H.B. Fuller Company (FUL) 2002 Q4 法說會逐字稿

Good morning, my name is Matthew and I will be your conference facilitator. At this time I would like to welcome everyone to the H.B. Fuller Fourth Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question-and-answer period. If you would like to ask a question press star and the number one on your telephone keypad. If you would like to withdraw your question, press star and then the number two on your telephone keypad. I would now like to turn the call over to Scott Devorak, Director of Investor Relations.

Good morning, everyone. This morning's conference call is being recorded and will be available for replay two hours after we are finished with questions. Present for this conference call is Al Stroucken, Chief Executive Officer, Ray Tucker, Chief Financial Officer and several other key executives.

Before beginning, I would like to remind all listeners that certain matters discussed during this call will include forward-looking statements as that term is defined under the Private Securities Litigation Reform Act of 1995. Since such statements reflect our current expectations, results may differ.

I also want to note that some of the financial information discussed today reflects adjustments from our quarterly results in order to assist investors understanding the impact of special items related to our restructure initiative. For more information on either of those topics please refer to our press release.

Now, Ray Tucker.

Thank you, Scott.

As many of you may already read, our fourth quarter results were ahead of our expectations. Increased volume and a continuing weakened U.S. dollar more than offset lower prices to post our first quarterly top line improvement in the last eight quarters. As in the previous quarter, lower raw materials and cost control initiatives also contributed to the improved net earnings in comparison to the prior year.

I want to remind everyone that per share amounts are reported on a diluted basis. Current and prior year results discussed will be prior to any special charges incurred due to the restructuring initiatives.

Net earnings increased from $14.4 million in the prior year to $16.6 million. Earnings per share were 58 cents, 7 cents higher than last year's fourth quarter earnings per share of 51 cents. As in the previous quarters of this year, current quarters earnings per share include a lower pension and post-retirement benefit income of 7 cents, partially offset by the elimination of goodwill amortization of two cents per share.

Sales for the quarter, $329.6 million, 2.1% higher than Q4 2001 sales of $322.9 million. Looking at the components of the sales change for the quarter, we see the following: pricing was down 1.2%, volume increases 1.5%. Currency effects primarily due to the Euro, the yen and the Australia dollar accounted for a $1.8% increase.

Gross margins of 28.7% was 7/10th of a percentage point better than last year's gross margin of 28%. A significant portion of this improved percentage was due to lower raw material costs.

Operating expenses were $66 million or 2.6 million higher than last year. As a percentage of sales operating expenses were 20% compared to 19.6% a year ago, and 21% in the third quarter of this year. Approximately 87% of the increase is attributable to the reduced income from our pension and other post-retirement benefit plans.

Interest expense of $3.8 million with 1.1 million were nearly 23% below the fourth quarter of 2001. Miscellaneous other expense of $500,000 compared to $1.7 million of expenses last year. Included in this year's amount is a gain of $1.5 million, compared to a gain of $800,000 last year, 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 costs of our eBusiness initiative.

Negative currency effects were $700,000 higher than the year before. In addition, last year's expense included goodwill amortization of $1 million.

Pre-tax earnings of $24.4 million were 19% better than the previous year's fourth quarter earnings of 20.4 million.

The effective tax rate for the quarter was 33%. In 2002, effective annual income tax rate of 33%, differs from the 35% previously discussed with you due solely to the reclassification of amortization expense associated with investment properties, specifically held to generate income tax credits. We have determined a more appropriate presentation of this amortization expense, is to treat such amounts as a pretax expenses, rather than as an offset to the related income tax credits.

As such we reclassified $2.4 million of amortization expense in 2002, from income tax expense, to pretax income, of which $900,000 was in the fourth quarter. The corresponding adjustment has been made to prior years, which will be reflected in our comparative financial statements. This resulted in effective annual income tax rates $28.3 and 35.2% in 2001 and 2000 respectively. These reclassifications had no effect on previously reported net income or earnings per share. On a comparative basis, we expect our rate for 2003 will also approximate 33%.

