Nordson Corp (NDSN) 2017 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Nordson Corporation's Webcast for the third quarter fiscal year 2017. (Operator Instructions) As a reminder, today's conference is being recorded. I would now like to turn the call over to Mr. Jim Jaye, Senior Director of Investor Relations. Sir, you may begin.

Thank you, and good morning. I'm here with Mike Hilton, our President and CEO; and Greg Thaxton, Senior Vice President and CFO. We welcome you to our conference call today, Tuesday, August 22, 2017, to report on Nordson's FY '17 third quarter results and our FY '17 fourth 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 September 5, 2017, which can be accessed by dialing (404) 537-3406. You will need to reference ID number 62150013.

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 on the quarter, we'll be happy to take your questions. And with that, I'll turn the call over to Mike.

Thank you, Jim. Good morning, everyone. I'm pleased to report that Nordson delivered record results for revenue, operating profit, diluted EPS and EBITDA in the third quarter of fiscal 2017. These results speak of the strong underlying performance across our base business and our focus on continuous improvement. I'll provide some highlights on our financial performance and let Greg provide more detail. We delivered 11% organic sales growth in the quarter compared to the prior year, with contributions from all segments and nearly all geographies. Acquisitions added another 10% growth to the top line. And we continue to be pleased with how all of our new businesses are performing. Operating profit in the quarter improved 24% over the prior year and operating margin improved 1 percentage point compared to the same period a year ago. Adjusted diluted EPS increased 21% compared to the same period a year ago. These results include $6 million or $0.07 per share -- diluted share of intangible asset amortization expense, associated with the 4 acquisitions we've completed fiscal year to date. Given these increased noncash expenses in the quarter and our expectation for continued acquisition activity going forward, we believe additional focus on EBITDA measures better reflects our core operating results and offers greater transparency for investors. Looking at the current quarter, EBITDA, EBITDA margin and EBITDA per share all improved compared to the same period a year ago. Free cash flow before dividends in the quarter also improved compared to the prior year. And after the quarter close, our board approved an increase to our dividend, marking the 54th consecutive year we have increased our annual dividend. We are 1 of only 14 public companies to have increased their dividend for at least that number of years. Looking ahead, our fourth quarter guidance reflects our backlog, current 12-week order rates and challenging comparisons for the same period a year ago, where we generated 13% organic growth. At the low end of our fourth quarter guidance, we are on pace to deliver record full year performance across most metrics, including revenue, earnings and EBITDA. I feel very good about our 2017 performance, both organic and acquisitive. We are well positioned for the future. I'll speak more about our outlook in a few minutes, but first, I'll turn the call over to Greg to provide more detailed commentary.

Thank you, Mike, and good morning to everyone. Third quarter sales were $589 million, an increase of 20% from the prior year's third quarter. This change in sales included a 11% increase in organic volume, a 10% increase related to the first year effect of acquisitions and a less than 1% decrease related to the unfavorable effects of currency translation compared to the prior year's third quarter. Organic growth exceeded the high end of our guidance, driven by strength across all segments and nearly all geographies. Organic sales volume in the Adhesive Dispensing segment increased 6% as compared to the prior year third quarter, where organic growth was also strong at 4%. This is the ninth consecutive quarter of organic growth in this segment. Our packaging, nonwovens and polymer product lines drove the growth in the current quarter, and all regions were positive, with the exception of Europe. Sales volume in the Advanced Technology segment increased 42% from the prior year third quarter, inclusive of 18% organic volume growth and 24% growth related to the first year effect of acquisitions. Customer demand for automated dispensing, tests and inspection, and surface treatment systems was robust across electronics end markets, with additional strength coming from demand in our medical end markets. All regions delivered strong organic growth compared to the prior year, most by double digits. Segment's acquisitive growth includes the first year effect of the LinkTech, ACE, InterSelect, PlasPak and Vention acquisitions. Organic sales volume in the Industrial Coating segment increased 3% compared to the third quarter a year ago. Cold material, liquid painting and UV curing product lines drove the growth, with the Americas and Asia Pacific being the strongest geographies. Gross margin for the total company in the quarter was 55%, or 56% and equal to the prior year when excluding $1.7 million of onetime purchase accounting charges with a step up of acquired inventory in the current fiscal quarter. These charges are now behind us. Operating profit for the total company in the quarter improved 24% to $153 million, and reported operating margin improved 1 percentage point to 26%, both compared to the prior year's third quarter. Adjusted operating margin was 28% in the quarter, excluding the onetime charges called out in the EPS reconciliation in our financial exhibits and also excluding the $6 million of intangible asset amortization expense related to current year acquisitions.

