H.B. Fuller Company (FUL) 2002 Q3 法說會逐字稿

Good morning, everyone. This morning's conference call is being recorded and will be available for replay within two hours after we are finished with questions. Eventing for this conference call are Al Stroucken, CEO, Ray Tucker, CFO and other key H.B. Fuller management personnel. Before beginning I would like to remind all listeners that certain matters during this call will include forward-looking statements as that term is defined under the private securities litigation reform act of 1995. Such statements reflect our current expectations. Actual results may differ. Please refer to our press release for full discussion of factors which could cause such differences. Now, Ray Tucker.

Good morning, everyone. As many of you may have already read, our third quarter results excluding restructuring charges were slightly ahead of our expectations. A weakened U.S. dollar has helped to minimize the impact the global economic situation has had on our top line and lower raw materials and cost control initiatives have helped to improve net earnings in comparison to the prior year after elimination of the one-time tax benefit incurred in 2001. I want to remind everyone that per share amounts are reported on a diluted basis. Current year results discussed will be prior to any special charges incurred due to the restructuring initiatives in 2002 and previous year's results will be prior to the one-time tax benefit of 9 cents per share. Net earnings increased from $12 million in the prior year to $13.1 million. Earnings per share were 46 cents, 4 cents higher than last year's third quarter earnings per share of 42 cents. After elimination of the one-time tax benefit as I mentioned before. As in previous quarters of this year, current quarter's earnings per share include lower pension and post retirement benefit income of 7 cents, partially offset by the elimination of good will amortization of 2 cents per share. Sales for the quarter were $313.9 million, only six tenths of a percent down from 2001 sales of $315.7 million. Looking at the components of the sales change for the quarter, we see the following: Pricing was down 1.4 percent. Volume decreased 1.5 percent. Currency effects primarily due to the Euro, the yen and the Australian dollar accounted for a 2.3 percent increase. Gross margins of 28.3 percent was 1.1 percentage points better than last year's of 21.2 percent. About one-third of this improvement or $1 million was due to lower raw material costs resulting from our strategic sourcing team initiatives with key suppliers while the remaining was attributable to other cost containment programs. Operating expenses were $65.9 million or$4.7 million higher than last year. As a percentage of sales, operating expenses were 21 percent compared to 19.4 percent a year ago and 21 and a half percent in the second quarter of 2002. Approximately 50 percent of the increase is attributable to the reduced income from our pension and other post retirement benefit plans. In addition, the currency impact accounted for 27 percent of the additional increase or approximately $1.3 million. Interest expense of $4.4 million was $845,000 or more than 16 percent below the third quarter of 2001. Other income of $1.6 million compares to other expense of $1.5 million last year. Included in this year's income is a gain of $900,000 relating to the sale of non-productive assets. As I have previously mentioned in earlier conference calls, we continue to sell non-productive assets to