Before moving on to the balance sheet, I would like to remind everyone the following figures may be subject to minor changes prior to filing the 10-K. The company's capitalization ratio was 29%, compared to 35% at the end of 2001 and 52% four years ago. The total debt decreased 21.8% from 2001, to $183 million. Capital spending for the quarter $10.8 million, compared to last year's fourth quarter spend $6 million. Capital spending for the full year was $36 million, compared to $31 million in 2001.

Precash flow for the quarter equaled $5 million compared to $25 million in the fourth quarter of last year. Precash flow for the year amounted to $34 million compared to last year's $47 million. Without the restructuring cash outlays and the cash dividend issued by our automotive business, precash flow for the year was $53 million, versus last year's $47 million.

Depreciation and amortization were 13.8 million for the quarter and 57.5 million for the year.

Operating working capital amounted to $209 million, compared to $219 million last year. A decrease of $10 million. As a percentage of sales operating working capital 15.8%, versus 17% 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 fourth quarter we incurred net pretax charges of $9.1 million. This consisted of 4.8 million for severance, 1.3 million of accelerated depreciation, $2 million of contract and lease cancellations, $3.1 million of other closing and disposal cost and $2 million in gains from sale of assets. Year-to-date we have incurred $29.7 million, pretax restructuring charges.

In quantifying the savings for the fourth quarter, it's difficult to pinpoint the exact number due to the closing of production in some facilities and the ramping up of that production in the receiving facilities; however, we believe the net cost savings realized for the fourth quarter are approximately $2.5 million. Primarily, in head count reductions, partially offset by one-time transition costs.

Again, I would like to reiterate that the expected annual savings will be at the high end of our projected $10 to 12 million range. And the completion of this plan should be accomplished by mid-year 2003.

As I conclude my remarks, I would like to quickly reiterate a few points about the effect that we will realize 2003 regarding our U.S. pension and benefit plans, including the retiree medical plan. Just to assure that we all have the same information, let me review our public comments about the U.S. pension and benefit plan costs.

November 26th, 2002, in a press release, we stated that the continued unfavorable performance of the assets in the portfolio and the decline in interest rates would increase the cost in 2003 by approximately 22 cents per share. This amount is in addition to the 27 cents per share increase we absorbed in 2002. Having completed the analysis of all the company's benefit plans, I can say that based upon available information, the additional cost of 22 cents per share is still the correct assumption.

Now, here's Al Stroucken.

Thank you, Ray, and good morning. I hope that this coming year will be a good one for all of you.

This past year ended very much like it started, uncertainty about the future economic develop in key regions, as well as the new focus of dealing with real or perceived potential threats to the security of many of the developed and developing nations has made it extremely difficult to predict with any degree of certainty whether traditional cycles of recession and recovery will apply. Throughout the year, we have tried to run our business in a fashion that allowed us to be prepared for any upturn, yet at the same time, ensured that we could operate successfully and profitably under more severe economic conditions.

I believe that we have achieved that goal and I will, a little bit later, following my comments about the fourth quarter try to summarize a few of the key activities that we accomplished during the year. They are important to review, because they not only permitted to us deliver the results of the fourth quarter, but they also created the platform and set the stage for future performance.

Even though the last quarter did not signify a dramatic departure from the underlying weak demand of the earlier periods of the year, it ultimately led for the first time in eight quarters to a year-over-year growth of 1.9% in volume. On an absolute U.S. dollar base, the growth was slightly higher at 2.1%, as the currency development patterns of the past five years reversed, and Asia Pacific and Europe regained some of the currency erosion they experienced during that time.

Granted, I have commented in my previous quarterly conference call that we would be moving into easier comparisons with the past year, yet the reports I keep reading about the negative developments in the manufacturing industries and the capital industry in particular, seem to make it clear that our performance was not a lay-up shot.

Our overall sales increased a bit, as I mentioned earlier driven by positive developments in not only converting, footwear, automotive, Foster, tech and our window businesses. Packaging, powder coatings and assembly remained weaker and seem to be areas of increased price competition, where competitors are trying to bolster generally lagging sales by picking up some chunks of business at reduced prices.

