deliveries, and we're seeing some of that, so we factor that in. As I was mentioning earlier, we do have this sort of seasonal period, where as we get through -- closer to the holidays, things slow down a fair bit, from an order entry perspective, and so we're factoring in sort of our historical view on that. So I'd say nothing unusual there, just fairly typical -- other than I'd say, given the relatively strong systems orders for the year, and solidly in the fourth quarter, some of those we know are not going to be delivered in the first quarter.

Okay. And ATS had a pretty killer year, better mobile cycle, but also you're clearly explaining your markets there. So there's some new favorable dynamics, I would think. So could you help us conceptualize how to think about the comparisons as the year goes on, in terms of modeling?

Yes, so the primary driver for the electronics part of ATS over the last number of years that we've talked about has been mobile, and that continues to be the biggest driver. But as we talked about in the last couple of quarters, we've sort of spread the customer base there, to take advantage of the initial automation of the Chinese mobile customers. We're seeing that on the dispense side, and we're starting to see some traction on the inspection side, which is encouraging.

And in addition, we've done some things to -- through technology to create some opportunities for on-wafer dispense and inspection, and we're continuing to see traction there. So from our perspective, the diversification efforts are continuing to play out well here for us here in the near-term. We still potentially have the wave effect, from how much change year-over-year has gone into the mobile segment, and at this point in time it's really hard to assess that.

As we've talked about in the past, we do a lot of development work with end customers on this, during the period of time up through, I'd say, February or so. And then, really it's towards that second quarter that we get a real sense of how many of those are going to go forward. So I'd say we're still in that development period. The development is fairly robust, but we don't have a clear crystal ball on which projects are going to hit.

Now outside of the electronics piece, as we talked about just a moment ago, medical is doing well. We continue to broaden and diversify that business, including this last acquisition that broadens our Quick Connect product line. And in the general industry area, we're seeing some uptick and improvement in things like 2K products for construction. The acquisition of LIQUIDYN last year filled in a nice gap in our product line, where we're really seeing significant global growth with that business, and some of the other new developments from a product standpoint.

So the areas outside the electronics system, we're trying to continue to diversify and see good traction. The electronics piece, we're diversifying, but we still have the impact of the mobile piece. And it's hard to say beyond the next quarter, where we're at there.

Okay. That's a really helpful explanation on the mobile piece. Within mobile or adjacent to it, we've seen the pattern in years past, but the Chinese piece is clearly gaining some scale, I think. Is that a more dramatic factor for you?

That's certainly becoming more relevant, as we start to see more adoption of automation, and there, our tiered offering approach has really gotten some good traction. So we do think that the key suppliers that are going to be around from a China perspective will continue to automate, and we still think there are opportunities there to sell critical equipment to them, to allow them to do that.

Okay. And maybe the same answer -- my last one, I promise. Any view to the sustainability of mix?

Are you talking about across the Company, or are you talking about --?

ATS, sticking with ATS here.

Yes, well, I'd say in the long run, we still think things like medical are going to grow faster than other elements of the business. We do think that we will see growth in the electronic systems piece, but it's going to come from more from our efforts to broaden and diversify, and less from things like smartphone penetration, as we've talked about in the past. As we look at year-over-year, this year, in that particular segment, having more of the type of business where we provide more of the value add, has helped our margins.

And so, I would say, that could continue to help, if we see dispense continuing to be as high as it has been. But quite frankly, we like our margins in the test and inspection business, and we're looking to drive that business as well. So I'd say there are opportunities for continued improvement in the mix, but again, the mobile piece will determine if we have fluctuations quarter-to-quarter and year-to-year.

And Chris, I would just add that -- this is Greg. We do see continued good growth rates in medical. And from an inorganic perspective, we'd like to see that become a bigger mix of the portfolio as well, to help with some of the cyclicality aspect of that segment.

Okay. Thanks for the understanding, guys.

All right.

Jeff Hammond, KeyBanc.

Hey, guys. This is James Picariello on for Jeff.

Good morning.

Good morning. Can you talk about in what businesses, particularly, you expect the moderation in orders during this seasonal lull that you talked about? So what businesses there? And then also in terms of the backlog timing, you said that you expect some businesses to flow through in the second quarter. Can you also just provide color around what segments are positioned to benefit there?

Yes. So I would say all of the businesses see this seasonal slowdown from an order intake, just because of the holidays. I mean, we think about our -- where we are right now, we're in the middle of December, a lot of our customers shut down. I'd say it's probably more impactful on our coatings businesses, and potentially some of the other businesses where we have bigger systems orders, because people tend to wrap up the year, and then it's usually well into January before they're through their budgeting for next year. Many of our customers are on a calendar year basis for their capital improvements. So I'd say those are the areas that tend to slow down.

And then I'd say on the businesses that have bigger orders, we can have some of those in coatings, but it's more likely that it'll be in the electronics area, where customers have staged orders, and in our polymer area, where we can have some bigger projects. And then within our traditional adhesives areas, some of the product assembly business which tend to be bigger systems order could also stretch out in time because of the nature of the project. So it varies across.

