H.B. Fuller Company (FUL) 2006 Q1 法說會逐字稿

Good morning and welcome to the H.B. Fuller Company first-quarter conference call. At the request of the Company, this conference is being recorded for instant replay purposes. This conference has been scheduled for one hour. 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, Senior Vice President and CFO and Mr. Steven Brazones, Director of Investor Relations. At this time, I would like to turn the meeting over to Mr. Steven Brazones. Sir, you may begin.

Thank you, Latasha and welcome, everyone. Today's conference call will be available for replay approximately one hour after we are finished with the question-and-answer portion of our call. Before beginning, I would like to inform everyone that certain matters discussed during this call will include forward-looking statements as that term is defined under the Private Securities Litigation Reform Act of 1995.

In such statements reflect our current expectations, actual results may differ. In addition, during today's conference call, we will be discussing certain non-GAAP financial measures, specifically free cash flow. Management believes a discussion of these measures is useful to investors because they provide insight into the ability of the Company to fund such things as debt reduction and acquisitions. For more information please refer to our recent press release and annual report on Form 10-K filed with the Securities and Exchange Commission, both of which are available on our website at www.HBFuller.com under the Investor Relations section. Now I will turn it over to John.

Thank you, Steven. Good morning to everyone. During the first quarter of 2006, we took another step forward building upon the successes of 2005. Our financial results were solid. The focus on profitable growth resulted in strong incrementals throughout the income statement with gross margin expansion and an even more robust improvement in operating margin.

However, improvement was not limited to the income statement. Further progress was made in reducing net working capital as well culminating in positive free cash flow during the quarter, a quarter that has typically been negative for the Company.

In addition, since reporting are fourth-quarter results, two noteworthy accomplishments were made on the M&A front. First, we announced the largest acquisition in the Company's history, Roanoke Companies Group, a leading U.S. manufacturer of pre-mix grouts, mortars and other specialty products focused on the flooring market. Roanoke, now part of our specialty construction brands business within the Full-Valu/Specialty group, broadens our reach in the marketplace.

Second, we just announced yesterday the acquisition of Henkel's insulating glass sealant business. Together with our window business, also within the Full-Valu/Specialty group, we will have a global footprint and enhanced product offering.

For the first quarter, net revenue was $348.3 million, 1.3% lower than the $353 million of net revenue in the first quarter of 2005. This year's first quarter was impacted both by the 2005 deconsolidation of our Japanese operations and unfavorable foreign currency translation due primarily to the weakening of the euro relative to the U.S. dollar. Combined, these two factors reduced our net revenue growth by 5.2 percentage points. Adjusting for these factors, net revenue increased 3.9% year-over-year on a comparable basis.

Gross margin for the first quarter was 28.1% compared to last year's first-quarter gross margin of 25.7%. The 240 basis point increase in gross margin was driven by a shift in mix to more profitable products, a continuation of operational efficiencies at the plant level and further progress from our pricing strategy.

SG&A expense was $75.9 million, down $4.5 million versus last year's first quarter of $80.3 million. As a percentage of net revenue, SG&A was 21.8%, down 100 basis points versus last year's first quarter of 22.8%. Increased productivity resulting from both Lean Six Sigma and cost controls drove this improvement.

Operating income, which is defined as gross profit less SG&A expense, for the first quarter was $22 million, up considerably from last year's first-quarter operating income of $10.4 million. This represents an improvement of over 110% year-over-year bringing our operating margin from 2.9% in the first quarter of last year to 6.3%, a 340 basis point improvement.

On a segment basis, Global Adhesives improvement was in no uncertain terms profound. Operating income for Global Adhesives increased from $5.7 million in the first quarter of 2005 to $16.1 million in this year's first quarter. This represents an increase of 440 basis points in segment operating profit margin year-over-year. This increase was driven by a deliberate emphasis on mix shift, as well as significant improvements through our focus on productivity enhancements supported by additional progress on pricing.

Full-Valu/Specialty also posted improvement during the first quarter. Operating income was $5.9 million, up $1.2 million from last year's first-quarter operating income of $4.7 million, an increase of almost 25% year-over-year. Strength within both SCB and window, which each grew at double-digit pace for the quarter, combined with profitability improvement in paints primarily led to this result.

Interest expense of $2.7 million was 17.6% lower than the $3.3 million for the first quarter of 2005 due to a lower debt level. Net gains on sale of assets were $800,000 in the first quarter of 2006 as compared to $1.8 million in last year's first quarter. Last year's number included a $1.7 million gain on the sale of our Chesham, United Kingdom facility. This quarter's number included a $600,000 gain from the sale of our facility in Elkhart, Indiana.

