Nordson Corporation (NDSN) Q4 2017 Earnings Conference Call Transcript

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Nordson Corporation (NASDAQ: NDSN)Q4 2017 Earnings Conference CallDec. 14, 2017, 8:30 a.m. ET

Contents:

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  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to Nordson's Corporation conference call today, Thursday, December 14, 2017, to report fiscal year 2017 fourth quarter results and fiscal year 2018 first quarter outlook. Today's conference call is being broadcast live on Nordson's website at Nordson.com/investors and will be available there for 14 days. There will be a telephone replay for the conference call available until December 28, 2017, which can be accessed by dialing 404-537-3406. You will need to reference ID number 7396249.

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

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

Michael F. Hilton -- President and Chief Executive Officer

Thank you. Good morning, everyone. Thank you for joining Nordson's 2017 Fourth Quarter Conference Call. With that being said, I would like to introduce Mike Hilton, President and Chief Executive Officer of Nordson Corporation. Please go ahead, sir. I'm joined by Greg Thaxton, our Senior Vice President and Chief Financial Officer.

I'd like to begin by recognizing the outstanding effort of our global team for delivering full-year record sales, operating profit, earnings per share, and EBITDA. Our commitment to meeting our customers' needs and delivering the best technology solutions continues to be our priority, helping us surpass $2 billion in annual revenue this year.

I'll provide some highlights on our record-setting financial performance, and Greg will offer more detailed commentary. Looking at the fourth quarter, organic growth of 2% was driven by strong demand in the electronics end markets, along with solid growth in medical and those end markets serving the adhesive dispensing segment. Against very challenging comparisons of a year ago, where total company organic growth increased 13%, this quarter performance exceeded our guidance. Our recent acquisitions added 10% growth for the quarter. The sales volume, coupled with our continuous improvement initiatives, resulted in EBITDA growth of 17% and EBITDA margin improvement of about one percentage point in the fourth quarter, as compared to the same period a year ago. Also during the quarter, we increased our annual dividend by 11%, marking our 54th consecutive year of dividend increases.

Overall, our fourth quarter performance was solid, ending what again was a very strong year for Nordson. Looking ahead to the New Year, our backlog, indicates another robust first quarter for fiscal 2008. Our guidance for the quarter is very strong and is largely driven by our advanced technology segment. A strong demand in electronics and medical end markets is driving performance.

I'll speak more about our outlook in a few moments. First, I'll turn the call over the Greg to provide a more detailed perspective on the fourth quarter and our first quarter guidance. Greg?

Gregory Thaxton -- Corporate Senior Vice President and Chief Financial Officer

Thank you, Mike, and good morning to everyone. I'll first provide some guidance on our fourth quarter and full fiscal year results before moving on to our outlook for the first quarter of fiscal 2018. Fourth quarter sales were $574 million, an increase of 13% over the prior year's fourth quarter. This change in sales included a 2% increase in organic volume, a 10% increase related to the first year effective acquisitions, and a 1% increase related to the favorable effects of currency translation compared to the prior year's fourth quarter. Organic growth exceeded the high end of our guidance range, driven primarily by strong demand in electronics end markets.

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

Within the advanced technology segment, sales volume increased 29% from the prior year fourth quarter, inclusive of 4% organic volume growth and 25% growth related to the first year effective acquisitions. The effects of currency translation were immaterial. This is outstanding performance that exceeded our expectations, considering the difficult comparison to the prior year fourth quarter, where organic growth for this segment was 30%. Strong demand from electronics and medical end markets drove the current quarter's growth. We continue to benefit from the ongoing changing technology in the marketplace and our ability to broaden our application solutions.

Regionally, growth was strongest in Japan, with the Americas and U.S. also adding to this growth. This segment acquisitive growth includes one month of the fiscal 2017 LinkTech acquisition and the fiscal 2017 acquisitions of Ace, InterSelect, Plas-Pak, and Vention. Organic sales volume in the industrial coating segment decreased 8%, where this segment was also up against a very challenging comparison to the fourth quarter a year ago, where organic growth was 12%. Customer demand in most product lines was offset by strong prior year performance and our cold material product line. Europe and Japan were strongest geographically in the current quarter.