Our paint business in Central America was successful in implementing their price increase, and achieved slightly improved sales and considerable gain in margins. With their slight improvement in sales they also reversed the negative trend of the past quarters.

Despite the competitive pricing actions in some sections of our business, as I mentioned earlier, we were able to pull back somewhat from the price deteriorations of earlier quaters and our year-over-year comparison for this quarter showed a negative price development of 1.2%, versus a 1.4% deterioration in the third quarter year-over-year.

In North America, our sales development did not quite meet our expectations. I have mentioned to you earlier in the year that we have been upgrading our sales and marketing organization, and we have been making great progress in this area. In some of our units that process has led to a turnover of more than 50% interstaffing. The changes do, of course, create temporary problems and maintain the relationships and the flow of the existing business, yet we were also seeing stronger competitive price pressures which given the latest run-up in oil and natural gas prices is a bit puzzling but we have taken the right steps to counter the impact of these transitional issues and competitive threats and expect to see a marked improvement in the coming quarters.

In the North American automotive industry, the sales of cars and trucks continued at a good pace and our Aptek participated in the positive development and also advanced the mark acceptance of their liquid applied sound dampener and direct placing product lines. Towards the end of 2002, however, car inventories spiked, and that will likely have an impact on the production rates in the first quarter of this year.

In Europe, economic conditions have been going from bad to worse. After a lengthy period of denial, most countries now have accepted that the economic contraction was not just a U.S. phenomenon but that it appears to your land as well. Bankruptcies and a considerable containment of private and public spending put a significant damper on growth prospects. The strengthening of the Euro, versus the U.S. dollar began to influence the demand for products of the traditionally export-oriented European companies. Furniture, footwear and electronics industry, they are going through one of the worst cycles in decades.

In this environment, our sales in Europe held their own with a 1.9% reduction on a directly comparable basis to last year, yet converted into U.S. dollars the region showed 6.8% higher sales.

Present conditions in Europe may lead to a longer-term issue. Faced with a socioeconomic and political environment that is not willing or able to make the hard choices to become competitive again, companies are considering moving their operational base towards the countries of Eastern Europe and Asia. Our efforts over the past couple of years to establish a Pan-European structure will allow us to adapt quickly to such shifts and have positioned us well for the future.

Also in Europe, we are going through the process of upgrading our capabilities in the sales marketing and service organizations. And combined with our structural changes of the past and the ongoing cost improvement programs, we expect that these steps will enable us to improve our market share in the region.

In Latin America, the continuing political and economic instability has not made it easy for any company to succeed, yet our company was able to operate very successfully in spite of these odds. Particularly in Argentina, which has seen the most dramatic economic downturn, we've succeeded in turning the challenge into an opportunity, and are using our operations as a very competitive base for the broader [Mercosure] and Latin American market.

We have to realize that participation in the more dynamic growth opportunities of the countries of Latin America requires an approach that differs considerably from the way we pursue our business in the more [spade] economy of Europe and the United States. Managing the balance sheet, production assets, and an adroit flexibility in expanding and contracting our resources requires a market-specific experience and knowledge that allows us to react quickly to this changing environment.

Our commitment in Latin America provides interesting growth opportunities albeit at a higher risk level but we have the experience and the talent in the region to make this a very positive risk reward ratio for our company.

In Asia Pacific as well, we improved our sales and results considerably compared to the previous year. China continues to develop nicely with an almost 30% growth rate. Australian and Japan is showing some good improvement also.

From a long-term perspective, it has become obvious to us that Australia and Japan will be the more solid and predictable economic environments with a moderate organic growth opportunity. Similar to Europe and North America, expansion of our position in such markets will have to come through acquisitions. That way we will be able, through our expanded base, to develop cost structures more advantageous than we have today and at the same time create a market access that permits to us channel global products on a broader basis into these countries.

China will require a different approach. Organic growth prospects in China are a multiple of what we can expect in our traditional markets. Conditions for doing business in the country have dramatically improved over the last decade. Economic energy and the opening and opening of China require more and more local companies to adapt their manufacturing processes to state-of-the-art technology. That technology does generally require more refined and highly developed [pieces] than may be available from domestic competitors.

