H. B. Fuller Company

Good morning, and welcome to the HB Fuller Q1 2020 Quarterly Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Barbara Doyle, Vice President, Investor Relations. Please go ahead.

Good morning and welcome to HB Fuller's first quarter 2020 earnings call for the fiscal quarter ended February 29, 2020. Our speakers are Jim Owens, HB Fuller President and Chief Executive Officer, and John Corcoran, Executive Vice President and Chief Financial Officer. After our prepared remarks, we will take questions. Please let me cover a few items before I turn the call over to Jim. First, a reminder that our comments today will include references to non-GAAP financial measures and references to organic revenue, which excludes the impact of foreign currency fluctuation and the impact of acquisitions and divestitures. On today's call, unless otherwise specified, discussions of sales and revenue refer to organic revenues, and discussions of EPS, margins, or EBITDA refer to adjusted non-GAAP measures. These measures are in addition to the GAAP results in our earnings release and in our forms 10Q and 10K. We believe that discussion of these measures is useful to investors to assist in the understanding of our operating performance and the comparability of results with other companies. Reconciliation of non-GAAP measures to the nearest GAAP measure is included in our earnings release. Also, we will be making forward-looking statements during this call. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Many of these risks and uncertainties are and will be exacerbated by the COVID-19 pandemic and any worsening of the global business and economic environment as a result. Actual results could differ materially from these expectations due to factors discussed in our earnings release, comments made during this call, or risk factors in our Form 10-K filed with the SEC and available on our website at hbfuller.com. Now let me please turn the call over to Jim Owens.

Thank you, Barbara. I'd like to first express my thanks and concern to everyone on the call, and especially those of you from New York that are in the epicenter of the U.S. COVID-19 crisis. I know you're dealing with the challenges in your personal lives and inside your own companies, and I appreciate you being here to understand what's happening within HB Fuller. At HB Fuller, we've been dealing with this crisis since January 23rd, when Hubei province went on lockdown. 18% of our employees and 12% of our revenue are from China, and we quickly learned how to manage social distancing, supply chains, quarantines, and delivery of essential products. We've used that experience and the experiences we have seen as China has begun to return to normal to guide our business plans, and our expectations going forward in other parts of the world. A significant portion of our business in China and around the world supports hygiene, health, food, and other consumer products, which have seen a significant increase in demand as consumer buying habits have shifted to using products at home. Our position as the largest dedicated manufacturer of adhesives in the world and our culture of global collaboration have positioned us to manage the supply chain and resource needs of the business more effectively than our competitors, both big and small. Our company is holding the world together in a time of crisis, whether in a personal hygiene product for your baby, a complex medical filter, electronic communication device, or packaging for the foods we're all eating at home. HB Fuller is there as an essential product in our lives. It is this capability to meet the diverse technical adhesive needs of manufacturers across the world that is the long-term value our company provides to the world and to our shareholders. We are squarely focused on protecting that long-term value for you, the shareholders who own this company, along with the employees who run it, and the billions of people in the world who rely on our products in their daily lives As a result of our actions through this crisis, we will be a stronger company, better positioned for growth after the economy recovers from the crisis. Last evening, we announced our financial results for our first quarter of fiscal 2020. Adjusted EBITDA of 78 million and adjusted EPS of 34 cents were both in line with our guidance for the first quarter, which did not reflect any estimated impact from the COVID-19 outbreak. Given the extensive disruption that this disease caused in China in the first quarter, this was an outstanding result and reflects the broad end market diversification of our business, the resiliency of our business model, and terrific work on the part of the HB Fuller team. Additionally, we continue to drive outstanding cash flow improvement with cash flow from operations up significantly year on year in the quarter and our debt pay down plan for the year intact. Let me start by talking about what we are seeing on the ground, how COVID-19 is impacting our business, and how our experience in China is guiding our plans and actions as the pandemic slows in China while it ramps up in the rest of the world. Based on our success and lessons learned in China, we have already taken steps for business continuity and to operate effectively during this period of uncertainty, making sure that we are keeping our employees safe and healthy through social distancing and hygiene actions, while meeting