Moving down the income statement, gross margin for the total company was 54% in the quarter, and operating profit improved 13% to $125 million, as compared to the prior year's fourth quarter, a reported operating margin of 22% in the quarter. This performance includes approximately $6 million from tangible asset amortization expenses related to acquisitions made in the current year, which dilutes operating margin by a full basis point. Looking at operating performance on a segment basis, adhesive dispensing delivered operating margin of 28% in the fourth quarter. This was an impressive improvement of four percentage points, driven by changes in product mix and fewer restructuring charges as compared to the prior year. The current quarter includes approximately $1 million in restructuring charges related to facility consolidation efforts. Within the advanced technology segment, reported operating margin was 24% in the fourth quarter, or 26% when excluding $6 million of intangible asset amortization expense related to current year acquisitions.

The industrial coating segment delivered an operating margin of 18% in the fourth quarter, down from the prior year's exceptional performance due to volume leverage and mix, but still a strong performance for this segment. On a total company basis, that income for the quarter was $80 million, and GAAP diluted earnings per share were $1.37, a 5% increase over the prior year gap diluted earnings per share. The $6 million from intangible asset amortization charges in the current quarter for current year acquisitions reduced earnings per share by $0.07. As Mike noted, we delivered strong fourth quarter EBITDA of $150 million, a 17% increase over the prior year fourth quarter. And EBITDA margin improved one percentage point to 26% as compared to the prior year's fourth quarter.

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

I'll now share a few comments on our full-year results. Sales for fiscal 2017 were $2.1 billion, inclusive of very strong organic growth of 8% as compared to the prior year, which also was a strong year for Nordson. The first year effective acquisitions added 7% sales growth, and we continue to be pleased with the performance of these acquisitions. Full-year operating profit was $458 million, which is an increase of 18% over the prior year and inclusive of approximately $15 million of intangible asset amortization expense related to current year acquisitions. Reported operating margin was 22%, or 24% on an adjusted basis to exclude both the effect of one-time charges highlighted in the EPS reconciliation financial exhibit and the $15 million intangible asset amortization expense, representing a 200 basis point improvement over the prior year's adjusted operating margin.

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

EBITDA for the full year increased 19%, to $547 million, and adjusted EBITDA increased 22%, to $565 million, both compared to the prior year. EBITDA margin and adjusted EBITDA margin were 26% and 26%, respectively, both up over a hundred basis points as compared to the prior year. From a balance sheet perspective, net debt to trailing 12-month EBITDA, inclusive of acquired EBITDA, was just under 2.5 times at the end of the fourth quarter. We generated $282 million of free cash flow before dividends and distributed $64 million in dividends, for a payout ratio of 22%.

I'll now move on to comments regarding outlook for the first quarter of fiscal 2018. We enter the quarter with strong momentum, whereas of October 31, 2017, backlog was approximately $402 million, an increase of 45% to the prior year, inclusive of 28% organic growth and 17% growth due to acquisition. Backlog amounts are calculated at October 31, 2017 exchange rates. We're forecasting sales to increase in the range of 30% to 34% as compared to the first quarter a year ago. This growth includes organic volume growth of 15% to 19%, 11% growth from the first-year effective acquisitions, and a positive currency effect of 4%, based on the current exchange rate environment.

At the midpoint of this outlook, we expect first quarter gross margin to be about 55%, and operating margin to be approximately 22%, or 23%, excluding $6 million of intangible asset amortization expense associated with fiscal 2017 acquisitions. EBITDA margin is forecasted at 27% for the quarter, as compared to 23% for the prior year's first quarter. We're estimating first quarter interest expense of about $11 million, depreciation and amortization expense of about $25 million, and an effective tax rate of 29% based on current tax law, resulting in first quarter forecasted GAAP diluted earnings per share in the range of $1.29 to $1.39 per diluted share. This EPS range is inclusive of the $6 million, or $0.07 per diluted share of intangible asset amortization expense related to the fiscal 2017 acquisitions. These charges did not occur during the first quarter of fiscal 2017. We expect EBITDA to be in the range of $141 million to $150 million.

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

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

Michael F. Hilton -- President and Chief Executive Officer

Thank you, Greg. This is outstanding performance for both the fourth quarter and the full fiscal years. I want to again thank our global team for helping us deliver these record results for fiscal 2017.

