H.B. Fuller Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
September 28, 2023

There are 10 speakers on the call.

Operator

Thank you for standing by. My name is Regina and I will be your conference operator today. At this time, I would like to welcome everyone to the H. B. Fuller Third Quarter Earnings Conference Call.

Operator

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Call. Call. I would now like to turn the conference over to Steven Brison.

Operator

Please go ahead.

Speaker 1

Thank you, operator. Welcome to H. B. Fuller's Third Quarter 2023 Investor Conference Call. Presenting today are Celeste Masten, President and Chief Executive Officer Conference and John Corcoran, Executive Vice President and Chief Financial Officer.

Speaker 1

After our prepared remarks, we will have a question and answer session. Conference Call. Before we begin, let me remind everyone that our comments today will include references to certain non GAAP financial measures. Conference Call. These measures are supplemental to the results determined in accordance with GAAP.

Speaker 1

We believe that these measures are useful to investors in understanding our operating performance Conference 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 Call to risks and uncertainties.

Speaker 1

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 Web site at investors. Hbfuller.com. I will now turn the call over to Celeste Masten. Celeste?

Speaker 2

Thank you, Stephen, and welcome, everyone. In the 3rd quarter, we delivered a double digit increase in adjusted EBITDA year on year and Conference 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 Call of Duty and Wealth Management. While challenging in the short term, we are successfully managing through this highly unusual phenomenon, Call.

Speaker 2

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. Conference Call. 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 3rd quarter Call.

Speaker 2

With all GBUs experiencing lower volume versus the prior year. Overall, the sequential trend in volume largely followed the path we Call. With the exception being the magnitude of volume impact in HHC. Customer destocking actions in EA and Conference Call. The CAA are largely complete and we believe they have peaked for HHC in the 3rd quarter.

Speaker 2

Incremental volume development has been improving since the second quarter trough and we expect this to continue and meaningfully improve in the 4th quarter. From a profitability perspective, Call. We overcame short term volume challenges to achieve a 13% increase in adjusted EBITDA year on year Conference Call and increased adjusted EBITDA margin 270 basis points year over year and 140 basis points sequentially Call from Q2 to 17.3%. The benefits from sustainable pricing discipline, Call. Proactive raw material cost management and restructuring savings realization more than offset the detrimental impact call from lower volume and drove the improvement in profitability in the 3rd quarter.

Speaker 2

We also delivered another outstanding quarter from a cash flow Conference with cash flow from operations increasing $50,000,000 year on year to $108,000,000 driven by strong profit growth and improved working capital performance. Now let me move on to review the performance in each of our segments 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 Conference Call. With that said, we know this to be temporary as underlying demand is stronger than our volume reflects Call. We are encouraged by the trends in HHC.

Speaker 2

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 conference call at 12% year on year to $69,000,000 and adjusted EBITDA margin increased 270 basis points Conference to 17.2%. This is quite impressive given the significant short term volume challenges Conference we have endured. Favorable price and raw material cost management and restructuring benefits drove the improvement year on year.

Speaker 2

In Engineering Adhesives, organic revenue declined 3.3% in the 3rd quarter, Conference. Much improved versus the 9% decline in the previous quarter led by strength in China. Organic revenue declined due primarily Call to lower volume and construction related end markets, which more than offset organic growth in the automotive, Conference and Solar Market segments. Adjusted EBITDA in EA increased 26% year on year, Conference. And adjusted EBITDA margin increased 4.50 basis points year on year to 19.3%.

Speaker 2

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. Call. Customer destocking impacts in CA continued to taper in the 3rd quarter as expected and are largely complete now. Conference.

Speaker 2

However, end market demand has weakened in construction related end markets, and we would ascribe most of the organic revenue declines in the 3rd quarter Conference. The restructuring actions the CA team has executed position this business to deliver sustainably Call. 15% year on year. Customer destocking impacts in HHC, which were notably outsized in North America relative to the rest of the world, Conference of the quarter. In EIMEA, organic revenue Conference.

