H.B. Fuller Company (FUL) 2008 Q1 法說會逐字稿

Good morning, and welcome to the H.B. Fuller first-quarter 2008 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 include Mr. Michele Volpi, President and Chief Executive Officer; Mr. Jim Giertz, Senior VP, Chief Financial Officer; Mr. Jim McCreary, Vice President and Controller; and 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 your conference.

Thank you, Erica, 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 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 operating income and earnings before interest expense, taxes, depreciation expense, and amortization expense, or EBITDA. Operating income is defined as gross profit less SG&A expense. EBITDA is defined as gross profit, less SG&A expense, plus depreciation and amortization expense. These measures should not be construed as an alternative to reported results determined in accordance with GAAP.

Manager 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. It provides insight into the ability of the Company to fund such things as debt reduction, acquisitions, and share repurchase programs. 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 pages of this presentation.

The results discussed today for all periods are from continuing operations and do not include the divested automotive joint venture. For more information please refer to our recent press release and annual report on Form 10-K filed with the Securities and Exchange Commission, each of which are available on our website at www.HBFuller.com under the Investor Relations section.

Now I would like to turn the call over to Michele.

Thank you, Steven. Good morning, everyone, and thank you for joining us. Before I start my comments I would like to take this opportunity to publicly welcome Jim Giertz, our new Chief Financial Officer. We are happy to have his depth of experience and broad background on our management team.

I would also like to thank Jim McCreary who acted as interim Chief Financial Officer during our search. Jim remains our Corporate Controller and will assist Jim Giertz in executing our financial initiatives.

Now let me start my comments on the quarter. Although we improved EPS by 3% year-over-year, our operational performance did not meet our standards. Specifically our gross margin and net working capital performance should have been better. Let me provide some context, explain what actions we are taking to remedy the situation, and highlight what we have accomplished in spite of these conditions.

First off, the difficult macroeconomic environment we were experiencing at the end of fiscal year 2007 has continued. Global economic growth is slowing, led principally by the United States. Despite this slowing, record high petroleum prices have led to higher raw material cost inflation.

Although this confluence of factors was challenging, we continued to execute on some of the controllable items and invest for the long term in accordance with our five-year plan.

Despite the conditions I just touched upon, we were successful in growing diluted earnings per share from continuing operations by 3% year-over-year. Sustained cost controls and lower interest expense offset a significant portion of the weakness in gross profit, while the share repurchase program led to the improved per-share performance.

Additionally, rather than cutting back on the level of investment in the business, we have continued to increase our investments for growth. We have added talent to the sales and marketing organizations of each region and initiated growth-oriented capital projects, all of which are designed to enhance customer intimacy, improve our value-added offering, and ultimately augment top-line growth.

Price management and net working capital management have been some of our key success factors over the last three years. However, this quarter we experienced a temporary setback due to the combination of competitive factors, economic slowdown, and our corresponding failure to react in a timely manner.

Specifically, raw material costs increased more than expected and pricing actions lagged the increase in raw material costs due to the competitive environment, which exacerbated the already nonconducive pricing situation.

The issue is being addressed. All tools and processes are being leveraged to turn this around promptly. We expect full realization of these actions in the second half of the year, as we plan to increase farther our controls on discretionary spending.

As we move forward we are confident in our ability to enhance profitability, land new business, and manage our cost structure while at the same time continuing our investments for long-term growth. As a result, we reaffirm our earnings expectation for 2008 to earn between $1.76 and $1.86 per diluted share.

This confidence has led us to invest in our own stock. We have aggressively bought back shares, repurchasing $100 million of the $200 million authorized in less than two months. Of the total, $61 million were repurchased in the last month of the first quarter and $39 million in the second quarter.

Clearly we are facing challenges, both external and internal. But this is not new to our organization. We are ready, willing, and able to execute upon the five-year plan we outlined in October of last year and to grow the business from a higher profitability profile.

As we analyze the top line, several factors impacted our performance in the first quarter, including the global economic slowdown, with the single largest factor continuing to be the weak construction-related end-markets in the United States, a factor we believe will be impactful for the next several quarters.

In particular, the first quarter's top line was again negatively impacted by a further deterioration in Roanoke's sales, which experienced a more than 50% drop year-over-year. Top-line performance in this North American residential construction area continues to fall short of expectations. Yet the situation will start to correct in the second quarter.

