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Nordson Corporation (NASDAQ:NDSN)

F3Q07 Earnings Call

December 19, 2007 8:30 am ET

Executives

James R. Jaye – Director Corporate Communications

Edward P. Campbell – Chairman of the Board & Chief Executive Officer

Peter S. Hellman – President, Chief Financial & Administrative Officer & Director

Gregory Thaxton – Vice President & Controller

Analysts

John Franzreb - Sidoti & Company

Charles Brady – BMO Capital Markets

Matt Summerville – KeyBanc Capital Markets

Operator

Good morning. My name is Lupita and I will be your conference operator today. At this time I would like to welcome everyone to the Nordson Corporation fourth quarter fiscal year 2007 results. (Operator Instructions) Mr. Jaye you may begin your conference.

James R. Jaye

Good morning. This is Jim Jaye, Director of Corporate Communications along with Ed Campbell our Chairman and Chief Executive Officer; Peter Hellman, President, Chief Financial and Administrative Officer and Greg Thaxton, Vice President and Controller. We would like to welcome you to our conference all today, Wednesday, December 19, 2007 on Nordson’s fourth quarter and fiscal 2007 results. Our conference call is being broadcast live on our webpage at www.Nordson.com and will be available for 14 days. There will be a telephone reply of our conference call available until Midnight, Friday, January 4th by calling 1-800-642-1687. You will need to reference ID #26929529.

Our attorneys have requested that 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 question and answer session. I would now like to turn the call over to Ed Campbell for an overview of our fourth quarter and fiscal 2007 results and Nordson’s future outlook. Ed?

Edward P. Campbell

Thank you Jim and good morning to all of you and thank you for attending Nordson’s conference call discussing our fourth quarter 2007 results. We had a very strong fourth quarter generating record sales of $290.8 million, up 20.4% from the prior year and a record for any quarter. Acquisitions added 11.6% to sales while core volume increased 4.4%. In addition, currency added 4.4%.

All segments contributed solid volume growth in the quarter. The advanced technologies system segment supported the sales line gain of 38.7% reflecting the impact of acquisitions. Excluding acquisitions, volume in this segment was down 6.4%. The adhesive dispensing system segment showed a volume increase of 9.5% and the industrial coating and automotive system segment achieved a sales line increase of 5.2%.

Fourth quarter sales volume was up in all geographic markets with the Americas rising 26.5%. Japan volume was up 22.0%. Asia Pacific was up 16.4%. Europe volume increased 15.9% and the United States increased 11.9%. The overall gross margin rate in the quarter was 54.9%. This margin rate was impacted by sales mix with a large volume of engineered systems shipping in the quarter. In addition, short term inventory purchase accounting for acquired inventory also impacted gross margins in the quarter.

Spending was up 13.4% resulting from volume increases of 10.2% driven primarily by acquisitions and currency which added 3.2% to spending. Operating profit net of charges associated with purchase accounting was 16.7% of sales and grew 17% from the prior year. Our interest expense was up $3.6 million in the quarter reflecting the use of debt to finance the four acquisitions completed this year.

Our effective tax rate for the quarter was 33.0% versus 24.0% last year. The prior year rate include a certain non-recurring tax benefit. Nordson’s net income for the quarter was $29.6 million versus $29.5 million from continuing operations last year and $27.8 million overall. Fully diluted EPS was $0.87, prior year’s reported EPS was $0.87 from continuing operations and $0.82 including discontinued operations.

Two items [masked] excellent earnings performance in the current quarter. First, is the lower effective tax rate in 2006 due to non-recurring tax benefits and a second is a $0.01 per share short term negative effect of purchase accounting for acquired inventory. Applying the current year effective tax rate to the prior year quarter results from continuing operations and adjusting for the current quarter purchase accounting charge for acquired inventory, EPS from continuing operations increased 15.8% in the quarter over the prior year.

Cash related measures reflected good performance in the quarter. The current quarter’s EBITDA was $57.5 million, a 22% increase over last year’s $47.2 million. Our operating cash flow for the quarter continued to be relatively strong. Specific cash flow items in addition to net income of $29.6 million were non-cash charges of $10.8 million and working capital which generated $4.9 million in the quarter resulting in cash from operations of $45.3 million. Capital expenditures in the quarter were $5 million and dividends were $5.9 million resulting in pre-cash flow of $34.4 million in the quarter.

Our debt leverage measured as debt to total capital ended the quarter at 39.5% or 37% if debt net of cash is used in the calculation. Despite having invested over $325 million in four acquisitions we finished the year with less than 40% debt-to-capital.