offset the cost of our E-commerce initiative. Currency effects were $.7 million in income of this year compared to $.3 million of expense last year. Also included in last year's amount was good will amortization of $1 million. Pre-tax earnings of $20.1 million were 11.5 percent better than the previous year's third quarter earnings of $18 million. The effective tax rate for the quarter was 35 percent. Same as the previous year's third quarter rate, excluding the one-time tax benefit. Before moving on to the balance sheet, I would like to remind everyone the following figures maybe subject to minor changes prior to filing the10-Q. The company's capitalization ratio was 30 percent, compared to 38 percent at the end of the third quarter of 2001 and 32 percent at the end of the second quarter of this year. Total debt decreased 27.4 percent from the third quarter of 2001 to $194 million. Capital spending for the quarter totaled $12.5 million, compared to last year's third quarter spend of $8.9 million. Depreciation and amortization were $14.1 million for the quarter and $43.7 million year-to-date. Operating working capital amounted to $215 million compared to $240 million last year, a decrease of $25 million. As a percentage of sales, operating working capital was 17.1 percent versus 19 percent last year. Before I turn it over to Al Stroucken, I would like to address a few additional items. First, an update on the restructuring initiative. The program is progressing according to plan. In the third quarter, we incurred pre-tax charges of $6.3 million. This consists of $1.6 million for severance, $1.5 million of accelerated depreciation, $1.7 million of contract and lease cancellations, and $1.5 million of other closing and disposal costs. Year-to-date we have incurred $20.6 million in pre-tax restructuring charges. As we mentioned in our last conference call, minimal savings were realized in the first and second quarters. In quantifying the savings for the third quarter, it is difficult to pinpoint the exact number due to the closing of production some facilities and the ramp up of that production in other facilities. However, we believe the net cost savings realized for the third quarter are approximately $800,000. Primarily in head count reductions, partially offset by one-time transaction costs. The expected annual savings will be at the high end of our projected ten to $12 million range. Total charges related to the plan are still expected to be approximately $35 million within the range of our original target. We have decided that by extending the time line of the restructuring plan into 2003, a few objectives could be better accomplished. As I have just elaborated, this will not change the cost or benefit we expect to derive from the plan. Next I would like to address the additional news release regarding the filing of a universal self-registration statement with the SEC. This self-registration statement is not yet effective. But once effective, it will allow H.B. Fuller to efficiently raise capital by issuing various types of securities, including common stock, preferred stock, bonds and warrants up to an aggregate amount of $500 million. As you are aware, most public companies have similar self registration statements in place. As part of this self registration process we fought and obtained a rating from standard and poors. I am pleased to announce that S and P has advised that it will assign a triple B corporating with a stable outlook to H.B. Fuller company. Now here is Al Stroucken.

