H. B. Fuller Company

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 comparing 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.

Thank you, Stephen, and welcome, everyone. In the fourth quarter and throughout fiscal 2023, our team members executed exceptionally well to achieve strong profit growth despite a low volume environment, record margins, and outstanding cash flow. I'm very proud of the team's response to the significant volume weakness precipitated by unprecedented customer destocking activity over the course of the year. We proactively managed rapidly changing price and raw material dynamics and supplemented those with meaningful restructuring initiatives to deliver these strong results. Overall, organic revenue improved substantially in the fourth quarter with consolidated organic revenue declining only slightly year-on-year versus the high single-digit declines we experienced in preceding quarters due to volume weakness. Pricing was marginally lower year-on-year as expected, following lower raw material costs and also reflecting the impact of product reformulations, and was primarily driven by raw material index-based supply agreements. As a highly specialized value-added adhesive sealants and functional coatings expert with inherent price-to-value power, evidenced by the fact that over half of our SKUs are specifically formulated For individual customers, we are strategically well positioned to maintain pricing discipline. Overall, volume development improved significantly and was flat year over year in the fourth quarter. This is a marked improvement over the previous four quarters when volume declined approximately 10% on average. From a profitability perspective, we continued to execute well and achieved both record fourth quarter and fiscal year adjusted EBITDA margins. This is a testament to the strong leadership in each of our market segments and the power of collaboration exemplified by all our team members. Through systematic execution across all functions, our team appropriately balanced pricing and raw material movements proactively took restructuring actions to lower our cost profile, and acquired highly synergistic businesses to deliver these record margins. In the fourth quarter, we achieved a 22% increase in adjusted EBITDA year-on-year, up 32% on a comparable 13-week basis, increasing adjusted EBITDA margin 440 basis points year-on-year to 19.1%. And for the fiscal year, we achieved a double digit increase in adjusted EBITDA, increasing adjusted EBITDA margin 240 basis points year on year to 16.5%. This demonstrates how successfully executing our strategy to transform our portfolio and purposefully targeting capital allocation to the highest growth, highest margin opportunities can increase the value we provide our customers and generate higher returns for shareholders. And the great news is we are not done. The growth and margin expansion opportunities that we have in front of us are readily actionable, and we are well underway in our plans to realize these improvements. Now let me move on to review the performance in each of our segments in the fourth quarter. In HHC, organic revenue was down 7.5% year on year. driven primarily by margin-preserving index-based pricing adjustments with large-volume customers and some lingering, yet lessening, fourth-quarter customer destocking activity. HHC has the highest concentration of index-based supply agreements, given the nature of its customer base. These agreements are designed to maintain margins throughout the cycle and follow raw material cost movements over time. Adjusted EBITDA for HHC increased 42% year-on-year to $82 million, and adjusted EBITDA margin increased 690 basis points to 19.9%, reflecting exceptional execution. The team overcame continued customer destocking headwinds, leveraging favorable price and raw material cost management, synergistic acquisitions, and restructuring benefits to achieve record margin performance. In engineering adhesives, organic revenue declined 1.4% in the fourth quarter, which represents continued improvement on a sequential basis. Organic revenue declined primarily due to lower volume in solar and construction-related end markets, which offset strong organic growth in the electronics and aerospace market segments. Adjusted EBITDA and EA increased 5% year-on-year, up 13% on a comparable 13-week basis, and adjusted EBITDA margin increased 240 basis points year-on-year to 20.2%. The improvement in profitability for EA was driven by favorable price and raw material cost actions and continued strong cost management. In construction adhesives, the organic revenue trend reversed. increasing 5% year-on-year in the fourth quarter. Customer destocking actions began in the fourth quarter of last year and continued through the third quarter of this year. As a result, the organic growth achieved in the fourth quarter now more appropriately reflects current underlying demand for CA and our strong share position, but it is still lower than historical levels. Adjusted EBITDA for CA increased 9% year-on-year, up nearly 18% on a comparable 13-week basis, and adjusted EBITDA margin increased 12.6%. The margin improvement in CA during the fourth quarter was a positive development and followed a consistent seasonal pattern sequentially versus the third quarter. While restructuring actions in the roofing and infrastructure business units are already positively impacting the P&L, restructuring actions underway in the flooring business will contribute to profitability improvement in that market segment in 2024. Geographically, America's organic revenue improved significantly on a sequential basis, reducing the year-on-year decline from 13% in the third quarter to a decline of 6% in the fourth quarter. Volumes were flat year-on-year in North America and improved substantially versus the third However, volumes remained weak in Latin America. In EIMEA, organic revenue was flat year on year, as modest organic growth in EA, driven by strength in automotive and electronics, was offset by modest declines in both HHC and CA. In Asia Pacific, organic revenue decreased 2% year on year, influenced by the relatively volatile recovery in China. While organic sales for HHC in Asia were flat year-on-year in the fourth quarter, organic sales declined slightly for EA given its greater exposure to China. The fits and starts we are seeing in the Chinese market are not unexpected, and we continue to believe that the overall trend there is positive and improving. From an overall global economic standpoint, conditions remain subdued. While real GDP measures have been slightly positive, sentiment, particularly within the manufacturing sector, remains weak and cautious. As a result, we continue to plan for a mild manufacturing recession in fiscal 2024, and our expectations for the year ahead reflect this scenario. We expect interest rates to remain high for the first half of the year and decline modestly in the second half. restricting industrial production and construction activity to lower than normal levels for most of the year. From a year-over-year comparison standpoint, constrained manufacturing activity will be more than offset by the absence of the destocking impact that weighed so heavily on 2023 volume. We will also benefit from the restructuring and cost saving actions that we initiated and the acquisitions that we closed in 2023. all of which will be additive to profit growth in 2024. Now let me turn the call over to John Corcoran to review our fourth quarter results in more detail and our outlook for 2024. Thank you, Celeste.

