H. B. Fuller Q2 2024 Earnings Report

H. B. Fuller EPS Results

• Actual EPS: $1.12
• Consensus EPS: $1.03
• Beat/Miss: Beat by +$0.09
• One Year Ago EPS: $0.93

H. B. Fuller Revenue Results

• Actual Revenue: $917.10 million
• Expected Revenue: $914.22 million
• Beat/Miss: Beat by +$2.88 million
• YoY Revenue Growth: +2.10%

H. B. Fuller Announcement Details

• Quarter: Q2 2024
• Date: 6/27/2024
• Time: After Market Closes
• Conference Call Date: Thursday, June 27, 2024
• Conference Call Time: 10:30AM ET

H.B. Fuller Company is a global manufacturer of adhesives, sealants and specialty chemical products. Its solutions are used to bond, seal, protect and assemble materials in commercial and industrial applications, including packaging, hygiene products, construction, transportation, electronics and durable goods.

The company offers products such as hot-melt, water-based and reactive adhesives, construction adhesives, sealants, coatings and specialty formulations. H.B. Fuller serves manufacturers, contractors and other commercial customers that require bonding and sealing solutions for products, components and building materials.

Founded in 1887 by Harvey Benjamin Fuller, the company has grown from a regional adhesive producer into an international supplier serving customers across North America, Europe, Asia-Pacific and Latin America. H.B. Fuller is headquartered in St. Paul, Minnesota, and operates through a global network of manufacturing, research and customer-support facilities.

H. B. Fuller Q2 2024 Earnings Call Transcript

Key Takeaways

• H. B. Fuller delivered a strong Q2 with organic volume up over 3%, flat organic revenue, adjusted EBITDA rising 10% to $157 million, and margin expanding 120 bps to 17.1%.
• The company is executing a $45 million restructuring program—targeting about $20 million of savings in 2024—to streamline its global footprint, improve ROIC and reach a >20% adjusted EBITDA margin within 3–5 years.
• By segment, Construction Adhesives grew organic sales 7% (with roofing up 20%), Engineering Adhesives returned to positive growth (+2.5%) with an 18.4% margin, and HHC saw volume gains offset by index-based pricing and reformulations.
• Fuller completed the strategic acquisition of ND Industries (VibraTite), adding about $80 million in annual sales at >30% EBITDA margin and expanding into fastener locking solutions at a post-synergy EV/EBITDA of ~6×.
• The 2024 outlook was raised to net revenue growth of 2–4% (organic 0–2%), adjusted EBITDA of $620–$640 million (7–10% growth), EPS of $4.20–$4.50, and operating cash flow of $300–$350 million, while reinitiating share repurchases to offset dilution.

Presentation

[Operator]

Thank you for standing by, and welcome to the H.B. Fuller Second Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press the star one. Thank you. I'd now like to turn the call over to Steven Brazones, Vice President of Investor Relations. You may begin.

[Steven Brazones, VP of Investor Relations at H.B. Fuller]

Thank you, operator. Welcome to H.B. Fuller's Second Quarter 2024 Investor Conference Call. Presenting today are Celeste Mastin, President and Chief Executive Officer, and John Corkrean, Executive Vice President and Chief Financial Officer. After our prepared remarks, we will have a question-and-answer session. Before we begin, let me remind everyone that our comments today will include references to certain non-GAAP financial measures. These measures are supplemental to the results determined in accordance with GAAP. We believe that these measures are useful to investors in understanding our operating performance and to compare our performance with other companies. Reconciliation of non-GAAP measures to the nearest GAAP measure are included in our earnings release. Unless otherwise noted, comments about revenue refer to organic revenue, and comments about EPS, EBITDA, and profit margins refer to adjusted non-GAAP measures. We will also be making forward-looking statements during this call.

[Steven Brazones, VP of Investor Relations at H.B. Fuller]

These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially from these expectations due to factors covered in our earnings release, comments made during this call, and the risk factors detailed in our filings with the Securities and Exchange Commission, all of which are available on our website at investors.hbfuller.com. I will now turn the call over to Celeste Mastin. Celeste?

[Celeste Mastin, President and CEO at H.B. Fuller]

Thank you, Steven, and welcome everyone. I'm very pleased with our strong second quarter financial performance, which reflects the team's steadfast commitment to execution while driving our long-term strategy to focus on more profitable, higher growth segments of the market. We continue to innovate and deliver customized, value-enhancing solutions to our customers while acquiring highly profitable, fast-growing businesses to expand our market presence in the most differentiated segments. As we execute our restructuring program focused on streamlining our global footprint, we are driving sustainable enhancements to our cost structure and improving our ROIC. In a large total addressable market where we win one application at a time, we continue to meaningfully move the needle and remain on track to deliver adjusted EBITDA margin greater than 20% in the next three to five years.

[Celeste Mastin, President and CEO at H.B. Fuller]

Looking at our consolidated results in the second quarter, our organic sales trend continued to improve, driven by organic volume growth of more than 3% during the quarter, with volume up in all three global business units. Overall, organic revenue was flat year-on-year, as volume growth was offset by reformulation activity and index-based pricing adjustments. From a profitability perspective, we executed well and delivered very strong results on slightly stronger than anticipated volume growth, consistent with our second half expectations. We grew adjusted EBITDA 10% year-on-year to $157 million and expanded adjusted EBITDA margin by 120 basis points year-on-year to 17.1%. Now, let me move on to review the performance in each of our segments in the second quarter.

[Celeste Mastin, President and CEO at H.B. Fuller]

In Engineering Adhesives, organic revenue increased 2.5% in the second quarter, marking a return to positive organic growth. Strength in the electronics, automotive, aerospace, and recreational vehicle market segments was partially constrained by slower demand in the woodworking and clean energy market segments. EA delivered a strong quarter, representative of our expectations, given the many growth segments in this GBU. Adjusted EBITDA increased 13% in EA, and adjusted EBITDA margin increased 160 basis points year-on-year to 18.4%. Favorable net pricing and raw material cost actions and restructuring benefits drove the increase in adjusted EBITDA margin year-on-year. In HHC, the organic revenue development improved sequentially on a return to positive volume growth. Reformulation activity and index-based pricing adjustments resulted in a decline in organic sales during the second quarter for HHC.