Thank you, Ray and good morning to all of you. For the eighth consecutive quarter the global economic situation continued to have an impact on our top line and overall results, albeit to a much lesser extent than previously on a year-over-year comparison. If I were to describe the overall conditions of our business environment I would compare it to bumping and scraping along the bottom without any clear signs of buoyancy. After some summary comments I will review the various situations we see regionally. But then would like to focus more on the internal picture for H.B. Fuller and try to convey to you the progress and or results of some of the initiatives we have undertaken and while we remain confident and optimistic about our future. Compared to the previous year's third quarter, trade revenue was down 6 tenths of a percent. On a sequential basis sales dropped 1.7 percent from the second quarter, a considerable improvement from the 3.9 percent drop we saw from the second to the third quarter in 2001 and more in line with the seasonal sales development of a quote unquote normal year. In contrast, the previous quarters the weakening U.S. dollar provided for a favorable currency impact of 2.3 percent for year-over-year comparison, driven by the strengthening Euro and to a lesser extent the Australian dollar an the Japanese yen. Our overall volume continued to stagnate given the economic situation. But certain end markets did provide some significant growth indicating that there may either be some segments of the industry that are awakening or that several of our initiatives are starting to bear fruit. Now Reuben's (ph) performance remains strong globally, with a 9 percent improvement over the previous year. Footwear also has shown continued success, particularly in Asia with sales increasing nearly 12 percent. In North America, the automotive industry continued to remain strong in the quarter with year-to-date car production up nearly 6 percent over last year and as a result our automotive revenue is up by more than 7 percent. In our full value specialty segment, TEC and Adalis continue their positive sales performance along with improved quarterly results from our window and consumer divisions nearly offsetting the significant weakness we have been experiencing in our paint-related businesses both here in the United States as well as in central America. Our pricing this quarter was once again under attack by competitors reacting to the weakened demand by lowering prices to obtain volume to utilize some of the excess capacity. As I mentioned, in the previous quarter's conference call, we will react appropriately to these attempts. It is obvious that slow demand is causing some irrational requests in the quest for additional volume. But given the cost pressure we are now seeing once again in raw materials we are very cautious in our decisions, even though our productivity improvements in the last few years have been given us a clear competitive edge. In some of our businesses we are, contrary to the trend I just described, in the process of adjusting our prices upward. A case in point is our paint business in central America where we just implemented a successful price increase of 5 percent throughout the region. Raw materials as a percent of sales remains at a level comparable to the second quarter. This is by no means an indication that our suppliers have not been successful in raising prices on some of our raw materials. But more specific to Fuller, it is a result of our supply chain management initiatives and processes, managing to offset some of these increases for the near term. The impact of rising oil and natural gas prices will have on our key raw materials in future quarters is yet to be determined as their respective market prices remain at levels dictated more by speculation than by supply and demand. Operating expenses continue to be well under control, despite the significant negative variances we had this year related to the reduced pension credits from our predominantly and accrative (ph) pension fund and post retirement benefits here in the U.S. We also have to take into consideration the higher expenses from those countries that have a favorable currency development when we convert them into U.S. dollars. The overall global picture remains much the same. Let me therefore just highlight a few noteworthy observations. Only the Asia Pacific region continues to demonstrate at this time the ability to support consistent growth. Where China's expected GDP growth continues to be about 7 percent, with a remarkable 8 percent expected in the fourth quarter. But also the Philippines as well as Taiwan seem to be on the mend. Sales volume in the Asian region showed an increase of 4.4 percent with China being the main contributor. In the U.S., the overall economic picture remains uncertain. Since the last conference call one could say there is an increased level of pessimism regarding the timing and strength in which a recovery, already delayed over twelve months from original predictions, will occur. Economic indicators such as continued dwindling consumer confidence, lower than expected second quarter GDP growth and more recently the August production levels dropping for the first time in eight months leaves little doubt that the year will more than likely end much like it began. An about face, the automotive industry just last week announced a reduction in the annual production levels by over1.5 million units, a further indicator of the uncertainty. It is particularly here in the United States that we are unhappy with our sales development. Our weak performance is mainly caused by our assembly business. As a result, we have made major changes in the management and sales organization and we expect this re-energized team to drive a strategy shift that will give us a competitive edge also in our marketing approach. European countries continue to operate under much the same environment as the United States. For the most part, second quarter GDP numbers for each of the Euro union (ph) countries were revised downward and consumers in the other countries of the European union claim to have experienced significant inflation since the introduction of the Euro. Italy's consumer confidence has dropped to its lowest in three years appeared the UK remains at a seven-month low. In Germany, retail and export sales are down. In addition, the expected scope of impact from torrential flooding