Other income expense net in the first quarter was $500,000 of income compared to $350,000 of expense in the first quarter of 2005. The improvement was principally driven by higher interest income. Pre-tax earnings were $20.6 million for the first quarter 2006 was over double that of last year's first quarter of pre-tax earnings of $8.5 million.

The effective tax rate for the quarter was 30% compared to 32% in last year's first quarter. This year's first-quarter improved tax rate was largely due to the geographic mix of earnings. This favorable mix is expected to continue throughout fiscal year 2006 due primarily to the improved profitability of our operations in Europe and Latin America.

As a result, we anticipate our effective tax rate to remain at 30% for the balance of the year. Accordingly, for the first quarter of 2006, net income increased from $6.5 million in the prior year to $15.3 million. Our net margin increased 250 basis points from 1.8% in the first quarter of 2004, excuse me 2005, to 4.4%. Diluted earnings per share was $0.52 compared to $0.22 for last year's first quarter.

This year's first-quarter net income includes, on a pretax basis, $1.1 million of severance-related expense associated with a minor business realignment. Last year's net income included, on a pretax basis, four items that netted to a positive $600,000. These items were detailed in our first-quarter 2005 earnings release.

Due to our strong first-quarter results and our increased confidence for the balance of the year, we now expect fiscal year 2006 diluted earnings per share to be in the range of $2.55 to $2.65. This range is inclusive of the impact we anticipate from the recently announced acquisitions.

Before turning to the balance sheet, I would like to provide you some information surrounding the acquisitions we recently announced. The Roanoke transaction was funded with $75 million of existing cash and $195 million of new revolving debt. We intend to fund the acquisition of Henkel's insulating glass sealant business entirely with existing cash. With a pro forma capitalization ratio of approximately 35% after these acquisitions, we still have solid flexibility on the M&A front.

Prior to discussing the balance sheet, I would like to remind everyone that the following figures are subject to minor changes prior to filing our 10-Q. Cash at the end of the quarter totaled $167.6 million, up $132.1 million versus the first quarter of last year. The increase in cash is a result of the significant free cash flow generation of the business.

Cash, pro forma after the aforementioned acquisitions, will be reduced to approximately $60 million. Net working capital, which is defined as net trade accounts receivable, plus inventory, minus trade accounts payable, amounted to $249.8 million. As a percentage of annualized net revenue, net working capital was 17.9% for the first quarter. This represents a decline of 60 basis points from the previous year's first quarter. Improvements were made in both accounts receivable and inventory; however, accounts payable regressed. We do remain committed to our long-term goal of 14% to 15% and we expect further progress to be made in the quarters ahead.

Capital expenditures for the first quarter were $4.4 million, down $2.5 million versus last year's first quarter spend of $6.9 million. This level of spend is not indicative of the rate we expect for the full year; rather, is the result of timing of planned projects in 2006. We continue to expect capital expenditures for the full year to be in the range of $30 to $40 million. The recently announced acquisitions are not anticipated to significantly impact our level of spend in aggregate.

Depreciation and amortization expense in the first quarter was $11 million, down $2.9 million from the prior year level of $13.9 million. As we mentioned in the fourth-quarter conference call, we do expect depreciation expense to drop in 2006 due to the fact that certain IT assets reached a fully depreciated status in 2005. The recently announced acquisitions are not anticipated to significantly impact the level of depreciation expense in the aggregate. However, these transactions will result in an increased level of amortization due to the amortization of other intangible assets resulting from purchase accounting adjustments. This increased amortization is anticipated to be approximately $10 million on an annual basis. Therefore, for fiscal year 2006, we now expect depreciation and amortization expense combined to be in the range of $50 to $55 million versus the previously discussed expectation of $45 to $50 million.

Total debt at the end of the first quarter was $145.4 million compared to $150.3 million at the end of the first quarter of 2005. In the second quarter, we will make a $25 million payment on our private placement debt in accordance with the scheduled amortization. Total debt pro forma after the aforementioned acquisitions will increase to approximately $340 million. The Company's capitalization ratio was 18.4% at the end of the quarter compared to 19.9% at the end of the first quarter of last year.

Free cash flow for the quarter, defined as cash flow provided by operations, less dividends paid in capital expenditures, was a positive $1.2 million compared to a negative $17.7 million in the first quarter of 2005. Last year's free cash flow was reduced by $9.5 million due to a contribution to our Austrian defined contribution plan.

