H. B. Fuller Company

Good day and thank you for standing by. Welcome to the HB Fuller Second Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone keypad. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I'll now turn the call over to Barbara Doyle, Vice President, Investor Relations, to begin.

Thank you, Operator. Welcome to H.B. Fuller's second quarter 2021 earnings call for the fiscal quarter ended May 29, 2021. Our speakers are Jim Owens, H.B. 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 organic revenue, which excludes the impact of foreign currency translation on our revenues and the impact of acquisitions or divestitures. We will also refer to adjusted non-GAAP financial measures during this call. These measures are in addition to the U.S. GAAP results that are reported in our earnings release and in our Forms 10Q and 10K. We believe that discussion of these measures is useful to investors to assist their understanding of our operating performance and how our results compare with other companies. Reconciliation of non-GAAP measures to the nearest U.S. GAAP measure is included in our earnings release. Unless otherwise specified, discussion of sales and revenue refers to organic revenue, and discussion of EPS, margins, or EBDA refers to adjusted non-GAAP measures. We will also 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 the resulting impact on the global business and economic environment. 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 will turn the call over to Jim Owens.

Thanks, Barbara, and welcome to everyone on the call. Last evening we reported another quarter of strong revenue and earnings growth, Organic revenues in the second quarter were up 19% year-over-year, adjusted EBITDA was up 21%, and adjusted EPS of 94 cents increased 38% versus last year. We overcame significant supply chain disruptions and moved quickly to raise prices in the quarter. We achieved an all-time record quarter in revenue as we met increasing customer demand and gained market share. Throughout the quarter, HB Fuller experienced raw material and container shortages, but because of strong support and global collaboration with key suppliers and the ingenuity of our technical and supply chain teams, we made certain to keep our customers supplied. HB Fuller's ability to assure supply of critical adhesives and provide innovative solutions that customers need remains a competitive differentiator for our company, which is evident in our top-line growth. H.P. Fuller's revenue growth was broad-based across segments and geographies. Organic revenues increased in each segment versus the second quarter of 2020, including strong double-digit growth in both engineering and construction adhesive segments and very solid growth in hygiene, health, and consumable adhesives against a very strong second quarter of 2020. Revenues also grew in each geography, including organic growth of 19% in the Americas and 27% in the IMEA, and 9% in the Asia-Pacific region. Importantly, our revenues are also up from pre-COVID levels. Total organic revenues increased by 9.5% versus the second quarter of 2019, which had no COVID-19-related impacts, with double-digit growth in HHC and engineering adhesives and mid-single-digit growth in construction adhesives. Strong volume leverage in the quarter coupled with pricing benefits and operational efficiencies were driving in the business, offset significantly higher raw material costs, and drove a 21% increase in EBDA dollars year over year. Raw material input costs increased in the second quarter by about 10% from the end of 2020, with some raw materials increasing more rapidly than we forecasted. We have implemented $150 million of annualized price adjustments to date and will implement an additional $75 million in the third quarter. We're prepared to do more as necessary. These price adjustments will offset the impact of raw material increases in this fiscal year. Suppliers have made good progress in restoring capacity for the commodity and specialty chemicals we purchase. However, the rate of recovery going forward will likely be uneven until inventory levels are rebuilt to fully meet demand. Our planning assumptions anticipate that the current supply volatility will lessen and pricing will begin to stabilize in the fourth quarter. We now expect year-on-year raw material inflation to be over 10% and expect that our pricing will fully offset raw material increases by the end of the third quarter. We expect gross margin headwinds in the third quarter, which is seasonally slower for volumes, and we will see additional pricing and margin benefit in the fourth quarter, which is typically our strongest volume quarter. Our global sourcing expertise, our innovative chemistries, and our operational agility were more critical than ever this quarter and continue to provide competitive differentiation. And the actions we have taken on price and to drive efficiencies across our business are enabled us to seamlessly serve our customers and achieve our profit targets in the quarter while at the same time increasing our debt pay down over last year's level in line with our target for 200 million dollars of debt reduction in 2021. now let me move on to discuss performance in each of our segments in the second quarter on slide four hygiene health and consumable adhesive second quarter organic sales increased 3.3 percent year over year which is an outstanding result considering the comparison to a very strong quarter last year when the business grew 7% organically. Sales increased versus last year across the majority of our HHC markets with strong growth across our packaging applications, beverage labeling, multi-wall bags, and tape and label. HHC segment EBITDA increased by 11%, significantly more than the top-line growth An EBITDA margin was strong at 14.7%, up 70 basis points versus last year. Margin improved driven by strong volume leverage, restructuring benefits, and good expense management. Construction adhesives organic revenue was up 23% versus last year, with strong growth in both flooring and commercial roofing as share gains and improving demand drove significantly improved top-line performance versus 2020. Even compared to a strong non-COVID impact in the second quarter of 2019, organic revenue was up 4%. Contributions from the pricing adjustments we have implemented in this segment were underrepresented in the second quarter as we fulfilled prior construction adhesive orders and backlog following the temporary disruption from the effects of storm Uri. We have already begun to see increased pricing roll through in the first few weeks of the third quarter and expect additional pricing realization in the P&L over the rest of the year. Construction adhesives EBITDA increased 4% versus last year as strong volumes were offset by higher raw material costs, unfavorable mix, and some temporary manufacturing costs that were required to return to normal surface levels after the extreme weather event in the first quarter. Engineering adhesives results were extremely strong, with organic revenue up nearly 40% versus last year, reflecting share gains and improving end market demand. Sales increased versus last year in all 14 of our engineering adhesive end markets with exceptional growth in adhesives for automotive, recreational vehicles, woodworking, electronics, and insulating glass. And looking back to the non-COVID-impacted second quarter of 2019, organic revenues were up 11%. We expect continued strength and double-digit full-year growth in this segment. Engineering adhesives second quarter EBITDA grew 42% year on year, driven by exceptional volume performance. We expect EBITDA margins to improve in the coming quarters as pricing actions are fully implemented and offset the impact of raw material cost increases. Looking ahead at our full year results, our planning assumptions are that economies will continue to open up as vaccines are rolled out around the world. Raw materials will be tight through most of the year, and pricing will remain elevated as supply chains begin to normalize and demand continues to be strong. We anticipate continued strong demand and share gains in each of our business units to drive strong volume growth in 2021 versus 2020. Revenue in most of our end markets will exceed 2019 levels. Overall, when considering our strategic pricing actions, coupled with the solid volume growth in HHC, continued improving performance in construction adhesives, and strong demand in engineering adhesives, we now expect full-year double-digit revenue growth versus 2020. Now let me turn the call over to John Corcoran to review our second quarter results and our updated outlook for the full year based on these planning assumptions.