Speaker 2

In Asia Pacific, organic revenue increased 7% year on year, driven by a rebound in demand in China in both Conference of the year. The organic sales trend for the region continued to improve as expected due to particular Conference Call. From a global economic standpoint, conditions remain relatively weak. Accordingly, we have executed supplemental restructuring initiatives, which will increase our expected annualized Conference of the U. K.

Speaker 2

And Europe, particularly in the Construction Adhesives and Engineering Adhesives businesses. In addition, during the Q3, 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 $20,000,000 on a Call of Duty and Retail Products. This is in addition to the restructuring initiative we announced in the Q1. The majority of the restructuring charges and run rate Cost savings associated with this restructuring are expected to be recognized in fiscal year 2024.

Speaker 2

Conference of approximately $60,000,000 of incremental EBITDA by 2025. Lastly, I would like to inform you that the recent acquisition of Hesion Biomedical is progressing exceptionally well and is on track for a record sales year. We have a well defined plan Call. Now let me turn the call over to John Corcoran to review our Q3 results in more detail and our outlook for 2023.

Speaker 3

Thank you, Celeste. I'll begin on Slide 7 with some additional financial details on the Q3. For the quarter, revenue was down 4.3% versus the same period last year. Conference. Currency had a negative impact of 1.7% and acquisitions positively impacted net revenue by 4.8%.

Speaker 3

Adjusting for those items, organic revenue was down 7.4% with pricing having a favorable impact of 0.6% year on year in the quarter And volume had a detrimental impact of 8%, reflecting customer destocking impacts, particularly in HHC and a general slowdown in industrial demand. Adjusted gross profit margin was 30%, up 3 50 basis points versus last year as a net effect of pricing and raw material cost actions Call together with restructuring benefits and general cost controls more than offset the impact of lower volume. Adjusted selling, general and administrative expense was up Conference slightly year over year. Good cost management, growing restructuring benefits, lower variable compensation and favorable foreign currency impacts Call. The Q4 of $156,000,000 was up 13% year on year and adjusted EBITDA margin increased to 17.3%, Conference Call, up 2 70 basis points compared to the Q3 of

Speaker 4

last year.

Speaker 3

This reflects proactive actions taken to optimize the price and raw material dynamics Conference as well as restructuring benefits and other cost savings measures. These actions combined with the contribution from accretive acquisitions Adjusted earnings per share of $1.06 was flat versus the Q3 of 2022 as strong operating income growth was offset Conference by significantly higher interest expense and unfavorable foreign currency. Higher interest expense and unfavorable foreign exchange negatively impacted adjusted EPS Conference in the Q3 by approximately $0.17 $0.05 respectively. Operating cash flow in the quarter improved significantly year over year Conference Call. 3rd quarter and year to date cash flow from operations increased year over year Conference by $50,000,000 $168,000,000 respectively.

Speaker 3

With that, let me now turn to our guidance for the 2023 fiscal year. We now expect full year net revenue for fiscal 2023 to be in the range of $3,500,000,000 to $3,550,000,000

Speaker 4

Conference Call.

Speaker 3

And taking into consideration the extra week in 2022, we now expect organic revenue to be down 4.5% to 5.5% Conference versus fiscal 2022. This reflects lower than previously expected volume due to a more significant destocking impact in HHC in Q3 and slightly weaker overall industrial demand conditions. Additionally, we now expect adjusted EBITDA Conference Call to be $580,000,000 to $590,000,000 representing a 9% to 11% year on year increase. Conference. This reflects lower organic revenue expectations offset by a more favorable pricing and raw material dynamic, conference call.

Speaker 3

We now expect net interest expense to be approximately $135,000,000 for the fiscal year and the full year adjusted effective tax rate Conference to be between 27% and 28%. Combined, these assumptions result in full year adjusted earnings per share Conference in the range of $3.80 to $3.90 Also, we now expect full year capital expenditures to be approximately $125,000,000 Regarding savings from restructuring plans, we now expect actions from the previously announced and subsequently expanded strategic restructuring Conference to generate between $40,000,000 $45,000,000 in annual pre tax run rate cost savings, up from our original estimate of conference call. $30,000,000 to $35,000,000 This is in addition to approximately $20,000,000 of pre tax run rate savings Conference associated with the Beardo Adams integration, which was announced during the Q3. Now let me turn the call back over to Celeste to wrap us up.

