H. B. Fuller Company

Good day. Thank you for standing, Ben. Welcome to the HP Fuller First Quarter 2022 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 would now like to hand the conference over to Barbara Doyle, Vice President of Investor Relations. Thank you. Please go ahead.

Thank you, operator. Welcome to HB Fuller's first quarter fiscal year 2022 earnings call for the fiscal quarter ended February 26, 2022. 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 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 acquired revenue and the impact of foreign currency translation. 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. 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 revenue refers to organic revenue, and discussion of VPS, margins, or EBITDA 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 Russia-Ukraine war 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 Owens.

Thanks, Barbara, and welcome to everyone on the call. Last evening, HB Fuller reported very strong results to start fiscal year 2022. Organic revenue was up 21%, and EPS was up 21%. And we delivered $113 million of EVTA, which was up 12% and ahead of our expectations for the quarter. This strong performance is continuing as we begin the second quarter and look ahead to the rest of the year. We are driving growth through innovation and strong strategic pricing. And as we saw in 2020 and 2021, in turbulent times, we are delivering for our customers and for our shareholders. with exceptional consistent operational execution. Our results were strong in each of our global business units. All three GBUs delivered mid-teens or higher organic revenue growth versus last year, driven by strong volumes and pricing gains. Our volume growth contributed 6% of our organic growth and pricing growth 15%. The tragic events in Ukraine have all of us concerned for the safety of people in the region, and our concerns at HB Fuller are with them first and foremost. From a trade perspective, the conflict is impacting a fragile supply chain with even higher prices for raw materials and transportation. Raw material inflation will be greater than we forecasted in January, and as a result, additional pricing actions are being implemented this quarter to remain ahead of the inflation. We have implemented approximately $130 million of pricing in the first quarter with at least an additional $175 million planned in the second quarter. These actions are in addition to the $450 million of annualized pricing executed in fiscal 2021 and are expected to more than offset raw material and delivery cost increases. Our teams are monitoring the situation daily and we are prepared to implement further price increases as necessary. While HB4 doesn't have direct dependency on materials sourced from Russia or Ukraine, supply of materials has tightened across the world as the war is impacting the availability and price of feedstream raw materials for many of our suppliers, particularly in Europe. Deliveries in much of Europe are being impacted by reduced air cargo, trucking, and ground transportation availability. While the most acute issues are in Europe, the impacts are being felt globally. Supply and demand is the key driver of the price increases in specialty chemicals, which make up over 85% of our purchases. The recent spike in oil prices and commodity chemicals will have a limited impact on our business in the short term, but will create additional pressures if higher prices persist later in the year. Our commitment to serving customers in this environment is unchanged. Supply assurance continues to be the number one issue for customers and for us. We have done a very good job of serving customers thus far by working closely to secure available materials. The breadth of our adhesive chemistry and the diversity of the specialty chemicals that we buy has meant that no single material has had a large impact on our ability to deliver product. And it has enabled us to help customers find alternatives when short supply exists. We utilize working capital to help us manage supply assurance in this high demand, high inflation environment. And we're managing this closely. Our working capital reflects increased sales volumes and price, as well as long lead times for material orders. We expect working capital as a percentage of revenue to follow our normal quarterly patterns, with Q1 as our highest quarter and Q4 as our lowest. And we remain on track to deliver our full-year working capital targets and strong cash flow. In addition to meeting demand through supply assurance, our innovation focus has enabled us to gain share and maintain strong growth momentum as we start 2022. Now let me move on to review the strong performance in each of our segments in the first quarter. Hygiene, health, and consumable adhesives first quarter organic sales increased 21% year over year, with revenue growth in every end market and very strong results in packaging, health and beauty, and tapes and labels. HHC segment APTA was up 4 percent year-on-year, driven by volume growth and pricing gains offset by higher raw material costs. We expect HHC organic volume growth to continue for the rest of the year, with pricing gains driving sequential margin improvement throughout the year. Engineering Adhesives' top-line results continued to be extremely strong in Q1, with organic revenue up over 17 percent versus last year, reflecting share gains and strong pricing execution. EA had strong revenue growth across the portfolio and exceptional growth in transportation-related markets, new energy, woodworking, and insulating glass. Engineering adhesives segmented EA was up 4% year-on-year, driven by strong volume growth and pricing gains offset by higher raw material costs. Like HHC, we expect engineering adhesives' organic volume growth to continue to be solid for the rest of the year, with pricing gains driving sequential margin improvement throughout the year. Construction adhesives organic revenue was up over 38% versus last year, with considerable growth in commercial roofing. This strong year-over-year performance was driven by robust organic volume growth, improving customer demand, HB4 share gains, and pricing. Construction activity in first quarter of 2021 was impacted by severe winter weather in the United States. Normalizing for that unfavorable weather impact on our business last year CA's organic growth still would have exceeded 30 percent. Construction adhesives EBITDA margin of 14.1 percent is up 600 basis points versus the first quarter of 2021, driven by significant volume leverage, pricing gains, and strong operational execution. We expect continued strong results for the remainder of the year. We also completed the acquisitions of Apollo and Forney in late January, which added $6 million of revenue in the quarter. While construction adhesives growth this year will primarily be driven by organic roofing, flooring, and utilities and infrastructure business, we're very excited about these two acquisitions, which significantly expand our construction adhesive footprint in Europe. Looking ahead, our planning assumptions are that demand will remain positive across our business units this year, Although we have factored into our outlook some slowing in volume growth as the year progresses, we expect that raw materials will continue to be tight throughout the end of the year, and raw material inflation will remain elevated against a strong demand backdrop. We expect to more than offset raw material and delivery expense increases through pricing actions. Overall, when considering our strategic pricing actions, coupled with the solid volume growth, we now expect full-year organic revenue growth of between 15% and 20% versus 2021. Now let me turn the call over to John Corcoran to review our first quarter results and our updated outlook in more detail based on these planning assumptions.