In summary, we had a very strong finish to the year. I am pleased with the strong sales volume growth achieved by each of our segments as well as the 17% increase in operating profit quarter-to-quarter. Our acquisitions without the impact of short term purchase accounting adjustments are accretive to results in the quarter and we believe we have additional synergies to leverage. In addition, we continue to see significant improvements in the financial performance of our industrial coatings and automotive segment with operating profit margins of 9.6% for the year versus 5.9% for fiscal year 2006.

While still not operating at the level we desire, the results today have demonstrated the turnaround that we have planned. On a full year basis we received record sales $993.6 million with a strong second half to the year. For the year, sales were up 11.4% with volume increasing 8.0% and favorable currency adding 3.4%. Fully diluted EPS for the year is $2.65 as compared to prior year’s $2.86 from continuing operations and $2.65 including discontinued operations. As with fourth quarter results, the full year EPS performance as compared to the prior year is impacted by two non-recurring items. The first, is a $0.16 per share in the current year for short term purchase accounting charges associated with acquired inventory. The second is the low 2006 effective tax rate which resulted from certain non-recurring tax benefits. Applying the current year effective tax rate to prior year’s results and adding the $0.16 per share to current year’s reported results full year earnings per share increased 5.2% over prior year’s EPS from continuing operations. The full year’s EBITDA was $183.7 million up 8% over the prior year’s $169.9 million.

Let me now turn to some brief comments about our outlook for the first quarter of 2008. The back log at year end was approximately $98 million up $26 million from the same period of the prior year measured in constant currency. Recent demand as measured by orders has shown considerable strength. Orders for the last 12 weeks ending December 9th ending in constant currency and including acquisitions in both this year and last year’s numbers were up 12% from the same period in the prior year. Recent orders by segment reflect that the past 12 week order rates versus a year ago are up 19% in adhesives, up 10% in advance technologies and 1% in industrial coating and automotive. Within advanced technologies I will note that orders without acquisitions are up 5% during this 12 week period. This growth rate of 5% compares to a decline of 8% announced during our second quarter conference and growth of 1% announced during our third quarter conference call. And again, including the acquisitions in both this year’s and last year’s figures improves the 5% year-on-year growth rate to 10%. We are clearly seeing improving order trends in these advanced technologies businesses.

On a geographic basis, orders over the past 12 weeks were up in all geographies. Orders were up 44% in Asia Pacific, up 14% in Europe, up 3% in the United States and up 2% in both the Americas and Japan. This perspective on order rates and our strong back log we currently have a sales outlook in terms of volume of an increase of 16 to 20% in the first quarter of 2008. Favorable currency effects should contribute a 5% increase in year-to-year sales resulting in an overall sales growth of 21 to 25% in the quarter. This sales outlook would be a record for any first quarter.

Given the mix of products we should see gross margins around 56%. Spending in the quarter will be up approximately 17% with the majority related to acquisitions and currency affects. Included in the spending growth is geographic expansion of acquired businesses as well as continued investment in growth market opportunities. We are estimating a tax rate of 34.75% for the quarter and indeed for the full year, up slightly from the prior year’s first quarter rate of 33.47%. This outlook results in earnings per share for the first quarter in the $0.55 to $0.64 range. Earnings in this range would represent record earnings per share for any first quarter with the $0.60 per share midpoint of this range 30% higher than the prior year’s first quarter earnings per share.

Regarding cash flow, let me provide an outlook capital expenditures for the year. As commented last year we have begun our efforts to realign our facilities footprint and therefore you may see some lumpiness in quarters due to the timing of building related spend versus proceeds from sales. For the year we would expect operating capital expenditures that is excluding any real estate investments to be about $21 million.

With that let me know turn to your questions. Operator, if you could now solicit questions from the participants.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of John Franzreb with Sidoti & Company

John Franzreb - Sidoti & Company

The first question is pretty much about the acquisitions over the past year. Could you discuss their relative performance versus your expectations? Also, can you talk a little bit about the [inaudible] we should be expecting in these businesses?

Edward P. Campbell

First of all, in terms of expectations, these were businesses that we acquired based on the strength of their market positions and the strength of the products and technologies they’re bringing to the company. Let me start by saying everything that we expected to find in these businesses is there. It’s validated our assumptions and we feel very positive about the strength of our portfolio of products and market positions that they brought to us. I can’t necessarily go through each one individually but, I would say that the performance has ranged from strong acceleration during the period of time that we’ve owned them and immediate realization of opportunities to sell some of these products in other segments or product lines of the organization in certain cases. To others having some softening or deceleration but continued growth as a result of some of the same factors that we’ve seen in the other portions of our advance technologies segments.

