H.B. Fuller Company (FUL) 2004 Q3 法說會逐字稿

(OPERATOR INSTRUCTIONS). Mr. John Feenan, CFO, and Mr. Scott Dvorak, Director of Investor Relations. At this time, I would like to turn the meeting over to Mr. Scott Dvorak. Sir, you may begin.

Thank you Sarah, and 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 initiative and is considered to be non-GAAP under applicable SEC regulations. Our earnings 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 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. As such statements reflect our current expectations, actual results may differ. For more information, please refer to our press release, quarterly report on Forms 10-Q and annual report on Form 10-K filed with the SEC. Now, John Feenan.

Thank you, Scott, and good morning.

Before I review the third 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.

As noted in our press release last week, third-quarter results for 2004 were significantly impacted by rapidly rising raw material costs exceeding selling price increases and higher than expected operating expenses for bad debt and legal costs partially offset by a favorable tax settlement. I will give more detail on each of these items as I review the third-quarter results. Net revenue for the quarter was $349.5 million, 8.5 percent higher than Q3 2003 revenue of $322.1 million.

Looking at the components of the sales increase for the quarter, we see the following -- volume increased 4.7 percent, currency affects primarily due to the euro and to a lesser degree the yen and Australian and Canadian dollars accounted for a 1.9 percent increase. Pricing was down .6 percent and the Probos acquisition generated a 2.5 percent increase.

Increase in volumes was seen once again in every region of our adhesive business as well as every division within our full value specialty businesses. The year-over-year pricing decline reflected for this year's third quarter does reflect an improvement to the run rate that we have been experiencing since the second quarter of 2003. The year-over-year decline is indicative of the overall lower market pricing, especially in water-based technologies, which has resulted from the intense competitive environment for volumes that we have discussed previously.

The improvement from the second quarter's rate of a negative 1 percent is reflective of the efforts that have been made to obtain price increases from our customers where it was contractually possible. As we work with our customers in mitigating the impact of the raw material cost decreases, we expect to see sequential improvement as it relates to selling prices.

Gross margin for the third quarter was 27 percent, slightly less than last year's third-quarter margin of 27.1 percent. The year-over-year percentage decline in gross margin of 10 basis points was primarily due to lower pricing, higher raw material and container costs and higher delivery costs due to the increase in energy prices. This was almost completely offset by achieving leverage on our manufacturing costs with our improved volumes and cost reductions realized from our previously announced restructuring initiatives. The sequential decline for the second quarter of 70 basis points is mainly attributable to increasing raw material costs and higher absorption costs due to the lower volume from that of the second quarter, partially offset by modest selling price improvements.

Operating expenses were $79.1 million or 22. 6 percent of sales. This percentage is 170 basis points higher than last year's third quarter of 20.9 percent and 120 basis points more than the second quarter of this year. As noted in the press release last week, operating expenses were impacted this quarter by higher than expected bad debt and legal expenses. Bad debt expense for the quarter totaled $1.4 million, $1 million higher than the third quarter of last year. The increase in bad debt, mainly in the adhesive businesses of North America and Europe, is a combination of specific account write-offs coupled with our continued efforts to strengthen Fuller's balance sheet.

With regards to the legal costs, we are part of a group of companies who recently entered into confidential negotiations to settle a number of asbestos related lawsuits. We have a conditional agreement to contribute towards the settlement in exchange for full release of claims by the plaintiffs. Subject to finalization of certain terms and conditions, the total amount of our contribution is $3.5 million of which approximately $1.2 million is to be covered by insurers resulting in an incremental $2.3 million of operating expense. We believe this is a favorable settlement for us and that it resolves multiple pending cases. It is difficult for us to estimate future exposure but based on currently available information, we do not believe that these matters individually or in the aggregate will have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows.

As discussed in earlier quarters, we also increased our year-over-year spend by approximately $1.5 million for Company specific growth initiatives, including our lean Six Sigma rollout. Foreign currency translation increased the reported U.S. dollar amount of operating expenses by approximately $1.3 million and outside professional costs associated with Sarbanes-Oxley equated to a $400,000 additional year-over-year spend.

Operating income for the third quarter decreased $4.9 million to $15.4 million compared to $20.3 million for the third quarter of last year. Operating income in global adhesives in the third quarter was $6.5 million, compared to $12.6 million in the third quarter of 2003. The decline in operating income is due to the various reasons I have just reviewed. Fuller Value (ph) specialties operating income of $8.9 million increased $1.2 million or 16 percent from the previous year's third quarter.