last month is still imprecise. In this difficult scenario, our volume sales in Europe were up 2.1 percent, even though the currency development allows us to show the12 percent growth over last year. Latin America remains under a very dark economic and political cloud. I spent some time in Latin America this quarter. And I am very pleased with how our people are handling the situation. Despite the significant devaluations of the peso in Argentina and the Brazilian real, we were able to minimize the impact on our financials. In addition, by shifting production over the last couple of years to Argentina, our operations there are exporting to other countries in the region and generating solid profits from a significantly reduced cost basis, despite a dramatic drop of in-country consumption. I would now like to change focus to the internal happenings here at H.B. Fuller. As Ray mentioned the restructuring initiative continues to be on target in terms of cost and annualized savings. We did incur a delay in terms of the selling of some assets that we thought would transpire in the fourth quarter of this year but are now scheduled to take place next year. In order to maximize our benefits from the transactions. In addition, we decided that a few objectives could be better accomplished by extending the restructuring time line into the mid part of 2003. Neither the total cost of the restructuring nor the initially expected benefits in 2003 will be negatively affected by this extension. The filing of the universal shelf registration is but another step we have made to position ourselves to be able to execute one part of our growth strategy, which is one large acquisition or several substantial acquisitions. By improving our balance sheet from the mentals (ph) and reducing the cost structure the investment rating of a triple B on our company is yet another achievement our people have accomplished at a time when many others have been going in the opposite direction. We have begun taking action regarding the findings of the sales force investigation we discussed during the last quarterly conference call. At this point we have already made many of the required changes identified by the process and hope to have this completed by the early part of next year. As I said last time, we need a sales organization that is driven to sell profitably and to win. We are well on our way to getting there. But implementing these findings is only one of the ways we believe that we can gain advantage in our competitive environment. Prior to creating our web based Fuller store, we estimated that approximately 25 percent of our sales force's time was directly related to order inquiries rather than to selling. During the first quarter's conference call I reported that we were conducting 70 percent of purchases and 25 percent of our sales in North America through E-commerce. We continue at this high rate in our procurement and have been expanding into Latin America and Asia Pacific and expect a significant boost in Europe before the end of this year. Our sales side has been developing at a slower pace. But today 40 percent of our adhesive sales in North America are handled through E-commerce with a strong upward trend. That is exemplary in the chemical industry. But what is more important is that through this vehicle we now have regular E-based interaction with a significant and growing customer base that we can leverage to increase penetration at existing accounts and to migrate through E-sales, to E-marketing. Our product line rationalization and our adhesive business remains on track with an overall (ph) reduction level of approximately 50 percent by the end of this year, compared to early 2000. Our new product sales growth continued again this quarter at greater than a 40 percent increase, signaling that more and more of our customers are enjoying the technical benefits and lower cost of ownership these new robust products provide. All of these steps will provide momentum to our growth objective in a very uncertain and difficult environment. The fourth quarter suffered an economic impact from the world's reaction to 9/11. Therefore, comparisons may become a bit more positive than heretofore. Yet I do not see any underlying economic ties that would raise all ships. We will continue to depend on our own savvy and tools to influence and shape our future. We have brought our house in order. And now we can focus on growing from a very solid foundation also in a difficult environment. In wrapping up my comments I'd like to address a few key personnel changes. As many of you may have seen last month, Patricia Jones has joined the company as chief administrative officer. In this capacity she will oversee human resources, community affairs, public relation also and other administrative functions. She will also hold the position of general counsel and secretary. Patty most recently served as senior vice-president of administration for the Star Tribune company and prior to that was 15 years with northwest airlines. I believe Patty will be of immense help to us as we continue to develop our new culture and drive our company to new levels of performance and capability. And finally, as most of you know, I recruited Ray Tucker out of retirement a little over three years ago to be part of a management team which was to embark on a transformation of our company from a paternalistic and satisfied mind set to a publicly-held company mind set with global reach, operating within the parameters of best in class and a constant hunger for improvement. With Ray's significant contributions and procurements, shared services, IT and of course in the financial arena, we have made much progress in achieving this goal. Ray's original commitment ended this past July. I wanted to let you know today that I was able to convince Ray to stay an additional year to July 7, 2003, but I was not able to sway him to stay longer. Ray will in this time continue as chief financial officer and ensure the successful completion of the current restructuring program of other ongoing initiatives, as well as assisting in the preparatory work on implementing a lean six sigma program. We will begin to use the next several months to commence the transition for Ray's replacement. As Ray readily agrees, it will be a challenge to find someone inside or outside our company of the same caliber, but not impossible. I will now be happy to answer any questions you may have.

