H.B. Fuller Company (FUL) 2007 Q4 法說會逐字稿

Good morning. And welcome to the H.B. Fuller fourth quarter 2007 investor conference call. At the request of the company, this conference is being recorded for instant replay purposes. This event 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, Frances. And welcome, everyone.

Today's conference call is being Web cast and will therefore be archived on our Web site 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 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. 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 operating income, earnings before interest expense, taxes, depreciation expense and amortization expense or EBITDA, pro forma net income per share and free cash flow. Operating income is defined as gross profit less SG&A expense. EBITDA is defined as gross profits less SG&A expense, plus depreciation expense and amortization expense. Pro forma net income per share definitions vary and will therefore be defined as discussed. And free cash flow is defined as cash provided by operations less dividends paid, less capital expenditures. These measures should not be construed as an alternative to the reported results determined in accordance with GAAP. Management believes that a discussion of these measures is useful to investors because it assists in understanding the operating performance of the company and its operating segments, as well as the comparability of results and it provides insight into the ability of the company to fund such things as debt reduction and acquisitions.

The non-GAAP information discussed today may not be consistent with the methodologies used by other companies. All non-GAAP information is reconciled with reported GAAP results on the last page of the presentation. The results discussed today for all periods are for continuing operations, except when noted, and do not include the divested automotive joint venture.

Lastly, I would like to inform everyone that next quarter's earnings release and conference call will be one week later than usual to accommodate certain internal scheduling conflicts. For more information, please refer to our recent press release, quarterly reports on Form 10-Q and annual report on Form 10-K, filed with the Securities and Exchange Commission, all of which are available on our website at www.hbfuller.com under the Investor Relations section.

I will now turn it over to Michele.

Thank you, Steven. Good morning, everyone and thank you for joining us.

We are very pleased to report sustained strong quarterly performance and we celebrate this very solid finish to another successful year. This is particularly rewarding given the fact that it was accomplished in a challenging environment and in a year in which we transitioned to a new executive management team and completed a broad regional realignment. Fourth quarter 2007 pro forma net income per diluted share was $0.53, at the high end of our previously-provided earnings guidance range of $0.50 to $0.53 for the quarter. The fourth quarter performance ended a year in which we grew income from continuing operations before cumulative effect of accounting change per diluted share, 24% over last year's pro forma income from continuing operations before cumulative effect of accounting change per diluted share of $1.34 to $1.66. Return on gross investment also continued to improve, up 70 basis points sequentially to 9.6%. The divestiture of the automotive joint venture contributed 50 basis points of the improvement, while productivity gains of the base business contributed the remaining 20 basis points.

On an annual basis, EBITDA margin increased 160 basis points year-over-year, despite the aforementioned difficult macroeconomic environment. This was driven by both improvements in gross margin and tight expense controls. Excluding last year's $12.3 million charge related to the separation agreement with the company's former Chief Executive Officer, this year's SG&A expense dollars were still down nearly $9 million year-over-year, or slightly more than 3%. Our focus on the controllable items has enabled us to deliver strong financial performance in light of the economic challenges we have faced. Fourth quarter gross margin again improved on a year-over-year basis, increasing 60 basis points to 29.7%. This was the result of the disciplined implementation of pricing actions, continued mix improvements and regional raw material procurement. During the quarter, we completed as well our stock repurchase program, buying back an additional $75 million of stock, equating to approximately 2.6 million shares. Lastly, we completed the sale of the automotive joint venture in the fourth quarter. This divestiture, as previously announced, is another step in our transformation. It will enable us to concentrate our efforts more fully on providing integrated solutions and value-added offerings to our segments of focus and to capitalize on more strategic growth opportunities in the future.

Significant foundational changes are under way with respect to the top line as we begin to execute on our five-year strategic plan. While the trend reversal in organic sales did not materialize this quarter, we are seeing encouraging signs. And at this time, we're cautiously optimistic that we will be able to return to positive organic growth sometime in the second half of 2008. In our recent five-year plan, we laid out several drivers for the top line growth. One is innovation and new product development. On this front, we continue to make progress and we are excited about the products we currently have under development. Our long-term goal is to increase new product sales to 25% of total sales.