We have been locally producing and marketing for over 14 years. In that time, we built an experience level and a domestic staff that gives us a solid foundation to expand to a significantly broader base. We will, therefore in the coming months go through an extensive process to define the appropriate ratio between capital investments for expanding our own manufacturing base and acquisitions or joint ventures with existing participants in the Chinese market.

Given the importance we ascribe to China with regard to our future success in the entire Asia Pacific region, we are convinced that the country will require a higher proportion of our resources and that it will generate a higher rate of return for the entire company. With regards to raw materials, we have seen a continuation of the slight upward trend during the last quarter on a sequential basis.

The most recent run-up in oil and natural gas prices came too late in our quarter to have a significant effect. We are facing increases in VAM and EVA compared to last year, but it is yet too early to predict how this will play out over the next couple of quarters. The uncertainty surrounding Iraq and Venezuela will continue to exert upward price pressure, yet the demand pattern of the industry runs counter to this pressure.

With regard to our own company, we believe that the combined effect of our strategic sourcing teams and the pricing actions, the business units are presently implementing in the market will be sufficient to neutralize the effect of increased raw material prices in the foreseeable future.

Now, let me review with you some of the steps that we have taken in the last year to give you a better feel for our capabilities as a company to succeed in whatever economic environment we may find ourselves in.

Our restructuring, as well as the introduction of our Pan-European integrated structure in Europe went extremely well, even though both of these events were exceedingly complex undertakings, our employees made it in the end look so easy that we sometimes forget how difficult it was. You already heard earlier from Ray that we are also achieving the financial benefits we had expected.

In our efforts to promote the use of eBusiness in our transactions, we have made some dramatic progress. At the end of the year, we were conducting approximately 70%, 7-0 percent of our worldwide transactions electronically and on the sell side, we achieved a 50% rate for our adhesives business in the U.S. These numbers are far and away at the top end of any eBusiness conversion in the chemical industry. We now expect to achieve our 70% rate for all transactions by the middle of this year.

But this is only the beginning. The use of information technology will enable us to move from the transactional phase into an interactive mode with our customers and use our knowledge and our resources in a much more focused and beneficial way in our selling and marketing efforts. Also, within our company information technology is shaping the way we plan, train, operate, communicate, and reach decisions. We are convinced that we are creating a competitive advantage for our organization that will be very difficult to duplicate.

In our continuing effort to rationalize our adhesives product line, we did achieve our targets of more than one-third reduction at the end of the quarter year-over-year. In in comparison with our product line of two years ago, we have reduced our portfolio of manufactured products by more than 50%, thus enabling our operations to run much more efficiently and to absorb the production volumes from our closed units.

As paradoxical as it may seem, at the same time we have been concentrating on creating new products. Products that would allow us to reach a much broader customer base across applications and regions and those products are continuing to provide us with some significant growth in an otherwise lackluster market. Products like HydroLock, a superabsorbent hot melt that provides the capability of absorbing up to 100% of its own weight in fluids, enabling our customers to partially substitute the use of powder absorbents in the diaper industry. But its application possibilities go far beyond the hygiene industry.

We are continuing our success with Advantra. The product line is growing at a race of 25% in North America, and at rates above 60% in Europe and Asia Pacific. The newly introduced product line of a unique one component and a newly developed two component adhesive for the wood working industry that meet their highest retirements.

Our NCC, our non-contact coating, proprietary technology that allows our customers to significantly increase line speed and inventory turnover and film lamination through a novel application technology, or the LASD, liquid applied sound dampening product, which combines environmental friendliness with ease of application and sound dampening advantages and many, many more, ike our new product introductions in our paint business or the H.B. Fuller Premium and to protect the high standard of pro plus brands, or in tech where our tile and stone care centers delivers new technology for homeowners. Combined, these and other new products lead to new sales of approximately $12 million for the quarter, and led for the entire year to additional sales of approximately $35 million.

Now, let me take a quick look forward. Ray discussed earlier the potential impact of reduced income from the U.S. benefit plans might have on the results of our company in the course of this year. At $10 million that impact is only slightly less than the $12 million of last year. I believe that past and ongoing cost reductions in many areas of the country will offset this cumulative effect of $22 million. We will need to carry this year.