Within the Adhesive Dispensing segment, reported operating margin was 28% in the quarter, an improvement of 1 percentage point compared to the prior year's period and inclusive of approximately $700,000 in restructuring charges related to facility consolidation. Operating margin for the segment was 29% without this charge. Within the Advanced Technology segment, reported operating margin was 30% in the third quarter, or 33% when excluded purchase accounting charges of approximately $1.7 million with a step up in value of acquired inventory and the $6 million of intangible asset amortization expense related to the current year acquisitions. Within the Industrial Coating segment, reported operating margin was 20% in the quarter, an improvement of 3 percentage points compared to the same period a year ago, related to improved product mix. This is continued strong operating margin performance by all 3 segments and reflects our ongoing continuous improvement efforts. For the company, net income for the quarter was $101 million, and GAAP diluted earnings per share were $1.74. Adjusted diluted EPS in the current quarter was $1.78, a 21% increase over the prior year adjusted diluted EPS. We've included an earnings per share reconciliation schedule in our press release to reconcile between GAAP earnings and adjusted earnings per share. Third quarter EBITDA increased 29% to $179 million. EBITDA margin improved 2 percentage points to 30%, and EBITDA per diluted share increased 27% to $3.08, all compared to the prior year's third quarter. Adjusted EBITDA in the quarter was $182 million or $3.12 per diluted share, a 29% increase over the prior year. Cash flow from operations increased 13% compared to the prior year's third quarter to $77 million, and free cash flow before dividends increased 14% compared to the prior year of $55 million. All of these measures highlight the strong cash generation of the overall business. We have included tables with our press release reconciling net income to EBITDA, adjusted EBITDA and free cash flow before dividends. From a balance sheet perspective, net debt to trailing 12 months EBITDA, inclusive of acquired EBITDA, was 2.7x at the end of the third quarter, down from 3x at the end of the second quarter. This level is well below our most restrictive debt covenants, leaving us with additional debt capacity. And at the end of the quarter, we had approximately $368 million of combined cash and availability on our revolver. As we've demonstrated, our strong cash generation enables us to deliver quickly, which remains our intent in the near term.

I'll now move on to comments regarding our outlook for the fourth quarter of FY '17. 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 acquisitions included in both years. For the 12 weeks ending August 13, 2017, order rates are down 2% as compared to the same 12 weeks in the prior year. This is a challenging comparison to the same period -- to the prior year ago, where order rates were up 16%. Within the Adhesive Dispensing segment, the latest 12-week orders are down 1% compared to the same period a year ago. Strength in packaging and nonwovens product lines was offset by softness in general product assembly and polymer product lines. Strength in Europe and Asia Pacific was offset by other regions. In the Advanced Technology segment, order rates for the latest 12 weeks are down 3% as compared to the prior year, where order rates were up 29%. Some electronics project activity occurred earlier in the year as compared to last year, benefiting our third quarter sales, and our ability to respond to these shifts remains a competitive advantage. Within our current order rates, strength in our test and inspection product lines, serving electronics end markets, was offset by softness in other product lines, mostly electronics related, due to project timing and challenging prior year comparisons. Within the Industrial Coating segment, the latest 12-week order rates are down 4% as compared to the prior year, where order rates were up 36%. Strength in powder, liquid and container product lines was offset by softness in cold material product lines, Europe was the strongest regionally. Backlog at July 31, 2017, was approximately $372 million, an increase of 10% compared to the prior year and inclusive of 13% acquisitive growth, offset by a 3% decline in organic business. Backlog amounts are calculated at July 31, 2017, exchange rates. Let me now turn to the outlook for the fourth quarter of fiscal 2017. We're forecasting sales to increase in the range of 4% to 8% as compared to the fourth quarter a year ago. This growth includes organic volume of down 3% to down 7%, 10% growth from the first year effective acquisitions and a positive currency effect of 1% based on the current exchange rate environment. At the midpoint of this outlook, we expect fourth quarter gross margin to be approximately 54% and operating margin to be approximately 21%. This margin performance includes $6 million of intangible asset amortization expense related to current year acquisitions. We're estimating fourth quarter interest expense of about $10 million, depreciation and amortization expense of about $25 million and an effective tax rate of approximately 29%, resulting in fourth quarter forecasted GAAP diluted earnings per share in the range of $1.18 to $1.32 per diluted share. We expect EBITDA to be in the range of $133 million to $144 million or $2.27 per share to $2.46 per diluted share. And finally, we are forecasting fourth quarter capital spending to be similar to the year-to-date run rate.

