H. B. Fuller Company

on your telephone keypad. To withdraw your question, press star one again. I would now like to turn the conference over to Stephen Brazones. Please go ahead.

Thank you, operator. Welcome to H.P. Fuller's third quarter 2023 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.hpfuller.com. I will now turn the call over to Celeste Mastin. Celeste?

Thank you, Stephen, and welcome, everyone. In the third quarter, we delivered a double-digit increase in adjusted EBITDA year-on-year and successfully drove adjusted EBITDA margin meaningfully higher. We achieved this despite weaker than expected volumes, driven by a more adverse customer destocking impact in hygiene, health, and consumable adhesives, and lower market demand in construction-related markets. Customer destocking actions have been temporarily detrimental to organic growth, leading to volume declines in excess of underlying economic demand. While challenging in the short term, we are successfully managing through this highly unusual phenomena taking actions that reduce our cost structure while sustainably executing our price-to-value discipline and leveraging our raw material scale. I am quite pleased that we were able to achieve double-digit growth in adjusted EBITDA in the current environment and, without question, the actions we are taking will continue to benefit our ability to grow adjusted EBITDA in 2024 and well into the future. Overall, organic revenue declined 7.4% year on year in the third quarter, with all GBUs experiencing lower volume versus the prior year. Overall, the sequential trend in volume largely followed the path we expected, with the exception being the magnitude of volume impact in HHC. Customer destocking actions in EA and CA are largely complete, and we believe they have peaked for HHC in the third quarter. Incremental volume development has been improving since the second quarter trough, and we expect this to continue and meaningfully improve in the fourth quarter. From a profitability perspective, we overcame short-term volume challenges to achieve a 13% increase in adjusted EBITDA year-on-year and increased adjusted EBITDA margin 270 basis points year-over-year and 140 basis points sequentially from Q2 to 17.3%. The benefits from sustainable pricing discipline, proactive raw material cost management, and restructuring savings realization more than offset the detrimental impact from lower volume and drove the improvement in profitability in the third quarter. We also delivered another outstanding quarter from a cash flow perspective, with cash flow from operations increasing $50 million year on year to $108 million annually. driven by strong profit growth and improved working capital performance. Now let me move on to review the performance in each of our segments in the third quarter. In HHC, organic revenue was down 10.5% year-on-year, driven by HHC's customer destocking activity. which we estimate accounted for most of the decline in organic growth. Since the pandemic, most of HHC's customers held significantly higher inventories of raw materials to mitigate the risk of supply chain availability. This has created a very unique situation for channel inventory destocking in 2023 that is unprecedented historically and has led to volume declines for HHC that have never been experienced before. With that said, we know this to be temporary, as underlying demand is stronger than our volume reflects, and we've also recently seen distributor buying patterns improve. Although underlying demand is down slightly given the current economic environment, we are encouraged by the trends in HHC. The team has been successful in gaining new business This will become much more evident once the HHC customer destocking actions conclude. Adjusted EBITDA for HHC increased 12% year-on-year to $69 million, and adjusted EBITDA margin increased 270 basis points to 17.2%. This is quite impressive given the significant short-term volume challenges we have endured. Favorable price and raw material cost management and restructuring benefits drove the improvement year on year. In engineering adhesives, organic revenue declined 3.3% in the third quarter, much improved versus the 9% decline in the previous quarter, led by strength in China. Organic revenue decline due primarily to lower volume in construction-related end markets which more than offset organic growth in the automotive, electronics, and solar market segments. Adjusted EBITDA and EA increased 26% year-on-year, and adjusted EBITDA margin increased 450 basis points year-on-year to 19.3%. The improvement in profitability for EA was driven by favorable price and raw material actions and aggressive cost management. In construction adhesives, organic revenue declined 9.4% year-on-year, a marked improvement versus organic revenue declines of 26% in Q1 and 14% in Q2. Customer destocking impacts in CA continued to taper in the third quarter, as expected, and are largely complete now. However, end market demand has weakened in construction-related end markets, and we would ascribe most of the organic revenue declines in the third quarter to end market conditions. Adjusted EBITDA for CA was down modestly year-on-year, and adjusted EBITDA margin of 14% was effectively flat as favorable price and raw material cost actions, as well as restructuring benefits, offset the impact of lower volumes. The restructuring actions the CA team has executed position this business to deliver sustainably strong adjusted EBITDA margins consistently throughout the cycle. Geographically, America's organic revenue was down 13% year-on-year, Customer destocking impacts in HHC, which were notably outsized in North America relative to the rest of the world, adversely impacted the region's organic revenue development in the third quarter. In EIMEA, organic revenue declined 6% year on year, driven mostly by weaker demand in the construction and packaging related market segments. In Asia Pacific, organic revenue increased 7% year on year, driven by a rebound in demand in China in both EA and HHC. The organic sales trend for the region continued to improve as expected due to particular strength in the automotive, electronics, and hygiene market segments. From a global economic standpoint, conditions remain relatively weak. Accordingly, we have executed supplemental restructuring initiatives which will increase our expected annualized pre-tax savings by approximately $10 million once fully implemented. On the M&A front, we recently acquired Sanglier Limited, one of Europe's largest independently owned manufacturers and fillers of sprayable industrial adhesives. This complementary acquisition expands our innovation capabilities and product portfolio across the UK and Europe, particularly in the construction adhesives and engineering adhesives businesses. In addition, during the third quarter, we announced the restructuring of the recently acquired Berto Adams business. Once completed, this restructuring is expected to result in an ongoing annualized cost savings of approximately $1. $20 million on a pre-tax basis. This is in addition to the restructuring initiative we announced in the first quarter. The majority of the restructuring charges and run rate cost savings associated with this restructuring are expected to be recognized in fiscal year 2024. The Bardo-Adams restructuring benefit represents a significant portion of the fiscal 2025 EBITDA contribution from the 2023 collection of acquisitions, which we now expect to contribute approximately $60 million of incremental EBITDA by 2025. Lastly, I would like to inform you that the recent acquisition of Adhesion Biomedical is progressing exceptionally well and is on track for a record sales year. We have a well-defined plan for synergy realization, and we are very excited about the future growth prospects of our medical adhesives business. Now let me turn the call over to John Corcoran to review our third quarter results in more detail and our outlook for 2023. Thank you, Celeste.