Our first quarter guidance is very strong, largely driven by the advanced technology segment, where strong demand in electronics and medical end markets is driving performance. Our diversification efforts to drive growth through new applications, technology, and tiering are paying off, and our recent acquisitions are off to a good start. With the short cycle nature of our end markets, we have limited visibility of sales beyond the first quarter. However, we do anticipate future organic sales growth to moderate to more typical levels beyond our first quarter, particularly given the challenging comparisons from a strong fiscal 2017.

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

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

Questions and Answers:

Operator

Thank you, sir. Ladies and gentlemen, at this time, if you do have a question, please press the * and the 1 key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the # key. And again, that's * and 1 to ask a question.

Our first question comes from the line of Matt Summerville from Alembic Global Advisors. Your line is open.

Matt Summerville -- Alembic Global Advisors -- Analyst

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

Michael F. Hilton -- President and Chief Executive Officer

Yeah, so let me comment on the first piece. What we've seen, really, in the tail end of our fourth quarter and into the first quarter is continuing strong demand in the electronics segment. A good portion of that is mobile-related. But also, we've seen some large orders related to some underlying growth in sort of newer technology. So, one example of that would be moving from rigid to flex circuits to provide some more flexibility to customers with a smaller design footprint. So, what I'd say is that we saw a couple of large projects come through, some of that supporting mobile directly, some of that more broadly based. And so obviously, we've had a pretty strong year of mobile introductions this year, and that's continued a little bit into the fourth quarter and into the first quarter. So, at a high level, that's what we're seeing on the electronic side.

As far as the guidance around the orders, let me kind of give you our thought process here. Now, we 've been thinking about the order guidance for quite a while. And originally, we provided that because we thought it was providing additional insight with regard to underlying run rates across the business. But more recently, over the last couple of years, we've seen sort of the order rates be out of whack a little bit with backlog and/or our sales guidance. And the reasons behind that are a couplefold. The mix of our business has changed with the growth in the advanced technology segment, both in electronics and now in the medical business. Particularly in the electronics side, our delivery windows have been shrinking, and the timing of orders year to year has varied pretty considerably. In addition, we have some customers who place orders for large projects but look at deliveries over multiple quarters.

So, we've found ourselves in situations where we're explaining why our sales guidance was out of whack with our quarter growth rate. And we thought a more consistent way to look at things was to give you sort of the backlog at the end of the quarter and then our guidance going forward that takes all of those kinds of thing into effect. And we also were getting feedback from many of our shareholders that they were getting confused by our order rate data, and it wasn't necessarily helping provide additional insight. And so, that's why we decided to make that change.

Matt Summerville -- Alembic Global Advisors -- Analyst

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

Gregory Thaxton -- Corporate Senior Vice President and Chief Financial Officer

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

Matt Summerville -- Alembic Global Advisors -- Analyst

Got it. Thanks, guys.

Operator

Thank you. Our next question comes from the line of Mike Halloran of Baird. Your line is open.

Michael Halloran -- Robert W. Baird -- Analyst

Hey, good morning, guys.

Michael F. Hilton -- President and Chief Executive Officer

Morning, Michael.

Michael Halloran -- Robert W. Baird -- Analyst

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

Michael F. Hilton -- President and Chief Executive Officer

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

Michael Halloran -- Robert W. Baird -- Analyst

And the backlog conversion question?

Michael F. Hilton -- President and Chief Executive Officer

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

Michael Halloran -- Robert W. Baird -- Analyst

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

Michael F. Hilton -- President and Chief Executive Officer

Yeah, just a couple of comments there. So, I'd say the first quarter obviously is stronger than we would have expected at the yearend, but that's really linked to some of those large orders that we got. When you look at the second and third quarters going out, we had strong double-digit organic growth. So, they're gonna be a little tougher comps year-over-year. So, I think that'll be sort of the challenge that we're up against.

I would say across the businesses, if you start at the technology side of things, we are looking at, on a pro forma basis, medical being a sizable part of the portfolio now, and that advanced tech piece, it's likely to be in that 30 percent range. So, that's gonna be something that's a little bit more stable. And then I'd say if you look at the piece that's not electronic-related beyond medical is probably as much as another 20%. So, that's also likely to be a bit more stable throughout the year, unless seasonal. The electronics piece is the one that can vary. What I would say is this is the time of the year where we look at and work with our key customers on project activity. And that project activity continues to be robust. I think the challenge will be that it's been a strong sort of launch here by some of the mobile guys.