Interest expense of $3.2 million was 12.5 percent lower than that of the third quarter 2003. Net gains and losses on asset disposals were losses of $400,000 in the third quarter of '04 as compared to no impact in the third quarter of '03. Miscellaneous other expense of $1.1 million in this year's third quarter compared to $900,000 of expense for Q3 of 2003.

Pre-tax earnings of $10.6 million for the third quarter of 2004 were below last year's third-quarter earnings of $15.6 million. The effective tax rate for the quarter was 17.1 percent, compared to last year's third-quarter tax rate of 27.9 percent. Last year's third-quarter rate resulted from adjusting the overall annual effective rate for 2003 to 30.4 percent. This year's third-quarter rate includes a favorable tax settlement on a previous tax audit and we still expect the effective rate for the fourth quarter to be 32 percent. As a result, for the third quarter of 2004, net earnings decreased from $11.8 million in the prior year to $9.5 million. Earnings per share were 33 cents compared to 41 cents for last year's third 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 filing the quarter's 10-Q. Cash at the end of the quarter totaled $28.6 million. Net working capital amounted to $263 million, compared to 272 million in the previous quarter. As a percentage of sales, net working capital remained steady from the previous quarter at 18.8 percent versus 20.8 percent at the end of last year's third quarter.

Capital spending for the quarter was $5.7 million, compared to last year's third-quarter spend of $11.7 million. Depreciation and amortization were $14.5 million for the quarter. Debt decreased from the previous quarter by $7 million to $172 million. The Company's capitalization ratio was 24.5 percent at the end of the quarter, compared to 29.6 percent at the end of the third quarter last year.

Free cash flow for the quarter, defined as cash from operations less cash outlays for dividends and capital expenditures, was a positive $23.2 million compared to a -$16.3 million in the third quarter of 2003. On a year-to-date basis, our free cash flow was at 46 million versus last year's nine-month amount of a -$18.8 million. The increase in free cash flow is primarily due to the improved working capital and the 2003 cash contribution to the U.S. pension plan.

While the third quarter was very challenging, we remain optimistic about our future. As I stated in previous calls, we will continue to improve the foundation of Fuller by strengthening the balance sheet, improving our net working capital position, generating significant free cash flow, and utilizing that cash generation to further growth the business.

With that, I would now like to turn it over to Al Stroucken.

Thank you John, and good morning to everyone.

On the review of our third-quarter earnings presented by John, you can easily surmise that our business has been significantly impacted by the rapid development of raw material costs and our ability to pass these costs onto the marketplace at a pace that keeps up with the speed and frequency of these increases. In addition, some significant operating expense developments late in the third quarter impacted the results for this reporting period. The combination of these events let us to conclude that the original financial objectives that we had set for this year are, despite continued solid growth, unlikely to be achieved.

Our focus for the remainder of the year will be to deal effectively with a run-up in raw material costs and with the restricted availability of some of the polymers and monomers that to go into our products in order to secure the positive trend of our topline growth.

I will come back to the raw material costs and pricing aspects a little bit later. I first want to add some comments on the charge we absorbed this quarter for asbestos related legal settlements. As John indicated, we were part of a group of companies who entered into a confidential and conditional agreement with a group of plaintiffs in exchange for a full release of claims by the plaintiffs. Our part of the total settlement does represent a small percentage that we believe it to be in the shareholder's best interest to resolve these claims. Our history on cases and settlements has had a minimal financial impact and this settlement does not alter our belief that these matters will not have a material adverse effect on the Company's future consolidated financial position. However, the opportunity may arise again in the future to enter into a favorable settlement such as this one. In the one or other case, such settlements could negatively impact our financial results in a particular reporting period.

As I mentioned earlier, the topline development continued to show strong year-over-year improvement of 8.5 percent as reported in U.S. dollars with over 65 percent of the increase coming from improved tonnage. Eliminating the favorable currency impact, we realized a 6.6 percent year-over-year improvement with the Probos acquisition accounting for 2.5 percent.

Our full value specialty segment nearly matched its previous quarter's volume improvement with a 7.4 percent third-quarter increase. With a favorable currency impact, the overall segment reported a more than 8 percent growth percentage.

Powdered coatings and consumer products achieved overall growth well into the double digits and the other businesses reached middle to upper single digit growth rates. Asia Pacific once again led the growth in our adhesives business with a near 10 percent volume improvement followed by Latin America where we saw strong volume growth of 6.6 percent. In Asia Pacific, our volume improvements were fueled by a broad-based advance of all of our business or reporting units with assembly, converting, graphic arts and footwear all posting double-digit volume improvements.