Through our sales and marketing efforts in the first quarter, we landed a significant amount of new business. However, due to the timing and customary ramp-up of new orders, this had a negligible impact during the first quarter. This new business will begin to reverse the sales trend for Roanoke starting in the second quarter.

On a similar note, the North American insulating glass business saw a drop in revenue of 18% year-over-year due to weakness in construction end-markets. Likewise, but to a lesser extent, the adhesives end-markets in North America are suffering from the slowdown in the general manufacturing activities.

Despite the impact to the business from the declining construction environment and general macroeconomic slowdown, our commercial teams are making progress. Our new business pipeline is becoming more and more robust each month. We are winning new business, and this trend will accelerate through 2008.

On the raw material front, cost inflation continued in the first quarter. Our raw material costs increased 2.5% sequentially and 4.2% year-over-year on a constant volume basis. This increase was above the high end of our prior expectations.

Driving this phenomenon was the upstream commodity market and the declining US dollar. With oil reaching progressive new all-time highs, and natural gas moving up on higher oil prices and normal storage drawdowns, raw material suppliers continue to increase their prices.

Broadly speaking we saw our largest increases in the raw materials for our hot melt adhesives. These principally include waxes, tackifying resins, and refined oils which, as we have said in the past, tend to be more sensitive to changes in crude oil prices.

From a water-based perspective is situation is somewhat better. [Coater] prices are steady as the supply-demand dynamic has improved with a weakening demand from the paint and coatings industry.

Looking ahead, we anticipate that raw material costs will continue to increase throughout 2008. Currently we expect an increase of 3% to 5%, up from our prior expectation of 2% to 4%. This is mainly due to the significant increase in upstream commodity costs rather than from the demand side.

Before discussing the regions, let me outline our areas of focus for 2008, the game plan that supports our expectation to achieve our full-year guidance. As we outlined in October, our focus is on profitable growth. This encompasses several fronts.

First, new product development efforts are being focused on expanding profitable new business through the creation of additional value-added offerings. In particular we have recently launched several new reactive hot melts for application in panel assembly, including flooring and doors, as part of our lean program. These hot melts greatly improve the efficiency of our customers' production processes and result in a lower total cost of manufacturing.

In addition we have continued to improve our offering to the filtration end-market through the development of next-generation adhesives for reverse osmosis application. On a different front, formaldehyde-free technology and solventless flexible packaging represent some of our key new product initiatives on the front of green technologies. Great progress is underway with these patented formulations, and we believe they will be key contributors to our future profitable growth, as customers increasingly focus on safety and environment.

These are just a few examples of the new products we have developed that are augmenting our new sales pipeline. The activity on new product development is being coupled as well with renewed efforts on the core specialty packaging and hygiene market segments, where several initiatives are underway to revitalize the product range, improve the application expertise, and enhance the value selling approach of our sales force with a special focus on global accounts and leveraging the support of our OEM partners.

Second, investing for future growth is paramount for our five-year plan and is a key area of focus for us. Both past and future investments include talent in the workforce, capital investments, acquisitions, and partnerships. Our approach has always been that of favoring investment versus spending; and the controls we have in place ensure that such rigor is maintained.

The recent announcement of the new technology center in Asia is evidence of this commitment. The new center will foster innovation, increase the speed of response to customer needs, and help drive growth in the Asia-Pacific region.

Similar investments have been authorized in other key geographic expansion regions like Latin America, while an overall effort is underway to add commercially talented resources and to develop and enable better utilization of those currently available.

Heightened sense of urgency, focus, and deeper customer relationships at all levels of organization are being developed to increase the level of customer intimacy, thus increasing our chances to land new business, reduce erosion levels, and increase share at existing accounts.

Lean Six Sigma tools and processes are being leveraged to make sure the proper support is provided to the sales and marketing teams in these endeavors.

From a profitable pricing standpoint, the market is not conducive to price increases; and the competitive environment is not helping, either. However, our past experience and success makes us firmly believe that there is a lot more we can do in terms of adjusting our selling prices more closely to our cost to serve; and that some of the past rigor needs to be reinstated. Actions in that sense have already been taken, and we expect realization will favorably impact our ledger fully in the third quarter.

From a cost control point of view, although we are somewhat happy with the degree to which we have been able to manage discretionary spending levels, we believe there are still additional opportunities for cost containment. We are already executing initiatives to reduce costs while still adequately funding all customer-facing activities and investing for future growth.

From a capital structure standpoint we are actively addressing our current position through our share repurchase program, while efforts to continue to generate cash from operations need to be reinvigorated.