As you have seen from our press release in November, the funding of our pension obligations is in very good shape, and I believe that the company has been acting wisely with regard to its funding of these obligations, and under a long-term perspective, the funds and the company will benefit considerably from the return on these investments. Many of you not only follow our own company, but also the broader chemical and manufacturing sector. You will know, therefore, that the outlook for the coming year in general is not muted. The expected and much hoped for economic turn around has moved yet another year.

Now to the second half of 2003. And even that prediction is sometimes tongue and cheek and lacks proper conviction. In this environment, it becomes even more difficult to call the quarterly development of an industry or company. Europe is likely to progress at a different pace than the U.S. and so far we have not seen any consistent and durable upward trends in any region outside of Asia Pacific and that's driven mainly by China.

We have to assume that whatever we can generate as growth for our own company will have to come from gains and existing markets, through new products through geographical extensions in those regions where we have an underdeveloped position, or through economic advantages that we can create through our products and services for companies that are currently buying from others. That's certainly not an easy task but any economic growth would, of course, provide us with some additional opportunities.

I believe, therefore, that despite the additional costs that we talked about earlier, and our funding of several marketing growth initiatives and the Full Value and specialty segment, we should be able to improve slightly on our performance of the last year. I expect that the sequential results development during the year will closely track a similar pattern as we saw in 2002.

Thank you for your patience and listening to Ray and me and I will now open it up for your questions.

The this time, I would like to remind everyone if you would like to ask a question, please press star and then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from Karen Gilsenan with Merrill Lynch.

Good morning, and congratulations on a solid performance.

Thank you.

Two questions. One, when I look at the global adhesives operating margin, you've seen significant improvement year over year, and I'm wondering how much of that is raw material driven and how much of that would be cost-cutting driven and volume, and what I'm really trying to get at is how much is sustainable as we go into '03, presuming raw material costs no longer act as a positive lever.

And then secondly, we've seen, actually the opposite in the Full Value specialty group where the margins deteriorated a little more than I was looking for and I was wandering if you could flesh that out a little bit and what you are doing to improve the performance in that part of the business.

Let's touch on the Full Value/specialty business first, and then I will come back to adhesives.

In the Full Value/specialty we see the effect of two situations. One is that our global coatings group, the powder coatings business has been struggling throughout the year and that continued through the fourth quarter and that has been reducing our income level from that business to quite a significant extent. And at the same time, question have, however, been investing and funding our activities, marking activities in our paints, as well as our branded product lines that go into the construction industry. Because we are of the opinion that in those areas we can generate some very good growth rates in the future, as well as some very good margins.

With regard to the adhesives sector, what you are seeing in the margins there is, of course, already some of the beneficial impact from Project James. Because the preponderance of the activities -- of the restructuring, as we call Product James -- or what we call Product James is really affecting the adhesive business and you also see the benefit emerging there much more strongly.

Raw materials, Al, on that group?

Well, raw materials are basically holding fairly stable. You see also in the -- in the gross margin development, in general of our business that we have a slightly better gross margin across the board as a company and that is reflecting and reflective of the strategic sourcing activities through -- which have been very successful in getting some benefits for us, despite the general run-up in raw materials. For instance, in the course of last year, Karen, our vinyl acetate monomer in general in the industry has increased by more than 10% from the first quarter to the last quarter and the cost in EVA also in that same period have increased from 5 to 7% in the marketplace and yet as you can see from our own income statement, we were able, through a variety of measures make sure that our margins stayed stable.

So the benefits that you are seeing should -- or these margins should be fairly sustainable then.

Yes, and that's why I also -- why at the end of my comments, I am confident that we'll be able to neutralize the effects of the raw material side through the cost-savings programs, as well as through the SSD programs that we talked about.

