H.B. Fuller Company (FUL) 2008 Q4 法說會逐字稿

Good morning and welcome to the H.B. Fuller conference call to discuss their fourth quarter results. At the request of the Company this conference call is being recorded for instant replay purposes. This event has been scheduled for one hour. Following today's brief remarks there will be a brief question and answer session. (Operator Instructions).

Management in attendance on today's call includes Mr. Michele Volpi, President and Chief Executive Officer; Mr. Jim Giertz, Senior Vice President and Chief Financial Officer; and Mr. Steven Brazones, Assistant Treasurer.

At this time I would like to turn the meeting over to Mr. Steven Brazones. Sir, you may begin your call.

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 gross 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 appreciation and amortization expense. And ROGI is defined as trailing twelve-month gross cash flow divided by gross investments.

More importantly, during today's call all numbers referenced for the fourth quarter of 2008 and fiscal year 2008 will be discussed on an adjusted basis to exclude the non-cash impairment charges taken during fiscal year 2008.

All of the non-GAAP measures discussed today should not be construed as an alternative to the reported results determined in accordance with GAAP. Management believes that a discussion of these measures is useful to investors because it assists in understanding the operating performance of the Company and its operating segments, as well as the comparably 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.

I will now turn the call over to Michele.

Good morning everyone and thank you for joining us. Before I begin discussing the quarter, I would like to address the non-cash asset impairment charges we took in the fourth quarter. During the quarter due to a combination of factors, including the ongoing weakness in the US housing market, the fall off in global demand for industrial products generally, and the decline in the public equity markets, caused us to reassess the value of goodwill on the balance sheet of our Specialty Construction Brands business, as we are required to do under accounting procedures.

Through this process we determined the goodwill associated with that business was impaired. In addition, we made the determination that two smaller venture capital investments we made several years ago were also impaired, given the macroeconomic environment and the outlook for those specific businesses. Together this resulted in non-cash pretax charges totaling $87 million, of which $85 million was due to the impairment of Specialty Construction Brands goodwill.

The vast majority of the goodwill impairment is related to the Roanoke acquisition completed in 2006. It is important to mention that these are non-cash charges that do not affect our cash flow or our ability to generate cash flow going forward.

So even given the extraordinary and non-cash nature of these charges, all financial information we discuss today will be adjusted to exclude these charges.

Now I will turn to a discussion of our financial results and future outlook. These are extraordinary times, and the fourth quarter of 2008 was a very challenging quarter. While raw material costs still lingered at peak levels, demand began to follow, and fall significantly. The drop in demand began in the second half of October and accelerated in November.

Although we were successful in raising prices and reducing operating expenses year-over-year, the benefit of these actions was muted due to significant decline in volume. The result was that the sequential improvement in performance that we had planned for did not materialize, and we significantly underperformed relative to a very strong fourth quarter last year.

Now let me review our scorecard for the quarter and the year-to-date relative to our long-term financial goals. From a topline perspective, although net revenue was down year-over-year, our re organic growth trend continued to improve on a sequential basis, up 10 basis point from the third quarter.

When we began the quarter we were on track to return to positive organic growth. However, the sharp and steep decline in volume in the last six weeks of the quarter put this goal out of reach. Without the significant pricing actions we took during the quarter our organic growth would most certainly have deteriorated.

Adjusted EBITDA margin was greatly impacted in fiscal year 2008 by the significant and rapid increase in raw material costs. In total, the raw material expense hitting our P&L was $75 million higher than fiscal year 2007. This equates to more than 50% of 2007's operating income. In the fourth quarter EBITDA margin also contracted on a year-over-year basis. It was down only slightly versus the third quarter.

We were able to hold our gross margin nearly flat on a sequential basis, which our pricing actions and adjusted SG&A expense increased only slightly as a percentage of sales. Note that adjusted SG&A spend was actually down almost $0.5 million versus the third quarter.

Return on gross investment declined 30 basis points sequentially, primarily due to the decline in EBITDA year-over-year. Gross investment declined approximately 6% from the third quarter. This decline was primarily due to the goodwill impairment charges taken in the fourth quarter.

