H.B. Fuller Company (FUL) 2008 Q2 法說會逐字稿

Good morning and welcome to the H.B. Fuller second 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. (OPERATOR INSTRUCTIONS) Management in attendance on today's call include Michele Volpi, President and Chief Executive Officer; Mr. Jim Giertz , Senior VP Chief Financial Officer; 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

Thank you, Kimberly, and welcome, everyone. Today's conference call is being webcast live and will also 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; earnings before interest expense; taxes; depreciation expense and amortization expense, or EBITDA; and return on growth investment, or ROGI. 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, and ROGI is defined as trailing 12-month gross cash flow divided by gross investment. These measures should not be construed as an alternative to the reported results determined in accordance with GAAP.

Management believes that the 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, 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. For more information please refer to our recent press release, quarterly report 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.

Now I'd like to turn the call over to Michele.

Thank you, Steven. Good morning, everyone, and thank you for joining us. During the second quarter, we were able to maintain the share profitability levels through continued focus on expense and capital management, despite a continuation of the macroeconomic challenges we faced during the first quarter. Let me share some of the highlights and challenges of the quarter with you. First, the earnings from continuing operations per diluted share increased 2% year over year. Second, the organic sales trend improved sequentially and net revenue was up 1% year over year. Third, continued focus on expense management and a significant curtailment of discretionary spending led to a $6 million decline in SG&A year over year. This was accomplished in conjunction with increased investments for growth.

Next, the turnaround of the Roanoke business has begun. At the end of the first quarter we landed a major new program with significant customer and that customer began ordering on a normalized basis in the second quarter. Based on our rollout performance and level of service we have already been awarded additional business with this key strategic account. Lastly, during the quarter, we completed our $200 million share repurchase plan. This plan is a clear signal of the confidence we have in our strategic five-year plan, as well as our committment to returning value to our shareholders. In terms of challenges raw material costs continued to escalate and increased even more than we had anticipated last quarter. Additionally, as we outlined during our first quarter conference call, we began to ramp up our pricing actions in the second quarter. However, due to the lag effect between announcement and realization, very little benefit from these price increases occurred during the second quarter. Finally, the construction-related end market in the United States continued to languish, and as previously anticipated, it is very unlikely that we will see a return to normal growth this year.

Now, let me provide a brief update on our long-term strategic goals and where we stand at the end of the second quarter on a five-year period. As I mentioned in my opening comments, the top-line trends improved modestly in the second quarter. The organic sales trend improved sequentially from -7.6% in the first quarter to -4.5%. The improvement was consistent throughout the quarter. In addition, net revenue growth, which includes foreign currency translation, turned positive, up 1% year over year. While improvement from one quarter to the next does not necessarily establish a new trend, we are still encouraged by what we are seeing on the top line and we are optimistic that incremental improvements will continue in the second half, despite the economy.

Regarding EBITDA margin we realize a decline of 140 basis points year over year. The savings from the significant reductions in SG&A achieved during the quarter helped to offset the [markedly] high raw material costs and corresponding margin erosion from the [lagging] pricing. It's important to note, though, that the reductions in SG&A were net of a significant increase in investments for growth. Similarly to the trend in organic sales, the trend in profitability also showed incremental improvement each month during the quarter. ROGI declined slightly on a sequential basis. The decline was primarily due to the decline in EBITDA for the aforementioned reasons. Gross investments was relatively stable between the first and second quarters. Although growth investment was flat we began to make progress in reducing net working capital.

As a percentage of annualized net revenue, net working capital declined from 17.5% at the end of the first quarter to 16.1% at the end of this quarter. Inventory was reduced by about 4% and days receivables declined by three days. We expect this favorable trend to continue in the second half of the year. Lastly, EPS growth from continuing operations remained positive. This was driven by the significant amount of repurchase activity in the first half of 2008. Let me reiterate that we are committed to returning value to our shareholders. In the last year we announced and executed upon two repurchase programs totaling $300 million. Our aggressiveness to buy back shares stems from both our confidence in our five-year strategic plan and our view of the value of the shares. These repurchases are significantly accretive to earnings and are expected to generate an implied return on investment that is significantly above our cost of capital.