Speaker 2

Thank you, John. Strategically, we're driving this business where we said we would, as evidenced by our gross profit Call and EBITDA margin performance demonstrating our confidence in becoming a higher EBITDA margin company. Conference Call. We strive to be recognized as the imperative ingredient to our customers' success. We're committed to driving innovative solutions for our customers Call to create valuable and sustainable solutions using drops, not trucks of adhesives.

Speaker 2

I would like to thank Call. Thank you. Thank you. Thank you. Thank you.

Speaker 2

Thank you. Our next question comes from

Speaker 4

the line of H. B. Fuller.

Speaker 2

Thank you. Thank you. Our next question comes from the line of H. B. Fuller.

Speaker 2

Thank you. Thank you. Our next Conference as we transform our company into a higher growth, higher margin, higher ROIC business. That concludes our prepared remarks for today. Operator, please open the line for questions.

Operator

Call. Our first question will come from the line of Jeffrey Zekauskas with JPMorgan. Please go ahead. Call. Our next question will come from the line of Patrick Cunningham with Citi.

Operator

Please go ahead.

Speaker 5

Hi, good morning.

Speaker 2

Good morning, Patrick. How are you?

Speaker 5

Good. How are you?

Speaker 2

Good.

Speaker 5

Call. On the strategic M and A update, you cited this $60,000,000 figure up from the previous $50,000,000 Can you quantify how much of that is Call. Coming from the latest acquisition versus maybe there's better than expected in adhesion or other incremental synergies.

Speaker 2

Yes, it is a blend of both the impact of Sanglier as well as better performance across the collection. We prefer not to quantify how much each particular acquisition brings to the blend, but it is composed of both.

Speaker 5

Yes, that Call. And then just you had the comment that you're encouraged by trends in HHC and just underlying demand as well as Share gains there. So what end markets have the best underlying demand and where are you gaining share? And do you think any Call. Particular end markets will see a restock in 2024.

Speaker 2

And when you say end markets, just for clarity, are you talking about the segments Within HHC or are you talking more so about the different GBUs?

Speaker 5

Either or both, but Conference. Typically within HHC.

Speaker 2

Okay, great. So within HHC, Conference. We're not in any of these businesses, I should just clarify. We're not planning for big restocking impacts. What we expect is we will progress through the destocking in HHC over the next 2 or 3 quarters, Conference.

Speaker 2

Lower than what we normally would see in any given year. And we are experiencing some great wins Conference with big consumer product companies, which are part of that space. We've seen a number of wins lately in the hygiene space, for example. Conference. And so we're going to you'll see strong performance there, as well as taking share in a number of packaging applications in HHC.

Speaker 2

Conference Call. So HHC, I have really a favorable outlook for that particular business. Again, we've got to work through the destocking. Conference. Now we're also experiencing some great wins in our other business units as well.

Speaker 2

In EA, for example, we just Conference. We had a big win in fuselage airline sealants, so in the aerospace industry, as well as we continue to expand our position in the EV automotive market, a market that's growing very, very fast globally about 22% Annually, and some nice wins in technical textiles, potting cables, PVC edge banding. So really, we have a very fragmented space with these 30 different global market segments and we're driving wins in all of Conference, particularly EA and, also seeing some big wins in HHC.

Speaker 5

Very helpful. Thank you. I'll pass it on.

Speaker 4

Call.

Operator

Your next question comes from the line of Ghansham Panjabi with Baird. Please go ahead.

Speaker 6

Hey, guys. Good morning. Hopefully, you can hear me okay.

Speaker 2

Conference Call. Good morning, Ghansham.

Speaker 6

Good morning, Celeste. I guess in context of the 8% volume decline in Call. Can you sort of take us through the cadence throughout the quarter and what you're seeing thus far in September? And also EBITDA margins were up, I think, 270 basis Conference Call. Are you forecasting additional year over year margin expansion in 4Q?

Speaker 6

We're just trying to reconcile to your guidance for the quarter.

