H.B. Fuller Company (FUL) 2004 Q2 法說會逐字稿

Good morning and welcome to the second quarter year 2004 earnings release. At the request of the company, this conference is being recorded for instant replay purposes. Following today's presentation, there will be a formal question-and-answer session. Instructions will be given at that time should you wish to ask a question. Management in attendance on today's call include Mr. Al Stroucken, Chairman of the Board, President and CEO. Mr. John Feenan, CFO and Mr. Scott Dvorak, Director of Investor Relations At this time I would like to turn the call to Mr. Scott Dvorak. Sir you may begin.

Good morning, everyone. This morning's conference call will be available for replay approximately one hour after we are finished with questions.

Before beginning, I would like to inform everyone that the discussion today will cover certain financial information that has been adjusted to reflect our restructuring initiatives and is considered to be non-GAAP under applicable SEC regulations. Our earning press release issued yesterday provides a reconciliation of these non-GAAP items with our GAAP results. This press release is posted on our web site at www.hbfuller.com under Shareholder Relations and Press Releases.

In addition, 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, actual results may differ. For more information, please refer to our press release, quarterly report on Form 10-Q, and annual report on 10-K filed with the SEC. Now, John Feenan.

Thanks, Scott and good morning. Before I review the second quarter, I want to remind everyone that prior year results discussed will be before any special charges incurred due to the restructuring initiative which has been reflected in the pro forma statements provided in the news release. In addition, per share amounts are reported on a diluted basis.

The second quarter's results for 2004 were marked by the continuation of improved volumes in all regions. Expanding on the trend we initially realized in the fourth quarter of 2003. Net revenue for the quarter was $363.1 million, 11.9% higher than Quarter 2, 2003 revenue of $324.5 million.

Looking at the components of the sales increase for the quarter, we see the following: Volume increased 6.4%, currency effects primarily due to the Euro, and to a lesser degree the yen, Australian and Canadian dollars accounted for a 3.9% increase. The Probos acquisition generated a 2.6% increase and pricing was down 1%. The year-over-year price decrease continues to reflect the heightened competitive environment and reduced pricing realized in selected markets.

The volume improvement is significant. Not only with regards to a year-over-year comparison, but to the sequential improvement we have realized as well. The volume increase of 6.4% represents a 250 basis point increase over the volume improvements we reported for first quarter of this year, which at 3.9% had nearly doubled the growth realized in Q4 of '03. But clearly we have gained momentum.

Gross margin for the second quarter was 27.7%. Slightly less than last year's second quarter margin of 28.1%. But improved over the previous quarters 26.9%. The year-over-year percentage decline in gross margin was primarily due to lower pricing, impacted to a lesser degree by higher raw material and container costs, and higher delivery costs due to the increase in energy prices. This was partially offset by achieving leverage on our manufacturing costs, with our improved volumes, and cost reductions realized from our previous restructuring initiatives.

Operating expenses were $77.7 million or $6.2 million higher than last year. As a percentage of sales, operating expenses were 21.4%, 60 basis points less than last year's second quarter of 22%, and 230 basis points less than the first quarter of this year. Foreign currency translation increased the reported U.S. dollar amount of operating expenses by approximately $2.4 million. Outside professional costs associated with Sarbanes-Oxley equated to $600,000 of additional year-over-year expense. We also increased our year-over-year spend by approximately $1.7 million, for company-specific growth initiatives as discussed in earlier quarters. The majority of this increase relates to our lead Six Sigma initiative.

Operating income increased $3.2 million, to $22.8 million, compared to $19.6 million for the second quarter of last year. The better than 16% improvement is significant in that our operating income as a percentage of sales also improved on a year-over-year comparison. Operating income in global adhesives in the second quarter, was $13.6 million, a decrease of $500,000 from the second quarter of 2003. Full-Valu Specialties operating income of $9.2 million increased $3.7 million from the previous year's second quarter.

Interest expense of $3.6 million, was similar to that of the second quarter of 2003. Miscellaneous other expense of $2.2 million in this year's second quarter compared to $600,000 of expense for Q2 of '03. Foreign currency accounts for the majority of the differential, amounting to a year-over-year change of $1.1 million.

Pretax earnings of $17 million was more than 10% higher than the previous year's second quarter pretax earnings, of $15.4 million. The effective tax rate for the quarter was 32%. Compared to last year's second quarter tax rate of 21.7%.

Last year's second quarter rate included a one-time benefit relating to the rationalization of our European legal structure. As a result, for the second quarter of 2004, net earnings decreased from $12.3 million in the prior year to $11.7 million. Earnings per share were 41 cents, compared to 43 cents for last year's second quarter.