At this time I would like to inform everyone, in order to ask a question please press star then the number one on your telephone keypad. If you would like to withdraw your question, please press star and then the number two on your telephone key pad. We will pause for just a moment to compile the Q & A roster. Your first question comes from Allen Cohen of First Analyst.

One, let me congratulate you on pretty much getting all the way there on the transition you set out to achieve. Now all you need is the growth part.

Yes.

If you would pull out the paint-related shortfalls in the quarter, would your volume growth be more in line with perhaps the market growth?

Well, I think that the market growth overall, if there has been any growth at all, has been anemic in the last quarter. We generally only get those statistics only six or nine months later, after the quarter. So it's difficult to say. I would not see the paint sales had a significant impact on the overall performance of the company. I believe that our greatest weakness really was in North America, as I already indicated in my comments.

All right. Then in terms of the timing of the shelf registration now, would a reasonable take away, is that you are now comfortable with the strength of the organization to move forward with acquisitions if the opportunity is there?

Yes, I think I have said that before. I believe we reached that point as far as our capabilities is concerned and we just used the last six to nine months to also get the mechanisms in place to get ready to move whenever an opportunity presents itself. So whenever something we are pursuing comes to fruition.

Thank you very much.

Thank you.

Your next question comes from John Roberts, Buckingham Research.

Good morning.

Good morning.

It sounds like the majority of the raw material cost reduction was related to your sourcing initiatives. I wanted to check that. As we go forward you will more closely track an index of raw materials, as you will as you start to anniversary some of the initiatives?

That's correct. Most of the benefits we have seen in the last quarter really were related to our own initiatives and not to the market development. I believe that some of the benefits that we did put in place will also extend into the future, but I would still expect that the majority of our cost development in the future is going to be governed by the overall price development of raw materials in the marketplace.

And if you had to take a basket index at the end of the quarter or right now, where are things either relative to the average last quarter or the start of the last quarter?

I believe that we have seen some further declines in raw material prices in the first half of this year or in the first quarter of this year there still was a decline from the previous year. But that position has stabilized. I would say perhaps we are at this point in time 2 percent or so as a percentage of raw materials. So it would be approximately around 1.7 -- sorry, it's approximately 1 percent or so below the cost structures that we had last year for raw material.

Thank you. And then lastly, you were kind enough to quantify certain markets like non-woven's up 9 percent, footwear up twelve. I don't recall that you actually quantified the decline in paint. If you could, could you provide some quantification of some of the other markets that were down materially?

I don't have this at my fingertips. I believe the reduction in quantity in paint was minimal. It was I think less than two or 3 percent. But a major impact in our paint business in the first half of this year an also the last quarter was price pressure we had seen. That's why I said we had a correction of that situation by introducing a price increase of 5 percent. I expect that to have a positive impact on the remaining quarter.

Thank you.

Your next question comes from David Begleetour (ph) of Deutsche Banc.

David Begleetour (ph): Good morning, Ray, good morning, Al.

Good morning, David.

David Begleetour (ph): Al, product prices, you gave a number for the decline year-over-year. What were product prices sequentially? And how confident are you as van and other feed stocks increase that you can get prices going forward?

Well, I would say what we have seen developing in raw materials overall was that in the four quarters of the year 2000 we saw a continued upward movement of raw material prices. And in the four quarters of '01 we saw a continuing decline of the raw material prices. And as I said earlier, we saw a little bit of that continuation, but with a more stabilizing trends in (ph) the first quarter. Then we saw really flat in the second and third quarter of this year as far as our cost structures are concerned. I'd say we have been able at this point in time to keep our price movement as well as our raw material movement in a positive trend for us. That is reflected in the income statement. I think that with the price pressures that we are seeing in raw materials at this point in time, hopefully there is also going to become a greater stabilization in price going forward. I think a lot of the things I described, about irrational actions that we're still seeing is still under the influence of the last five or six quarters of raw materials generally coming down. I think people are realizing this is not going to continue. And that will help us in maintaining a positive spread.

David Begleetour (ph): Al on pricing and the irrational actions are those from your large global competitors or more regional local players?

It's basically across the board. I think, David, we see that in particular in those areas, I believe, where we still have sales organizations or sales forces basically determining price structures and price levels and there is a natural tendency there to perhaps take action to not, to gain volume in a difficult environment. That may not make sense economically, but I would hope that eventually that's going to take care of itself. People are going to see what the effect of that is going to be and will have a more rational approach.

David Begleetour (ph): And Ray (ph), have you gotten complete control of your sales force so that all actions are driven by you and not by local sales people?

I wouldn't use the world complete control. Only my wife is in complete control of me, but I would be very -- it would be very difficult for me to say there's complete control, but I think we have very good oversight. And we'll find out very quickly if something is going out of whack.