Thank you, Greg. I want to thank our team for delivering another outstanding quarter. Revenue, operating profit, diluted EPS and EBITDA were records for any Nordson quarter. In terms of our fourth quarter, our guidance reflects a very challenging comparison to the same period a year ago, where we generated 13% organic growth. We are on pace to deliver record full year performance on most metrics. At the midpoint of this guidance, full year organic sales growth is at 6%. This is excellent performance, and it's on top of a robust 7% organic sales growth we delivered in fiscal 2016. Full year adjusted diluted earnings per share at midpoint is $5.24, an increase of 12% compared to fiscal 2016. Again, I'll point out that fiscal 2017 adjusted diluted EPS per share includes intangible asset amortization expense related to this year's 4 acquisitions of approximately $15 million or $0.18 per diluted share. As I mentioned in my opening remarks, we believe additional focus on EBITDA measures, which exclude these noncash expenses better reflect our core operating results and offers greater transparency for investors. At the midpoint of our fourth quarter guidance, fiscal year 2017 EBITDA increased to 16% to $535 million, EBITDA margin increase is 1 percentage point to 26%, and EBITDA per diluted share increase is 15% to $9.19, all compared to the prior fiscal year. This is very strong performance. Our continued ability to generate high levels of cash provides us with the ability to fund multiple initiatives. In the near term, deleveraging is likely to remain our priority for capital deployment, but we also have capacity to execute on acquisition targets in our pipeline if and when they become available. Overall, we are well positioned across the diverse end markets we serve. Our global team remains focused on creating shareholder value by offering customers innovative technology solutions and outstanding support. Again, 2017 will be a strong year on top of a very strong 2016. With that, we'd be happy to take your questions.

(Operator Instructions) And our first question comes from the line of Matt Summerville with Alembic Global Advisors.

Just in terms of the organic guidance for fiscal Q4, down 3 to down 7, orders down 2, are we to read from that, that as the 12-week period progress you saw further weakening on a year-over-year basis, in order to get to that guidance? I clearly recognize you're up against very tough comparisons. But just a little more granularity on the sequencing of orders as you progress to this latest 12-week period, please?

Yes. I wouldn't necessarily say that, that that's what we're seeing, Matt. What I would say is, if you look at our typical annual pattern of orders, I think as you know well, they decline in the fourth quarter to a low point sort of in January and they peak somewhere in the third or fourth quarter. I'd say what we're seeing is a strong peak that's come through in the third quarter and seasonally trailing off, whereas last year, we had the strongest peak in the early part of the fourth quarter, and that's what you're seeing here, is a little bit of a crosshair just based on the timing of the peak in the year. And I wouldn't say that we're seeing orders necessarily slowdown in the last -- in the 12 weeks. It's really more about the year-on-year comparison.

And then just a follow-up. Clearly, I recognize it's early; it's only August. You guys are going to be up against pretty tough organic comparisons, at least through the first 3 fiscal quarters of 2018. As you look at the key organic drivers across the businesses, the underlying momentum you see today, what's your level of conviction that you are able to grow organically, looking out over a little bit of a longer period of time, again, bearing in mind you still have some tough comps to digest beyond what you're digesting today?