I'd say, a lot of our core packaging kinds of activities in non-wovens tend to be delivered in the quarter, and some of our more standard products in the other businesses tend to be delivered in the quarter. Of course, the parts side of the business is generally all in the quarter. So it's basically the larger systems orders, and those orders that are placed 50 at a time, 100 at a time, with staged deliveries, and those are the areas that I mentioned.

Okay. And then, regarding restructuring, the benefits are clearly -- clearly have shown through, throughout the year. You did make the comment that restructuring actions are largely behind the Company now, in terms of the costs. Are there any additional actions that could be taken in FY17, and how were you thinking about just sizing the incremental savings bucket for this upcoming year?

Yes, I would say, the primary activity that we see going that's of significance in the next year is really this consolidation in the US of three polymer facilities into one, and that will be going throughout the year. As far as the charges, I think we're largely beyond the charges. As far as the benefits, some of the benefits may stretch out into the first quarter of 2018, as we build out and then transfer to that facility.

But I don't see any substantial charges related to the programs that we've talked about, and the specifics for structural margin improvement. That said, we have an ongoing robust program in our Nordson business system to drive year-on-year continuous improvement, and we have strong plans in place there. Our minimal goal there is to offset any cost [push], and then over and above that, we're looking for some benefits.

Okay, and last one on capital allocation. The bias this year has been on debt repayment. So how does the M&A pipeline look, and how are you balancing debt repayment versus acquisitions, and even buybacks at this point? How are you thinking about those three?

Yes, so I would say, as we typically talk about primary, number one use is support organic growth. And I think Greg talked a little bit about that, including the activities we have going on for restructuring. Second is our dividend piece, and that's pretty modest.

So then, when you get back to that, M&A is a key priority. We still have the four areas that we're interested in, along with anything that we can do to tuck into our core business. The area that has the probably the deepest pipeline is still in the medical area. We made one small acquisition this year. There's small acquisitions and some larger ones out there that would be opportunities.

And I'd say also another area where we continue have interest is the cold material space. I think Greg talked a little bit about how that's doing from an order and performance perspective. So I'd say the pipeline is pretty robust. I'd say, the market is for relatively full-priced opportunities here, and we've got pretty clear views on what we're interested in, and what we're willing to pay, but I'd say we've got a pretty robust pipeline. I'd say on the share buybacks, we still have an open share buyback authority from our Board. As Greg mentioned, we haven't done anything since the first quarter, and I think we'll continue to be opportunistic there.

Thanks, guys.

Matt Summerville, Alembic.

Good morning, thanks. Mike, if we take into account the conversations you're having with your customers at this point, and you sort of touched on this a little bit. But what does that suggest to you about the prospects for advanced technology to generate organic growth in the mid single-digit or better range again in 2017, relative to how you performed in 2016? Do you get the sense that you have the opportunity to break this sort of every other year, where you get high single-digit to low double-digit organic growth, and then it flattens out? Can you just talk about that in a little more granularity?

Yes, what I would say at a high level, as Greg mentioned earlier, there is still some cyclicality to that business. And as long as it's going to be driven -- and I'm talking about half of the advanced tech piece that's focused on the electronics business. As long as that is going to be linked strongly to the mobile piece, you're going to have some of that. And quite frankly, we've taken advantage of all the advances in the mobile segment, but it does provide some fluctuation.

So as we've talked on that particular piece, it comes down to how much change you're going to see year-on-year. For a long time, it was about penetration of smartphones. We're pretty much there, in terms of the overall market penetration, without -- perhaps with the exception of a large market like China, and maybe in the future, a growing market like India. But we're pretty close to being there from a penetration standpoint, so it comes down to change.

And we've talked in the past, it's not just sort of form factor change or feature change, it can also be process change like waterproofing, which drove some activities this year. So I'd say all the projects that we're working on with our critical customers are around change elements, and it's hard for us to predict what they're going to launch on going forward. So that's still an unknown.

The things that can counterbalance that are a couple-fold. One, new products can help, from giving our customers greater value and benefit, and potentially allowing us to increase our wallet share. Two, we have some new applications. So we've talked a lot about the wafer side of things, where we're going into that [flow], from a [dispense] for three dimensional 3D-type chips, as well as inspection for that.

And then, the [tiering] piece has really been focused, as a focus for the Company across all markets, but in particular in this end, we've really see traction, as we mentioned last quarter, with three of the four Chinese mobile guys. And what we see from them is more interest in doing more automation, more interest in doing more sophisticated types of processing, so that's certainly encouraging. Obviously, they have to pull the trigger on it, and place the orders throughout the year, but that's encouraging.

So those are the kind of things that we're trying to do, to counterbalance that sort of on/off cycle that we've seen for the last few years in the mobile side. What that balance in the end looks like is, I'd say, still hard tell right here. In the long run, we do think we're going to grow above the market because of things like new products, new applications, tiering to give us growth, more robust than what you will see in the industry. In the short run, it's a little harder to predict. Obviously, we're off to a good start here in that business, but the critical time frame on the mobile phone piece is really as we get closer to the end of the second quarter.

