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Edited Transcript of NDSN earnings conference call or presentation 21-Aug-18 12:30pm GMT

Q3 2018 Nordson Corp Earnings Call

WESTLAKE Sep 6, 2018 (Thomson StreetEvents) -- Edited Transcript of Nordson Corp earnings conference call or presentation Tuesday, August 21, 2018 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Gregory A. Thaxton

Nordson Corporation - Executive VP, CFO & Principal Accounting Officer

* Lara L. Mahoney

Nordson Corporation - VP of IR & Corporate Communications

* Michael F. Hilton

Nordson Corporation - President, CEO & Director

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Conference Call Participants

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* Carl Schemm

* Charles Damien Brady

SunTrust Robinson Humphrey, Inc., Research Division - MD

* Christopher D. Glynn

Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst

* Matt J. Summerville

D.A. Davidson & Co., Research Division - Senior Analyst

* Matthew A. Trusz

G. Research, LLC - Research Analyst

* Walter Scott Liptak

Seaport Global Securities LLC, Research Division - MD & Senior Industrials Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to Nordson Corpora

tion Webcast for Third Quarter Fiscal Year 2018 Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to introduce your host for today's conference, Lara Mahoney, Vice President of Corporate Communications and Investor Relations. You may begin.

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Lara L. Mahoney, Nordson Corporation - VP of IR & Corporate Communications [2]

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Thank you, Norma. I'm here with Mike Hilton, our President and CEO; and Greg Thaxton, Executive Vice President and CFO. We welcome you to our conference call today, Tuesday, August 21, 2018, to report Nordson's fiscal year 2018 third quarter results and our fiscal year 2018 fourth quarter outlook.

Our conference call is being broadcast live on our webpage at nordson.com/investors and will be available there for 14 days. There will be a telephone replay of our conference call available until September 4, 2018, which can be accessed by dialing (404) 537-3406. You will need to reference ID number 9285137.

During this conference call, forward-looking statements may be made regarding our future performance, based on Nordson's current expectations. These statements may involve a number of risks, uncertainties and other factors as discussed in the company's filings with the Securities and Exchange Commission that could cause actual results to differ. After our remarks on the quarter, we will be happy to take your questions.

With that, I'll turn the call over to Mike.

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Michael F. Hilton, Nordson Corporation - President, CEO & Director [3]

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Thank you, Lara, and good morning, everyone. Thank you for joining Nordson's 2018 third quarter conference call. Nordson delivered solid results despite challenging comparisons to our prior year's third quarter. Our total company sales increased 20%, inclusive of 11% organic sales growth. Strong organic growth during the quarter within 2 of our segments was offset by challenging comparison of the Advanced Technology segment. Our prior year organic growth was 18%. Our commitment to delivering the best technology solutions while employing continuous improvement initiatives drove bottom line performance, generating operating margin of 23%. Free cash flow before dividends was $118 million, which reflects strong cash conversion of 124% of net income. Our base business is strong, and we remain focused on bringing value to our customers in the diverse end markets that we serve.

Looking ahead to the fourth quarter, our guidance reflects strength in adhesives and medical product lines, offset primarily by lower demand for Advanced Technology dispense product lines that serve the electronics end markets and automotive cold material product lines. For the full year, we are on pace to deliver another consecutive year of organic sales growth, which is a reflection of the stability of the end markets we serve and our ability to drive initiatives that lead to organic volume growth.

I'll speak more about our outlook in a few moments, but first, I'll turn the call over to Greg to provide a more detailed perspective on the third quarter as well as our guidance for the fourth quarter and the full year.

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Gregory A. Thaxton, Nordson Corporation - Executive VP, CFO & Principal Accounting Officer [4]

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Thank you, Mike, and good morning to everyone. I'll first provide some comments on our third quarter results before moving on to our outlook for the fourth quarter of fiscal 2018.

Third quarter sales decreased 1% from the prior year's third quarter, inclusive of a decrease of approximately 3% in organic volume, 1% growth related to the first year effect of acquisitions and a 1% growth related to the favorable effects of currency translation as compared to the prior year's third quarter. Organic sales volume was in line with our guidance as we expected moderation against last year's results where all segments demonstrated strong organic sales growth.