And then just circling back to the Full Value, would you expect to see improving margins in '03? Is there any kind of hope for this powdered coatings business or does the investing level -- you know, you are starting to get a payoff from the investing that you've done in the Central America business --

I think that what is obvious. And you saw it from the list of product lines. I mentioned TEC, Adelese, and Foster, those are showing is some significant growth year-over-year and that's at a fairly gross margin rate and we'll expect to see contributions from those investments. We are dealing with the issues and the global coatings division and have decided on certain steps that we are going to take to turn that situation around.

Right. Thanks, Al.

You're welcome.

Your next question comes from Rosemarie Morbelli from Ingalls & Snyder.

Good morning, and I will add my congratulations for a good quarter.

Thank you, Rosemarie.

Just following up a little bit on your sustainable margins, are you saying that the benefit you will have from all of the steps have you taken will keep those margins at this particular level regardless of what happens to raw material costs or are we actually going to see some improvement as you will save more than the additional expenses will be?

Well, Rosemarie, as I indicated we have a significant additional cost structure in the coming year, additional reduced benefit from the pension fund so we are going to have to make sure that whatever we have been able to gain at this point in time, as far as margin is concerned, is to maintain and even expand it to absorb that additional cost. So I would say certainly from the steps that we have taken and the expectations that we have at this point in time, we would be able to improve our position in the margin and to absorb those additional costs that come to us from the pension side.

But net, net, we will not see an additional improvement in the gross margin because those additional costs are so high.

They may not appear in the gross margin side. You may have the expenses and the operating expenses in other than the gross margin and 25%, I think, of the expenses that we get through the reduced income from the pension fund will appear on the cost of goods line and 75% of that will show up in SG&A.

Okay. Could you give us a little more details on the new marketing initiatives you are now funding?

Yes, I already touched on one product line, that we started to roll out into the marketplace, which is the stone and tile care center that TEC is introducing into the marketplace. We're also going to promote our [Terasa] product line a bit stronger in the coming year.

We are in the paint business, going to establish additional stores in the Central American region. So -- and then the Adelese product line, we have been promoting the new brand of Adelese that has been driving very good growth rate over the past couple of quarters as well.

And in the Foster area which also belongs in the Full Value/specialty area, are indoor air quality coating system for heating and air conditioning, it needs some additional resources so it can get to that growth on a much broader base.

These new products, I mean, were about $35 million -- generated $35 million in revenues in '02.

Additional.

What kind of growth do you see?

If I look -- if I look at the -- at the total numbers that we have been generating, for these product lines, I think it's well over $100 million.

And type of growth rate for the whole $100 million as opposed to just some specific products.

Well, I would expect that we will continue to see i-- in these product lines we will continue to see some similar growth rates. In fact, in the course of this year, the growth rate was between 40 and 50% of the combined product lines and I would expect that we will see a percentage that's not too far removed from that in the coming year.

Okay. And lastly, you have a new board member from Argentina and you said that you are going to look towards expanding geographically. Are you indicating that there will be a lot going on in Latin America or maybe just Argentina?

No, I think that we already have had a position in Latin America, which is not insignificant. If I combine my paint business and the adhesive business in Latin America, we're talking about close to $200 million of activity and I think that's a significant chunk of business and I believe that we can benefit from local knowledge, as well as insights into the economic, as well political environment when we make our decisions and especially when we're making decisions with regard to investments or in regards to expansion of our manufacturing sector.

Just as a follow-up, if my memory serves me right, most of the profit came from the paint area and very little from the adhesive side in Latin America. Any change recently in that particular ratio?

We're seeing a significant improvement in our adhesive profitability in relation to the paint business.

Okay. Thank you.

Your next question comes from Allen Cohen with First Analysts.

Good morning. It's actually Drew filling in for Allen. Al, could you talk a little bit more on your sales force reorganization, you know, how the efforts are going? You mentioned there's some turnover, about 15%, if I heard you correctly. I just wanted to get your take on what you've been seeing.

I did not acoustically get whether you heard the number right. It was 50%, 5-0 percent is the turnover many some of the businesses that I referred to. Overall, I expect to have an effect of 25 to 30%. I think we're making very good progress. We have certainly gone through the first phase of this process, and are presently refilling the ranks of the organization, with new talents on the outside. And we're finding some very good capabilities in the marketplace that I believe will help us very well in our future approach to the marketplace, which is going to be more marketing driven.