David Begleetour (ph): Thank you very much.

Your next question comes from Rosemarie Morbelli (ph) of Engels and Snyder (ph).

Rosemarie Morbelli (ph): Good morning, all. I would like to commend to Ray for his modesty and your wife, Al, for her sense of character. Now, having said that, could you touch a little bit on the extension of the restructuring what kind of tests are you going to delay? And I am assuming that it is in order to make sure that they are done properly.

That, of course, is the case. As you know, we are taking out approximately 20 percent of our total manufacturing operations and also at the same time reducing our product line significantly. So we've got to make sure that those activities move in tandem and move appropriately. On top of that, we also have found that for some of the properties we may be able to get a higher value if we do some preparatory work first and before we put the properties on the market and that too plays a role. And that would allow us at least, or would make sense to continue the operations a little bit longer as we go through those steps.

Rosemarie Morbelli (ph): In terms of product lines, how many S KUs do you have currently? And what is the game plan? How low are we going?

Well, I think I don't have the S KU numbers, but I have the product numbers and specifically I have them for North America available. We can give you more specific data perhaps off line on what we have on the worldwide basis. But we're now down in the adhesive side. We are now going to be down to approximately a thousand 600products at this point in time in North America, and the expectation is that that number will be lower at the end of the year.

Rosemarie Morbelli (ph): All right. And then you talked about material costs having materialized, at least if I understood properly was in terms of comparison with the prices last year.

Yes.

Rosemarie Morbelli (ph): Now with what is going on in the middle east and so on, are aren't you expecting some of those to go up in the fourth quarter and affecting your gross margin?

Well, I think predictions are extremely difficult in this volatile environment. I would certainly expect with tensions running high, generally in the last couple of months and continuing into the next months as well, we are going to see a progression (ph) -- we have seen it already in oil prices as well as in natural gas prices. I saw a quote yesterday for natural gas around $4 or $3.95 or something. So I would certainly expect that to have a formulaic effect on some of our purchasing contracts. We've got to make sure we are prepared and putting in place the steps necessary to compensate for that with price increases.

Rosemarie Morbelli (ph): Looking at the gross margin which is linked to some degree to raw material costs, it was 28.6 percent in the second quarter and then 28.3 in the third. While when I look at previous years, usually if I am not mistaken, the margin increases sequentially and so it is down in the third. Do you think you can maintain it at this level in the fourth? Or as you do historically, can it be higher regardless of what happens to raw materials?

Well, I don't know specifically historically how this develop has been. I think what we may have seen a little bit emotionally (ph) as an impact is that some of the competitive class actions that were taken in the second quarter and that I described in the second quarter may have come through and perhaps have had a slight effect. See, it's not only volatiles that you see there, it's the price ratio between the raw materials. And that may not move synchronously with the actual development in the marketplace as far as absolute price is concerned.

Rosemarie Morbelli (ph): So, back to the fourth quarter do you expect that gross margin to improve sequentially? It should because seasonally speaking ...

It depends, of course, on the additional volume that we move through. And I would expect at this point in time to go back most forward (ph) to the second quarter levels approximately.

Rosemarie Morbelli (ph): Okay, thank you.

Your next question comes from Karen Guildman (ph) of Merrill Lynch.

Karen Guildman (ph): Good morning. A little bit more detail, if we could on the restructuring. I think Ray mentioned that the third quarter - in the third quarter you saw savings of about $800,000. I'm wondering what that looks like, what that figure might look like in Q4. An additionally in 2003 you were hoping to get that full annualized benefit, I think, of ten to 12 million. Now that you delayed some of these steps into the first half of '03, what kind of cost savings might we see?

