H.B. Fuller Company (FUL) 2009 Q1 法說會逐字稿

Good morning and welcome to the H.B. Fuller conference call to discuss the first 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 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.

Thank you, Tim 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 gross investment, or ROGI. Operating income as 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. Also during today's call, all EPS numbers referenced for the first quarter 2009 will be discussed on an adjusted basis, to exclude the true-up of noncash goodwill impairment charges taken during the quarter.

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 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.

Lastly, I would like to inform everyone that during the first quarter 2009, our packaging solutions reporting unit, that had been reported entirely in the North America segment, has been broken out into all four operating segments. The reporting unit is now managed on a regional basis and its results are therefore reflected in each operating segment. Prior year amounts were reclassified to conform to the current year organization's structure. On the last pages of the investor presentation for this conference call, we have provided the reclassified segment information by quarter for 2008. For more information, please refer to our recent press release and annual report on Form 10-K, filed with the Securities and Exchange Commission, both 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. I just want to begin by saying that I think we posted respectable results in the first quarter. Not perfect by any means but decent, given all the challenges that exist in our markets today. The first quarter is always the most difficult for us but it was exacerbated this year by the significant deterioration in the month of December, as customers shut down production and drastically reduced inventories. That said, we are looking to better results as we move forward.

Here are a couple of the positives that I see. First, we maintained our pricing discipline in the face of a significant broad drop in market demand. In the first quarter, our average selling price was 5.7% higher than one year ago, a slightly higher rate than we achieved in the fourth quarter. This is the result of the significant pricing actions taken throughout all of last year and specifically, in the fourth quarter, to recover the significant raw material cost inflation we faced in 2008. We are working to maintain this disciplined approach to pricing in 2009, while at the same time, addressing our customers' needs for volume.

Second, our geographic diversity helped to dampen the effects of the current global economic slowdown. Although North America and Europe were severely impacted by the macro economic environment during the quarter, Latin America and Asia Pacific fared relatively better, with some of the units in those regions achieving positive organic growth in the first quarter. Third, gross margin was restored by 200 basis points sequentially due to our efforts to drive down our raw material costs and our ability to maintain pricing at more appropriate levels. This is the first time we have increased gross margin on a sequential basis since the third quarter of 2007.

Next, we reduced our SG&A costs year-over-year and held them flat sequentially. This is true even after adjusting for the favorable currency impact on SG&A expense year-over-year. As most of you know, we have been driving efficiency in our operating expenses for several years. So, the first quarter result is a realization of the actions and decisions taken over a longer period of time. Just to quantify this a bit, in 2007, our total SG&A expense was $276 million. This was reduced to $255 million in 2008. And as I mentioned, in the first quarter of 2009, our spend is lower than it was last year. Our ability to consistently manage our operating expenses, while investing in high priority activities, is a strength of this Company that is especially important in these turbulent times.

Finally, we continued to invest for growth and innovation. We announced earlier this week our intention to acquire Nordic Adhesives in Europe. Nordic will help us to accelerate our global market penetration in the highly attractive, flexible packaging market. Nordic has a solid portfolio of differentiated products and has established credibility in the global marketplace for delivering unique solutions. This acquisition will immediately strengthen our market and technology position and will provide us a platform from which to accelerate our growth plans.

So, as I mentioned at the start, a lot of good things happened in the first quarter, in spite of the difficult market environment. Of course, not everything ran smoothly. Volumes were down sharply, especially in our largest regions of North America and Europe. Lower overall demand and customer decisions to reduce inventory levels led to a 15% decline in volume year-over-year on a consolidated basis. From a raw material standpoint, although costs were down sequentially, they were still up approximately 4% year-over-year. Recall, that one year ago, commodity prices and our raw material costs were just beginning to increase and the increases accelerated through the year. These higher raw material cost, although partially offset by the pricing actions I mentioned earlier, primarily drove the 150 basis points reduction in gross margin on a year-over-year basis.