Fourth quarter adjusted net income per diluted share was in line with our previous guidance of $0.24 per share. Although operating income came in a little bit better than we had expected in early December, these was offset by a higher than expected effective tax rate. The tax rate differential was primarily due to a shift in the geographic mix of earnings and the negative impact of foreign exchange translation on taxed assets.

Fiscal year 2008 adjusted net income per diluted share declined 15% year-over-year. This is less than the overall decline in operating income would suggest due to the share repurchase program executed earlier in the year, which reduced our outstanding share count by about 16%.

Now let me provide a brief regional review of the business. In North America the significant decline in the economy in the last six weeks of the quarter had a direct impact on the business. Underlying demand dropped and customers reduced inventories. As a result, volume for the region was down 10% year-over-year.

Despite this development, strong pricing actions added 6.6 percentage points to net revenue growth, and led to a sequential improvement in the organic sales trends versus the third quarter of almost 2 percentage points. Most of the revenue decline is attributable to the SCB and windows business, where residential home construction end markets remain weak.

Revenue in our core adhesives business was flat in the fourth quarter compared to prior year. Adjusted operating income was down year-over-year in the fourth quarter, driven primarily by higher raw material costs year-over-year and lower volume. However, on a sequential basis EBITDA margin increased 40 basis points versus the third quarter due to the execution of significant pricing actions.

In Europe the topline erosion challenges continued, and were exacerbated by the spillover effects of the economic slowdown and financial market disruptions in the United States in the fourth quarter. Organic sales declined 5.9% year-over-year. A higher average selling price added 3.3% to the topline; however, lower volume reduced net revenue by 9.2% year-over-year.

Volumes were particularly weak within the residential construction end market. At the beginning of the fourth quarter the Company completed a small, but strategic acquisition, in Egypt. This acquisition added 1% to Europe's net revenue year-over-year.

Together with the topline development, profitability for the region suffered in the fourth quarter. Higher raw material costs, coupled with more subdued pricing actions, primarily led to the decline.

In Latin America the topline development, although slowing somewhat sequentially, remained positive in the fourth quarter. Net revenue grew 2.6% year-over-year, all of which was organic. Growth was driven by the strongest pricing actions of all the regions, with average selling price adding 7.4 percentage points to net revenue growth year-over-year.

The paint and adhesives businesses were equally successful at raising prices. However, volume was challenged due to generally deteriorating end market conditions, business disruptions caused by sharp foreign exchange rate changes, and disruptions in consumer paint sales due to persistent rain and wet weather in Central America.

Once again, Asia-Pacific was the strongest of the four regions from a topline perspective. Organic growth continued at its double-digit pace, up 11.5% year-over-year. Net revenue growth was more subdued at 4.9% year-over-year. Negative currency effects, primarily due to sharp devaluation of the Australian dollar, reduced net revenue growth by 6.6 percentage points year-over-year.

At the end of the third quarter we had fully expected to return to positive organic growth in the fourth quarter, and through the first six weeks we were tracking to these expectations. However, the sudden and pronounced global economic slowdown significantly altered our course and put this goal out of reach.

That said, we clearly made positive progress in 2008 on these key performance metrics, despite less than favorable market conditions through a recessionary year.

Both Asian and Latin America posted positive organic revenue growth in all four quarters of year. North America made consisted incremental improvement throughout the year, including in the fourth quarter. And in Europe, although the progression was a bit mixed, second half performance was favorable to the first half of the year.

Giving the significant turmoil in the financial markets, I think it is worth reviewing where we stand from a balance sheet and cash flow standpoint. We are a financially strong Company. Despite the significant slowdown in the fourth quarter and facing 20% higher raw material costs year-over-year, we were still profitable, and we still generated positive cash flow from operations in the fourth quarter.

From a liquidity standpoint we have ample flexibility. Cash on hand at the end of the quarter totaled $80 million, and unused revolving credit capacity was $155 million. Total debt was $240 million at the end of the fiscal year, down approximately $100 million from third quarter level. During the fourth quarter we used excess cash to temporarily pay down $90 million on our revolving credit facility to reduce net financing cost.