Now let me comment on the pricing and raw material cost. As we anticipated in the first quarter, prices continued to lag raw material cost increases in the second quarter. The revitalization of our pricing [vigor] and discipline was initiated in the second quarter and resulted in significant pricing actions being taken. These initiatives largely went into effect at the end of the quarter, resulting in minimal impact to the second quarter financial results. It is important to note that the environment we are facing today is much different than in the past few years. Today, we're not only experiencing raw material cost inflation but also weak end market demand, which has lead to a delicate pricing environment. While we have seen some of the larger competitors announce price increases, which is encouraging, customers are only now slowly starting to become accustomed to price increases. We expect our customer [intimacy] model to aid us in our pricing endeavors, but at the same time we expect the environment to remain difficult for some time to come.

Regarding raw materials, inflation accelerated during the quarter. In aggregate, our raw material costs went up 3% sequentially and 10% year over year. At this time we expect raw material costs to increase between 13% and 15% for the full year, significantly up from our prior expectation of 3% to 5%. Although we have experienced various challenges in 2008 we have continued to maintain balance between short-term operating performance and position the Company to achieve our five-year financial goals. We have shifted the focus to the front office.

We have utilized cost control initiatives to not only offset weakness resulting from the pricing and raw material situation, but to also invest (inaudible) the business to drive top-line growth. These investments have been made mainly in the fastest growing regions of the world and to date have been focused mostly on sales and marketing talent and training. Despite our increased level of investment we were still able to reduce overall SG&A spending by $6 million year over year, or more than 9%, and by $2 million sequentially, or more than 3% versus the first quarter. This was achieved through both staffing reductions of roughly 75 positions versus last year's second quarter, as well as significant reductions in discretionary spending. Also note that foreign currency translation from Europe alone added approximately $1.8 million to SG&A in the second quarter. In this case, currency is working against us.

Now, let me provide you a brief regional review of the business. In North America the macroeconomic slowdown persisted, particularly with respect to residential construction-related end markets. Our construction related businesses, Specialty Construction, and insulating glass, were both off approximately 15% on an organic basis. Adhesives top line was also negatively impacted by the spill over effects of the construction markets but to a lesser extent, while packaging solutions was relatively strong with organic growth of 5% year over year. Profitability for the region deteriorated during the quarter, with EBITDA margin down 220 basis points year over year. The pricing and raw material dynamic negatively impacted profitability; however, a larger contraction was avoided due to the strong cost controls implemented in the region during the quarter.

There were two one-time charges that occurred during the second quarter in North America which significantly reduced the profitability of the segments. These charges, totaling $2.7 million on a pre-tax basis, were associated with the realignment of an adhesive facility in Paducah, Kentucky, as well as channel resetting costs associated with their position of new retail business within the Company's Specialty Construction business. Taken together, these one-time charges reduced EBITDA margin by approximately 150 basis points in North America in the second quarter. On a consolidated basis, these charges reduced EBITDA margin by roughly 70 basis points in the second quarter and reduced diluted earnings per share by $0.03. We are very pleased with the new business landed at Specialty Construction within the retail sector. Turning the Roanoke disappointment around was one of the cornerstones of our five-year strategic promise. This change in sales strength clearly shows the result, determination and ability to execute on growth from our construction teams in spite of a difficult macroeconomic environment.

In Europe the organic growth trend worsened versus the first quarter. Heightened competition on price, particularly in the more [commodity-like] product lines, such as polymer, resulted in higher-than-expected volume erosion as we held firm on pricing. This volume erosion was mostly made up of lower margin product lines. On the new business front we are optimistic. We expect the current and future investments in the growing parts of Europe to positively contribute to the top-line development in the quarters ahead. We are encouraged by some of the most recent use coming from our innovation team in Europe. I'm proud to say that we have been able to land new business with Adidas with whom we have partnered to develop the official soccer ball used at this year.s European championship. This is an example of how we plan to further grow in the future through game-changing innovation and superior performance.