The other area in which we underperformed in the first quarter is inventory management. Like many other companies around the world, we had a difficult time managing our inventory levels, as volume contracted suddenly and sharply in the last quarter of 2008. In short, we entered the new year with inventory levels that were appropriate for our higher demand levels. We wore this inventory down during the quarter and in fact, inventory levels declined in Q1 versus Q4, but the reduction was not enough. This postponed some cash generation for us and also dampened the positive impact from lower raw material costs. As we achieved better inventory balance in the second quarter, our cash flow should improve sequentially. I'll talk more about working capital and cash flow later in the call.

So, just to sum up the quarter, volume was down but, we believe, not down as much as the overall market. Gross margin is up due to lower raw material costs and SG&A expenses are down. A very difficult quarter is behind us, from a seasonal perspective, and we are hopeful for more positive trends going forward.

Now, let me review our scorecard for the quarter relative to our long-term financial goals. From a top line perspective, both net revenue and the change in the organic sales were largely determined by our volume development. Volumes were down in every region and in aggregate, were down 14.7% year-over-year. Higher average selling price positively impacted the top line by 5.7%. And unfavorable foreign currency translation negatively impacted the top line by 5.1%. The acquisition last quarter in Egypt had a slight positive impact to net revenue.

EBITDA margin deteriorated sequentially, despite the improvement achieved in gross margin. This was largely driven by the decline in volume. Even though SG&A dollars were flat to slightly down versus the fourth quarter, the lower volume led to a loss of SG&A leverage on the top line. Consequently, EBITDA margin was down 160 basis points versus the fourth quarter. Return on gross investment declined 90 basis points sequentially, primarily due to the decline in EBITDA year-over-year. Gross investment was essentially flat versus the fourth quarter.

The first quarter adjusted net income per diluted share was $0.14, down significantly year-over-year. This was primarily the result of lower volume and higher raw material costs. In addition, due to an unfavorable shift in the geographic mix of earnings, the effective tax rate was 37% in the first quarter, up 6 percentage points from a previously anticipated rate of 31%. We are currently planning for an effective tax rate for the year of approximately 36%, as we expect the geographic mix of earnings for the full year to closely mirror that of the first quarter.

Now, let me provide a brief regional review of the business. Despite facing the most challenging macro economic landscape, North America's performance was relatively strong compared to the other three regions. Compared to last year, volume was down nearly 17%. Organic revenue was down only about 10%, as a 7% increase in price levels boosted revenue. Looking at the results sequentially, volume was down significantly versus the fourth quarter, yet EBITDA margin was flat versus the fourth quarter. Management of the raw material costs, combined with price discipline and solid cost controls, mitigated the decline in volume.

Our North America region posted the most favorable results relative to the other regions on margins. In large part, because the business had reduced inventory aggressively at the end last year. This allowed the benefit of lower raw material costs to flow through more directly and boost margins in the first quarter. The North America region has also been successful in maintaining a conservative operating expense level, while at the same time investing in the commercial organization. Over the last several months, a new, more customer focused organization has been put in place. And staffs with experienced professionals and positive results are already being seen in new business landed.

In Europe, Middle East and Africa, the volume situation paralleled that of North America, with volume down nearly 17% year-over-year. Construction related end markets were the weakest. While the core nonwoven and packaging end markets performed relatively better. On pricing, the increase in average selling price, of 2.9% for the first quarter, was slightly less than the rate of increase in the fourth quarter. During the first quarter, EBITDA margin declined by 310 basis points sequentially. This decline was primarily due to the drop in volume. In addition, the weakening euro, relative to the US dollar, resulted in an $800,000 decline in operating income for the region year-over-year.

In Latin America, the volume situation was better than that in North America and Europe. However, volumes still declined slightly, more than 10% year-over-year. The volume decline in paints was 15% in the first quarter, while the adhesives business dropped about 8% in volume. From a pricing point of view, the region grew its average selling price at the fastest pace of all of the regions, increasing their ASP close to 8% year over year, with strong price development in both the paints and adhesives markets. During the first quarter, EBITDA margin declined 170 basis points versus the fourth quarter. The decline was largely driven by the drop in volume, partially offset by tight expense controls, lower raw material costs and further progress on price.

