Nordson Corporation F3Q09 (Qtr End 07/31/09) Earnings Call Transcript

| About: Nordson Corporation (NDSN)

Nordson Corporation (NASDAQ:NDSN)

F3Q09 Earnings Call

August 21, 2009 8:30 am ET

Executives

James Jaye - Director Investor Relations

Edward Campbell - Chairman, President and Chief Executive Officer

Greg Thaxton - Vice President and Chief Financial Officer

Analysts

Kevin Maczka – BB&T Capital Markets

John Franzreb – Sidoti and Company

Matt Summerville – Keybanc Capital Markets

Walter Liptak – Barrington Research

Scott Blumenthal – BMO Advisors

Operator

Welcome everyone to the Nordson Corporation third quarter fiscal year 2009 results conference call. (Operator instructions) Thank you, Mr. Jaye. You may begin your conference.

James Jaye

Thank you. Good morning. This is Jim Jaye, Director of Communications and Investor Relations, with Ed Campbell, Chairman, President and Chief Executive Officer and Greg Thaxton, Vice President and Chief Financial Officer.

We would like to welcome you to our conference call today, Friday, August 21, 2009 on Nordson's third quarter fiscal 2009 results. Our conference call is being broadcast live on our web page at www.nordson.com and will be available for 14 days. There will be a telephone replay of our conference call available until midnight Friday, August 28th by calling 1-800-642-1687. You will need to reference ID number 23947653.

Our attorneys have requested we open this call with a cautionary statement under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. During this conference call forward-looking statements may be made regarding our future performance based on Nordson’s current expectations. These statements may involve a number of risks, uncertainties and other factors as discussed in the company's filings with the Securities and Exchange Commission that could cause actual results to differ. After our remarks we will have a brief question and answer session.

I would like to now turn the call over to Edward Campbell for an overview of our third quarter fiscal 2009 results and Nordson's future outlook. Ed?

Edward Campbell

Thank you, Jim and good morning to all of you on the call. Thank you for attending Nordson's conference call discussing our 2009 third quarter results. Our comments this morning will provide highlights of our third quarter performance as well as some perspective relative to our outlook for the fourth quarter.

Relative to the third quarter, I am pleased to report that Nordson delivered very solid performance in the quarter with sales, operating profit and earnings per share all improving sequentially. Operating margin and return on sales in the quarter are indicative of very strong operational performance. Compared to a year ago, performance was impacted by the weak global economy. However, as we suggested during last quarter’s conference call there are positive indicators the global economy is improving and perhaps the worst is behind us.

I will be speaking more directly about current trends specific to Nordson and our outlook for the fourth quarter but before that I will turn the call over to Greg Thaxton, our Chief Financial Officer, who will provide a summary of our third quarter financial results.

Greg Thaxton

Thank you Ed and good morning to those listening. Regarding third quarter results, sales were $206 million up 29% from the prior year with volume down 24% and unfavorable currency effects reducing sales by 5%.

On a segment basis, adhesive dispensing sales volume was down 21% in the quarter as compared to the prior year third quarter and advanced technology and industrial coating and automotive sales volumes were down 23% and 37% respectively, again as compared to the third quarter of 2008. As a general comment, as has been the case for each of the preceding quarters of 2009, some portions of our business associated with consumer nondurable systems as well as consumables and after market demand in all segments has continued to perform comparatively better during the quarter.

Most softness as compared to the prior year we have seen in the engineered systems product lines within each of the segments. As we look at our sales performance on a sequential basis, that is the third quarter of 2009 as compared to the second quarter of 2009, sales are up 9% comprised of 5% volume growth and 4% favorable currency effects. Advanced technology was the driver of the sequential improvement as sales increased 38% from the second quarter while adhesive dispensing sales increased 1% and industrial coating and automotive sales declined 10%, all as compared to the second quarter of 2009.

With regard to the advanced technology sequential improvement, we noted in our second quarter earnings conference call that we were seeing improving trends in some of our advanced technology end markets and this trend continued during the quarter. The end markets associated with this growth are semiconductor and consumer electronics.