As we turn to the balance sheet, I would like to remind everyone the following figures may be subject to minor changes, prior to our filing of the quarter's 10-Q.

Cash at the end of the quarter totaled $10.5 million. Net working capital amounted to $272 million, compared to $284 million in the previous quarter. As a percentage of sales, net working capital decreased to 18.7%, versus 22.3% at the end of the first quarter, and 20.5% at last year's second quarter end.

As you may recall, this was mentioned in last quarter's call as a key initiative for H.B. Fuller. What is encouraging is that we realized improvements within every reporting unit of our business on a global scale, and as a result have significantly improved our cash generation performance.

Capital spending for the quarter was $7.6 million. Compared to last year's second quarter spend of $7.3 million. Depreciation and amortization was $13.6 million for the quarter. Debt decreased from the previous quarter by $5.8 million, to $179 million in which all debt relating to the Probos acquisition has been retired. The company's capitalization ratio was 25.5% at the end of the quarter, compared to 28.7% at the end of the second quarter last year. Free cash flow for the quarter was a positive $37 million compared to a positive $26 million in the second quarter of 2003. On a year-to-date basis our free cash flow was at $22 million, versus last year's six month amount of a negative $3 million.

As I alluded to earlier, in the approved operating income, and focus on reducing our net working capital, drastically improved our performance over that of the previous year. We believe our quarterly results demonstrate the improvements we have made in Fuller's base operations. This will enable us to deliver improved quality earnings, coupled with consistent strong cash generation, despite the continued global pressures driven by increasing energy prices, and the very competitive environment. With that I would like to now turn the call over to Al Stroucken.

Thank you, John. And good morning to everyone.

As you heard from John, though the second quarter's net earnings fell slightly short of that of last year, the significant top line growth, the improved earnings from operations, improvements made in net working capital and the considerable creation of free cash flow, demonstrate the inherent strength that has been built in our company's core operations. Our directional momentum is positive and benefiting from the past restructuring initiatives and the continuing process improvements.

Last quarter, we believed that our raw material prices had peaked. And it now serves as a reminder to me that predictions about the prices of oil and natural gas are as challenging as predictions of the exchange rates.

As you are all aware, energy prices during the second quarter and reaction to various uncertainties, increasing industrial activity and speculation reached record highs. Creating continued pressure on raw material costs. This trend seemed to strengthen towards the end of the quarter. A little bit later, I will come back to this topic and I will talk about some of the steps we are taking to minimize its impact on the thrust our business has gained over the last couple of quarters and to regain some of the margin erosion we would see otherwise.

First, let me review our top line.

Our sales development for the second quarter built on the positive trend of the first quarter. Reflecting a near 12% increase year over year as reported on a U.S. dollar basis. Eliminating the currency, and pricing impacts we realized a solid, underlying growth of 9% of which 2.6 percentage points relate to our acquisition in Portugal.

I was very pleased with the improvement of our Full-Valu specialty segment where the overall top line increased near 10% with volume improvements accounting for 7.6%. Window, analyst, powder coating and consumer grew well over 10% in sales dollars, and the other businesses were also achieving middle to high single digit growth. Most of the businesses saw a continuing upward trend in the course of the quarter and that bodes well for the remainder of the year.

In our adhesives business, Asia Pacific led the way with nearly 14% volume improvement, followed by Latin America's volume increase of 10%. Having just come back from a review of Latin America, we are confident that with the economy strengthening here in the U.S., we will see some positive developments from our activities in quite a few of the key countries in that region as well. The development in Asia Pacific and Latin America continues to underline the importance our global footprint has in following the regional growth opportunities and at the same time, demonstrates the increasing importance of those markets for overall organic growth strategy as a company.

In North America, our volume growth improved over the previous year by 6.4%. More than doubling the percent improvement realized in first quarter of 2004, with tonnage improvement well exceeding 12%. We're finally starting to see the higher growth rates in our domestic markets that will allow to us leverage our existing infrastructure, and to achieve operational performance levels we strive towards as a company.

There is another aspect, though, that I would like to comment on, because I think it has significance for the overall market place. Our product mix has been driven to lower price products as you can easily surmise from the delta between our tonnage, and our volume numbers that I just mentioned. The volume numbers that we report includes the mix effect. It is demonstrative of the ongoing severe price competition exists in this market and that has us looking for lower cost alternatives to ward off competitive bids that we cannot match with some of our existing products. We will most likely see more of this in the larger volume standard water-based product lines in hot mills or other product lines.