In Latin American assembly and converting, we are converting significantly to our momentum with double-digit growth.

The European business landscape remains challenging, as our markets and the individual economies continue to be very competitive for volumes and lower cost products. This general economic condition is also reflected in an increased credit list with customers and distributors that got squeezed between cost increases and anemic growth. For quite a while, the European adhesive industry has been insulated from some of the more dramatic raw material increases we have seen here in North America, but there are indications that this is changing and recently some companies have announced price increases for the European region as well.

In North America, our volume, including mix, improved by 2.6 percent. The overall North American tonnage shipped improved nearly by 6 percent. As I noted last quarter, the difference between the volume and tonnage improvements reflect the mixed impact resulting from continuous efforts to provide lower cost alternatives as our customers look for means of maintaining or reducing even their purchasing spend despite the pressures in raw materials, thus driving our product mix to lower priced alternatives.

Next (inaudible) is that positive developments in volume and in currency, pricing on a year-over-year comparison still reflects a decline. On a sequential basis, however, we're seeing improvements. That trend was strengthening throughout the quarter, albeit not at the speed that we desire. While we reported a year-over-year pricing deterioration in the second quarter of 1 percent, that number dropped in the third quarter to .6 percent. Corresponding numbers in adhesives improved by 70 basis points.

The sequential improvement becomes even more pronounced when we look at the latest development in our large U.S. market, where we have seen our highest raw material increases. The numbers for the first three weeks in September show a price improvement over May of this year of twice the rate that we achieved in the third quarter. I expect that the fourth quarter will see a positive sequential trend posting a positive year-over-year number as we work with our customers in sharing the burden of the rising cost of raw materials.

While I'm covering the specialty chemical industry, you may know that it is generally lagging several months behind the basic chemical sector on passing through cost increases. That lag may now also be affected by an underlying change that has occurred over the last couple of months. Oil and gas prices no longer seem to be the primary driver of our raw material prices. The three key feed start (ph) derivatives, ethylene, propylene and benzene are in a tight global supply situation, moving the market for these derivatives from the buyers' to a sellers' market. Notices that we've received in all regions from certain suppliers declaring force majeure or sales restrictions for specific raw materials are exacerbating the tight market and supporting increased raw material costs. In most cases, the tight supply situations are caused by shutdowns (indiscernible) scheduled and unscheduled maintenance combines with the increased demand of an expanding economy. For the fourth quarter and beyond, this is yet another aspect in the procurement for raw materials that we will have to monitor and where we will need to take preventive action.

Now, seen in a positive light, these circumstances will help us as well as in our efforts with our customers to adjust our prices to these new conditions. As John had already explained, the main variations in our year-over-year operating expenses I will forego commenting in further detail but I will make a few general observations relating to operating expenses.

While expenses for bad debt and legal expenses are an ongoing cost item and cannot be labeled as onetime charges, we do not consider this particular expense level of the third quarter to be part of our typical run rate. Our costs for growth initiatives and additional expenses incurred for Sarbanes-Oxley compliance are going to give us benefits that will add to the profitability of our company. You will recall that, earlier this year, we accepted some higher expenses to improve the cost structure and operating efficiencies of our full-value specialty businesses and I believe that the progress that we've made in the performance of these businesses has fully justified that step.

As part of our growth initiatives, lean Six Sigma development continues on plan and will be self-funding at the end of the year. Currently, we have trained more than 650 employees and have completed 18,000 belt projects with 42 percent of the total projects being customer focused.

Aside from these five to six month-long belt projects, we also have conducted 46 kaizen events throughout the organization. The kaizen event is a week-long focused effort primarily in the manufacturing area. These events built on improved manufacturing processes that we've created over the past couple of years by identifying areas to further reduce waste and improve efficiencies. All of these activities not only improve our capabilities and lead to financial gains but help drive our operational excellence model to heighten levels, garnering external recognition as well.

Along with the sequential reduction of net working capital, our free cash flow for the quarter was $23.2 million compared to last year's negative amount of 16.3. The significant cash generation and reduction in working capital is reflective of our continued effort and an improvement of our overall operations and not just those tied directly to the bottom line.

Overall, the environment in which we operated in the third quarter was challenging and difficult and did not provide the results and leverage we had expected from our growth at the beginning at the year. But we're determined to succeed in this tough environment by remaining focused and flexible by adjusting to external conditions as needed. We will draw upon our stronger operations base and the energy and dedication of our employees who built the foundation for our future success.

