H.B. Fuller Company (FUL) 2007 Q1 法說會逐字稿

Good morning, and welcome to the H.B. Fuller 2007 investor conference call. At the request of the Company, this conference is being recorded for instant replay purposes. This call 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 includes; Mr. Michele Volpi, President and Chief Executive Officer; Mr. Jim McCreary, Interim Chief Financial Officer and Corporate Controller; 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, April. And welcome, everyone. Today's conference call is being Webcast and will therefore be archived on our Website for future listening. In addition, this 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 to 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. Since 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 that the discussion of free cash flow is useful to investors because it provides insight into the ability of the Company to fund such things as debt reduction and acquisitions.

Lastly, I want to remind everyone that the results discussed today for all periods are from continuing operations and do not include the divested powder coatings business. 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 are available on our Website at www.hbfuller.com under the Investor Relations section. I'd like to turn it over to Michele.

Thank you, Steven. Good morning, everyone and thank you for joining us today. I would like to start the call by providing you with commentary on the first quarter and then turn it over to Jim for a detailed financial review. And then finally, wrap up with a discussion of our outlook for the rest of the year.

Once again, we are very pleased with our financial performance during this first quarter. Although we faced a very difficult North American environment, particularly in the construction and automotive end markets, we delivered growth of over 40% in earnings from continuing operations. Profitable pricing processes, ongoing mix management, and comprehensive cost controls were the primary factors leading to the increased earnings.

Our top line development showed a year-over-year increase, driven mainly by acquisitions and partner progress on pricing. Our pricing was positive. The volume development was heavily impacted by weakness in both automotive and construction-related end markets in North America. Automotive, insulating glass, and specialty construction all had volume declines in that region of about 20% to 30% year-over-year. Our performance now continues to improve. Our pricing processes and repositioning efforts, which utilize a number of Lean Six Sigma tools have enabled remarkable profitability growth.

Likewise, on the operating expense side, we continue to drive improvement. Lower personnel costs, attained through attrition management, coupled with unrelenting cost control measures throughout the organization are enabling us to drive efficiencies. From a geographic standpoint, there was a very stark difference in performance between North America and the rest of the world in the first quarter of 2007.

This phenomena was even more accentuated than what we experienced in the fourth quarter of last year. As previously mentioned, North America faced a very challenging economic environment. With acceleration in the slow down in manufacturing activity concentrated in the construction-related and automotive end markets, volumes were down substantially. And at this point in time, it is not likely that we will see a trend change before the fourth quarter.

Housing permits, along with housing starts, continued to tumble. Each falling nearly 30% in the first quarter and falling at an increased rate from that in the fourth quarter. This has had a very adverse impact on the confidence level of home builders, which is at an all time low. Similarly, same store sales comps at the major home improvement retailers continue to worsen, with both Home Depot and Lowe's reporting mid-single digit declines in their most recent quarter.

American automobile manufacturers are not feeling any better, with overall productions continuing to decline in February. This tough environment has resulted in a worsening trend in our sales, which has also been exacerbated by the thinning of inventories and reengineering efforts of some of our customers.

The rest of the world fared better than North America in the first quarter. Rest of world net revenue, which contributed about 50% of total H.B. Fuller sales, was roughly flat year-over-year. Our diverse geographic presence has definitely helped to mitigate the difficulties in North America.

In Europe, we are experiencing a much better environment and positive organic growth during the quarter. In Latin America, we are working through the unique geopolitical situation, which is currently tenuous. In light of this, we are keeping a tight control on our receivables exposure and this has somewhat muted our sales evolution in that region. In Asia Pacific, Japan continues on its recovery path where we believe China will benefit by our new organizational realignment.

The performance of the businesses we acquired in 2006 remains mixed. The European insulating glass ceiling business continues to meet expectations. However, given the difficult construction market in the United States and the loss of certain product lines within the big box retailers, the Roanoke transaction is failing to deliver the results we expected, yes. While we are disappointed in this result, we continue to believe in the long-term potential for this business. And we are working diligently to replace lost product lines and to manage through this difficult market environment.

The raw material side is largely unchanged from the previous quarter. Raw material costs in the first quarter were flat to slightly lower. We experienced, in North America, some slight declines in certain ethylene based raw materials such as [VAM] and EDA. Waxes, oils and rubbers continued to increase. For 2007, we see our raw material costs, in aggregate, relatively flat with fourth quarter 2006 levels, with perhaps a slight downward bias. With that overview, I will now turn it over to Jim for a review of the financials.

