Nordson Corp (NDSN) 2017 Q4 法說會逐字稿

Good morning, and welcome to Nordson's Corporation Conference Call today, Thursday, December 14, 2017, to report fiscal year 2017 fourth quarter results and fiscal year 2018 first quarter outlook. Today's conference call is being broadcast live on Nordson's webpage at nordson.com/investors and will be available there for 14 days. There will be a telephone replay for the conference call available until December 28, 2017. This can be accessed by dialing (404) 537-3406. You will need to reference ID number 739-6249.

During this conference call, forward-looking statements may be made regarding 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 remarks on the quarter, there will be a question-and-answer session.

With that being said, I would like to introduce Mike Hilton, President and Chief Executive Officer of Nordson Corporation. Please go ahead, sir.

Thank you. Good morning, everyone. Thank you for joining Nordson's 2017 fourth quarter conference call. I'm joined by Greg Thaxton, our Senior Vice President and Chief Financial Officer.

I'd like to begin by recognizing the outstanding effort of our global team for delivering full year record sales, operating profit, earnings per share and EBITDA. Our commitment to meeting our customer's needs and delivering the best technology solutions continues to be our priority, helping us surpass $2 billion in annual revenue this year. I'll provide some highlights on our record-setting financial performance, and Greg will offer more detailed commentary.

Looking at the fourth quarter, organic growth of 2% was driven by a strong demand in the electronics end markets, along with solid growth in medical and those end markets serving the Adhesive Dispensing segment. Against very challenging comparisons of year ago, where total company organic growth increased 13%. This quarter's performance exceeded our guidance. Our recent acquisitions added 10% growth for the quarter. The sales volume, coupled with our continuous improvement initiatives, resulted in EBITDA growth of 17% and EBITDA margin improvement of about 1 percentage point in the fourth quarter as compared to the same period a year ago. Also during the quarter, we increased our annual dividend by 11%, marking our 54th consecutive year of dividend increases.

Overall, our fourth quarter performance was solid, ending, what again, was a very strong year for Nordson. Looking ahead to the new year, our backlog indicates another robust first quarter for fiscal 2018.

Our guidance for the quarter is very strong and is largely driven by our Advanced Technology segment, where strong demand in electronics and medical end markets is driving performance.

I'll speak more about our outlook in a few moments. But first, I'll turn the call over to Greg, to provide more detailed perspective 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 fiscal year results before moving on to our outlook for the first quarter of fiscal 2018.

Fourth quarter sales were $574 million, an increase of 13% over the prior year's fourth quarter. This change in sales included a 2% increase in organic volume, a 10% increase related to the first year of effective acquisitions and a 1% increase related to the favorable effects of currency translation compared to the prior year's fourth quarter. Organic growth exceeded the high-end of our guidance range, driven primarily by strong demand in electronics end markets.

Looking at sales performance for the quarter by segment, sales in Adhesive Dispensing segment increased 6% as compared to the prior year fourth quarter, inclusive of 4% organic volume growth and 2% related to the favorable effects of currency translation. This marks the 10th consecutive quarter of organic growth in this segment, where all product lines and nearly all regions drove the increase in the current quarter.

Within the Advanced Technology segment, sales volume increased 29% from the prior year fourth quarter, inclusive of 4% organic volume growth and 25% growth related to the first year effect of acquisitions. The effects of currency translation were immaterial. This is outstanding performance that exceeded our expectations, considering the difficult comparison to the prior year fourth quarter, where organic growth for this segment was 30%. Strong demand from electronics and medical end markets drove the current quarter's growth. We continue to benefit from the ongoing changing technology in the marketplace and our ability to broaden our application solutions. Regionally, growth was strongest in Japan, with the Americas and U.S. also adding to this growth. This segment's acquisitive growth includes 1 month of the fiscal 2016 LinkTech acquisition and the fiscal 2017 acquisitions of ACE, InterSelect, Plas-Pak and Vention.

Organic sales volume in the Industrial Coating segment decreased 8%, where this segment was also up against a very challenging comparison to the fourth quarter a year ago, where organic volume growth was 12%. Customer demand in most product lines was offset by strong prior year performance in our cold material product line. Europe and Japan were strongest, geographically, in the current quarter.

Moving down the income statement. Gross margin for the total company was 54% in the quarter, and operating profit improved 13% to $125 million as compared to the prior year's fourth quarter. Where reported operating margin of 22% in the quarter. This performance includes approximately $6 million of intangible asset amortization expense related to acquisitions made in the current year, which dilutes operating margin by a full basis point.