While some of the regional decisions to trade payables or inventory for higher discounts from suppliers may have been technically correct in the short term, we will in the future make sure that on an ongoing basis we more rigorously scrutinize all components of working capital and regain the edge we had in terms of inventory management, receivable terms, and collection and payables.

Clearly the impact of all of the actions that we are putting in place will have a limited effect in the second quarter, which will have its challenges as well.

Now let me provide a brief regional review of the business. In North America the macro situation continues to worsen as evidenced not only by the deteriorating economic data, but by the number of companies reporting challenging conditions and reduced expectations. The United States entered into a significant slowdown; and as a result we are focusing on the controllable items rather than betting on a quick rebound in the market.

Consequently, we have reduced headcount and have put programs in place to totally scrutinize all discretionary spending that is not growth oriented. In the first quarter our North American segment experienced a significant decline in net revenue. While disappointing, the issue was mainly driven by the construction-related end-markets, where revenues were off 30%, driven largely by the performance of Roanoke, as mentioned earlier.

With that said, from an operating income perspective the region was up slightly year-over-year due to tight expense controls. The first quarter operating profit increased $400,000 year-over-year, and operating margin expanded by 160 basis points. The region responded to the interim challenges by executing on some of the controllable items.

However, here as well we were not able to recover the raw material cost increases during the quarter. The team is actively working with the customer base to successfully address the issue.

In Europe the macro situation is relatively better than in the United States, with most economies forecasting GDP growth of between 2% and 3% in 2008. With that said, there are pockets of weakness.

For example, industrial production has turned negative in the United Kingdom; while France, Germany, Italy, and Spain have all started to experience a slowdown in manufacturing activity. As in the past, the East continues to outpace the West, and this trend is expected to widen even farther in 2008.

Our European segment also faced challenges during the quarter with respect to the top line. Heightened competitive activity coupled with the continuation and the conducive pricing environment adversely impacted organic growth and profitability. Nonetheless, given the strength of the euro, segment net revenue grew 4.4% year-over-year.

The growth of our sales in the East, a key targeted area for growth, continues to significantly outpace our sales in the West, much more than the overall economic variances would suggest. In the first quarter our sales in the East grew in excess of 15%, albeit from a relatively small base. This accelerated growth is the reflection of the preliminary investments that we started to make in region. These investments establish a sales presence in Russia, Hungary, Slovenia, and the Middle East.

We expect these investments to continue to add momentum. Additional investments in the East are currently being considered.

From a profitability perspective, tight expense controls led to a slight increase in operating income year-over-year, despite the aforementioned non-conducive pricing environment and competitive pressures. However, operating margin did slide slightly from 8.4% in last year's first quarter to 8.1% this year.

Latin America's economic fundamentals broadly speaking are relatively strong. Unemployment is generally declining throughout the region. GDP growth is expected to be in the mid single digits. Inflation, while relatively high versus the developed economies, is stable.

However, there are energy-related and labor cost increases in Argentina and Chile, currency pressures in Brazil, and increasing hurdles to [safely] export into Venezuela, all of which are being closely monitored and managed.

For our Latin American operations organic growth was positive in the first quarter, up 1.5% year-over-year. Investments made to transition the business to a more value-added selling approach started to enhance the commercial momentum and in top-line performance.

While we are pleased overall with the top-line trend performance of the region, we are disappointed with the significant drop in profitability. A portion of the drop was expected and was due to further commercial investments we made in the region and due to an increase in promotional spend.

The majority of the decline, however, was related to price increases not being sufficient enough to offset rapidly rising raw material costs, and to supply chain disruptions that have since then been corrected.

We remain optimistic for the region, as we expect the additional investments we made for growth, combined with a strong commercial pipeline, to lead to more profitable top-line performance in the quarters ahead. In addition, we expect the pricing and supply challenges affecting the profitability of the region in the first quarter to be resolved in short order.

In Asia we are continuing to execute. We have invested greatly in the region and we are starting to see results. In the first quarter of 2008, net revenue for the segment increased 11.1% year-over-year. Excluding foreign currency inflation organic sales growth was positive, up 1.6% year-over-year.

We are seeing clear signs of improvement in the business as a result of the investments in talent we have made in the region over the last year. Clearly these investments still had a short-term negative impact to operating income in the first quarter. Consequently, although operating income was up slightly, margin is 40 basis points year-over-year from 5.4% to 5%. We believe this is a temporary phenomenon for the reasons just mentioned.