Operating margin for the quarter is 18% including $1 million of restructuring charges associated with our spending reduction efforts. Excluding this one-time restructuring charge operating margin is 19% in the quarter. There are two noteworthy items contributing to this strong level of operating margin. First, gross margin of 59% in the quarter is a high mark for Nordson over the last 12 years and is reflective of several factors; a higher concentration of spare parts and consumables in the quarter, a greater mix of higher margin products as compared to prior quarters and a reduction in manufacturing overhead costs.

The second item contributing to this level of operating margin is the reduction in selling and administrative expenses of 24% from the prior year. At this pace we are on track to achieve the $80 million savings from the prior year that we previously communicated excluding restructuring charges and before currency effects.

On a segment basis, the adhesive segment once again delivered very strong operating margin in the quarter of 29%, up from 28% in the second quarter of 2009 and 27% in last year’s third quarter. Advanced technologies operating margin improved to 18% in the quarter up from slightly negative in the second quarter of 2009 and 17% in last year’s third quarter. In addition to the gross margin improvement and operating expense reductions, this segment’s operating margin clearly benefited from the 38% sequential growth in sales.

Industrial coating and automotive operating margin performance has improved on lower overall sales as compared to the previous quarter and we remain optimistic when this segment’s sales return to the revenue levels of 2007 and 2008 we will see double digit operating margins.

Net income for the company in the quarter was $24 million; an increase of 73% over the second quarter of 2009 and at 12% of sales is reflective of solid execution in the quarter. Fully diluted earnings per share is $0.71 in the quarter. In addition to the $0.02 per share charge in the quarter for restructuring charges, the quarter’s results include a one-time tax benefit of $0.02 per share.

Cash measured in the quarter were very strong. Sources of cash in the quarter included net income of $24 million, depreciation and amortization and other non-cash charges of $11 million, working capital of $2 million and changes in long-term liabilities generating $6 million. Uses of cash in the quarter included capital expenditures of $2 million and dividends of $6 million resulting in adjusted free cash flow after dividends of $35 million in the quarter. This quarter’s performance is more than double the $17 million adjusted free cash flow of last year’s third quarter.

The current quarter’s EBITDA is $45 million and our debt leverage, measured as debt to total capital, ended the quarter at 25%. Net of cash, this ratio would be 23%.

In summary, although we continue to operate in a challenging environment from a sales perspective the organization has responded appropriately and delivered very strong operating performance in the quarter. In addition we generated excellent cash flow and continued to maintain a very strong balance sheet.

Edward Campbell

Thanks Greg. I will now turn to some brief comments about our outlook for the fourth quarter of 2009 but before I do I would like to add some perspective on the outlook we will share.

Although we continue to see significant challenges in the global economy there are indicators that broadly suggest the worst is behind us on a macro basis and several major geographies appear to have turned the corner on recovery. The shape of the recovery is still very uncertain though. Specific to Nordson, I do believe we are also turning the corner as evidenced by our recent order trends provided both on a segment and geographic basis with our press release.

As a reminder, these are orders for the latest 12 weeks as compared to the same 12 weeks of the prior year on a currency neutral basis. Looking at these orders for the 12 weeks ending August 16th, overall they were down 21% from the same 12 week period in the prior year. At the time of our second quarter conference call in May the order rates were down 25% and orders were down 31% at the time of our first quarter call in February so we are seeing an improving trend in orders.

Within adhesives, orders were down 14% from the prior year primarily due to a reduction in those product lines associated with durable end markets which tend to be larger dollar systems such as product assembly systems supporting housing end markets and general industry. Orders associated with consumer nondurable end markets and spare parts have held up fairly well.

Regarding advanced technology, 12 week order rates are down 23% from the prior year reflecting an improvement from our 12 week order report we shared in our second quarter conference call where orders were down 33% from the prior year. Although customer volume patterns have not fully recovered, we are seeing improvement in many of the end markets served by this segment including semiconductor and consumer electronics.