I guess one point I would make to reiterate the kind of uplift they’re providing to us. I mentioned that the orders in the most recent 12 weeks were the advanced technologies segment was 5% year-over-year if you just look at Nordson’s core businesses. But, when you average in the growth rate this year over the newly acquired business they bring up that average from 5% to 10%. These are businesses that are making us better as a segment, making us better as a corporation.

John Franzreb - Sidoti & Company

How should we think about the [inaudible] in the businesses now?

Edward P. Campbell

Of the four businesses let me briefly go through them. Dage is a test inspection company that is centered on semiconductor assembly primarily. It would move similarly to the Asymtek business and general notation in that it is dependent upon the rate of investment in semiconductor capital equipment but greatly fueled by new technologies and evolving trends in lead free solders and ever small packages where there is a shift if you will in the need for these customers to move to the new products and accelerate investment from what might otherwise be in the trend line. The YEStech is one that would disproportionately sell into electronic assembly markets as compared to semiconductor markets and so it would move with spending for consumer electronics and the like and it’s cycle would be, if you will, slightly off and different from that. Our PICO business on the other hand is one that sells precision dispensing equipment and it is a seller of products that range everything from producers of consumable non-durable products to general industrial assembly to some of the same markets that our other advanced technologies businesses sell into and it’s one that we think [inaudible] far less [inaudible]. Then lastly, TAH Industries, a company we acquired in the fourth quarter sells plastic disposable components. It sells into broad assembly markets. It sells into the life science markets, it sells into aviation and construction markets as well. It would have very different cycles than would these other businesses. It would tend to flatten some of the [inaudible] that we would more generally associate with the electronic and semiconductor market.

John Franzreb - Sidoti & Company

In a semi related question, the order growth in the industrial segment was 1% if I heard you correctly in the previous 12 weeks? You mentioned in previous conference calls that you have businesses that are late cycle businesses. Can you kind of address what your outlook is and what your thoughts are for some of the later cycle businesses is as we enter into 2008?

Edward P. Campbell

First of all, in terms of the 1% industrial coating and automotive, as I mentioned last quarter that business has had some impact of capital spending with the automotive industry. That is part of that segment beginning about six months ago. I’d also mention they had a very strong comparable – right around this same time a year ago we had a very strong group of orders. 12 months ago their orders were up 10%, their shipments were up 11% before currency effects and so some of that I think is influencing the numbers you see there. As we shared with you our outlook for sales volume in the first quarter, volume from our traditional businesses is continuing quite strong, accelerating in fact from what we had in the fourth quarter and all of 2007. Within that we expect to see quite good volume continuing in industrial coating and automotive. I’m not in any way pessimistic about the kind of year they’re going to have.

In terms of other back cycle businesses or the things that people have been concerned about, I know for example, housing is one that has come up in questions in prior conference calls. The portion of our business that is most directly related to those end markets is within the adhesive segment and that business is very strong. We’re seeing globally sales of our systems to manufacturers of products that would find their way into the housing market up over 20% in terms of orders globally and up high single digits in the US so, we have technology that is driving very good performance right now.

Operator

Your next question comes from the line Charlie Brady with BMO Capital Markets.

Charles Brady – BMO Capital Markets

Ed, can you just give us the 12 – the order rate for the past 12 weeks you said was 12%. What is that just on an organic basis ax out all the acquisitions.

Edward P. Campbell

That includes the acquisitions in last year’s numbers and this year’s numbers. Frankly, the way we look at it this year in 2008 now is they’re part of the core base of businesses. Yes, they’re adding to growth rate as I mentioned the 5% in advance tech without the acquisitions 10% overall. Of course, the other businesses are completely devoid of any acquisitions so 19% is a currency free straight core comparison for adhesives and correspondingly the 1% has no acquisition effects there.

Charles Brady – BMO Capital Markets

Can you comment on the powder coat businesses? How is that business fairing these days?

Edward P. Campbell

The powder business has pockets in this particular quarter of tremendous strength particularly in the Asian markets were we see major manufacturing investments. It has been strong throughout 2007. It is, I will tell you right now, in the US less strong. Our sales leadership in the US region feels positive about the kind of year they’re going to have based upon the indicators they get from customers. But, imbedded in that 1% is strong in Asia, less strong in North America.

Charles Brady – BMO Capital Markets

On a geographic base are there any of the businesses that are out performing significantly in one geographic area or another? Or, the opposite of that really under performing or softening in one geographic area or another? You obviously mentioned the powder coat business but I was wondering if you could extend that out to some of the other businesses.