Overall we are happy with the plans put in place by the region, the disciplined execution, the enthusiasm of the team, and the buildup of the new business pipeline. As a result, we are in the midst of authorizing further investments in the region.

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

Thank you, Michele, and good morning, everyone. For the first quarter, consolidated net revenue was $322.6 million, down 3.2% from last year's first quarter. Foreign currency translation favorably contributed 4.4 percentage points to net revenue growth. Higher average selling prices contributed 0.4 percentage points. Volume declines reduced growth by 8 percentage points year-over-year.

Gross profit was $91.5 million for the quarter compared to $99.7 million in the first quarter of 2007. Gross margin for the first quarter was 28.4%, down 150 basis points on a year-over-year basis. Michele already spoke about the reasons for the decline and the actions we have put in place to remedy this situation.

SG&A expense was $65.0 million versus last year's first quarter of $71.6 million. Last year's first-quarter SG&A expense included a $1.7 million charge resulting from the accelerated amortization from a discontinued Roanoke product line. Aside from this item, the majority of the improvement year-over-year was due to lower discretionary spend and lower salary and benefit expense related in part to productivity gains and lower headcount.

Operating income for the first quarter was $26.5 million versus $28 million in last year's first quarter. Correspondingly, operating margin eased slightly from a first-quarter record high 8.4% to 8.2%.

EBITDA for the first quarter was $38.1 million versus $41.9 million in last year's first quarter. Consequently EBITDA margin declined from 12.6% to 11.8% in this year's first quarter.

The effective tax rate for continuing operations in the first quarter was 29.0% compared to 29.1% in last year's first quarter. For fiscal year 2008 we continue to expect an effective tax rate of approximately 29%.

For the first quarter of 2008, reported net income from continuing operations was $18.2 million. This was basically flat with the $18.7 million in the first quarter of last year.

On a per-diluted-share basis, earnings from continuing operations increased 3% to $0.32 from $0.31 in last year's first quarter. This increase was driven by the share repurchase activity of the Company. The repurchases this quarter had a minimal impact on the quarter due to the timing of the purchases, but will contribute more meaningfully in the quarters ahead.

Prior to discussing the balance sheet, I just want 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 $195.5 million, up $23.7 million year-over-year and down $50.9 million sequentially. Total debt at the end of the first quarter was $214.8 million compared to $197.2 million at the end of the first quarter 2007, and was up $42.2 million on a sequential basis.

During the first quarter we executed on repurchasing $61 million in Company stock at an average price of $21.36. This equates to roughly 2.9 million shares. The first-quarter repurchase was funded by both excess US cash and through new borrowing on our revolving credit facility.

Net working capital -- defined as the net amount of trade accounts receivable, inventory, and trade accounts payable -- amounted to $225.9 million. As a percentage of annualized net revenue, net working capital was 17.5% for the first quarter, up 310 basis points over the first quarter of last year. Europe and Latin America experienced the largest increases during the quarter.

Depreciation expense in the first quarter was $8.6 million, down $300,000 versus the prior year. Amortization expense was $3.1 million in this year's first quarter, down $1.8 million versus last year. As I mentioned before, last year's amortization expense included $1.7 million of accelerated amortization related to Roanoke.

For 2008 we continue to expect depreciation expense to be approximately $35 million and amortization expense to be approximately $12 million.

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

Thank you, Jim. In my opening comments I discussed the challenges we are facing. However, let me be very clear that we will continue to take advantage of investment opportunities and continue to execute regardless of the challenges we face.

One thing is for sure, we will come out of this economic situation stronger and much better positioned for long-term growth. For the remainder of 2008 we are determined to execute on the controllable items; build our pipeline of new business; turn around the underperforming businesses; and make the necessary investments to position the Company to succeed in both the short and long term.

We are dealing with a deteriorating economic environment and correcting the execution issues we encounter. We have a strong team and a dedicated and loyal workforce, all of whom are aligned and incentivized to grow the top line, improve the operating performance of the business, and ultimately to achieve our long-term financial goals.

Thank you for your attention. Now I will open up the call for your questions.

(OPERATOR INSTRUCTIONS) Jeff Zekauskas, JPMorgan.

This is Olga Guteneva sitting here for Jeff. Just a couple of questions. I guess the housekeeping questions first. How many employees did you have last year in the first quarter?

This is Jim McCreary. For the end of the first quarter we had 3,200 employees.