Thank you, Michele. And good morning. For the first quarter, net revenue was $351.8 million, up 5.6% versus the first quarter of 2006. The impact of acquisitions and divestitures, as well as foreign currency translation, favorably contributed 9.4 and 2.4 percentage points effectively to net revenue growth. Average selling prices contributed 4.1 percentage points. And volume declines reduced growth by 10.3 percentage points year-over-year.

Gross profit was $102.3 million for the quarter, compared to $94.1 million in the first quarter of 2006. Gross margin percentage for the first quarter was 29.1%, compared to last year's first quarter gross margin percentage of 28.3%. The 80 basis point increase in gross margin percentage was achieved through continuing price actions, new product offerings, higher productivity, cost controls, mix, and raw material management.

SG&A expense was $73.6 million versus last year's first quarter of $73.2 million. As a percentage of net revenue, SG&A expense was down 110 basis points from 22% in last year's first quarter to 20.9% this year. Operating income, which is defined as gross profit less SG&A expense, for the first quarter was $28.7 million, versus $20.9 million in last year's first quarter. Correspondingly, operating margin improved by 190 basis points from 6.3% in last year's first quarter to 8.2% in this year's first quarter.

On a segment basis, global adhesives operating income for the first quarter increased from $16.1 million in 2006 to $21.4 million this year, an improvement of approximately 33%. As a result, the operating margin percentage increased from 6.6% in the prior year to 9% this year. For the Full-Valu specialty segment, operating income improved from $4.7 million in last year's first quarter to $7.3 million for the first quarter of 2007. Accordingly, operating margin percentage also increased by 120 basis points this year, from 5.2% in the first quarter of last year to 6.4% this quarter.

The effective tax rate for the quarter was 29%, compared to 29.9% in the first quarter of last year. The combined results of minority interest an income from equity investments reflects recognition of an additional income of $1.1 million compared to that of last year. The change is the result of improved profitability in the automotive joint venture in Europe and Asia. For the first quarter of 2007, net income from continuing operations increased from $14.5 million in the prior year to $20.8 million. This resulted in diluted earnings from continuing operations of $0.34 per share, compared to last year's first quarter of $0.24 per share.

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 $171.4 million, up slightly year-over-year. Net working capital, defined as the net amount of trade accounts receivable, inventory and trade accounts payable, amounted to $207.2 million. As a percentage of analyzed net revenue, net working capital was 14.7% for the first quarter. This represents the decline of 260 basis points from last year's first quarter. Capital expenditures for the first quarter, $6.9 million, up from $2.6 million versus last year's first quarter spend of $4.3 million.

Depreciation expense in the first quarter was $9.3 million, down $300,000 from the prior year's level. Amortization expense was $4.9 million in this year's first quarter, up $4.2 million year-over-year. This quarter's amortization expense includes $1.7 million related to a discontinued product at Roanoke. Total debt at the end of the first quarter was $197.2 million, compared to $258.7 million at the end of 2006.

Lastly, free cash flow for the quarter was a negative $8.2 million. This result was expected due to the normal trend of higher cash payments in the first quarter, coupled with seasonally lower sales levels. Free cash flow is defined as cash provided by operations, plus dividends paid and capital expenditures. The components for the first quarter were as follows. Cash provided by operating activities was $2.4 million. Dividends paid were $3.8 million. And capital expenditures were $6.9 million. I will now turn it back to Michele for some brief closing comments.

Thank you, Jim. Well, earlier I mentioned how pleased I was with the improvement in our first quarter endings and the continuation of the impressive turnaround performance that started in early 2005. Before concluding the call, I would like to briefly comment on our outlook for the balance of the year. As we look forward, we are optimistic for 2007. Despite the challenges we are facing in North America, we are on the right track. As a result of our strong first quarter performance and the confidence we have in our ability to execute on our strategy, we now expect to earn between $1.65 and $1.75 per share, diluted shares, for fiscal year 2007.

Finally, I want to emphasize that we are committed to growth, both organic and through acquisitions. We are confident, based on the new team we have put in place, that we are well positioned for this endeavor. Our M&A strategic focus and compasses both strategic and consolidation acquisitions, which underline short-term accretion and long-term shareholder value creation. Thank you for your confidence and support. And we will now open up the call for your questions.