Speaker 2

Call. Right. Okay. So let's talk about the quarter, and your question on volume decline month over month. So Our P7, which was the 1st month of our quarter, was much worse than the other 2.

Speaker 2

So in P7, we saw really extreme destocking in our HHC business, But also our EA and CA businesses were down double digit on volume in that month as well. We saw a real inflection point Call. For the EA business in particular come P8, and really experienced more Conference Call. Flat volumes in EA, P8 and P9 and a lot of that was due to this rebound in China. So we're seeing strong performance in China.

Speaker 2

In fact, when you look at China from Q1 to Q3, Our volume has swung from a negative 15% roughly to a positive. So I give the team in China a lot of Credit to be nimble enough to handle operationally that shift in volume. And Conference. We saw in the CA business also, sort of some leveling off, at in the back end of the quarter. Your question around P10, really much more of the same.

Speaker 2

Conference. So we're really seeing HHC starting to settle out a little bit, but there's still destocking there. That's going to go on for a couple of quarters. However, in EA and CA, I think this destocking is completed and we're seeing much better

Speaker 3

Maybe I can comment on your question on margins, Ghansham. So yes, we are Call. Forecasting additional margin expansion in Q4. If you look at our guidance range both for revenue and EBITDA, that's what is reflected. We're seeing that so far in P10.

Speaker 3

We're seeing margins continue to expand. We'd expect a bigger contribution from

Speaker 6

restructuring in Q4 than

Speaker 3

we've had the previous quarter. So, something on

Speaker 7

conference call. In Q4 than we've

Speaker 3

had the previous quarter. So something on the order of 100 basis points of margin expansion in the 4th quarter is more or less in line with our forecast.

Speaker 6

Got it. Thank you, John. And gents, obviously, there's been 4 sequences of events, right, over the past couple of months, Conference. How are you sort of thinking about these dynamics as we especially in the cost side cycling into fiscal year 2024 in context of pricing starting to moderate, I think, reported plus 0.6 percent in the most recent quarter. And can you just give us any more variances to think about for fiscal year 2024 that sort of underlines your confidence

Speaker 2

Call. Yes. So a couple of things there. First, I'll just pick off the easy one on your point about UAW. So if you look at our total sales, only about 1% of H.

Speaker 2

B. Fuller's total sales are made to the big 3 automakers or suppliers of theirs, tier 1, 2 or 3 suppliers. So Conference Call. Now that said, it's an important market for us. We're actually in the automotive space, much more prevalent in the EV vehicle market, which is growing much faster.

Speaker 2

So certainly we're watching that market closely, Conference Call. The big three and what develops there, but I don't believe it will have a material impact on us in 2024. Conference. Now I think your question around raw material cost and I'm going to relate price to that also is a really important one. So first, I would point out that our raw materials don't move with crude.

Speaker 2

So we monitor and buy about 4,000 different types of raw material and all of those have their own supply demand position. And what happens is Call. When volume is down and we're a great indicator of global volume. So when our volume is down, it tends to mean global Volume is down across the industrial world and those 4,000 raw materials are much more influenced Conference by those unique volume movements rather than what happens with crude. So the advantage for us in a market like this is Conference Call.

Speaker 2

Given that we have so much scale in this industry, we have great opportunity to conference call to leverage our volume and continue to optimize our purchasing positions with those suppliers. Conference. So in a low volume market, we will be pushing on suppliers and we'll get raw material advantage. Conference. We balance that out on the pricing side.

Speaker 2

So if you look at price for the next quarter and on into next year, Our pricing performance or pricing comparisons will be down. There's a few reasons for that. One is Call. Carryover will have been annualized from previous year when we had big increases in Q2 and Q3. Also, we've got some customers tied to indexes.

Speaker 2

Those indexes and those customers Conference that have pricing tied to indexes, have their price tied directly to the raw materials that we buy and put in their formula. Conference Call. So while it will look like pricing is coming down, it's really a margin preservation strategy for us. So you'll see a price incremental price reduction because of that in the upcoming year. And also Conference.