The second quarter in Europe remained fairly flat, compared to the second quarter of 2003. The volume growth rate of 1% is anemic at best. And, of course, unsatisfactory. As the overall European region's economy continues to lag behind the improving trends we are here in the United States and elsewhere, we do not expect the underlying industrial growth in that region to improve until later in the year. Over the last couple of months, we have, however, made progress in some of the countries and we believe that the third quarter will show a more positive sales development than we have seen in some quarters.

Part of our volume improvement is coming from our new product offerings. Once again, this quarter's year over year growth for new products achieved a greater than than 30% increase and accounts for approximately 16% of our overall sales versus a 13% rate in the same quarter of last year.

Now, let me get back to the topic of raw materials and other cost of goods factors. Particularly, towards the end of the second quarter, we saw a consistent and rather broad-based increase of a variety of raw materials based on either oil or natural gas. Along with that came increases in container and transportation costs. Depending on the business area, and region, we have been taking steps to raise prices, add fuel and container surcharges and switch to alternative formulations without sacrificing quality and performance.

We need to work with our customers in sharing the burden of the increasing cost pressures. The adhesive manufacturers have absorbed most of these pressures over the better part of a two-year period, as the economic conditions caused many manufacturers to compete for volume gains, despite the raw material cost development. Some of our steps will take time to be fully implemented pand the speed and the level of success will be dependent on what is going to happen in the market place at the customer. We have seen a flurry of announcements by a variety of competitors and we can only hope that the raw material price pressure we all face will have a positive impact on the implementation this time.

If I look across the company, we see the greatest cost pressure here in the United States, where the dollar-based pricing of oil and the related natural gas pricing have had the greatest impact by a considerable margin. But also Latin America has seen some significant increases, as much of the supply demand picture in that region is highly reactive to the situation here in the United States. Europe has had the benefit of a strong Euro, helping in the conversion of oil prices to the local markets. But there, as well as in Asia Pacific, prices for raw materials are now trending higher as well.

As our top line is impacted by foreign currency translation effects, so are the operating expense levels in those countries. Foreign currency translation increased our reported operating expenses by approximately $2.4 million.

Despite our continued spend on important initiatives, our operating expenses, as a percent of sales were below that of last year, by 60 basis points and 230 basis points below that first quarter run rate. Relating to our internal initiatives, our lean Six Sigma deployment continues on track and by the end of June, we will have completed 18% of the lead Six Sigma trading for this year. 43% of the current projects are customer focused and will help us in achieving future growth. I look forward to being able to share some of the success stories we expect to come out of this initiative in the coming quarters.

As John mentioned earlier, our operating income for the second quarter exceeded that of the previous year's quarter by over 16%, and the margin increased by 20 basis points. Despite the raw material development, and our investments in improvement programs, the uptick in operating income is indicative of the significant improvements we have made in base operations.

In addition to our operating income improvement, the reduction in our net working capital and increased free cash flow is indicative of another concentrated effort that's giving us some positive results. We have only started and need to do quite a bit more until we achieve our overall targeted rate of 14% net working capital.

For the second half of the year, given what we see today, we believe the economy here in the United States will continue to provide for some good growth in the manufacturing area, and the economies in Latin America and Asia Pacific will track with the growth pattern we have seen in the beginning of the year. The big question mark will be the timing of the economic turn around in Europe. The coming quarters will be heavily dependant on the success we will have on passing on the increases we are seeing in our raw materials. We will also continue to focus internally on actions that will help us to mitigate the impact, the raw material cost development we have, such as our strategic sourcing team initiatives, cost controls, and reformulations. The company is positioned well and is taking the steps that we need to take to remain competitive and successful in our business.

Thank you, and I will now open it up to your questions.

At this time, if you would like to ask a question, please press star one on your touch-tone phone. Once again that's star one to ask a question. You will be announced by your name. One moment. Your first question comes from Rosemarie Morbelli. Your line is open, and please state your company name.

Oh, thank you. Good morning all.

Good morning.

Could you give us a feel for how much you are expecting to get open the raw materials cost increase and how much has been announced in terms of selling price increases?

Well, I think Rosemarie, as far as raw material increases are concerned, what we expect as a total impact for the year, compared to what we had planned is about $11 to 12 million at this point in time. Of which we have seen in the first half around 4 to 5 million. So it's going to strengthen a little bit in the second half of the year as far as impact is concerned. And as I said, most of this is happening here in the in the United States but some of the other regions are now slowly seeing some pricing pressures as well.