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

(OPERATOR INSTRUCTIONS). Ray Kramer.

Hi, I'm with First Analysis. Al, you talk about seeing sequential price increases. Number one, can you quantify that at all? Then number two, can you kind of comment on the competitive environment? Is that finally starting to get a little better and is that what is helping you get through the price increases?

Let me try to address this first ,as far as the overall atmosphere in the market is concerned. I think what we're seeing quite clearly is that the market is much more receptive now to price increases than I have seen in the six years I have been with the Company. I think that just the general overall breadth of price increases that companies are facing is making it easier also for us to gain higher prices. We are seeing basically that wherever we are going with increases, we find a much more receptive year than we have in the past.

Now, I mentioned in my comments that we saw, in adhesives, an improvement of about 70 basis points since the last quarter sequentially and as I also mentioned, in the first three weeks of September, that number was twice that rate. So, I think we are seeing, in the sequencing as well as in the timing of the increasing, a much more positive impact as time goes along.

Looking back at the third quarter, I would say that we most probably -- we're still in June and July or in July -- June and July dealing with a market that was a bit tentative about where is this raw material train going and do we really have to increase prices or should we ride it out? I think that issue has been resolved for all people and it's going to make it much easier to get increases, going forward, than what we have seen perhaps in the past.

Okay. Then can you quantify at all the raw material impact you had in the quarter or maybe talk about it in terms of the GAAP raw material versus price? Can you give us any sense of your sensitivity, for example a 1 cent increase in ethylene prices -- do have like what impact that would have on EPS for example?

I believe, as far as the impact to a particular feedstock or a particular raw material, I think it's very difficult to really establish an effective correlation between the market price movement, for instance in this case of ethylene, to a change in our growth margin percentage. Ethylene, as you know, is just one of the key derivatives from which raw materials are produced and for some of our raw material, movement in ethylene moves through fairly quickly if it's used in a formula for some of our raw materials. For others, the effect of ethylene depends not only on the market conditions but on the contractual position as well as the load on the facilities in secondary manufacturing processes. So it becomes a very complex environment and I really do not feel that we can tie a movement in one of the key feedstock lines directly to a per-share impact for the organization.

Okay. Can you comment at all maybe then at least qualitatively? Do you think you have seen the worst of the price increases or are there potentially more coming along?

If I look at it from a broader basis with regards to what's happening for many of the raw material apps, if I look in accolades -- accolades are very tight. There have been four rounds of price increases this year, each ranging from 15 to 25 percent. They're allocations in place. There has been force majeure declared. So, I don't think that that is going to really ease up fairly soon.

Hydrocarbon resins are even in tighter supply than non hydrogenated hydrocarbon resins. Also there we're seeing considerable pressures and as so often is the case, if supply is tight, then raw material increases generally stick much better than in an environment where (indiscernible) ample availability. If I go through the entire range of products, whether it's a block of polymer rubbers, whether it's acetone phenol, whether it's isocyanates ,whether it's ethylene oxide, glycol polyesters, all of these are basically in the same situation.

So I would say, given this environment at this point in time ,we are most probably going to continue to be faced over the following several quarters with continued tightness in the marketplace. That's going to have an impact on raw materials and also on the availability to source.

Now, I have to add as well, looking at it from a perspective of how to manage this effectively, I would rather have a very clear-cut environment like this where markets are tight and raw materials are markedly going up because that's going to help us much more effectively in raising our prices as well as to our customer base than is a creeping inflation of half a percent here and .6 percent there. Yes, it is going to give us our handful for the next couple of quarters to deal with this effectively but I think it's also creating a much more receptive environment in our marketplace.

Thanks Al, that's very helpful. Just a follow-up question for John. The loss on asset disposal -- can you comment on what that was about? It looks like you pulled it out in the year-ago quarter. Is there a reason you are leaving it in this quarter?

This is the first time we've broken it out, Ray, on the P&L. What that was driven by -- if you recall, last year, you look at the number from last year, there was a gain on -- or a sale of property in Chatsworth, California. The number this year, the gain of roughly 400 is a combination of a gain of our Roseville, California facility, which we disposed of, and then two other items, a true-up on a depreciation around two facilities; that's just a reclass of an asset held for sale, and then also some fixed asset write-offs around some of our physical work. That was mainly in North America and Asia Pacific.

Lawrence Alexander (ph).

Good morning, Deutsche Bank. The first question is on the allocation that you're reporting. Are you seeing any significant issues delivering volume to your customers? Are you losing any volume because of tight raw material supplies? Do you see any risk of that next quarter?