And at the end of this quarter?

That was the end of this quarter. So for the end of first quarter of 2007 we had 3,484 employees.

Okay. What was the headcount reduction in the North American segment you mentioned?

For the North America segment we went from roughly 1,100 down to 975.

That is year-over-year?

That is year-over-year.

And sequentially from the end of the fourth quarter?

For North America sequentially it was up slightly.

It was up. Why is that? Why did you add people?

There were just two additions. Basically investment type positions.

Basically flat, Olga.

I'm sorry, I did not hear the last comment.

We are basically flat, but you have to take into account that when you analyze our expenses pattern in the first quarter there is a lot of churn going on. Because while on one side we have been very thorough in our cost controls, we have also added talent specifically in the commercial functions.

So the balance is just an aggregate number that doesn't shed light on some of the investments we have already made and that we will continue to make.

Okay, and if we go back to working capital, so your inventory was up like $16 million sequentially. What was the reason? Was it that you just tried to purchase more raw materials in advance? Or you were not able to sell the products you produced? So what happened there?

As we said in the script, Olga, the regions tried to offset some of the raw material increases by working with the suppliers in a tactical way. Clearly, moving forward we need to make sure that the model is sustainable long-term, because we believe that inflationary pressures will continue.

So our approach needs to be much more thorough; and also we need to make sure that we regain the rigor of the past.

Okay. If I may, just a quick question on the share repurchase program. So you borrowed like $40 million, $42 million for the share repurchases purposes.

Do you plan to do it in the future? So you are trying just to buy back as many shares as you can and as -- I mean as fast as you can. Should we expect an additional borrowing to find your share repurchase program?

This is Jim. I'll try to answer that question. We have authorization to acquire additional Company stock. We will do that as we think it is appropriate in the future.

Basically over the long term, we will fund the share repurchase with our operating cash flow. But in the short term we fund with whatever cash we have available in the US. Right now the short-term approach would be to borrow from our committed credit facility, and then it will be repaid with operating cash flow.

Okay, thank you. I will get back in the queue.

James Sheehan, Deutsche Bank.

First on the raw material -- sorry on your price increase targets for 2008, you had been talking about 2% to 4% price increases on your last conference call. Have you revised what your expectation is for pricing this year?

We talked about a price increase on a full-year basis. I think we've been pretty clear and direct in saying that we have faced difficulties in the first quarter in really implementing in full the price increases that we should have.

Raw materials have gone up faster than expected. Customers, given specifically the economic situation in North America, have been pushing back big-time. The environment is that of people cutting down on inventories, reengineering products, shutting down plants. And that makes it very, very difficult.

At the same time the competitive environment has been fierce, and some of the capacity additions that were supposed to come in the second half of the year, we are still monitoring what impact they will have.

The dollar has added further to these raw material pressures. But we are going to be very clear and very honest that we also had our own internal execution issues that we are remedying as we speak. Clearly there is a time lag in terms of the impact of those actions.

Okay. Also on your volume declines, I know you are targeting organic volumes to improve in the second half of '08. You also commented today that some of your actions, your corrective actions you have been taking, are not expected to really come into effect until Q3.

So should we expect similar volume declines in Q2? Can you just comment directionally, are volumes so far in Q2, in March, are they less than they were in Q1?

When we gave full-year guidance we already said at that time that we were expecting a ramp-up in the second half of the year. We confirmed that.

That is based not really on banking on economic recovery, but it is banking on our own forces, on our own strength, on our pipeline. It is clear that second quarter, as I said earlier, is still going to be rough on all aspects, while our countermeasures have an impact in the P&L.

Now clearly our return to a better trend in sales in the second half of the year is still the goal, is still attainable, and is what we are focused on accomplishing. As you heard before on the comments of Roanoke, we have landed new business that is going to start having an impact in the second quarter. But as in everything, in Roanoke and in other accounts, we are going to have a ramp-up.

So the pipeline is a positive top-line variable. The landing of new business that has already happened is another positive. Clearly the more we go towards the second part of the year, and we already made that in the Q&A clear last quarter, there are going to be easier [erosion] comparables.

But also we have to take into account that the headwinds are a long list. Economic and construction markets are weak and weaker. Competitive environment more intense. We will see what happens when this situation becomes a bit more clear coming April or May. Also we need to make sure that we [retool] some of our pricing discipline and some actions have already been decided; but are going to have a full impact as we said earlier as of the third quarter.