Okay. Yes. So what I would say is a couple of things. I think we said at the beginning of this year, we saw global economy growing at 2%, 2.5%, and we would grow at a multiple of that on an organic basis. And certainly, we're in the position to do that for this year. I think as you look forward, we expect over the long run that's the kind of growth rate that we're going to see. Because we have some quarters where we are off a little bit and other quarters we are stronger, just like the third and fourth quarter you are seeing here. Yes, but the fundamentals are strong in our business. We're well positioned across all of our end markets from a competitive standpoint. We see nice growth driven by new product innovation. We're continuing to adjust our portfolio to provide higher growth, parts of the business like the medical additions that we are doing that also support high margins and help with cyclicality in our business. And we still have a strong part of our business that's related to consumer nondurable products. So as I look at it, we feel good about our growth prospects for the business and the mix that we currently have in the business is improving with the acquisitions that we've made this year.

And our next question comes from the line of Jeffrey Hammond with KeyBanc.

So I understand kind of the order declines in Advanced Tech and Industrial Coating just given the comps, but was a little surprised by the order decline in adhesives, and maybe you could just speak more to that? And was there any kind of noise or lumpiness that would have impacted that? And maybe just talk about forward visibility in adhesives?

Yes. If I look at the lapse in the Adhesives business, we do have a couple of elements of the business that are more project-oriented, like our product assembly business and some of our polymer-related businesses. And so I think, there, you've got some quarter-on-quarter comparisons just when those products come through. If you look at sort of our core packaging, nonwovens kind of businesses, those are the ones that are focused on the consumer nondurable space, they are doing well year-on-year, and the momentum is continuing there. So I think what we're seeing is just a little bit of lumpiness year-on-year on some of those more project-oriented product lines within the business.

Okay. And then in Advanced Tech, I think you cited on the order front, certainly the comps, but then some project timing within electronics. Can you maybe just peak to a little more clarification on what you are seeing on that project timing?

Yes. So what we saw, and it's reflective of somewhat in the third quarter, is customers ask us to pull-through -- pull forward deliveries to meet their needs. And that's probably impacted our overall performance by a couple of percentage points in the quarter, but that's good for the third quarter, probably pull that out of the fourth quarter. But one of the competitive advantages that we have in addition to being the strongest technology player out there is our ability to flex to beat the customers' demands. And so what we really did is work hard to sync up with the delivery schedules that they were looking for. I'd say under the -- on the underlying part of the business, a lot of positives to think about there. We're doing well in the mobile segment and continuing to diversify into the Chinese mobile players. We are doing well into the applications, like the semiconductor side. Our whole new platform in the test and inspection area with new products is doing very well. So I'd say underlying business is very solid, and our positions our strong. We do have the seasonality in the business, and it can vary quarter-to-quarter, year-on-year, and that's more of what we're seeing right now. So we feel good about how we're positioned in that business. And then, of course, the other part of the Advanced Tech business, which is equal in size now and it will be larger next year, is nonelectronics, which is delivering very solid and consistent performance with strong growth and good margin.

Mike, is there a way to quantify, maybe on an EPS or revenue basis, how much of that -- how much of a pull-forward you saw? Because it looks like you kind of came in $0.10 ahead of consensus and maybe similarly light on 4Q?

Yes, I would say probably on the revenue side, it might be a couple of percentage points. So that will translate down to more on the earnings. I'm not sure it's all of that $0.10, but it's probably pretty close to that. So in our view, we knew we had a strong second half year of comp, and I think if you look at it collectively, third and fourth quarter, we feel pretty good about where we are at.

Yes. This is Greg. I'd just echo Mike's comment there and put little bit of context around that, where we exceeded even the top end of the guidance for our quarterly revenue growth, much of that is related to the volume that we're talking about.

And our next question comes from the line of Allison Poliniak with Wells Fargo.

Could you touch on progress in Vention? Is it -- how is it proceeding? As expectations, above, below? Any color there?

Yes. So we are very pleased with the Vention business. I'd say it's right on plan for our top line and bottom line expectations. The pipeline of new projects looks very healthy in that business. And we like the business model that's come with that in terms of the ability to provide upfront design through final solutions there. So we feel very good about that. And the integration is going just as planned. And we feel really great about the team that's come with that business and the capabilities that they bring.