This quarter, we again made progress towards that goal, building momentum as new products constituted 22.4% of total revenue. In the future, these initiatives will ensure greater degrees of innovation within each region closer to the customer. An additional driver is represented by focusing our resources and investments in fast-growing regions to drive geographic expansion, both organically and through acquisitions and joint ventures. We are targeting regions that have a higher growth profile driven by expanding economies and an emerging consumer class. We have made significant progress in identifying and building our pipeline of potential opportunities, ranging from acquisition targets to joint venture partners to greenfield sites. We believe that our actions will allow us to execute on some of these opportunities already in 2008.

One more driver is sales force effectiveness in aligning the sales effort around our core value-added market segments, fast moving consumer goods and construction. As we have organized our effort to concentrate on global accounts, we will benefit from the counter-cyclical nature of the fast-moving consumer goods sector. On the construction side, while the United States housing market continues to languish, we are confident in the long-term prospects of this market and we intend to continue to invest in this area. Another driver of our plan for growth is to build customer intimacy and to continue to build up on our solution-selling approach to the marketplace to become an integrated solutions provider. We are already laying the groundwork and developing partnerships with OEMs, a [digits] dispensing equipment manufacturers and manufacturers of complementary products. We are building a differentiated business model that will allow us to leverage our core strength and to drive organic growth. We are excited about the potential we see ahead of us in 2008 and beyond.

This is just a brief update of a few of the many growth drivers we have lined for you at our Investor Day three months ago. Also in conjunction with our five-year plan, we're continuing to execute on core competencies like pricing. On this front, the non-conducive pricing environment continued during the fourth quarter, with several industry participants reversing to their go-for-volume strategies. Recently, we have seen some our larger competitors taking price actions to offset rising raw material costs but not to the degree we believe is warranted.

Lastly, the weakening U.S. dollar continued to benefit the top line, driven principally by the strong Euro. Foreign currency translation contributed approximately $15 million to net revenue. Current economic forecasts do not bode well for the dollar, leading us to believe that currency translation could continue to benefit the top line in 2008. Raw material costs in the fourth quarter were up, as our tools and processes predicted. In aggregate, raw material costs increased approximately 3% sequentially and 6% on a year-over-year basis. Nevertheless, we saw an improved average selling price in business mix. Raw materials again declined as a percentage of net revenue.

In 2008, we expect upward pressures to continue, despite the eagerly anticipated capacity additions of some industry observers. Key areas of pressure include vinyl acetate, driven principally by methanol, as well as waxes, refined oils, and detackyfying resins, driven primarily by the rising cost of crude oil and derivatives. We anticipate that these pressures will be more concentrated in the first half of the year. In aggregate, we expect raw material costs to increase between 2% and 4% in 2008. Actions are under way to effectively deal with this situation at H.B. Fuller.

In the fourth quarter, we began executing on our new five-year plan to realign our portfolio around higher margins, more strategic business line in which we have demonstrated core competencies, as well as we started building our pipeline of acquisition targets to drive geographical expansion. The divestiture of the automotive joint venture, a non-core, non-strategic asset for the company, will enable us to focus our attention on our core areas more effectively. With less than 20% gross margin and the [minimum] operating margin, this venture was not meeting our return on invested capital requirement. Its removal from the portfolio was accretive to ROGI and to both our overall growth and margin profile. While not a strategic focus for us, it will be a core holdee for our former joint venture partner and better positioned for long-term success. We thank our former North American automotive associates, as well as our partner, EMS Chemie, for their many years of collaboration and support in a very difficult environment.

Our focus on acquisitions and alliances as we align in October is three-fold and targets geographic expansion, product and technology extension, and building economies to scale. We have realigned our corporate development team internally around the chief strategy office, and we are encouraged about the opportunities we have entering the pipeline. Here, too, we believe we are in a good position to execute on some of the opportunities currently under review already in 2008. Regarding our capital position, it continues to be exceptionally strong. This stems from the significant and robust free cash flow generation of the business. Together with the proceeds of the automotive joint venture divestiture, our strong capital position enables us to complete the $100 million stock repurchase program in less than five months. In the future, we plan to continue our commitment to maintaining a balanced approach to returning capital to shareholders while maintaining flexibility to finance growth through acquisitions and organic investments.