Okay, thank you very much.

Mike Sison.

Welcome on board, Jim.

Thank you very much.

Michele, I wanted to get a better feel, and I know you have talked about a couple variables here in terms of pricing. What is perplexing is through the third quarter of '07 you were ahead of raw materials, in an environment where you could probably argue it wasn't any better.

You sort of talked about three areas that has impacted pricing -- one, the ongoing weak demand; two, it sounds like there is a little bit more capacity or overcapacity; and number three, a more intense competitive environment. So -- and maybe a little bit of internal issues.

So could you help us bridge the gap of what happened since the third quarter when you for a couple quarters were getting pricing? Is it more just more supply? Is it more demand is weak? Or is it really this competitive -- maybe one or two bad competitors? Not bad competitors, maybe just sort of busy competitors that aren't raising prices as they once should.

Mike, we believe that internally what we experienced was a temporary setback in terms of execution. So there is an internal component.

Some mixed signals on how fast and how broadly raw materials would have hit our ledger in the first quarter. That is what I consider a controllable item, and we are taking care of that.

Nonetheless, while we leverage all the tools, let me be very clear that the economic environment in the first quarter has got much worse. People started in December by cutting down on inventories; but right now the theme is about reengineering products to reduce costs, it is shopping around. And the environment we are getting is in many cases there are customers that are shutting down plants, reducing shifts, and it is not easy to have a discussion on price even if you have all the reasons of this world to basically recover your raw material increases.

At the same time clearly the competitive environment has been fierce. I think it will become more rational during the year for several factors. Also because I think that when everybody reports first quarter there will be a better perspective from everybody on what is really going on in the economy, specifically North America.

Okay. Then if I think about the raw material increase you have alluded to, 3% to 5%, if I did the math that is anywhere between, let's say $30 million to $35 million potentially on the high end.

How much of that, assuming that you fix some of the internal issues that you had hoped to fix, maybe some help from the external environment on pricing, can you cover in 2008? Can you cover some of it, most of it? There are, as we saw in the first quarter little.

Well, it is clear that in the second half of the year we expect to return on our previous ability to execute. Clearly second quarter is going to be a transition quarter. All comments that I'm make making, Mike, are related to our controllables. That is, independent of what the economy does.

Clearly if raw material increases are higher than the 3% to 5% that we are highlighting, we will have to review that. But based on what we know today we have our plan in place. We have started executing. We expect that the third and the fourth quarter will be more satisfying, more gratifying from our side both in terms of pricing processes but also I would say net working capital process.

But you can cover some of the price increases under what is your control, assuming raw materials stay at these levels going forward?

I think that longer-term our business model can't deviate from recovering in full the raw material increases. Clearly it takes some time. Again, that is why we provide full-year guidance and we try to give directionally why it is going to be more back-end loaded both from a volume, from a pricing, and raw materials standpoint.

Last question, if you do catch up by year end, which would be great, in terms of closing the gap between raw materials and pricing, in 2009 it does appear that there could be some oversupply, particularly on the major commodity chemicals chains.

If raw materials indeed fall in '09 and 2008, what happens to your pricing? Is that sort of a tailwind for you? Can you hold some of that? What type of margin expansion could you expect in the event?

Although I would hear you; we've never seen raw materials fall. If that does fall, is that a positive for you?

I think that relatively speaking over the last three years we have shown that we are better equipped than the rest of the marketplace as far as adhesives are concerned. Clearly I am speaking now at a low point, because first quarter was not in line with that; and that is why we are trying to recover.

But that is our expectation. That is our desire, and that is our plan. Now speaking of 2009, based on what is going on right now in the economy, is really a challenge. Everybody is speaking from a raw materials that hot-melt capacity will come onstream in the second part of the year. We have to see that really happening.

We have to see what happens with the dollar. We have to see what happens on the supply side profitability scenario. So there are lots of variables at this point in time.

I can tell you directionally we are not moving away from our pricing strategy and the processes and tools we have developed. But we are banking more on our own internal forces than on macroeconomic aspects.

If raw materials fall you should be able to hold some pricing?

Well, that is --

Part of your pricing mechanisms would suggest that you would hold some pricing.

That is the expectation. We want to be true to our word.

All right. Thank you.

Chitra Sundaram, Cardinal Capital.

Congratulations to navigating such a tough environment. A couple of things. When we look at the 8% volume decline, is it possible to get a ballpark understanding by regions? In North America, Europe, and then in Latin America, how that 8% kind of split out, without having to wait for the 10-Q?