More specifically, of particular strength recently is our technology supporting low end computing needs and Smart phone applications. Also, as in other segments, orders associated with consumable product lines within this segment have fared reasonably well. Within the industrial coating and automotive segment the latest 12 week order rates are down 38% as this segment continues to be challenged by the weakness in consumer durable end markets. Recovery in this segment’s end markets tend to lag overall economic recovery.

Looking at our order rates on a sequential basis, that is our latest 12 week order rates as of the end of July as compared to the preceding 12 weeks again on a currency neutral basis, orders are up in all segments and up 13% for the company. We have used the end of July as a reference point for the sequential comparison as a way to exclude holiday seasonality as the month of August includes holidays and shut downs in much of Europe as well as Japan.

Overall I am pleased with this improving trend in orders and optimistic that business conditions seem to be improving. As we look at the fourth quarter we currently project sales of between $224-235 million. At current exchange rates, currency effects are expected to be neutral as compared to the prior year’s fourth quarter. On a sequential basis, the midpoint of this guidance represents sales volume growth of 11% with an additional 1% increase due to exchange rates.

Given the mix of products assumed in our forecast we expect gross margin to be about 57% in the quarter. Selling and administrative expenses in the quarter including restructuring charges of approximately $2.2 million will be down approximately 23% from last year’s fourth quarter reflecting very aggressive spending controls. As Greg noted earlier, we are on track to deliver on the $80 million reduction in selling and administrative expenses before currency and restructuring costs.

In terms of our outlook for operating margin in the fourth quarter we do expect another strong quarter where the midpoint of the sales guidance would generate operating margin of approximately 19%. This results in earnings per share for the fourth quarter of $0.75 to $0.87 inclusive of restructuring charges estimated to be approximately $0.04 per share. At this midpoint of this range and assuming a consistent share base from the third into the fourth quarter return on sales would be 12% matching the strong performance of quarter three.

In summary, the current business environment continues to be very challenging. As such, we have taken significant steps to mitigate the effects on our business by responding very quickly and aggressively to control spending, protect profitability and focus on cash flow. Our strong balance sheet provides an advantage against much of our competition and we do continue to fund those investments that are important to our underlying business.

Furthermore, we continue to believe we have the products, organization, talent, resources and liquidity that leaves us in a stronger position relative to our competition and we are well positioned to respond to global economic recovery.

Let us now turn to your questions.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from the line of Kevin Maczka – BB&T Capital Markets.

Kevin Maczka – BB&T Capital Markets

The first question, remarkable gross margin performance to put up a record like that with down nearly 30% revenue. My question is just to try and understand the sustainability there. I guess you are looking for 57% in Q4 but can you talk a little bit more in detail about some of the mix shifts, some of the aftermarket mix that really drove that upside this quarter? Maybe talk about how much different are the margins in some of these high profit products or these aftermarket products and why that might not be the same in Q4 and beyond.

Edward Campbell

Clearly when we look at the revenue that we had this year versus revenue last year it is down big double digit percentages. If you look at what is not in the income statement this year that was in the income statement last year it is disproportionately systems. That is true in each of the businesses by the dollar amounts we have fallen short. Clearly some consumables and spare parts are down somewhat but not nearly as much so we have a favorable mix.

Now, those systems that we didn’t sell if I can describe it that way, they carry gross margins that are substantially higher than the operating margin of the organization so the recovery of those systems and the associated expenses if you will to install and get those sales, all other things being equal, tend to be accretive to operating margins not to gross margins. We have been able I think to yes generate very strong gross margins because of that mix and we have been able to generate strong operating margins as we have taken out cost, again with a good gross margin as well.

I think if we look at the performance we would expect going forward without trying to get specific around time, I think we would see that okay the recovery will disproportionately bring to us systems revenue as compared to incremental parts and consumables revenue and it is reasonable to expect the gross margin to come down. I think as we begin to have a healthier economic environment we will look on a targeted basis to add resources to get that next round of sales or do the things to support the investment initiatives the customers may have and we may see some changes if you will in the spending pattern sequentially as we begin to put bonus programs back in and unfreeze wages, as we have done for the last year.