Looking at operating performance on a segment basis, Adhesive Dispensing delivered operating margin of 28% in the fourth quarter. This was an impressive improvement of 4 percentage points, driven by changes in product mix and fewer restructuring charges as compared to the prior year. The current quarter includes approximately $1 million in restructuring charges related to facility consolidation efforts.

Within the Advanced Technology segment, reported operating margin was 24% in the fourth quarter or 26% when excluding $6 million of intangible asset amortization expense related to current year acquisitions.

The Industrial Coating segment delivered operating margin of 18% in the fourth quarter, down from the prior year's exceptional performance due to volume leverage and mix, but still a strong performance for this segment.

On a total company basis, net income for the quarter was $80 million and GAAP diluted earnings per share were $1.37, a 5% increase over the prior year GAAP diluted earnings per share. The $6 million from intangible asset amortization charges in the current quarter, or current year acquisitions, reduced earnings per share by $0.07.

As Mike noted, we delivered strong fourth quarter EBITDA of $150 million, a 17% increase over the prior year fourth quarter, and EBITDA margin improved 1 percentage point to 26% as compared to the prior year's fourth quarter.

Cash flow from operations was $133 million, and free cash flow before dividends was $111 million, or 139% of net income, highlighting our continued focus on liquidity. Our press release includes financial exhibits, reconciling net income to free cash flow before dividends and adjusted free cash flow before dividends as well as EBITDA and adjusted EBITDA.

I'll now share a few comments on our full year results. Sales for fiscal 2017 were $2.1 billion, inclusive of very strong organic growth of 8% as compared to the prior year, which also was a strong year for Nordson. The first year effect of acquisitions added 7% sales growth, and we continue to be pleased with the performance of these acquisitions.

Full year operating profit was $458 million, which is an increase of 18% over the prior year and inclusive of approximately $15 million of intangible asset amortization expense related to current year acquisitions.

Reported operating margin was 22%, or 24% on an adjusted basis to exclude both the effect of one-time charges highlighted in the EPS reconciliation financial exhibit and the $15 million intangible asset amortization expense, representing a 200 basis point improvement over the prior year's adjusted operating margin.

Net income for the full year was $296 million and GAAP diluted earnings per share were $5.08. Adjusted diluted earnings per share increased 15% over the prior year to $5.37. Both EPS amounts include the $0.18 per share of charges for intangible asset amortization expense for fiscal 2017 acquisitions. A reconciliation between GAAP earnings and adjusted earnings per share is included within the financial exhibits to our press release.

EBITDA for the full year increased 19% to $547 million and adjusted EBITDA increased 22% to $565 million, both compared to the prior year. EBITDA margin and adjusted EBITDA margin were 26% and 27%, respectively, both up over 100 basis points as compared to the prior year.

From a balance sheet perspective, net debt to trailing 12 month EBITDA, inclusive of acquired EBITDA, was just under 2.5x at the end of the fourth quarter. We generated $282 million of free cash flow before dividends and distributed $64 million in dividends for a payout ratio of 22%.

I'll now move on to comments regarding our outlook for the first quarter of fiscal 2018.

We entered the quarter with strong momentum where, as of October 31, 2017, backlog was approximately $402 million, an increase of 45% compared to the prior year, inclusive of 28% organic growth and 17% growth due to acquisition. Backlog amounts are calculated at October 31, 2017, exchange rates.

We're forecasting sales to increase in the range of 30% to 34% as compared to the first quarter a year ago. This growth includes organic volume growth of 15% to 19%, 11% growth from the first year effect of acquisitions and the positive currency effect of 4% based on the current exchange rate environment. At the midpoint of this outlook, we expect first quarter gross margin to be about 55% and operating margin to be approximately 22%, or 23% excluding $6 million of intangible asset amortization expense associated with fiscal 2017 acquisitions.

EBITDA margin is forecasted at 27% for the quarter as compared to 23% for the prior year's first quarter.

We're estimating first quarter interest expense of about $11 million, depreciation and amortization expense of about $25 million and an effective tax rate of 29%, based on current tax law, resulting in first quarter forecasted GAAP diluted earnings per share in the range of $1.29 to $1.39 per diluted share. This EPS range is inclusive of the $6 million or $0.07 per diluted share of intangible asset amortization expense related to the fiscal 2017 acquisitions. These charges did not occur during the first quarter of fiscal 2017.

We expect EBITDA to be in the range of $141 million to $150 million.