Speaker 2

The third thing being we're reformulating a lot of products right now where we can save money on raw materials, we're reformulating our adhesives and we're Sharing that savings with our customers. So again, you'll see price decrease Conference when you look at a comparison, but margin preserved. So at the beginning of the year, I talked about this 100 and $30,000,000 to $160,000,000 bucket of value that we would get out of this balance between price and raw material movement. Conference. What you'll see is that in the first half of the year, a lot of that was related to price.

Speaker 2

And in the second half of the year, we'll be getting more tailwinds on raw material. So that's how the balance works and that's why we like to talk about it that way.

Speaker 3

And maybe Ghansham, I'll give a little more perspective on Call. Considerations for 2024, not getting too granular here because we're still in our planning process. But what Celeste described in kind of the price raw balance. It's been very consistent this year kind of in this $40,000,000 to $40,000,000 $45,000,000 benefit each quarter. Now it's flipped between being more of a benefit from pricing to more of a benefit from raws.

Speaker 3

But we'll carry that over next year. And if raw material costs settle out where they are, it will not be as big a benefit as it will be this year, but we'll see some benefit and we think it'll be Equal to or slightly greater than any price decreases. Obviously, the big some of the other big drivers are the restructuring impact will be much larger in 2024 than 2023. Conference. As we've said, it's we project $40,000,000 to $45,000,000 at run rate.

Speaker 3

We'll probably capture about $10,000,000 to $12,000,000 this year. So You can kind of extrapolate the midpoint of that being kind of what we'd experienced in 2024 and then the contribution from acquisitions Conference that we talked about $60,000,000 by 2025, we'll probably be about $12,000,000 this year. So again, you can probably sort of extrapolate that. The negative we'd have is we do have a fairly sizable variable comp benefit this year that's in the neighborhood of $30,000,000 lower than last year that will But given those, we're projecting that it will be a continued challenged volume environment. That's kind of what we're building our plans on.

Speaker 3

We don't expect to see nearly the impact from destocking in 2024 that we had in 2023. But those are the components that we're looking at that give us confidence conference. We can deliver another profit growth year and we'll likely be another challenging environment.

Speaker 6

Okay. Got it. Thanks so much.

Operator

Your next question comes from the line of Mike Harrison with Seaport Research Partners. Please go ahead. Call.

Speaker 8

Hi, good morning.

Speaker 2

Good morning, Mike.

Speaker 8

I was hoping that you could maybe give a little bit more detail

Speaker 2

Call. On the

Speaker 8

increase in the restructuring expectations, I believe you're in the midst Conference of an operational review that has maybe helped to increase that target. Just curious conference. What stage is that operational review in? And do you have any sense of how much more savings could potentially be identified in the future?

Speaker 2

So we're very early on, Mike, in the operational review that we're doing. Just to take a step back on that recall, we are in the process of identifying capacity utilization Call. We should have a complete Call. Assessment of that outlook as well as how it relates to our future growth plans, by the end of this year. And following that, we will be announcing steps we're going to be taking to optimize that footprint.

Speaker 2

So this is very early in and what you see in the updated restructuring is that we've identified There are additional plants that we can take out of the network, but again, we're not completely through that analysis.

Speaker 3

And I guess I'll just comment, Mike, on the increase. We increased the range by $10,000,000 I think when we came out with our initial estimates of 30 to 35. We said about 2 thirds of that impact was related to manufacturing costs and about a third related to SG and A. We did increase the number of anticipated plant closures. We had talked about 2 plant closures.

Speaker 3

After Q1, we now have 8 that are planned. They're small, but they do have an impact. I would say the recently announced changes to restructuring savings estimates actually are a little more weighted Call. So this sort of second round we went through, we focused in more on SG and A where we had potential redundancies, opportunities reduced costs given lower volume. And so the balance now might be 60% manufacturing cost, 40% SG and A.

Speaker 3

But I think what Celeste alluded to is I think there's more opportunity in the manufacturing footprint and supply g we will be focused on here in the near term.

Speaker 8

All right, perfect. And then my other question is on the M and A front. You've done several Conference Call. With the exception of Beardo, I think most of them are relatively small. But just curious at what point Call.