Thanks, Jim. I'll begin on slide five with some additional financial details on the second quarter. Net revenue was up 22.7% versus the same period last year. Currency had a positive impact of 3.9%. Adjusting for currency, organic revenue was up 18.8%, with volume up 17.4% and pricing up 1.4%, with most of that pricing realized in the second half of the quarter. All three GBUs had strong growth versus 2020, as well as compared to the non-COVID impacted second quarter of 2019, which we believe validates the strength of our top-line performance. When compared to Q2 2019, organic revenue increased 9.5% for the total company, with strong organic growth for all three GBUs. Adjusted gross profit was up 17.4% year-on-year, and gross profit margin was down 120 basis points, as volume growth and pricing gains were offset by higher raw material costs. Adjusted selling, general, and administrative expense was down 130 basis points as a percentage of revenue, reflecting volume leverage, savings associated with our business reorganization, and general cost controls offset by higher variable compensation than last year. In total, adjusted operating income margin improved by 20 basis points year over year. Net interest expense declined by $1.3 million, reflecting lower debt balances. The adjusted effective income tax rate in the quarter was 26.8% compared to 27.6% in the same period last year. Adjusted EBITDA for the quarter of $122 million was up 21% versus the same period last year, driven by strong volume growth, pricing gains, and restructuring savings, partially offset by higher raw material costs and higher variable compensation. Adjusted earnings per share were $0.94, up 38% versus the second quarter of last year, reflecting strong income growth and lower interest expense associated with our debt reduction. Cash flow from operations in the first half of the year of $80 million compares to $108 million in the same period last year, reflecting working capital requirements to support strong top-line performance as well as higher raw material costs. We continue to reduce debt, paying down $62 million in the first half of 2021 compared to $51 million during the same period last year, and keeping us on track for our full-year debt pay-down plan of $200 million. Regarding our outlook, based on what we know today, we now expect full-year revenue growth to be in the low double digits. As you will recall, we increased our adjusted EBITDA guidance range last quarter to $455 to $475 million, and this guidance remains unchanged given our expectations for the continued strong volume growth and accelerating pricing, offsetting raw material cost increases that we now expect to exceed 10% for the fiscal year. Based on the seasonality of our business and the timing of raw material and price increases, we expect revenues in the third quarter to be up about 15% versus the third quarter of 2020 as we continue to deliver strong top-line growth. EBITDA margin in the third quarter is expected to be about 100 basis points lower than the second quarter on a sequential basis. As pricing actions are fully implemented, margins will improve in the fourth quarter, which is also our strongest quarter from a volume standpoint. We expect cash flow to be strong for the rest of the year, allowing us to maintain our target to pay down approximately $200 million of debt during 2021. With that, I will turn the call back to Jim Owens for some closing comments.