In addition to this first quarter outlook, the following full year data points may be helpful. For our effective tax rate, we're forecasting the full year rate to be 29% based on current tax law, and we're forecasting capital spending to be approximately $60 million.

And with that, I'll turn the call back over to you, Mike.

Thank you, Greg. This is outstanding performance for both the fourth quarter and the full fiscal year. I want to, again, thank our global team for helping us deliver these record results for fiscal 2017. Our first quarter guidance is very strong, largely driven by the Advanced Technology segment, where strong demand in electronics and medical end markets is driving performance. Our diversification efforts to drive growth through new applications, technology and tiering are paying off, and our recent acquisitions are off to a good start. With the short-cycled nature of our end markets, we have limited visibility of sales beyond the first quarter. However, we do anticipate future organic sales growth to moderate to more typical levels beyond our first quarter, particularly giving the challenging comparisons from a strong fiscal 2017.

Our strategic priorities for the year remain consistent with prior years, and we'll continue to be focused on driving our growth initiatives across each segment. From an M&A perspective, we'll continue to target high-quality companies in our targeted space, and we continue to use tools within the Nordson Business System to drive operating improvement across the enterprise.

With that, we'll pause now and take your questions.

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

Can you first talk about the Advanced Tech business and whether there's a clearly defined timing element to this? I guess, the best word to maybe describe it is as a surge you anticipate in your business in Q1, whether that's a handful of projects, a few customer concentrations that's driving that, or if this is indeed something more broad-based? And then also, historically, you've given quarterly order data. Is there a reason you're not providing that and if so, are you able to provide it in response to the question?

Yes. So let me comment in the first piece. What we've seen, really, in the tail end of our fourth quarter and into first quarter is continuing strong demand in the electronics segment. A good portion of that is mobile related. But also, we're see -- we've seen some large orders related to some underlying growth in, sort of, newer technologies. So for -- one example of that would be moving from rigid to flex circuits to provide some more flexibility to customers with smaller design footprint. So what I'd say is, that we've -- we saw a couple of large projects come through, some of them supporting mobile directly, some of that more broadly based. And so obviously, we've had a pretty strong year of new mobile introductions this year, and that's continued a little bit into the fourth quarter and into the first quarter. So at a high level, that's what we're seeing on the electronics side. As far as the guidance around orders, let me kind of give you our thought process here. And we've been thinking about -- of the order guidance for quite a while. And originally, we provided that because we thought it was providing additional insight with regard to underlying run rates across the business. But more recently, over the last couple of years, we've seen, sort of, the order rates be out of whack a little bit with backlog and to where our sales guidance. And the reasons behind that are couple of fold. The mix of our business has changed with the growth in the Advanced Technology segment, both in electronics and now in the medical business. Particularly on the electronics side, our delivery windows have been shrinking, and the timing of orders year-to-year has varied pretty considerably. In addition, we have some customers who place those orders for large projects but look at deliveries over multiple quarters. So we found ourselves in situations where we're explaining why our sales guidance looks out of whack with our order growth rate, and we thought a more consistent way to look at things was to give you, sort of, the backlog at the end of the quarter and then our guidance going forward, because it takes all of the -- those kinds of things into effect. And we, also, were getting feedback from many of our shareholders that they were getting confused by our order rate data, and it wasn't necessarily helping provide additional insight. And so that's why we've decided to make that change.

Got it. And then just one follow-up with respect to Advanced Tech. As I look at the incremental margins in the fourth quarter, if I, sort of, backout, i think the $6 million of intangibles' amortization, I come up with a number in the high 20s, which isn't a bad number per se. But I guess, I would think with positive volume gain, maybe that number would be a little bit higher. So going forward, and I assume you're going to continue to include the intangibles' amortization, as you've laid it out in your guidance, what's sort of the right way to think about the incrementals in Advance Tech going forward?

Matt, this is Greg. What I'll add there is, we did see a good volume growth, as a succession of fourth quarter. But that was largely acquisitive growth. We had low single-digit growth on an organic basis, and what we had suggested in prior quarters was the operating margin, excluding the intangible asset amortization for those acquisitions was very near the op margins of that segment. So had we seen stronger organic growth, or when we see stronger organic growth, that's where we see very strong incremental margins, helping lift margins. In this case, that wasn't necessarily true.

And our next question comes from the line of Mike Halloran of Baird.

So on the order side, the one thing that was useful was the composition by segment. Could you give a little context on the backlog, as we exit the year in two respects? One, I'm guessing, Mike, that it mirrors the comments that you just gave to Matt's question, but a little thought on the backlog, as you look through the segments. And also, how to think about conversion of backlog into revenue?