So when you --

As far as price increases is concerned, we are actively engaged in a variety of regions, raising prices, and as you could already surmise, in the Full-Valu specialty, with very already seen a positive uptick in the price comparison with previous years. They have been a bit more successful and faster in their activities. And the adhesive end, we're just at the very beginning at this point in time, and I would expect that we will most probably only see impacts starting to begin by the middle of next month.

When you say that your raw material costs are $11 to 12 million and you expect them to be 11 to 12 million above last year that is above your previous estimates, right.

Yes. About the estimate that we had for the year. That's correct.

Does that change your outlook for the year in terms of your performance, and -- well, do you have a new number for us? [ LAUGHTER ]

Well, no, I wish I could be that prescient, but I'm not. I think as far as the outlook is concerned, it's going to be much more difficult, of course, now this this environment to achieve the numbers that we have set for ourselves and it is dependent on how successful we're going to be in passing through these raw material increases to the marketplace. I believe the difference, perhaps from what we have seen over the last three or four years is that the overall demand is somewhat stronger, so we're trying to pass through increases in an environment that at least has some underlying growth which generally I think sets a better stage for the success of these increases.

If I look at last year, and prior years, your gross margin usually improves sequentially, Q3, and Q4 versus the beginning of the year, I mean it just goes up sequentially every quarter. With what is going on on the raw materials cost side, do you think that we are still going to see these kind of trends or are you not going to be able to do enough to offset a dip in gross margin next quarter versus this one.

Rosemarie, now you are addressing a variety of factors that have an impact on that. Number one, we would typically expect to the second half of the year to show better margins than the first half of the year because of the larger volume. As you know the first quarter is always the weakest quarter and that has an impact on that distribution of the cost and absorption of the cost. The other part that is an important factor is, of course, raw materials that we just talked about, but also pricing, and so I think it's really those three factors and a few others that play into that role, which make a prediction at this point in time very difficult. And I think that what we are trying to achieve is through our increases make sure that the impact of the raw materials is minimal in the overall results of the company.

And then lastly, could you bring us up to date on the Probos acquisition? Have you -- is it accretive at this particular state? Have you found any negative? And the situation in the Middle East, is that upsetting the new markets you are getting into via the acquisition?

Rosemarie, this is John. I will answer that. The acquisition is going fine. If I -- if you recall from our previous call, I walked through the exact numbers of what we had paid and what our expectations were a quarter later. We've had no major surprises. Things are working well. The integration is going fine. We still expect it to be slightly accretive for the year, which is the guidance I gave on the last call, and the only new bit of news is part of the contract, we had a [claw] act clause around our net worth, so we were able to secure another $1.5 million pounds and we essentially paid off all the debt and that just gave our final EBIT a multiple which I said last quarter was 7 and that brought it down to 6.5. So things are working out fine and we fully delevered that business.

Thanks, I will get back on queue.

Your next question comes from Ray Kramer. Your line is open. Please state your company name.

Ray Kramer with First Analysis. A couple of easier questions first, I hope. Sequentially, what are you seeing in pricing? I know overall, I think it was down 1% also last quarter, but what has sort of been going on sequentially? Is that stabilizing? Any signs of improvement there?

I looked at the last four quarters and I basically see in every quarter I see about .9 to 1, 1.1 percentage as far as pricing is concerned. So I would say it has been fairly stable at a slope that's not very much to our liking but certainly there have not been any significant variations in direction.

And any change in that going -- as much as you can see into the third quarter now?

Well, I would expect that with the pricing activities that we have underway in both Full-Valu specialty, as well as adhesives that number is going to change, and that we're going to move more to a positive trend, whether we will be fully positive yet in this quarter, I -- I cannot predict at this point in time, but I would certainly expect the trend to move in that direction.

Okay, and then sort of in that same vein, with the strong volume and even stronger tonnage and demand figures there, you know, it's probably not too difficult to expect that, you know, prices should have been going up already. Are there some other factors there? I know you talked to the competitive situation a bit. Were there other factors there making it hard to get the prices up? And then going forward, since, you know you have been dealing with this competitive pressure for a while, and, you know, it hasn't seemed to have abated, what do you think is the big driver for that to change going forward? And these competitors to kind of get with it and start bringing prices up across the boards.