[Celeste Mastin, President and CEO at H.B. Fuller]

Strengthened bottle labeling, packaging, and medical partially offset continued, although lessening, organic sales declines in the hygiene market. Adjusted EBITDA was flat year-over-year for HHC in the second quarter, despite lower organic revenue and adjusted EBITDA margin expanded 50 basis points year-over-year to 16.6%. Favorable net pricing and raw material cost actions, restructuring benefits, and acquisitions drove the increase in adjusted EBITDA margin year-over-year. In construction adhesives, organic sales increased 7% year-over-year on strong demand in roofing, which achieved a 20% increase in organic sales. Construction market conditions have improved and are more consistent with a normal construction season thus far. Adjusted EBITDA for Construction Adhesives increased 24% versus the second quarter of last year to $23 million, and adjusted EBITDA margin expanded 90 basis points to 15%.

[Celeste Mastin, President and CEO at H.B. Fuller]

Net price and raw material cost management, improved volumes, and restructuring savings drove the improvement in adjusted EBITDA margin year-over-year. Geographically, Americas organic revenue was flat year-over-year in the second quarter. EA and CA both achieved positive organic growth during the quarter, and on a combined basis, achieved organic revenue growth of more than 6% year-over-year in the Americas region, driven by strong growth in electronics, aerospace, and roofing. HHC organic revenue declined 7% versus the prior year. The hygiene market, while slightly improved in the Americas, continued to negatively impact organic sales development for HHC in the region. In EIMEA, year-over-year organic revenue development, while still down, improved significantly relative to the first quarter, as expected. The organic sales development for all GBUs improved sequentially, although still declined modestly year-over-year.

[Celeste Mastin, President and CEO at H.B. Fuller]

This bounce back was expected, as much of the demand weakness experienced in the first quarter was temporary. We would expect the trend to continue to improve as we progress through the remainder of the year. In Asia Pacific, organic revenues increased 7% year-on-year, driven by strength in electronics, automotive, beverage labeling, and flexible packaging. Strength in China, which nearly achieved a double-digit increase in organic sales, drove the region's organic sales growth. We have a winning strategy, a focused team, and a strong track record of execution. Our path to 20% adjusted EBITDA margin is multifaceted and includes restructuring opportunities, volume growth, improved organic mix between growth and leverage market segments, and acquisitions of higher growth, higher margin businesses in the most differentiated adhesive applications. During the second quarter, we completed the acquisition of ND Industries.

[Celeste Mastin, President and CEO at H.B. Fuller]

This highly strategic and financially compelling acquisition expands our market presence into a new and exciting growth market segment, fastener locking solutions, which is a combined system of adhesives and mechanical fasteners. The acquisition accelerates one of our top growth priorities and is consistent with our focus on proactively driving capital allocation to the highest margin, highest growth market segments within the functional coatings, adhesives, sealants, and elastomer or CASE industry. As part of the acquisition, products under ND Industries' Vibra-Tite brand will be added to H.B. Fuller's existing epoxy, cyanoacrylate, UV-curable, and anaerobic product ranges. This acquisition represents a very financially compelling transaction for H.B. Fuller. ND's full year 2024 sales are expected to be approximately $80 million at greater than 30% EBITDA margin.

[Celeste Mastin, President and CEO at H.B. Fuller]

Total purchase price was approximately $250 million, equating to a pre-synergy enterprise value to EBITDA multiple of less than 10 times and a post-synergy EBITDA multiple of approximately six times. Our M&A pipeline is robust, and we continue to evaluate a number of potential transactions. We have proven the ability to acquire multiple companies while simultaneously reducing our leverage ratio. Given this capability, we have reinitiated our share repurchase program, allowing us to both invest for growth and return additional capital to shareholders. Now let me turn the call over to John Corkrean to review our second quarter results in more detail and our updated outlook for 2024.

[John Corkrean, EVP and CFO at H.B. Fuller]

Thank you, Celeste. I'll begin with some additional financial details on the second quarter. For the quarter, revenue was up 2.1% versus the same period last year. Currency had a negative impact of 1.7%, and acquisitions increased revenue by 3.9%. Adjusting for those items, organic revenue was down 0.1%, with volume up 3.3% and pricing down 3.4% year-on-year in the quarter. Adjusted gross profit margin was 31.1%, up 210 basis points versus last year, driven by the net effect of pricing and raw material actions, restructuring savings, and higher volume.

[John Corkrean, EVP and CFO at H.B. Fuller]

Adjusted selling, general, and administrative expense was up 9% year-over-year, as expected, with acquisitions driving approximately half of the increase and the rest of the increase resulting from higher wage inflation and higher variable compensation, partially offset by restructuring savings. Adjusted EBITDA for the quarter of $157 million was up 10% year-over-year, reflecting the net positive impact of pricing and raw material cost actions, volume leverage, restructuring savings, and the favorable contribution of acquisitions, which more than offset higher variable compensation and wage inflation versus the prior year. Adjusted earnings per share of $1.12 was up 20% versus the second quarter of 2023, driven by strong operating income growth.

[John Corkrean, EVP and CFO at H.B. Fuller]

Year-to-date, operating cash flow increased $21 million year-over-year on improved profitability and lower net working capital as a percentage of revenue. This strong growth in EBITDA and cash flow resulted in net debt to adjusted EBITDA of 3.1 times at the end of the second quarter, down from 3.3x at the end of the second quarter of last year. On a sequential basis, the ratio increased from 2.8x to 3.1x, reflecting the acquisition of ND Industries. On a pro forma basis, including the acquired EBITDA from ND Industries, net debt to adjusted EBITDA was 3.0 times at the end of the quarter. During the second quarter, we reinitiated our share repurchase program and acquired 182,000 shares.