Edward P. Campbell

Well, I will. Let me talk for example about Asia Pacific, for example. In Asia Pacific I mentioned on a currency neutral basis orders right now were up 44%. That’s a tremendous number. Our industrial coating and automotive business right now is more than doubled a year ago in that part of the world. But, also significant in that is I had mentioned in the conference calls three and six months ago that we had seen weakness in Asia Pacific in our advanced technologies business because those were areas where some of the investment had been curtailed during some of the typical slow down that we’d seen last year. Our orders now in Asia Pacific for advanced technologies were up 40%. We see very good growth there. I guess just to finish the three segments adhesive system orders in Asia Pacific are up 28%. Asia is red hot across all three segments.

I will answer a question that hasn’t been asked but I think it’s a point worth noting. Within the adhesive segment 19%, a question that might be asked is well, is that focused in one geography and one line of business? The answer is not. We have a very strong pattern of orders right now that runs across our product assembly our non-wovens other of the product lines that we sell out of that segment and it’s demonstrating strength not just in Asia as I mentioned but also we’re seeing it in the other geographies right now. A very strong momentum coupled with very good currency as you will see as you look at the table on the earnings release.

Peter S. Hellman

I would just like to add the kind of implication Charlie you made and also going back to John’s question. Late cycle business is somewhat being trumped by geographic elements. If you think of Asia Pacific as capitalization or recapitalization and the fact that we have 15% of our sales in Asia Pacific with only 30% of our sales in the United States we now are really seeing the play of the geographic diversification. So, late cycle we would have to ask you where.

Operator

(Operator Instructions) Matt Summerville with KeyBanc has the next question.

Matt Summerville – KeyBanc Capital Markets

Can you give a little more granularity in terms of the core order activities son advance tech between Asymtek and EFD and then maybe just talk about the other core businesses in the division and how they’re performing.

Edward P. Campbell

I’m not going to go through each one of the businesses. We normally would not get down to that level of detail but I have shared with folks on these calls that the center of our weakness that we had seen earlier in calendar 2007 had been in products – Asymtek branded products. I tell you that among the various businesses and core advance tech right now our strength is at Asymtek. The things that we had expected to see getting stronger as we came into 2008 we’re seeing the manifestation of that in the order book now.

Matt Summerville – KeyBanc Capital Markets

Based on discussions you’re having with customers in semiconductor how much visibility would you say you have into fiscal 08 at this point?

Edward P. Campbell

It varies to a great extent by customer. We have some customer where we work very closely with them in terms of their roadmaps and they with ours. We do have the benefit of having just released a brand new major product line within the Asymtek product line family. We introduced that at a major electronics and semiconductor equipment show in Europe just a few weeks ago [Prototonica] and the introduction of that product line couple with the understanding of our technology roadmap, if you will, sometimes can both produce demand after its release and it can adversely affect demand before its release among those customers that see our roadmap and understand where we’re headed.

We feel optimistic about the fact that we’re now in a position to begin to sell systems at higher performance and greater productivity for our customers. That gives us the belief and the sense we’ve been talking about for quite some time that we expect 2008 to be better than 2007 and correspondingly I’ll continue to reiterate that we believe 2009, directionally, is going to be better than 2008. We think that the ramp that we would hope that you’re going to see and hope is the wrong word but, it is what we expect to see moving forward is going to continue to have legs that extends into 2009.

Matt Summerville – KeyBanc Capital Markets

In terms of your order bookings as of late what does that translate into from a mix standpoint in the first quarter? You’re talking about 20 to 25% total revenue growth and if you look at what you did last year in Q1 I think it was $0.46 but that had $0.03 of inventory step so maybe the right base to think about is more like $0.49? Help me understand the different dynamics that are playing into your EPS forecast versus revenue growth.

Edward P. Campbell

I don’t think there’s a lot of complexity that goes on with this quarter it is just straight volume both from the continuing first two year affects of acquisitions but, also we’re talking about core volume businesses that we had last year. Again, this year without any acquisition affects that are at levels we have not seen since I believe 2006. That simply flows right through the P&L. I don’t think there are any unusual items that would make this different. I will comment though on the first quarter last year we had relatively weak volume and as a result there was a great proportion of our sales last year that were spare parts as compared to systems. As a result the gross margins that we would expect to see in the first quarter of 2008 is going to be lower the 56% range that I mentioned in my comments compared to last years 57.7%.

Matt Summerville – KeyBanc Capital Markets

That’s exactly what I was trying to understand.