But we're seeing a lot of interest in some of the newer technology, whether that's on the wafer side, or whether that's on some of the things like the flexible packaging side of things, which is gaining share in the marketplace and has generally higher growth. So, it would be figuring out that mix, particularly in that segment, against some stronger comps in the second and third quarter, I think, is the challenge. But that's sort of the best insight we can provide at this point.

Michael Halloran -- Robert W. Baird -- Analyst

Well, thanks for that. I appreciate the color. Congrats on a very nice quarter.

Michael F. Hilton -- President and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from the line of Matt Trusz of Gabelli & Company. Your line is open.

Matthew Trusz -- Gabelli & Company -- Analyst

Good morning. Thanks for taking the question.

Michael F. Hilton -- President and Chief Executive Officer

Good morning.

Matthew Trusz -- Gabelli & Company -- Analyst

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

Michael F. Hilton -- President and Chief Executive Officer

Yeah, so I'll make a couple of comments. So, on the semi side, we've historically done a lot on the packaging end, but now we're seeing some customers that are looking at advanced technologies where they're actually stacking on the wafer, as opposed to after the wafer is diced. And so, ultimately that'll proceed toward what's called through silicon VM. So, just think of that going vertical on the chip architecture and doing that on the wafer. That's a new application that is resulting in some nice growth for us over the last sort of 18 months. There are still potential additional customers that would adopt that particular approach, and that's very sophisticated technology that we've developed in concert with these customer applications.

I'd say on the spend side, but also on the inspection side, a lot of our new products on the electronics side have enabled growth in a number of areas. On the packaging side, on the flexible packaging -- you have rigid packaging and flexible packaging, and smaller packages that basically cram more in and allow for growth for the batteries. Customers are starting to go to more flexible packages, and that's something that our technology is enabling. And then, I'd say if you look one a broader basis, right now today, probably about 15% of advanced technology business goes into auto electronics. And we see that as a longer-term growth opportunity as you move toward more and more sensors and equipment that would support, eventually, autonomous driving. So, we're doing a lot of development there.

And then when you look at the non-electronics part in the advanced technology space, with the medical piece, virtually all of the medical growth is coming from supporting new products and new applications for customers. And that's kind of the hallmark of our total company. And all of our businesses, our focus is around how do we curate our own demand, whether that's in our adhesives area, or our coatings area, or even our technology area, that's really the focus. And that's something we've been driving hard in the relatively slower growth environment that we've seen over the last several years.

Matthew Trusz -- Gabelli & Company -- Analyst

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

Michael F. Hilton -- President and Chief Executive Officer

I'd say it's early on, but it's hard to say to what extent it all be adopted. I think if you look at sort of broader -- like the flex circuit technology, that's something that's growing in sort of high single-digit rates right now as it -- basically, as some of the rigid circuit board gets converted over on the wafer side, there are multiple ways to get at sort of the three-dimensional approach. So, it depends on which dimensions the customers take, but there's still some additional opportunity there.

And then the one area we haven't talked about yet is the other things that we offer on the electronics space, particularly tests and inspections. So, as customers go to either three dimensions or different approaches in process or technology, the inspection piece is becoming more critical, particularly on the X-ray side of things. And we've got a whole new set of products there that are doing really well. And then our most recent acquisitions of the smaller solder-based companies are off to a good start as well. And that's linked in or connects in ultimately three dimensions. So, we feel pretty good about that. Talked a lot about electronics, but the philosophy in terms of driving new product and new application growth, and as Greg said earlier, tiering, is what we try to do across all of our businesses.

Gregory Thaxton -- Corporate Senior Vice President and Chief Financial Officer

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

Matthew Trusz -- Gabelli & Company -- Analyst

Thank you very much.

Operator

Thank you. Our next question comes from the line of David Stratton of Great Lakes. Your line is open.

David Stratton -- Great Lakes Review -- Analyst

Good morning. Thanks for taking the question.

Michael F. Hilton -- President and Chief Executive Officer

Yeah, good morning.

David Stratton -- Great Lakes Review -- Analyst

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

Michael F. Hilton -- President and Chief Executive Officer

So, there's a lot in that question, but let me suggest that -- I'd say particularly on the electronics side, we've become a very adept at flexing up and down. We have our facilities across the world, where we have capacity to flex up and down, and we've also used our Nordson business systems to, in many cases, relay out our factory to relatively low cost and capability. So, I think we're very good there. I'd say, with the medical business as an example, we have been through the acquisitions, adding not only capacity, but capability in the U.S. and outside the U.S., and we have been expanding. And we've built a new facility in Colorado. We've expanded our facility in Mexico. With our latest acquisitions, we've got some additional capability, and we're all -- we're centered in all the key areas where our customers are doing their development work.