Great momentum has been created during the second quarter with an increase of new product introductions. We expect positive results to hit the ledger as we continue down this path. From a profitability perspective, the pricing raw material dynamic negatively impacted results in Europe, as well. Nevertheless, significant cost control measures, coupled with strict limits on discretionary spending, help mitigate a large portion of the squeeze. Together with favorable foreign currency translation, EBITDA dollars held steady year over year.

In Latin America the top-line situation is mildly improving. The investments made late last year to improve the customers' buying experience contributed greatly to that regions organic growth rate in the second quarter. Likewise, incremental sales and marketing additions have helped drive new sales and have lead to an acceleration in organic sales. In aggregate we are pleased that the growth in Latin America is running higher than our long-term goal of 3% to 5%. This suggests to us that our initial steps towards the geographic expansion are working well and hold promise for the future. On the bottom line Latin America also performed well and held steady. This was primarily due to the success the region had in increasing prices during the quarter by more than 3%. In addition, on the cost side of the equation, here too, (inaudible) cost control measures and limits on discretionary spend where implemented. Combined these actions resulted in holding EBITDA dollars flat year over year with only a slight decrease in EBITDA margin.

Asia-Pacific was the strongest performing region in the second quarter. The investments we have made in talents are beginning to directly benefit the top-line evolution. We are particularly excited with the pipeline of new business being developed and closed. Combined with the new regional technology center, the region is well positioned for continued, profitable, organic growth. From a profitability standpoint, the Asia-Pacific region more than doubled its operating income and grew its EBITDA margin by more than 200 basis points year over year. Significant growth in new business and a less severe raw material inflation environment versus the rest of the world led to the strong operating performance during the second quarter. The performance of this region is encouraging and reinforces our belief that our geographic expansion strategy in Asia comprised of investments, resources, talent, and focus is the right one. We are proving here as well that we can execute on profitable organic growth and we are reinvigorated by it.

Before concluding today's presentation I would like to provide you with a quick update of our expectations for the full year. As we discussed earlier, we are confident in our ability to execute on the controllable items and effectively deal with the inflationary raw material environment. This confidence leads us to reaffirm our guidance for the year to earn between $1.76 and $1.86 per diluted share. In addition, provided the timing of approved projects, it is likely that the actual CapEx spend this year will be slightly lower than we previously expected. We now anticipate total spend between $20 million to $25 million. Furthermore, we still anticipate an effective tax rate for the year of approximately 29% excluding any future significant discrete items. Regarding depreciation expense, amortization expense, there are no changes to our outlook for the year.

In conclusion, as we begin the second half of 2008 one thing is steadfast, and that is our committment to deliver in both the short and the long term. The challenges we faced during the first half of the year will continue, but we are prepared to effectively deal with them. The headwinds from raw material price increases and volume deterioration in some key North America Markets had a significant negative impact on the results in the second quarter. This mostly overshadowed the positive developments that we believe point to better results in the future. Let me share with you some indicators that may be helpful to monitor our progress in the quarters ahead.

First, we are revitalizing our pricing discipline. This will reduce the pricing lag and ultimately lead to EBITDA margin recovery and growth in EBITDA dollars. This quarter we began to lay the ground work but obviously more work needs to be done. All necessary resources have been deployed to remedy the current situation and we are confident that we can regain and maintain the (inaudible) necessity to effectively deal with the current and future raw material environment. The fact that we have reaffirmed our guidance reinforces that margins can and will improve in the second half of the year relative to the first half. Second, we will continue to make investments to accelerate geographic expansion. This quarter both Latin America and Asia-Pacific achieved organic growth that exceeded our consolidated long-term goal of 3% to 5%. This was driven principally by the investments we have already made in these regions.

Third, we will continue to manage our cost structure, to help mitigate the [interim] margin pressure brought about by the existing environment. During the second quarter, we reduced SG&A by $6 million year over year and $2 million sequentially, while continuing to fund new investments in sales and marketing. Fourth, we will focus on net working capital. This quarter we began taking steps to address the significant increase in the first quarter and we started moving in the right direction. Last, although we still have more work to do, we are confident we are on the right path with the Roanoke acquisition. As we discussed earlier, we landed significant new business at the end of the first quarter. This is just the beginning of the turnaround. Now, this is not an exhaustive list by any measure but rather just a few of the indicators you can use to monitor our progress.