No, we have not yet. We have been able, through our global sourcing process, to make up for some -- or the other shortfall in a particular region by moving volume around. At this point in time, a significant benefit to us of course is the substantial procurement position that we have in some of these raw materials, which is helping us to make sure at least that our supply is secured. Then we are very actively looking at our formulations because, in some cases, we can change from one raw material to the other that may not be in tight supply and still get product performance that meets the standards and the specifications.

So, to date, we have not seen an impact on availability for product for our customers. In the one or other case, we may want to look more judiciously at some of the volume streams that we have a make a determination whether perhaps holding on to a very low margin business makes a lot of sense. But I think we will make that decision when we get to that point.

Okay. The second question -- have you seen any significant -- any signs of a slowdown in the hot note (ph) adhesives market or the specialty adhesives?

No, we have not. As you know from the reporting in the previous quarters, our overall percentage of volume growth in the previous quarter was a bit higher than it was this quarter. But that also has a little bit to do with our being a bit more selective with regard to water-based and hot melt. I would say hot melt is still moving fairly strongly and we're still seeing some very good overall volume demand coming to us.

Also, looking at the top line for the first half of the year compared to the third quarter, you have to keep in mind that there was a much more significant currency impact in the top line which has disappeared or which has not disappeared -- which has been cut in about half in the third quarter compared to the first half of the year.

Rosemary Morbelli.

Ingalls & Snyder. Good morning, all. Al, you mentioned looking at different sources of raw materials or different raw materials. When you do that, don't you have to get the product improved and does it delay some sales or are you preapproved for certain variations if they are not too wide?

It depends on the application and the customer. In the automotive industry, it's a much more involved process, as you very well know, but because of the strategic sourcing teams' activities that we developed over the last couple of years, we have, in the course of the past years, already been approving alternate raw material sources to prepare for this situation. So, whereas five or six years ago we had many formulations that were exclusively sourced from one particular raw material supplier, we have now a much greater base of products that allow alternatives and that already have approval from the customer base. So I think, at this point in time, the restrictions that do exist may be in very few and very particular application areas.

Okay and then going back to the price increases versus raw material cost increases, do you think that, by the fourth quarter, you can be ahead of the curve or while your price increases are being accepted, given the new environment -- or not new but worsening environment I would call it, you are still going to be behind and we may not see an improvement in the gross margin?

As I stated in some of my comments, I expect the trend of price improvements to continue in the fourth quarter and expect that the year-over-year comparison is going to be in positive territory this year. The amount of price increases and the frequency of price increases are increasing as we speak and in fact, in some of our product lines, we are already in our third and fourth effort in the last four or five months. On top of that, we also are seeing that the percentage increases are moving up and also the acceptance of price increases on the part of customers is much more readily agreed to than what we have seen in the past.

So, I believe that, with the effort and very concentrated effort underway at this point time, we should be able to at least ensure that the margin is not going to further decline and we expect that, in combination with some of the strategic sourcing efforts that are still ongoing and cost effectiveness activities that we're going to see some benefits from through lean Six Sigma, we will be able to hopefully get a slight improvement as well.

All right. Could you touch on the automotive industry? I'm assuming that gain you're showing on the minority interest line means that they have been losing money after making some money in the second quarter?

We had an inventory adjustment I believe in the third quarter and perhaps John can shed some additional light on that.

On that -- what you saw there on the P&L around the minority interest, you're absolutely right; it was driven by the automotive JV being less profitable. As you know, we consolidate 100 percent of that loss and then through the mechanics we passed 30 percent of that loss to the JV, which comes back to us as positive minority interest.

Besides the inventory adjustment, what is that particular division doing? Are they improving? If you eliminate the adjustment, are we still in a very difficult environment?

I believe, Rosemarie, we're going to benefit in the fourth quarter from a higher percentage of newer products that we had been selling to that industry for direct LASIK (ph) as well as for the sound -- (technical difficulty) -- systems. I would expect the fourth quarter to see a positive trend compared to last year, and I believe that we are on track with the steps that we've taken. Also, with these new products, we are picking up additional volume and additional sales of our companies that we have not serviced before. So I think it's going to be beneficial also to the distribution of the fixed costs that we have in that organization.

The new products are at a higher margin?

They tend to be a higher margin than the products that we have sold to that industry before. For those that are familiar with the automotive industry, you know that you can only improve your margin by introducing new products and creating a new plateau, which basically is your initial price, and then from then on it goes downward. With these two new segments, we were able to create, at least from this point in time, pricing points that give us a somewhat higher margin than in the more traditional and established products that we've been selling for many years.