It's not a very homogenous market as you can surmise from the discussions we have had in the past. We see quite a variety of activities and the trends that sometimes vary company by company quite significantly and so it's very difficult to -- to develop an underlying trend out of all of this. But we are still seeing, in some cases, some very aggressive actions to switch large customers from one supplier to the other supplier. And the case in point, one of our larger customers, a couple of quarters ago, we were finding ourselves against a competitive bid that was offering something between 15 and 20% reduction in price, which, of course, is huge in comparison to the overall margins that we have. And I think those situations, as long as they are going to continue to occur, it will put competitive pressure on the market in the very broad base. Nevertheless, I also feel that this is not a business where margins are so large that this can go on forever, and with the significant impact that raw materials have, I believe it's clearly setting a baseline under some of these activities beyond which people have to start looking at alternatives to the way they've been approaching the market so far.

Is it fair to say that given this, you may have lost a bit of share over the last couple of quarters?

No, I don't think so. I think we have in the last couple of quarters if not gained, at least maintained share, because I do not think that the overall consumption in adhesives on the broad basis growing at the levels that we have been growing over the last quarters.

Okay. And then just one more follow-up, financial-type question before I get back in queue. Other income, even if we factor out the FX benefits still looks like it's up about a million sequentially. Can you comment anymore on what other moving parts are in there?

Yeah, the other -- the other moving part was essentially about $400-$500,000, and that's simply costs associated with real estate that we have for sale. So we're essentially working again to tighten up that balance sheet even further.

Okay. Thanks, guys.

You're welcome.

Your next question comes from Robert Kosowsky. Your line is open and please state your company name.

Sidoti and Company. Hey guys, I think I missed it earlier, but what was the outlook for lean Six Sigma in the quarter.

The outlook for lean Six Sigma was about $1 million for the quarter.

About $1 million?

Yes.

Okay. You are staying to your forecast of being break even for the year?

Yes, we do. We're watching that very closely. Our expenses could be a little bit less but we still think it's going to be break even.

Okay. And was there any other, I guess, non-recurring charges in the quarter, similar to what happened in the first quarter, you know, with the facility closure?

No, I think the facility closures were basically completed and you see it in the improvement in profitability in the Full-Valu area that we really gotten the leverage out of this, as well. And I think what we have seen in Full-Valu in the last quarter is indicative of the leverage that we have created and those areas where raw materials are not eating away at it. Because in Full-Valu specialty, the impact of raw materials has been somewhat less than in adhesives and we have seen a significant increase in our leveraged earnings with the volume increases we got there.

Okay so the major reason for the margin expense was leverage?

Yes. Mm-hmm.

And I guess could you give us a little bit of, I guess anecdotal update on the windows product that you have?

The windows business?

Yeah.

We are still in the introductory phase of our sash slide activities and sash slides project. We are seeing very good acceptance from our customers. We went in the last Quarter mainly through the trial phase, and some of the initial runs of the companies and we expect some volume to come into our sales this quarter.

All right. Thank you.

You're welcome.

Your next question comes from David Begleiter. Your line is open. Please state your company name.

Thank you, Deutsche Banc. Al, just on these competitive actions have you seen in the market place, which appear to be irrational, why do you think -- how do all the competitors justify these activities? What gives you confidence that they will halt these actions and we've been facing rising raws for a while now, and dovetails into your confidence as to why now you will get pricing pushed through here. At this point in the cycle.

Well, I would never accuse my competitors of being irrational. I think that there's always a goal and a target and an objective behind any of the actions that we see. It may not always make complete economic sense, but we have to deal with the situation that we're facing. And I can only hope that our focusing continually on cost optimization and operational excellence, that eventually there will not really be a lot of room to do this anymore, and that we will, therefore, be able to compete more effectively again on the basis of performance and based on value that we provide our customers which is not only the value of the product but is how the product performs in their operations. I, as in any company, I think sometimes things occur and happen at the front end that is not totally under control of what the executives or the management would like to see, but they still have to live with it, because the people represent the company, and I can only hope that these are aberrations that are not indicative of a broad based approach.

Would there be an opportunity to at some point either change your model to mirror the actions of these competitors, or you will stick to your model of providing value and getting paid for it?

Well, I believe that we have to make sure that we understand where our products go, and what the competitive situation for these products are. And you know that we've, some years ago, made the determination that some of the dynamics in our market segments are quite different. If I go to the market segment of converting, that's clearly a price competition to a very large extent with fairly simple and -- simple products where the barriers to entry are fairly low. If I go into different areas like assembly, there we have a different competitive environment. And it's much more selective, the customers are much more selective in what products they are going to use and therefore pricing power tends to be more on our side and I think rather than have one strategy, across the board, as we sometimes see happening in the market place, we think that a more appropriate and -- and assigned strategy to each of the individual market dynamics is the more opportune way about going about this business.