all of our customers' needs. We estimate that the disruption caused by COVID-19 and the shutdown in China to address it had a negative impact of approximately $15 million on revenue in the quarter. China was the only affected geography in the quarter, with 75% to 80% of the impact in engineering adhesives and the remainder in health, hygiene, and consumables. We estimated that this sales decrease in China translated to a negative impact on EBITDA of about 4.5 million and EPS of about six cents in the quarter. The outbreak began to affect our operations in China in late January. We have approximately 1,000 employees in China, all of whom are safe with no reported infections. During the first quarter, the disruption to our raw material supply was very limited given our robust global supply chain and well-established business continuity plans. As part of those plans, we have been actively securing alternate raw material sources, quickly locking down supply of materials where we anticipated shortage could occur. We have six factories in China, none in the Hubei province. All but one of our six factories have been fully operational since the extended Lunar New Year holiday ended on February 10th, and all of our factories have now reopened and returned to normal production levels. In our China engineering adhesive business, We see March results at about 80% of expected levels, and based on market feedback, expect April to be at about 90% of expected levels. Our hygiene, health, and consumable demand is above budgeted levels in March, as supply chains for these consumable goods are refilled, and we expect that to continue into April and move back to normal levels in May. The total three-month impact on HHC in China is resulting in a shift of volume across the months, but not an overall decline in the total demand. Our engineering adhesive business is seeing about a 30 percent total decline from expected levels. Our planning assumptions assume similar short-term impacts in Europe, North America, and other parts of the world, combined with recessionary impacts related to reduced employment and reduced consumption in other sectors of the economy. We are already seeing this scenario play out in Europe and North America. Our March demand numbers are up significantly in HHC and down slightly in engineering adhesives. Our April projections show continued strong demand in HHC and sizable reductions in engineering adhesive market segments beginning to hit our numbers in April. We believe that our global supply strategy, robust business continuity plans, and outstanding leadership on the ground provided us a meaningful competitive advantage in China during this challenging first quarter. As we prepare for disruptions to ramp up in other geographies in the coming weeks, the protocols we are implementing are similar as we leverage the lessons learned in China. From implementing disinfectant and social distancing procedures utilizing internal chat tools to connect to each person in the company, ensuring effective remote work capabilities as practical and appropriate, allowing essential travel while utilizing technology to connect with customers, including our state-of-the-art wearable glass technology to provide remote support to our customers. The core of our continuity plans is working closely with customers to determine and plan for customer delivery needs, utilizing our robust global supply chains to backfill raw materials as needed, and shifting production between sites where needed. Manufacturing factories have generally been exempt from business shutdowns around the world. But whenever there have been manufacturing shutdown mandates, such as the recent mandates from the governors in New York, California, and other states in the U.S., HB Fuller facilities have received a government exemption as they meet the criteria for an essential manufacturer under federal guidelines supplying the hygiene, food packaging, or medical industry. We operate these facilities under strict protocol to avoid disease transmission. Today, nearly 100% of our 72 factories around the globe are operating fully. Now I will move on to the financial results in the first quarter. Organic revenues were down 1% year over year, driven by the impact on our China sales of the disruption caused by the COVID-19 outbreak. Outside of this impact, our business was on track for very strong performance in the quarter. Excluding impacts on our sales in China from the delayed holiday and the outbreak, we estimate that organic revenue is up approximately 1% year over year, with volume growth in all three segments. Adjusted EBITDA was 78 million in the quarter, which is consistent with our guidance, despite an estimated 4.5 million impact from COVID-19. Impacts from the virus were offset by lower raw material costs, restructuring savings resulting from the move to global business units, and solid organic growth, particularly in construction adhesives, as well as strong growth in HHC adhesives due to elevated demand within the paper, packaging, and hygiene end markets. Adjusted EPS of 34 cents was flat year over year and would have increased by more than 15% without the COVID-19 impact of approximately six cents in the quarter. And cash flow continued to be very strong in the quarter, with cash flow from operations up significantly versus last year, keeping us on track for our full year debt pay down plan. Importantly, our business