Yes. So from a overall backlog standpoint, obviously, the strongest change in there is in the Advance Tech segment, and if you take out the -- for a couple of reasons. One, most of the acquisitions follow into that -- or all of them fall into that segment, number one. Number two, on an organic basis, medical is strong, electronics is particularly strong. As you look at the other businesses, our Adhesives business was up, our Coatings business was a little bit down, and that's really more of a year-on-year comparison, where the prior year we had some strong -- both in Q4 and then Q1, some strong auto platform work that didn't repeat. So I'd say, in general, the biggest driver is the Advanced Tech segment, but the Adhesive piece is up as well. And as we look to the first quarter, we expect all of the segments to be up. But again, the key driver's going to be the Advance Tech piece.

And the backlog conversion question?

I'd say, for this quarter, coming forward, most of what we see in the backlog will get converted in the first quarter. But we do have some longer projects, both in the Adhesives area, particularly the polymers, and then some of the Industrial Coatings, and even in some of the technology side, where you have some orders that potentially push out. But I'd say, a good portion of that, as you know, converts within the quarter.

Yes, that's what I would guess. And then second question. Obviously, the seasonality on the Advanced Tech side has shifted around here. You answered the previous question, pledged some nice project activity, some electronics pieces that have moved in the quarter, some of the higher-complexity items helping out. Could you -- I know your visibility is limited on that side, but could you help provide how you're thinking about seasonality through fiscal '18? Are you expecting some seasonality to materialize in the fiscal second quarter, that maybe would've materialized in the fiscal first quarter before ramping hard in the back half of the year, something smoother than that? Now that you've got a larger piece of that portfolio being medical? Maybe, just some thoughts on the cadence.

Yes, just a couple of comments there. So I'd say, the first quarter, obviously, is stronger than we would've expected at the year-end. But that's really linked to some of those large orders that we got. When you look at the second and the third quarters going out, we had strong double-digit organic growth. So there's -- there are going to be a little tougher comps year-over-year. So I think, that'll be the, sort of, the challenge that we're up against. I would say, across the businesses, I mean, we started the technology side of things, we are looking at, on a pro forma basis, medical being a sizable part of the portfolio now and of that Advance Tech piece, it's likely to be in that 30% range. So that's going to be some that's a little bit more stable. And then I'd say, if you look at the piece, it's not electronic-related beyond medical, it's probably as much as another 20%. So that's also likely to be a bit more stable throughout the year and less seasonal. The electronics piece is the one that can vary. But I would say is this is the time of the year where we look at and work with our key customers on project activity, and that project activity continues to be robust. I think the challenge will be that it's been a strong, sort of, launch here by some of the mobile guys. But we're seeing a lot of interest in some of the newer technology, whether that's on the wafer side, or whether that's on some of the things like the flexible packaging side of things, which is gaining share in the marketplace and has generally higher growth. So we'll be figuring out that mix, particularly in that segment against some stronger comps in the second and third quarter, I think, is the challenge. But that's, sort of the -- kind of the best insight we can provide at this point.

Our next question comes from the line of Matt Trusz of Gabelli & Company.

Just following up on that, could you go through more detail and discuss the technology dynamics driving growth in electronics away from mobile and more on the chip and semi side?

Yes, so on the -- so I'll make a couple of comments. So on the semi side, we've historically, done a lot on the packaging end but now we're seeing some customers that are looking at Advanced Technologies, where they're actually stacking on the wafer as opposed to after the wafer is diced. And so ultimately, that'll proceed towards the -- what's called through (inaudible). So just think of that going vertical on the chip architecture and doing that on the wafer. That's a new application that has resulted in some nice growth for us over the last sort of 18 months. There are still potential additional customers that would adopt that particular approach, and that's very sophisticated technology that we've developed in concert with these customer applications. I'd say, on the dispense side, but also on the inspection side, a lot of our new products on the electronics side have enabled growth in a number of areas. On the packaging side, on the flexible packaging, you have rigid packaging and flexible packaging and smaller packages to, basically, cram more in and allow for growth in the batteries, customers are starting to go to more flexible packages. And that's something that our technology is enabling. And then I'd say, if you look at -- on a broader basis, right now, today, probably about 15% of Advanced Technology business goes into auto electronics, and we see that as a longer-term growth opportunity, as you move towards more and more sensors and equipment that would support, eventually, autonomous driving. So we've done a lot of development there. And then when you look at the nonelectronics part in the Advanced Technology space, look at the medical piece, virtually all of the medical growth is coming from supporting new products and new applications for customers. And that's, kind of, the hallmark of our total company. In all of our businesses, our focus is around how do we create our own demand. And so whether that's in our Adhesives area or Coatings area or Advanced Technology area, that's really the focus and something we've been driving hard in a relatively lower growth environment that we've seen over the last several years.