Within the Adhesive Dispensing segment, organic volume increased 3% on top of 6% organic growth in last year's third quarter. We are pleased with the pace of the end market demand across all product lines.

Within the Advanced Technology Systems segment, organic volume was down 11% as compared to the prior year's third quarter organic growth of 18%. With the exception of those product lines facing the most challenging comparisons to the prior year, namely dispense and surface treatment product lines serving electronics end markets, demand was robust during the quarter for test, inspection and fluid management product lines, including medical components.

Within the Industrial Coating segment, powder painting and container coating product line drove this quarter's organic sales growth of 6% compared to the prior year.

Moving down the income statement. Gross margin for the total company was 55% in the quarter, operating profit was $136 million, with reported operating margin of 23% in the current quarter. As discussed in previous earnings releases, we have been incurring incremental costs associated with the consolidation of certain adhesive facilities. The impact of this effort is approximately $7 million year-to-date. Specific to the third quarter, incremental costs were approximately $2 million. In the fourth quarter, we're estimating the incremental costs will be about $1 million.

On a segment basis, Adhesive Dispensing delivered strong operating margin of 28% in the quarter or 29% to exclude onetime restructuring charges of approximately $1 million related to the facility consolidation effort. Within the Advanced Technology Systems segment, reported operating margin was 25% in the third quarter. The Industrial Coating segment, reported operating margin was 22%, which is up 160 basis points compared to the prior year, primarily related to improved sales mix and our deployment of tools from the Nordson Business System.

On a total company basis, net income for the quarter was $95 million, and GAAP diluted earnings were $1.61 per share. EPS was reduced by $0.02 per diluted share from the $1 million nonrecurring restructuring charge mentioned previously. EPS benefited by approximately $2 million or $0.03 per diluted share from discrete tax benefits. A reconciliation of GAAP earnings per share to non-GAAP adjusted earnings per share is included in the financial exhibits of our press release.

We delivered strong third quarter EBITDA of $163 million or 28% of sales. From a balance sheet perspective, net debt to trailing 12 months' EBITDA was 2x at the end of the third quarter as we have successfully delevered from the Vention acquisition.

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 turn to the outlook for the fourth quarter of fiscal 2018. We're forecasting sales to be in the range of flat to down 4% as compared to the fourth quarter a year ago. This outlook includes organic volume to be in the range of up 1% to down 3%, 1% growth from the first year effect of acquisitions and an unfavorable currency translation effect of 2% based on the current exchange rate environment as compared to the prior year.

Our guidance reflects strength in adhesive and medical product lines, offset primarily by lower demand against very challenging comparisons for Advanced Technology dispense product lines serving electronics end markets as well as automotive cold material product lines within the Industrial Coating segment.

At the midpoint of this outlook, we expect fourth quarter gross margin to be about 54% and operating margin to be approximately 22%. We're estimating fourth quarter interest expense of about $8 million and depreciation and amortization expense of about $27 million, resulting in fourth quarter forecasted GAAP diluted earnings in the range of $1.38 to $1.54 per diluted share. We expect EBITDA to be in the range of $143 million to $155 million.

Consistent with our comments in the February earnings call, our estimated effective tax rate for the fourth quarter and full year, based on current tax laws and our jurisdictional mix of income, is approximately 25%.

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

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Michael F. Hilton, Nordson Corporation - President, CEO & Director [5]

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Thank you, Greg. Again, I'd like to express my appreciation to our outstanding global team. We knew we were facing challenging comparisons this year, and the team continues to deliver growth. I'm particularly pleased with the growth we've generated in our medical product lines, which has been a primary area of focus for our corporate development team, helping to drive top line growth and offset the cyclicality of the electronic systems product line within our Advanced Technology segment.

For the full fiscal year of 2018, at the midpoint of our guidance, we expect to generate total company organic sales growth of about 2%. This is growth on top of 8% organic growth in fiscal 2017 and 7% organic growth in fiscal 2016. Our ability to deliver organic growth again this year highlights the attractiveness of the end markets we serve, our ability to capture growth initiatives and our ability to continue to meet our customers' expectations.

We also remain focused on delivering value to our shareholders. Earlier this month, we announced the dividend increase of 17%. This marks the 55th consecutive year of annual dividend increases, ranking us 14th among publicly traded companies for the longest-running record of annual dividend increases. We take pride in returning a portion of our cash flow to our shareholders, and we appreciate your continued support.