Lastly, Al, you talked about your mix changing in the adhesives area towards the lower-priced water-based. Is there something that you can do in order to lower or increase rather your efficiencies in that particular business? Is this a trend that is going to continue and now you have to go through a whole new slew of restructuring in order to improve that particular -- those particular operations?

I believe that, as far as the infrastructure that we have created for the manufacture of these products, we are at a point where we believe we can manufacture very effectively. So, if we're looking at product lines that are demanded by the marketplace at a lower cost, then we automatically have to look at the composition of these products and look at the formulations and that means changes in raw materials; that means changes in the way we formulate rather than changes in the installed infrastructure of the organization.

I believe, Rosemarie, that quite a bit of what we may have seen in the past may also be due for a trend change because the raw materials that we were talking about, in particular raw materials that go into water-based products, are the ones that are, at this point in time, seeing some of the highest increases. I don't think that that's going to pass by the water-based marketplace. So I think we're going to perhaps see a change in the way that is being approached as well.

Robert Kosowsky.

Sidoti and Company. Good morning, guys. Hey, as far as the positive pricing comparison you're looking for in the fourth quarter, are you going to be looking for a positive comparison in all regions? Also, are you looking for a positive comparison in all of your different end markets? Could you kind of give us an idea of who are maybe some pricing leaders and laggers within the business?

I think that, given the comments that I made with regard to the European market where we have not really had a lot a raw material pressure because they were shielded somewhat by the currency development, I would expect that they most probably are trailing a bit behind what we've seen in the U.S. with regard to resolve and also with regard to acceptance of price increases in the marketplace. I would, at this point time, expect and we already saw it, in the third quarter, an improvement of the pricing because the price did not decline as much as it did in the second quarter.

In Latin America, the development was already positive in the third quarter and I think Asia Pacific you really have to talk about two segments. One is China, where the growth rates of demand and also the mentality is perhaps a little bit more attuned to dealing with changes in raw material costs and being willing to accept price increases whereas in Japan, which traditionally is a much more stable market, there would certainly be initially some more opposition to increases.

So it's going to be regionally a mixed bag. The ones where we have the largest have the largest impact and where we have the greatest urgency of course is North America and that's why I focused in my comments on the United States.

Okay, thank you. I guess, in terms of end markets ,is it also a mixed bag?

Could you repeat the question please?

In terms of end markets, is it also a mixed bag in terms of price and fixed assets (ph)?

Again, the markets that typically have fewer large volume customers are the more difficult markets to address. Yet we have found that even at our largest customers we were able to get significant increases. It has taken us a bit longer and that has had an impact on the timing that I referred to in the third quarter but I think, given the overall environment it, is becoming much easier. A customer setting where you have a much more distributed customer base of course very often there it is easier to get your increases as far as timing and size (inaudible).

As far as the bad debt expense, do you think you took the bulk of this increase in this quarter or are there some other customers out there you might be worried about or changing the way you deal with them?

We look at it very closely. In this specific example, the $1 million was really broken up into two pieces. It was bankruptcy of a major UK customer; that was roughly half of it. Then the other half was really truing up some allowances for doubtful accounts and that was mainly in our global adhesive business in Europe and North America. But nothing that I see on the horizon that causes me to lose sleep.

Okay. I'm also curious what lean Six Sigma -- how much was the cost in the quarter and what is the cost year-to-date and do you have an idea of what the benefit has been year-to-date?

We expect that the cost for the year is going to be slightly lower than we had anticipated. I believe we had talked last year about $3.5 million. I think we're going to come in at about 3.1. The costs in the third quarter were about $1 million and we expect that, for the year, meaning compared to the $3.1 million, it is going to be self funding.

Okay, so you guys look for a major impact in the fourth quarter?

It is going to help us in the fourth quarter, yes.

Also, you usually give us new products as a percent of total revenue. Do you have an update for that metric?

Unfortunately, I don't have that at my fingertips at this point in time. I only know that Advantra again went up by 28 or 29 percent, which is close to the 30 percent rate that we have in the FAS. Let me see whether I can quickly put my finger on some of the numbers at this point in time. I think the overall percentage of sales related to the volume that we sold is 15.5 or 16 percent, in that range.

Lawrence Alexander (ph).

Deutsche Bank. One follow-up on the asbestos settlement -- how significant is this? Can you give us any qualitative assessment in terms of a number? Perhaps are you -- a third of your claims have been settled or how large a chunk of the claims has been settled with this particular agreement?