Thank you, John. During our last conference call, I outlined the three critical priorities we set for 2021 in the current supply-constrained, inflationary COVID recovery environment. These three priorities are volume growth, price, and greater productivity. And we executed well against each of these key imperatives in the second quarter. Our first priority is to drive volume growth by supporting our customers in the current high demand and supply-constrained environment. Volume growth and share gains are our foundation for creating durable shareholder value. Our 19% second quarter organic revenue growth is even more significant than it appears considering our HHC business had a very strong quarter of 7% organic growth in the second quarter last year. And our business overall grew 9.5% compared to pre-COVID levels in the second quarter of 2019. Our second imperative is to strategically manage pricing aligned to the value we deliver in this inflationary environment. We implemented $150 million in price increases from March 1 through July 15, and we're planning an additional $75 million in price increases later in Q3. We're also delivering on our third priority to release greater productivity and capacity to our operational excellence programs. In the second quarter, we out-delivered competitors and supporting customers, and our factory labor and overhead as a percentage of revenue in the second quarter decreased versus the second quarter last year. COVID-19 has changed how businesses operate, and supply constraints and pricing volatility are challenges that are impacting our industry today. In this environment... HB Fuller's strategic clarity, the benefits of our robust global operations and supply chain, our culture of collaboration and market-based innovation, and the speed and agility we have developed across our company is delivering results for our customers and for our shareholders. We will continue to navigate the challenges of a constrained supply environment, grow our business, and build on our rising leadership position in the global adhesive industry, and we will continue to deliver strong results for our customers and for our shareholders. This concludes our prepared remarks today. Operator, please open up the call so we can take some questions.

Thank you. As a reminder, if you would like to ask a question, please press star, then the number 1 on your telephone keypad. If your question has been answered and you wish to remove yourself from the queue, press the pound key. Our first question comes from the line of Vincent Anderson of Steeple.

Yeah, thank you, and good morning, everyone. Morning, Vincent. So thank you for some of the extra detail on the outlook, but I'm a little slow this morning in trying to still unpack a couple of things. So depending on what we call low double-digit top-line growth, you recorded it looks like about 14.5% organic in the first half of the year. And then it sounds like the price actions will flow through more in the second half, at least weighted towards the second half. And when I kind of just carve all that up, it sounds like to get to just low double-digit organic growth, it doesn't seem like there's a lot of room for volume gains in the back half of the year. Am I missing something? No.

Perhaps, yeah, I think the low double digits is a broad term. I think of that as 13%, 14% overall, Vincent, so low double digits. So, yeah, we're not talking something like in that range. And I think, as you pointed out, there's very significant price increases that are flowing through in those numbers, along with I think we have more modest projections for volume growth, but certainly volume growth. during the second half of the quarter. But, yeah, the volume growth continues, pricing ramps up, and that gets you to the numbers that are somewhere, you know, we probably should have said, you know, 13, 14, 15, something like that. Go, John, what were you going to say?

Yeah, I think the other factor, Vincent, in the second half of the year is we'll have less servability from FX. So I think, you know, based on that number that Jim gave you, you know, I think we still expect to see, you know, low double-digit growth or low teen growth in the back half of the year and 13 to 14 to the full year.

Okay. Yeah, that helps a lot. I appreciate it. And then one thing that hasn't really been discussed in all of this is just how we should think about mixed impact on margins as we get to a more normalized demand environment.

Yeah, overall, the mix improvement is very positive for us. It was positive in the quarter. It's going to get more positive as we go throughout the year as we drive EA and CA. And I think recognizing that the pricing actions that we've taken hit the second half of – of this quarter really ramp up in Q3 and Q4. And EA and CA are typically a little slower, you know, have a little more customer notification in them than our HHC business. So you'll see a ramping up of their margins and that positive mix, combined with the fact that our HHC business is doing a great job, right? They have improved their margins here versus where they were last year. So I think you'll see a very positive mix effect as we head into Q4 and certainly into 2022.