Speaker 8

Do you start to worry about reaching capacity on trying to integrate too many things at once? Obviously, you've got 30 different market segments Conference and 3 GBUs that you work on and not all of them were in the same markets. But how do you think about integration and your capacity Conference to integrate as a bigger company.

Speaker 2

I feel good about it, Mike. So we have focused our M and A and capital allocation activities around our top 25 growth opportunities. Conference. And we continue to update that list every year. Within that list, there's a lot of opportunities Conference Call.

Speaker 2

And we end up getting a lot of different market segments involved in doing so. So when we do an acquisition, From the very beginning, we assign an integration leader during due diligence. That integration leader participates in diligence and that embedded knowledge is very, instructive as we work through the integration process. Now as we integrate, we primarily use people from within the business that did the acquisition. Conference.

Speaker 2

And so when you think about it, we have integrations going on in different regions Conference. Managed by different people or being performed by different people in different businesses concurrently. We're very careful as we look at our pipeline. We would not double up on a region and a business conference call for an acquisition if we felt like we would not have the people, the resources to place against that. Call.

Speaker 2

And the good news is we have lots of other targets, lots of other places where we can acquire and drive high EBITDA margin and high growth rates. Conference Call. So, I think it will be a long time, Mike, before we get to the point where we're really ever saturated with integration activity, call, particularly because we're integrating these businesses fully within 2 or 3 years.

Operator

Call comes from the line of Vincent Anderson with Stifel. Please go ahead.

Speaker 4

Yes, thanks. So I just wanted to spend maybe a bit more time on the cost savings side, if that's okay. It sounds like The savings are more around footprint consolidation versus site specific cost out. But if that's so, just Can you help me get comfortable handicapping your expectations on the manufacturing cost savings prior to completing your review? And then just a Part B to that, Are these initiatives being paired with inventory management changes that we can expect incremental cash return on those savings?

Speaker 2

So what we've described in the restructuring actions, Vincent, and good morning, by the way. What we've described in the restructuring actions is more so footprint related. However, we have actions Conference. Underway within the businesses today to optimize our shift load, Conference Call. B.

Speaker 2

Fuller:] So there's a lot of cost saving effort underway That would impact conversion cost that's happening already. We're just not we're not talking about it in the form of a restructuring. And yes, you're right. We do have work ongoing as it relates also to the supply chain. We're adding capabilities that will allow us to more analytically manage, in particular, our inventory levels.

Speaker 2

We've started down a path. We've made an we've acquired some software to do that and we actually B. Fuller:] Our piloting that activity as we speak at 6 of our facilities. So, yes, those efforts are proceeding Conference in parallel, and not just focused around the footprint.

Speaker 4

Okay. All right. That's helpful. And You touched on both of my next questions, so I'm trying to pick which one to start with. All right.

Speaker 4

So you mostly answered this one, Call. But maybe taking that a step further, I mean the pricing and the procurement systems were really kind of formalized Call. After the 2019 restructuring. So same question, is there more that could be investigated there?

Speaker 2

So we have an excellent pricing system, pricing team and pricing methodology. And I think I've mentioned before that I'm on a call with our pricing group every 2 weeks. So it's definitely an area of focus. And what I'll say is that every 2 weeks, Conference Call. Something new comes out of that, right?

Speaker 2

We expand our capabilities. We Focus on some other reporting that we could do. We identify strategies for price increases in parts of the portfolio. And it's It's not just myself. I get to see the outcome of the work that's going on with that pricing team and in concert with the GBUs.

Speaker 2

And Conference. We're never going to be satisfied that we're perfect pricers. We continue to work on What I think is already an excellent capability and continue to make it better. And one of the things Conference. That is a very important part of that is the technology leverage, right?

Speaker 2

Not just in pricing systems, but ensuring that We're pricing to the value that our customers are experiencing. So pricing is sort of the last thing to happen. The first thing that happens Conference is understanding our customers' needs, knowing how they use our product, understanding their goals, really driving innovation around bringing a solution Conference that matters to them and that we can be paid for. So pricing, we're never going to be done and we're going to continue to capture value there. And similarly, our procurement system, you're right, that we have a great team.