[John Corkrean, EVP and CFO at H.B. Fuller]

Now that our net debt to adjusted EBITDA ratio has returned to more historical levels and given our expectations for continued strong free cash flow, we anticipate regularly repurchasing shares with the goal of offsetting annual share creep from equity-based compensation programs. With that, let me now turn to our guidance for the 2024 fiscal year. As a result of our strong first half performance and recent acquisition activity, offset somewhat by the impact of the strengthening U.S. dollar, we are updating our previously communicated financial guidance for fiscal 2024 as follows: Net revenue growth is now expected to be in the range of up 2%-4%, with organic revenue flat to up 2% year-on-year.

[John Corkrean, EVP and CFO at H.B. Fuller]

Adjusted EBITDA is now expected to be in the range of $620 million-$640 million, equating to growth of approximately 7%-10% year-on-year. Net interest expense is now expected to be approximately $130 million. Our adjusted effective tax rate is now expected to be between 26.5% and 27.5%. Full year depreciation and amortization expense is expected to be approximately $170 million, and our fully diluted share count is now expected to be approximately 56.5 million shares. Combined, these assumptions result in full year adjusted diluted earnings per share in the range of $4.20-$4.45, equating to year-on-year growth of between 9% and 15%.

[John Corkrean, EVP and CFO at H.B. Fuller]

We still expect full-year operating cash flow to be between $300 million and $350 million. Finally, based on the seasonality of our business, we would expect third quarter EBITDA to be in the range of $165 million-$175 million. Now, let me turn the call back over to Celeste.

[Celeste Mastin, President and CEO at H.B. Fuller]

Thank you, John. At H.B. Fuller, we are committed to working alongside our customers to test new ideas, optimize bonding performance, and develop highly tailored adhesive solutions. It is through this unique collaborative approach that we're able to innovate with speed and enable our customers' success. We have the privilege of collaborating with and creating solutions for an extensive group of customers. In April, we recognized the most innovative product introductions that resulted from these partnerships in 2023 by naming Anhui Huasun, GAF, and Niine as the inaugural winners of the H.B. Fuller Customer Innovation Awards. We are proud to recognize these customers for their exceptional achievements that leverage our unique technology to improve our world. Let me share a little more about this year's winners.

[Celeste Mastin, President and CEO at H.B. Fuller]

Anhui Huasun Energy is a market leader in solar panel construction, and their heterojunction technology solar modules were recognized for their ability to offer power that is more efficient and reliable than previous generations of solar modules. This improved solution has helped to facilitate the broader adoption of clean energy. GAF, a Standard Industries company and North America's largest roofing and waterproofing manufacturer, was recognized for its EnergyGuard Non-Halogenated Polyiso insulation, which gives architects and contractors an energy-efficient solution designed to help meet their sustainability goals. This product line offers excellent thermal value and is free of potentially hazardous flame-retardant chemicals. The product offering holds numerous sustainability certifications. Niine, a leading feminine hygiene company in India and producer of sanitary napkins, was recognized for introducing India's first biodegradable solution, which helps to mitigate adverse impacts on the environment.

[Celeste Mastin, President and CEO at H.B. Fuller]

This is particularly crucial in India, where high population density, combined with a still-developing disposal system for feminine products, has led to a push for more sustainable solutions. Incredibly, Niine's new product reduces the estimated decomposition time from 800 years to less than 18 months for a sanitary napkin in a landfill. Congratulations to these customers for innovating to improve our world and for being our inaugural Innovation Award winners. H.B. Fuller was also recognized for innovation in the second quarter, winning our second consecutive Annual Innovation Award from the Adhesive and Sealant Council, following our win in 2023 for our EV Protect product. This year, we were honored for our new thermoplastic encapsulant platform for photovoltaic modules used in the construction of solar panels.

[Celeste Mastin, President and CEO at H.B. Fuller]

Our products have application in newer thin-film modules and are advantaged by lower levelized costs of electricity, enabling the creation of solar panels that generate power at a lower cost per watt than traditional technology. We are very proud of our clean energy team, and we thank our peers at the ASC for the 2024 Innovation Award.... To wrap up, we are very pleased with our first half financial results and the continued incremental improvement we are driving throughout the business, consistent with our strategic plan. The team is executing well, and there is complete alignment across the organization. We have one focus: creating customized, value-added adhesive solutions for our customers. We're set to deliver another year of improved profitability and ROIC, strong cash flow, and we are on pace to achieve our long-term financial targets and drive attractive shareholder returns. That concludes our prepared remarks for today.

[Celeste Mastin, President and CEO at H.B. Fuller]

Operator, please open the line for questions.

[Operator]

Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one again. Your first question today comes from the line of Ghansham Panjabi from Baird. Your line is open.

[Matt Krueger, Senior Research Associate at Baird]

Hi, good morning, everyone. This is actually Matt Krueger sitting in for Ghansham. You know, I just wanted to focus my first question in on volumes for the quarter and for the rest of the year. So, you know, you highlighted that all three segments demonstrated volume growth. I think this is the first time since early 2022 that this can be said. But can you provide some added detail on segment volumes during the quarter specific to each segment? And then, you know, how the third quarter has kicked off, and maybe what your budgeted volume expectations by segment are for the year? Just trying to get a sense of what should we be thinking about for the second half.

[Celeste Mastin, President and CEO at H.B. Fuller]

Sure, Matt, and welcome. Good morning. So when you look at our volume performance over Q2 by segment, highest volume performance was logged in by our construction adhesive business, which you would expect. They're, they're mid-season right now, and last year was definitely a weak construction season. So they're up, volume growth is up double-digit percent. EA also had a strong quarter from a volume perspective and, you know, showed mid-single-digit volume growth. And HHC, low single-digit volume growth, but volume growth all the same. So we've seen the destocking that was occurring in HHC now solidly in the rear view mirror, and we're feeling good about all three of these businesses from a volume outlook perspective. When we look at P7, we're seeing continued strong performance on volume.

[Celeste Mastin, President and CEO at H.B. Fuller]

And actually, what we've seen is, you know, we were already projecting volume growth for the second half of the year and around mid-single digit, and we actually have now seen that earlier than planned, which really explains our second quarter.