Great. Just to ask a follow-up on that, what's your sense of the penetration of these newer technologies into the supply chain, and how many more years or portion of the market will need to adopt?

That's -- I'd say, it's early on. But it's hard to say to what extent at all will be adopted. I think if you look at sort of broader, like the flex circuit technology, that's something that's growing at, sort of, high single-digit rates right now, as it -- basically, as some of the rigid circuit board gets converted over. On the wafer side, there are multiple ways to get at, sort of, the 3-dimensional approach. So depends on which dimensions the customers take, but there's still some additional opportunity there. And then the one area we haven't talked about yet is the other things that we offer on the electronics space, particularly test and inspection. So as customers go to either 3 dimensions or different approaches and processor technology, the inspection piece is becoming more critical, particularly on the x-ray side of things, and we've got a whole new set of products there that are doing really well. And then our most recent acquisitions of the smaller solder-based companies are off to a good start as well. And that's linked to interconnect and ultimately, three-dimensions. So we feel pretty good about that. Talked a lot about electronics, but that's the philosophy in terms of driving new product and new application growth, and as Greg said earlier, tearing is what we try to do across all of our businesses.

And Matt, this is Greg. I'll just add a high-level comment. A lot of the trends that Mike talked about, translate into more sophisticated solutions for our customers that they're dispensing smaller quantities in tighter, more difficult-to-reach spaces. And the more sophisticated the application is, the more likely they're coming to Nordson for that solution provider.

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

Just one for me today. And given the growth, especially in ATS, can you talk a little bit about capacity, where you stand? Has acquisitions -- have they been adding to capacity, so you don't really need to expand? Or is there a potential that this growth could create some bottlenecks and impact your ability to meet demand in the near future?

So there's a lot in that question, but let me suggest that, I'd say, particularly on the electronics side, we've become very adept at flexing up and down. We have our facilities across the world where we have capacity to flex up and down, and we've also used our sort of Nordson Business System's to -- and many cases, relay out our factories to relatively low cost and capability. So I think we're very good there. I'd say, with the medical business as an example, we have been through the acquisitions adding, not only capacity, but capability in the U.S. and outside the U.S., and we have been expanding. So -- and we build a new facility in Colorado. We've expanded our facility in Mexico with our latest acquisitions. We've got some additional capability, and we're all -- we're centered in all the key areas where customers are doing their development work. But then I'd say, across all of our businesses, we've used a combination of our continuous improvement activities and an increasing levels of upgrading of equipment and automation to not only make us more efficient, but to give us capacity we need. So other than, sort of, normal maintenance capacity, we're in pretty good shape. And with regard to our polymers business, we're finishing up this year, the transition in that business through consolidation. So I think we're pretty good shape from a capacity standpoint.

Our next question comes from the line of Jeff Hammond of KeyBanc.

Jeff?

Just on -- maybe, on the acquisitions. Just -- I think you said they were on track. But anything notable in terms of opportunities that you're uncovering it on cost of revenue synergies are early on?

Well, I would say, a couple of things. So we've done a number of acquisitions, and maybe I'll break them down and start with some of the smaller ones. Our smaller ones were 2 acquisitions in the electronics side that got us into a new area in a selective solder space. And our plan there is off to a good start is just what we did with the MatriX inspection company, which is the globalized, local business, and so we've seen some good success, I'd say, in utilizing our global sales force to create new opportunities and start to close on some of those. I'd say, with our Plas-Pak acquisition, we've added complements to our EFD product line and got us into a new area in animal health, and I think we're seeing benefits from that, and I think there's opportunities to optimize the -- our EFD business there. I'd say, Vention brought a lot of capability to us. In particular, in the design and development phase, which really allows us to get in early, not only with critical larger established customers involved in their new product development, but also with some of the entrepreneurial, sort of, new venture development companies there. And we've been able to seize opportunities to pull through our broader product portfolio of products. And I think longer term, there'll be opportunities across some of these businesses to further optimize our supply chain and footprint. But I'd say, in the short term, we're off to a good start. We've added capability. In the case of the medical side, we've added significant capability on the design front that is, I think, just what customers are looking for and very helpful with pulling the full product portfolio through. And it really came with some very established organization and people capability.