I'll begin with some additional financial details on the fourth quarter. For the quarter, revenue was down 5.8% versus the same period last year. On a comparable 13-week basis, revenue was up 1.2%. Currency and acquisitions collectively had a positive impact of 4.7%. Adjusting for those items, organic revenue was down 3.5%, primarily driven by pricing. Volume was flat, reflecting slower but improving in-market demand in HHC, offset by solid growth in construction adhesives. Adjusted gross profit margin was 31.3%, up 510 basis points versus last year, as pricing and raw material cost actions increased restructuring benefits, and general cost reductions drove the margin increase year-on-year. Adjusted selling, general, and administrative expense was effectively flat year-on-year, reflecting continued cost management and restructuring savings, as well as the impact of last year's extra week offset by wage inflation and the impact of acquisitions. Adjusted EBITDA for the quarter of $173 million was up 22% versus last year, up over 30% year-on-year, adjusting for the extra week, reflecting pricing and raw material cost actions, the favorable impact of acquisitions, and restructuring savings and other cost reduction actions. Adjusted earnings per share of $1.32 was up 27% versus the fourth quarter of 2022, driven by operating income growth, which more than offset higher year-on-year interest expense, depreciation and amortization expense, and a higher tax rate. Cash flow was very strong for both the quarter and the full year. Full year cash flow from operations of $378 million was up $122 million year on year, reflecting higher operating profit and improved working capital, driving our end of the year net debt to EBITDA ratio down to 2.9 times. With that, let me now turn to our guidance for the 2024 fiscal year. Based on the market assumptions outlined by Celeste earlier, We anticipate full-year net revenue to be up 2% to 6% versus 2023, and organic revenue is expected to be flat to up 3%, with volume up low to mid-single digits and pricing to be down low single digits. We expect foreign currency translation to negatively impact revenue by about 1% versus fiscal 2023. We expect adjusted EBITDA to be between $610 and $640 million, representing a 5% to 10% year-on-year increase as volume growth, restructuring savings, and the impact of acquisitions more than offset wage and other inflation and bonus and variable compensation rebuild. We expect our 2024 core tax rate to be between 27% and 28% compared to our 2023 core tax rate of about 27%. We expect full-year interest expense to be $115 to $125 million, reflecting continued strong cash flow and moderating interest rates. We expect depreciation and amortization to be roughly $170 million, and the average diluted share count to be about 57 million shares. These assumptions result in full-year adjusted earnings per share in the range of $4.15 to $4.45, representing year-on-year growth of 7 to 15% versus fiscal 2023. Finally, we expect full-year operating cash flow to be between $300 and $350 million before approximately $140 million of capital expenditures. Based on the seasonality of our business and the timing of working capital needs, we expect operating cash flow to be weighted to the second half of the year. Taking into account last year's destocking activity as well as the typical seasonality of the business, We expect first quarter revenue to be up low single digits and for adjusted EBITDA to be between $115 million and $125 million. Now let me turn the call back over to Celeste.