I am very optimistic the changes we have made have taken us to another level in operating margin performance from where we have been and I think we will see shifts within the income statement but I am pretty optimistic the overall operating performance of the company is going to look differently in this recovery than it might have been in another period.

Kevin Maczka – BB&T Capital Markets

How much higher is the aftermarket spare parts mix now than it typically is?

Greg Thaxton

I would say several percentage points higher than what we have seen historically.

Kevin Maczka – BB&T Capital Markets

If I could ask one on ICA, I think I heard you say that if revenues get back to the 2007/2008 levels you would expect a double digit EBIT margin there. That seems like that is probably a long way away given the later cycle nature of that business. So is it your expectation, maybe without quantifying anything that those revenues sequentially continue to decline whereas of course the other two units are not?

Edward Campbell

I don’t know that I would expect a sequential decline. In fact, in some of the end market segments it is hard to imagine for them to get materially weaker and you have a number of plants out there in various markets where over the past several months they have been operating on reduced shifts, reduced days of the week of production and so on because the demand for some of the products they sell whether it is appliances or office equipment or in fact things that might go directly into housing and the like.

Some of the anecdotal things we are hearing about and we are hoping we can connect those dots is we see that shifts are getting added, the amount of incremental production people are engaging in is improving sequentially. We may have because of the lumpy nature of some of the orders we have in this business, sometimes multi-million dollar orders, we can bounce around. But I think the trend from where we would see today is going to be tilting upwards. I would also say just to put it into perspective I think we have a forecast we feel pretty good about for the fourth quarter in terms of the financial performance and profitability we expect to deliver in quarter four and I will tell you we are not assuming any improvement in the profit contribution of that segment in quarter from what we have seen in quarter three.

Operator

The next question comes from the line of John Franzreb – Sidoti and Company.

John Franzreb – Sidoti and Company

My first question is regarding the cost savings. You kind of inferred last quarter that roughly half of it was variable but given your comments this morning it seems like more of it is going to stick around than we had previously thought. What are your thoughts about how much of the cost savings is sustainable in a recovery?

Edward Campbell

I am going to ask maybe Greg to put some numbers behind what I am going to share. What is in the cost savings this year of course everything has been measured and compared against 2008 which was a year in which we performed well. Those portions of the employee base that have some of their compensation be variable they had the benefit of achieving targets and so we had a year of incentive compensation that was above the zero amount that will be provided to leadership team this year.

I would expect assuming 2010 is an average year with various units performing well and perhaps some others being challenged we will see incentive compensation and some amounts being paid that will be all incremental expense to the P&L next year. We expect that with our employee population more broadly we will unfreeze the wages and it is my expectation we will see in our financial performance next year the cost of reestablishment of those kinds of traditional things we have had over time.

I think some of the restrictions that we have imposed relative to discretionary spending; some of the travel and some of those other things that have been throttled back will have some amount of increase associated with activity at customers that merit the kind of travel that is productive and useful at a time of increased investment in the marketplace. All of that is going to go up absent the addition of a single employee.

We have during this period of time made continuing selective investments in employees as it makes sense for opportunities to fund investments around new products or to support customer activities in some emerging economies where we have not had representatives before. That will continue next year. I think if I look at the structural things we have been able to do in some of our organizations where we have combined some of our engineering teams, for example, or where we have gone to more consolidated production activities in certain places and the like.

Some of those structural changes I think will continue regardless of what happens within the economy. I think we have proven to ourselves we can perform at a very high level with resources that are down substantially from what we had before. So, my view is I think about it on a macro basis just to see the gross level of the financial statement. In fact, dating back to the announcement we made in September we said some of the changes we were making as part of the cost reduction program we announced in mid-September is that we expected operating margins to expand by about 2 percentage points from what they otherwise would be. I think some of the benefits of those programs that even were expanded from where we had started back in September have shown that the operating margin we are producing now are substantially higher than the operating margin we had in the last periods of weakness back in 2001, 2002 and 2003.