In Asia Pacific, net revenue declined approximately 13% year-over-year, driven primarily by unfavorable foreign currency translation. Average selling price increased at a faster pace than in the fourth quarter, nearly offsetting the 6.5% decline in volume for the region. The volume development for the region was influenced by extended holiday shutdowns and customer inventory reductions, particularly evident in China. Our consumer related market in Australia suffered the largest volume drops, while our core adhesives markets across the region saw volume declines in the lower digits.

From an EBITDA perspective, the performance of the region was significantly impacted by the decline in volume. And to a lesser extent, by the revaluation of the US dollar versus several of the Asian currencies, particularly the Australian dollar, Korean won and Philippine peso. In total, unfavorable currency translation is responsible for approximately $300,000 of the decline year-over-year in operating income.

During the first quarter, the region celebrated the grand opening of its new regional technology center in Shanghai, China. The new lab, part of the Company's five-year strategic plan, will promote end market innovation and customer intimacy through its focus on next-generation adhesives applications. In addition, the region will be breaking ground this year on its previously announced manufacturing facility. The combination of research and development with manufacturing, will enable to region to comprehensively serve its customers' needs.

As we discussed on our fourth quarter call, from an organic growth perspective, the whole world changed in the fourth quarter of 2008. The significant and abrupt change in demand, that began in October, worsened through the end of the calendar year and in large part, continues today. In the first quarter of 2009, all regions reported a decline in organic sales. Latin America and Asia Pacific fared the best but exhibited the most significant change sequentially. Asia Pacific, for example, went from growing at double digits throughout 2008, including the fourth quarter, to flat. The two bright spots, as I mentioned earlier, occurred within the adhesives business of Latin America and Asia Pacific. Both businesses grew organic sales slightly year-over-year and helped to mute the negative trends within each region's consumer related businesses.

Now, let me provide you an update on both our balance sheet position and our cash flow situation. We continue to have a strong balance sheet and ample liquidity. Cash on hand at the end of the first quarter totaled $70 million. And unused revolving credit capacity totaled $160 million. From a covenant perspective, we continue to have plenty of room. Debt to EBITDA was 1.7 times at the end of the first quarter, compared to a covenant maximum of 3.5 times. And our EBITDA to interest expense coverage was 10.2 times at the end of the first quarter, compared to a covenant minimum of no less than 2.5 times. We have no material debt maturities until December 2010, when our revolving credit facility comes up for renewal. The only debt principle maturity we have in fiscal year 2009 is a $25 million private placement principal payment. This is due at the beginning of the third quarter and we intend to fund this repayment with cash on hand.

Net working capital deteriorated in the first quarter, driven principally by matters related to inventory. Generally speaking, inventory levels at the end of the first quarter were much higher than our current volume levels would warrant. This situation occurred because the end market demand for our product dropped so much over a short period of time that we were unable to adjust our raw material and finished good levels fast enough to avoid overstock. Inventory levels started to be worn down over the quarter by reducing production levels and delaying raw material purchases. This, in turn, reduced our payables dramatically and caused our net working capital to expand.

To quantify some of this, inventory was down year-over-year only 9%, compared to a volume decline of 15%. Receivables trended in line with the decline in net revenue. But payables declined nearly 30% due to a delay in new purchases, as a result of the higher than necessary inventory levels at the end of the fourth quarter. With the exception of North America, which all ready did a relatively good job at managing its inventory level at year end and through the first quarter, we expect to see improvement in net working capital from the other three regions beginning in the second quarter. Cash flow from operations was $2.2 million in the first quarter, compared to negative $15.3 million in the first quarter of 2008. The improvement in cash flow from operations was primarily due to a significant improvement in cash generation from working capital related items, offset somewhat by a decline in net income.

Before I take your questions, let me say a few words about our outlook for the remainder of this year. As you know, we have not issued earnings guidance per share for 2009. That said, I can make a few broad comments about what we are anticipating for the balance of the year. Overall, we are not expecting any meaningful change in the overall demand picture as we move through the year. At this time, we anticipate a slight improvement in net revenue development in the second half of the year, culminating in full year net revenue being down between 10% and 12% in 2009. This slight improvement in top line performance from first half levels will come from both new opportunities with our customers and a gradual phase-out of the current inventory destocking cycle.