reorganization remains on track and delivered savings in Q1 at the high end of expectations. The new global business unit organizations have been fully operational since December 1st, strengthening the collaboration across our global teams and the support of our customers. In addition, we are driving down our cost-to-serve customers. In the first quarter, we realized $6 million of savings from our reorganization. We are also accelerating several projects and now plan to see total annualized savings at the high end of our $25 to $35 million range. Now I'll move to segment performance in the first quarter on slide four. Revenues in engineering adhesives declined by 4% on an organic basis, driven by lower volume compared with last year. As we said earlier, the impact of COVID-19 felt in China was most evident in our engineering adhesive segment. We estimate that the virus impacted EA revenues by about $12 million in the quarter, and organic revenue would have been close to expectations in about even the last year, excluding this impact, with volume up in the low single digits year on year. We continue to see very strong results in electronics, which was up double digits again in the quarter based on market share gains. This was offset by slower results in automotive, insulated glass, and new energy. These end markets will likely decline further through the fiscal year as economic impacts of the pandemic are felt. Adjusted EBITDA margin of 12.4% was lower than last year, reflecting unfavorable mix associated with lower sales volumes. Hygiene, health, and consumable segment, or HHC, organic sales, were up about 1% year-on-year in the quarter. As we said, we saw about 3 million of sales impact from the shutdown in China in the quarter for COVID-19. We estimate that organic revenue would have been up about 2%, excluding this impact, reflecting strong growth in packaging and health and beauty. HHC segment EBTA margin of 11.5%, improved 100 basis points year-over-year, driven by favorable mix, slightly lower raw material costs, and savings from the restructuring of the business. Construction adhesives had a very solid quarter as the business returned to top-line growth and double-digit EBITDA, on track with our forecasted improvements. The improvement in the quarter was led by double-digit revenue growth in roofing and improving results in flooring. Construction adhesives' EBITDA margin returned to double digits and increased year over year, driven by volume growth and improved mix related to the portfolio repositioning and new product solutions, as well as the operational improvements from the restructuring. Our visibility and pipeline for construction adhesives look solid in the first two months of the second quarter. Looking further, we would expect a negative impact to this business if there is a pandemic-related shutdown of new construction or a significant processionary environment. Regarding our outlook for the second quarter and the rest of this year, This obviously continues to be a very fluid and difficult environment to predict. We are using China as a baseline on which to rigorously plan our operations and adjustments we need to make. Our current assumption is that we will see economic contraction in the second and third quarter of this year. More acute in the second quarter than the third quarter with some rebounds in the fourth quarter. We expect the high demand we are seeing for paper, tissues and towels, hygiene and health products will continue through the year particularly in packaging, as consumers continue to delay eating out. Construction will continue at close to the current pace in March and April and likely slow into May and the third quarter. Engineering adhesives will face declining demand in durable goods for transportation, solar, and doors and windows, with some offsets in filtration, electronics, and MRO adhesives. We also expect that raw material costs will decline significantly based on softer global demand and lower underlying petroleum prices, with these cost declines accelerating over the next several months. Fundamentally, a decline in petrochemical prices supports HB Fuller's margins and our cash flow. Importantly, under various scenarios, we continue to forecast sufficient cash flow generation to pay dividends of approximately $34 million and $200 million of debt repayment this year. We are also developing additional levers to improve our operating efficiencies and underlying costs. Our 2019 restructuring project impacted SG&A costs, and prior to COVID-19, we initiated a review with external consulting support to evaluate our 72 factories with three goals. To improve efficiencies in our large factories, to establish a roadmap towards site consolidation, and to build a plan to accelerate our inventory reduction strategies to improve supply chain planning. We expect to share more details on our plan savings and timing during our Q2 conference call in June. While the economic backdrop continues to evolve and our underlying assumptions could change dramatically, we think that it is important to share with you what we are seeing today and how it is guiding our expectations and operating plans for the rest of the year. and share with you other levers that we have at our disposal. Now let me turn the call over to John Corcoran to review our first quarter results and our revised outlook for fiscal 2020 based on the economic assumptions that I just described.