Now, let me provide a brief regional review of the business. In North America, as we had anticipated, residential construction related end markets continued to deteriorate as a function of the housing and credit related difficulty. On a broader economic perspective, the conditions are worsening. We are taking the appropriate actions to effectively deal with this situation at H.B. Fuller. We are committed to execute on the controllable items while investing for growth to position ourselves for continued financial improvement and top line expansion. Operating income for our North American segment for the fourth quarter declined by $1.7 million year-over-year. However, due to an improved mix of business, operating margin increased 30 basis points. The largest factor driving the decline in operating income for the segment was the performance of the Roanoke business. Excluding the results of the Roanoke business, operating income would have been relatively flat year-over-year and margin improvement would have been even higher.

In Europe, industrial production is still positive, although recent economic forecasts are calling for slower growth in 2008. Europe is also experiencing a slowdown in construction in the Western part of the region. Our European segment operating profit increased 27% in the fourth quarter, from $10.5 million to $13.3 million. As a result, operating margin in the fourth quarter improved 230 basis points year-over-year. The increase was driven by continued mix improvement, better productivity and favorable foreign currency translation.

In Latin America, the economic outlook is closely linked with that of the United States. However, the region is buffered somewhat by the weaker dollar. The region is increasingly improving its fiscal performance, specifically with regard to inflation and this is leading to more stability and improved credibility which helped to reduce the risk of investment in the region. Our Latin American region experienced a setback in the fourth quarter, with operating income down $2.6 million year-over-year, and operating margin down 410 basis points year-over-year. The decline in operating profit was primarily driven by lower sales and an environmental charge of approximately $800,000.

Lastly, in Asia-Pacific, economic growth continues to outpace the rest of the world. Although we believe 2008 will slow somewhat, Asia will continue to be the growth engine in the global economy for quite some time. Our Asian operations continue to invest prudently in additional resources to focus on long-term organic growth. As a result, operating margin declined by 90 basis points year-over-year. This is a direct result of the actions we are taking to better position ourselves in the region for the long term. We clearly anticipate that these actions will augment growth for the region and will be leveraged as the revenue grows.

With that, I will now turn it over to Jim for a more detailed review of the consolidated financial.

Thank you, Michele. And good morning, everyone.

For the fourth quarter, consolidated net revenue was $360.9 million, down 3.7% from last year's fourth quarter. Foreign currency translation favorably contributed 3.9 percentage points to net revenue growth. Our average selling prices contributed 1.4 percentage points, and volume declines reduced growth by 9 percentage points year-over-year. Gross profit was $107.3 million for the quarter, compared to $109.2 million in the fourth quarter of 2006. Gross margin for the fourth quarter was 29.7%, up 60 basis points on a year-over-year basis. The improvement was primarily driven by improved mix, disciplined implementation and execution of pricing actions, regional raw material procurement strategies and continued productivity improvements driven through Lean Six Sigma. SG&A expense was $67.8 million, versus last year's fourth quarter of $80.4 million. Last year's fourth quarter SG&A expense included a $12.3 million charge resulting from the separation agreement with our former CEO. Excluding this charge from the prior year, SG&A expense was $68.1 million.

Operating income for the fourth quarter was $39.5 million, versus $41.1 million in last year's fourth quarter, excluding the impact from the aforementioned separation agreement. Correspondingly, operating margin was steady at 11% year-over-year. EBITDA for the fourth quarter was $51.7 million, versus $53.7 million in last year's fourth quarter, excluding the impact from the aforementioned separation agreement. Correspondingly, EBITDA margin was steady at 14.3% year-over-year. Included in both operating income and EBITDA in the fourth quarter of this year was a $2.9 million net charge for certain product liability claims. The effective tax rate for continuing operations in the fourth quarter was 24.3%, compared to 12.5% in last year's fourth quarter. Last year's tax rate was also impacted by the aforementioned separation agreement. Adjusting for this item, last year's fourth quarter tax rate was 21.3%. Discrete items and the reclassification of the automotive joint venture to discontinued operations resulted in a lower than expected tax rate in the fourth quarter of this year from the expected 29%.

For fiscal year 2008, we expect an effective tax rate of 29% for the year. For the fourth quarter of 2007, reported net income was $25.7 million or $0.43 per diluted share. This year's net income includes a $6.2 million loss from the sale of the automotive joint venture, or $0.10 per diluted share. The after-tax loss was incurred because a portion of the transaction was structured as a stock disposition without distribution of excess earnings. Our tax basis for this portion had not changed between the formation of the joint venture and the sale. However, our book basis increased as these portions of the joint venture generated profits. Consequently, this resulted in higher tax and ultimately the after-tax loss on sales. Adjusting for this impact, net income would have been $31.9 million or $0.53 per diluted share. This is comparable to the company's previously-issued earnings expectations for the fourth quarter to earn between $0.50 and $0.53 per diluted share and was at the high end of the range.