Complementing our dividend increase, our other capital deployment objectives remain consistent. We'll continue to prioritize acquisition opportunities in our targeted markets that will help drive our strategic vision for long-term growth.

We're focused on finishing strong with another good year of organic sales growth, enhancing bottom line results through continuous improvements using the Nordson Business System and providing superior service and technology to our customers.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Christopher Glynn of Oppenheimer.

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Christopher D. Glynn, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [2]

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Just wondering, at ATS, as you have the period of the lower mobile demand, as that plays out, how would you describe the pipeline of your field-testing activity across various applications within those markets, as informing your expectations for waves of future innovation to drive demand for you guys?

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Michael F. Hilton, Nordson Corporation - President, CEO & Director [3]

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At a high level, I think, as we talked about in the beginning of the year, we've said this is likely to be a more challenging year, particularly in the mobile segment. And that's sort of the way it played out with modest volume growth and not a lot of innovation. That's kind of the way it played out. If I look at the various segments that we're involved with, I think the things that will drive mobile in the future will be the move to 5G, that has some impacts on what goes into mobile devices, particularly phones, and there are some other areas around RFI shielding and so forth that we see as opportunities going forward in addition to any other innovation that our customers would put into the phones. And we continue to see strong growth in the auto electronic side of things as our customers are putting more cameras, more sensors into the cars. And ultimately, we think, long term, as you move closer to autonomous driving, there's going to be more input into the cars, and that will play well for us. And then as we mentioned a couple of times here over the last year, we're doing more on the tail end of the semiconductor side with both dispense and inspection, and we think that will continue to grow over time. But we knew this -- coming into the year was going to be a challenging year. If you look at our guidance through the fourth quarter, we're likely to be flat to modestly down in that electronics portion of the segment. So our diversification efforts have helped us mitigate a pretty significant decline in the dispense business. We're not -- I don't think I'm going to be quite there, but it's helping to do that. And then, obviously, the other parts of the segment, the medical business in particular, is growing very nicely and meeting our expectations there.

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Christopher D. Glynn, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [4]

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Okay. And then on the geographies. Could you help us understand the magnitude that Japan declined in the quarter versus overall Asia-Pac or Asia-Pac ex-Japan much more moderate softness? Look, what differentiates Japan in terms of the higher volatility there?

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Michael F. Hilton, Nordson Corporation - President, CEO & Director [5]

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Yes. I think, that's really related again to the electronics side of the business. If you think about a lot of final assembly going together in China, but a lot of component manufacturing being outside China. Japan is one of the key areas where you -- we see a lot of component manufacturing. And that's really related to the component manufacturer going into the phone lines.

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Operator [6]

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Our next question comes from Bradley -- Charlie Bradley (sic) [Charlie Brady] of SunTrust Robinson Humphrey.

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Charles Damien Brady, SunTrust Robinson Humphrey, Inc., Research Division - MD [7]

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Charlie Brady. Mike, wanted to talk about on the Nordson MEDICAL business. You touched on a little bit on the growth that you're seeing there. It sounds like that business, positioning today relative to where it's been over the past couple of years with some of these new acquisitions. But it sounds like that the growth path of that business has ticked up a pretty decent amount, a lot of innovation coming out of that as it's ticked up. Is this -- could you talk about kind of the efforts you guys have made to really, kind of, more focus on that business in terms of organic development not just the acquisition stuff you guys have done?

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Michael F. Hilton, Nordson Corporation - President, CEO & Director [8]

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Yes. I think that's a good point, Charlie. There's a lot of new products that are coming out of our medical business. And I think one of the things that's helped with the acquisition we made last year, with the Vention business, and the restructuring we have done along the Vention model, there's a, sort of, design and development pipeline on the front end that really gets us in early with key customers, not only the large customers, but some of the emerging innovators. And what that allows us to do is innovate our systems and our components around their desires and where things are heading. And a big focus is around minimally invasive procedures that when you think about what the fastest-growing part of the medical device segment is, it is around minimally invasive procedures. And that's heart and lung and brain and some spinal cord and other vascular areas, and our design and development capabilities and our components fit nicely into those end markets. So what we have now is a more complete set of offerings that allows us to participate in more opportunities. So we have a strong pipeline there, and we're introducing a lot of products to support the growth there, and we're excited about what we see.