Then within North America, you mentioned a couple of major items in Roanoke and in glass. But I am not clear what the impact of that would have been on whatever that number is, volume decline.

What I can tell you, Chitra, first of all good morning and thanks for the comment; because I think it is showing our understanding of the situation.

Volume, clearly as we said earlier by our comments, a majority of the volume decline was in North America. As we said before, from a top-line perspective clearly Roanoke performance was the main contributor to that.

Overall, while we had a positive mix impact, volume was down to a lesser extent in all regions of the Corporation. As we said, we are working diligently to make sure that our expectations for the second half materialize and there is a trend reversal in the second half of the year.

Of course what we are doing is to make sure that there is that trend reversal not at the expense of a profitable price.

Okay. That 50% decline you mentioned for Roanoke, that was year-over-year correct? It wasn't from fourth quarter or anything?

Year-over-year, correct.

Year-over-year. When we talk about working capital, so it sounds like -- because I mean one of the things that I think has given a lot of people comfort in following Fuller has been that despite the challenging situation beginning to unfold as we went into Q4, you really had your act together when it came to the working capital piece especially. And then pricing to the extent the environment might support it.

So what might have happened when you look at the working capital usage? How much -- you said a certain piece was execution. But can you elaborate a little bit more on that and what you all are doing perhaps with some more specificity to get around (multiple speakers) that.

From an inventory and accounts payable perspective, as I said earlier, there has been the attempt to tactically cooperate with suppliers to delay, postpone, mitigate some of the raw material impact in our P&L. So that has come a bit at the expense of that portion of the working capital.

At the same time, there have been some logistic project in parts of the world like Latin America that have not worked as expected. They have already been corrected as we speak. So there is both, let's say, intentional changes -- regardless that we really considered them right -- and there have been also execution issues internally.

On the receivables side there has been really no change. Actually we believe in a period like the current one that it is extremely important to manage very closely receivables, not to get surprises.

So a mix of intentional, a mix of execution issues that of course we are correcting because we believe the net working capital is a key component of our profitable growth model, starting to look at it from a ROCE perspective.

So we are not happy with our performance in the first quarter on that side, as we are not on pricing. And we are correcting to make sure that our full-year guidance is achieved.

If I may, when you said new capacity coming on, I guess I had understood it as on the raw materials side.

Yes, on the raw materials side.

Is there new capacity coming on on the adhesives side? Did I misunderstand?

Well, as you know, part of our organic growth plan is both acquisitions and investments, and all of them are right now analyzed. There are projects underway on both sides of the equation, external and internal growth.

As soon as we have something that we can announce either in terms of acquisitions or investments, we will communicate accordingly. But all options are on the table, and we are working on all options.

Lastly, were there any severance expenses that might have gone through cost of goods sold that might have inflated that number a bit as you have reduced headcount?

In the first quarter, a very limited impact.

Okay, thank you so much.

Christopher Butler, Sidoti & Company.

I wanted to ask about the North American segment. Could you give us an idea of revenue? How much revenue fell in nonconstruction products?

Around 5 percentage points.

You had said in your opening that North America continues to worsen. As we look into the second quarter are we looking at top line falling similar to the first quarter? Or do we have easier comparisons in the second?

Well, more than easier comparisons. One thing that encourages us and is part of our decision to reaffirm the guidance is that we have landed already new business. Clearly there is a ramp-up in that new business, so you are not going to see the full impact in the second quarter.

But specifically for the biggest negative contributor to the first quarter, which was Roanoke, that is expected to be -- the first quarter of '08 is expected to be the lowest point.

Shifting gears to Latin America, you had mentioned that there is a supply chain problem there. I'm wondering if you could give us an idea of the impact on that, and maybe some more color on the profitability out of Latin America.

There were three factors affecting profitability in Latin America. The first factor being clearly raw materials that escalated pretty rapidly; and our pricing actions had a time lag, which as you have heard has been a non-satisfying theme for the first quarter. And that is why we are taking action.

The second component was the investments that we decided to make in the region. Those investments are hitting the first quarter; not that it means that it will not be different during the rest of the year -- were mainly headcount related in terms of adding sales and marketing people to the region, which is what gives us confidence for accelerating sales growth in the second part of the year.

But it is also due to investments in promotional spend, which you know specifically for some parts of the business in Latin America are critical to foster growth. We thought it was the right thing to do, and we still believe in that, and we expect to get the returns for that already in the second half of the year.