But then, I'd say across all of our businesses, we've used a combination of our continuous improvement activities and increasing levels of upgrading of equipment and automation to not only make us more efficient, but to give us the capacity we need. So, other than sort of normal maintenance capacity, we're in pretty good shape. And with regard to our polymers business, we're finishing up this year, the transition in that business through consolidation. So, I think we're in pretty good shape from a capacity standpoint.

David Stratton -- Great Lakes Review -- Analyst

All right. Thank you.

Operator

Thank you. Our next question comes from the line of Jeff Hammond of KeyBanc. Your line is open.

Michael F. Hilton -- President and Chief Executive Officer

Jeff?

Jeffrey Hammond -- Keybanc Capital Markets -- Analyst

Hey. Sorry about that.

Michael F. Hilton -- President and Chief Executive Officer

It's OK. Good morning.

Jeffrey Hammond -- Keybanc Capital Markets -- Analyst

Good morning. Just maybe on the acquisitions, just -- I think you said they're on track, but anything notable in terms of opportunities that you're uncovering on cost or revenue synergies early on?

Michael F. Hilton -- President and Chief Executive Officer

Well, I would say a couple of things. So, we've done a number of acquisitions, and maybe I'll break them down and start with some of the smaller ones. Our smaller ones were two acquisitions in the electronics side that got us into a new area in the selective solder space. And our plan there is off to a good start, is just what we did with the matrix inspection company, which is the globalized -- a local business. And so, we've seen some good success, I'd say, in utilizing our global sales force to create new opportunities and start to close on some of those. I'd say with our Plas-Pak acquisition, we've added the complement story to the product line and got us into a new area in animal health. And I think we're seeing benefits from that, and that gives opportunities to optimize our EFT business there.

I'd say Vention brought a lot of capability to us, in particular in the design and development phase, which really allows us to get in early not only with critical larger established customers, involved in their new product development, but also with some of the entrepreneurial new venture development companies there. And we've been able to seize opportunities to pull through our broader product portfolio of products. And I think longer-term, there'll be opportunities across some of these businesses to further optimize our supply chain and footprint. But I'd say in the short-term, we're off to a good start. We've added capability in the case of medical side. We've added significant capability on the design front, that is, I think, just what customers are looking for and very helpful with pulling the full product portfolio through. And it really came with some very established organization and people capability.

Jeffrey Hammond -- Keybanc Capital Markets -- Analyst

Okay, great. And then, you mentioned active project inquiries, etc., and advanced tech kind of looking out past 1Q. Can you speak to the same on what you're hearing from your customers on the adhesive side? If we can look a little further out just in terms of quoting and customer feedback, etc.?

Michael F. Hilton -- President and Chief Executive Officer

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

Jeffrey Hammond -- Keybanc Capital Markets -- Analyst

Okay. Thanks a lot, Mike.

Michael F. Hilton -- President and Chief Executive Officer

Yeah.

Operator

Thank you. Our next question comes from the line of Christopher Glynn of Oppenheimer. Your line is open.

Christopher Glynn -- Oppenheimer Holdings -- Analyst

Hey, good morning. Congrats on the organic and inorganic performance.

Michael F. Hilton -- President and Chief Executive Officer

Thanks, Chris.

Christopher Glynn -- Oppenheimer Holdings -- Analyst

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

Michael F. Hilton -- President and Chief Executive Officer

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

Christopher Glynn -- Oppenheimer Holdings -- Analyst

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

Gregory Thaxton -- Corporate Senior Vice President and Chief Financial Officer

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

Christopher Glynn -- Oppenheimer Holdings -- Analyst

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

Michael F. Hilton -- President and Chief Executive Officer

Yeah. I would say it's gonna be relatively modest because we'll have completed both the major progress we have under way, the one in North America where we're consolidating three facilities into one, and the one in Europe, we're going from two to one. They'll get completed in the year. But for the first part of the year, we're still running multiple facilities as we transition equipment and build out the new facilities. We're further ahead in the U.S., and the project in Europe started a little bit later. So, I'd say there'll be some modest impact in this year and some larger impact in '19.