Great. Thanks. And I just have one last quick one on the price side. So well communicated on the price. My question is, are they fairly standard pricing terms? And so you'll hold on to this for a bit? Or are, you know, there's some share of these where it's somewhat exceptional because of how tight the raw material environment is. And so some of those prices will just naturally unwind rather quickly with an easing of raw material constraints.

Yeah, we don't believe in temporary price increases or surcharges, so you don't have very little of that, right? And that's why our raw material prices go up quickly. What we do is we notify customers, we explain our value, and the price increases in our business are permanent, right? They stay in place. So, yeah, there's very little, if any, temporary increases here embedded in here.

All right, excellent. Thank you. Best of luck on the rest of the year. Okay, thanks, Richard.

The next question comes from the line of Gansham Punjabi of Baird.

Hey, guys, good morning. Good morning, Gansham. Yeah, so, you know, if we focus on the EA segment, you know, you call out your sales were basically 11% above fiscal year 19 comparable levels. You know, the margin's down 360 basis point over that two-year period, and obviously there's a lot going on with bras and you're working on price increases, et cetera. But, you know, was there a mixed impact, you know, relative to two years ago? And then what is the reasonable timeline to recover to that level if, in fact, that is the right level that, you know, we should expect a convergence towards?

Yeah, so, yeah, I think you hit on it, right? The biggest challenge is raw materials. So, you know, what happened in second quarter in terms of raw materials is – one of the most significant spikes in raw materials that we've seen. And in a business like EA, that's a real opportunity for us, and we're taking advantage of it and getting a lot of the pricing, but it doesn't happen automatically. So that's why you'll see the margins slip a little here in Q2 and into Q3 as we fully implement the EA price increases. But this is a real opportunity for us to reposition some customers there. So it's mostly a raw material and price situation. There's probably a little bit of mix just on where some of the markets have grown. You know, aerospace is now positive again, but that's a real nice high-margin business that's not doing as well as some other businesses that are more durable goods kind of businesses. But it's mostly raw materials more than mix. And, yeah, I think it's one of the real positive upsides is what's going to happen to margins here in EA and CA in the coming quarters and into 2022. Okay, got it.

And then for the second half of this year, I mean, is there a way, can you just give us the volume outlook by segment relative to the comparable 2019 period? I mean, there's just so much complexity with... maybe mobility increasing and some impact on HHC, converse impact on EA and so on. So just curious as to what you have specifically embedded for the back half relative to 2019. And then second, in terms of raw material velocity, you've already raised prices, your outlook for cost inflation twice so far this fiscal year. Can you give us a real-time indication as to how things are progressing at this point? So far in 3Q, and then also I assume you were impacted by out-of-pattern movement in the second quarter relative to winter storm Yuri. So was there any specific call-out on cost side that may not recur in 3Q? Thanks so much.

Okay, yeah, a lot of good questions. You know, I'll let John try and unpack exactly what happened with 2019 volumes. As you know, we don't go into that much detail by segment. I would say that each one of them has very positive volume trends for this full year versus 2019. So, you know, and rightly we're pointing out toward 2019 significant expansion in volume in our volumes, and I think that's really a product of how well we manage the business throughout COVID. We've got a lot of new qualifications. We were out in front of customers in one new business last year, and especially what we've done here in the second quarter. We haven't talked much on this call yet about it. But the volume that we generated in this quarter was directly related to the agility of our company to respond in a supply-constrained environment. So we met the needs of our customers better than others in the market. We also had all those gains that we were pulling together as we qualified new products, and we were able to meet those needs. So really great work by our supply chain teams to get the raw materials and the sourcing guys in the supply chain teams to meet what was a significant uptick in demand in a constrained environment. As far as... There were three questions. I'll go to the third one, and I'll come back to the second one. The third one was about exceptional cost. There were definitely exceptional costs in this quarter. We didn't call them out, but I mentioned just a second ago what we did. We air freighted raw materials from China to the U.S. at exceptional prices in order to meet the needs of customers. We had one supplier who had a ship stuck in the Suez Canal, one of those famous ships, We work with them to air freight material from the U.S. to Europe in that case, and that was a significant cost that we share with that supplier to keep our customers running. We had steel, steel short out there. We had a shortage of steel drums. We bought raw material off of one of our customers who had extra steel and had our supplier convert it into steel. So we did exceptional things with exceptional costs. In some cases, we had customers pay for it. A lot of cases, this was about enabling us to get the long-term price increases and the margins that we expect out of our business. So we made a lot of investments this quarter that are going to pay off both in share gains and also, I think, pricing realization as we go forward. And before I turn it over to John on the 2019 question, what was the second question, Don?