I think what you know from our previous statements and so on is that we are part of this entire environment and as a participant in the chemical and construction industry, we are exposed to these claims. But I would say, in most cases, these claims always involve multiple codependent companies and generally seek unspecified damages resulting from the less (ph) exposure to asbestos containing products. Of the active cases, we are often dismissed without payment because the plaintiffs are unable to establish an injury due to asbestos exposure or unable to establish exposure to our products.

You have seen, in the comments and the 10-K, I think last year, we had a very small number of cases that have been settled over the past decades. I think we're looking at this from an aspect of what makes sense. What does give us a settlement that we think makes economic sense for us as a company and that's the way that we will continue to pursue it.

Now, we of course cannot predict with absolutes what's going to happen in the future. As part of the regular financial review, we're going to continue to evaluate these cases and establish financial reserves where and if appropriate. But we do not believe that it will have a material impact on the overall financial condition. So, it will continue to move along at a pace that we have been seeing over the last couple of years and I think we will deal with it effectively when they come up.

Godfrey Birckhead.

Hi, Al. Can you give me some historical background on these class action suits and what time frame are we talking about?

All right. As I indicated, most of these cases, of course as you know, refer to things or products that were being sold 20, 30 years or so ago. Many of these claims of course are filed to preserve the plaintiff's claim and have very little activity for a year and very often, there are just spread very widely so you do not really know whether your product has been used or has not been used. Only when these cases eventually come up to be tried do you get greater clarity and do you get a greater definition on this. We have settled some cases over the last several years that -- for amounts that reflect the confirmed disease and seriousness of the case. Insurance and indemnification have paid a portion of these settlements and we expect to continue -- that to continue in the future.

So, I really think that based on our perspective -- and we look at it of course regularly -- we do not see any significant impact on the future results of the organization.

Is it possible to give us collectively what the total amount of these suits are at the present time?

I do not really know off the top of my head. On top of that, I also believe that these cases and the size and the number of these cases really give you any indication of what the liability is going to be and what the likelihood of these cases to be settled is going to be. They really have to be decided on an individual basis.

What is the latest (indiscernible) that was leveled at you? What year was that happens (ph)?

I think the cases that we have spent as you know many years -- but as far as new cases are concerned, they're very, very few that I am aware of. I think perhaps in one year there may be 10 or 11 or 12 or something of that nature.

These have to do with product liability?

Yes.

What percentage -- thank you. What percentage of capacity did you go at during the third quarter?

I think we are at around 45 percent or so as overall capacity is concerned for the entire company. I think Fuller's full value specialty (ph) as well as adhesives.

What of full capacity?

I would assume, given the way we manufacture on a batch process, I would consider we get to 75 percent or so, we are most probably talking full capacity.

Okay. In terms of the selling, general and administrative costs, if we take out the other two items there, your SG&A costs as a percentage of sales were about the same as last year, the way I figured it. I wondered, are we still talking about getting those costs down over time to maybe from 21 percent where they are now down to about 18 percent? Does that continue to be your goal?

Godfrey, this is John. That's exactly correct. As you remember from Al stating in previous calls, we're still working diligently to try to decrease that run rate down into the high teens from where it stands today.

Do you think you will make some progress in 2005 in that sense?

I am looking very hard.

Al, what is the definition of new products?

New products are products that have been introduced within the last five years and also maintain a growth rate that is significantly above the growth rate -- average growth rate of our company. So they not only have to be innovative as far as technology is concerned but they also have to make a significant difference in the growth rate development of the organization. That is being reviewed basically on a quarterly basis and people are taking products in and products out that do not meet the criteria of a timeline or do not meet the criteria of a growth rate.

Do we have an objective, a la 3M, say that over time a third of your products you would like to see in that category or --?

Yes, I think that, some time ago, I said we should be over 20 percent as an organization. In some cases, like for instance in our full-value specialty area ,that percentage is already surpassed. So they are at a much higher rate of new products than we would typically find in the adhesive business where you have many different and more established applications. So, it varies from product line to product line and I think, in the full-value specialty area, we're most probably going to be first over that hurdle that we have set for ourselves.

Finally, thank you very much. Depreciation and capital expenditures for the year as a whole please?

Depreciation and amortization is somewhere right around 52 million. Our CapEx is running a little bit lighter than what we would expect and that's mainly driven around our socks initiatives, which has impacted some of the timing of our IT projects and I would look at our CapEx somewhere right around low 30s.

Rosemarie Morbelli.

