H. B. Fuller Company

Ladies and gentlemen, thank you for standing by and welcome to HB Fuller Q3 2021 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will follow at that time. If anyone should require assistance during the conference, please press star zero on your touchtone telephone. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Ms. Barbara Doyle. Please go ahead.

Thank you, and welcome to HB Fuller's third quarter 2021 earnings call for the fiscal quarter ended August 28th, 2021. Our speakers today 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 your 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. We will also refer to adjusted non-GAAP financial measures during this call. These measures are in addition to the GAAP results reported 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 their understanding of our operating performance and how our results compare with other companies. Reconciliation of non-GAAP measures to the New York GAAP measure is included in our earnings release. Unless otherwise specified, discussion of sales and revenue refers to organic revenues, 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 resulting deterioration of 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 let me turn the call over to Jim Owen.

Thank you, Barbara, and welcome to everyone joining us on the call this morning. In a world where there are unprecedented supply chain shortages and significant inflationary pressures impacting every portion of our business, HB Fuller delivered double-digit growth and met our bottom-line commitments. Last evening, we announced strong third-quarter results led by 20 percent year-over-year revenue growth. Organic revenue was up 16% versus 2020 and was up 13% versus the pre-COVID-19 environment in the third quarter of 2019. This top-line performance reflects broad-based, double-digit organic revenue growth in all three global business units and includes significant contributions from both volume and pricing. We also reported adjusted EBITDA of $111 million and adjusted EPS of 79 cents. These results were slightly ahead of our implied guidance. Our margins in the quarter were reduced, as expected, and we expect to see significant margin recovery in Q4 and 2022 as our price increases begin to outpace raw material increases and other inflation. In the third quarter, we continued to gain share in key market segments with our innovative solutions. We are leveraging our technical capabilities and global footprint as well as our operational speed and agility so that our customers can continue to innovate and build new products. Our adhesive wins this quarter are in products ranging from new consumer electronics and globally produced solar panels to sustainable food packaging and electric vehicles. These wins are driving our growth. At the same time, our team is managing the raw material supply chain exceptionally well. enabling us to meet high customer demand without impacting our sales volumes. We are also demonstrating our ability to price based on the value our critical adhesive solutions provide our customers. Through the third quarter, we have implemented $225 million of price adjustments, and we took the decisive step of announcing a September 1st increase and surcharge in order to offset further raw material cost increases. These actions are expected to result in more than $400 million of pricing revenue on an annualized basis. We anticipate a significant improvement in margins in Q4 and into 2022 as a result of these actions. We are also prepared to take additional pricing actions as needed at the end of the year. These pricing actions coupled with our strong organic volume growth, which is up 13% year-to-date, is the basis for our confidence that HP Fuller's innovative solutions and global network will continue to drive share gains and significant margin improvement in the quarters ahead. We are demonstrating an outstanding ability to perform in a highly dynamic macro environment. Shortages persist for many specialty chemical raw materials, for plastic and metal packaging, and for international shipping containers. We continue to see inflationary cost pressures in terms of materials, freight, and labor. Extraordinary weather conditions during the year have caused shipping disruptions. Unplanned safety and governmental actions have caused factory closures. And we continue to navigate the uneven impact of the COVID-19 pandemic around the world. Through all of this, we are serving customers, we are winning through innovation, and we are protecting our margins. We anticipated gross margin headwinds in the third quarter, and we managed them well by controlling SG&A expenses. We are now positioned to reestablish our margins through higher pricing over a larger base of business. We have grown our base of business through exceptional support for existing customers, helping other customers in need when we can, and by adding new customer business by winning through innovation. While we overcome these near-term challenges, our actions are aligned with our long-term strategy to grow our business through innovation and continue to build our position as the world's leading dedicated adhesive provider. We're gaining share in our markets by focusing on providing new and innovative adhesives that enable hygiene and packaging products to be more environmentally friendly, buildings more energy efficient, and durable goods stronger and more lightweight. Our largest customer wins in this quarter were in the areas of electric vehicles and solar panel production. We are also actively investing to further differentiate our products and expand capacity. We recently announced a strategic partnership in Europe with Covestro, one of the world's largest polymer suppliers, to deliver an adhesive with a reduced climate impact for the woodworking, composites, textiles, and automotive industries. This partnership is one of our initiatives to advance our sustainability efforts and better enable customers to achieve their own sustainability objectives. We also recently announced a strategic investment to build a new facility in Cairo to support customers' increased demand in the fast-growing markets of Egypt, Turkey, the Middle East, and Africa. Because of the resilience of our cash flows, we are able to make these investments while continuing to pay down debt in line with our $200 million target for 2021. Now, let me move on to discuss our GBU performance in the third quarter. Hygiene health and consumable adhesives third quarter organic sales increased 13% year-over-year, with strong growth across the portfolio, including very strong results in packaging applications, beverage labeling, and tapes and labels. As expected, HHC segment A to DA margin of 12% was down versus last year. Strong volume leverage and pricing gains were offset by higher raw material costs. We expect HHC organic volume growth to continue to be solid in the fourth quarter, with pricing gains driving significantly higher margins as we exit the year. Construction adhesives organic revenue was up 20% versus last year, with strong growth in both flooring and commercial roofing as improving demand, share gains, and pricing drove significantly improved top-line performance versus 2020. We saw a significant improvement in pricing contribution in the quarter, with pricing contributing 8% of the organic growth in Q3. We expect these pricing gains and the impact of the surcharge to drive 10% to 15% year-on-year growth in EBITDA in the fourth quarter. Engineering adhesives' top-line results continue to be extremely strong in Q3, with organic revenue up over 19% versus last year, reflecting share gains and strong pricing execution. Sales increased versus last year in almost every market, with exceptional growth in adhesives for woodworking, insulating glass, and new energy. And looking back to the non-COVID impacted third quarter of 2019, organic revenues were up more than 15%. We expect continued strength and double-digit full-year growth in this segment. Engineering Adhesives' third quarter EBITDA increased 11% year-over-year, driven by exceptional volume performance and pricing gains. We expect double-digit sequential EBITDA growth in the fourth quarter as pricing actions and the surcharge are fully implemented and further offset the impact of raw material cost increases. Our planning assumptions are that demand will remain strong across our business units. Raw materials will continue to be tight through the end of the year, and pricing will remain elevated against a strong demand backdrop. We anticipate that higher customer demand and share gains in each of our business units will drive strong year-over-year organic growth. As a result, revenue in most of our end markets will exceed 2019 levels by double digits. 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 revenue growth of 17% to 18% versus 2020. Now, let me turn the call over to John Corcoran. to review our third quarter results and our updated outlook in more detail based on these planning assumptions.