It was on the raw material conviction that 10% plus is the right sort of baseline.

Oh, yeah, yeah, in terms of where we got to. So what we see right now is the raw material increases are lower in Q3 than they were in Q2. So they're still increasing in Q3. We see a flattening, potentially a decrease, but a flattening in Q4. We do see some downtick in some materials in China right now. That's usually the early sign. It's going to be tougher to realize those globally because of the supply chains, but, you know, maybe a little slower than normal to see those flow around the world. But, yeah, definitely I think we have a pretty good picture of where things are and are headed here at least in the next two quarters. And it's a little different than when we entered last quarter where it was a big question. We knew what was going on. It was just a matter of how much. I think today we have a fairly good picture at least out over the next three or four months. Right. So, John, on 2019?

Yeah, so I don't have exact math here, Gonshin, but I think directionally, if you look at the second half of the year based on the guidance we've given, you know, you're probably looking at volume growth versus 2019. The first half of the year was, you know, 9% to 10%. And second half of the year, we're probably in the mid to high single digits in terms of volume growth. at an overall company level, so, you know, reflecting maybe a little bit of pent-up demand in the first half of this year that lessens a little bit, modest maybe attrition related to some of the pricing gains we get. And by GBU, you know, I think we're able to expect to see, you know, EA in the high single digits, low double digits, and construction pieces and HHC sort of in that mid-single digit to high single digit. Does that help? Absolutely. Thanks so much. Great. Thank you, guys.

Our next question comes from the line of Mike Harrison of Seaport Research Partners.

Hi. Good morning. Good morning, Mike. I was wondering if you can talk a little bit about, I don't know if you have a great sense for this, but how much the supply chain disruption impacted your volumes today? You just mentioned that maybe in the first half here you're benefiting from some pent-up demand. But the sense I get is that there's not a lot of restocking going on at this point. But if you had all the raw material supply that you could have wanted, how much higher would your volume growth have been? And maybe what segment had the greatest impact from the disruption from a volume standpoint?

Yeah, really hard to quantify, Mike. So I can say that there's definitely some strain that we realized during the quarter. So, you know, I'd say certainly early in the quarter we had some supply constraints in the HHC business related to vinyl acetate, which got very tight. And have we fully filled all those buckets? Probably not. You know, somebody already mentioned the auto business. You know, we're going hand-to-mouth there. We are picking up some business and winning some business because we've got a great supply chain, but there's definitely more backlogs today than there was a quarter ago. And probably the biggest place we have backlogs right now is in our CA business. So if I had to pick an area where we have a bigger backlog, it's in construction adhesives. But overall, we're doing a good job meeting demand, but there's definitely more. If you ask my sales team, they'd tell you a very big number, right, because it just feels like, Everywhere we go, customers are looking for more, and part of that's because we're doing a really good job.

All right, and then on the capital priorities front, you continue to be on track with your debt paydown plans. I think that the leverage situation is going to kind of resolve itself between free cash flow and EBITDA growth. Can you give us a better sense of when you expect to be more comfortable in shifting your capital allocation strategy toward M&A, particularly if an attractive target were to become available?

Yeah, so as you point out, our goal is to get our debt-to-EBITDA ratio below 3. I think the current projections will be around 3.2 at the end of this year, so that should happen early next year. And we see ourselves staying in that range long term. So we look at every target, every opportunity that's out there. I think we've made a lot of great decisions for shareholders, both in the deals we've made and at the times that we've passed. And the last couple of years bringing down our debt has been a priority. So we'll make the right decisions for shareholders at the right time. But our long-term commitment is to be in that two to three debt to EBITDA ratio.

If I can sneak one more in, kind of a housekeeping question, the diluted share count, if my model is correct, went up by about a million shares sequentially. What drove that, and I guess how should we think about the share count progressing in the remainder of the year?

Yeah, that's definitely a question for John. So I asked the same question, so he can give you a complex math.

So it's all a function of the dilutive share count calculation, meaning our higher share price results in less ability to sort of, you know, buy back shares in the calculation. So it's not related to shares issued. It's not related to anything we're doing around, you know, share buyback or share issuance. It's simply the math. And I would say, Mike, you know, it will depend on where the share price goes, but I would project it's probably going to be around the same number for the rest of the year.

All right. Thanks very much. Thank you, Mike.

Your next question comes from the line of Jeff Sikoskis of J.P. Morgan.

Thanks very much. The margin progression in the health and hygiene business from the first to the second quarter was pretty good, and it was good year over year. but not so much in engineering. What's the difference? Why is the margin profile improving in HHC but not in engineering?