The third part was clearly net working capital management. I wouldn't say really so much on the receivables side, but really on the inventories. We made some attempts to go into a different logistic model, specialized by plant. It didn't work out as expected, and we are correcting the situation as we speak.

Since you didn't mention the supply chain problem in that, is that (multiple speakers) significant impact?

The supply chain model was exactly that change in the logistic assets that now we are correcting. Clearly as of the second quarter we should see an improvement. It will still take two to three quarters to go back exactly to normal for the portion of that.

All right. Thank you.

Dmitry Silversteyn, Longbow Research.

This is Jonathon Grassi in for Dmitry. Going back to North America, you guys did drive your operating margin up about 1.5 points. You alluded to some cost-saving techniques that will help drive that. But I guess looking at the economic situation, higher raw material costs, and Roanoke, was there anything else besides those cost-saving actions that helped drive the operating margin higher?

Well, taking into account that when we are speaking of costs based on the way we report we are speaking of costs not only controlled by the region; but we are also speaking of corporate costs that are allocated to the regions. This is I think important for everybody, that everybody understands.

Why we have extremely [tightened] our cost-control measures we have clearly differentiated between cost controls more into the non-sales-related areas versus the sales-related areas where instead we have continued to invest; and we will continue to do that during the year.

So yes, there have been some cost savings on the operational side of North America. But there has been also a lot of cost savings on the corporate side, which you see reflected in every region.

At the same time, take into account that last year in '07 we had call it a negative unusual of $1.7 million that didn't repeat this year due to the Roanoke amortization of a product line.

Okay. Can you just speak about the acquisition pipeline and what we are looking at for 2008?

Well, we are working a lot on our geographic expansion strategy. That is both organic, but also through M&A.

In M&A we are looking both at straight-out acquisitions and also at joint ventures. Clearly the areas are, as we said, Middle East and North Africa, are Eastern Europe, are China, India, Brazil. And hopefully during the remaining three quarters of the year we will be able to come back to you and to the rest of the investment community with some news.

So far what we have done has been mainly doing organic investments in Asia-Pacific and in Latin America. But more is expected to come. At this point in time still we cannot comment, because it is still under review.

Overall is it fairly robust, or have you seen it slow in the past quarter or two? (multiple speakers) opportunities.

I think it is more robust. I think it is more strategic, I mean aligned with the strategy. So I am pretty comfortable.

But clearly when you are speaking of acquisitions and joint ventures there are lots of things on the plate. So you have to wait till you have the score on the [net].

Okay, thank you.

Robert Felice, Gabelli & Company.

Thanks for taking my question. You did a great job during the quarter whittling down that SG&A number. That was really your leverage to offset the gross margin decline. I was hoping you can just delve a little bit deeper into how you were able to do that. I mean, beyond just the lower headcount reduction or the headcount reductions.

Then more specifically, by how much did you step up investment spend in that line item? So if you could kind of work through the gives and takes during the quarter.

I think that first of all to give some context, take into account that that expense reduction has been achieved despite absorbing the corporate costs that were previously allocated to the automotive business. So remember that we had a lot of those corporate costs that didn't go away, and you know that managing those takes time. So any recovery of those will be ramping up during the year.

Take into account that amortization expenses declined $1.7 million. That explains basically 2 points of the 10 percentage drop.

Pension expense is $1.5 million lower; and that explains another 2%. While the remaining 5 to 6 points of the drop are lower discretionary spend, lower salary and benefit expense, that is lion's share.

Now take into account that there are several million dollars that over the last three quarters we have injected into the different regions to add, as I said earlier, commercial talent. We are not really speaking of capital investments but really headcount. So the number actually in terms of savings is higher than what I am telling you. But we typically don't go into that level of detail.

What I can tell you is that in October with everybody that was present here at our investor conference we committed to a five-year plan; and investments for growth were part of chapter 3. But we also said that we were going to start doing some of those earlier, and we have started.

Based on what I see, for instance in Asia-Pacific, on how things on developing based on the talent we have hired there and the things we are doing, I am encouraged. Clearly the economy is not very conducive. But I fully believe that we are doing the right things. That is one of the factors behind our reaffirming the guidance.

Ladies and gentlemen, we have reached the allotted time for Q&A. Do you have any closing remarks?

We would just like to thank everybody for joining us today for our conference call. Have a good day.

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