And last point, you mentioned last quarter that M&A was picking up. Will there be a chance that perhaps takeout some of these -- I will use the word, irrational competitors going forward?

Well, as I said, there are no irrational competitors. I think what we're seeing is people are doing what they think is in the best interest of their companies. And I believe that a strategy that is based on -- or an acquisition strategy that's based on taking out a competitor, or taking on nuisance in the market is not a very wise strategy. I think the strategy has to be driven by the cost advantage, permanent cost advantage that we can create for our company, and especially given the fact that we have said that in adhesives, this is clearly a consolidation market and a consolidation acquisition strategy. And I think we would be well advised to concentrate on what the potential synergies are than what it it will do to the noise factor in the market place.

Thank you very much, Al.

You're welcome.

Your next question comes from Dimitri Silverstein. Your line is open. Please state your company name.

Good morning. Longhorn Research. Couple of questions. First I want to confirm that the 12% increase in tonnage, that was for the overall Fuller not just the adhesive and sealant segments; is that correct?

The 12% was the tonnages was for North American adhesives.

Versus 6% volume growth you said?

Pardon me?

Versus about 6.4% volume growth?

That's correct. That's correct.

Very good. It's a pretty sharp decline in mix to kind of get from one to the other. Is this a -- kind of a new development or is this an acceleration of something that's been happening and why do you think you have such a -- such a sharp downward movement in mix?

Well, I think, again, there's no single individual reason but you recall, Dimitri that we talked last year that we've lost some volume in the area of converting because we have competitors going in at very low prices earlier in the year and we have regained some of those customers. So that is a mix impact if you look at the price levels that we would generally get in that business. And we've also been successful in gaining some larger customers in market segments that typically have a -- a water-based consumption and water based prices tend to be a little bit lower than hot mill products and that's basically is impacting this average mix impact.

Okay. So would it be fair to -- how would you characterize similar dynamics in -- in Europe and Asia? I mean are we talking about the same order of magnitude or is the situation there is significantly different?

No, in Europe and Asia, we're really talking much more about an impact that has to do with direct pricing, and price competition. We really do not yet see as dramatic a shift from one type of product to another type of product.

Okay. Is there -- do you have any idea of when this is likely to anniversary. Are you kind of at the beginning or in the ninth inning of this trend?

Well, I think that certainly this is not the beginning. This has been a trend that's ongoing for a number of years. It just has strengthened over the last couple of years because of the pressures that were existing in the market place. I would expect that if the overall economy improves and the overall volume growth is available to many, that act in the market place then some of that pressure is going to go away.

Okay. And, you know, 12% volume growth, quote/unquote in North America excluding the mix is very robust and looks like to be significantly faster than the over market recovery in the industrial segment. Can you give us an idea of which business in adhesives and sealants are driving this type of growth?

Well, we are seeing a -- a variety and I can give you some global numbers. I don't have them specifically for the United States, but in the global adhesive markets we are seeing particularly strong growth in the area of converting, as I already said earlier. We are also -- assembly is very strong, as is non-woven on a global basis, and automotive this year is performing at a very high level because we have gained approval at several direct glazing, as well as liquid [INAUDIBLE] on some accounts which have significantly impacted those volumes at those accounts.

You said earlier in your response to a question that you think you're at least holding if not gaining market share. It sounds like you are gaining market share, judging by the growth of the end markets and the overall global markets which you are competing against. Do you have any idea of kind of what the incremental contribution from share gain would be or is that too nebulous of a --

I think that's very difficult to ascertain because especially if I look at the area of adhesives you have so many factors and manufacturing, like raw material prices and [INAUDIBLE, Audio Problems]. I think the clearest picture that we have is in the area of Full-Valu specialty, where we see some fairly good leverage and that's going to be reported in our 10-Q and you will be able to see that in quite some detail.

And just a final question to revisit Rosemarie's earlier question. The $11 to 12 million raw material impact that's a delta over your earlier expectation of about $11 to 12 million increase?

That's the delta over the expectations that we had at the begin of the year. [INAUDIBLE, Audio Problems ]

Okay. You faded out, but that was my last question. So thank you.

Okay. Let me repeat that. As I indicated that was the expectation, the $11 million was the expectation that we had at the -- or is the difference between the expectation that we had at the beginning of the year. The first half of the year we have already seen an increase of between $4 to 5 million and we have, of course, included those increases in the sequential reports and the conference calls that we've had.

Okay. Thank you.

You're welcome.

And as a reminder if you would like to ask a a question, please press star one on your touch-tone phone. Once again that's star one. Your next question comes from Rosemarie Morbelli. Your line is open.