Thank you. [OPERATOR INSTRUCTIONS] The first question comes from the line of Jeff Zekauskas with JPMorgan.

Good morning, this is Silke Kueck for Jeff. How are you?

Good morning, Silke.

So obviously the operating environment has become a little more difficult but yet you've increased your earnings guidance. And so, you must be optimistic about your ability to increase prices. And maybe you can just talk about your expectation for the remainder of the year? And in broader terms, I think that the longer term margin goal is really get from an 8% margin level to 12%. And you can talk about over what period of time you think that is achievable and what impact price would have?

Thank you, Silke. Well, as far as pricing, clearly, it's not very easy to increase prices in the current, specifically North American, depressed environment. Still we did it. It has been a key component of profitability in this quarter. And it is really not just repositioning or adjustment to raw materials, it's also the result of mix management, which is strategic in nature.

So the processes, as we have said, that we started creating 2005 will continue. And we are very, very comfortable that that will continue to deliver profitability. As for us, the long-term margin goal, first of all take into account that the margin that you see this quarter is also related to the seasonality and to the lower sales typical of the first quarter. But we reiterate our long-term operating income margin goal of 12%.

And in the quarters to come in this year, we will be much more specific, not only on what kind of metrics. We are going to adopt for the future, but also far as the timing on when we're going to achieve each one of those different metrics. We're not going to deviate big time from what we've said up until now. We're just going to be more granular, more committed, clearer time lines. And also looking more also at other measures that up to now have been missing in our goals, like return on invested capital or similar kinds of metrics.

And we believe that as far as the growth, in spite of this environment, we are working very well on our controllables. And the economy is factored in our guidance. And that's why we are optimistic and we came with that $1.65 to $1.75 guidance for the year, raised from prior $1.58 to $1.68.

My second question is a follow-up. If you wouldn't have had like the initial overhang from the Roanoke acquisition, what would EPS guidance be excluding that? Maybe you can talk about what the impact is of Roanoke? And presumably that will go away by the end of the year.

Well, for sure, Silke, I think we started pointing out some disappointments on this acquisition, short-term disappointment already in the previous quarter. Clearly, things have gotten no better. But at the same time, I want to be very, very fair with our team that they are really putting lots of actions in place. They are executing at speed of light and very well. That gives me comfort maybe more for 2008 than not for 2007. And I can tell you, everyone here, starting with me, is engaged to turn this around. So, as we said, we are committed to this business. Clearly, without getting into specifics because we are still looking at the situation. It has not been very contributive, I would say, to our performance in the first quarter but we're going to work on it. And again, take into account our guidance, our increased guidance of $1.65 to $1.75 for 2007 includes that disappointment in the Roanoke performance.

So if you are able to turn around Roanoke quicker then that would be additional benefit?

Yes. Also if the economy was helping, it would be also nice news. But still, we've got to deliver to our shareholders and our guidance is incorporating what we have basically depicted in the scripts that you have just heard.

Thanks very much, I'll get back into queue.

Thank you, Silke.

Your next question comes from the line of Ray Kramer with First Analysis.

A couple questions. First, I want to look at volume. And it sounds like the volume declines are getting a little more complicated with what's going on in North America. If you split out or can you give a rough split of what portion of the 10% decline was from this, all it, accelerating weakness in auto construction versus your pruning of customers and still trying to get the higher value customers versus any lost business that you didn't want to lose that isn't in those former two buckets?

Well, let me give you a perspective for the time that we have here, Ray. If you look at the other regions of the world, which are regions where still we have used the same pricing processes and the same strategy that we have used in North America, there were, year-over-year from a revenue perspective, basically flat. So there is a huge differential of 20% to 30% points difference among the businesses affected by automotive construction. And let's remember, it's not just those segments, it's a general manufacturing activity. You see that basically all the latest reports that are coming out are pretty doom and gloom in North America. And that is what clearly has not contributed.

Now, that doesn't mean that we are not having a pipeline of new business, that we are not executing, that we're not getting results, and we're not committed. That is part of our confidence for the remainder of the year, which means being a bit insulated from the economy environment. So clearly, when you look at automotive and construction related business, as we said, you have volumes down year-over-year between 20% and 30%.