And then, when you look at the other part of the business, the fluid management part of the business, medical, it's all about new products, and increasing the breadth of our product offering. And then in the general industries area, it's driving our offerings there. We've done a complete head-to-toe refresh of all of our dispense products. We've upgraded our tabletop automation products.

We've added things like LIQUIDYN, they're getting good traction, and allowing us to globalize, how we've introduced some really new technology that both electronics organization and fluid management organization are using on these very high small-volume dispense applications that we're getting traction on. So those are all the things that we're trying to do to buffer it. I can't say that's going to mean that we're not going to see some year-on-year up and down, depending on how the mix works out there.

Got it. That's helpful. And just as follow-up, within -- just sticking with advanced tech, can you talk a little bit about what you saw from a mix standpoint on a sequential basis from Q3 to Q4? And then work that into -- as we think about how to model Q1, how would you suggest we look at advanced tech, in the sense that even just going back the last couple years, your operating margins in Q1 have varied from, say, 7% to 20%. There's a pretty big gap there, I guess. How would you suggest we consider modeling Q1 in that regard?

Yes, I'd say the things that have created the volatility in Q1 have been, number one, volume. So in some cases where volume has been soft, I think you know we've got strong incremental margins in the business. And then in the very short-term, even though we -- this is a business where we can move resources up and down pretty quickly, it's hard to offset. So volume is the number one piece.

And then two, mix in the business, as I mentioned earlier, more dispense is better, only because we have more value add on the dispense side than we do on the inspection side. So those two things tend to drive, more than anything else, what we see in the quarter.

And so, like I said, we're off to a good start with the order pace that we have, and the backlog that we have right now. And your other question on the third to fourth quarter, are you specifically talking about margins, or what are you --?

Yes, I mean, I'm Iooking at $10 million round number sequential revenue decline, and a $14 million, $15 million sequential operating profit decline. I'm trying to understand what some of the current pluses and minuses are on that, from a mix standpoint, if you will?

Yes, Matt, this is Greg. That's going to largely be within that segment product line mix, whereas Mike alluded to we've got different margin profile on different product lines than others. And then, there's going to be some volume leverage as well.

Okay. Great. Thanks, guys.

(Operator Instructions)

Matthew Trusz, Gabelli.

Good morning, gentlemen. Thank you for taking my question.

Good morning.

So you've spoken to the trend of recapitalization driving growth. Can you speak to the extent to which this is concentrated in the traditional [ADS] North America area versus a more broad opportunity for you?

Yes. I mean, certainly one of the key areas for us is the core adhesives business where we have such a large installed base. But we've see that in our fluid management business. As an example, with this whole new launch of products, and a refresh and an augmentation to our valve line, and the addition of a product portfolio, we've seen a very strong value proposition to encourage our customers to upgrade to the latest technology, so that's another area that where we see that.

I think when you look at even parts of our electronics area, it's around the performance of new products, and what they can do to meet the challenges that the customers are looking at. But I'd say, it's certainly been in those two areas that I have highlighted.

And Matt, it's a global opportunity for us as well. In the adhesive segment as well, is that recap opportunity, not just in the US, but globally.

Great. Thank you. And then second from me, at a high level, how do you think about the political dynamics that you might face next year? Has customer confidence changed at all over the last couple months? How are you thinking about the early possibility of repatriating some foreign cash or any changes to tax policy?

Yes so I would say -- let me try and address a couple of those. For us, from a repatriation of cash, it's not a big issue either way, because we have a very small cash balance, and we don't really have anything of substance trapped outside the US. So for us, that's not necessarily an issue. What I would say though, is a couple of things that are being talked about would be helpful for our customers, from an investment standpoint. So certainly, an overall lower corporate tax rate would help some of our customers in the US.

Now we have 70% of our business outside the US, so we're taking advantage of growth in all those areas, but it would certainly help some of the US customers. And I'd say some of the areas around deregulation would be helpful as well to customers in the US, and potentially increase their thoughts around investment. I do think there were some areas like our powder business this year where we saw customers kind of delaying -- they tend to be bigger system orders, delaying investment to see how the election has played out, and we've seen near-term uptick in that business, but I'd say it's a little early to tell.

Certainly anything that drives growth more is going to lead to more investment, which is going to be a good thing for us. So if it increases our customers' confidence, and leads to investment, that will be a plus. And we're really everywhere, with all the critical customers, to take advantage of that. But it's pretty early yet in the process.

Thank you.

Thank you. And I'm showing no further questions at this time. I would like to turn the call back to Mr. Jaye for closing remarks.

Thank you, Kaylee, and thanks everybody for joining us on the call today. I'm available the remainder of the week, if you have any follow-up questions, and thank you again. Appreciate your interest.

Thank you.

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