Clearly we are in a position of [relative expense]. Given the current liquidity crisis we have the flexibility to invest for organic growth and acquire opportunistically as we feel is appropriate in these market conditions.

Regarding net working capital, we continued to manage closely. During the quarter net working capital was down 10 basis points sequentially to 15.4%.

Before discussing our outlook for 2009, let me first recap 2008, a challenging year, but also a year in which progress was made on a number of fronts. In 2008, in accordance with our five-year plan, we took several steps to position ourselves for growth and planned for the upturn.

First, we announced the building of a new technology center and manufacturing plant in China. Both will help enhance our value-added offering and allow us to better serve our customers in the region. These investments not only serve as a sign of our intent to expand geographically, but also to invest in value-added markets and technologies and to move towards a more specialty focused portfolio.

Most recently we announced the geographic expansion acquisition of Egymelt in Cairo, Egypt, a hot melt and specialty water-based adhesive company. Egymelt will serve as our platform for growth in the Middle East and North Africa, one of the fastest-growing regions in the world.

During the year we also made significant product enhancements to our leadership team, with the addition of Jim Giertz as our Chief Financial Officer, Jim Owens, as our head of North America, and Barry Snyder as our new chief technology officer. Each is a seasoned executive and each possesses unique capability that will help us execute our five-year strategy and fuel growth.

At the end of 2007 we knew 2008 would be a challenging year. In response to this outlook we took action to curtail discretionary spending and to reduce our operating expenses. In 2008 we reduced adjusted SG&A expense by more than $20 million or about 150 basis points year-over-year.

We got an early start on positioning the business for tough economic times, and this puts us in a much more desirable position as we enter this next phase of global recession.

Also, in 2008 we executed on our commitment to returning value to shareholders through the completion of a $200 million share repurchase program.

One final thought on the year 2008. Yes, our adjusted EPS was down approximately 15% from record performance last year, but in a challenging environment we maintained our profitability and strong balance sheet. Compared to the 2006 fiscal year, our adjusted EPS was actually up 17% at about the same revenue level.

As we look ahead to 2009, there is more uncertainty than most of us have experienced in our professional careers. Obviously, this makes forecasting our future financial performance extremely difficult. As a result, we have decided that in lieu of specific earnings guidance it will be more helpful to provide some color on our baseline planning scenario for the year.

From a topline perspective there are several significant forces that will impact our revenue in 2009. Current foreign exchange rates indicate a significantly stronger US dollar relative to 2008. If FX rates stay up or near current levels, our 2009 revenue could decline by 6% due to FX translation alone.

Although our current outlook for volume, especially in the first half of 2009, indicates significantly lower revenue for 2009 compared to prior year, we are optimistic that given the current situation in the marketplace we are well-positioned to win with customers and improve our market position.

We are already landing a lot of new business with new products, and we expect this to accelerate as we progress through the year. We expect this will help mitigate some of the challenges we are facing from the demand side in 2009, especially in the first half.

In addition, pricing actions already taken will generally lift revenue in 2009. How all these factors will come together and what our actual revenue trends will be is difficult to predict at this time.

In terms of phasing the first quarter, which is seasonally our lowest revenue quarter, will be weaker than normal as the significant disruption in demand experienced in November continued into December and January, as customers reduced inventories, extended holiday shutdowns into the new year, and generally bought less.

We expect some weakness in underlying demand to continue in subsequent quarters, but our overall financial performance should improve significantly as seasonal factors turn positive, and the benefit of raw material cost reductions flows through.

On the raw material front we exited 2008 running at approximately 20% inflation year-over-year, with the peak in the third quarter of the year. In 2009 we expect to begin to see significant declines from peak third and fourth quarter levels. Exactly how much and how fast is still uncertain, but we're happy to see that we are already starting to see some relief.

Ultimately our ability to improve gross profit in 2009 will be driven largely by our ability to reduce raw material costs, while sustaining the pricing actions we implemented in 2008 by providing superior value to our customers.