And unfortunately, it's strongly correlated with what the economy's doing right now. And by talking to customers, talking to our agents and to our sales reps, nobody is optimistic on a turnaround in North America of the general economic activity before the first quarter of next year.

And just a quick follow-up there. About what percentage of your sales are in auto and construction in North America?

Well basically, what we've said in the past was -- let me just go back and look at what we said exactly that Full-Valu specialty approximately $225 million in sales relate to U.S. residential. And 2/3 relates to new construction. While for global adhesives, that is tied to North America automotive plus what is linked indirectly to that and construction is around $200 million.

Now take into account that this was basically what we were commenting in the fourth quarter of last year, we are giving more color this quarter that is not just construction and automotive. You see that the trend in factory orders, when you exclude aerospace, is really going down big time. So we have to be very, very cautious.

And again, the reason of my confidence is that while we are very active on the profitable growth side, that you can still execute on that even in this environment and we are committed to that. We're also very, very thorough in controlling our cost structure and making sure that we don't get surprises on the net working capital side.

Okay. And then my second question with this Roanoke business that you lost at the big box, can you give us a little more color in terms of what type of product that was? And sort of what the story was in terms of why that business is lost?

Well clearly, here we would be getting maybe too in detail also for competitive reasons. So, allow me to be a bit generic. But clearly, at this point in time, there are things that we are learning. That is a positive because it means that on future deals we will not repeat those mistakes and that's a good thing. I think that we will be more thorough in due diligence in the future. And at the same time, we are being very creative and very committed in turning these things around. Because let me tell you, Ray, we are committed to growth.

Thank you very much.

Thank you, Ray.

Your next question comes from the line of Rosemarie Morbelli with Ingalls & Snyder.

Nice to see you are back after your short vacation. If I could follow-up on this question. You say that if you will not make the same mistakes with the big box in the future. Was it a question of raising prices in which you have been doing all along and losing revenues purposely but in this particular case you have to use a different tactic when you deal with a big box? Or was it a question that the products were not up to their expectations in terms of quality?

Thanks, Rosemarie. First of all, let me clarify my comment in terms of not doing things like that in the future was not referring to to big box retailers. What was relating to how more thorough and more data oriented we can be in the due diligence process. I just wanted to clarify that because I think big box retailers, if managed properly, can provide great opportunities. And we are actually looking forward to that and we are working with them big time on several new opportunities that we have right now in the pipeline.

But the answer to your question is no, pricing has nothing to do with this event that we talked before. It is more product related and some of these things are related to the previous ownership. So from that perspective, no, nothing is -- it's not that we went there with an industrial approach to pricing without knowing about anything in retail and then we screwed things up. It has nothing to do with that.

Okay. And then in your higher expectations, if I look at consensus, you already did much better in the first quarter and that is more or less the difference between your previous expectations and your new expectations for the year. Were you also surprised by the first quarter results? And can you put your fingers on areas where you did better than you previously anticipated?

Well, as we said Rosemarie, we wanted to be cautiously optimistic. It was my first quarter. I wanted to understand fully the situation, we had several moving pieces, we said that were controllables and noncontrollables. And as a matter of fact, the noncontrollables, being the economy one of those, went actually farther south than we expected. So we worked relentlessly on the controllables. And I am very happy to say that we have been delivering greatly on the expectations and that's why I'm raising the guidance right now. So clearly, I think we wanted to be cautious to make sure that we are at the same time realistic with our expectations.

Moving forward, clearly the noncontrollables are still there, raw materials. If you just look at the oil price of yesterday, you wouldn't be considering that necessarily a positive factor. When you look at consumer confidence, you look at housing permits and you look at several other economic factors; there's not a lot to be happy. But we are happy on the controllables. And for that, we just need to work with our key partners, which are the customers. And we're doing that and we're very happy with that.

One last question, if I may, related to the powder coating business. First of all, do you have the restated second and third quarter? Was the fourth quarter fully representative of the sale of that business? And then if I look at gross margin and at the SG&A as a percentage of sales, you reported them lower than what you have adjusted in the first quarter. So did you benefit to the bottom line? Some of your benefit and expected, was some of it derived from the sale of the powder coatings and we expect the same kind of situation in the next few quarters?

Rosemarie, this is Jim McCreary. When you look at the 10-K, you'll see that we have provided the restated numbers for each of the quarters for last year. And you will see the impact of the results for the powder coatings business in the discontinued operations line. So of course, the numbers that we're reporting would reflect the sales and the profitability for that business as moved out of continuing down to discontinued operations.