Ingalls & Snyder. Al, you have talked about not seeing really any slowdown in volume sequentially. Could you look at the different areas and different markets that you serve and are you seeing some slowdown in one particular area?

I believe there are some industries that most probably are a little bit less energetic at this point in time as far as the economic development is concerned and for instance, if I look at footwear in Europe. Footwear is struggling and I think I just saw some statistics that footwear production in Italy is down 25 percent from the previous year.

In the area of graphic arts also with regional differences, we see still good growth in regions like Latin America but in Europe as well as in North America, the industry, graphic arts industry is not doing too well this year; they do not see very strong growth. So you really have to segment already pretty finely, Rosemarie, to get to points where you say there are people that are really not doing too well.

I would say, in broad strokes, if I look at our packaging business, if I look at our converting business, if I look at our assembly business, which tend to be the largest areas, they're all doing fairly well.

By fairly well, you mean at the same level as the previous quarter or they're still doing fairly well but a little slower?

I assume that with Europe hopefully starting to pick up a little bit on the global basis, it is most probably going to continue to be at the rate that we have seen in the past.

Why do you expect Europe to pick up as they are just beginning to see some increasing raw material costs?

Again, increasing raw material cost is indicative of a tight supply situation and I assume that some of the economic statistics that we have seen from Europe are to be looked at very similarly like we looked at them here in the United States. We saw economic activity picking up before we sought it in the manufacturing industry. Similarly, in Europe, we see economic activity picking up before it hits the manufacturing industry. Just deducing from that what the logical sequence is going to be, I expect that manufacturing in Europe is going to start to pick up albeit at higher raw material prices. I think the two, to a certain extent, go hand-in-hand.

So you expect those higher costs of raw materials are because of the shortage or the tightness of some of those products as opposed to oil and gas, which is what I was thinking about?

That's correct.

Just for John quickly -- could you separate short-term debt and long-term debt, putting your current payment of long-term into the short-term category?

Yes. Short-term, our total debt, Rosemarie, about 172. Of that, about 10.5 is what we would call short-term. I then have another 22 million that is going to be -- that's been now classified as short-term around our private placements, which we intend to pay off and that is in February, so Q1, and then the balance roughly of 140 is our long-term breakout and that's, as you know, the bulk of that is all our private placement debt.

That's 140 compares to the 162 or thereabouts that you had at the end of the second quarter?

I believe that is correct.

Richard O'Reilly.

Standard & Poor's. There was -- in your response to the question about operating rates, did I hear the answer was 45 percent? Was that --?

That's correct.

I guess what surprises me is, a few years ago, you went through the restructuring. I thought, at the beginning of that, you were running at a 50 percent rate. Is my memory wrong and I guess I'm just surprised why it's still -- why it seems to be below 50 percent.

Okay, I think one important factor, Richard, is that we also have reduced our number of products by almost two-thirds over the same period of time. We have moved production facilities into other production facilities and thereby combining volume, which has given us the significant enhancements in the output and in the throughput of the facilities. The processes that we have been working on with regard to kaizen and lean Six Sigma and general process improvements over the years have really given us some advantages. What we do is we adjust then our calculations for our capacity based on our capabilities that we have today. We have become a much more capable operator of these facilities and that by itself has added to having fewer, many fewer but larger facilities with a much greater capacity for throughput.

Fine. Is there a possibility you might go through another round of plant downsizing or restructuring or whatever the right buzzword might be?

I would believe that's going to be more along the tenor of what we did earlier this year when we closed an operation in our full-value specialty business and when we made some adjustments in our global coatings division, which really I think are fairly small and yet bring a very quick payback. So we would not look at this as a wholesale (ph) restructuring. I think we have taken care of most of that and whatever needs to be done in addition, given the changing conditions or situations, will be done on an ad hoc basis and will most probably give us very (indiscernible) and very rapid payback.

The second question is I guess I'm still a little confused about the pricing, selling price trend. I can see the year-over-year delta was smaller but I guess I'm thinking third quarter versus the second quarter, did you actually see a sequential improvement in your selling price?

In the third quarter for the second quarter, yes we did..

Okay, that's overall for the Company or just North America adhesive or --?

Overall for the Company.

Do you think that is going to continue into the fourth quarter?

We expect that to continue.

That should result in an absolute year-over-year positive?

That's correct.

This does conclude our question and answer session for today's conference. At this time, I would like to turn the call back over to Mr. Scott Dvorak.

Thanks, Sarah. We would like to thank all of you who took the time to listen and participate in today's conference call. With our time running out, we will now conclude this conference call. Thank you.