I think the biggest difference was the speed at which they introduced pricing, Jeff. So our HHC business did a better job of getting ahead of this. They also had – maybe more shortages of raw materials earlier, so they had a burning platform that they were able to point to with customers. And I think in these very high-value businesses, we want to have careful, more thoughtful dialogues with customers as we raise prices. So that's fundamentally the difference, a bit of a mix. But, yeah, the HHC team did a great job of jumping on prices. The rest of the businesses have done the same thing, just with more customer notice.

So my memory is that in the last conference call, I think you thought that prices would be up about 3% in the quarter, and they were up, you know, whatever it is, 1.4. And so is it the case that your assessment of your ability to raise price, you know, it turns out it was tougher, but volume conditions were better? And why didn't prices go up faster?

yes so i don't know if we still have to look back at the scripts so you know i would say jeff if you do certainly the last month the quarter they were more than three percent so so i think in the quarter we said uh... you know it was the end of march and we said that we're going to raise prices in April and May, right? So one of the challenges, right, we're a month into the quarter now, then we were a month into the quarter. Most of our price increases went into effect April 15th and May 1st. So you saw the impact in our numbers in period six, our last period of the quarter. And that's why we're very confident in what's happening. We see it in our numbers here in P6 and flowing into P7. So now I would say pricing happened a lot exactly like we expected. In fact, we ended up announcing more. I think during the last call I said $100 million would be announced, and we're now at $150 million that's implemented and agreed. When I say it's in place... This is implemented, agreed, and changed in our system to happen between, you know, March and July 15th. And then we're right now planning this additional $75 million. So pricing happened like we planned. What didn't happen like we planned is rolls were a little stronger than we planned, a little stronger and faster. And as you point out, volume was stronger. So I would say pricing was pretty much what we expected, maybe a little stronger than we expected. Volume was stronger and raw material increases were stronger. So all three were higher.

Why is the engineering business doing so much better than it did in 2019 in your assessment?

Yeah, these are share gains, Jeff. I mean, we built a great team there that understands market trends. This whole move to these GBUs has allowed us to really put a lot of power in the hands of those 14 segment leaders. If you talk to our electronics teams, they know where the new products are coming out and they know where they're going to win. Talk to our solar team, they see the trends that are happening, the new panels that are being developed, where the investments are going. If you talk to our RV team, you know, they see who the winners and losers are in the market and what applications are going to create value. So that move, which saved us money, you know, we talk on these calls about how much money it saved us, is really enabling us to grow faster. And that model in our EA team is no more applying in the other businesses to generate organic growth, but it's particularly valuable there when... you're part of new and evolving products, electric vehicles. We're doing a great job with electric vehicles. Water businesses, uh, is benefited from that shift. So, so it's, it's really the way we've designed the organization to get ahead of opportunities. And I would just add to Jeff in, in, um, in 2020, 20 during COVID, our team was very aggressive at qualifying new applications. So some of that's coming, coming here as a benefit.

Okay. Maybe lastly, um, Ashland is interested in monetizing its adhesives business. Is that acquisition too big for you? Is that something that, you know, that allures you?

Yeah, of course we wouldn't comment on any specific acquisitions, Jeff. You know, I think they've said they're doing a strategic review. I guess we'll see what happens with that. But it's a good business. I would say that it's a good adhesive business business. And, you know, as I said earlier, we're going to do what's best for our shareholders with a clear view toward having the right debt-to-EBITDA ratio in the long run. So we won't ignore anything that happens in the market. If it happens, right, we'll see what comes out of their strategic review. Because our goal is to be the best adhesive company in the world, and we've done that by growing our business organically. And when the right inorganic opportunities come up that are good for our shareholders, you know, we look at those seriously.

Okay, great. Thank you so much.

Thank you, Jess.

Our next question comes from the line of Eric Petrie of Citi.

Hi. Good morning, Jim and John. Eric. Good morning, Eric. Just a question on strategy. You know, you talked about 19 and the applications and engineering adhesives. Is that the right number for you, and you just want to get larger in those businesses, or do you want to actually expand into other end markets?

Yeah, I would say today it's the right number. Some of those are groupings of other markets, but, you know, I think it's a good manageable number of end markets, and we have expertise there. So, you know, sometimes these businesses evolve. You know, there's a whole subsegment of electric vehicles that, you know, is becoming a business unit within automotive, right? So, you know, but, yeah, we're at the right number.

Okay. And then, secondly, just to follow up to the prior question, you mentioned share gains because you're better supplying your end customers. You know, you noted EVs was doing real strong. What other end markets is that recognizable or you would point out to us?