So in other words, getting rid of it helped?

When you look at the full year, no there is a, and I think we talked about that at the fourth quarter call, there's about a $0.02 to $0.03 negative impact on the year. When you take the powder coatings business out.

Okay. But that was not the case in Q1? Q1 actually helped not having it?

It was a small negative impact with Q1, as you can see in the press release.

Okay. Thanks.

Thank you, Rosemarie.

Your next question comes from the line of David Begleiter with Deutsche Bank.

Good morning. It's Jason [Miner] sitting in for David this morning. Just revisiting some of the questions on your repositioning and the volumes. Recognizing that the repositioning process is ongoing, are you guys still finding the lower margin business to walk away from? And when would you expect to see perhaps a significant step down in the rate of volume you're walking away from? It's a little hard to parse out with the 10% decline.

Thank you very much for the question. As I said earlier, the process is meant to continue. It is an ongoing process. And I can tell you that theoretically, you should get to an end to this. In practice, you never get to an end because there are lots of defects on their way. You give prices to customers based on expected volumes and then the volumes don't realized. You give prices to customers based on their specific order pattern, a certain level of forecasting, a certain size of the order. And then that doesn't materialize that way. In some other situations, cost changes because raw material change.

At the same time, we are trying more and more to move the portfolio up. So, what maybe today is in line with the median and the day after tomorrow will be below the median and will become a negative outlier. So, there are lots of moving pieces. We are very, very happy with the thoroughness and the visibility and the speed of the processes we have created. And we are in a situation where we believe this is going to continue and it's going to continue to contribute to our P&L. It's not just a superficial price to raw materials. It is actually profitably pricing and it is an alignment of selling prices to cost to serve economics.

Thank you. And then just thinking about the portfolio in that way. I think, in the past we've talked about perhaps 30% of the adhesives portfolio being more commoditized. Would you see that as a lower percent now? Or have your -- or maybe that was the target. Have your targets changed for the split of specialized versus more commoditized business there?

Well, I think that in past there were thoughts of 30%, not 3%, If I remember well. But I commented, and if not, I do it right now; that that was more meant to be a long-term target to become really 70% specialty from an initial point of only 30%. And I can reiterate that commitment. And that not only a long-term commitment but we are already working on it and we are moving into that direction. But as I told to Silke of JPMorgan before, we will commit to specific timings and to metrics for monitoring our goal achievement within the remainder of this year.

Fair enough. And then just lastly, as you mentioned on the pricing front, if you see raws perhaps following in '07, would you expect to face additional pressure on your price increases?

Well, the pressure on price increases exists always. And exists also regardless of raw materials due to competitive reasons. The market is very, very dynamic. Clearly, if raw materials were to move significantly from today's trend, which is basically flat, I'm sure we would face pressure. And then we should prove to the customers that our value proposition is solid and we're not just selling raw materials or passing them through. And I believe that we have not only the strategy and the processes, but also the people that are capable of doing that, as they have been doing that in nine quarters in a row right now.

Very good, thank you.

Thank you.

Your next question comes from the line of Mike Sison with KeyBanc.

Hi, guys, nice quarter under tough conditions. Just curious on the volume front in North America in terms of the weakness that you saw, was it pretty steady through the quarter? We saw some heavy inventory corrections in December by most of the other spec. chems. So, I was wondering if that caused a larger delta in your declines? And when you look at the rest of the year, does that volume decline of 20% to 30%, does that get better on a year-over-year basis as the year unfolds?

Thank you very much. Well, first of all, you are -- we are on the same page. What has happened in the first quarter is not only a reduced level of manufacturing activity and not only in the automotive and construction segment. But clearly, it's only one quarter and people have the hopes that in rebounds, they are still holding. When they see it's not going to turn around for at least the next four quarters, people start taking action to survive. And we see plants closing, inventories being thinned out, and also higher emphasis on reengineering efforts.

And nobody, at this point in time, sees that changing in the year, that is 2007. I think that people are hoping that it turns around in 2008, but take into account there is the big question mark of; What's going to happen with the subprime mortgage market? And is that going to be an additional factor that we will be talking in Q2? So based on all of that, we have clearly been even more aggressive, more proactive in all of our actions towards profitable growth. And I can tell you that I see the new team very engaged. I see a very high level of activity. And I see them doing things differently, which means what we bring to the table. And I'm very happy with what I see.