Before we end let me remind you that 2008 is the first year of a five-year transformation, a year of transition from a turnaround phase to a growth phase, as we stated repeatedly, last October during our investor conference. Even though the first year coincides with a very difficult macroeconomic environment, we believe we are making progress by balancing short-term pressures with long-term investments for growth. We are confident in our leverage potential and our ability to execute and we are committed to all of our stakeholders; employees, customers, and shareholders. Based on this confidence we have reaffirmed our guidance. Thank you for your time and we would now like to open the call up for your questions.

(OPERATOR INSTRUCTIONS) Your first question comes from Jeff Zeskauskas with JPMorgan.

Hi, good morning.

Good morning, Jeff.

Hi. How many employees did you have at the end of the quarter , if you

Well, I can tell you that the employees total closed the Company at the end of the second quarter were at 3162. 3,162. That is the total H.B. Fuller census at the end of the second quarter.

Second question is you talked about these new pieces of business at Roanoke. Can you size the magnitude of these businesses, this business that you picked up?

Well, as you know, there are expectations. In retail it depends on how the construction market is doing, but is significant enough for us to talk about it and is significant, strategic, and solid enough for us to take some reset charges in the quarter. We are very happy this has been going on. Of course, we didn't speak about it for confidentiality reasons in the quarters before but that was behind my committment to turn around the business. I think they have done a terrific business. It is long-term business that we have targeted, that we have landed and goes into the direction of the strategy. Allow me not to be specific as for us numbers are related, but we are speaking clearly of several millions of dollars.

In terms of the price increases, what's the order of magnitude of new price increases that you've issued and what do you hope to achieve over the next couple of quarters?

Well, it is clear that we were able to remedy some situations in the second quarter but the vast majority, it is fair to say it was a time of preparation in the second quarter. It was very tough time of preparation because things kept moving and keep moving and you've seen all of the announcements in the marketplace. At a certain point of time we made a cut and we said that we go with this. But it is clear that we are speaking for the full year of double-digit price increases, and they are necessary to cope with ever escalating raw material prices and you've seen our expectation that is between 13% to 15% over the year. Of course, our sourcing teams and technology teams are working as much as possible on the formulation but it is important that our teems and our customers understand the situation.

So this quarter your prices were up a percentage point roughly, so next quarter are you hoping for some number like plus six?

Well, certainly it's going to be significantly higher than the second quarter. What I can not tell you right now is if we are going to have further surprises of the raw material side with the additional announcements coming over. What I tried to make clear in the script, Jeff, and I know you know is that it is more difficult than it was in '05 and '06 because it's also a combination with very weak demand. We have to be very careful. At the same time we are trying to build long-term relationships and we have to keep an eye also on the five-year plan, so we are very judicious in the moves that we are taking.

Okay, thank you very much.

Thank you, Jeff.

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

Hi, guys, nice quarter there. In terms of the raw materials just I want to understand your forecast a little bit. We saw Dow raise prices again for July. Are you expecting more increases from your suppliers heading into the second half of the year or is that incorporating what we just saw recently from a lot of the commodity guys and maybe no more increases as of the end of July?

Well, we -- thank you, Mike. We have done our trend analysis and clearly it's not just based on what has already been implemented or been announced but is also now our expectations for the rest of the year.

Okay.

Clearly that is a gross number and a hope that our sourcing and technology teams can do better, but also we have to continuously update you and investors on a quarterly basis on also what are the surprises of the raw material side. I think the environment is very volatile and what I am comfortable with now more than in the first quarter is that we are getting momentum and we are getting back to discipline and [vigor] we had in the past. I think we have learned over three years also to be a bit more judicious and work better on the front and the intensive customer [intimacy] relations.

Okay. Then when you take a look at the volume declines that you had in North America and Europe, was that mostly just indicative of demand or were you walking away from some areas that you don't want to be in, sort of that old product rationalization efforts that you were doing the last couple quarters?