The components for the first quarter of 2006 were as follows. Cash flow provided by operating activities was a positive $9.2 million; dividends paid were $3.6 million; and capital expenditures were $4.4 million. This is the first time in a long time that we have reported positive free cash flow in the first quarter. Improved profitability, lower capital expenditure requirements and working capital improvements led to this result.

To summarize, we're happy with our first-quarter performance and the continuation of incremental improvement over previous quarters. As we look ahead, we will execute on our strategy and continue with our focus on profitable growth.

All team members deserve congratulations for a job well done. Their dedication to the Company, their energy, enthusiasm and their willingness to adapt has led to our continued transformation. As we move ahead, we will continue to build upon the solid foundation we have created that will result in consistency of results and returning value to our shareholders. I will now turn the call over to Al.

Thank you, John, and good morning to our participants on this conference call. On our press release and from John's comments, it is quite obvious that we again had a good quarter financially and that we are making progress in our efforts to position the Company at a higher profit generating profile than we may have had in the past.

To accomplish such a repositioning takes time, determination and a focus on internal processes. Externally, it means providing products and services to customers that will value and support the direction that the Company is pursuing. Repositioning also means that certain businesses or markets spaces that may have fit in the old profile no longer are supportive of the direction we're pursuing today and other new businesses or acquired assets will help us to get there faster or in a more substantive manner.

The two acquisitions, one completed and the other announced, are helping us to move in that direction. At this point in the process since the announced insulating glass sealant acquisition is still subject to the customary closing conditions, we're not yet at liberty to divulge the transaction and the detail that you may wish to see. I believe, though, that since both companies fall into the construction-related components that are part of our Full-Valu/Specialty group that I can give you some summary information on the combined acquisitions that will add some prospective on why they are a good fit for our Company and accretive to our results after the initial integration period.

The Roanoke acquisition added a portfolio of leading brands in the do-it-yourself retail flooring segment complementing and strengthening our strong position in the professional brand channel. Brand names like Color Caulk, AIM, CHAPCO and Tile Perfect combined with our TEC brand present us with significant cost selling synergies in the various channels. We believe that going forward the construction-related product lines offer considerable growth opportunity in developed, as well as in emerging markets of the world. The cyclicality of the housing market is tempered by a significant component of renovation rather than new construction.

For those same reasons, we felt that the strong European position of the insulating glass sealant business of Henkle would be a great addition to our own highly successful North American insulating glass sealant business. The technologies that are predominately being used in Europe differ from those here in North America and it looks like China is likely to embrace both technologies. The combination gives us technological access to virtually all global markets.

Both businesses will contribute to or strengthen the growth rates and profitability of our existing activities in those segments. To put that into perspective, the revenues of our business in this area combined with the revenues of the acquired assets for the past two years on a pro forma basis exhibited an annual compound growth rate of 17.8% on a combined basis versus a compound annual growth rate of 8.4% for consolidated H.B. Fuller on a reported basis for that same period.

Additionally, for calendar year 2005, unaudited pro forma net revenue of the two transactions combined was about $135 million. Unaudited pro forma operating income, defined as cost of goods sold, less SG&A expense, was roughly $27 million. Total purchase price consideration for the two transactions is expected to be approximately $300 million. This equates to a multiple of approximately 11 times 2005 pro forma operating income on a combined basis.

For comparative purposes based on yesterday's closing price and our 2005 fiscal year-end net cash position, H.B. Fuller was trading at a multiple of more than 14 times 2005 operating income. With both of these transactions, we expect meaningful cross-selling synergies, as well as cost savings on raw materials among other areas of spend. As previously mentioned, our new earnings expectations for fiscal year 2006 incorporate the slight dilution we expect from transactions on a combined basis.

Looking forward, we anticipate these acquisitions will be accretive to 2007 earnings to the tune of between $0.12 and $0.18 on a combined basis per share.

Now let me comment on the first quarter and on our views regarding the remainder of the year. Raw materials increased further, as I have indicated in my last call. Sequentially, raws increased at the highest rate of the last the quarters. Increases were in fact twice as high as the sequential increase in the third quarter of last year. The reason I point this out is that even if and when we might be seeing a gradual lessening of upward pressure in the second half of this year, the year-over-year impact for fiscal 2006 is at least going to be 5% to 6% higher raw materials based on what has happened already so far. Certainly not an environment to relax on our pricing strategy and on our processes.