Gregory Thaxton -- Corporate Senior Vice President and Chief Financial Officer

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

Christopher Glynn -- Oppenheimer Holdings -- Analyst

Okay. Thanks, guys.

Michael F. Hilton -- President and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from the line of Walter Liptak of Seaport Global. Your line is open.

Walter Liptak -- Seaport Global Securities -- Analyst

Hi, thanks. Good morning.

Michael F. Hilton -- President and Chief Executive Officer

Hi, Walt.

Walter Liptak -- Seaport Global Securities -- Analyst

And congratulations, too. You talked about backlog, and I think Jeff asked about it. I wonder if we could do the same thing on the coatings? It sounds like that one's probably maybe down, or even -- or probably growing the least. Any commentary on the first quarter and what you're seeing from projects over the next year?

Michael F. Hilton -- President and Chief Executive Officer

Yeah. So, as I mentioned, I think, earlier, we do expect for all the businesses to be up in the first quarter. But we have seen, I'd say, some tough comps this fourth quarter and in the first quarter on the coatings business, primarily on the auto side. If you look at our powder/liquid container, those businesses have grown nicely. We had some big auto platform work last -- fourth quarter that went through, and some of that continued into the first quarter as the customers were going through model changes. We don't anticipate significant model change kind of activity going through this year.

But we do see a couple of areas that I think for the future would present good opportunities for growth in that business, where we've had some revenue and expect it to tick up over time. One we've talked about before in the sort of aerospace area as customers, both the end customers and the Tier 1 suppliers look to do more automation. So, I'd say we've had a lot of development work and some modest sales to date. We expect that to pick up over time.

And another area that we're seeing more opportunity in is with electric vehicles. There's more work around the batteries themselves, and we're seeing opportunities across the business, but most importantly in the coatings area to support some of the things going on in the battery development. So, we see opportunities there over time. I'd say the thing that's been a little bit of a drag this year, this year being '17, has really been the auto piece of the platform piece. But in the longer-term, we expect to see growth in that area.

Walter Liptak -- Seaport Global Securities -- Analyst

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

Michael F. Hilton -- President and Chief Executive Officer

Yeah. So, there's a lot of components there. Well, let me just -- maybe I'll just start at just the highest level and if you look at the mix of our business in advanced tech today. So, if you look at sort of pro forma for '18, about 30% of our business is going to be medical. There's probably another close to 20% that would be industrial and other types of application. Then about half falls into that electronics space. So, of that total advanced tech, about 15% is directly mobile, and then you've got auto electronics is a similar size. I think conductor is a little smaller, and other consumer electronics are a little smaller. So, that could be gaming consoles, LEDs, a variety of other things. So, there's a breadth in the diversification, I'd say, to the applications there across the whole segment that is different than it was if you just go back a couple of years, primarily because of one, the medical piece, and two, some of these other applications.

So, I'd say now, in some of the newer applications that we've mentioned, the direction for most semiconductor makers is to go 3D, to go to three-dimensional chips. The question is whether you do that before or after you dice the wafer. The newest technology is going toward doing it on the wafer, but everybody is not following that path. We have some indications that others will be going in that direction, but it's not clear yet whether that's gonna step up in a significant way. But those are typically larger opportunities, more sophisticated equipment.

With regard to some of the other technologies that support the mobile side -- and I think if you look at the most recent phones, the biggest thing you see is battery. Everything is about battery, capacity, and space, which means it squeezes everything else out. And so, some of the things that customers are working on is, how do I cram in the capability in that reduced space? And one of the ways to do that is to use more flexible circuits. And we're certainly seeing outsize growth in the flexible circuits. And that's an area where we've been successful in offering our technology, both on the dispense and on the inspection side.

Those are a couple of examples of things that we'll work on. There's a lot of other things that customers are working on. Now, you also ask about sort of the Chinese mobile folks versus the more traditional. I mean, this has been a good -- '17's been a good launch year for the more traditional global players. We haven't heard as much from the Chinese players, but over time, they have been growing and taking share, particularly in China. So, the opportunity for them is they continue to grow in China. Do they grow beyond China? And we expect to see further growth there. And as we've mentioned in the past, they have now got on the automation train, and they're moving that way. Still not far along as the global folks, but we expect that trend to continue. So, we have lots of projects for all of these folks -- how we -- which ones are gonna go at what time is always difficult to judge.