And, Allison, just to remind everybody, an attractive part of this now about 20% of total Nordson portfolio on a go-forward basis is strong operating margin and accretive on the EBITDA margin to our base business. So we expect to continue to see the growth that we've experienced traditionally in those medical end markets. And now that that's a kind of $300 million size portion of the business will be a good platform in the portfolio.

That's great. And then also as we look across the businesses in Q4, outside of seasonality, are there any mix issues to be mindful of in terms of EBIT margin?

No. I don't think any significant mix. I mean, obviously, when buying goes down, we have an impact on margins in the short term year-over-year. But I'd say no significant mix effects in that.

No. And just, again to elaborate there, as you think about our fourth quarter, that's a bit of what we have in our outlook is -- well, first off, there is about a percentage point related to these -- the incremental noncash charges related to the acquisitions. And then in a period where we're forecasting negative organic, that's going to have a margin impact, as Mike noted.

And our next question comes from the line of Charley Brady with SunTrust Robinson Humphrey.

Just on the Advanced Tech and the medical business, you, obviously, sized it up for us. How much -- can you break out how much of that business grew, the medical piece, the life science piece in the quarter?

Well, overall, we expect that business to grow double digits, and it did that in the quarter. And I think our view, long term, of medical is the market itself is probably only 5%, but with some of the other trends, like the outsourcing, the drive to plastic, some of the minimally invasive procedures that Vention is getting us into now, we expect double-digit growth in the long run. And that came in with double-digit kind of growth.

Great. And just on your comment on use of capital focusing on deleveraging, I mean, you're not super overlevered right now. You are under 3x. I'm just wondering, is there a level you will want to take that to? Or is it more a function of how the M&A pipeline looks and kind of timing of that pipeline and it just isn't an actionable item to close, so focus on the deleveraging instead?

Well, our primary -- if you look at our priorities of capital deployment, they haven't really changed, if you go back. Number one, support organic growth. We're going to continue to do that. Number two, the dividends piece that we've mentioned here. Number three is offsetting any kind of comp dilution, which is marginal. But number four is, we'd like to do M&A transactions. Number one, you can't always predict the timing, although we've got some interesting things that we think are in the pipeline. And related to that is you want to have the capacity of some more sizable opportunities come forward. And so in the short term, our focus is really around creating that capacity for more sizable opportunities.

Okay. So, yes, just to clarify then, the M&A focus or the M&A desire hasn't shifted at all? It's still kind of what it was before and is kind of positioning itself...

Yes, just the -- obviously, we can't control the timing, but what we can control is being prepared appropriately. And as you've seen in the past, if things are a little slow on the M&A front and there's an opportunistic moment with the variability in the market to buy back shares, we've done that too. Right now, our primary focus was on deleveraging to create capacity for us to do more acquisitions that make sense in our strategic areas of focus.

Can you talk about, from a margin standpoint, of the impact the acquisitions you had, purchase accounting aside, the opportunity you have once you're folding these businesses in to really leverage some of that up and push the margins higher on kind of a go-forward basis over the next 24 months or so?

Yes, I think we've certainly commented on the medical acquisition. But the other acquisitions, particularly ones that are added to EFD are similar kind of margins to the company and EBITDA margin accretive. And so we also feel as we continue to grow and scale those businesses, we'll be able to improve margins through continuous improvement activities for those businesses. So we feel good about the opportunity, like we do about all of our businesses, to grow and expand what already is a good starting point.

And our next question comes from the line of Christopher Glynn with Oppenheimer.

I just wonder if we could do a little deeper dive, state-of-the-union on some of the new market penetration dynamics and the China Tier 2 trajectory, maybe an inning gauge or something like that, and some of the other initiatives that have been developing?