Despite this environment, we are deriving significant benefits from continually improving our productivity through a wide variety of activities and manufacturing, research, marketing, sales, as well as administration. Our operating expenses and our conversion costs, again this quarter, showed solid improvements. Aside from the many benefits that our Lean Six Sigma initiatives are generating, our existing resources are also focusing on the higher value add activities that ultimately lead to being a preferred supplier for those customers that derive value, not only from our molecules, but from our knowledge, insight and expertise as well.

Despite the global growth rate on a comparable basis of 3.9%, in North America, as well as in other parts of the world, we decided to forego several opportunities for significant volume since it did not meet our profitability criteria. Given the very many different applications for adhesives, it is not always easy to pinpoint the highest impact area. But typically, we would find the greatest pressure points in commoditized water-based adhesives or in large volume standardized products of other chemistries as well.

In many adhesives applications, as well as in most of our Full-Valu/Specialty businesses, we saw a very positive development. Competitive activity varied widely. Many suppliers were active in raising prices following the raw material run up, but there are still notable exceptions.

Our European business has gone through a remarkable development and continues to improve its performance again this quarter. Operational efficiencies, cost reductions and pass-through of increased raw material costs have been very effective in bringing our European business to a notably higher performance level despite a typically very sluggish pricing environment in the region.

Early 2006 reports for the general economic activity indicate that the lower euro may be breathing some life into the export-oriented industries.

Latin America, combined for Full-Valu/Specialty and Adhesives, also reached a new performance level in respect to sales and contribution. Virtually all countries reported sales increases with some countries well into the double-digit range. Price recovery has played a significant role in this development, but equally, productivity improvements are benefiting our cost structures.

Customer-focused projects have been very helpful in regaining position at several large accounts. In the Asia-Pacific region, China, Korea, Philippines and Taiwan, showed solid growth. In this traditionally very difficult pricing environment, we also made good progress in our efforts to recover the raw material cost increases.

Economic growth in Australia and New Zealand seems to have weakened somewhat, but economic activity remains at a very high level. Adhesives and Full-Valu/Specialty had a very good quarter with incremental improvements in Adhesives coming at a much higher rate because they also had seen the steepest decline in the years prior to 2005.

On a comparable basis, their top-line growth rates were almost equal. Looking at the pattern our businesses have performed at, over the past four quarters and the effectiveness of the processes that we have implemented over the course of the last couple of years, we are confident that we are pursuing the right strategy to transform our Company into a more profitable, higher growth specialty chemical business.

We believe, therefore, that in light of the present market conditions and our existing performance level, we can raise the expectations for this year. Even under consideration of the integration cost of the two transactions that I discussed earlier, we now believe that the full-year results for the Company are likely to be in the $2.55 to $2.65 per share diluted range that John mentioned in his comments.

Let me end my prepared remarks with the following observation. I'm very pleased with the hard work invested and the results that our associates have achieved. Our Company is in the process of a transformation and such a change requires courage and energy. We derive our courage from what we have achieved and our energy from what we can still aspire to. Our new colleagues from the two acquisitions will be a great boost to that energy. Thank you and we will now open it up for your questions.

(OPERATOR INSTRUCTIONS) Ray Kramer, First Analysis.

Assistant Allan Cohen. Really, congratulations. Fuller embarked on a -- attempted a transition in 1993 to a higher quality company and if you look at a model across town, Valspar was a clear picture. It looks like you are well on your way. Two brief questions, what were volume and price in the quarter? Is volume a little negative?

Allan, thanks for your kind comments. As I had indicated in the last conference call, we would expect that our volume decreases that we have seen in the last quarter to mitigate and that in fact has happened because other people have been raising prices as well. And pricing has continued to improve on a year-over-year comparison, but also there, of course, the overall percentages are somewhat diminishing because we already started raising prices in the first quarter of last year. So typically now you're looking at a combination of an increase last year and an increase this year, and so the differential becomes a little bit less. But I think it is obvious from the impact on the income statement that both factors are contributing to the overall performance of the Company.

So is volume slightly positive then?

No, I think on the year-over-year comparison, it depends on what business you talk about. If you look at the adhesive business, you could still see a decrease in volume, but that, as I said before in my comments, is intended because we are shifting our mix clearly to higher profitable products and if I can sell 1000 pounds at $10, I prefer that over selling 5000 pounds at $1.

That is the other question. You're transitioning to a higher quality business. Where are you -- if you look at that, you are probably walking away from a certain amount of business intentionally each year. Some of it inadvertent and perhaps you would like to keep and you're bringing in new business of a more desirable type. As you look at the amount of business you are walking away from, what might be a sustainable rate and where are you at today and how many years might it take to get that sustainable rate? In other words, if you are weeding out 2% of your business each year, are you now at a 5%, 6% rate and over time, that weeding out will decrease?