Okay, great. And then you mentioned active project increase, et cetera, in Advance Tech, kind of looking out past 1Q. Can you speak to the same on what you're hearing from your customers on the Adhesive side, if we kind of look a little further out, just in terms of quoting and customer feedback, et cetera?

Yes. I'd say, on the Adhesive side, it's a pretty -- pretty typical of what we see. This time of year, things slow down in most of the businesses for the holidays. But I'd say, in terms of opportunities going forward, we think our -- there's an opportunity for growth in all of our businesses. Some of them are more digital, like our product assembly businesses and our sort of pelletizing businesses. But we're seeing -- I'd say, typical activity and opportunity there. And for us, in businesses like our traditional Adhesives business, we continue to benefit from both tiering. So this year, we've got involved in a -- yet a lower tier of nonwovens set of customers, all new to us, based on complete design and build-out of Shanghai, and there's some growth opportunities there. And then we've really used the new product development to help recapitalize in that business. And I'd say, we've introduced some new technology to Asia. For example, on the pelletizing side, where we've gone to -- with our underwater pelletizer, that's -- we've just started up the first facility in China, it's going well, and we've got a lot of interest now relative to competing products. So we feel good about what the new technology has bring. I'd say, at this point in time, our visibility in some of the these businesses is short term, but I think the activity is typical of what we'd expect to see at this point in time.

Our next question comes from the line of Christopher Glynn of Oppenheimer.

So just wondering about capital allocation in the medium term. You've come off some pretty robust activity there. Is the focus on continued execution on the pipeline relative to debt paydown, or where does all that stand?

Yes. So I'd say, our capital allocation is first and foremost, supporting organic growth. I think, Greg gave you some numbers on that. And then second, around the dividends fees. Both of those together are relatively modest. I think beyond that, we still have a short-term focus on debt reduction to free up capacity for opportunities, and we still see opportunities out there in the targeted areas that we've mentioned. I think there's still probably, the most opportunities in the medical side, just because of -- the market is more fragmented. But I'd say, in the very short term, it continues to be around reducing debt to give us some freeboard, sort of, opportunities kind of through year. So I'd say, the priorities are pretty similar to where they've been, kind of, after first quarter of last year.

Okay. And then a modeling question on the corporate number. It spiked up a little bit in the quarter, but what's the best way to plug in for run rates there?

Yes, Chris, this is Greg. We had some, call it, unusual items, and of course, some one-time in the quarter. And most of that increase over the prior year was associated with an initiative that we have in North America to move a portion of the business to a more shared service type of model. So I'd expect as we move into FY '18, we'll kind of normalize back to spend amounts that you've seen in the most recent quarters.

Fourth Quarter and it should trend down over time.

Okay. And then my last one is on ADS. I just want to revisit, if you can quantify the structural benefits from consolidation for fiscal '18 over '17?

Yes. I would say, it's going to be relatively modest, because we'll have completed both of the major projects we have underway. The one on -- in North America, where we're consolidating 3 facilities into 1. And the one in Europe, we're going from 2 to 1. They'll get completed in the year. But for the first part of the year, we're still running multiple facilities as we transition equipment and build out the new facilities. We're further ahead in the U.S., and the project in Europe started a little bit later. So I'd say, there'll be some modest impacts in this year and some larger impacts in '19.

Yes. So Chris, we'll probably firm that number up and give you some better guidance on that margin improvement within that segment as we're heading into '19.

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

Just -- you've talked about backlog, and I think Jeff asked about Adhesives. I wonder if we could do the same thing on the Coatings. Sounds like that one's probably, maybe, down even or probably growing the least. Any commentary on, kind of, the first quarter, and what you're seeing from projects over the next year?

Yes. So as I mentioned, I think, earlier, we do expect for all of the businesses to be up in the first quarter. But we have seen, I'd say, some tough comps this fourth quarter and in the first quarter on the Coatings business, primarily on the auto side. If you look at our powder, liquid, container, those businesses have grown nicely. It's -- we had some big auto platform work last fourth quarter that went through. And some of that continued into the first quarter, as the customers were going through model changes. We don't anticipate significant model change kind of activity going through this year. But we do see a couple of areas that, I think, for the future, present good opportunities for growth in that business, where we've had some revenue and we expect it to tick up over time. One that we've talked about before in the, sort of, aerospace area as customers, both the end customers and the Tier 1 suppliers look to do more automation. And so I'd say, we've had a lot of development work and some modest sales to date, but we expect that to pick up over time. Another area that we're seeing more opportunity in is with electric vehicles, there's more work around the batteries themselves, and we're seeing opportunities across this business, but most importantly, in the Coatings area to support some of the things going on in the battery development. So we see opportunities there over time. I'd say, the trend has been a little bit of a drag this year, this year being '17, and has really been the auto piece, and a platform piece. But longer term, we expect to see growth in that area.