[Matt Krueger, Senior Research Associate at Baird]

Got it. That's, that's helpful. And then, you know, just, you know, can you provide some added detail on, you know, the benefit from the cost optimization and, and restructuring of the business that's gone on so far? You know, how, how much have you achieved to date? You know, how much opportunity is there left under the, you know, the current program, the current effort? And then, you know, how should this progress through the remainder of the year? Maybe a, you know, a first-half contribution versus second-half contribution type split or something like that, just to give us a sense of the scale of the benefit that we're looking at.

[Celeste Mastin, President and CEO at H.B. Fuller]

Sure. So, so when we announced the restructuring last year, we announced a $45 million restructuring program over three years. In the first year, 2023, we delivered about $10 million toward that end. This year, we're on track for what will be about $20 million of restructuring savings, and the remainder will then occur in 2025.

[John Corkrean, EVP and CFO at H.B. Fuller]

Yeah, Matt, in terms of kind of impact by, you know, quarter or first half or second half, I would say we're probably seeing 35%-40% of that $20 million in the first half, and we'll see the rest in the second half. So it'll ramp up a little bit as we go through the year.

[Matt Krueger, Senior Research Associate at Baird]

Got it. Got it. That's helpful.

[Celeste Mastin, President and CEO at H.B. Fuller]

And that $20 million was incremental, Matt, right? On top of the-

[Matt Krueger, Senior Research Associate at Baird]

Yep

[Celeste Mastin, President and CEO at H.B. Fuller]

... 10. Yep.

[Matt Krueger, Senior Research Associate at Baird]

Yep, yep, yep. Makes sense. Okay, that's it for me. I'll, I'll hop back in. Thank you very much.

[Celeste Mastin, President and CEO at H.B. Fuller]

Great. Thanks, and our regards to Ghansham.

[Matt Krueger, Senior Research Associate at Baird]

Great. Thank you.

[Operator]

Your next question comes from the line of Kevin McCarthy from Vertical Research Partners. Your line is open.

[Kevin McCarthy, Partner at Vertical Research Partners]

Yes, thank you, and good morning. Celeste, congrats on the acquisition of ND Industries. Just wondering if you could maybe address a few questions related to that deal. In listening to your comments on sales and margins, would it be fair to say that you're baking in, say, $5 million-$7 million of EBITDA per quarter in the back half of the year? And then just qualitatively, maybe comment on your early experience now that you've owned it for five weeks, and maybe what the integration roadmap looks like over the near term and, you know, medium-term strategic thoughts. Those sorts of comments would be welcome.

[Celeste Mastin, President and CEO at H.B. Fuller]

Sure, Kevin, and good morning. So we're baking in, call it $13 million of benefit from ND in the second half. So about $6 million a quarter. And our experience with the team to date has already just been amazing. We acquired some terrific technology there and some amazing, amazing people. You know, when you look at their business, a portion of that business was adhesives that they produced under the Vibra-Tite brand. And, you know, we have, we're a believer in that brand. We love that brand. Mark, we already had a lot of cyanoacrylates, and UV curables and epoxy systems. What they had that was really unique for us was a very advanced anaerobic product offering. And so when you look at this anaerobic product offering, it's tremendous.

[Celeste Mastin, President and CEO at H.B. Fuller]

They take what's basically a two-part epoxy, they encapsulate that, they impart that into a carrier system, a liquid carrier system, which then gets coated on a mechanical fastener. And it remains in there, you saw the pictures on the presentation we just showed, until the threads are combined. And when the threads are combined, the product mixes and cures into what is really a structural bond. So this is... You know, we're excited to bring this to even more of our big OEM customers in the aerospace and automotive space. Think heavy equipment. This really provides a strong structural bond. And part of the business that we acquired is also the actual coating of these customers' fasteners.

[Celeste Mastin, President and CEO at H.B. Fuller]

So this brings us even closer to our customer base and allows us to do what we know how to do very well, which is apply adhesives. So, you know, as I look at the operation, it's a very good fit for us because it capitalizes on two things we do very well. One, formulate adhesives that meet customer needs, and secondarily, understand how those adhesives are actually applied in use to the extent that we're doing the applying now at ND. From an integration perspective, we're implementing based on our standard integration playbook. So we've got a regimented group of activities that we do regularly, that are scheduled through, you know, each month throughout the next two years. And even today, our leader, our legacy H.B.

[Celeste Mastin, President and CEO at H.B. Fuller]

Fuller leader, and the leader from that business that we've acquired, who now becomes a market segment leader here at H.B. Fuller, are already in Europe looking at opportunities with customers there to geographically expand the business. In fact, one of the tailwinds that we really appreciated in the business was that one major competitor to ND Industries, because of supply chain issues, had decided to exit the market, leaving an opportunity for us to grow volume there and expand rather quickly. So we've got a really grand plans for ND Industries, and we're so glad to have that team on board.

[Kevin McCarthy, Partner at Vertical Research Partners]

That's super helpful. As a second question, Celeste, I was wondering if you could comment on your price experience in each of the segments in the second quarter. And taking into account that, you know, your comparisons look very different on pricing moving forward, how would you characterize pricing prospects for the fiscal third quarter? Do you... Would you expect, you know, the negative numbers there to flatten out or perhaps even turn back to positive territory at some point?

[Celeste Mastin, President and CEO at H.B. Fuller]

Yeah, so there's a few impacts affecting pricing, that affected price in the second quarter, but, you know, that I can speak to for the second half. HHC does have a lot of index-based pricing agreements, which I've spoken about before. And when you look at our pricing performance in both the first quarter and the second quarter of this year, a lot of that negative, the negative numbers there were driven by the correction that's happening on these index-based pricing agreements. What we're seeing to date is that raw materials are steadily increasing. We monitor about 4,000 different raw materials. And as I look forward, about, you know, 80% of those are flat to increasing.

[Celeste Mastin, President and CEO at H.B. Fuller]

So we will see with these big customers, the index-based pricing agreements start to level out in the third quarter and then increase with rise over time. The other pricing experience we're having, that we'll see more of in the second quarter is reformulating products. So particularly in an environment like this, when customers are very cost sensitive, they will ask for help on their, on their product, on their customer, on their adhesive price. And typically, what we will do, where it makes sense, is to work with them to replace certain raw materials within their existing formula with others that are lower cost or come from different suppliers, in order to overall reduce the price we can offer that customer on that product. So, you know, we're lowering our costs as we do that.