So it doesn't sound like there was much of an inventory correction. And it was sort of a smooth, pretty weak decline throughout the quarter. And if that's the case, when you look at the guidance for the year, the delta between the top end and the high end, is it demand or what you can control?

Well, I would say that the majority is what we can control. And I can tell you that within the first quarter, you look at the trend between December, January and February and actually it got worse.

It got worse?

Yes.

Okay.

Because the inventory, from a economy standpoint, the efforts of the customers in reducing the inventory has been even higher. Clearly, there reason they are not happy is because they see news of new business coming in in spite of that and coming in the right area.

Okay. Last two questions. In terms of SG&A, did you take any, you announced sort of the strategic initiative there in February globalizing both segments. Did you take any hits in your SG&A as you let go a couple of people? In addition, you've been managing adhesives in a global sort of regional basis for two to three years. So, I just wanted to get a feel for what's really changing the strategy? Is it just implementing that focus into full specialty value or is there something sort of different that you're doing going into next couple of years with the realignment?

First of all, from a cost perspective, nothing material. From a strategic perspective, we have done this realignment and not at all thinking of any restructuring. It has not been a cost move.

Okay.

It has been a strategic move to make sure that our differentiation strategy is fully leveraging global knowledge sharing; is fostering innovation; and is delivering differently on new things, profitable things to actually accelerate what we have done in the last nine quarters. The new team that we have announced is in place, is already moving very fast, gives me a hell of a lot of confidence. And I tell you that they are trying to show that they can do much, much better than what I have done in global adhesives in the last two years.

Great. Thank you very much, guys.

Thank you.

Your next question comes from the line of Christopher Butler with Sidoti and Company.

I wanted to ask about the acquisition market. With difficult market conditions for a lot of companies right now, it seems like it could be an opportune time for you to move back into an acquisition mode. I was hoping to get a little bit more color on that, please?

Well, thank you, Chris. And yes, you are right. We see more and more companies having difficulties in the marketplace. And at the same time, more and more companies and investors and bankers realizing that we have created capabilities that are there to stay, that we know how to turn around stuff. And how to generate earnings that are somehow insulated from the underlying economic conditions. So yes, I am much more comfortable than in the past towards M&A.

I think we are learning every day. And I think also that M&A is going to be, in the future at H.B. Fuller, to be more driven by the strategy than just reacting to opportunistic things that come out. As I said earlier, we believe that M&A has to create shareholder value long-term, but also being short-term accretive. That's our commitment. We are actively engaging that. I am engaging that in first person. And I am engaged in both strategic and consolidation opportunities. Because I believe that due to the high level of performance achieved and the capabilities created, we are in a better opportunity than ever before to also do large deals. And we are doing our best to make sure that we execute on those.

Of course, I cannot give a time frame at this point in time. But together with delivering on organic growth, we have a commitment to deliver on M&A but we want to make sure that we do good deals for our shareholders.

Thank you. And to follow on with that. Just wondering that whether your experienced with Roanoke at this point would slow that process down. May possibly create a longer due diligence process? Maybe make construction-related projects less desirable for you at this point? And whether you could touch on what you're seeing as far as valuations in the marketplace right now?

Well, I think that Roanoke, first of all strategically long-term, is still something that is extremely valuable to us. I still believe in it and it has been a great learning opportunity. I think this Company is really becoming a great learning organization. And that's all that I can ask. And as for us, what impact that will have in our future M&A process, yes will have an impact. It will not lengthen our due diligence, nor make it more complicated, it will just make it much smarter.

Also take into account that you're speaking of Roanoke but we have another is that high point, positive point all the way through both in the due diligence, but also in the integration in the execution of the deal, which is the European insulation glass business. Also there, we are learning and making sure that we leverage from that best practice as we leverage in the past from the Portugal acquisition in 2004. As we learned from the North American acquisition of Carolina Partners, which has been accretive from day one.

So that's our commitment and we are making sure that we have really learned from all of that and we get to a higher level of performance. Because we want to do better than what we have been doing in the last nine quarters.