Okay. And then if I could just ask, yes, I don't mean to beat a dead horse on the Advanced Tech, but I wonder if there's a way of delineating -- kind of the traditional mobile phone makers versus China, where it sounds like you've been, maybe, growing more rapidly as that market evolves? Then any difference in kind of the growth rates there? And then with the new technologies, you talked about large projects, and I -- but I think this is the first time we're hearing that. I wonder if you could comment just -- are these test orders? And if the technologies work, there's more behind it as there's more features -- they're going with flexibles? Or is this sort of a short-term thing? Is there any visibility there?

Yes. So there's a lot of components there, Walt. Let me just -- maybe, I'll start at just the highest level, and if you look at sort of the mix of our business in Advanced Tech today. So if you look at sort of pro forma for '18, about 30% of our business is going to be medical. There's probably another close to 20% that would be Industrial and other types of application. Then about half falls into that electronics space. So of that total Advanced Tech, about 15% is directly mobile, and then you've got auto electronics, it's a similar size. Semiconductor is a little smaller and other consumer electronics that are a little smaller. So that could be gaming consoles, LEDs, a variety of other things. So there is a breadth and a diversification, I'd say, to the applications there, across the whole segment that is different than it was if you just go back a couple of years. Primarily because of: one, the medical piece; and two, some of these other applications. So I'd say, now I mean, some of the newer applications that we've mentioned, the direction for most semiconductor makers is to go 3D, to go to three-dimensional chips. The question is, whether you do that before or after you dice the wafer? The newest technology is going towards doing it on the wafer, but everybody's not following that path. We don't -- we have some indications that others will be going in that direction, but it's not clear yet whether that's going to step up in a significant way. But those are typically larger opportunities, more sophisticated equipment. With regard to some of the other technologies that support the mobile side, and I think if you look at the most recent phones, the biggest thing you see is battery. Everything's about battery, capacity and space, which means it squeezes everything else out, and so some of the things that customers are working on is, how do I cram in the capability in that reduced space? And one of the ways to do that is to use more flexible circuits, and we're certainly seeing outsized growth in the flexible circuits, and that's an area where we've been successful in offering our technology, both on dispense and on the inspection side. But those are just a -- those are a couple of examples of things that we work on. But there's a lot of other things that customers are working on. Now you also ask about sort of the Chinese mobile folks versus the more traditional. I mean, this has been a good -- '17 has been a good launch year for the more traditional global players. You haven't heard as much from the Chinese players. But over time, they've been growing and taking share, particularly in China. So the opportunity for them is, they continue to grow in China, do they grow beyond China? And we expect to see further growth there. And as we've mentioned in the past, they're -- have now got on the automation train, and they're moving that way, still not as far along as the global folks, but we expect that trend to continue. So we have lots of projects with all of these folks, how we -- and which ones are going to go at what time is always difficult to judge. And I'd say, in the other areas that are outside of the electronics space, we got a lot of development work, particularly in the medical side, it's robust. And then in the other businesses as well, we -- this is typically the time of year where we're working on, particularly, the newer technology-related projects.

Our next question comes from the line of Charlie Brady of SunTrust.

This is actually, Patrick Wu, standing in for Charlie. Looking at Adhesive Dispensing margin, I mean, adjusted margins were 28%, obviously, very good. And just wanted to know what the mix of parts and consumers -- consumables was for the segment? And so looking out what expectations do you guys have in terms of Adhesive margins expanding in '18 and beyond?

Yes. So I'd say, Greg's looking up the parts number here. I mean, typically that's a segment where the parts are a little higher than our average. So they might be closer to the middle '40s than the lower '40s. But we'll give you a heads up on that. But it's in that range. I'd say, longer term, from a margins perspective of that segment, we'd like to get to the 30% level. Some of that will come from our normal continuous improvement using our business systems, some of that will come from the restructuring that we're going through in the polymer side of the business, but our longer-term goal would be to get to that 30% level.

Okay, great. As I wait for, I guess, Greg on the consumables part...

Yes, we may have to follow up and get back to you on that, it's not jumping off the page for us right now.