Well, I think that that in North America actually the situation is slightly getting better, even if when you're speaking of negative volume growth you should be speaking of more of less worse than before. But I'm very encouraged by the pipeline and the momentum that we're getting. The teams are very committed, we hear very good feedback from the customers, so I think that we are improving from a share standpoint and our expectations of continuing these improvements in the second half of the year are based on our own forces and not on the economy. As for us, Europe, we had a more fierce environment. I think that areas like Eastern Europe, Middle East and North Africa are faring better than Western Europe, but also there as I said in my script, innovation is starting to ramp up and in line with the long-term strategy. Again, it doesn't happen in one day but I think we are going to have positive results out of that.

Okay, and just a quick follow up. When you think about the second half of the year, the volume growth should be less negative for the full year but you'll have much stronger pricing so organic sales growth in total should be positive?

Well, let's say that we are working in that direction. There are several components that are a bit less controllable and we have to see really what the customers do on the other side. Very weak demand is not only in North America. Inflation is pain at all, people are shutting down plants and we want to get share but not undermining our profitability, so clearly, there's the work and the trend is there. Where it is going to end up, we want to be cautious. So we are on one side optimistic, we see what we are doing, we are encouraged by it, but we want to be cautious because there are lots of balls up in the air.

Okay, thank you.

Thank you, Mike.

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

Michele, what was the gap between pricing and raw materials in Q2?

Well, good morning, Dave. Basically, raw materials went up I would say sequentially by 3% and our pricing sequentially went up nearly 1%, so there is a gap there. Clearly dollars is a bit less, but if you remember,, Dave when we made the first quarter conference call we said that we were still going to struggle because we knew it was going to take time and in these situations you don't want to panic , you don't want to over react, specifically if you have your customers in mind and you want to build something with them over five years. I think we have done a very good preparation in the second quarter and I think that that gap is going to be reduced in the third quarter and the fourth

But it will still be negative in those two quarters?

I can't tell you right now because you do a price increase and the day after you receive another letter from a raw material supplier that increases the price, so a lot is not about what number you do but is also -- what number you go for but is also the timing, so it is a very volatile environment. I think that we haven't seen this inflation for years and I think everybody's trying to get used to it. I think we have good processes for that. We are regaining momentum on that but that is also why we were very very strong in the cost controls because we knew it was coming.

And just on the volume front, would you expect positive volume growth in 2009?

Well, if everything that we do is working well and we start having easier comparables, I would say it is a reasonable expectation. Now there are lots of pieces there. I think we can be confident and cautiously optimistic on our controllables, but on the demand side I think that lots of people are realizing now that what we were saying one year ago is really out there, and the value of being realistic about that is that you just can get prepared.

And lastly, just given the share buy backs, what share count should we be using for Q3 and Q4?

I think that number is 49 million.

In both quarters?

Diluted.

Diluted or basic?

49 million diluted shares both in the third quarter and the fourth quarter.

Thank you very much.

Yes.

Thank you, Dave.

Your next question comes from the line of Dmitry Silversteyn with Longbow Research.

Good morning. I'd just like to follow up a little bit on the pricing issue , Michele. You talked about teaching your customers the discipline of price increases. I think Sherwin-Williams yesterday talked about implementing prices and the fact that it gets them about -- takes them about 12 to 18 months to get pricing to fully offset the raw material increases. You guys have similar gross margins and percentages of raw materials and percentage gross margin and their customers have been well trained to accept price increases so I'm just trying to understand your confidence in getting greater traction in next quarter having just announced price increases over the last couple of quarters. Is your market different enough to where you can get them through quicker versus 12 to 18 months that Sherwin-Williams thinks that they'll be able to get their pricing

Well, thank you, Dmitry. I am pretty happy with the accountability and speed of our teams. I have to say that we are having a better understanding from customers as far as what is happening in the environment. Our teams are working very closely with them. I can not say that we will not lose any volume at all but we are trying to make sure that we do all the right things in terms of early notification to customers, that we are explaining the reasons that we are working with them. There are several components of cost to serve, it's not just raw materials, and trying to find solutions that are win-win. So from that perspective I think that our teams have come a long way and that gives me a lot of confidence. Will we have some volume loss? Maybe, but am I more confident than three years ago on how the teams are doing things strategically? Yes. And I think that we are also supported by new product introductions and (inaudible) what we are doing with accounts.