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-K. Cash at the end of the quarter totaled $246 million, down $9 million year-over-year. Total debt at the end of the fourth quarter was $173 million, compared to 259 million dollars at the end of the fourth quarter of 2006 and was essentially flat on a sequential basis. In 2008, we will make a $25 million repayment of our 6.6% fixed rate private placement debt. Net working capital, defined as the net amount of trade accounts receivable, inventory and trade accounts payable, amounted to $193.8 million. As a percentage of annualized net revenue, net working capital was 13.4% for the fourth quarter, up 130 basis points over the fourth quarter of last year. Higher levels of inventory and lower payables more than offset the decline in accounts receivable. Capital expenditures for the fourth quarter were $5.3 million, down $3.1 million versus last year's fourth quarter spend of $8.4 million. For fiscal year 2008, we expect capital expenditures to be in the range of $30-$35 million.

Depreciation expense in the fourth quarter was $9.1 million, down $500,000 from the prior period -- from the prior year's level. Amortization expense was $3 million in this year's fourth quarter, flat with last year. For 2008, we expect depreciation expense to be approximately $35 million, and amortization expense to be approximately $12 million. Finally, free cash flow for the quarter was $26.6 million. The components for the fourth quarter were as follows: Cash provided by operating activities was $35.7 million, dividends paid were $3.9 million, and capital expenditures were $5.3 million.

I will now turn it back to Michele for some brief closing comments.

Thank you, Jim.

As we look ahead to 2008, we are cautiously optimistic. Although we believe the macroeconomic environment will worsen further globally, particularly in the United States, we remain committed to continuing to deliver solid financial results. We have a robust five-year plan that positions us well for the future and we are already executing on it. From a top line perspective, we currently envision gradual improvement with momentum gaining in the second half of the year. This expectation takes into account our cautious view of the broader economic conditions that we expect to encounter in 2008 and the progress we anticipate around new products, innovation, customer intimacy and the other areas I mentioned earlier.

From an earnings perspective, we expect to continue to improve in 2008, as we execute our five-year plan. We expect to grow diluted earnings per share by between 2% and 8%, from $1.73 to between $1.76 and $1.86. Our commitment to our new five-year strategic plan and corresponding financial goals is steadfast. We have already made a key strategic portfolio move through divesting our automotive joint venture. We have also addressed our capital structure through implementing and maintaining a balanced approach to returning capital to shareholders. And we have begun accelerating the building of our pipeline of potential acquisition targets and organic investment options. We have much more ahead of us in 2008. Thank you for your continued support and I will now open up the call for your questions.

The company would like to provide everyone the opportunity to ask a question. So if you could please limit yourselves to two questions at a time, it would be greatly appreciated. You may requeue as often as you would like, time permitting.

(OPERATOR INSTRUCTIONS) We will pause for just a moment to compile the Q&A roster.

Your first question comes from the line of Douglas Chudy with KeyBanc.

Good morning. A couple of quick questions. It appeared during the quarter that volume declines accelerated following a couple of quarters of improvement. I wondered if product rationalization had any impact on that. And if so, to what extent?

Good morning, Douglas. Well, first of all, if you remember, when we discussed about the third quarter, we were very, very cautious in calling it the beginning of a trend reversal. What has happened in fourth quarter has been clearly U.S. construction market going farther down, clearly reflected by the sales of our tax business, our window business, but it has also been overall general industrial activity that has affected also our adhesives business, in spite of very positive successes in terms of developing and closing new business. Clearly, specifically North America, the biggest driver as outlined before in our comments, the biggest driver of this decline has been the Roanoke business, which has been posting revenue year-over-year of less than 35% net to the negative.

Okay. So I mean, is product rationalization a small component of that or pretty much it's all on the demand front?

It's a small component of that. That clearly doesn't mean that we are not continuing to reposition, but the vast majority was demand-driven and strongly linked to the Roanoke results.