From a SG&A standpoint we controlled our level of spend fairly well in 2008. Given our cautious outlook for 2008 at the end of 2007, we took action early to prepare for what we expected to be a challenging year. A combination of tight cost controls, lower pension expense, lower (inaudible) and lower variable compensation expense allowed as to reduce total SG&A expense by over $20 million.

As a result, we are relatively well-positioned to invest prudently for growth when others are looking to make drastic cuts. In 2009 we intend to use this position to our advantage by investing judiciously in the areas of our business that support organic growth and our overall five-year strategy plan.

At the same time, we're maintaining caution. We do have contingency plans in place and ready to execute to curtail discretionary spending further if we believe business conditions warrant. But we will do that with a balanced approach.

With respect to our capital plans for 2009, we expect CapEx to be no more than $30 million. This includes $12 million for our previously announced manufacturing facility in China. Depreciation expenses expected to be approximately $34 million, and amortization expense is expected to be approximately $12 million. Consequently, we will underspend our depreciation expense yet again this year.

The tax rate for 2009 is planned at 31%, up from the rate of 28.1% in 2008. The higher tax rate assumption reflects the onetime tax benefit that occurred in the third quarter of 2008, that is not expected to recur, and on expected shift in the geographic mix of earnings in 2009.

We know that 2009 will be a challenging year, but we remain confident and committed. Despite the difficult end market conditions, we have a couple of factors working in our favor. Raw material prices will come down, our balance sheet is solid, and we have a strong organization willing and able to capture some of the interesting market opportunities that this kind of market is creating.

We are a strong Company. Given the significant market turmoil and liquidity crisis, this places us in a very unique position in the marketplace. We have the ability and the willingness to invest to grow the business organically and to acquire where advantageous.

How long these market dynamics will continue to persist is still unknown. But one thing is certain, we intend to come out of this situation as an even stronger Company, and even better positioned for growth in the future.

I would now like to open the call for your questions. Thank you.

(Operator Instructions). Jeff Zekauskas, JPMorgan.

Your prices were up roughly 5.5% this quarter. Do you expect your prices to be up that much or greater in the first quarter of next year?

Clearly when you look at it from year-over-year comparison, I would say that pricing in the first quarter in the first half of the year is going to be one of the few positive comparisons year-over-year. So first quarter '09 versus first quarter '08. Clearly on the other side, on the negative, we will compare ourselves with currency volumes and raw materials that show a much tougher comparison.

So as far as pricing is concerned, I would say that our discipline and commercial ability in keeping overall prices at the current levels has been regained in the fourth quarter. You saw a significant sequential improvement versus the third quarter. And our goal in '09 is to increase our spread by capitalizing on raw material reductions and to join costs to serve reduction initiatives with our customers. That is reformulations, working on the logistics, forecasting complexity.

Now how effective we will be in doing that clearly is still out in the open. That is why we're not giving guidance, but clearly our committal is to make sure that we manage that raw material price and volume equation in the best possible way, both for our customers and for ourselves.

Maybe if I can just rephrase my question. On a sequential basis in the first quarter do you think prices will be flat to up, or flat to down?

I would say more flat.

More flat. Secondly, just in looking at some of your geographic results, it looks to me as though in some geographies raw materials are falling at a faster rate. In other geographies they are higher, or maybe you still have high-cost inventory. I guess, Europe seems to be the problem area. Can you comment on that?

I'm going to give you parts of the answer and then maybe Jim wants to add something. But, yes, we have different inventory accounting ways in North America versus the rest of the world. Yes, there are different raw material dynamics in the world, not only because there are different suppliers, there are different dynamics right now going on in terms of price negotiations. But there are also different balances in terms of volume capacity and complexity in the raw materials that we buy.

As we always said, adhesives is a world of complexity, and you win profitability and growth by being able to handle that. Jim, do you want to add something?

If you're referencing LIFO adjustments specifically, I don't have the number in front of me, but I think our LIFO expense in the fourth quarter was minimal, so that didn't really have an impact in Q4.