[Celeste Mastin, President and CEO at H.B. Fuller]

We're sharing it with the customer, and there's not a margin impact to us, but you will see a pricing impact start to occur. So when we look at our, you know, full year guidance, you know, while we had been projecting price of, you know, -2% to -3%, we are more in the, you know, we're gonna see a little more in the 1%-2% range at this point.

[Kevin McCarthy, Partner at Vertical Research Partners]

Perfect. Thank you so much.

[John Corkrean, EVP and CFO at H.B. Fuller]

Maybe I can just add a little color, just if you're thinking about this sequentially, Kevin, for, for purposes of modeling. So, you know, first half of the year, our prices were down roughly 3.3%-3.4%, and as Celeste said, that will narrow as we go through the back half of the year, you know, based on the fact that indexes have now leveled, and we'll, we'll actually start to see a little bit of benefit from those. We'll also annualize against some of the price adjustments we had in the second half last year. So if you're thinking about, you know, the 3 to, you know, 3-ish, 3.5% in the first half, I would say in Q3, it'll probably be closer to, you know, a -2%.

[John Corkrean, EVP and CFO at H.B. Fuller]

In Q4, maybe, you know, kind of -1% to -2%, something in that range.

[Kevin McCarthy, Partner at Vertical Research Partners]

I see. Thank you, John.

[Operator]

Your next question comes from the line of Patrick Cunningham from Citi. Your line is open.

[Celeste Mastin, President and CEO at H.B. Fuller]

Morning, Patrick. [crosstalk]

[Patrick Cunningham, Vice President and Senior Analyst at Citi]

Good morning, John. Yeah, I think it just-- I think in terms of HHC, I wanted to drill down into, you know, volume outlook there for the year. I, I think you've cited some ongoing softness in the hygiene space. I guess the first part of the question is, is destocking mostly complete within that sector, and how should we expect it to evolve throughout the year? And then just broadly across HHC, it does seem we're getting some, you know, lingering, you know, data points on consumer weakness in the U.S. and Europe still somewhat weak. So you know what-- You know, what's your level of confidence in, you know, solid positive volumes in the back half across HHC?

[Celeste Mastin, President and CEO at H.B. Fuller]

Yeah.

[John Corkrean, EVP and CFO at H.B. Fuller]

Sorry, Patrick. So I would say we would expect the volume trends to continue. We saw that from Q1 to Q2, and I think if you look across the portfolio, you know, it's generally, we've seen a return to volume growth in almost every market segment. So, you know, eight out of the 12 market segments are showing volume growth in Q2. Hygiene continues to be a soft spot. We've spoken about that in the, during the last call, but that's actually improved quite a bit from Q1 to Q2. So I think we would expect to see, you know, an improvement each of the next two quarters. I think we're still projecting that the hygiene volume, or I should say, hygiene organic for the full year will be down kind of low single digits.

[John Corkrean, EVP and CFO at H.B. Fuller]

But you will see you should see an improvement each of the next two quarters.

[Celeste Mastin, President and CEO at H.B. Fuller]

Yeah, when I think about the year, organic growth for the year in HHC, it'll be a slight negative, but most of that will be. Well, that will be entirely pricing overcome to some extent by volume.

[Patrick Cunningham, Vice President and Senior Analyst at Citi]

Got it. That's helpful. And then just on in terms of expectations for, you know, capital expenditures, free cash flow for the year, you know, where do we stand there? And just given the sizable acquisition that you did, should we expect more of a bias towards repurchases for the balance of the year, or would you maybe still have appetite for another, you know, $100 million plus deal here?

[Celeste Mastin, President and CEO at H.B. Fuller]

So when you look at our capital forecast, it remains at $140 million for the year. And let's just talk for a few minutes about the M&A pipeline. So our M&A pipeline is very robust. We continue to identify and work closely with owners of businesses in those select spaces, where we can acquire at reasonable prices, businesses that are much higher EBITDA margin than our own, which you saw. You know, ND Industries is a great example of that, and that are in, you know, faster-growing spaces. So I think, you know, safe for you to consider for modeling purposes, you know, expenditures of up to $350 million in M&A this year.

[Patrick Cunningham, Vice President and Senior Analyst at Citi]

Got it. Thank you.

[Celeste Mastin, President and CEO at H.B. Fuller]

Well, your question on repurchase. So we'll continue to repurchase-

[Patrick Cunningham, Vice President and Senior Analyst at Citi]

Great [crosstalk]

[Celeste Mastin, President and CEO at H.B. Fuller]

... shares to offset equity-based compensation programs. You've seen us initiate that in Q2. We'll continue that throughout the year.

[Patrick Cunningham, Vice President and Senior Analyst at Citi]

Great. Thank you so much.

[Operator]

Your next question comes from a line of Jeffrey Zekauskas from J.P. Morgan. Your line is open.

[Celeste Mastin, President and CEO at H.B. Fuller]

Morning, Jeff.

[Jeffrey Zekauskas, Analyst at JPMorgan]

Thanks, great. Hi, good morning. Thanks very much. In terms of the financial leverage that Fuller is willing to bear to execute its acquisition program, is it fair to say that you want to stay within a three to four times unless something really unusually good came up? Is that where we're evolving to for 2024 and 2025?

[Celeste Mastin, President and CEO at H.B. Fuller]

No, Jeff. So I would put that range in the 2.5x-3x. And that's where we've been operating over the course of this year. You know, now we're at 3.1 with ND Industries. But as you look back, what you see is that as we acquire these businesses, we have simultaneously been able to continue to reduce that leverage, given the strong synergies that come with the businesses we're buying, their EBITDA, and our ability to further grow their EBITDA. So I'd consider 2.5x-3x as more so the reasonable range of operation.

[Jeffrey Zekauskas, Analyst at JPMorgan]

Okay. And then, maybe a couple of questions for John. The benefit from ND in the second half is more than $10 million, and you increased the lower end of your guide by $10 million. So is it the case that the base business, for whatever reason, is a little bit weaker than you expected because the increase is smaller than the acquisition benefit?