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Charles Damien Brady, SunTrust Robinson Humphrey, Inc., Research Division - MD [9]

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Yes, that's helpful. And just switching gears here. On the typical question here on industrial calls, price/cost, you guys are seeing raw material inflation and pricing as a put-through. Can you just talk a little bit about what you're experiencing in terms of that?

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Michael F. Hilton, Nordson Corporation - President, CEO & Director [10]

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Yes. So there are some raw material increases that -- things like steel and aluminum that we see. Our sourcing team has done a nice job of mitigating the impact there, and we've also been able to move some pricing to, I'd say, largely, to this point, offset the impacts that we've seen. But there is some cost push there that's atypical that I think we've been able to offset.

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Operator [11]

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Our next question comes from Matt Summerville of D.A. Davidson.

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Matt J. Summerville, D.A. Davidson & Co., Research Division - Senior Analyst [12]

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First, could you, sort of, do a walk-through in terms of what you saw in the quarter across -- I'm thinking of the 4 pieces of the adhesive business? Talking about rigid packaging, polymer, nonwoven and product assembly, and I guess, looking out, at least into the fourth quarter, even into early next year, what your overall outlook is for those businesses?

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Michael F. Hilton, Nordson Corporation - President, CEO & Director [13]

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So you're talking about -- and so if you look in the third quarter, I'd say, in our core adhesives business, it was pretty solid, stronger packaging and product assembly, a little soft in nonwovens. But that, you can see quarter-to-quarter movement there based on big projects. So I don't read anything into that. And we had a pretty strong comp the prior year of about 6%. I'd say, in our plastic product lines, pretty solid performance in the quarter across most product lines within our plastics business and a building and strong backlog in that particular area to the point that we're seeing some lead times extend a little bit, not only for us, but some others in the industry. So that's encouraging to see the backlog there builds across the plastic component piece of things.

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Matt J. Summerville, D.A. Davidson & Co., Research Division - Senior Analyst [14]

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And then just as a follow-up. While I recognize you guys, given sort of the short-cycle nature of the business, you don't really guide beyond the next quarter. Having said that, to your point earlier, Mike, given some of these comparisons you're facing, specifically the 50% plus comp you're facing in advance tech in the fiscal third quarter of '19, is there any comment you might make as to whether or not you feel the Street at this point, is effectively handicapping or capturing that comp?

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Michael F. Hilton, Nordson Corporation - President, CEO & Director [15]

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Yes. I mean, obviously, the comp is out there. And so I think most folks recognize that. I can't really comment on whether everybody is looking at that. But I'd say, if we step back, and this is where quarter-to-quarter, kind of, movements can maybe give an improper indication of how the business is doing fundamentally. If we step back and look year-over-year, this is -- as I said earlier, for the electronics business, this is a challenging year. But we're going to be close to flat, offsetting a pretty significant drop in mobile dispense, with the efforts that we've had to diversify both from a customer and an application standpoint and the strength of the other parts of our electronics business. And then I think the continued growth in medical and general industries activities are going to more than offset what we've seen there which I think is pretty good performance there. But you can see these swings quarter-to-quarter because we can't control when our customers are going to place orders. What we can control is how we respond to those and take advantage of it. So I think if you look at sort of annually and over a cycle, you're going to see this business continuing to grow. In the short term, there's more volatility, and we're trying to mitigate that with our diversification efforts.

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Operator [16]

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Our next question comes from Chris Dankert of Longbow Research.

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Carl Schemm, [17]

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This is Carl Schemm on for Chris. So just, kind of, on the facility consolidation, do you have any updates on, kind of, the timing and the expected benefits there?

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Michael F. Hilton, Nordson Corporation - President, CEO & Director [18]

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Yes. So we're looking at, by the end of the calendar year, to be through the consolidation effort. The primary effort is in the U.S., although we have some effort in Germany as well. But we should be through both of those by the end of the calendar year. And I think, as Greg mentioned earlier, he's highlighted what the additional cost that we've seen this year as a result of that consolidation. We'd expect that to go way next year. In the long run, we'd expect to see some more efficiencies come out of the new facilities as well. But right now, we're still in middle of the final transfers and ramping up the new facility. So not ready to project efficiency improvements beyond that at this point.