And I'd say, in the other areas that are outside of the electronics space, we've got a lot of development work, particularly in the medical side, that's robust. And then, in the other businesses as well, this is typically the time of year where we're working on particularly the newer technology-related projects.

Walter Liptak -- Seaport Global Securities -- Analyst

Okay. All right. I appreciate that color. Thanks, guys.

Michael F. Hilton -- President and Chief Executive Officer

Thanks, Walt.

Operator

Thank you. Our next question comes from the line of Charlie Brady of SunTrust. Your line is open.

Patrick Wu -- SunTrust Robinson Humphrey -- Analyst

Hi, guys. This is actually Patrick Wu standing in for Charlie. Thanks for taking my question.

Michael F. Hilton -- President and Chief Executive Officer

Hey, Patrick.

Patrick Wu -- SunTrust Robinson Humphrey -- Analyst

Good morning. Looking at adhesive dispensing margin, I mean, adjusted margins were 28%. I mean, obviously, very good. And I just wanted to know what the mix of parts in consumables was for the segment, and sort of looking out, what do expectations you guys have in terms of adhesive margins expanding in '18 and beyond?

Michael F. Hilton -- President and Chief Executive Officer

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

Patrick Wu -- SunTrust Robinson Humphrey -- Analyst

Okay, great. And I'll wait for, I guess, Greg on the consumables part.

Michael F. Hilton -- President and Chief Executive Officer

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

Gregory Thaxton -- Corporate Senior Vice President and Chief Financial Officer

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

Patrick Wu -- SunTrust Robinson Humphrey -- Analyst

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

Michael F. Hilton -- President and Chief Executive Officer

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

Patrick Wu -- SunTrust Robinson Humphrey -- Analyst

Okay. That's all right. Thank you.

Operator

Thank you. And our next question is from the line of Allison Poliniak of Wells Fargo. Your line is open.

Allison Poliniak-Cusic -- Wells Fargo Securities -- Analyst

Hi, guys. Good morning.

Michael F. Hilton -- President and Chief Executive Officer

Good morning.

Allison Poliniak-Cusic -- Wells Fargo Securities -- Analyst

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

Michael F. Hilton -- President and Chief Executive Officer

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

Allison Poliniak-Cusic

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

Michael F. Hilton -- President and Chief Executive Officer

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

Allison Poliniak-Cusic

Great. Thank you.

Michael F. Hilton -- President and Chief Executive Officer

Thank you.

Operator

Thank you. We do have a follow-up question from the line of Walter Liptak of Seaport Global. Your line is open.

Walter Liptak -- Seaport Global Securities -- Analyst

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

Gregory Thaxton -- Corporate Senior Vice President and Chief Financial Officer

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

Michael F. Hilton -- President and Chief Executive Officer

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

Walter Liptak -- Seaport Global Securities -- Analyst

Okay. Where is the shared services gonna be? Is it in one location?

Michael F. Hilton -- President and Chief Executive Officer

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

Walter Liptak -- Seaport Global Securities -- Analyst

Okay, great. All right. Thank you.

Gregory Thaxton -- Corporate Senior Vice President and Chief Financial Officer

In an existing facility.

Michael F. Hilton -- President and Chief Executive Officer

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

Walter Liptak -- Seaport Global Securities -- Analyst

Okay. Okay, thank you.

Michael F. Hilton -- President and Chief Executive Officer

Thank you.

Operator

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

Michael F. Hilton -- President and Chief Executive Officer

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

Operator

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

Duration: 59 minutes

Call participants:

Michael F. Hilton -- President and Chief Executive Officer

Gregory Thaxton -- Corporate Senior Vice President and Chief Financial Officer

Matt Summerville -- Alembic Global Advisors -- Analyst

Michael Halloran -- Robert W. Baird -- Analyst

Matthew Trusz -- Gabelli & Company -- Analyst

David Stratton -- Great Lakes Review -- Analyst

Jeffrey Hammond -- Keybanc Capital Markets -- Analyst

Christopher Glynn -- Oppenheimer Holdings -- Analyst

Walter Liptak -- Seaport Global Securities -- Analyst

Patrick Wu -- SunTrust Robinson Humphrey -- Analyst

Allison Poliniak-Cusic -- Wells Fargo Securities -- Analyst

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