All right. You talked about raw materials and pricing and I was wondering if you could talk a little bit about that sequentially, not year-over-year. What have you been seeing?

Well, we saw a significant pressure on prices in the second quarter, which then eventually materialized and was reflected somewhat in the third quarter. That pressure abated somewhat in our fiscal fourth quarter but then in the last month and a half, of course, with the raised level of the tension on Iraq, and the unrest in Venezuela, natural gas, as well as oil prices, took quite a steep climb. And there is, of course, a lot of discussion ongoing right now between suppliers and customers how are we going to deal with that market situation.

I would -- see, I would feel that given what I'm reading in the paper with regard to the political situation, and what I hear on the other side from the suppliers are most vulnerable, see the peak of that pressure in the first quarter and then, perhaps, in the course of this year, that pressure is going to be diminished. But one other important aspect that we have to keep in mind behind this is also the demand. And the demand at this point in time, as you will hear from all the companies that are reporting on their results for the quarter is not a very high demand so I'm sure that's going to have a dampening effect on whatever output pressure there may be.

All right. Thank you very much.

You're welcome.

Your next question comes from Gil Yang with Salomon Smith Barney.

Good morning. Al, could you talk about what percentage ultimately of revenue from new products that you are currently targeting, you expect to have over the next few years.

Could you specify that question?

You know, what percentage of your revenue do you expect to be coming from new products let's say, ultimately?

Well, I think at this point in time, it's running at around, a 10% rate. I would expect that that -- certainly depending on what do you consider new materials? Mean have you to look at a variety of specifications here. I think if you take the traditional outlook of products that were introduced or created or developed into the market over the last five years, I would assume that a reasonable percentage for us would be between 15 and 20%.

Okay. So you're sort of halfway there. Could you characterize -- of the $100 million in revenue from new products that you currently mentioned that you've got, could you characterize currently some of those marketing initiatives? It sounds like you've got some specific new products. You mentioned some earlier.

But of that $100 million what would you characterize as truly new products where you're not cannibalizing any revenue, versus just new introductions that might be better than old products but ultimately you lose the old product revenue when the new product comes?

That's a very difficult exercise to go through and I think it depends a little bit on what the product line is, and what the new product is that you introduce. If you go with the new product or a new technology into an existing market, we find that most of all, you are talking about 60% new business, 40% is replacement of existing business.

If you go into areas that are new to us, like the tile and stone care center, it's 100% growth. If you go into indoor air quality, it's 100% as new business. It's not replacement business.

So it varies across the board. And I would say most probably if I combined the two on a big overall view, I might say half and half, Gil.

Okay. So that $100 million, $50 million is in completely new business that you haven't been in before?

That's correct.

Right. Do you have any sense for when there might be any turn around in pricing? Would we see pricing begin to rise if demand started picking up, or is there something else driving prices down?

Well, we have seen in some of our businesses, we have seen some pricing pickup and the last month of the year. We started with some initiatives and in November, we do not yet see a very broad-based movement in the marketplace, so we have to be selective as to what we can achieve, and without hurting other factors too much, but I would expect that as the pressure on the raw material continues for a prolonged period of time, we'll see more activities in the marketplace trying to go after that.

I see in the raw material end, I see companies like Roman Haas and companies like Dow announcing price increases virtually every week. So I think there is some pressure building and eventually that will move also into the secondary markets.

Okay. And finally, could you maybe just comment on what's going on on the M&A front in terms of what types of pricing you are seeing and what kinds of interest in selling assets other different people have that you might be interested in?

Well, many of the things that I discussed at the last meeting still apply. These are the best of the times and these are the worst of times. The best of times because valuations have come down. The worst of times because there are really too many things around to buy.

But we have a pretty good portfolio at this point in time that we're working on that run the gamut from regional, as well as product line differentiation and diversification. So I think there is some more activity. The question still is going to be, are the real big transactions that, of course, always have been our target and our goal, are they really going to be becoming a little bit more active and I don't see that happening yet.

Thank you very much.

You're welcome.

Your next question comes from Lawrence Alexander with Deutsche Bank.