It would be my expectation that we will see good operating margins in 2010 presuming some of the sequential improvement is sustained and maybe even continues even if at only a modest amount. Greg let me I guess see if you want to make anything more specific.

Greg Thaxton

Clearly what you said we will have some of that spending coming back into the P&L but with the structural changes we have made and our focus on modifying our processes and procedures to help prevent some of that spend from coming back into the P&L I still think my estimate would be of that total savings the structural change should allow us to keep I would say half of that out of the P&L and some of the variable spend associated with the travel, compensation and the like. We will see that come back.

John Franzreb – Sidoti and Company

Regarding the timing of that coming back should we be thinking about that as a calendar type of event? Maybe some time next year? Even as just kind of a fiscal event as the fiscal calendar turns? On top of that question, given that advanced technology has come back the quickest, how soon will you have to re-staff there? What kind of revenue levels do you start to think about re-staffing there or adding to the bonus system there compared to the other businesses?

Edward Campbell

All good questions. First of all, in terms of the base salary of our employees around the world we tend to make changes once a year and they tend to be either at the beginning of the fiscal year or in early January depending upon the country. Our first quarter will have assuming all things play out as I described will have higher run rates of spending and I would expect in our December conference call we will quantify some of those numbers just so people get a sense. You can make some assumptions around the employee population and average salaries globally. With regard to bonus systems they tend to be annual plans and we tend to accrue on the financial statement the amounts that we would estimate based on performance as it moves across the year.

So we will have within the first quarter income statements both those accruals and some higher based salaries and in the second quarter we will have the full boat because some of those don’t kick in until January 1.

John Franzreb – Sidoti and Company

Regarding advanced technology?

Edward Campbell

Let me also comment that all of this is revenue dependent. Back to advanced technologies, first of all with regard to the production activity we flex those resources according to the demand we see. In advanced technology we use part time workers and temporary if we have a surge of work going through. We do everything we can to protect the job security of our permanent employees. That flexing occurs on an ongoing basis. I’m sure we have resources on some of these units today that are higher than you saw back in January and February.

With regard to the portion of the spending that has to do with selling and administrative resources that is sort of semi-variable if you will. That is more associated with the investment opportunities or if we have a major investment program occurring within one of our customers and they have a very significant branch of resources within that facility then we might add some support personnel in that local site to enable the quality of service and support that we give the customer to be there. These are frankly lost in the scope of the margins that kind of curtail in my example would support.

John Franzreb – Sidoti and Company

The revenue outlook and the margin outlook for next quarter, does that kind of assume more systems sales and adhesive dispensing given your comments in coatings? Is it less of parts mix? Can you just give a little bit of color to what you are expecting as far as systems and parts in Q4?

Edward Campbell

I guess the answer is all of the above. We do expect more systems sales as a percentage of the total. We work that margin estimate from a bottoms up basis across our various business units. Then look at system shipments they would expect to ship before the end of the fiscal year. They will factor those in. So it bottoms up rather than top down. It is not unlike the process we used in the outlook we gave you in the third quarter and Greg our outlook for the third quarter I think was 57 also? Was it?

Greg Thaxton

No, our outlook for the third quarter as in the 55…

Edward Campbell

Okay so what that does to us is so we had more revenue when we had more margin. Sometimes some of those estimates that are bottoms up and we of course will look at it from a consolidated basis and upon our best judgment but we also have good mix or we have success in realizing systems sales at better margins than we might have anticipated. Sometimes we had geographic mix where we enjoy better performance on a system or part in that particular territory than we might in a different one. Our ability to very precisely forecast this stuff has its boundaries but I think reflected in our fourth quarter forecast is that bottoms up view based upon where we think we will be.

Operator

The next question comes from the line of Matt Summerville – Keybanc Capital Markets.