If you look out into 2009, one thing I could say is that each of the regions have very similar outlooks for their raw material cost reductions. So they are looking at the future in a very consistent basis. All of the regions are looking for significant raw material cost reductions of about the same order of magnitude.

I guess lastly, by my calculations I have your raw material costs in the fourth quarter about up 10%. Does that seem right to you?

Clearly we had still carry-over effect of raw materials in the fourth quarter. Specifically that is why I was speaking about the phasing for next year. We are going to compare with the first quarter, where in '08 we really didn't have inflation. While our first quarter of '09, even if it will see raw material reductions sequentially, will still be higher than the corresponding period of last year. Now going exactly into your question in terms of numbers, the number we have 18% in the first quarter.

Mike Sison, KeyBanc.

A couple of quick questions. On raw materials, when -- so if your raw materials give back -- you were up $75 million '08, if they fall $75 million in '09, and maybe -- I don't know if that is the right number, but of that decline, would you -- based on your new pricing mechanism, obviously fourth quarter were great -- would you be able to keep the bulk of that, or is it maybe 50% of that? Can you give us a little bit of understanding of how much of that spread you can keep?

As I said before to Jeff, our goal is to increase our spread, and is not just in making sure that we get all of those raw material reductions fast, and still with good quality and delivery from our partners suppliers, but clearly we want to make sure that we hold on to our prices as much as possible.

But we're going to do that together with our customers, and making sure that we foster the right collaboration with them, looking at all alternatives and win-win solutions. As I said, there can be working on several components of the costs to serve economics, it is not just the base price.

At this point in time I am not in a position to provide guidance as for us how much we will be able to keep of that. It will be also driven by the macroeconomic environment. Clearly the volume reductions, the economic activity in November/December which continued in January was so weak, that clearly is generating lots of intense conversations with our customers, as well as we're doing with our suppliers. And we are making sure that we manage those in a way that at the end we end up winning.

In terms of timing, it sounds like the declines in raw material costs won't really hit your results until the second or the third quarter?

Raw materials are starting to come down, but again, the point that I'm trying to make as far as the phasing is really the year-over-year comparison. Before they go down to first quarter levels, it is going to take some time. And obviously you will have as your biggest pressure on the contribution in gross margin percentage levels will be in the first half of the year for '09.

Then for -- I was encouraged to hear that -- and I think I heard this right -- that adhesives in North America, volumes were largely flat in the fourth quarter. My question is, can you give us a little bit of a feel have the adhesives part of your business should hold up in difficult times? Are you seeing any weaknesses year-over-year in December, January or February, or is this a business that should be more resilient generally speaking heading into a recessionary conditions?

More than what the market is doing, I'm going to speak about what we're doing, because it is a controllable that I feel actually pretty good about. Yes, adhesives revenue was flat year-over-year in North America. Yes, there are lots of actions being put in place by our new North America VP, Jim Owens. He is really constructing a very strong team. Several new accounts have been landed.

Core profitable business is also being protected in a smart way. New products, technology platforms are gaining successful traction. So that is why I'm optimistic on this controllable item. Clearly it is a bit muted that optimism by the current macroeconomic environment, which is concerning, and we have to be very realistic.

But the reason why I spoke in my script about a balanced approach is because we believe there are also opportunities in this market environment, both organic and external. And we want to make sure that we have a balanced approach, because lots of things have been put in place, specifically on the growth side, and we want to make sure that we're very, very cautious before we go to an indiscriminate cost-cutting approach, putting at risk also revenue generation items.

David Begleiter, Deutsche Bank.

Halfway through the first quarter, do you think you'll make less money then you earned in Q4?

Look, we are getting away from guidance specifically because the environment is extremely turbulent. I don't think we will really do any service to our shareholders by giving specific forecast. Still as I said before, November was very, very bad. December was even worse. And January, we don't see really, from a topline perspective, really huge changes in the pattern.