Thank you. SG&A as a percentage of sales, you have a goal of 18%. Excluding any acquisition in the near future, in the Full-Valu area, which would increase that particular goal, do you think you could reach it by 2005? Or is that being overly optimistic?

I think 2005, is overly optimistic. It depends, of course on how our organic growth is going to develop, if we continue to see growth that we've seen so far, then we have a better chance at getting to that point by leveraging what we have already in place. But I -- I would not want to make a prediction that by the year 2005, we'll be able to get to that level.

And since you are -- any acquisitions in the Full-Valu area will change that goal, what can you tell us in terms of acquisitions? Are you still optimistic that you will get a couple under your belt by the end of the year?

I don't know if the end of the year, Rosemarie is -- that's kind of soon for us. But I can tell you there's been no -- no change in what we reported last quarter. We have heightened activity in that area. As you can see, our cash generation has been very strong. So we're spending a great deal of time on that effort, and I can just tell you that we're looking at a lot of different opportunities. But as Al said, you know, I want to reiterate, we are not going to buy something for the sake of buying something. So we're being very disciplined in our approach.

Well that is reassuring. [ LAUGHTER ] If we can go back to our -- Al, what you talked about, regarding one of your competitor getting some business away at 15 to 20% lower pricing, how do you react to this kind of situation, since it is not going to go away? And do you have the possibility of getting your costs down by that much? Or close to it?

No, I don't think that we are in a position at any of our large customers where we have that kind after additional margin available because if we had, we were not -- we certainly would not be supplying our customers with top value, because that means we would not have been doing our homework. I think the issue really is one of making a determination as to whether such an offer is going to be successful in the long term, or whether such an offer is going to be dependent on modifications in the product line or modifications in the quality of the product that's going to need to be supplied and then hopefully in we'll have an opportunity a year later or a year and a half later to rebid and to re-enter those customers, and that is something that has been happening over the last couple of years and quite a variety of instances where we lost an account or a customer, due to pricing. And eventually we're able to get back in because of performance issues. I think that the best way we can react to this is look at the broad picture of our business, and make determinations on an individual case, whether we can afford to continue to supply a customer at a lower price or whether we would be better off looking for a new customers and new relationships elsewhere. And I think given the fact that we only have on a global scale about a 5% market share, I think there are plenty of opportunities for us to look around and then try to make up some of these accounts where just the economic basis no longer is available anymore to continue that relationship.

So the business that you have lost in the last couple of years, and then are beginning to get back, I am guessing that you lost it because pricing was 20% below your price, the competitive bids? You may have gotten back and I can pulling numbers out of a hat, but you may have gotten it back by lowering your pricing by 10%, but also being able to lower your cost by 10%, by changing the formula and whatever raw material you use? I mean, am I looking at this the right way? Is that how you are thinking about this?

Yes, there's a decisive effort to look at -- at formulation changes, look at the raw material changes and you've heard me talk in the past about our strategic sourcing teams. A significant effort that we have made to make these sourcing teams inclusive of marketing, of sales, research and development, manufacturing, as well as legal personnel, to really develop formulas and to develop strategies that allow us to make modifications and formulations without impacting the performance and at the same time, setting the stage for us to have at alternatives available with regard to the raw materials that we can use in those formulations. That is not something that can be done from today to tomorrow. That's going to take sometime to approach this in such a comprehensive fashion and that's why it sometimes takes six months or nine months to regain a customer again, but then at a base that we can justify and we feel is still contributing to the overall performance of the company.

But nevertheless, at a lower margin than what you had before?

In some cases they have been the same and in some cases we have even seen the margins be higher. So it is difficult to generalize what the margin will be at the end of the day after we've gone through this process.

Okay. And when you talked to -- could you give me again -- I just -- I know you said it twice, but I still did not catch it. The level of expenses on Six Sigma in the second quarter?

Yeah, Rosemarie, they are between -- right around $1 million to $1.1 million in the second quarter.

So this is on the slightly up from the $900,000 in Q1? Am I correct?

The expenses were higher than in the first quarter, and as you recall, at the beginning of the year, we said we were going to expect something around $3.5 million overall in expenses and at this point in time we may be a little bit lower than that.

Right, I was expecting a lot more than $1 million in that second quarter. I was expecting closer to $2 to 2.5.

I think we'll see a broader distribution throughout the year than perhaps we had initially anticipated.

Okay, and another capital numbers I didn't catch is the operating income for the Full-Valu and the global adhesive business.

Yes, we can give you that.