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Carl Schemm, [19]

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Okay, great. And then any update on, like, the tiered product offering and growth in ADS, AT -- ATS there?

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Michael F. Hilton, Nordson Corporation - President, CEO & Director [20]

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Did you say in adhesives or -- yes. So in adhesives, yes, we've seen some nice growth in our -- despite my former comment here, and some nice growth in the lowest tier of the nonwovens business. As we've talked about that before, we're into a group of customers we haven't captured before. And I think both from an end customer standpoint and an OEM standpoint, we're seeing nice growth there beyond what we had expected for the year. So that's very encouraging because in the end, they'll move up the line. So I think that's good. I'd also say in adhesives, we've added to our systems additional measuring capabilities, in our packaging business, which our customers find very helpful and the material suppliers also find very helpful in demonstrating the benefits, not only of our equipment, but of their materials. And so we're working closely with them. And so I think that's encouraging as well.

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Operator [21]

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(Operator Instructions) Our next question comes from Matthew Trusz of Gabelli & Company.

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Matthew A. Trusz, G. Research, LLC - Research Analyst [22]

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Are you seeing tariffs or trade rhetoric more broadly impacting your customers in a way that's impactful to your business? And I guess, overall, I'd wonder, what is your overall business confidence in macro outlook now, and has that evolved at all over the last 3 months since we last talked?

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Michael F. Hilton, Nordson Corporation - President, CEO & Director [23]

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Yes. I would say, it's hard to say that we've seen any significant impact on the tariff discussions to date. I would say, in general, projects are proceeding as the way they would normally proceed. I think the, sort of, broader discussions about more aggressive tariffs, particularly with China and China with the U.S., is a little bit more concerning, and that could have some broader impacts. We're encouraged to see that there is some discussion going on right now, but it's hard to predict where that's going to head. I'd say, our view of the overall macro economy hasn't really changed. I think, in the last quarter, we talked a little bit about the U.S. being stronger than it has been for the last 2 or 3 years. However, Japan and Europe are still growing, but at a softer rate than we certainly saw last year. And China is hanging in at about the same rate as we saw last year, certainly not improving. The one thing that has changed significantly and whether that's a function of the tariff discussions or a function of Federal Reserve policy is, currency has flipped around as we look going into the next quarter from being a tailwind to a headwind. So that's probably the one thing, at this point, looks a little bit different, and it's hard to predict how that's going to go forward as well. But I'd say, sort of the outlook that we saw 3 months ago, is pretty similar. I'd say, there is some added concern if the tariff piece escalates more.

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Matthew A. Trusz, G. Research, LLC - Research Analyst [24]

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Okay. And then with automotive, how much visibility in that end market do you have? And how do you feel about cold dispensing opportunities as we look forward to next year on light-weighting new platforms or otherwise?

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Michael F. Hilton, Nordson Corporation - President, CEO & Director [25]

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Yes. I would say, we have a pretty good idea of projects that are planned. I'd say, not all those go ahead. And so if you look at our -- we talked about this last time, and I think we saw sort of global platform peaks in '16 and a modest decline last-year, and more of a decline of this year. It's hard to tell exactly what the cycle is going to be on that. I think, obviously, a drive to more efficient pieces is important. But I would say, one of the areas that we're pursuing in our cold material side of the business is a focus around the electric battery side, both for the automobile side of things, but also for base storage capability. And we've seen some nice growth, although relatively modest in terms of total revenue this year, but that's an encouraging longer-term opportunity for not, only our cold materials, but a number of our businesses. And then in the cold materials space, we're also doing some work at the aerospace side. I'd say, the whole qualification process there has taken longer than we would've expected. But we see some good opportunities there as the industry looks to do -- to drive automation to help them with their backlog of orders and to effectively increase their capacity. So those are 2 areas that we see as growth opportunities for that part of the business as well.

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Operator [26]

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(Operator Instructions) I have a follow-up from Matt Summerville of D.A. Davidson.