Now we are ready (technical difficulty) two months of three that are in our first quarter, so clearly if we have to speak of phasing, and we also [reconduce] to what I just said earlier in terms of, in the first half and even more in the first quarter, currency being a negative year-over-year -- a significant negative, volume being at hopefully the lowest point today, and it doesn't get worse, and raw materials comparing to very, very tough first quarter of '08, we are much lower. You understand that there is going to be underperformance in the first quarter of '09.

Can you at least say that you will be profitable in Q1?

Clearly that is our intention at this point in time, and I would say that we can speak about that. We can speak about being profitable, but I think we have to be extremely cautious as far as how profitable (technical difficulty).

Very good. Just on SG&A for the full year, will that spending be up or down for that full year versus 2008?

I can tell you that what we are currently doing is making sure that we keep truthful to our five-year plan. And we keep investing judiciously, not just in CapEx, not just in acquisitions, but also in SG&A. And the closest those SG&A expenses they are to commercial and technical areas that are generating revenue, the more we're keeping there.

Now clearly if the macroeconomic situation should deteriorate further, and force us to take worse extensive cost measures, obviously we will have to consider that. The contingency plans are very well done. They are there, but there is a lot of pain. Even on the pain, there is discrimination between things that propel growth and things that don't propel growth.

Right now we're making sure that we are leveraging the time advantage we have created for ourselves by taking actions on cost early on. And we are making sure that we have a better perspective on how January and February go, and how our pipeline develops, to make sure that we don't compromise something that it is even more important, which is planning for the upturn.

Rosemarie Morbelli, Ingalls & Snyder.

Could you give us a little more details on those contingency plans, and how bad should things be before you put them into effect?

I don't think we are going to get any prize for coming out with ideas that nobody has thought of. You look at all my colleagues in the chemical industry, everyone has gone for drastic layoffs, 8%, 10%, 15%. Those that had made very expensive acquisitions have to make that even more. They are having more liquidity concerns.

You know, the reason why we are being balanced right now is because we took actions early on. At the beginning we were portrayed as being pessimistic and having a doom and gloom view on the economy. Well, we did something with that. We are very proud of that, and that helps us keep in the balance.

Now clearly if the situation continues further and actually aggravates, we will have to reconsider part of it, and deliver on the contingency plan. But clearly those plans are all around costs, both on the FL and MOH area, on the SG&A, on everything. And clearly are painful because it would mean putting a halt or delaying some of our growth initiatives.

If you allow me, I'm not going to give specifics of those contingency plans, but I think that over the last two years you have seen our process discipline and execution capability. And also, that we have done a lot on SG&A, so it means we know how to deal with it, and not necessarily always calling off dramatic restructurings, but doing it in a judicious, fair way.

Without giving details, do you have a feel for how much costs you could save by implementing them? I know you do, but are you willing to share that with us?

I think that there is still a lot that can be done, but it all depends on the level of pain and the patience that you have, and the belief that this market will turn around, and that ultimately also our volume, price and raw material efforts will pay back.

I committed, with everybody in the executive committee, on delivering on a five-years plan. Clearly the environment has gotten much worse, but we're not deviating from that. We're going to transform H.B. Fuller. We see lots of good leading indicators, as I said, muted by the environment, but we're holding as much as possible on pulling those drastic cost reduction plans.

Now that doesn't mean that we're not working on efficiencies, as we have been doing all along in this last two years, but we're doing that in a very surgical and strategic way.

Just quickly, do you have a feel for the inventory situation at your customer sites? When do you think they will be done, and will actually have to buy something, regardless of the demand level?

That is a good question. Look, I think that in November and December -- and remember December is part of our first quarter -- we saw dramatic inventory reductions, also because of year-ends of several of our customers.

But overall I think that in this current environment everybody is looking for cash, and everybody is being smarter and more aggressive at watching inventory as a key component of net working capital, so I don't think that really we will be done in the first quarter. I think that throughout the first half, and maybe all of 2009, we will see much more attention at our customer level of inventory. That is why it will be more critical for us and our customers to work together on cost to serve reduction initiatives, which include also inventory. But making sure that we don't sacrifice service levels, because we still need to sell and they still need to buy.

Christopher Butler, Sidoti & Co.