Matt Summerville – Keybanc Capital Markets

A couple of questions. First, if you can comment in the second quarter I asked a question regarding the sustainability of the operating margin performance and obviously that improved sequentially. I think some of your comments led me to believe that run rate was not sustainable due to in part the favorable mix you were enjoying which obviously looked to continue in the third quarter. I guess as to your comments this morning and moving in the other direction maybe you do think this kind of run rate in margin in adhesives is sustainable even if mix starts to swing against you in 2010. I just want to make sure I understand all these dynamics correctly.

Greg Thaxton

It is a good question. The margins that we enjoy on a gross margin basis in that business are obviously reflective of good margin positioning and differentiated product offerings. The systems versus parts mix we have been experiencing has been very favorable on an average basis but we have within the adhesive businesses seen shortfalls in the demand for some of the engineered systems and we have seen shortfalls with regard to demand for some of the things that we sell through OEMs that come in thinner margins than the average in other systems and would come in a lot lower than the spare parts.

Our cost to deliver those systems though is not large. So these systems are accretive to operating income and would come in obviously better than the kind of operating margins that we perform. So as long as we can control the cost structure of the organization I think I am more optimistic than I probably was a quarter ago we can maintain these kinds of operating margins. Widening them becomes more challenging of course but I think for the reasons we have been talking about today I think we are going to work hard to see if we can’t sustain this and establish with the structures we have put in place a new target for ourselves.

Matt Summerville – Keybanc Capital Markets

In your prepared remarks I believe you indicated, and I think it is helpful to talk about as well, the sequential order performance for the company overall I believe was plus 13% for the period ended July. Can you comment on what sequential order activity looked like by business segment?

Edward Campbell

I am going to let Greg look at his numbers and decide what he feels. We typically don’t do that.

Matt Summerville – Keybanc Capital Markets

You have been providing year-over-year order activity for awhile and there is definitely more of an emphasis on your part in both your comments today and your comments on the last call that you want us to focus sequentially and I thought it might be helpful.

Edward Campbell

I will tell you they are all up. Using that same data sequentially all three segments are up. The advanced technology segment is up most sharply. That is reflective, I would like to actually come back and talk a little bit about what is going on in some of the advanced technology end markets, but we are also seeing sequential improvement within our industrial coating and automotive segment that is not significant. That may be too strong of a statement but it is very meaningful.

Greg Thaxton

You are talking about sales sequential Q3 versus Q2? Quarters?

Matt Summerville – Keybanc Capital Markets

Quarters.

Greg Thaxton

So it is strongest in advanced tech followed by ICA with adhesives being the most stable as it typically is. Meaningful itself as well.

Matt Summerville – Keybanc Capital Markets

My next question was a little more detail on what you are seeing in advanced tech so if you want to go ahead and make those comments that would be great.

Greg Thaxton

We talked about the fact that revenue was up 38% sequentially quarter two to quarter three. We have seen that in a couple of different end markets as I mentioned in my comments, both low end computing technology as well as Smart phones. This would be to the whole supply chain, these products are becoming increasingly complex and the componentry that goes into various of these end market products has a whole network of areas where there is a lot of investment going on. This is not just something you will hear from Nordson but I think you are going to hear it from other people.

If I use, and I often times quote Gartner as a publicly available data source, the most recent thing I think we quoted March data when we were together last time when they were forecasting for 2009 packaging and assembly equipment would be down 47% but in 2010 rebound by 30%. They have since updated that in June and now the expectation of growth for packaging and assembly equipment in the semiconductor equipment markets is to be up 42% next year and then as they described the demand for things like test and measurement they use terms like explosive growth and the fact they are beginning to see some signs of change.

Then more recently another data point that is more recent has been the earnings announcement at the end of July of [inaudible]. They talked about their sequential growth wherein their quarter third ending at the end of June their revenue was up 106% from the second quarter and their outlook for revenue growth in their fourth quarter which would be end of September would be up between 85-90% because of really very strong dynamic demand they are seeing in a lot of end markets.