Okay, that sounds good. Can you comment on your industry overall? You've done a lot of things to improve the Company in terms of value-added margin over the past three years and being a little bit more aggressive with your customers and pricing, not being afraid to lose volume. Have significant competitors of yours followed this strategy ? In other words has this marketplace become more disciplined and a little bit more amenable to price increases versus three years

Well I think that clearly our biggest number one and number two competitors have just got together. I think we all know that there are more that you get in situations like those further accentuated by the (inaudible) and macroeconomic environments, but I believe over the long term consolidation will make things more rational, more professional. But clearly it's all about timing and you want to make sure that you stay the course and at the end specifically key global players will behave rationally.

Okay, and then just final question. You've done an excellent job executing your $200 million share repurchase program and that really gives you almost a 16% lift in earnings per share this quarter versus last. The stock is still valued very attractively, you still have a pretty strong balance sheet when you look at the net debt and cash you're building on the balance sheet. Are there any thoughts of another reauthorization of similar magnitude or are you going to be deploying your cash elsewhere for the balance of the year?

I think the best answer to that is that we don't have any current plans for additional share repurchase, but it's something that's always under consideration, and so I think our balance sheet is capable -- or it has the capacity to do more share repurchase but we don't have any specific plans to do that right now.

Also, I want to add, Dmitry, that we -- in line with our five-year plan we're going to make sure that we maintain resources to invest wherever there are acquisitions or organic investments because we committed to that -- specifically if you remember the geographic expansion section -- plus financing the [size] growth that we believe in over five years.

Okay. Okay, thank you very much.

Thank you, Dmitry.

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

Thank you, guys. I'll enjoy the European comp a lot more now knowing you've got --

Good morning, Chitra.

Hi. A couple of questions. On price increase, so if most of the price increases were, if I understood correctly, put through at the --

Chitra, are you there? If you're not, maybe we need to move to the next and put her back into the roster.

I'm sorry, I think I might have had the mute on.

We'll go next to Christopher Butler with Sidoti & Company.

Hi, good morning, guys.

Good morning, Chris.

Just following up on the last thing that you said about keeping powder dry for acquisitions could you give us an idea of what the pipeline looks like, what's going on with valuations. As the economy here in the U.S. and Europe slows is this becoming better -- are the opportunities becoming better for you now?

Well first, a macro response, I think that over time it will get better. I think more reasonable multiples will come. I don't think yet is the time. There have been multiples in our industry that have clearly created expectations for everybody, but I believe that there will be more room for strategic players in the industry. I think that the current (inaudible) environment will clearly make (inaudible) those that perform and those that not perform, so I think we're going to be on the side of those that perform, so I think we will be active in that marketplace. I'm speaking in terms of results.

In terms of activity there is a lot of activity where the team is engaged in several regions of the world and I am confident that we will do what is right for what we outlined in October. We talked about geographic expansion and we said that in some cases it was going to be acquisitions and in some cases we are going to be entry points into the marketplace to then further develop from there and in other cases we said we were going to go organically if the right acquisitions that we felt comfortable with were not available. We are working on that and as soon as we have news we will inform you, Chris.

And also, with use of cash you'd mentioned that your expectation for CapEx is a little bit lower for the full year. Is this a case of timing or keeping powder dry as the things slow down here?

Well, a lot of that is timing. We are very judicious as for capital expenditures for (inaudible) real investments so we have a good project discipline and in some cases we don't pull the trigger until we are not ready. In some cases some of those capital expenditures are linked to other conditions. But overall, remember that when we have spoken about investments we have spoken not only about CapEx but also about investments in resources and in talent. And sometimes, you want first to have the people, the process -- the processes ready before you really put whatever is still in the ground or you make an acquisition. So in some cases we may have been late, but we are really doing what we said that we were doing in October and if you stay tuned you will see.

And the strength that you saw out of your Asian segment, I was hoping for a little bit more color on that. Also, are you going to run up against any capacity constraints and could also touch on maybe investments that you're putting into place there?

