H. B. Fuller Company

Good day and welcome to the HB Fuller third quarter investor 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. To ask a question, you may press star then one on your touch tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Barbara Doyle, Vice President of Investor Relations. Please go ahead.

Good morning and welcome to HB Fuller's third quarter 2020 earnings call for the fiscal quarter ended August 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 this call, unless otherwise specified, discussion of sales and revenue referred to organic revenues and discussion 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 10-Q and 10-K. We believe that discussion of these measures is useful to investors to assist 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 COVID-19 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 forms 10-K and 10-Q filed with the SEC and available on our website at investors.hbfuller.com. Now, I'll turn the call over to Jim Owens.

Thank you, Barbara, and welcome to everyone on the call. In June, we reported second quarter results that were ahead of expectations and ahead of our competitors' performance. Last evening, we reported strong third quarter results. with $691 million in sales, 76 cents of adjusted EPS, and $106 million of adjusted EBTA. Our third quarter results were also ahead of our expectations and ahead of the prior quarter. In the fourth quarter, we expect to deliver EBTA results in line with the fourth quarter of 2019. The performance over the last two quarters and our expected performance are a direct result of the actions we took to reorganize our business and invest in growth segments and opportunities. This performance is also a result of the strength of HB Fuller's leadership team and our position as a leader in the adhesive industry. Our operational performance in the third quarter resulted in a solid sequential improvement in sales, EPS, and EBITDA. In the quarter, we leveraged new business wins and market share gains into revenue performance that exceeded our expectations. We also continued to capture raw material savings and realize operational cost deficiencies from our business restructuring, supporting EBITDA results that were better than we had forecasted. Cash flow performance continued to be strong, and year-to-date cash flow from operations increased 20% versus the same period last year. and enabled us to exceed our pay down target for the quarter and keep us on track for full year debt pay down of $200 million. Throughout 2020, and especially in the last six months, we have leveraged our 72 factories and globally connected operations and supply chain teams to ensure consistent delivery of adhesives for essential goods around the globe during this crisis. We have not let our customers down. We have also leveraged our broad adhesive technology portfolio and the applications expertise of our people to support customers who needed to solve supply problems or develop new products. While other companies may have taken similar actions, HB Fuller's dedicated focus on adhesive technologies and our global capabilities have positioned us to move first and fastest to deliver results for customers. We have leveraged our investment in digital tools to improve our service to customers, deliver innovation faster, collaborate internally more effectively, and increase the speed of decision making. Our global operations are agile and have been crucial differentiators for HB Fuller as our customers face significant upward shifts in demand of some products and downward shifts in other products. Our ability to meet increased demand and ensure customer supply and our capabilities to remotely qualify new applications and troubleshoot complex problems have proven to be competitive advantages. As a result, we have been able to shorten sales cycles, increase share with existing customers, and win business with new customers. These results were evident in the second quarter as we outperformed the market and competition. Our sequential top-line improvement this quarter directly reflects the proactive, collaborative approach including our ability to deliver new applications and provide world-class remote customer support. Our performance in the third quarter also reinforces the value of HB Fuller's strong product, customer, and end market mix. Hygiene, health, and consumable results remain positive in the quarter, but moderated from the very strong performance in the second quarter as surge buying dissipated and economic slowdowns in India and Brazil impacted results. At the same time, engineering and construction adhesives' performance improved meaningfully on a sequential basis, particularly in engineering adhesives. We were well positioned to meet increasing demands as markets opened up, new customers were gained, and China began moving toward more normal demand patterns. Our reorganization into three global business units at the beginning of this year is helping us win with customers and execute more effectively in each of our market segments. The organizational realignment is also enabling us to generate $35 million of annualized savings, of which $30 million will be realized in 2020, including $7 million of SG&A savings realized in the third quarter. As discussed on our last earnings call, earlier