I guess I would say there clearly is, you have heard it in our comments and in our conference call three months ago and we are continuing to see several different sectors not only is it those two I mentioned but we are seeing life science continue to be plugging away. We have seen steady demand for some small bits of aerospace and in military that we have access to as well in some of our business units. So it is very encouraging we are seeing sustained activity and we see it not just in our own orders but we see it in the people that we see out there in the network of companies that there is a lot of stuff going on in the technology markets right now with I think some growing enthusiasm that not just this year but next year is going to be significant.

Matt Summerville – Keybanc Capital Markets

Are your customers in advanced tech starting to put together their capital budgets yet for fiscal 2010? I guess in the conversations you are having with them do the numbers they talk about or the numbers they are discussing with you do they sort of line up with what you have shared from other non-Nordson sources and the comments you just made?

Edward Campbell

I would say it is interesting. Our customers fall into various different categories. There are some well known companies out there that they will give you an order and say can I have it tomorrow and the visibility is not particularly meaningful or useful. Then there are other people that take different approaches that might give you a very long-term forecast with milestones across those time periods and continuing to update it. I would say if we look at all of the sources of input that we have, it appears that there is a lot of very good things going on. I don’t want to overstate this either. There are also some segments, some large global accounts we would deal with that are important in some of these markets that have not really begun to step up and make big capital expenditures.

So as we sit here in August of 2009 where they are talking about industry investment being significantly below where they were in 2008 there are sectors that are contributing to that less than robust total activity but there is a lot of rumbling out there and of course we are seeing very meaningful expansion in the pace of business we are getting.

Matt Summerville – Keybanc Capital Markets

Back to orders, the current pace of orders you are seeing for Nordson overall right now, would that coincide with year-over-year order growth in the fourth quarter as you are up against the first large negative comparison?

Edward Campbell

I’m sorry, would you say that again?

Matt Summerville – Keybanc Capital Markets

I guess I am trying to get, if you look at the pace of incoming orders Nordson is seeing right now would that number suggest that as we move into fiscal fourth quarter would that support year-over-year growth in overall orders? I’m trying to think about the fact you face a pretty sizeable negative comparison beginning when the credit markets froze. I guess I’m trying to get a sense of are we back above that pace?

Edward Campbell

Back above the pace we had seen, that we were experiencing in October and November of last year?

Matt Summerville – Keybanc Capital Markets

Yes.

Edward Campbell

Clearly our run rate, if you use the midpoint of our guidance and do a full year, our revenue of $811 million or some such number as that in terms of the full year there was a period of time if you just looked at what was going on with our shipments and our backlog in the first part of the year we were well below that. Well below those amounts. Correspondingly the run rates we have been at right now if you annualize the fourth quarter we are talking about $900 million kind of pace.

So we are seeing that kind of sequential growth. It is kind of the 11% number on the $800-900 million. Those kinds of ranges that we are seeing sequentially going on and we are going to get to a point where we are lapping where we were a year ago and I think there will be some interesting comparisons and we will be operating as we enter that period with a lot less expense than we were a year ago.

Operator

The next question comes from the line of Walter Liptak – Barrington Research.

Walter Liptak – Barrington Research

I wanted to try and put some numbers to the leverage ratio in the discussion you had earlier. It sounds to me like the recovery is sustainable especially in Asia and that the margins are sustainable, operating margins and the 16-17% rate because of the costs out. Is that right?

Greg Thaxton

In other words we are talking about 18 this quarter. You do the arithmetic as we mentioned in our guidance on the various lines on the income statement. We are expecting 19% in quarter four at the midpoint of our guidance. The first quarter is traditionally a seasonally slower quarter and we will have a little more expense cranked into the income statement but you do the math on that and I would think that if this environment sustains itself at the level we have seen now with a little bit of sequential growth taking out seasonal factors, I think we are going to have some nice comparisons as we enter 2010 compared to the very challenging times we had back in 2009.