As far as valuations, I think in the last two years maybe things have gone a bit too out of control. I think people have been really speaking of artificially high expectations. And I think that like in the housing markets, prices will have to go down. If not, you will not sell it. And I can tell you that some of these companies need to sell because in the current economic environment, having just gone through volume and not having made changes in the structural way that they operate, they are really exposed.

I just heard of a small UK competitor that just went into trouble because of clearly just thinking that in a business dominated by raw materials and the cost of goods, you can offset that with volume. We've been saying that for nine quarters in a row, we have been executing on that. I think we've been very successful and we're not going to deviate from that.

Thank you, guys.

Your next question comes from the line of Robert [Felice with Gabelli] and Company.

Hi, guys. Most of my questions have been answered. Just a couple more. If I'm not mistaken, you've had Roanoke for just about a year now. And I was wondering what the contribution was on an operating income basis over the last 12 months, if you have that?

Well, I can tell you at this point in time, we don't have those numbers yet. I think we are still in a situation that is in flux. Clearly directionally, we've been very open, that is not meeting expectations and that requires a hell of a lot of work. And that's what we are doing. And long-term, we are still believing it's going to be a very good thing but 2007 is clearly not meeting expectations.

Okay. Fair enough. And you've made comments that you've learned a lot on the due diligence process. And just wondering what you would in fact do differently going forward? What you have learned, and kind of what took you by surprise on the Roanoke front?

Well, I think that what we have found out is there is value in the due diligence and even in the pre-due diligence to have a much greater involvement from the business side. And that's why with the new organization we have responded to that learning by creating a business development function under the Chief Strategy Office to make sure that it's not just corporate development under the finite organization that is looking at the valuation and is doing the due diligence analysis. But there is really a lot of commercial, common sense, business perspective brought in. That is intelligence that we have learned that we need to bring at much earlier stages. And that's why we have introduced this business development activity with people that have a lot of business experience on a global basis and they have had also business experience. So, that's why I'm very, very positive on the learning out of that.

Okay. And maybe I'm reading a little too much into it, but in your prepared remarks, you seemed to be pretty aggressive or excited about the M&A pipeline. Is it fair to think that you're pretty close to doing something on a larger scale?

Well, I envision in the future that the new team that we have put in place will kick me out more and more from operational stuff. And so, I've got to find something to do. And I think, jokes apart, that M&A requires the entire Company engagement. And a lot of commitment and really also personal involvement on the CEO. I am here to pay back for the shareholders but I am here as part of an executive committee team. And I am sure that we are going to do things much better, much more successfully in the future and M&A is going to be an acceleration factor to our organic growth factor.

Okay. And then just finally shifting gears, last question. Is it fair to assume that the Full-Valu business going forward will now be run under the same model as the global adhesive business? And if so, should we expect a similar step-up in profitability say over the next 18 to 24 months? Is there any reason that this business shouldn't perform at a level greater than adhesives? I know in the past you've said, or previous management has said, that the Full-Valu/Specialty business was -- in fact, more of the specialty business, the adhesives business, was more commoditized. And I know that's changed over time. But any reason that we shouldn't expect Full-Valu to catch up to adhesives?

Well, clearly, we want to have balanced growth, both top line and profitability, among all parts of the business. So, we put the things together to really get to a more uniform level of performance. And when we speak of uniform, it's not going to the low end of that but to the high end of that. So, yes alignment in the profitability levels is the goal. Specifically, to get to the 12% long-term operating income margins, as Silke from JPMorgan was mentioning before.

But as for as Full-Valu/Specialty getting to global adhesives, I can tell you that our intention when we put the things together was to get the best of both worlds. That our best practice is in both parts of the organization. And I can tell you that there are several parts where some of the Full-Valu/Specialty businesses have been best practices. And not only we have the intention but we are already executing into strengthening that globally. I don't think at all, it is global adhesives teaching things to Full-Valu/Specialty but is actually putting the best of both worlds, taking into account that Full-Valu/Specialty, more than global adhesives, has been hit hard by the current North American construction economic environment.

Okay. Thanks for taking my questions.

Thank you.

You have a follow-up question from the line of Jeff Zekauskas with JPMorgan.

Yes, good morning. Not to debate this to death, but do you expect any contribution to your operating income from Roanoke this year?

Yes. For sure. We are speaking here about the less than expected. We're not speaking that we're not getting any contribution.