Those are many questions in one. Let me try to address it so that directionally you get the right sense and the right idea. Typically in the more commoditized products, you will find the higher volume use. I mean I think having a high-volume consumption of a product is one of the preconditions for a product to become commoditized. And that yet at the same time, is also the area where we have in the past and not just in the past year, but in the past ten years, always found the lowest margin and the lowest contribution.

Combined with the fact though that this is not a very capital intensive business, it basically means that we do have the flexibility in our operations and in our cost structures to adjust for the changes that we are making. And I believe that is an underlying factor in how we have been able to get to the improved performance level at this point in time is by making those choices and not just following the old model; fill the plant, fill the plant, fill the plant. And because if we fill the plant with something that is not contributing, it doesn't really make a lot of sense. I think it is really that shift that has led to the significant difference that you see in our performance now versus perhaps what you have seen in the past.

And then just finally, would you care to speculate on what kind of operating margin you could settle out? Again, looking across town that would be low double digits. I have always viewed your businesses as having, if you will, higher potential operating margin than Valspar's?

I think we have said publicly several times in the past, we want to get to a performance level of at least 5% net return on sales. I think we're getting close to that mark, so it time to look at new targets and new objectives. We're presently going through the process in the Company of defining what a realistic objective could be. You have heard me talk in the past that my own personal feeling is that a specialty chemical business should be able to generate 7% to 8% net income after-tax as an ongoing business. And that is -- I think that we clearly are now looking at and will have to develop the plans to get to that point.

Thank you very much.

You're quite welcome.

Chitra Sundaram, Cardinal Capital.

Thanks. In the base guidance or increased guidance for 2006, about $0.26 of the increase is coming probably from Q1 I think and then about $0.23 is that additional or that upside. Is it possible to get a sense of how much of that is organic versus acquisition cost versus volume recovery?

Well, you cannot -- I think is going to be very difficult to just take two components because we have quite a variety of things that are still ongoing in the Company like productivity improvements, cost reductions and so on that we're continuing over the coming couple of months. What we are, however, including in our projection is that we have seen already last year a ramp up in the second and the third and in the fourth quarter of our profitability. So the comparison is certainly going to become a little bit more difficult as we progress through the year.

Okay.

This is John. I just want to add one point to your question on the acquisitions. As we stated previously, no change in our guidance that they will be slightly dilutive for '06.

Okay, all right. Thank you. Just relating to the earlier question on the 440 basis points increase in gross margins on the adhesive side. Is it possible to answer -- and I think that when you look at the last four quarters of the last 12 months, you can kind of see how that improvement was going through the system. Year-over-year, it is a big change, but you can see how it's been building up and really pretty incredible. But is it possible to get a sense -- how much of that improvement has been coming from mix shift versus on the cost side? That's one aspect I am not able to get my arms around clearly. There has been a lot of cost control going on, but I'm not able to see the mix shift. Is there a way to --?

Well, I think you are really hitting on a point here that is I think very important. That is why we have stayed away a little bit in this comparison this time from volume and price comparisons because we always went through a huge gyration of getting those numbers. You can understand that if we have a product portfolio as we have today with glue sticks, cartridges, tubes, paint cans, linear feet of product, tank cars, as well as services, it is very difficult to really get a homogeneous picture out of this to see what is volume and what is price impact because there is a lot of mix that plays into that role.

But if I look specifically at a business unit or as a business component that has some greater similarity in its product lines, and I believe that applies to adhesive, we clearly see that in the last two quarters or so, the mix change has become a more dominant component of the profitability improvement and the price increase.

Right. Yes, but it is, I think, in early stage.

Of course. I think, as we said, we are in a transformation and we are in a gradual move towards a higher profitability profile and we certainly hope that we have not arrived at the finish line yet.

What I guess I'm -- please stop me if I should stop here, but where that takes me is -- okay, so the cost improvements incrementally good but maybe -- not stabilizing, but you see where I'm going. The emphasis would be more on the mix shift aspect. What happens there? Is it that -- what kind of products are the emphasis being put on? I know you have talked about focusing on alternate materials or maybe that is more a raw material cost issue or is it certain kinds of markets, certain kinds of customers. Is there any flavor you can give there?

Yes, let me again try that. Again, I think one of your basic assumptions that eventually there is also going to be an end to taking out costs. Of course, from a general theoretical point is correct, however, what we have found, especially with our Lean Six Sigma, is it's almost like it is going into a house of 1000 doors. Whenever we open one door and see an opportunity for taking additional cost out and getting some benefits, we find three more doors we can enter. So still at this point in time, the benefits that we are deriving from a productivity standpoint by the use of the principles of Lean Six Sigma are still continuing to increase and continuing to contribute to the improvement and we expect that to persist during the remainder of the year.