Well, I still expect the savings in the next year to be at the high end of the ten to $12 million range that we have mentioned. I think we are still well within the target there or even at the upper limits that we said (ph). With regards to the fourth quarter we of course have been trying to figure out as well what is going to be the benefit. The uncertainty that we still have, and as Ray already indicated in the termination of the benefits in the third quarter, at this time we still have two countervailing activities ongoing. One is to shut down and the benefit we get on the shut down and the other is the start up of the operations where we are moving the production to. Ranbob (ph) will have off batches as we run trials, we'll have some customers that we have to convert and some issues that we have to deal with. So, it's really a balance between additional outlays of -- in running operating expenses and benefits that we get from the shut downs. I would expect the number to be slightly higher than what we saw in the third quarter.

Karen Guildman (ph): Okay. And Al, you implied in your comments that earnings should be up in the fourth quarter compared to the weak results, 9/11 affected results a year ago when you reported 51 cents. Does that comment -- you take into account the reduced pension income in that kind of comment? In other words if you were ...

All our numbers so far this year, of course, have the reduced pension income already included in that. We have been tracking fairly closely to last year. And, therefore, my belief is that as we go and get an easier comparison in the fourth quarter, I should also see some improvements there. And that does include the effect of the pension, unless the pension benefit that we had already predicted for the entire year.

Karen Guildman (ph): I guess, what I was trying to say is that, if we stripped that out, you should see improvement?

And yes. And I was, of course, in particular when I was referring to that number, I was referring to our sales activities and the sales comparison. That will be easier, and you already saw some of that happening in the third quarter where our deviation from last year was significantly less than the deviation that we've seen in the previous quarters. But ultimately that is going to have an effect on the income as well.

Karen Guildman (ph): So sales and income should be up in the fourth quarter. And just finally, Al, on this 500 million shelf registration, do you sense that in the, you know, current kind of tough economic environment that interesting properties might be coming on the market? And that perhaps getting back to the timing of this, I mean, do you think the probability of Fuller doing a sizeable acquisition is greater today?

I certainly think the probability as far as our own capabilities are concerned is certainly greater than it has been at any point in time in the past. The difficulty that we see, and I have been discussing that with quite a few people in banks over the last couple of months, is the reluctance of people to sell at this point in time because they look at it from the other direction and say we could get much better prices if we wait a little bit or if we wait a year, rather than sell at this point in time. So we are very often finding that the only opportunities that really are available are people that either have a financial need, an urgent financial need to do something in this area or generally companies that are going through a reevaluation of their portfolio, larger companies that have come to a strategic decision to get rid of a particular business. So I would say yes, our capability has improved. The availability of worthwhile targets and worthwhile objectives in the marketplace has somewhat decreased. We therefore see this environment more as an environment where we have to drive the initiative rather than picking and choosing from what may become available in the marketplace.

Karen Guildman (ph): Thank you.

Your next question comes from John Harlow (ph) of Barrow Hanley (ph).

John Harlow (ph): Can you hear me?

Yes, John.

John Harlow (ph): I've got a question about your desire for acquisitions. You and I have known each other for a long type. I can recall when another company was interested in your company. And your thought was, what value did it add? Most acquisitions fail. You know, why build a bigger company if it doesn't add value. A whole lot of things. And this seems to me -- it strikes me as strange and really not you, so ...

Well, let me try to answer your comments. Number one, I have said also in the past that a large transaction in the adhesive business are, only a large transaction in the adhesive business makes sense. Any transaction in the adhesive business would, of necessity, be a cost play. Would be a opportunity to get synergies out of basically merging or combining two virtually identical or very similar operations with similar global footprint, with similar market position, similar products, similar manufacturing facilities. And there is a lot of money to be made. It is a tough way of getting to the money, because it involves a lot of people. A lot of people's lives are going to be affected by it. But certainly that is one of the strategic acquisitions and directions that make sense for us as an organization. We have, on the other hand, the opportunity through our full value and specialty area to go to a series of acquisitions that may still be substantial in nature but are not that huge. And those would be acquisition s to either access new channels to the marketplace. They would be accessing either new technologies or new product lines, for which we already have a channel into the marketplace. So there are acquisition opportunities there that are clearly adding to growth and that are adding to profitability because generally the profitability level in those businesses is higher than what we would achieve overall in adhesives. So I think it really is a two pronged approach that we are looking at. I think it widens our area of opportunity that we can pursue.