Okay. Let me just make a couple. We'll start there with the mobile side. I mean, obviously, we are well positioned with the sort of global leaders there, and this is turning out to be a pretty strong year in that regard. With the mobile players, we've seen them significantly increase their adoption of automation from something that was almost nonexistent, probably 2 years ago to a nice first step next year to significantly stepping up this year. Still not to the kinds of levels of automation sort of the global leaders, but making really good process. So there's more to go. On an inning basis, but probably less than halfway there compared to global leaders. And it's not clear whether they'll go all the way or not, but clearly, they're seeing the benefits of automation in terms of quality and throughput and overall cost benefits associated with that. In addition, in the electronics area, we've talked about doing more on the front-end and dispensing on wafer and test and inspection on wafer, and we're seeing some progress there. We have also seen some progress in terms of revitalization of our total test and inspection product line that really has seen a nice uptick as the semiconductor industry, in general, front end and back end, is having pretty solid year. So those new products are really getting traction. If you look at then the nonelectronics part of our Advanced Tech business in the medical space, it's all about the broadening capabilities, new products getting plugged into the front end, and we've got both good product specs and good traction there. And in the nonelectronics, nonmedical piece, we've introduced some new products in terms of refreshing our total valve portfolio and some of our mixing technology, which is also getting good traction. If you look at our sort of core adhesives business, I mentioned earlier we are doing well in the packaging; nonwovens areas is an example. But we continue to make good progress on tiering. We've introduced yet another new tiering set of applications in our core Adhesive Dispensing. I think that's really opened up yet a whole new set of customers to us, which will feed, ultimately, up to a higher level. And then in our coatings business, we're doing a lot of work in the sort of cold materials side, which is opening up aerospace, for example, to us as an opportunity as the industry looks to find ways to basically get more planes out the door, and they look for automation there as an opportunity, and we are making good progress there. So I feel good about the new products, new market opportunities that we have in the business, and they should continue to grow over the next few years.

And just following up on the mobile. Wondered if you could comment on the relative contribution of the adoption in China versus the global leaders in the quarter you reported. And if you see a dynamic, where following all the fairly dramatic innovation on the global leaders this year, if that portends a particular ramp in the secondary players?

Well, we've seen solid step up. I mean, if look at the global statistics, certainly, the shares of the top 3 Chinese players have probably grown, a lot of that in China. Some of it's starting to be outside China. This is a pretty robust year. And as I said, there's more opportunity for automation. I think the overall supply chain in the electronics area, given the growth in the sort of established players and the new players is pretty stretched. I mean, we're in a good position to supply all the opportunity, but in other areas, it may be a little stretched in the short term. So I think there's opportunity as we go forward for that to loosen up a little bit and some opportunities for further growth.

Our next question comes from the line of Walter Liptak with Seaport Global.

I wanted to just ask a follow-on on the adhesive segment. Maybe to ask it this way, the comp didn't look that tough because the 12-week orders last year were up 2, and now you are down 1. And in your answer, you called out that there were some -- I wasn't sure I understood with polymers or product assembly, what's going on? Is it -- are you seeing that orders were pull forward or that there were just orders in the pipeline that you are still waiting to book?

Well, in any 1 quarter, we can have -- they tend to, first of all, be bigger individual quarters. So in any 12-week period of time, you can have some things that look like a little bit of an anomaly, because you got a big project last year, and you don't have that in this 12-week order this year. Well, that's really all I was trying to talk about there. I think underlying fundamentals are pretty solid. I mean, if you can think about our sort of adhesives business, this will be the fourth year in a row we're seeing nice growth and it will be soft, macro economy for well-established businesses. So I feel good about what the team is delivering there. Just quarter-to-quarter, you can -- in a 12-week comparison, you could have a big project last year that's not in this 12-week order and 2 weeks from now, it's reversed, okay? So I don't feel like any significant concern around the underlying performance of those markets. It's really just a quarter to the 12-week comparison.

And, Walt, just to add a couple of comments -- this is Greg. As we talked about the pull forward, that was specifically related to Advanced Technologies, so not really in adhesives. And as we mentioned earlier, if you take some of the product lines that we would consider kind of more run rate product lines that are more heavily tied to nonconsumer, nondurables, the packaging, for example, the nonwovens, those were pretty robust, those order rates. So it's -- as well as some of the product lines within polymer. It's these more system, project-related product lines that Mike mentioned, you're going to get from time-to-time some comparisons that are just related to the timing of those projects, not necessarily indicative of a competitive position or general underlying conditions.