Good morning.

Good morning.

You referred to puzzling price actions by your competitors on the lower margin business. Would you mind fleshing that out a little bit?

Well, I -- I never referred to ugly actions by the competitors because I think it's all part and parcel of doing business. We sometimes are driven by other motivations than, perhaps, our competitors are, so none of the activities that we see in the marketplace should be looked at frivolously. I think there's always a reason behind it.

But what we are finding is that especially the large chunks of business have become very attractive targets for any company to go after because they, of course lead to a significant cost dilution and the smaller the company is, that goes after such chunks of business, the more and the higher the impact, of course is on their cash flow, the impact is on their cost structures and that's where a lot of the activities come from.

So it's really not that we see one competitor's strategically following a particular pricing strategy. It's more a -- a situation of ordered chaos, I would say, where you're seeing an action this time and this business area and this region and then the next time you see it somewhere totally else, but there's no connectivity between those activities.

Thank you. What's your outlook for capital spending in 2003.

Would you speak up a little bit.

What is your outlook for capital spending in 2003?

At this point in time, we expect that our capital expense during the course of the year is going to be somewhere between 35 and 45 million dollars. You saw this year up a little bit by I think it was about $4 million, but we had $8 million of our investment was due to the restructuring activity creating new capacities and the ability of other facilities to take on that additional volume. But I would say a $35 to 45 million range is most probably appropriate and a significant portion of those investments, as in the past, will be IT-related investments.

Okay. Thank you.

Your next question comes from Jeffrey Zekauskas with JP Morgan.

Hi. Good morning.

Hi, Jeff.

Hi. A couple of questions. I guess the first really is for Ray Tucker. Was there a $1.5 million gain that was in other income that was not part of the non-recurring events that you had in the quarter or was that part of it? And what was the earnings per share impact if it wasn't included?

Would you restate that question again, Jeff?

When you started off your introductory remarks.

Right.

You spoke of there being a sale of non-strategic assets.

Yes.

And what I was wonder was whether that sale was included in your non-recurring charges or excluded and if it were excluded what the earnings per share impact was.

Okay. It was excluded. The earnings per share impact was about three cents a share.

Okay.

Last year we had two cents a share. So the change from year-to-year was a penny.

Okay. Secondly, in general, can you talk about, you know, how the quarter has started; that is, sort of what volume conditions are like, and your -- I guess your volume assessment for the first quarter of 2003?

Well, that's, of course, very difficult to predict. I would say I would see it on a continuum, I do not see any significant change from the fourth quarter. There is a slight stabilization, a slight improvement because we are comparing with weaker periods.

The only period that we have behind us is December, and December is a notoriously unreliable predictor for the year because of the holidays, because of people cutting back on inventories and just the other day, in a chemical marketing reporter, somebody referred to the December that never was and it wasn't really that for us. We saw a stable December in comparison to last year. So I would expect we'll see most probably a continuation of what we saw in the fourth quarter with a slightly upward trend.

Okay. Lastly, when you look at your raw material costs increases in the coming year and you look at your pricing initiatives. Can you sort of quantify in a ballpark way what benefit you think you will get from the pricing initiatives and what kind of raw material price pressure you may experience?

Okay. I -- I'd say with regard to pricing initiatives in the marketplace, given the competitive environment with 400 competitors in the U.S., 500 in Europe, I would say most probably there's going to be a limit as to what we can generate as additional income streams with regard to price increases. I think the price will always be significantly related to the development of raw material costs because that's the factors that the other people will feel.

Okay.

I believe that by moving, however, into our Full Value area, to a larger extent and see some good and better growth rates there, than we see in the adhesive business, those business typically have a much higher growth margin and therefore we'd like to see some benefit overall in the mix of the structure of the company to come from that area.

Okay. Thank you very much.

There are no further questions at this time.

Okay. I will hand it back over to Scott then.

All right, thank you, Matthew. We'd like to thank all of those who took the time to listen and participate in this conference call. Since there are no more questions we'll now conclude this conference call.

This concludes H.B. Fuller Earnings Conference Call. You may now disconnect.