Well the good thing is that on average -- and this is a valid company-wide -- we have a lot of leverage. We're not speaking only financial but we're also speaking from a capacity perspective so that's good news and I think it's making this a positive for us. As for Asia-Pacific I think is we are hitting all cylinders, we did what we needed to do. We started already one year ago deploying talent at different levels of the organization, call it spending. We made sure we put the focus, we gave support from the entire global organization, we have added resources in sales and in marketing, and we are starting to see the results.

I think that for those that were attending the October investor conference where we were saying we were going to revert our sales trend, (inaudible) have seen that we have two regions out of four that are starting to move in that direction, and obviously, the other two regions are bigger masses to move but they will come as well. So Asia-Pacific is going to the right direction. We have obviously challenges there, but you'll see both top line and bottom line we're working out there and we expect to use the same approach with everything else. Even in Europe and North America you have pockets of business where we have trend reversals and in other cases, like specialty packaging in North America or Eastern Europe, are going pretty well already.

Thank you for your time.

Thanks, Chris.

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

Good morning, all.

Good morning Rosemarie.

Going back to the strong performance in Asia-Pacific, your income line doubled or just about, but you also said something to the effect that raw material cost increases were not as steep there as they were in the rest of the world. Do you see signs that actually they are about to catch up on the raw material cost increase there and therefore it could affect your margin in the second half of the year?

Well, clearly, Asia-Pacific has a time lag advantage from this perspective on the raw materials. It is a more competitive environment so while it is a [toll] on the selling price side is somehow an advantage on the reverse side on the raw materials side. Clearly, we all have seen the decisions of the Chinese government. As for (inaudible) prices we can expect some inflation there, as well, but I seen that our Asia-Pacific teams are really learning and getting ready from what is happening to the other regions. At the same time I think they have been already in the last year starting to push for more value-added applications, business that [speaks] more, longer cycle, but is more specification related and that's our path. Now, you don't do that in one day because it's long cycle, takes lots of changes in the organization, but I think that Asia-Pacific is getting results, not just because of tactical operation or management but really strategic choices.

So even if inflation grows at, let's call it 10% from the balance of the year, they are the same way you are expecting for the full year of company-wide you think that you can raise prices there without a lag? Did I understand that properly?

Well, I think that the struggle depends on how big is the raw material increase, how sudden it is, but as I said, I am cautiously optimistic that also in Asia, like we did in the past we can raise prices and we can do this in collaboration with our customers.

And still in Asia-Pacific, how much of that business -- well, how much of the business you are doing there with your customers is for customers exporting back into the U.S. and how much is for local customers for the local --?

Well, our vast majority, Rosemarie, is really local business in China and that is actually our strategy. That's the reason why we decided to localize our technology center there and we are planning to increase the level of investment because is a market that over time is not just going to be an actual market but is going to have internal consumer demand growing.

Okay, so that is good news because it seems as those Chinese companies and other Asian companies are mostly going -- working on exports back into the U.S. or Western Europe are beginning to slow down so you are saying that it is not really going to affect you?

Well, at the same time, Rosemarie, let's be fair that we have a pretty small share in the Asia-Pacific market, so more than what is the market doing is what are we doing and how are we managing our share and what parts of the market are we targeting. I think that is having more of an impact and that's why I'm cautiously optimistic.

And then if I may, on price increases raw material costs have been going up for the past two, three years and this year they have accelerated further. What changes are you making in the way you are approaching customers that you haven't already done and what kind of elasticity do we have in this environment and particularly since your number one and number two competitors have joined forces and they may have some synergies which allow them not to push pricing as much as you are -- or as much as you need to?

Well I can not comment on the synergy realization of (inaudible) and National and I'll let them do their work, but as for us working better with customers I think is a continuous improvement process, it's part of our [legacy] methodology, and it is something that I see the teams working better on closer engagement with their accounts, explaining better what is going on, and working with them on trade offs. The cost to serve economics are at multiple levels. It's not just raw material. It's container, packaging, it's transportation, it's size of the order, it's length of the order and it is just doing a better job together with them. At the end we have in many cases very big professional customers that are already doing these projects on their own internally so we are really speaking the same language. So from that perspective I think we are getting better in an even more difficult environment. So I'm not saying that we are exempt but I think that together with the cost controls and the investments we are making progress.