Okay. Right. So the systems are related to product assembly, is that correct?

Yes. And probably 1 or 2 product lines in the product -- in the polymer area. So -- but, again, I think what Greg is trying to say is, in that case, we have bigger projects, and they can swing the 12-week order rate if 1 year you have a big project and in the next year you don't. And 2 weeks later, it could reverse.

If you look at some prior quarters of going into the quarter what the order pattern was, it wouldn't be uncommon to see order growth rate heading into the quarter. I think last quarter, it was up 1, and we delivered 6% organic growth. So it's that run rate business where those orders can continue to flow through the quarter, and then as that project activity comes, it's a timing-related issue.

Okay. All right. And so the way that you're describing it, it sounds like there's still more product assembly systems, polymer systems in the pipeline which will result in decent growth kind of going forward. Is that correct?

Yes. There's no concern on a long-term basis. And there's -- quarter-to-quarter, you can have some anomalies as a result of timing of projects. That's all we're saying.

Okay. All right. Great. And then I think last quarter you guys talked about the 200 basis point program winding up. You had nice successful period of margin improvement from some consolidation and other things. How should we think about new projects, the next 2 years of projects? Can you get another 200 basis points, for example, of margin improvement?

Yes. So we haven't said we'd stop there. And we're continuing to drive our continuous improvement efforts. We'll see some further benefits when we get through the final consolidation on our polymer business next year. And we have some other longer-term things that we're looking at that I'd say are probably not ready for prime time in addition to our normal drives. I think 200 basis points with no volume growth in the near term is probably a stretch. But we are continuing to drive the programs that we do have, and we've got very robust programs. So I feel good about where we are at. I feel good about what we have in the pipeline, not ready to commit to a couple of hundred basis points with no volume, like we did the last time at this point, yet.

And our next question comes from the line of Liam Burke with FBR Capital.

Mike, on the adhesives front, you mentioned the polymer being a contributor to growth. In terms of operating margin, how have, as the polymer business progressed, are they at the levels -- are you satisfied with the level of profitability in that part of the business?

So the margin improved, but, no, we are not satisfied yet. We're still in the middle of this last phase of restructuring. So in the short term, you see the hit in terms of the restructuring cost and not yet the benefit of having consolidated and upgraded the equipment. So I think next year, we'll be in a more normalized role, and then beyond that we'll finish the final relocation in sort of the early part of next year, maybe the first calendar quarter or so. And then after that, we should see the full benefit. So we are not there yet.

Okay. And on the medical front, you're seeing healthy growth. It's been a priority on the acquisition front. How are you sized for capacity?

So I would say, we continue to expand. For example, we built the new facility in Colorado for our components business. We've expanded once, doubled the size of Mexico. Now we're expanding again in Mexico. With the Vention acquisition, we've added 5 or 6 new facilities that have some capacity in them. But given the growth rates that we have down the road, we'll expect the need to expand further, and that's in our plans.

Our next question comes from the line of David Stratton with Great Lakes Review.

Just a follow-up. Only a few questions left, really, for me. And mainly regarding Vention, was that accretive in the quarter, and if so, by how much?

Well, we've said, it's probably accretive in the quarter after the second quarter. And we expect it for the year to be in that sort of $0.05 to $0.10, and I think we are on track with that. So we feel the best acquisition is right where we expected it to be.

Got you. And then geographically speaking, it seems like every region is doing pretty well with the exception of maybe Europe in adhesives. And if you'd talk about that a little bit, I'd appreciate it.

Yes. So I would say, Europe is actually doing reasonably well for us. There's a couple of areas where, given the large OEM base, you can see some swings quarter-to-quarter. And I think if you look at this quarter, it was probably off a little bit in terms of actual performance. But that's really a function of some of the things we talked about earlier with the larger-project activity. I think in our order rates, it looks encouraging. So I'd say, underlying this year, Europe is playing out reasonably well, but you, again, can have some anomalies project-to-project. So in this quarter, it was probably a little bit off, but the order rates, it looks encouraging. Year-on-year, I think it will be a solid year for Europe.