[John Corkrean, EVP and CFO at H.B. Fuller]

Yeah, it's probably-

[Jeffrey Zekauskas, Analyst at JPMorgan]

Secondly... I'm sorry, if I can-

[John Corkrean, EVP and CFO at H.B. Fuller]

No, go ahead. Go, go ahead, Jeff.

[Jeffrey Zekauskas, Analyst at JPMorgan]

I'm sorry. Then secondly, your EBITDA was up about 10%... Your adjusted EBITDA was up about 10% this quarter, and but, your acquisition sales benefit was about four, 4%. So, you know, that's a... So when I do the calculation, it looks like acquisition benefits from EBITDA were about $6 million. So what I get is sort of an organic EBITDA growth of about 5.5%. Is that a calculation that's roughly right?

[John Corkrean, EVP and CFO at H.B. Fuller]

Well, I think you'd have... So let me go to your first question-

[Jeffrey Zekauskas, Analyst at JPMorgan]

Sure

[John Corkrean, EVP and CFO at H.B. Fuller]

... around the guidance. So the $10 million, yeah, that's roughly right. It's a little bit more than that. You know, one of the things we saw in the second quarter was a continued strengthening of the US dollar, and we factored that into our guidance as well. We saw that start to show up in Q2. It kind of increased as we went through Q2, and we would expect the full year to be about a -2% impact from FX. So, you know, that would reflect, you know, a higher impact in the second half. You had devaluation of the Egyptian pound. Turkish lira was down about 7%, and then you have the renminbi/euro also weakening against the dollar. So we factored that into the second half.

[John Corkrean, EVP and CFO at H.B. Fuller]

That pretty much offsets the impact of the ND Industries contribution to EBITDA. So, you know, we kind of look at it as we're adding ND, we've got some negative FX, and the guidance, for the most part, in the second half is unchanged.

[Jeffrey Zekauskas, Analyst at JPMorgan]

Mm-hmm.

[John Corkrean, EVP and CFO at H.B. Fuller]

When you look at the second quarter, yeah, I think the $6 million might be a bit high. We only got $1 million from ND Industries in the quarter. It's probably around $4 million, but I get your point.

[Jeffrey Zekauskas, Analyst at JPMorgan]

Yeah.

[John Corkrean, EVP and CFO at H.B. Fuller]

The other impact you have to factor in, though, is FX, right? Because it wasn't nearly -2% impact.

[Jeffrey Zekauskas, Analyst at JPMorgan]

Mm-hmm. Yep.

[John Corkrean, EVP and CFO at H.B. Fuller]

So, yeah, I think on an, you know, netting out FX and, and ND, it's maybe a little less than 10%, but it's high single digits.

[Jeffrey Zekauskas, Analyst at JPMorgan]

Mm-hmm. And just if I could squeeze in one last one,

[Celeste Mastin, President and CEO at H.B. Fuller]

Sure.

[Jeffrey Zekauskas, Analyst at JPMorgan]

Maybe this is for Celeste. What kind of growth rate do you expect for ND in sales over a 3-5 year period, and what's been its historical growth rate?

[Celeste Mastin, President and CEO at H.B. Fuller]

Yeah, so growth rate over a 3-5 year period, you know, we're looking revenue growth for greater than 10% per year on that business.

[Jeffrey Zekauskas, Analyst at JPMorgan]

Mm-hmm.

[Celeste Mastin, President and CEO at H.B. Fuller]

Historically, it has not performed to that level, but that has primarily been because it's, it's been a little capital constrained, right? You know-

[Jeffrey Zekauskas, Analyst at JPMorgan]

Mm-hmm

[Celeste Mastin, President and CEO at H.B. Fuller]

... this is, private owners, you know, throw everything into these businesses, and, you know, it could use $2 million more CapEx here and there. They have expanded over time in sort of stages-

[Jeffrey Zekauskas, Analyst at JPMorgan]

Mm-hmm

[Celeste Mastin, President and CEO at H.B. Fuller]

... and we're just at the point where they're ready for that next stage of expansion.

[John Corkrean, EVP and CFO at H.B. Fuller]

Yeah, and just to add to that, Jeff,

[Jeffrey Zekauskas, Analyst at JPMorgan]

Yeah, go ahead.

[John Corkrean, EVP and CFO at H.B. Fuller]

You know, Jeff, Celeste had commented, you know, a major competitor, you know, leaving the U.S. market creates a big opportunity in the near term. But the big opportunity is geographic expansion, right? This is a business that's almost entirely U.S.-based. As Celeste alluded, you know, we've already got the team looking at opportunities in Europe. There's opportunities in Asia. So, you know, this will be a deal that brings a lot of commercial synergies with it.

[Celeste Mastin, President and CEO at H.B. Fuller]

That, that's something that we are much better suited to do than a private owner, given that we already have a well-entrenched footprint around the world.

[Jeffrey Zekauskas, Analyst at JPMorgan]

Mm-hmm. Great. Thank you so much.

[Celeste Mastin, President and CEO at H.B. Fuller]

Sure.

[Operator]

Your next question comes from the line of Mike Harrison from Seaport. Your line is open.

[Celeste Mastin, President and CEO at H.B. Fuller]

Hey, Mike.

[Mike Harrison, Managing Director and Senior Chemicals Analyst at Seaport]

Hi, good morning. Congrats on a nice quarter. Was wondering if we could talk a little bit about the Engineering Adhesives business. I guess, first of all, I'm curious if you can walk through the volume growth that you're seeing in some of the key end markets within that business. I assume that electronics was still kind of leading the pack, but what are you seeing in areas like transportation, clean energy, and some of the stuff that's exposed to construction markets?

[Celeste Mastin, President and CEO at H.B. Fuller]

Yeah, sure. So really strong this quarter in EA were automotive, aerospace, electronics, RV, and glass, and I'll talk about all of these. So automotive is you know a business where we are aggressively taking share. It's been strong. It's gonna remain strong in the second half. In fact, we've seen double-digit increases. I'm talking 20%-60% increases in interior trim applications, in exterior trim applications, like plastic lift gates and adding spoilers to automotive structures, the EV powertrain. In fact, we're making a thermally conductive gap filler now being used in the EV powertrain, in the lighting applications, so in headlight sealants and headlight controls.