Okay. And secondly, can you talk about how you achieved the reduction in SG&A expenses as percentage of sales? And year-over-year, I think it went from 22% to 21%. And should we expect similar reductions in SG&A expenses going forward for the year?

Well, what we started doing beginning of 2005, together with introduction of the Lean Six Sigma methodology was to make Kaizen the way we do business on a daily basis. And are not necessarily driven by cost-cutting efforts but from an idea of getting better, getting leaner, getting faster, reducing waste out of the organization in all kind of processes, not only manufacturing processes. If you go back to the terminology of Kaizen, it means continuous improvement. So, that has never an end and we will continue into that direction. Clearly at the same time, there are areas where we need, we want to invest and clearly we are going to do that.

So as far as getting into a specific number on SG&A, apart from the long-term goal that still stays there, we are going to talk more thoroughly in the remainder of the year as far as how that mix is going to change, which are areas of the organization where we believe there is still room for improvement. And other areas that need to be finite because one of those is like growth needs to be finite. But we are going to be very, very focused on that. In line with the portfolio strategy that we have and with the segmentation that we have, we are going to put the resources where we see the highest profitability, the higher growth levels and higher chances to succeed.

And lastly, how's the CFO search progressing and when do you thinkyou'll make an announcement?

Well, we continue to look. I expect to have identified a CFO, whatever it will be internal or external, within the next two to three months. And I believe that meanwhile this organization has proven they can execute in the middle of changes. We were speaking in the fourth quarter our CO change. We are speaking of the first quarter a CFO change, plus a full organization realignment. But also, let me tell you that we have here with us Jim McCreary, a guy who has been the Corporate Controller for the last six years. And he has been one of those keeping the wheels on the engine and we have a lot of talent and a lot of bench strength. Because remember, that same people sometimes the second, the third, the fourth line, those that are less visible to you, have been there driving this turnaround since 2005 and they are here.

Okay. Thanks very much.

[OPERATOR INSTRUCTIONS We have follow-up question from the line of Rosemarie Morbelli with Ingalls & Snyder.

Hi, forgive me if I missed it, but did you give us the revenues for global adhesives and Full-Valu? I know you gave us your total income, but I don't remember revenues.

Rosemarie, this is Jim McCreary. For global adhesives, the revenue is $237.4 million for the quarter. And the Full-Valu/Specialty, $114.4 million, that adds up to the $351.8 million that we reported.

Okay. And then I was going for the 10-K with a fine toothed comb, and there is the adjusted or restated revenue line, as well as the gross profit and then we go straight down to the net income. So in between there is a difference in SG&A and in the income tax with all of the other small numbers remaining the same. Do you happen to have those numbers for the next few quarters?

Rosemarie, I don't have those with me right now, so we'll need to talk to you further on that outside of this call.

Okay. That would be good. Thank you very much.

Thank you. We have really only two minutes left. So maybe we can get one more question and hopefully we don't cut anybody off like last time. I still apologize for that.

You have a follow-up question from the line of Mike Sison with KeyBanc.

Hi, guys. Michele, if you can maybe give us an idea of where you will see some growth in volume this year-to-year, either in pockets of adhesive, geographically, but as the year progresses, where do you think you can generate some volume growth this year in either of the businesses?

Well, I think that global adhesives even if it is also influenced by the North American slow down in manufacturing activity is the one that may be is going to show a bit earlier reversal from the current situation. Also taking into account that by definition global adhesives is also having a bigger presence outside of North America and we have talked about the differences in economic dynamics in the other parts of the world. And clearly, within the global adhesives segment, drilling a bit more, we expect and actually is a continuation of what we've seen these last nine quarters, that it will be in the higher profitability areas in line with the strategy.

Were the volumes in global adhesives about the same decline year-over-year as the segment for the quarter, worse?

Well as for us, what we said before, yes, clearly Europe, Asia Pacific, Latin America, the parts outside of the world had a different performance based on the different economics also there with North America.

So as the year progresses, we may be able to see volume growth in total maybe toward the end of the year?

I want to be very cautious at this point in time in saying that we expect to see a trend reversal, which is not necessarily positive volume growth towards the end of the year. I expect to see revenue growth in 2008.

I got you. Okay. Thank you very much.

Ladies and gentlemen, we have reached the allotted time for questions and answers. Speakers, are there any closing remarks?

Thank you for joining us today for our first quarter conference call. Have a good day.

This concludes today's conference call. You may now disconnect.