(Operator Instructions) And our next question comes from the line of Matthew Trusz with Gabelli & Company.

Just a follow-up on the Europe order rates question. If we turn to the United States, down 6% might be surprising even considering comp last year. Can you provide some additional color on what you're seeing geographically there? And whether that's project noise or something fundamentally going on?

Yes, I would say it's mainly project-related activity. I'd say one area that we haven't talked about yet that was particularly strong last year that's a little softer here, it's the whole auto space. And not generally, because the production levels are high and there's a lot of work for us in the body shop piece and the electronic side, but we had some larger platform orders last year, as a -- and platform orders mean model change, significant model changes, and that's not repeated itself. And that's one of the things affecting the U.S.

Yes. This is Greg. I'll just add additional color there. We're up against a pretty challenging comp to last year, where we were up 9% total in the U.S. And that cold material or autofocus that Mike mentioned is part of that answer. And then again, you kind of go back to, in the current quarter, as we talked at the total portfolio level, to kind of the timing of some of those systems orders as that would affect adhesives as well. So where the U.S. was impacted, it was primarily in the Industrial Coating segment and adhesives, and that has to do with those -- the timing of these system orders.

Great. Thank you for the color. And then secondly, just following up on the M&A discussion, can you talk about the interplay between the availability you're seeing in medical and other attractive assets versus what the valuations are like in the marketplace? And where are you identifying interesting opportunities outside of medical?

Yes. And so if you look at the medical space, the one good thing is it's still fairly fragmented. There is an opportunity to have differentiated positions through technology and support and service. The businesses generally tend to have good profitability and high growth rates, and so you need to pay premium price to get them, and that hasn't changed in the last year or so. We still see quite a few opportunities there, and that, I'd say, is probably our primary focus in the short term. Beyond that, we have sort of 3 other areas that we've identified as interest to us in the cold materials space, so think about that as atmospheric dispensing of adhesives and coatings and sealants. There are a lot of smaller players there that we have interest in. They've just -- none of them have come to market yet other than the acquisition we made a couple of years ago of sealant equipment and engineering. I'd say we still have some inspection areas of interest in electronics and closely adjacent markets. And I'd say we're pretty good on the polymer area. But we are also in the process of longer term identifying what are the next couple of areas that we have interest in, and we've got work ongoing, but we're not ready for prime time on that yet.

And we have a follow-up question from the line of Walter Liptak with Seaport Global.

Kind of along the lines of geographic -- the comps are toughest in Japan and Asia-Pac, and so I was wondering -- you kind of addressed already the visibility and the kind of fundamental robustness in your end markets. But I wondered if you could talk specifically about Asia and Japan and kind of what you're seeing from those economies and kind of new-order pipelines.

Yes, I would say, Asia, in general, has been pretty solid. China, their kind of new normal of 6%, 7% has been solid for us. Asia, outside of China, and Japan has been solid. Underlying Japan has been reasonable. What you're seeing in the fourth quarter is just timing, largely driven by the electronics markets. When you think about most of the final assembly and packaging folks are in China and Taiwan, a lesser extent Korea, and then a lot of the components supplier that would go into the mobile and other electronics business are in Japan, so when you think about camera modules and speakers and things like that. So I think what you are really seeing is, a lot of that activity being earlier in the year, particularly late second and third quarter. And last year, it trended a bit more into the fourth quarter, at least probably halfway through the fourth quarter. So that's really what you're seeing here. Underlying economies, Japan has been solid, China has been solid. Outside those 2 in Asia, good year. So again, kind of the new normal for China. You need to take into account the solid year, in general.

And I'm showing no further questions at this time.

Well, I just want to thank everyone for participating this morning. I think I want to leave you with just one message that we have a very strong year that we're expecting to deliver here. We're very well positioned with the changes that we've made to the portfolio through the acquisitions to both add to our growth, support our high level of performance from a margin perspective and reduce the cyclicality in the overall business. So I feel good about how we are positioned going forward. I just want to thank our team for delivering another stellar quarter. 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 great day.