Now with regards to the shift in applications and the shift in products, you have to consider that we cover basically a wide universe of applications and with only 4% marketshare that we have in the total world market there is still 96% of the market out there that we are not covering. I think we are making a deliberate choice to go after those parts of that 96% of the market that we're not covering where we see and the 4% that we have of that market are the highest potential for profitability. And so you can see with only 4% marketshare in the bag at this point in time and that is still not in the optimal product mix, there is a huge potential to keep driving forward in that other direction.

Rosemarie Morbelli, Ingalls & Snyder.

Good morning, all. I will add of my congratulations for quite a super quarter. As you are walking away from some of the commodity like business, what is happening to your available capacity? Do you find yourself with a lot of excess capacity, which you can fill up with product lines from Henkel for example as it seems as though you're not buying any manufacturing plants or do you think that you are going to eventually have to much even considering a higher gross level?

Well, Rosemarie, I think I may have referred to this issue already in the past and I commented about it also in the first question today and the answer to the first question is it is not a very capital intensive business and we really have the opportunity through a judicious use of shift and shift utilization to adjust the cost structures to the overall volume throughputs that we have and that we need to serve.

However, as we have continued to do in the past and we have had several quarters last year where we had adjustments of our cost structures and in some cases that was also idling some facilities or part of facilities that we didn't need any more and I think we can handle that again because they are not huge investments. We can handle those gradually as we go through the process of making that shift without having to have perhaps like we did in 1999 and 2001 have to have these huge wholesale closures of facilities.

As you are eliminating product lines -- I mean product lines -- well, are you mostly eliminating customers and then finding ways of selling the same or similar product to someone for whom it will be more valuable and who will be willing to pay or are you actually eliminating a lot of SKUs?

I think we have been eliminating a lot of SKUs and you have heard me talk in the past about that I think in the years between '99 and 2004 we reduced something like 65% or 67% of our total SKUs and we continue to do that at this point in time, as well, as we look at this portfolio shift. But I believe one of the things that is really important to look at it is that if we have a dramatic situation like we had in the last two years with raw material costs run up in the range of, in some cases, well over 100% and your available margin on some of these high throughput but low contribution businesses is basically eating up 3, 4, 5 times by the shift in raw materials, it is a very easy choice to make. There is also not a lot of upside trying to regain that business because the fundamentals of that business are going to be that -- most probably, as long as there still are 400 manufacturers of adhesives in the United States, going to be a business that everybody is going to jump on and we have made the decision that there are sections of this business that we would not really feel help us getting to where we need to go.

When -- I know you are going to get sick of this. I am looking at the price versus volume mix. Pricing was up 2.6% in the fourth quarter of last year versus an increase of 8% in the first quarter. Now the combination of both is 3.9%. So are we sticking around the 2% increase in price and we are seeing a little bit of an increase on the volume/mix if you look at that on a per pound basis?

If I recall correct, in the fourth quarter of last year, our price increase was something like 8.9% of the Company and our price increase, as I mentioned in the conference call earlier, in the first quarter of this year, is somewhat lower than that, but still well north of about 5% or 6%, but it is diminishing not because the price is diminishing; it is diminishing because the comparative period in the first quarter of last year already saw some increases. So pricing is still moving forward.

I'm sorry; I apologize. I was looking at the wrong sheet. But, yes, 8.9%. We are now looking more at last year first quarter, the price alone was up 4.4. So now we are looking at price in the 2% range in order to continue to catch up?

I think you lost me. Specifically, let me try to throw some numbers at you and see whether they make sense.

Okay.

As I said, we had, year-over-year in the fourth quarter, we reported well over an 8% price increase. But also already and I don't have the numbers in front of me, we reported a price increase in the first quarter of last year and I believe in the first quarter of last year, we had a price increase of 4.4%. So you have to deduct whatever we see at this point in time as a price increase or you have to add that 4.4% that we achieved last year through the price increase that we are achieving this year.

Do you need to get more -- if you forget how much you raised prices in the first quarter of last year. Let's look on the fourth quarter, would you need -- if it was zero the prior year, would you need another 8% to catch up with your raw material cost increases?