Yeah, it's a combination of two things that are driving the share gains. In our business, being the innovator who solves a customer's problem is the biggest way we win business. I can point to examples in almost all of our 30 segments where we have an innovation that's making a difference with a trend. I'll comment on a couple of those. What's unique about what's happened here in the last year between COVID and especially second quarter is is our service levels have been a differentiator, right? Usually service levels aren't a differentiator, but in this supply-constrained environment, our teams did exceptional things to support our customers and support customers in need, and that's driving share gain that's exceptional. Normally we don't have that. But in terms of where we'll win, we continue to grow in electronics by finding new and different opportunities In our insulating glass business, we developed some patented technology that includes some new equipment. That's driving a lot of growth for us as people look to innovations to make more energy-efficient buildings. In solar, we're a leader in China, and as companies make investments outside of China, we're getting those opportunities because of how global we are. And I already mentioned the electric vehicles. And then I think importantly in HHC, what that team's done since we went through the GBU structure, is thought very carefully about sustainability trends and how that's changing adhesive needs. And that's opening up opportunities. And then finally, I guess in CA, probably the biggest growth area from an innovation standpoint is what our roofing team is doing, to make easier-to-use, environmentally-friendly roofing adhesives that allow you to use less construction workers because there's just such a problem getting construction workers. So putting those roofs on faster with some of our new technology is a big winner there. So there's a lot of little examples, little meaning millions, multi-millions of dollars that are adding up to significant impact.

helpful. And then just one follow up on on your outlook on supply chain. You know, how much do you produce captively of your of your own like tapifiers or resins or polymers? And do you look to expand that, you know, to avoid these, you know, shocks and raw material prices?

Yeah, no, I would say our goal is not to be backward integrated. You know, I think one of the things that helps us, you know, if you dig in the details, what's happened with raw materials, commodities went up a lot. We buy only 13% of our raw materials are commodities. You know, the specialty materials have less inflationary volatility. That's good for us. It's good for our shareholders. So we don't have the kind of volatility that somebody who's backward integrated makes. And then we've got a whole model of building partnerships with suppliers. So we think that works to our favor. So a small percentage of our business is polymers we make for ourselves captively. But, you know, we're mostly formulators. And, you know, where it makes sense, we'll build the polymers where it's proprietary technology.

Great.

Thank you.

Our next question comes from the line of David Begleiter of Deutsche Bank.

Thank you. Good morning. Hey, Jim, going back to your comments on retaining these price increases, I heard what you said, but historically, when you've seen prior periods of rapid inflation, has Ford been able to retain the entirety of the amount of these price increases, or historically was there some portion that did go back to the customer, especially maybe in the automotive or maybe more assembly side of the business?

Yeah, I would say historically what you'll see over time is a very slow leakage. And really, we don't lower our prices anywhere. They become competitive pressures that put us in positions where we either introduce new products or we meet a competitive situation. So, you know, I would say multi-quarters afterwards. But in auto, no, we don't have any kind of price up, price down kind of commitments. We do have about 15% of our business that's indexed with a lag, so not really automotive. So that part of the business will follow a pattern of the market. But for the most part, you know, so you're right, it's not 100%. But for the most part, price increases go in place, and they're more permanent in our business.

Got it. And, Jim, just some volumes looking into next year. I know it's early, but. If we have a more normalized year next year, how are we thinking about the volume growth for the three GBUs?

Yeah, it's really early to predict volume growth. You know, I think we're going to get a lot of pricing benefit next year, you know, because we're half a step behind of all materials here in raising prices. That'll drive a lot of margin benefit next year. I mean, I think we're going to be at higher revenue. We're going to be higher margins. And, you know, these growth wins we have could put volume on top of that. It'd be amazing. But I think we've really set ourselves up well, not just to have a strong finish to this year, right? I think you'll see it here as we head into Q4, but I think we've positioned ourselves for a very strong 2022 without a lot of volume growth. And if we get a lot of volume growth, it could be exceptional.

And last thing, any labor constraints in your business that you're seeing right now?

Yeah, everywhere, right? So it's a big challenge for our factories. And I mentioned we don't talk a lot about it in this call, but our three priorities are delivering on the volume growth, getting the pricing, and then productivity. And we see this as a productivity opportunity at all of our facilities, either to automate or just drive other efficiencies. But, yeah, there's labor constraints. I think we're a 130-year-old company, great employer. So we probably don't have the same kind of things you see from other companies, but, you know, it's causing a little wage inflation in some parts of the country and pressure on employees. So far, our teams have done a good job, but every one of my plant managers is looking for good workers. Got it. Thank you very much. Thank you.