Speaker 2

It's been in place Call for quite some time now and we continue to leverage our scale successfully Conference in these multiple raw material segments that we participate in. And each one of them is different. Conference. Sure.

Speaker 4

All right. That's helpful. All right. So last one. Conference.

Speaker 4

You talked a bit about this. It sounds like a lot of it's still kind of to be determined through the end of the year. Conference Call. A lot of your non U. S.

Speaker 4

Sites at least appear to be running fewer technologies on a per site basis than what we see with your kind of like Conference. So as I think to your growth strategy, you've been globalizing a lot of U. S. Developed products through buy rather than build. Call.

Speaker 4

Are there opportunities to get more leverage out of the non U. S. Sites where the footprint and staffing might be underutilized? And is any of that In your current savings targets or is that more related to again kind of your growth strategy?

Speaker 2

Conference. So that again will be addressed as we look at our global footprint. So when you look at our plant base, well over half of those plants serve multiple GBUs. And you're right, most of them are technology based, Probably 2 or 3 different types of technology that they will be focused on. Our intention is not to have big Mega sites, we want to continue to produce close to our customer, and there's a value in doing that.

Speaker 2

We just need to make sure Conference. Again, when we look at the business, capacity utilization by technology that Conference. Where there is redundancy that's unnecessary that we can remove it.

Speaker 4

Conference.

Speaker 2

Did I answer your question, Vincent?

Speaker 4

Yes. I might try again in 6 months, but yes. Okay.

Speaker 6

That's it for me. Thank you.

Operator

Your next question comes from the line of David Begleiter with Deutsche Bank. Please go ahead.

Speaker 7

Thank you. Good morning.

Speaker 2

Good morning, David.

Speaker 7

Good morning. Celeste and John, your Q4 guidance implies a pretty steep ramp Call from Q3. Can you give us some color on the various drivers and buckets? How much from price cost? How much from cost savings?

Speaker 7

How much from volume and normalized operations to drive that ramp.

Speaker 3

Yes, I think the biggest driver is The momentum we're seeing from raw material savings and I think we've done a good really good job managing pricing. So Call. As I said, it's been very consistently kind of a $40,000,000 to $45,000,000 of savings Per quarter between the two and we would expect a similar number in Q4 on better volume performance, Conference. So those are the major drivers. And we would the impact Conference from restructuring and acquisitions will be more in Q4 than it has been in any of the other quarters, Maybe close to double based just on the timing of the acquisitions and the ramping up of restructuring.

Speaker 3

So those are the things that B. Fuller:] Would drive this ramp. Now, we also, I would say, have an easier comparison than Q1 through Q3 as it relates to Conference. The macro environment that we were facing in Q4 last year versus the previous quarter. So the growth rates are in part a reflection of an easier comparison, but It's more of those things that I talked about, the timing on raws, management of pricing, improving volume and ramping up Conference of restructuring, savings and acquisition impact.

Speaker 7

And John, of that $40,000,000 to $45,000,000 price cost tailwind, how much that is locked in? I presume pricing is locked in. I presume most of the raw material costs are locked in as well. Is that fair?

Speaker 3

Yes, I think that's fair. I mean, I think everything is A little bit, particularly on the raw material side on the lag, right, because it's the products that we purchased in Q2 We're really the ones that impacted our P and L in Q3. So if you think about what's a Q4 impact, it's really materials that we've already purchased Conference. And pricing, we do have quarterly resets on our formula based pricing, but we have a Those are based on the previous quarter's raw material costs. So we do have pretty good visibility on that as well.

Speaker 7

Call. Great. And this is Leslie. In 2024, on the non formula based products, which I know will be down, Do you expect price to be down on the other portion of the business, the negotiated portion of the business?

Speaker 2

Well, again, Conference Call. We will because there will be plenty of reformulated products that we introduce to customers that are at a lower price to the customer while still being margin preserving for us. So there's a lot of activity, David, right now underway to reformulate and provide savings to customers, given the weak volume demand that's out there. Now some customers will take advantage of that and some won't. Again, we're a very small part of our customers' end product and very enabling.