No, I think, as we have commented in several quarters in the past, one of the big advantages that I believe we were able to garner from the use of processes in the Company is to compact the time that is required between when we see raw materials increase and the time we raise prices. So in fact by moving diligently in that direction and I have to admit it is not always easy because very often we're standing out there by ourselves in the marketplace because we were way ahead of what others were doing, but we were able to basically make sure that the time compression was so significant that I believe in the first quarter of this year we were able to basically deal with the increases that were occurring in the first quarter in a timely manner. Therefore, I think, we are right now pretty much in line with what is happening with raw materials.

Okay, which leads me to my last question if I may. So the 28% gross margin sounds as though it is the good number for the balance of the year. No particular reason why it should go up or down since you have caught up on the pricing and the volume is not moving that much and then you are seeing a huge amount of cost-cutting in addition to --.

I would expect that given the change that we are going to see in the remainder of the year, also in the mix of our products because now we will have these two acquisitions added to that and as you can see from the operating profit in relation to sales, that's a fairly high number that most probably in the new model, we're going to see some different, higher numbers in gross margins than we have seen in the past.

So they have a similar -- they don't have a lower gross margin for example, but also a lower SG&A, so in the end, they end up with a higher operating margin? They actually have a higher gross margin as well.

Absolutely.

Okay, thank you.

Jeffrey Zekauskas, JPMorgan.

Hi, good morning. I guess I have a couple of puzzles I was hoping you would help me with. The first-quarter depreciation and amortization is 11 million and the estimates for the year is now 50 to 55, is that correct, because we are annualizing at 44?

That is correct, Jeff.

Okay, and will gradually step up, is that it?

Right. We were down 3 million quarter-to-quarter '05 -- '06 to '05. As I stated in my comments, the first quarter is not indicative of our spend rate in the CapEx. We still expect the CapEx to be in the $30 to $40 million range. As I alluded to in my other comments, any of the fall-off that we would see in depreciation will be offset through the amortization and the purchase accounting through our acquisitions. So that is why we upped our guidance this year to the 40 -- excuse me, 50 to 55 range.

Okay. Second question, the SG&A costs were down year-over-year in the first quarter. If I remember correctly, I thought your pension costs might be up this year. Is this a trend that we will see through the year where SG&A costs will be lower than the previous year for 2006?

As I had mentioned with regard -- since you mentioned the pension cost, the reduction in depreciation that we have anticipated for this year was going to be largely offset by increases in pension and benefits cost that we were going to see and some other factors that I mentioned in my last conference call. But as far as SG&A costs and rate development is concerned, I think that is really where you see and will continue to see the benefits of the Lean Six Sigma processes that I referred to and the productivity improvements.

Yes, your numbers are down in absolute terms year-over-year in the first quarter. What I was wondering is are you going to be down absolutely for the remainder of the year?

Again, the remainder of the year of course is going to be a combination with the acquisition. So year-over-year it is going to be up on absolute terms because of the acquisitions.

Right, so I guess another question for John. What is going to be your quarterly interest payment once you begin -- once you have to finance these acquisitions?

Our all-in interest cost for the year, Jeff, for the acquisitions is going to be around $8 or $9 million and I would expect that to kick in some time in -- we have closed one transaction; the other one will probably close toward the latter part of Q2. So that would be our cost for this year.

So $8 or $9 million in addition to the call it $2.7 million that you're running on a quarterly rate?

That's correct.

I guess sort of my last question is -- I guess I have two more. So you lifted your guidance to I guess 255 to 265, which is really substantially higher than it was before. So what surprised you in the quarter that caused such a large change?

Well, I had some concern in the last quarter because we had not seen any pricing activity really from our competitors. And then in the first quarter, it became obvious that perhaps some of the situation that I had feared would happen that we would have some substantial impact on volume did not incur to the extent and, in fact, it turned out much better than I had anticipated. On top of that, we also continued to have great progress in our productivity improvements through the Lean Six Sigma process and having done this now for, I would say six or seven quarters, we just have a greater confidence level that this is going to be a continued feature of our performance also in the remainder of this year.

So if I can just distill what you said to me, your prices are higher than you would have thought?

No, I think that the potential impact of volume dropping off because other people would be offering products at lower prices has not occurred to that extent.

Okay, I guess my final question and sort of final puzzle is -- the first quarter numbers, especially on the gross margin side, were really remarkable. In the sense that your gross margin percentage in the first quarter was higher than it was in the fourth quarter of '05 and in the fourth quarter of '05, your sales were about $65 million higher than they were in this quarter. And year-over-year, at least in Adhesives for example, your sales are lower and your operating profits, all things being equal, are 10 million higher. These are just remarkable changes.

