H. B. Fuller Company

Good morning. My name is Colby, and I will be your conference operator today. At this time, I would like to welcome everyone to the HB Fuller Q1 2023 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you'd like to withdraw your question, again, press star and the number one. Thank you. I will now turn the call over to Steven Brazones. You may begin.

Thank you, Operator. Welcome to HP Fuller's fourth quarter 2022 investor conference call. Presenting today are Celeste Mastin, President and Chief Executive Officer, and John Corcoran, Executive Vice President and Chief Financial Officer. After our prepared remarks, we will have a question and answer session. Before we begin, let me remind everyone that our comments today will include references to certain non-GAAP financial measures. These measures are supplemental to the results determined in accordance with GAAP. We believe that these measures are useful to investors in understanding our operating performance and to compare our performance with other companies. Reconciliation of non-GAAP measures to the nearest GAAP measure are included in our earnings release. Unless otherwise noted, comments about revenue refer to organic revenue and comments about EPS, EBITDA, and profit margins refer 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. Actual results could differ materially from these expectations due to factors covered in our earnings release, comments made during this call, and the risk factors detailed in our filings with the Securities and Exchange Commission, all of which are available on our website at investors.hbfuller.com. I will now turn the call over to Celeste Mastin. Celeste?

Thank you, Stephen, and welcome, everyone. In the first quarter of fiscal year 2023, the team executed exceptionally well to deliver solid first quarter results that were in line with our expectations despite challenging demand conditions, particularly in construction adhesives. The diversification of our portfolio enabled us to deliver stable organic sales even with these challenges, and diligent management of price and raw material dynamics drove significant gross margin improvement both year on year and sequentially. Overall, this resulted in a solid adjusted EBITDA performance and led to higher adjusted EBITDA margin year over year. Looking at our consolidated results in the first quarter, organic revenue was significantly impacted by continued demand weakness affecting construction adhesives. CA experienced significant customer destocking impacts, which began in the fourth quarter of last year and continued in the first quarter of this year. It is uncertain when and how significant a restocking event will be. However, the benefits of the company's geographic and end-market diversification offset a significant portion of CA's declines and led to stable, consolidated organic sales year on year. This was driven by hygiene, health, and consumable adhesives and engineering adhesives which on a combined basis continued to generate positive organic growth in the first quarter and significant margin expansion. These GBUs continue to outperform the market by leveraging innovation-based market share gains to expand existing customer relationships and generate new business wins. From a profitability perspective, We performed at the high end of our guidance, and we continue to be very encouraged by the team's disciplined approach to optimizing price and raw material cost developments to expand margins. On a year-over-year basis, adjusted EBITDA was stable in the first quarter, and adjusted EBITDA margin increased 40 basis points to 13.6%. On a constant currency basis, adjusted EBITDA was up approximately 6% year on year. Given the strength of the comparable construction adhesives quarter in fiscal 2022, this demonstrates the power in our portfolio to overcome down cycles in any of the 30 market segments we serve. Overall, global economic conditions are slow. But aside from what we have seen in CA, largely in line with our projections, we expect a mild global recession in 2023, which will adversely impact economic activity. While we are well positioned to grow EBITDA in such a scenario, we are proactively initiating a restructuring plan focused on reducing costs across the enterprise, and particularly in construction adhesives. This restructuring will better align our cost structure with the current economic outlook. These actions are enabled by process efficiencies that were highlighted during our last investor day and are also consistent with our longer-term strategic objectives of improving our gross profit and EBITDA margins and increasing our ROIC. The restructuring is focused on both reducing manufacturing costs and SG&A. When completed, we expect these actions to deliver annualized cost savings of between $30 and $35 million, including approximately $10 million this year. From a raw material perspective, while costs are still higher year over year, the rate of inflation continued to slow during the first quarter, consistent with our expectations. We are on track to deliver between $130 to $160 million in net benefit from price and raw material cost management, as evidenced by the strong expansion in gross margin we achieved in the first quarter. Offsetting this benefit somewhat will be approximately $80 million of headwinds from lower volume and wage and other inflationary pressures. We continue to appropriately manage pricing in this dynamic raw material cost environment. As we indicated previously, we purchase approximately 4,000 different raw materials, and the cost movements of these are not synchronous. Most are stable sequentially, some are decreasing, yet a meaningful portion are still increasing. This requires continued comprehensive pricing execution, which we continue to demonstrate. Now let me move on to review the performance in each of our segments in the first quarter. In HHC, organic revenue was up 4.5% year-on-year. This was a particularly strong result given the current economic backdrop and a difficult year-on-year comparison where organic sales increased 21% in the first quarter of last year. Strength in hygiene, packaging, tissue and towel, graphic arts, and health and beauty markets continued in the first quarter of the year. HHC's responsible management of pricing dynamics offset lower volume and drove organic revenue growth in the quarter. Adjusted EBITDA for HHC increased 28% year-on-year, and adjusted EBITDA margin increased 360 basis points to 15.6%, driven by favorable price and raw material cost management. In engineering adhesives, organic revenue declined slightly in the first quarter, impacted by continued weakness in China, as well as some destocking and somewhat slower demand in durable goods and products used in the construction trades, as expected. This more than offsets strong growth in automotive and aerospace markets. Adjusted EBITDA was flat in EA and adjusted EBITDA margin increased 90 basis points year-on-year to 15%. Here too, favorable price and raw material cost management drove the increase in adjusted EBITDA margin year-on-year. In construction adhesives, organic sales significantly declined year-on-year As expected, the substantial customer destocking actions that began in the fourth quarter of last year continued in the first quarter of this year and considerably impacted organic sales. CA also had a very challenging year-on-year comparison due to the prior year's first quarter benefiting greatly from the post-COVID demand surge in construction markets. The roofing market segment continues to be hardest hit by customer destocking actions and drove most of the decline in organic revenue for CA. Adjusted EBITDA for construction adhesives was severely impacted by lower volume and negative operating leverage in the first quarter. The restructuring actions that I referenced earlier are heavily weighted to CA and will lower the cost structure of the business and allow for significant margin expansion as volume trends returned to more normal levels. Geographically, America's organic growth was down 4% year-on-year, significantly impacted by the decline in construction adhesives. Organic growth excluding CA was up low single digits in the Americas in the first quarter led by HHC. In EIMEA, organic revenue increased 5% versus the first quarter of last year. Both HHC and EA generated very solid organic growth, given the economic backdrop, up mid-single digits on a combined basis. In Asia Pacific, organic revenues decreased 8% year-on-year. Although China ended their stringent COVID-related restrictions in January, Spiking infection rates during the first quarter delayed a rebound in economic activity and adversely impacted demand. This was consistent with our expectations. Now let me turn the call over to John Corcoran to review our first quarter results in more detail and our outlook for 2023. Thanks, Celeste.