[Celeste Mastin, President and CEO at H.B. Fuller]

You know, so the team has really been able to work as a strong innovation partner with these big companies around the world in the automotive space, and has, you know, become part of the innovation process with these customers. So I anticipate automotive being very strong, both the ICE units as well as EVs, where we have an incredibly strong position in China, working with many of the EV producers. In glass, you know, the glass business is really been. There's a lot of momentum in the glass business that's driven by our 4SG innovation, which is a unique product that enables, you know, a lot of architectural advances, as well as thin pane triples, right?

[Celeste Mastin, President and CEO at H.B. Fuller]

In the glass business, the most automated customer in Europe actually just committed 100% of all their business to us. In the U.S., we've leveraged our profile wrapping position with one U.S. OEM from 25% share to 100% share, thanks to the product quality and the customer service we bring. You know, again, this market is gonna continue to grow for us, regardless of what happens in construction, and we're seeing. And I say that because of the innovation, right? We're seeing customers invest in 4SG lines in the second half, so that'll continue to grow. We'll continue to grow in that ultimate end market. Aerospace has been incredibly exciting. We just introduced a non-chrome corrosion-inhibitive sealant for fuselage sealing for aerodynamic smoothing. We've taken some share with that.

[Celeste Mastin, President and CEO at H.B. Fuller]

We've taken share in trim in the aerospace environment because we have flame, smoke, toxicity-approved products for the interior trim. And we just won some business in India, in aerospace, polysulfides for sealing the door hatches on emergency doors, which I'm sure we're all very glad about, and the edge sealing on parts of helicopters. So a lot of strong performance, really, as I see this aerospace team take this advantage portfolio we have and start to now introduce it around the world because of this global market segment leader structure that we're operating within. And then finally, electronics. I mean, what can I say? The electronics business has been growing like crazy. Really, our position in China has been a nexus of that growth.

[Celeste Mastin, President and CEO at H.B. Fuller]

We're very involved with customers there in their development process, and we actually just moved our leader of our consumer electronic space from China to the US to ensure, again, that we're effectively expanding that electronics business in every region we possibly can. So, we're pretty happy with the EA business and their growth potential and what we're seeing there. In fact, most of our growth segments, when you look at how the growth versus leverage segments are allocated within our GBUs, about two-thirds of them are in the EA business. In fact, we've just added another with fastener locking systems. But, you know, another growth opportunity in that space is E-Power. I actually just met with a customer in the E-Power space who's introducing new battery technology for the non-passenger car EV battery market, and we're their exclusive supplier.

[Celeste Mastin, President and CEO at H.B. Fuller]

So we've got customers in India buying EV Protect for battery applications. I mean, it's really a very exciting space for us, and it is growing. It's growing quickly.

[John Corkrean, EVP and CFO at H.B. Fuller]

Mike, you had asked about, you know, the impact of kind of the construction-oriented markets.

[Mike Harrison, Managing Director and Senior Chemicals Analyst at Seaport]

Yeah.

[John Corkrean, EVP and CFO at H.B. Fuller]

because we did call that out in Q1 as a soft spot for Engineering Adhesives, which seemed probably a little counter to the comments we were making about construction, our construction adhesives business unit. But remember, I think we tried to make it clear that the construction business, our construction business, is almost entirely U.S.-based, which is performing very well. The EA businesses in that are construction related, glass, woodworking, panels, are very global, and Europe was really slow in Q1. That improved in Q2. So those are the. So we're seeing improvement in the construction-related businesses. Celeste called out glass as one of kind of the highlights. So that's a positive sign, and we would expect that to continue into the second half.

[Mike Harrison, Managing Director and Senior Chemicals Analyst at Seaport]

All right. That's definitely helpful color. And then the EBITDA margin in your Engineering Adhesives business, pretty strong. You said 160 basis points of year-over-year improvement.

[Mike Harrison, Managing Director and Senior Chemicals Analyst at Seaport]

... I know that long term, you see EA as a segment that can consistently deliver 20% EBITDA margin or higher. Is that 20% margin level something that, that we should expect you guys to achieve in the second half based on what you're seeing today?

[John Corkrean, EVP and CFO at H.B. Fuller]

So Mike, I would say, you know, we were at 18% in Q2. You know, we would expect that to step up as we see continued volume improvement and ND. So yeah, I think the second half average should be closer to 20% than the 18.

[Celeste Mastin, President and CEO at H.B. Fuller]

That's in the second half. When we think about where we're taking the portfolio over the next three years, our aim is for H.B. Fuller to be, in total, a 20% EBITDA margin business. How are we gonna get there? Remember, we have the growth segments, and we have the leverage segments. Our growth segments need to deliver 25% EBITDA margin, plus our leverage segments need to be above 15. Our leverage segments are already pretty close to 15, so our objective now is to continue to acquire and grow in these faster-growing, higher-margin spaces, very differentiated spaces. And to your point, you know, watching... You know, you'll be watching EA in the lead to that end.

[Mike Harrison, Managing Director and Senior Chemicals Analyst at Seaport]

All right. Thanks very much for the additional color.

[Celeste Mastin, President and CEO at H.B. Fuller]

Thanks, Mike.

[Operator]

Again, if you would like to ask a question, press star one on your telephone keypad. Your next question comes from the line of David Begleiter from Deutsche Bank. Your line is open.

[David Huang, VP of Equity Research at Deutsche Bank]

Hi, this is David Huang in for Dave. I guess just going back to the guidance, it sounded like volume is tracking ahead of expectation, and pricing will become less negative in the second half. Why did you reduce the top end of your organic sales guidance from 3%-2%?

[John Corkrean, EVP and CFO at H.B. Fuller]

Hey, David. So, you know, the two adjustments we made is we actually changed our guidance from 0%-3% organic growth to 0%-2% organic growth. And the two changes we made were effectively, we took the impact of price for the full year from about -1% to 2% to -2% to 3%. And volume, we were projecting a full year impact of 2%-4%, and now we're projecting 3%-4%. So we actually kind of upped the volume assumption on the bottom end of our range and then offset that with a slightly more negative impact from price.