Regarding gross margin, the second quarter should improve slightly versus the first quarter, as more of the benefits of lower raw material costs are realized and flow through inventory to the income statement. Obviously, market conditions remain very uncertain and volatile. That concludes my prepared remarks. And I would like now to open the call for your questions.

(Operator Instructions) And your first question comes from Jeff Zekauskas from J.P. Morgan.

Hi, good morning.

Good morning, Jeff.

A couple of questions. First, as far as your inventories go, my recollection is that maybe a 25% of your inventories are LIFO and that the rest are a lower of cost or market. Raw materials are coming down pretty sharply on a sequential basis, so does this mean that you may have to write down some of your inventory in the second quarter? And if you did, sort of what would be the magnitude of it?

Well, I will ask Jim to add. Yes, parts of our business measure inventory on LIFO. It's a minority of our inventory and clearly that sees raw material declines more quickly, flowing to our income statement. With that said, we had excess inventory, based on the sharp change in demand that we said before in all the other regions. And we have work to do from that respect. As for write-downs on inventory, we don't anticipate at this point in time. I tell you, we are all over that and we are making sure that we get those in line with where they should be. To make sure that not only the cash generation improves further but also that the raw material declines have an impact in the income statement more quickly. Jim, do you have anything to add?

I'd just add, specifically in the first quarter, the LIFO effect was a slight positive for us in the first quarter. And we would anticipate, given current trends of our raw material costs, that we would have slight favorable LIFO adjustments in the subsequent quarters.

So, do you feel that you have a lot of high-cost inventory that's still lying around or do you feel that you've worked through a lot of your high-cost inventory? Can you give some rough percentages?

Yes, Jeff, I would just say, as Michele mentioned in his comments, his prepared remarks, in North America, our inventories were really quite low. So our cost basis is in line and so there we're seeing the lower raw material costs flow through to our income statement in a more immediate basis. It's really offshore, where we've had more inventory. We have higher inventory balances. And as we work those inventory balances down, we should see more favorable raw material costs flow through to our income statement.

Great. So if you sort of compare the profitability of North America to Europe or to Asia, where the profitability was really impaired, all things being equal, as the -- as your inventories go lower and you're able to buy raw materials at more reasonable prices, should we get a rebalancing of profitability in those other regions?

Well, I think that there are lots of variables in place. Right? One is the inventory. The other is also the way we are dealing with raw materials. Remember, that we have different suppliers and different dynamics in the different regions of the world. What I can tell you is that the approach is right now the same everywhere in the world. And I've seen that the leadership team is going to execute on that. And that is what we can offer as a guidance in terms of inventory being reduced sequentially and net working capital improving in Q2 versus Q1 across the board.

Okay, thank you very much.

Thank you, Jeff.

And your next question comes from Douglas Chudy from Keybanc Capital Markets.

Good morning. You provided net revenue guidance of a 10% to 12% decline in 2009. Can you provide a little bit of color on your underlying assumptions in terms of volume, price and currency for the rest of the year?

Yes. We believe that today, what is going on in the marketplace, is two effects. One is demand beg significantly down. The other is that everybody is still working on reducing inventories. I think it takes some months to bring everyone to what is a steady state, like it is for us. There are inefficiencies and not everyone is able to react so quickly. And clearly, when we are saying that the volume will improve in the second half of the year, part of this is related to the inventory effect fading away. We believe that inventory may play between 5 and 8 points into the current market situation and that should gradually go away, we said, mainly towards the end of our second quarter, call it May. Not just for us but I think for several other industrial companies. And of course, added to that, what we are banking on is new business and growth with current customers, based on what we have already landed and would we expect to land in the future. But clearly, inventory destocking, phasing out is going to play a key role. We are not banking in demand overall getting better.

That's helpful. And then, just on the pricing side, you guys had good strength in pricing during the quarter. Raw materials have been coming down. I'd assume, directionally, you're going to have to give some of that back. Would you expect that pricing would turn negative as the year progresses due to raw material give-backs?

Well, what I can tell you, Doug, is we are going to do whatever is in our power to manage this polarity between price and volume. I think we have learned a lot about the years. We are working very, very close well our customers and with our suppliers to make sure that we don't compromise the five-year plan, which calls for growth but also that calls for profitable growth. So, we are making sure that we have pricing, as much as possible, at every account and at every SPU aligned with costs, to serve economics. And that has to do with raw materials but also with other components of what we call the pocket price [of our products.]