Thanks. And secondly, at the Investor Day back in October, you provided the long-term EPS goal of 10% to 15% annual growth. I understand that's the long-term goal. Certainly the guidance for 2008 on an EPS basis is quite a bit below that. Do you feel that you're being relatively cautious at this time due to the current environment? And secondly, do you still feel that that that long-term target remains realistic?

For sure, we believe in the long-term target. But also if you remember, Doug, when we discussed in October at the investor conference, we said that it was going to be a gradual ramp-up, not only because changing a business model takes time, but also because of our view of the economy, which we have been very clear and consistent all along the last five quarters. And clearly, when we have to give a forecast, which for us as usual is a commitment to our shareholders, we need to make sure that we are cautious and that we incorporate in our guidance the status of the economy.

Okay. Thank you.

Thank you, Doug.

Your next question comes from the line of Chitra Sundaram with Cardinal Capital.

Good morning, Chitra.

Hi. How are you? Congratulations on a great quarter, actually, despite everything. I'm just a little curious. Roanoke must have anniversaried probably around August of '07, I believe. And it had already been weakening very significantly right through Q1 of '07. So surely I would have thought by this stage it would have been such a small part of the business that even negative growth of large numbers in that business would have minimal impact. I guess I'm just trying to understand how it continues to shift the revenue line the way it is.

Well, unfortunately, you're right, it is a small part of the business but it has become a smaller part of the business and it has really not been performing. So at the beginning of the year, it was a positive comparable because it was still another year-over-year positive but during the year, Roanoke performance has declined. And basically when you look at our comments that we made before on the North American segment fourth quarter performance, Roanoke impacted that by 1.7 million around.

Okay. And I was curious about the product liability charge, I guess 2.9 million that was the charge that occurred in Q4. Could you give some context and where perhaps that is accounted for, cost of goods sold, [indistinct]?

I will ask Jim to take that question.

Yes, that is accounted for down in the SG&A area.

And could you give some context, because it's a fairly decent-sized number.

Yes, this relates to -- is an asbestos-related settlement. We feel it was a very good settlement that we're working on. And if you want to find more information around our asbestos-related exposures, you can see those in our SEC filings.

Sure. I mean, is this going to be a couple of quarters of these sort of charges that go up to a settlement, or was this just something that closed so it's sort of a one-time thing that popped up in this quarter?

Yes, this represents a settlement that will cover a number of years, but it was all taken in the fourth quarter.

Got you. Thank you, sir.

Your next question comes from the line of Jeff Zekauskas with J.P. Morgan.

Good morning.

Good morning, Jeff.

Hi. You've had a chance to see December volumes and half of January's. Are you tracking in volume terms above or below where you were in the fourth quarter? And is it the case that your first quarter earnings will be up or down? What's the trend?

Well, Jeff, you know that we don't provide quarterly guidance. What I can tell you is that the economic situation in the fourth quarter, as is seen by everybody, has actually deteriorated further in December. It has not just been in the retail sales. It has been the general industrial activity, further accentuated by trimming down of inventories. And so that's what I can tell you right now. As far as the trend within the year, as we have outlined, there is going to be a gradual ramp-up within the year because clearly we believe that if there is going to be an inflection point in the economy, it is for sure not going do be in the first half of the year and also our efforts of repositioning and executing on the long-term plan take time.

Can you discuss in a little bit more detail some of the issues in Latin America, in that even with the $800,000 environmental charge, you know, you were still down almost a couple of million dollars. Is this something that you can fix quickly? Is this a one-time problem? How do you assess the South American opportunity?

Well, a lot of actions are taking place there already since several months, Jeff, is not a surprise. A lot of focus is on sales force effectiveness, is on really repositioning the portfolio and in really getting more profitable volume. It is clear that in that market, that also is somehow having some ripple effects from the North American downturn. There have been lots of imports coming in from several parts of the world, both from Asia-Pacific and from North America, to try to offset some of the drawbacks that are being seen in North America and that is having an impact. I am comforted by the actions that I see in the region. Our leadership is stronger, is doing all the right things and that's why we are cautiously optimistic and we think that there is going to be a trend reversal during 2008 also in that region.

And then lastly, what's your headcount now? How many people work at H.B. Fuller?

Let me research that exactly. Give me one second. Jim, do you want to take that?

Hi, Jeff. This is Jim.

Hi, Jim.

The headcount is 3,200 as of the end of the quarter.

3,200. Okay. Thank you very much.