[David Huang, VP of Equity Research at Deutsche Bank]

Okay, got it. And then on working capital, do you still expect that to be a source of cash for the full year?

[John Corkrean, EVP and CFO at H.B. Fuller]

You know, I think we're... I'm not sure it's going to be a source of cash. I think it was a source of cash in Q1, and a use of cash in Q2 as we return to volume growth. So it's gonna be, I think, for the full year, probably relatively neutral. We still expect kind of our full year working capital to get down, you know, closer to 16%, or to closer to, you know, between 15% and 16%. So we believe we'll see continued sequential improvement, but year-over-year, it will probably be up because of the volume growth.

[David Huang, VP of Equity Research at Deutsche Bank]

Okay, got it. Thank you.

[Celeste Mastin, President and CEO at H.B. Fuller]

You know, back to your, back to your price volume comment, David. I mean, when you look at the change in midpoint for our adjusted EBITDA projection, you know, really, when you think about it, we're going, we're increasing our midpoint by about $5 million, which you've seen in Q2, and offsetting the benefit of ND Industries with FX. So not, not a lot of other changes happening.

[David Huang, VP of Equity Research at Deutsche Bank]

Okay, got it. Thank you.

[Operator]

Your next question comes from the line of Rosemarie Morbelli from Gabelli Funds. Your line is open.

[Rosemarie Morbelli, Portfolio Manager at Gabelli Funds]

Thank you. Good morning, everyone, and congratulations on the strong quarter.

[Celeste Mastin, President and CEO at H.B. Fuller]

Thanks, Rosemarie.

[Rosemarie Morbelli, Portfolio Manager at Gabelli Funds]

Celeste, the company's focus and obviously ND, the ND acquisition is showing that you are following the playbook you have mentioned previously. On the leverage categories, with a margin of 15%, are there any divestiture potential that we should expect in order for you to get to that 20%+ EBITDA margin over the next three to five years?

[Celeste Mastin, President and CEO at H.B. Fuller]

Yeah, so when you look at that leverage category, we are, we are very close to 15%, and, you know, we don't have many businesses that don't deliver a benefit. Now, we are looking at all of them with a very different lens than we have in the past. As you know, we have requirements to be a leverage business revolving around raw material scale, ability to pick where we play selectively. So that's, that's always the first thing we'll look at. We'll look at a market segment and say, "Can... We wanna stay in as many of these segments as we can. If we pick where we play effectively, is this gonna be a higher margin, but maybe a little smaller business?" So that's sort of the first evaluation point.

[Celeste Mastin, President and CEO at H.B. Fuller]

If we find, you know, as we're going through the portfolio, if we see a business that we don't think meets our leverage parameters, can't meet those characteristics, we'll certainly consider divesting it. One thing to keep in mind is that in this business, while our plants and infrastructure is allocated to a global business unit for management purposes, almost all of our plants are technology-based, and they produce for multiple business units. So the prospect of separating out a market segment and exiting it can have other consequences where we have shared plants. So it is, it's a complicated evaluation, but certainly we have it underway, and we're very, you know, critically evaluating all of these businesses on a regular basis.

[Rosemarie Morbelli, Portfolio Manager at Gabelli Funds]

Thanks, Celeste. So you just said that all of the plants are servicing, so if I can use that term, all of your operations, all of your businesses. So how do we go from that comment to restructuring and eliminating, lowering your overall infrastructure?

[Celeste Mastin, President and CEO at H.B. Fuller]

So, so most of them are shared, most of them are technology-based. That doesn't mean that there's not opportunity or redundancy to eliminate plants. And in fact, since we started our optimization exercise, we've announced that we're exiting nine, nine plants out of the 80 that, I started with. So, so there are opportunities to continue to streamline the footprint. We're at nine today, and as I look forward, you know, I see there's... We're evaluating three to six more, right now we have in process. So, so there are ways to rethink our infrastructure that we are, that we are focused on. Secondarily, I would say we've also started looking at our warehouse infrastructure, and in the U.S., we have a network optimization program underway to evaluate and streamline our warehouse infrastructure.

[Celeste Mastin, President and CEO at H.B. Fuller]

So, you know, there's quite some opportunities to take fixed costs out of this business. That's never easy, and we want to be very careful as we proceed forward, but there are many opportunities.

[Rosemarie Morbelli, Portfolio Manager at Gabelli Funds]

Thank you. And if I may sneak in one last one. Looking at any, ND 30% EBITDA margin, that was when they were operating on their own and not as part of a public company. Are you allocating some of the additional costs of being public, and therefore, their growth, we can anticipate that margin not to stay at that 30% level?

[Celeste Mastin, President and CEO at H.B. Fuller]

You should anticipate that margin to remain and increase over time. Yes. I mean, they certainly will end up supporting some corporate costs, but there are also synergies on the business and opportunities for us to reduce cost within it, so that we, you know, will employ. Plus, as we continue to expand the business and grow volume, we'll get additional operating leverage out of that. So, I'd say 30%'s the low watermark, Rosemarie.

[Rosemarie Morbelli, Portfolio Manager at Gabelli Funds]

Okay. Thank you very much.

[Celeste Mastin, President and CEO at H.B. Fuller]

Thank you.

[Operator]

That concludes our question and answer session. I will now turn the call back over to Celeste Mastin for closing remarks.

[Celeste Mastin, President and CEO at H.B. Fuller]

Thanks, everyone, for joining us. We look forward to speaking with you again next quarter.

Participants

Executives

• Celeste Mastin, President and CEO
• John Corkrean, EVP and CFO

Analysts

• David Huang, VP of Equity Research at Deutsche Bank
• Jeffrey Zekauskas, Analyst at JPMorgan
• Kevin McCarthy, Partner at Vertical Research Partners
• Matt Krueger, Senior Research Associate at Baird
• Mike Harrison, Managing Director and Senior Chemicals Analyst at Seaport
• Patrick Cunningham, Vice President and Senior Analyst at Citi
• Rosemarie Morbelli, Portfolio Manager at Gabelli Funds
• Steven Brazones, VP of Investor Relations at H.B. Fuller