Speaker 2

There may be cases certainly where we're introducing higher priced products that bring overall total savings to them Call. By allowing them to use a different substrate or run their lines faster. So it's a bit of a mixed bag, but Conference Call. I think that the overall movement on price will be

Operator

Call. Your next question will come from the line of Jeffrey Zekauskas with JPMorgan. Please go ahead.

Speaker 9

Thanks very much.

Speaker 2

Call. Good morning,

Speaker 9

Jeff. Hi, good morning. Did you reiterate your cash flow guidance for the year of $350,000,000 or no?

Speaker 3

We didn't reiterate it, but it remains intact.

Speaker 9

So you just reiterated it? Is that what

Speaker 4

Conference Call. I guess it's

Speaker 3

a good day we just reiterated it.

Speaker 9

Okay.

Speaker 3

And we feel good about cash flow. It's We had another strong quarter as expected and everything is lining up to be in line with the guidance we gave in Q2.

Speaker 9

Okay, great. So you've spent $195,000,000 on acquisitions so far, exclusive of The costs that you might take out or the synergies that you might achieve. What's the annual EBITDA of that $195,000,000 in spending and what are the annual revenues roughly?

Speaker 3

So this year We'll recognize approximately $100,000,000 of revenue for these acquisitions and roughly $12,000,000 of EBITDA. And Conference. I'd say that that is roughly reflective of a half a year's worth contribution because we acquired them over the course of this year. So you can kind of double those numbers and get to what we've acquired for the Now there's a little bit of synergy in that that we're getting this year. So maybe the number is not 24, it's 18 to 20 and then our synergies add another 4 to 6.

Speaker 3

So does that answer your question, Jeff?

Speaker 9

Yes, it does. Call. Your non recurring charges this quarter were about $0.36 I was listening to your answers to some previous questions. Conference. Did you effectively say that your non recurring charges in the 4th quarter would be double that or about $0.72

Speaker 3

No. I think that and I kind of look at it on a pretax basis. And as of the end of the Q3, the non recurring charges were about $40,000,000 Call. Some of those were, won't be repeating. We had an earn out related to an acquisition we did last year, which is A payment we made because the business is performing better than our deal model reflected, which is a good thing.

Speaker 3

But we are seeing the impact of these restructuring related charges and the integration costs for these acquisitions. I would expect that the Q4 for the full year, Conference. These non recurring charges will be around $55,000,000 to $60,000,000 on a pre tax basis. And And the other thing we had going on in Q3, which made that number a little larger was a fairly large discrete tax item related to settling some old tax audits. So we're not anticipating that repeating in Q4.

Speaker 9

In the engineering segment, your EBITDA went up about $10,000,000 sequentially even though your revenues were flat. Was that raw material benefits or something else?

Speaker 3

So couple of things going on there. Yes, raw material benefits are ramping in all 3 GBUs and that is impacting EA call. The other thing is the mix was very favorable in Q3 relative to the 1st two quarters as the performance of electronics Conference. And automotive continues to be very strong, electronics improved significantly in Q3. Some of that is Conference.

Speaker 3

So I would attribute half of it to raw material conference and the other half to the growth in the higher margin parts of the business.

Speaker 9

And then lastly, Celeste, do you plan to buy anything in

Speaker 2

We are constantly rebuilding our pipeline, Jeff. It's a real focus area for us. So, I never want to say I'm going to do a deal until it's done.

Speaker 9

But you're working.

Speaker 2

We're always working. We're always working the pipeline and there's a lot of opportunities Conference that we find to invest in those top 25 growth opportunities for the business. We have 30 market segment leaders that are desirous of growing their business. Conference. They're encouraged and incentivized to grow their business.

Speaker 2

And they've recognized that one of the ways that they can fill some of these most critical needs Conference is through M and A. So yes, so we have a strong pipeline and we'll continue to work that Those deals to a close many quarters to come.

Speaker 9

Okay. Thank you so much.

Operator

Call. We have no further questions at this time. I'll hand the call back to Celeste Masson for any closing remarks.

Speaker 2

Call. Thanks everyone for joining us this morning. We appreciate your time. Have a great day.

Operator

Call.

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Earnings Conference Call
H.B. Fuller Q3 2023
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