Your next question comes from the line of Paratash Nisra of Barenburg.

Thank you. Good morning, Jim, John, and Barbara. Good morning. On the raw material inflation, is the percentage increase in raw material cost, is that pretty much the same for the three segments, or is there some contrast there?

Yeah, I'm looking at John, and we're trying to sort that out. I would say it's probably a little higher in EA, maybe a little higher in EA, but Pretty much the same. Probably a little less in CA, a little more in EA. Pretty much the same across the business. So I got it.

Okay.

Okay. Okay, great. And then on pricing, which segment is going to see the biggest chunk of this more than $200 million price hike? And then I guess just kind of related to that, it sounded like in construction you said that pricing in Q2 didn't really fully reflect what has been announced. So could you just elaborate on that as well?

Yeah, yeah, yeah. Yeah, HHC probably a little more than EA, but HHC and EA lead the charge with CA having less in terms of the dollar impact. All the businesses have significant price increases that they're putting forward. And as I said, HHC is off to a great start on that. CA, a little slower for two reasons. One, two of our factories were in the Texas area, so they had a backlog. So they took a while to get caught up and get the pricing out of those. And then because of how some of our distribution channels are set up, we didn't have the pricing timings a little more delayed. So you see it flowing through on the numbers this quarter. but you saw less of it last quarter. But they're very much on point right now, and I'm pretty confident we're going to see some really good benefits from them in the coming quarters. Thanks, Jim.

And then I guess the last one, did you – Talk about how your customers are getting affected by the chip shortage issues. I'm not sure if you could quantify the volume impact, but anything anecdotal. And is that mainly the automotive customers or you're hearing that from solar or electronics customers as well?

Yeah, I would say we're seeing it mostly in the auto space, and it's mostly around the fact that, as we all see, right, you've got a dearth of cars at every dealership in America and around the world. So I think the chip shortage just shows up in a little bit lower demand areas. But I would say they're still making a lot of cars and still using a lot of the visas, and sometimes they're parking them aside to put them in with these chips. So it's an impact, but not one that I'd be the best guy to quantify because we're seeing strong growth in our automotive business overall. A combination of some share gains, some opportunities, some of the EV work we've been doing has made our auto business strong despite the chip issue. Got it. Thanks for that insight.

That's all I have. Thanks, guys. Okay, thanks very much.

We have time for one more question. Your final question will come from the line of Rosemarie Morbelli of Gobelli & Company.

Thank you. Good morning, everyone, and thank you for taking my question. Jim, you mentioned that you gained shares because you were able to supply quite a few customers whose regular supplier could not do it. So do you think, in your opinion, have you gained those particular businesses for the long term, or do you think that they will eventually return to their previous supplier at a lower price point?

Yeah, well, it's not like we were out there supplying everybody in the market. It's an incremental number of customers we were able to serve, but those all were based on long-term commitment. So we had very much, Rosemary, a priority for existing customers. But we added business where we saw it as a customer that really appreciated the value that we bring, and we got long-term benefits out of it. So, no, I wouldn't say it's temporary. Thanks for the question.

And then looking at your comments regarding the fact that you are ready to raise prices more if necessary, are there any particular areas where you could potentially see additional inflation?

It's a good question, Rosemary, and I think that's the question out there broadly in the market, right? And we all ask about just inflation in general. Is this an inflation super cycle or is it transitory, as our friends at the Fed say? I would say the inflation we're seeing in the third quarter is less than second quarter. And I mentioned that China is starting to see a little bit of decreases. So I tend to think that this is on its way down. But if for whatever reason there's a spike, my point, Rosemary, to you and to all of our investors, is we're going to raise our prices in the market more than we get from raw material suppliers. And we've just got to get that balance right. There's a little timing that we've got to manage. But we will get the price increases in the market, and we've shown a great ability to do that. So that's the point of that comment. But right now I would say we think we see a tapering of inflation here going into the second half of the year.

Thank you, and congratulations on the great quarter.

Thanks, Rosemary.

Thank you. That was our final question for today. I want to return the call to Mr. Jim Owens for any closing comments.

Thanks, everybody, on the call for your support and your questions. And we're excited about the quarter, but also what we're building here for the future. So, again, thanks for your support. Have a great day.

Thank you. That does conclude the H.D. Fuller Second Quarter 2021 Earnings Conference Call. You may now disconnect your lines and have a wonderful day.