Thank you, Jeff.

Your next question comes from the line of Christopher Butler with Sidoti [Capital].

Hi. Good morning, gentlemen.

Good morning.

Good morning.

The first question I wanted to ask was could you give us some detail on the $0.05 dilution that you have in your guidance for fiscal 2008? What exactly are we looking at there and -- yes, just what exactly are we looking at there?

Hi, Christopher. This is Jim McCreary again. That dilution represents a net number of taking the operations for the automotive joint venture and then reducing that by the positive impact of the stock buyback related to the proceeds that we received from the sale of the automotive joint venture.

All right. So, simply stated, is this -- I'm trying to get an idea of exactly what this nickel is. Is this sort of a one-time item that I can look at as far as the auto joint venture? Or is this -- it sort of sounds like some sort of share dilution as a result of the transaction.

Yes, what we're saying is that the automotive joint venture had operational profits in 2007. Okay? And that, of course, will go away with the sale. We're then having some offsets with ongoing transition service arrangements to that operational profit that goes away. We also have a benefit of the buyback of shares from the proceeds of that sale, so that creates the net dilution.

All right. And also looking at the guidance, I think it's fairly apparent that housing in North America is having difficult conditions. What are the assumptions baked in as far as the housing market through 2008? Are you expecting a bottom at some point second half of the year, something of that nature?

What we hear from customers, distributors and what we hear from the marketplace is right now we are not going to see any trend reversal until the fourth quarter of 2008 as far as housing is related.

All right. Thank you. I'll go back in the queue.

Thank you.

Your next question comes from the line of Beth Lilly with Gabelli.

Good morning.

Good morning, Beth.

Good morning, Beth.

I wanted to explore ROGI a little bit. Can you talk about -- you gave us the annual figure. Can you give us your ROGI on a quarterly basis over the last year? And then, can you talk about what it was a year ago?

Yes. Beth, this is Jim McCreary again. When we talked about the ROGI for the end of the quarter, we had a 9.6% number. At the end of the third quarter it was 8.9%. At the end of last year, the number was 7.5%.

Okay. So for the full year 2006, it was 7.5?

That's correct. It's done on a trailing 12-month basis. And so for the full year 2006, that's what it was.

Okay. And then I'm sorry, what was it in the fourth quarter?

Fourth quarter was 9.6%.

9.6. Okay.

And that was where we saw the 70 basis point improvement sequentially over the third quarter.

Yes. Okay. And that's a 210 improvement year-over-year; correct?

Correct.

Okay. Great. Perfect. That's all I have. Thank you.

Thank you.

Your next question comes from the line of Dimitri Silverstein with Longbow Research.

Good morning. A couple of questions, if I may. When you talked about pricing and volume components, where do you account for mix? Is it part of pricing or is it part of volume?

It's part of volume.

Part of -- okay. So when the volume declined 9%, that's volume mix declined 9%. You talked about actually mix benefiting a little bit. So it sounds like pure volume decline was actually more like double digits?

Jim, do you want to take that?

Okay. Very good.

Let me just answer that, Dim. The pure volume piece was 10%.

Okay.

We've said the combined was 9.

Right. So you had a little bit of a positive mix benefit there. That's great. Because of when your fiscal year ended in November, typically on raw material front you -- what we're hearing is that there was a pretty big increase announced in December. And then people were telling us that they expect another one maybe as early as this month or early next month. When you talk about your 2% to 4% raw material increase for 2008, do you -- my understanding is that there will be somewhat a higher increase in the first half of the year and then hopefully with all this capacity that's supposed to come on stream and petrochemical prices declining as a result, maybe a benefit in the second half of the year. Is that the right way of looking at it or do you expect that 2% to 4% to be pretty steady throughout the year?

Well, as we said, we expect a 2% to 4%. And we said yes, Dimitri, that it's going to be more accentuated, that increase in the first half of the year than out in the second half. Clearly, that's our expectation as the situation is right now. Clearly, the deterioration of the economy may play a role there as well.

Okay. In your growth outlook for next year, you mentioned that the competitive environment is getting somewhat tougher and there's several manufacturers that do seem to be chasing volume again so the pricing increase hasn't been as great as you hoped it would be to offset raw material cost increases. What's your outlook for pricing in 2008? Do you think that there is still enough demand out there and enough discipline out there to maybe push through another 1% to 2% price increase or should we start thinking about actually pricing coming down in 2008?