Okay, and then --

Rosemarie sorry to interrupt you, but we need also to give time to the other people in the queue before we --

I understand. All right, may I still ask this?

Okay.

It only requires a yes or no. On the acquisition side it sounds as though the valuation has not come down enough to be really interested -- interesting to you at this particular point.

Well as I said things are moving. I think that the teams are doing a good job in terms of making sure that we scan proactively the market for opportunities that are strategic in nature, in doing a good job at understanding what is really the detail behind the synergies that is not up high in the sky, and then conversations maybe take longer but I think we're well positioned that when there is a bit more realism we may be able to close on some things.

Okay, thanks.

Thank you, Rosemarie.

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

Hi, good morning. It's actually Mike Harrison sitting in for Steve.

Hi, Mike.

Was hoping, Michele, that I could get some clarification on the magnitude of the pricing actions you expect to take -- or that you've been taking here at the end of Q2. It sounded to me like you said that you expect for the full year for pricing to be up double digits. Looking at the first half, pricing was up between a half percent and a full percent, that would suggest to me that the magnitude for the second half would be something like 20%. Is that -- do I understand that correctly or can you just give me a little bit more color on the magnitude there?

Thanks for giving me the opportunity to clarify. I am speaking of double digits in terms of communicated, in terms of implemented, I'm not speaking necessarily of things hitting the ledger because then it would have a radical impact on our P&L that would be above and beyond the guidance that we are reaffirming today. Clearly you know there is a time lag but based on what I was telling to Rosemarie I think we are doing what is right in terms of managing the relationships and being very realistic and pragmatic as for us what is needed to deliver on the management of our P&L.

But in terms of what you've communicated to your customers then, the magnitude is more like 20% than like 10% when you're talking in terms of double digit; is that correct?

Well it varies in the different regions of the world because there are different dynamics in terms of raw material supply. It varies in terms of raw materials. We have thousands of those, so I would say that is still a situation in evolution and I'm sure we will get a better picture when we speak at the third quarter conference call.

Okay, I appreciate that. And then I was also hoping you could give us a sense for how the $2.7 million in special charges breaks down between the adhesives business and the Specialty Construction business, as well as between cost of goods sold and SG&A?

Okay. The entire amount is in cost of sales. And then to your first part of your question I think we'll just decline to answer that one. We don't wish to be more specific about that.

Is roughly 50/50 a good number to use?

No, I can't be any more specific.

All right. And the last question I had is the $3.9 million in interest expense for this quarter, is that a good run rate to use for the remainder of the year?

Yes, it is.

All right, thank you very much.

Thank you, Mike.

The next question comes from Chitra Sundaram from Cardinal Capital.

Okay, I hope you guys can hear me now.

Yes, Chitra.

Okay, good. Congratulations and as I was trying to say I will enjoy the European Cup a lot more now knowing you guys are -- (LAUGHTER)

I can say the same.

A few questions. CapEx, did you ever mention what it was for Q2? And on the cash flow from operations do you have anything there you can give us?

Yes, just one second, let me grab my notes.

Yes, and then as I wait for that, on the price increase I know lots of questions coming out, I guess I'm just trying to understand. Clearly in Q2 towards the end you'll have communicated price increases. As we are now approaching the end of June is there any color on how that is being absorbed in the system given the weak demand environment?

Well, I think that customers understand but clearly, I can not tell you what the reaction will be since it is not going to be our last price increase this year, and the situation keeps moving so we are staying very close to our accounts to keep them informed. I would say that for what we have communicated up until now we have got very good collaboration and partnership, we have ironed out several things, and but really the situation is very volatile and we are continuously speaking to accounts because it's not over.

Okay.

Now, let me have Jim give you the answer, I think he's got all of the numbers now on the CapEx.

I've got the notes now. Okay, so CapEx in the second quarter was $4.6 million.

Okay.

And then with respect to free cash flow, free cash flow was positive approximately $20 million for the quarter, so that's a substantial increase sequentially from first quarter of this year.

Yes. Thank you very much.

You're welcome.

Thank you, Chitra.

There are no further questions in queue.

Thank you for joining us today. Have a good day.

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