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Matt J. Summerville, D.A. Davidson & Co., Research Division - Senior Analyst [27]

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I'll fire up a couple more. Just with respect to ICS, very good -- I mean, all year, really, very good incremental margins in that business. Can you talk about, sort of, what's driving that? Is that mix related with some of the auto stuff, maybe not as strong as it was in the prior year period? And I guess, ultimately, where do you think ICS can go? I mean, can that be a 20% plus margin business for you guys?

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Michael F. Hilton, Nordson Corporation - President, CEO & Director [28]

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So Matt, you're correct. Certainly, the mix has helped. When you look at the mix of different product lines there, and auto tends to have a bigger buy-in component than some of the other systems. So with that being off a little bit, the mix has helped. But we've also done a lot of good things utilizing the Nordson Business System to drive productivity there. As we've said, going back 4 or 5 years, we wanted to get that business up to something like 20% margins, and we're getting close, and we still have things to work on there. I think, just given the nature of the business, I don't think it's reasonable to expect that it would be in excess of 20%, just because of the scope of what we typically supply and how much is more standard buy-in equipment. But I think 20% is still a good goal, and we're getting close to it.

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Matt J. Summerville, D.A. Davidson & Co., Research Division - Senior Analyst [29]

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And then similarly, my question on ADS earlier. With respect to advanced tech, can you maybe provide a little bit more granularity? I think, last quarter, you indicated, outside of the mobile space specifically, most of your businesses, if not all, in advance tech were growing in that, kind of, high single to low double-digit rate. Can you kind of talk about, was the mobile piece off 50% this quarter, and everything is up 10%? Can you give us a better feel for how those -- the various pieces of the segment there are really performing?

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Michael F. Hilton, Nordson Corporation - President, CEO & Director [30]

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Yes, what I would say, if you look at the total segment, now remember half of it or more now is not electronics, and that's performing well both the general industry piece and the medical -- and the medical piece is part of the diversification effort. We expect that to be high single digit, double-digit growth going forward and it's playing out the way we expected. And I'd say, within the electronic segment, the test and inspection business has been very solid this year with nice growth, in part, because that serves a more diverse end market than we see in the expense side of the business in particular. So the 2 biggest components of that business are test and inspection and dispense. And the test and inspection will -- for the year, will be up nicely. The dispense is going to be off significantly, and that really is the mobile-related piece. As I said, overall, we expect that part of the business, the electronics part of the business, it will be down modestly. But we feel like we've covered a lot of ground between the diversification efforts within electronics and then the diversification efforts in that segment outside of electronics.

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Matt J. Summerville, D.A. Davidson & Co., Research Division - Senior Analyst [31]

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And then just maybe one quick one for Greg. It looked like corporate expense stepped up quite a bit, a couple million dollars on a sequential basis. Can you talk about that, and I guess, what the expectation would be built-in for Q4?

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Gregory A. Thaxton, Nordson Corporation - Executive VP, CFO & Principal Accounting Officer [32]

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Yes. Matt, there were a couple of onetime items, onetime expense items in the quarter that hit in that corporate managed number. So I wouldn't suggest that, that's a new run rate. I'd probably back it down back to that $13 million range going forward.

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Operator [33]

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Our next question comes from Walter Liptak of Seaport Global.

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Walter Scott Liptak, Seaport Global Securities LLC, Research Division - MD & Senior Industrials Analyst [34]

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Well, I just wanted to do a couple of follow-ons related to China, and in the past, and last year especially, you had talked about some of the Chinese mobile phone makers and some of the new products that had gained traction and grown. There was no discussion of that, and I wonder if you could help us understand, how much of the tough comp is related to the Chinese mobile phone makers? And was there a pause, was like the demand -- the capacity went in, and now we've got a pause out of China, or is it more broad than that?

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Michael F. Hilton, Nordson Corporation - President, CEO & Director [35]

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No, I'd -- what I would say is 2 things. If you look at, sort of, total smartphone growth, it was -- it's been pretty modest, like 1%, 2% growth for the year. So there's not a big volume driver. So that affects all of the customers that supply mobile phones. And two, this is a year with less innovation, so it's going to be incremental. And that's the, sort of, a typical pattern that we've seen. A strong year of innovation and a weaker year of innovation. And so that's kind of what we're seeing here. I'd say, on the Chinese mobile side, no different in terms of how they have approached things. Now they've probably gained a little bit of market share here in the short term, but not anything that would dramatically drive the needle one way or another.