We expect pricing to go up between 2% to 4%.

Okay. So enough to offset the raw material cost and then some, it sounds like.

Yes.

Okay. Excellent. And then finally, on Latin America, you've posted negative growth throughout the year. I understand that every quarter, there was a little bit something different that accounted for it. What's your outlook like in 2008? I was just a little confused about your comments. You talked about things getting better, but yet the fourth quarter really didn't show it. So what's you're outlook for Latin America in 2008?

We see a clear trend reversal in 2008. We see already leading indicators in terms of pipeline moving up, the right discipline in place, and that is in spite of what is happening with competition and with the economy.

Okay. So you think your internal efforts as far as salesman training and product line differentiation will lead to positive results there, regardless of what happens there economically?

Well, that's why we outlined a long-term plan. And I can tell you that we are resourcing already fast growing regions. We are under way in our M&A efforts in those fast-growing regions. We are already refocusing our sales force towards the markets that have been on focus that we outlined in October. The ROGI introduction has started and is already impacting commercial decisions, as well as re-evaluation of unproductive assets. Customer relationships are being built, in some cases being rebuilt. And investment decisions, as we speak, are being taken to strengthen labs, to strengthen IT, HR systems, enhance talent and relooking at our manufacturing footprints. So a lot of momentum is being generated right now.

It sounds like with what you're saying that we're going to see the impact on the margin maybe a little bit faster than the top line. Is that the right way of looking at it?

I wouldn't say that. Take into account, we're speaking of ranges and we are at the beginning of the year so we still have wide ranges and we have to see exactly how the economy shapes out.

Okay. Very good. I'm sorry, one final question. Since you're in a net cash position at the end of the year, despite completing $100 million share repurchase program during the quarter, I'm sure you have an acquisition pipeline which commands or will command some of the cash. But given your borrowing capacity and given the strength of your balance sheet, is the board talking about another share repurchase authorization, maybe somewhat of an accelerated type, given where the stock price is currently?

The did. As outlined in October, we are evaluating all options. We have already executed $100 million buyback, clearly the cash position, I would say, makes us -- puts us in a much better position than several other companies in this downturn.

Absolutely.

So we have options that several others don't have and we are judiciously looking at all of them and I think in the past we have never been showing ourselves as a company with poor execution or slow, but we are going to do what is right for the business long-term.

I understand that. Thank you very much.

Thank you.

Your next question comes from the line of Steve Schwartz with First Analysis.

Jim, when you walk through the adjustment for 2008 guidance relative to the auto JV, you did not mention the unsold SG&A that would be absorbed. Does that still exist as an impact?

That would be an area that we would continue to work to utilize in other businesses and bring down. So that is a factor out there that would have to be addressed.

Okay. It used to be $0.03 to $0.05. Is that still the level you're expecting for '08?

Say that again.

It was at the announcement about $0.03 to $0.05. Is that still the level you're expecting?

Yes, and that's -- we said we're at the higher end of that at $0.05.

Okay. And then with respect to CapEx and D&A guidance, it looks like your CapEx is expected to go up significantly in the year and yet D&A looks like will drop relative to 2007. Can you talk about what's going on there?

Let me do the amortization piece. You know, that drops because we did take an additional charge in the earlier part of this year related to an intangible tied into the Roanoke acquisition. So we're essentially flat on amortization year-over-year if we exclude that item. And let me turn it over to Michele to talk about some initiatives that we have in mind that impact the CapEx.

Yes, as I said before, we will do what is right to deliver on the long-term plan that we outlined only three months ago. It's a plan for growth and includes investments. And as I said before, investment decisions are being taken as we speak and that is reflected in our CapEx number.

Yes. Let me make one more comment. Concerning the depreciation trending down, that ties into the timing of when the capital expenditures would take place during the course of the year and when they would move into the depreciation, which would be further out.

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

Good morning, all.

Good morning, Rosemarie.

Good morning.

I would say that most of my questions have been answered, but I do have a couple of clarifications. You said that in 2008 you expect raw material costs to go up 2% to 4% and that you expect your price increases to follow that particular trend. However, in the fourth quarter your raw material costs you said increased 6% up from the prior year but you only show a 1.4% increase in pricing. So what makes you think that next year you will actually be able to cover the raw material costs and will not have to give back some of that pricing, regardless, due to the competitive environment?