John Harlow (ph): A follow-up to that, though, is that there is a big property in the adhesive business on the market several years ago. Prior management of Fuller had an appetite to try to buy it. One of the lessons at least I got from the observation is this company doesn't have the size assets or equity or the balance sheet that can support the kind of debt it takes to make the merger in the acquisition business. It's a risky deal and it would have been very dilutive. Why now? Nothing's really changed.

No, I think that we have available and that also goes hand-in-hand with our filings that we have made. We have a variety of insolence (ph) available to the company to make acquisitions. But I also believe we have to recognize our limits. And I mean trying to go after a $2 billion or $3 billion company just doesn't make any sense.

John Harlow (ph): It seems to me what makes sense is that we be the seller, not the buyer.

Well, I think if that makes economic sense to our shareholders, if that makes economic sense also to the continuing operations, I think that we certainly have an obligation to talk to our board about it an give it serious consideration.

John Harlow (ph): What's your attitude about dilution?

Well ...

John Harlow (ph): I know what it has been in the past. I want to hear what it is today based on your filings.

I believe that we can expect our shareholders to accept dilution for about a year or so. But then we've got to be able to show some real benefits for the transaction and through the transaction.

John Harlow (ph): And how much of that do you think we can swallow?

As far as a percentage is concerned?

John Harlow (ph): Sure.

I don't know what your capability for sufferance (ph) is. I don't know.

John Harlow (ph): It is not very high. I don't think anybody else's on this call's is that high either. But what is acceptable to you?

I think if we are talking about dilution, it really depends on the individual deal. To make a prediction at this point in time is just impossible.

John Harlow (ph): That's not a good answer really ...

It depends on the benefit you get at the end of the dilution pyramid. I think you have to look at both factors in combination. You cannot just look, how is it going to cost me in a quarter? If it's going to bring you a fortune in the next year, then it might be easily acceptable.

John Harlow (ph): That's a fair comment. Thanks Ray.

Your welcome John.

Your next question comes from Jeff Zekauskas (ph) with JP Morgan.

Jeff Zekauskas (ph): Good morning.

Good morning Jeff.

Jeff Zekauskas (ph): You are making strides in reducing your overall capacity. So, what's your general level of capacity utilization now? And assuming that your volumes were flat over the next year, what would be your capacity utilization level at this time next year after your initiatives are over?

Well, as we said in the original announcement when we introduced the initiatives, we were going to bring up our capacity utilization to over 50 percent. At this point in time or in the past that utilization was lower than 50 percent and we think we're well on our way to get to that objective.

Jeff Zekauskas (ph): So you were, it just defines, so I understand you clearly -- you were under 50. Now the goal is to be over 50?

The goal is to be over 50. There is a difference, of course, between some of the technologies that we use. If you go to a hot mail product line and the hot mail product area, we generally have a higher capacity utilization and in the water based area the utilization generally is a little bit lower and also if you know, and as you know from studying our company, many of our prophesies are batch operations and batch operations in the pure definition of capacity available -- capacity that I apply to our company, which is 24 hours a day, seven days a week, a batch operation generally is utilized at about 70 to 75 percent utilization of that baseline.

Jeff Zekauskas (ph): Okay. I guess just a very quick second question. Can you just say again what the volume change was in the United States this quarter? Did you grow in the U.S.? Did you shrink a little bit? I couldn't tell.

One second. Let me try to verify that number. As far as volume is concerned in the United States, we were down by 1.8 percent.

Jeff Zekauskas (ph): Okay. Thank you very much.

Okay.

We would like to thank all those who took the time to listen and participate in today's conference call. If there are no more questions, we will now conclude this conference call, you may now ...

Thank you very much.