Don't forget, last year we had the extra week. So that is substantially $20 or $30 million of sales. I don't have the exact number in front of me, but it's a substantial chunk of sales.

And costs.

53rd week and costs. So when you factor out the impact of that 53rd week and you look at our margin, which was I believe 27.5 in the fourth quarter versus 28.1, just a continuation of what we talked about earlier of managing our pricing and our costs.

I think, Jeff, it is also a confirmation of what I was just talking about. I believe it was with Rosemarie, is the fact that volume is not necessarily the determinant for this business because we can adjust cost structures depending on the volume that goes through our facilities. The impact -- the biggest impact on our profitability is going to be and continue to be raw materials because that is the biggest cost factor and it's going to be our operating expenses and the efficiencies that we can generate there, as well as the price level, but I think capacity utilization throughput and so on is not necessarily the key determinant in the profitability of the organization.

I guess lastly I'm hearing very optimistic things about growth in Germany, especially on the industrial side, but perhaps on the consumer side as well. Is that something you are picking up?

Well, I was just over there and what I'm hearing and I heard it in three or four different countries is that domestic consumption still is very low in those countries. What people are seeing is a pickup in export business because of the lower euro in relation to the U.S. dollar and that has increased their competitiveness a little bit. Given the stride that is presently ongoing in France, and the problems that Germany is also having by dealing with the changes in the economic environment, I really doubt that I see a significant indicator of domestic growth in those countries. I think there is going to be most focus on the economic expansion, but it's going to be driven by demand from North America or demand from Asia-Pacific rather than by demand from Europe.

Okay, thank you very much.

Christopher Butler, Sidoti & Company.

Good morning, gentlemen. Just wanted to ask a general question on the new acquisition that was just announced. If I remember correctly, the Roanoke acquisition, you were looking at cross-selling opportunities more than say operational synergies or the fact that it was an underperforming asset. The new acquisition -- does that fall into that same sort of category?

Well, I think if you look at the Henkel acquisition, we're talking about geographical expansion, number one. We really did not have a position in the European market because the technologies were different. Europe typically uses a polysulfide or a polyurethane-based material depending on the country and what we believe we can get from this is, of course, an opportunity to expand into Eastern European countries that have developed a significant market in these products that we did not have the anchor for in the past or the anchor production for.

But also, I believe that the fact that China is mostly probably going to use a combination of European, as well as U.S. technologies, is going to help us to open that market up significantly for us too.

As far as cross-selling is concerned, we do have uses in the United States for the technology that have been predominate in Europe as well. So we are going to be able to take some of our polyurethane technology and move it over to Europe and some of their polysulfide technology and move it into North America. So there are also in the two main regions of the activities cross-selling opportunities.

And the deconsolidation of the Japanese operation, could you give us an idea of the impact that that might have on the top line for the second quarter?

In the second quarter, it is going to be, I think, comparable because we had our transaction I think April 1 of last year. So there may be one month that is still going to affect us. So if you think about one-third of the impact that it's had in the first quarter, that would be about right. I don't know what the exact percentage is going to be, but I think it's going to be less than 1%.

Okay.

Just to confirm that. It will be less than 1% because exactly what Al said of the timing of when we closed that transaction in Q2 of '05.

With the April 1 date, we, at this point, almost have a full year of the deconsolidation with --.

That's correct.

Could you give us an idea of the growth that you're expecting there? I'm looking specifically at the income from equity line?

We are still going through the final stages of the integration of the two cultures, the various technologies. In fact, as we speak, we have a team of people here that is using our processes that we have successfully used over the last two years and going to apply them to the joint venture. So I think that, going forward, we're going to see some real beneficial impact.

As to what we have already seen as far as income from equity, perhaps John can comment on that.

Yes, Chris, as you recall with Q4 '05, Japan was quite strong for us in that income from equity investments line. What you're seeing in the 1 1 versus the 500 is really twofold. The impact of the Sekisui JV, which continues to go as planned and the real increase this quarter was the result of our [MJV], strength in their business in both Europe and Asia-Pacific.

So it sounds like this is probably going to continue and we can expect numbers closer to the first quarter '06 then the first quarter '05?

We certainly will strive to improve upon it.

We're not satisfied with those, but I would expect those are realistic for a look forward.

Thank you, those are my questions.

Ladies and gentlemen, we have reached the allotted time for questions. Mr. Brazones, will there be any closing remarks?

Thank you. We'd like to thank all those who took the time to participate in today's conference call. Have a good day.

Thank you, ladies and gentlemen. This concludes (technical difficulty). You may now disconnect.