Walter Liptak – Barrington Research

Fair enough. I guess I’m trying to factor in if revenue is flat next year which it doesn’t sound like it is going to be, it sounds like it is going to be up, these high teens margins are a new operating structure. A new return rate for Nordson?

Greg Thaxton

Yes, we did 17% operating margin in 2006 and again in 2008. I think if you do the four quarter average of what we have talked about in our guidance and the actual numbers we have for nine months we are talking about something order of magnitude that is 14% for this year and I think as we get full year benefit of this new cost structure even with some additional costs that would factor in we are going to be operating at a level that whatever the revenue is assuming it doesn’t go down from where we are it is competitive with what we had in our best years of late. I think with any meaningful recovery we might be able to hit some new high water marks.

Walter Liptak – Barrington Research

That is the thing, the new high water mark. If you just take out and do simple math…if you added $50 million in revenue it sounds like $25 million of that could fall to the operating line? If that were the case then you would be talking about operating profits in the low 20’s again? Or I guess that would be like you said a new high water mark.

Greg Thaxton

Again, I will use your math. I think the $25 million gross margin would be a little bit better on that $50 million kind of assumption. On 3,750 employees we are going to have call it on average 3-4% cost inflation plus some incentive compensation that creeps back in. We will probably have, and I don’t want to throw a number out because it would be wrong, but we will have some offset to that increased gross margin in there. I am not ready to embrace your low 20’s but I think you can do the math pretty simply on that inflation.

Walter Liptak – Barrington Research

Because of the cost out, we are looking at Nordson that is going to have high returns in the next up cycle than it has ever had previously.

Edward Campbell

At least in the last 20 years. I think that is right.

Operator

The next question comes from the line of Scott Blumenthal – BMO Advisors.

Scott Blumenthal – BMO Advisors

Ed considering the remarks you made a little bit earlier, I am not sure if it was you or Greg, that parts were several percentage points higher than historically. Can we assume that most of that percentage in the product type mix came from these systems portion of the business and that the standard products were kind of flat?

Edward Campbell

No, I don’t know if you can necessarily say that. The mix is clearly more consumables and spare part and less systems. Now the split between standard systems and engineered systems which is one we typically speak to periodically, I think we have seen both weakness in some of the standard systems particularly in our adhesive markets where for example some of the OEMs have not had customers making the investments even in these nondurable markets but the plants are still running and the spare parts are still being consumed. Then as you get over in let’s say industrial coating and automotive those are what you have asked or postulated is correct. We have seen particular weakness in some of the engineered systems because they tend to carry a higher price tag.

So it is really across both of those.

Scott Blumenthal – BMO Advisors

So when you say or when Greg said that parts and spares was several percentage points higher than historically, are we talking double digits percentage higher?

Greg Thaxton

No it would be more close to mid single digits.

Scott Blumenthal – BMO Advisors

The $1 million in restructuring charges, where does that appear and in which number is that?

Greg Thaxton

In the financial exhibits with our press release it is in the corporate managed number.

Scott Blumenthal – BMO Advisors

One other modeling question. Did you give a tax rate assumption for Q4?

Greg Thaxton

We did not but I would use 35%.

Operator

I am not showing any further questions at this time. Do you have any closing remarks?

Edward Campbell

I do operator. Thank you. Let me summarize it by what I believe are the take aways from today’s call. The economy does appear to be turning the corner and more specific to Nordson we are pleased with the improvement in order rates and sequential improvement in sales during the year. Our favorable mix and spending reduction efforts have generated strong operating performance and excellent cash flow. Nordson does have its sectors of comparative strength and these include our spare parts and used once then disposed components, our nondurable end markets like packing and non-woven, life science, technology and other emerging markets and applications and cost saving systems and we continue to make the appropriate investment to improve our competitive position in the marketplace.

So as I conclude the call let me again thank all of you for your continuing interest in Nordson Corporation. This ends the call.

Operator

This concludes today’s conference call. You may now disconnect and have a great day.

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