Well, the fourth quarter raw material increase, Rosemarie, was 3% and our price increase was 1.4%. So our price increase was below the range that I have given for next year. The rational behind the 2% to 4% price increase for next year is because some of those decisions have already been made as we speak.

And you don't think that customers will come back and say, well, we don't have the demand so we can eat -- we can leave out of our inventories or we can just go somewhere else for lower prices?

I think we are in a better position than several of our competitors to do that with the right processes and we are doing it in a way that doesn't affect our long-term relationships with the customers.

Okay. Before I ask my other question, if I could have a clarification on ROGI, trailing 12 months for '06, Jim, was 7.5%. In the fourth quarter of this year it is 9.6%. What was it for the 12 trailing months in '07, so we have an apple-to-apple basis, or is it already in an apple-to-apple?

That is an apple-to-apple.

It is apples-to-apples? It was not specifically the number for Q4?

When we do the calculations, it's always trailing 12 months of end [indistinct].

Okay. I got it. So now, Michele, what are your -- when you look at the low end of your range, which will be actually a couple of pennies lower than in 2007, do you have a recession in that or do you just have a slowdown? I mean, based on all of your comments, it sounds to me as though you expect everything to kind of pick up in the second half of '08. Well, if it is not the case, isn't your low end expectations kind of high?

As we said, Rosemarie, our entire range of 2% to 8% factors the current situation of the economy.

That's not a recession. We are not in a recession yet. What if we get there? Do you have that? It is not in there, then.

Look, I am not an economist but I read the newspapers like you and I talk to my customers and I can tell you that it's clearly not pretty out there. People are extremely cautious, some others are extremely concerned and it is clear that we have to factor that in our estimates and make sure that that panorama is incorporated in the outlook. The reason for the range, 2% to 8% and not a discrete number, is related to the time factor around our controllables. How fast, how good will we be in delivering on the new business, on the new investments and on the new acquisitions. That explains our 2% to 8% range.

So in the 8% you have some acquisitions, I mean, potential acquisitions that you would close between now and the end of the year. Am I hearing this properly?

Well, I would say that the 8% includes delivering very well on the organic growth, even if we deliver very well on the acquisitions with trauma costs and timing of when they would come on board in '08, that's not necessarily a factor that you can say is going to be very accretive for the first year.

And since we are on the acquisition subject, when do you expect Roanoke to actually show some improvement versus the prior year?

2008.

Starting in the first quarter or you are still fixing some product lines and it won't take effect -- I mean the benefit won't take effect until the second half?

Roanoke is not exempt from the general trend and gradual ramp-up was given, so I will call it for the second half '08 to make sure that we are realistic with our estimate.

Okay. Thanks a a lot. I appreciate it.

Thanks, Rosemarie.

Ladies and gentlemen, we have time for one more question. Your final question comes from the line of David Begleiter with Deutsche Bank.

Thank you. Good morning.

Good morning, David.

Good morning, David.

Thank you. Michele, you mentioned organic volume growth should be positive in the back half of 2008. For the full year of 2008, what is your expectation for organic volume growth?

We said we expect positive organic growth for the year. Clearly, not to the high end that we aligned at the investor conference.

And just looking at the Q4 results, Michele, did you lose any market share in terms of business you wanted to keep in that negative 10% volume decline?

Well, there are some businesses that had customers that we didn't want to lose. Roanoke is one of the examples. We bought it because of a high profitability profile and clearly losing volume is an example of business that you didn't want to lose. On the rest of the business, I think we are getting better and better at reducing our erosion and lost business. It doesn't mean that there are no defects, but I would say that the vast majority of the disappointments come from Roanoke, from high margin customer perspective.

And lastly, what was Roanoke's operating loss for the full year 2007?

We typically don't break down to that level because as you know, that is part of the [SEB] group of business within the North American business.

Yes, David, it becomes part of the [SEB] component so it becomes pretty entwined in the way that business operates.

Should Roanoke be profitable, do you think, in 2008?

Well, I think yes.

Thank you very much.

Thank you very much.

We have reached the allotted time for questions. Gentlemen, do you have any closing remarks?

We would just like to thank everybody for joining us today. Please have a good day. Thank you.

This concludes today's H.B. Fuller fourth quarter 2007 investor conference call. You may now disconnect.