The first question is concerning the goodwill write-down. I know earlier this year you had made some comments that Roanoke was performing better and you had some better expectations for that. The write-down that we're looking at was that specific to something going on with Roanoke here in the quarter, or was that more an indication of some of the other businesses that are included with it in Specialty were deteriorating?

What I can tell you is that clearly the triggering event was the Q4 macroeconomic environment and the impact on our outlook for 2009. With that said, I am confirming what I said in previous calls that the Specialty Construction segment has been doing remarkable improvements. We have landed significant new business. But clearly that has not been enough to offset our goodwill revision, that it was the right thing to do for us and for our shareholders.

That doesn't mean at all that we're not actually continuing to make progress, but clearly that progress is less than before because everybody is buying less. Jim, would you like to add some color on this?

I think that's right. I would just further emphasize that the trigger was more generally the economic conditions in the fourth quarter and the devaluation of the equity markets. Those are the trigger events, not a specific change in our view of the prospects of our SCB business.

Shifting gears here a little bit, you had talked about winning new business. It seems to me that this is an extremely difficult environment for everybody. Competitors of yours that may not have the financial strength, are you seeing any benefit from those at this point, or is it still too early to expect something of that nature?

I think it is difficult, but I think it is possible, and I know that it is happening. What we're doing on the top line is smart. It is really making us win with our customers. We're landing significant new business. Some, of course, is going to ramp up not just through '09, but also through 2010.

But it is clear that, as I said before, in relative terms we're in a better position been several of our competitors. We're not in the middle of merger turmoils. We have not made recently acquisitions that significantly altered our cash position. We're not cash constrained. We have a lot of good momentum -- with the new leadership put in place, both in commercial side of the organization and in the technical side of the organization. So, yes, of course, all is much darker. There is a steep incline due to the market, but I like when I see, and I like what the team is doing.

Dmitry Silversteyn, Longbow Research.

A couple of questions. You have described a fairly negative environment here demandwise at the end 2008 calendar year and beginning of 2009. Given the fragmentation in the adhesive and sealants market and how many different niches and markets that you address and your competitors address, have there been any markets that are doing better in this environment, or any markets that are doing particularly weak?

In other words, what should we be concentrating on as we look out to 2009 for signs of a turnaround or an exacerbation of current conditions?

Some markets clearly closer to, I would say, daily consumer goods, the anti-cyclicals. Like we're speaking the nonwovens, the textiles are clearly holding better. That doesn't mean the customers are also there not watching cash and not reducing inventories, but in relative terms those are the markets that are holding better than others.

Everything else is -- it is really pretty dire. And still in that environment what we are saying to everyone in our team is that we still can get into new market segments, more profitable market segments. We still can gain a competitive position in the marketplace. And we can still do a much better job than the past at managing in a profitable way our core business.

So I would say, yes, it is pretty tough the outlook out there. We have to be extremely realistic. We have to be very, very vigilant, being very prudent. That is why we're not providing guidance. But we're making sure we're taking a hell of a lot of actions on all components of our P&L and balance sheet.

Great. Just to make sure I understand what you're saying, it sounds like the consumer-related markets are doing better than the industrial-related markets, is that a good summary?

Yes.

So as we look to consumer confidence, and hopefully improved spending patterns, that could be an early indication that your business is getting some feet under it?

That is a partial indicator, because that is the noncontrollable, the macroenvironment. I think that good companies don't just go up and down with the market but try to do better, and that is our commitment.

Speaking of competitive situation and companies going up and down, with volume losses that you and others in the industry are experiencing, and perhaps other even worse than you, have you seen any less disciplined behavior coming from competitors in terms of pricing?

Pricing was difficult to come by, and was gratifying to see that it accelerated as 2008 came to an end, but as we get into 2009 with raw material prices coming down and with demand seems to be evaporating, how concerned are you that you'll be able to maintain prices enough, not just to maintain margin, but actually to expand margin, and maybe even expand profit dollars year-over-year?