Yeah, the operating -- I have -- I need my glasses Rosemarie.

That's okay. I do too. Join the club.

We are seeing the operating income for our global adhesives business and the second quarter is $13.6 million. And in the Full-Valu specialty business, it is $9.2 million.

Okay. And then my last question of the day, could you touch on the automotive business, in your minority interest you had a gain last quarter, which means that they were losing money in Europe. This time you have a negative number, so I am assuming that they have turned around and are now profitable this quarter. Could you touch on what is happening there? And in North America in terms of trends?

No, I think you may --

Oh, did I not look at it right?

Something that you are looking at that is not the correctly interpreted. I think the loss was in our activities in North America, and therefore, there was a charge to the partner, whereas this quarter, we have a profitable number, and therefore, there is a credit to the partner.

Okay. Okay. Could you talk about the trends within the industry in both areas?

Well, I think the overall underlying expectation in the automotive business is as always highly speculative. I think at this point in time, we keep hearing that people feel, perhaps inventories are getting a bit too high, and the -- on the part of the automotive manufacturers which would indicate that perhaps they are going to slow down some of the production. But I believe for us, what we have seen largely in first half of the year was the impact of new product acceptance and introductions as a variety of plans at Ford, General Motors and Chrysler for liquid applied sound dampening, for direct glazing, that's helped us to significantly exceed what the underlying growth rate in the automotive industry would indicate.

Are you offering those new products to the transplants?

Yes, we are. And, in fact, we're also going to have some success there. As you know, or may not know from the automotive industry, sometimes the approval processes take well over a year to get on line and I believe that we will continue to see some additional facilities to adapt these products, and accept these -- accept these H.B Fuller as a supplier for these product lines.

Okay. Thanks a lot and good luck.

Thank you.

Your next question comes from Jeff Zekauskas. Your line is open. Please state your company name.

J.P. Morgan. Two questions. The first is, should we read the negative 1% price as a combination of positive price offset by negative mix?

The mix impact is under volume, as you can see in the statements that we made to go hand in hand with our announcement. The price is pure price and with the variety of countries that we deal with and variety of product lines, it's very difficult to be purist in this area, but we made great efforts to really compare product by product, customer by customer to come to some conclusions.

And so the price impact is the purest price impact that I can provide at this point in time. Thank you. That's very clear. The second question is in your estimation of how much your raw materials are up, if I understood what you were saying, it was $11 million above your previous forecast? If you --

No, I said --

If you took your previous forecast and added the $11 million.

Our costs at this point in time are expected to be $11 million higher than we had anticipated at the beginning of the year.

Right and what was the original anticipation so that we can get a net number for '04?

Oh, we do not give detail on what the raw material costs specifically are, but it gives you about an impact on the total manufacturing costs, and what we also had said is that we saw in the first half of this year, the impact was about $4.5 million of those $11 million. So as we have been going through the reporting of the first quarter, as well as now in the second quarter, those numbers have, of course, been included in our outlooks.

By my calculation, your raw materials should be up about 4.5%. Is that, you know, in the ballpark of your forecast?

I don't know where that number would come from.

Well , that is $11 or 12 million stretched out through the year is about a 1.5% raw material increase, year-over-year, which seems low. And so --

I would say if you look at raw materials and containers that's approximately right. Yes. For the year it's about 1.5%.

Then you must be purchasing very well, because that's much lower than, you know, virtually all of the other chemical companies we cover.

Well, as I told you, we have been putting a lot of effort into our strategic sourcing teams. And we have been able to offset quite a bit of some of these things that we have seen, not necessarily in the raw materials that are indexed to oil and natural gas or to ethylene. But we have quite a variety of other raw materials as well where we've had had some significant savings.

Okay. Thank you very much.

You're welcome.

Your final question comes from Richard O'Reilly. Your line is open and please state your company name.

Standard and Poor's, good morning gentlemen. Al, I guess at the end of your formal presentation I was wondering if you were implying a reduction in your guidance. And I guess you did kind of answer that. And I just want to make it clear, you haven't changed your guidance from the prior up 8 to 12% but you are just saying it is going to be more difficult.

It is going to be more difficult and I think it is going to be extremely dependent on our success that we're going to see over the next five or six weeks with regards to the price increases that we have initiated and if we feel that that is going to have a considerable impact then we will speak up and make sure that we're not going to be surprised.

Okay. Good. okay. Thank you then.

With that being the final question. We'd like to thank those who took the time to participate and n this conference call and we will now conclude this conference call. Thank you.

Thank you.

Thank you.