H. B. Fuller Company

Good day and thank you for standing by and welcome to the HB Fuller Quarter 4 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. And please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Ms. Barbara Doyle, Vice President of Investor Relations. Ma'am, please go ahead.

Thank you, Operator. Welcome to HB Fuller's fourth quarter and fiscal year 2021 earnings call for the fiscal quarter ended November 27th, 2021. 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 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 nearest 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 the 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 Mr. Jim Owens.

Thank you, Barbara, and welcome to everyone joining the call this morning. Last evening, HB Fuller reported strong fourth quarter results, including 15% year-over-year revenue growth, $134 million of EBITDA at the high end of our guidance, and $1.9 of adjusted EPS. Organic revenue was up 15% versus 2020 and increased 20% compared with the pre-COVID fourth quarter of 2019. We had double-digit organic revenue growth in all three segments as a result of our innovation efforts, pricing strategies, and service levels. We also saw significant margin recovery with gross margin up 340 basis points versus the third quarter as a result of decisive pricing actions taken during the year. And we continue to pay down debt in the quarter to substantially reduce our debt-to-EVA-TA ratio to 3.3 times from 4.1 times a year ago. We delivered on our commitments in the quarter as we have all year, despite a rise in virtually every cost associated with serving our customers and unprecedented supply chain challenges. Our global team of 6,500 employees again demonstrated outstanding operational execution in this environment. At the beginning of 2021, we set three operating priorities, volume growth, pricing to value, and improved productivity and operational capacity. We delivered on all three of these priorities throughout the year. Volumes are up, productivity has improved, and in the fourth quarter, we saw significant benefits from our strategic pricing actions. We took swift actions early and throughout the year as persistent inflation impacted our raw materials. And in the fourth quarter, our pricing actions enabled us to catch up with material inflation and restore our margins. In 2021, we implemented over $450 million of annualized price adjustments, overcoming the annualized value of raw material cost inflation. While inflation and supply chain management have been important drivers of the results this year, it's the overall strategy, the culture, and the organizational capability that we've built that is enabling the company's success. Our strategy is to deliver innovative adhesive solutions to customers faster than our competition, to collaborate effectively within our technical teams and with our global suppliers, to solve challenges and serve customers first and fastest, and to do that while consistently demonstrating HB Fuller's values and principles as a great place to work. It is this culture and strategy that is enabling our success. Our ability to execute today is a result of the organization we've built and designed over the last several years. In 2019, we reorganized into three global business units centered on 30 end markets, each focused on the needs of customers within that segment. We invested in our supply chain and manufacturing systems to promote flexibility, and we streamlined the organization, better aligning all employees with our strategic objectives. Because of these actions, our agility, speed to market, and operational efficiency have increased and enabled us to successfully navigate widespread inflationary pressures, shipping disruptions, raw material shortages, and numerous COVID-related impacts. Shortages still persist for many specialty chemical raw materials, for plastic and metal packaging, and shipping containers. but we continue to effectively leverage our global footprint and our sourcing capabilities to deliver for our customers. Most importantly, we continue to capture new opportunities and gain share across end markets by delivering innovative adhesive solutions to meet new consumer needs and greater demand for sustainable goods. In construction, high demand for HB Fuller roofing adhesives led the way to a 29% increase in this segment sales over the fourth quarter last year as we helped customers deal with labor shortages. Our innovative sprayable bonding roofing solutions increases installation speed with more efficiency and is approved for use in all VOC regulated markets. Our new level setting products, ready to use grouts, mortars, and pressure sensitive adhesive products enable new flooring to be installed more quickly and more reliably. In 2021, we want significant new business and engineering adhesives with our solutions in support of sustainable markets, including electric vehicles, energy-efficient insulated glass, automotive electronics, and solar panels. And in hygiene, health, and consumable adhesives, we are delivering innovation to meet increasing demand for more efficient and environmentally-friendly packaging. In 2021, we launched new adhesives that decompose with no residue or microplastics, while at the same time managing demand spikes, supply chain delays, and raw material shortages to deliver record levels of adhesives for our customers. Now, let me move on to slide four to discuss fourth quarter segment performance in a little more detail. Strong performance continued in our hygiene, health, and consumables segments. where organic revenues increased by 13% year-over-year with double-digit growth in most of our end markets and very strong results in packaging applications, tapes and labels, tissue and towel, and health and beauty. HHC organic revenues also increased 18% versus the pre-COVID fourth quarter of 2019, demonstrating strong underlying consumer demand and share gains. HHC segment EBITDA margin of 13.6% reflected the absorption of significantly higher raw material costs, as well as increased variable compensation compared with last year, offset by strong pricing. EBITDA margin was up 160 basis points sequentially versus the third quarter, as strong pricing gains are driving higher margins as we exit the year. Construction adhesives had an extremely strong quarter, with organic revenues up over 29% versus the prior year, and up 31% compared with Q4 of 2019. Year-over-year performance improvements in all three construction end markets were driven by volume growth associated with improving market conditions and share gains, as well as outstanding pricing execution. Construction adhesives EBITDA margin of 16.3%, increased significantly year over year, up by 390 basis points. CA's EBITDA margin also improved by 390 basis points over the third quarter of this year, driven by volume leverage and pricing gains. The construction adhesives team drove extensive operational improvements in 2021. They have met strong demand in an extremely challenging environment, and the business is positioned with strong momentum as we enter 2022. Engineering adhesives delivered another strong quarter of results. Organic revenue increased 13% year-on-year, led by strong double-digit growth in new energy, recreational vehicles, insulated glass, woodworking, technical textiles, and footwear. Engineering adhesives EBITDA margin remained strong at over 15%. and up slightly versus Q3 on strong pricing execution offset by higher raw material costs and higher variable compensation expense. Looking ahead to 2022, we will pursue continued growth opportunities and share gains in a business environment where we believe that underlying demand remains strong and that cost inflation will persist. We anticipate that continued solid demand for hygiene and health products, packaging, paper, tissues, and towels will continue into 2022. and we anticipate construction adhesives in markets will show strong improvements for the first half of 2022, with commercial activity improving throughout the year and residential activity remaining solid. And we believe that engineering adhesives and market demand will also remain strong, given a backlog of consumer demand for electronics, vehicles, and durable goods. In total, our base case planning assumptions are for organic growth in the low teens driven by pricing and modest volume growth. Our current outlook is for raw material costs to continue to increase in 2022 versus the fourth quarter 2021 exit rate. The inflation we are seeing in Q1 is sizable, though less than the fourth quarter of 2021. We expect the raw material increases to be broad-based across the businesses and relatively consistent by region, with Asia showing less inflation to start the year than EMEA and the Americas. We will continue to price the value and will remain vigilant regarding raw material inflation. We have over $100 million in pricing actions taking effect in Q1, and we will take whatever pricing actions are necessary in 2022 to fully offset raw material cost increases and enable us to restore margins. Against a challenging economic backdrop, our performance in 2020 and in 2021 demonstrated that our business is diverse and resilient. Our operations are nimble and we are executing our strategy well. And we expect to continue to outperform our end markets again in 2022 as we face the challenges ahead. Now let me turn the call over to John Corcoran to review our fourth quarter results and our expectations for 2022 in more detail based on our planning assumptions.