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Walter Scott Liptak, Seaport Global Securities LLC, Research Division - MD & Senior Industrials Analyst [36]

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Okay. Can you just -- is what you're saying that the Chinese mobile manufacturers that they're still growing because they are coming off of a small base? Or...

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Michael F. Hilton, Nordson Corporation - President, CEO & Director [37]

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So they are not a small base any more, but they are still growing. I'd say, the opportunity is still there for increased levels of automation. So both in terms of the degree of overall automation and in terms of their process, the approach that they take, it's less than -- less sophisticated than the global guys. But I'd say, in general, this has been a pretty quiet year for innovation. And so as we've talked about in the past, as the smartphone penetration got closer to saturation, it's really around change and innovation. And this year has been a weaker year across the board on that.

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Walter Scott Liptak, Seaport Global Securities LLC, Research Division - MD & Senior Industrials Analyst [38]

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Okay, got it. And then just a follow-on. I appreciate your answer on the tariff question. But what are -- specifically, I'm sure you've run through with the $50 billion tariff and the $200 billion tariff. Is -- are your product categories included in either of those tariff discussions?

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Michael F. Hilton, Nordson Corporation - President, CEO & Director [39]

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So I'd say, in the first set of tariffs, very few, very modest. In the second set, we don't really know yet all of the details on the codes, and we don't know what the Chinese response is going to be. So that's the -- those are the 2 unknowns to date. And so we'll have to wait and see. Obviously, we're trying to understand that as best as we can, and we've got a team focused on that. But there's not enough clarity yet to make a comment there. But I'd say, when you talk about $200 billion, it gets more concerning.

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Walter Scott Liptak, Seaport Global Securities LLC, Research Division - MD & Senior Industrials Analyst [40]

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Okay. And if, let's say, in the second $200 billion that your product going into China for electronics assembly was included, is that -- 25% increase, is that big enough to be a deterrent to the [band] or is there any other choices? I don't think there's any local supply for the kind of dispensing equipment that you make for electronics?

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Michael F. Hilton, Nordson Corporation - President, CEO & Director [41]

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Yes. Well, I'd really not want to speculate here until we see how that plays out. Obviously, we would -- we do have manufacturing capability in Suzhou and we are doing both test and inspection in some of our mid-tier dispense products out of there. But we would pull all levers we could if there was an impact to us. Like I said, we really are waiting to get a better feel for both the U.S. side and the Chinese side and trying to anticipate what might happen and how we might mitigate any particular impacts there. But I would just say, in general, when you look at that magnitude of the number, it's more concerning than $15 billion or $16 billion.

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Operator [42]

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I have a follow-up from Christopher Glynn of Oppenheimer.

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Christopher D. Glynn, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [43]

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Just wondering if you could remind us what the algorithm is for FX translation as impacts EPS ultimately when you add in the transactional influences?

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Gregory A. Thaxton, Nordson Corporation - Executive VP, CFO & Principal Accounting Officer [44]

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Yes. Chris, this is Greg. If you look historically, the way it kind of models out is, if you look at the percentage change in sales, it's a 2x to 3x, that number percentage change in EPS. So if currency adds 1% to sales, it might be a plus 2.5% tailwind to earnings per share change from the prior year.

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Christopher D. Glynn, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [45]

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And then on interest, I'm not sure if my numbers are right, but I think you had $13 million in the quarter and said $8 million for the fourth quarter, can you explain the dynamic there, if I got those numbers correct?

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Gregory A. Thaxton, Nordson Corporation - Executive VP, CFO & Principal Accounting Officer [46]

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Yes. So a little bit of a timing issue where we had some cash on the balance sheet that will, post the third quarter year-end, we'll be paying down some debt.

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Operator [47]

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At this time, I'd like to turn the call over to Mr. Mike Hilton for closing remarks.

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Michael F. Hilton, Nordson Corporation - President, CEO & Director [48]

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Well, thanks -- thank you for your interest in our call today and thank you, again, to our global team for continuing to serve our customers well.

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Operator [49]

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Ladies and gentlemen, thank you for your participation in today's conference. You may disconnect. Have a wonderful day.