Edward P. Campbell

It’s the parts versus systems but also it’s the mix of some new businesses. Some of the businesses that we’ve acquired do not have the gross margin as we do in some of Nordson’s historically strong margin businesses like our adhesive systems.

Operator

Your next question comes from the line of John Franzreb with Sidoti & Company.

John Franzreb - Sidoti & Company

I was just wondering if you could kind of talk a bit about the competitive landscape in the three segments what are you seeing from the competition today?

Edward P. Campbell

In the adhesive segment I would say nothing that is note worthy from what we’ve seen historically. Nordson is blessed with historical strong market positions. We tend to compete with a series of private companies that have particular strengths in certain geographic regions. We have a couple of global competitors. Generally our competitors try to compete on the basis of either low price or trying to sell competitive spare parts and that’s a fair stable set of relationships. In our industrial coating and automotive segment I would again say there was nothing new from what we see. Within powder the largest piece of that business we have a couple of global competitors that operate with areas of geographic strength that are different from ours. We have very strong positions in portions of Europe but weakness in others. Strong North American positions. Strong Asian positions. We are enjoying the kind of growth that I mentioned in Asia as a result of those positions. In the advanced technologies markets obviously we have a number of diverse product lines that sell into different pieces of market segments. Again, as I’m just going through the list mentally I can’t think of anything that is different if you will from what we’ve seen in the past.

John Franzreb - Sidoti & Company

Can you discuss a little bit about commodity costs as they’ve kind of come in – in recent months and the competitive factors? You seemed to have at best you’ve held you’re leading shares. How come you’re not getting a better margin benefit?

Edward P. Campbell

Yeah. First of all you should remember that our margin is adversely influenced in all of these comparisons to 2006 because of the acquisition accounting which between the amortization of acquisition intangibles as well as the inventory affects it cost us about $0.21 per share to what would otherwise be historical cost accounting of the acquired companies and our existing companies less interest.

John Franzreb - Sidoti & Company

Right.

Edward P. Campbell

I’m not sure I understand exactly what you’re trying to get at?

John Franzreb - Sidoti & Company

I was just thinking about that 56 gross margin. You have currency in your favor, it seems like the landscape is good and you have lower raw materials costs. I would have thought it would have been a little bit higher. Maybe I’m missing something?

Edward P. Campbell

The big issue was a year ago we had a very weak quarter as you will recall. The relative volume of our spare parts tends to be consistent. So, the mix in last year’s first quarter compared to this year’s first quarter is quite different in that what’s going on this year is a major drive of systems through the P&L and they would average down the spare parts. Frankly, it’s a function of how our businesses are performing strongly this year compared to last year. For example, if you compare any first quarter of Nordson to any fourth quarter you’ll always see a low gross margin in the fourth quarter and always a high gross margin in the first quarter because of that mix between systems and parts.

The other issue you asked about was commodity pricing and commodity pricing is a very small issue for Nordson and frankly the success that we’ve had in resourcing many of our assemblies and component parts from low cost countries from relatively expensive western European and North American centers our average cost of purchased materials has gone down rather than gone up more than offset commodity cost inflation.

John Franzreb - Sidoti & Company

A little bit of your thoughts about paying down the debt? What’s your scheduling and what are your thoughts of finishing the year end 08 at what kind of debt level?

Peter S. Hellman

Well we haven’t made a full year cash flow forecast so I think a majority of free cash flow will be used absent any potential for additional acquisitions will go to pay down debt. Historically our annual cash flow and I’m not making a forecast is in order of a magnitude of $100 million and we’ll have to see how the year unfolds with other opportunities. But absent those opportunities it would go to pay debt which is all at a floating rate basis under a term commitment that we renegotiated during the year.

Operator

There are no further questions at this time.

Edward P. Campbell

Let me do a couple of things. First of all let me take note of the fact that we’ve enjoyed the benefit of Peter Hellman on this call as we have for all of our calls for the last eight years and as we’ve discussed on some of these calls in the past and you’ve seen in our announcements that Peter will be retiring from Nordson at the end of the calendar year. I just wanted to take this moment to recognize and thank Peter. I know all of you on the call have had the opportunity to work with him and seen the value of his contribution to this organization. He’s left us with a good organization beneath and Greg Thaxton will be stepping into his shoes. But, regardless of the talent of the team we’re going to miss Peter on a professional and personal basis and I wanted to just thank him here to this group today.

Secondly, let me thank all of you for your interesting and attention. We look forward to continuing these conversations as we go through the quarter. Thanks again. Bye-bye.

Operator

This concludes today’s conference call. You may now disconnect.

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