Actually, what we have seen in the fourth quarter is not only much more disciplined behavior on the pricing side from our competitors, because everybody, not only us, was hit dramatically by the Q3 and Q4 run-up in raw materials and tightened margins big-time. So nobody had really an option, but to grow up in price.

But also we have seen a more disciplined behavior from payment terms receivable. I think that is related to the fact that several of our smaller and medium-sized competitors are cash constrained. And as well as some of the key players in the chemicals industry that made big deals at very high multiples are going through the normal merger turmoil. Plus on top of that are facing situations where they have to recover those EBITDA multiples and they have to raise prices and they have to watch their cash.

So if anything, the combination of the largest players may have added more discipline to the market?

Yes, that is what we have seen so far. Now what will happen in '09, I don't know. But from what I see, our teams are acting in a very professional manner. They making sure that, as I said before to Jeff and to Mike, we do our best to increase our spread. Clearly one thing is the spread and one thing is the gross margin. That would be also impacted by volume.

Steve Schwartz, First Analysis.

Just a question on the balance sheet and what is happening with cash flows and so forth. It looks like your cash balance dropped by about $100 million -- or I'm sorry $128 million, but you reduced your debt by $100 million. What happened to that other $27 million, $28 billion? That was about 10% or 12% of your former cash balance?

The bulk of that is currency translation. So a lot of our cash is in -- the bulk of our cash is invested in the euro zone, and so FX translation accounts for the vast majority of the difference.

What was your CapEx for the quarter?

It was $20 million for the year so -- hang on --.

So that would put it about $7 million.

$6.5 million, I believe.

$6.5 million, Okay. Usually your first quarter is a draw on cash. Considering this environment, do you foresee yourself going to your revolvers in this quarter?

No, is the answer to that. For various reasons we anticipate our cash flow from operations is going to be quite a bit more favorable in the first quarter of this year than last. But the answer to your question is no.

Jeff Zekauskas, JPMorgan.

In terms of the new business that you have picked up, what is the magnitude, or how did you acquire it, or why do you seem to be picking up a little bit of share?

In some cases it is finally getting to new market segments. It has taken a bit too long for my personal taste, but it is now coming and we're getting some good momentum there, and in some other cases with gaining new applications at accounts. So that is not really static share from other business competitors.

And in some other cases they are awarding us more business because we're working better. Now some of that business is sizable. But because it is sizable, it is going to ramp up in '09 and '10.

But the good positive thing is that some of the projects that in many cases we started three years ago are coming to fruition. And that gives us a lot of confidence, and suggests to us that before really pulling the trigger, like everybody else, on massive restructuring actions, we have to think about it very well.

Also in terms of the tax rate, the geographic distribution of your revenues didn't really shift very much. Can you just explain in a little bit more depth why the tax rate was up, whatever it was, 2,000 basis points sequentially?

Sure. I will try to do that. In the fourth quarter we had several discrete items that had fairly significant impact on our tax rate. For example, we have a deferred tax asset in Brazil, which we talked about on the third quarter. The Brazilian currency devalued substantially and so we had a loss. That is an example. We had some other discrete items that have flowed through.

I think the best way to look at the tax rate in the fourth quarter is really to look at our outlook, or our guidance, on tax rate for 2009. So Michele mentioned earlier that we expect our tax rate next year to be 31%. If you took out the all discrete items in 2008, we were probably running -- we probably had a tax rate, kind of a structural tax rate, of about 30%. So we are expecting our tax rate to be slightly higher in '09 versus '08, if you take out all discrete items.

Now there is really two things. The way I would explain the dynamic of tax rate, geography does matter. So the more income we earn in Europe, for example, the lower our tax rate. And also the last dollar we earn typically has a lower tax rate -- income tax rate than the first dollar. So as our profitability declines, like it did in the fourth quarter, we tend to thicken our tax rate. Does that help?

Yes, that is very helpful. Thanks very much.

We have no further questions at this time.

Thank you for joining us today. Please have a good day.

Thank you, ladies and gentlemen, this does conclude today's H.B. Fuller fourth quarter 2008 investor conference call. You may now disconnect your lines.