I -- actually, Patrick, I have that. So within Adhesives, in the fourth quarter, our mix of parts was about 46%. And that's trending pretty closely to what it had been in prior quarters. And as Mike mentioned, that tends to be pretty close to where the total company -- total company was about 48% in the fourth quarter. Now that -- that's up a bit from prior year, driven by a couple of things. One, general mix in the quarter as well as we've got the impact of the acquisitions in there that are more of a consumable, so they fall into that category. So that's lifting as well by a couple of percentage points, what the total mix otherwise would have been prior to those acquisitions finding their way in. That's going to be primarily be in the Advance Tech segment.

Okay. And then just wanted to go through Coatings for a second. Looking at the margins for the fourth quarter in -- of '17, that seems to be lower than the previous 3 fourth quarters, I guess, going back to '14. Is there anything we should be looking at here or is it one of those items where you talked about volume being down and sort of the bigger -- guys had an impact on autos?

Yes. So I think -- so obviously, there's some impact from the volume being down a little bit. And then there's a little bit of mix effects there. There's nothing structurally changed there, and that's something that we've been on a good path of improvement year-on-year for quite a while. And I think we have continued opportunity to move up a little bit in that -- in that area. So nothing structurally going on there.

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

Just want to go back to Jeff's question, in terms of customer or client thoughts into '18. I mean, as we stand today versus may be a year ago, I mean, are customers talking more optimistically about spend in '18 or really no change at this point?

I would say, we haven't seen a significant change in terms of the dialogue at this point. Obviously, we have this potential for tax change here coming up, if that happens, I could see particularly some of our smaller midsized customers that might be an opportunity for further reinvestment. But I'd say, the mood is encouraging. I think, if you look at the year, just from a macro standpoint, the U.S. is probably going to end the year a little that we thought, clearly Europe and Japan are stronger this year than most expected and so you've seen some good performance there. But I'd say, in terms of, sort of, project lists and volumes, not a dramatic change in terms of customer attitude, not a dramatic change for us.

Got it. And then I might have missed this, but can you talk about the growth rate that you're seeing in medical, are we still in that high single-digit range at this point?

Yes. We've had a good year, sort of a double-digit year for us this year, and I think that's our high single -- the double-digit is expectation for us in the long run there. There's a lot of trends that favor that, and as we talked earlier, a lot of that's driven by new customer procedures and their approaches and products that we develop to support them. And particularly, with the drive towards minimally invasive procedures, we see that as a strong opportunity going forward.

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

I just wanted to -- you answered a question, Greg, about the shared services and the increased expense. Is this a part of a bigger multi-quarter project to try and to do more shared services, where are you even if that's true? Where are you in the project, and is there going to be some savings from it?

Yes, Walt. I'd say, it's part of our ongoing drive to improve overall performance, figure out how we can approach the business from a more efficient way. And you could go back several years prior to acquisitions and suggest that, in parts of the world we had been executing under this model, but with acquisitions over the last several years, this is an effort to really, kind of, bring more of the businesses under this type of model. So we're starting first in North America. We're largely into that effort we'll complete that, I'd say, most of that in the first half or so of FY '18. And then we will look to other parts of the world, and where it makes sense then to integrate some of the businesses that are not in some of the established locations, where we had shared services. So I do expect that this will continue. I wouldn't suggest that I see this as being a significant expense to be modeled in, once we get through the '18 effort here.

And I'd say, Walt, the biggest benefit that we see is really -- there was a question earlier about capacity and capacity to support growth. For us, the biggest benefit here is to have a platform that allow us to scale more cost effectively. And as Greg said, to integrate some of the acquisitions more efficiently, and there's been a fair bit of work, what we needed to do up-front around process and systems and we're in a phase now starting to stand up the North American organization. So again, I think the benefits we'll see are, sort of, longer term and our ability to scale more effectively and efficiently.

Okay. Where is the shared -- is it going to be in one location?

Yes. For the U.S., it's going to be in Ohio. In Europe and Asia, today, we have I'd say, partial shared services in different places, as Greg was mentioning. But for the U.S., it's going to be in Ohio.

In the existing facility.

Yes, at an existing facility that we're refitting.

And at this time, I'm showing no further questions. I'd like to turn the conference back over to Mr. Mike Hilton, for any closing remarks.

First of all, I'd like to thank everybody for participating. And I'd like to, once again, thank our global team for doing an outstanding job this year of meeting our customers' needs in a very effective way and allowing us to deliver outstanding results. And with that, I'd just say, happy holidays to everyone. Take care.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.