this year we initiated a review of the company's manufacturing operations and supply chain utilizing the support of an external consultant. As an outcome of this review, we identified opportunities in three areas. One, lower cost operations at individual sites by leveraging best practices into a number of our higher cost facilities. Two, a roadmap toward manufacturing footprint consolidation. And three, acceleration of our inventory reduction plan to improve supply chain processes. Based on specific projects identified, we have validated $20 to $30 million in manufacturing cost savings from these initiatives, with approximately half of these savings to be realized in 2021. We are also targeting an inventory reduction of approximately $25 million in 2021 through these initiatives. Now I will move on to our segment results in the third quarter on slide three. Hygiene, health, and consumable adhesives, third quarter organic sales increased 1% year on year. Across the second and third quarters, we have seen strong growth throughout this segment, including packaging, tissue and towel, hygiene, and health and beauty. Third quarter global growth in hygiene, health, and consumables was muted by significant volume declines in Brazil and India. HHC segment EBTA margins were strong at 13.6%. Margin was down slightly versus last year, primarily reflecting mix and the timing of some expenses offset by lower raw material costs and savings from the restructuring of the business. Construction adhesives revenue was down 12% versus prior year, but improved from the second quarter with higher sequential revenues in both flooring and roofing. This positive progress was delivered despite continued COVID-19 related disruptions in commercial construction which is a significant part of our construction adhesive business. Retail channels remained strong for do-it-yourself activity, while contractor flooring work and commercial roofing activity improved at a slower pace. Construction adhesives EBITDA margin was solid at 15%, reflecting new product introductions and improved product mix related to last year's portfolio repositioning, as well as operational improvements from the GBU restructuring. These operational improvements position this business for strong margins when commercial construction activity increases. Engineering Adhesives results improved significantly in the third quarter. Double-digit growth in electronics, recreational vehicles, and technical textiles, and solid results in insulating glass and woodworking offset slower but improving results in transportation-related markets. Total organic engineering adhesive revenues declined less than 3 percent versus last year. Engineering adhesives EBITDA margin remained strong at 17 percent. And while margins were down versus last year, we saw very good sequential margin improvement of 210 basis points versus the second quarter due to better volume and mix, lower raw material costs, and restructuring savings. Our planning assumptions for the fourth quarter have been developed in an environment that continues to evolve and will be impacted by COVID-related restrictions and the corresponding recessionary impacts. We have taken a granular approach by segment and geography in analyzing our future results. Our core planning assumption is that COVID-related shutdowns will not worsen, but recessionary forces will result in a year-on-year economic contraction for the rest of this year and into next year. As discussed last quarter, we believe that the second quarter had the most acute impacts with sequential improvement in the third and the fourth quarters. Elevated demand for hygiene and health products, packaging, paper tissues, and towels will likely continue through the year as consumers continue to spend more time in their homes. HHC volume should improve from Q3 to Q4 as manufacturers work down inventory levels and start restocking. Construction adhesives performance in Q4 is expected to improve versus Q3, with commercial markets improving but at a slower rate than residential activity. Engineering adhesive demand picked up throughout the third quarter, and we expect those trends to continue into the fourth quarter. We anticipate that demand for the transportation and durable goods markets will continue to improve in the fourth quarter, supporting sequential improvement in engineering adhesives volumes as we exit the year. Raw material costs have started to flatten, and we expect raw material costs in the fourth quarter to be similar to costs in the third quarter, but still down year on year. Improving volume trends, our ability to capture raw material savings, and reduced working capital requirements will enable us to continue to drive strong cash flow. This will enable us to meet our commitment to pay down debt by $200 million in 2020, exceeding our three-year targets. While the economic backdrop is not great, our performance in the first nine months of 2020 demonstrates that our business is diverse and resilient, our operations are nimble, and we are executing our strategy well. HB Fuller has multiple levers to deliver strong results in this fast-changing environment. Now let me turn the call over to John Corcoran to review our third quarter results and our outlook for the fourth quarter based on these planning assumptions.