Okay. And just lastly, quickly, have your competitors been act pretty rationally on the pricing front?

Well, I think that, clearly, there is a lot going on in the marketplace. I think that some of the challenges we have faced in '08 have not been only for Fuller. Same is for first quarter. So far, we see that the main competitors are rational. They are, some of them, engaged in big merger turmoil, others to market turmoils. And so, far we think that rationality is prevailing. What it will do in the future, I'll tell you when we do the second quarter call.

Thanks for taking my questions.

Thank you, Doug.

And your next question is from Jason Miner with Deutsche Bank.

Good morning. I just want to focus on the competitors again for a second. Are you seeing any market share shift or some more competitors under pressure, possibly yielding you some share?

Well, we all have at hand public information what happened in the fourth quarter. I think it is clear that some of the competitors are facing a lot of distraction. And everybody is trying to do their best to manage pricing in a smart is rational way and to manage their own integration issues. And face this demand, there is substantial decline. Overall, that's all that I can say. We believe that several of the regional and small competitors are even more under pressure than the big guys. And it may happen that the consolidation trend in the marketplace will continue.

In that vein, do you see any -- to focus on where you're investing, you mentioned sort of more customer focused sales force in North America. Do you see bolt-on acquisitions or further organic investment? Are you investing in R&D or sales folks?

Yes, Doug -- sorry, Jason. If you look at what we have been announcing in October of '07, we're exactly doing that. I didn't agree with some of my colleagues that are hunkering down and are saying that a strategic plan doesn't exist. For us, it does exist. We are sticking with it. We are managing both the short and the long term. And that strategic plan called for geographic expansion in areas like China, which you have seen what we have announced in terms of a new lab. So really going for profitable growth. A new plant into the reactive hot melt technologies, which again, calls for innovation and profitability. You've seen what we have done in Egypt by also expanding an area that we were targeting, which is the Middle East and north Africa, with very strategic acquisition. And I would say improving our position in some strategic markets like flexible packaging with the recently made acquisition of Nordic.

So we are very, very judicious with our acquisitions. We are trying to buy really what is in line with our strategic plan. And making sure that we buy at the right price and that we can really digest and integrate properly. I think this environment, while it's full of threats, is also full of opportunities. And I'm very, very comfortable with the team that we have now, starting with Jim Giertz, that we are going to continue doing the right thing.

And just lastly, the 150-basis-point gross margin head wind, do you expect that that might even turn fully to a tail wind in the next quarter? Or how do you see the gap evolving as we go through the next quarter or two?

Well, our gross margin declined year-over-year but was up sequentially. So, I would say the trend that we are more looking at is the sequential one.

I'm sorry, price versus raw material, was where I was sort of focusing. The 150 basis --?

Well clearly, the pressure is there, is going to be there. I think that the companies that are going to be successfully in managing that equation are those that are able to sit down with the customers, work in a collaborative way. As well as with suppliers to make sure that value is delivered but also that long-term viability of suppliers is ensured. You want a Company like H.B. Fuller to invest in technology, to invest in customer service, which is what we are doing. And I think that, so far, we are getting lots of successes and it's part of our plan and we expect to remain there. Now, what pricing is going to do in Q 2, Q3 and Q4? I can't tell you. We are going to do whatever is in our power to hold it but at the same time, making sure that we have a very good performance on the top line.

Thank you very much.

Thank you.

And your next question comes from Christopher Butler from Sidoti & Company.

Hi, good morning, guys.

Hi, Chris.

I wanted to ask, on the destocking, I think you had mentioned that it started for you in December. I had heard from other companies in the petro chemicals supply chain, that it was the middle of November. Give us an idea of when you first -- when demand really first dropped off from a destocking perspective.

Well, we saw the first shock, in terms of declining demand, in mid-October. Of course, we had a full month of that in November. And clearly, the biggest part of the destocking was towards the end of November and December, when basically you have regions like Europe, that were four, six weeks extended vacation periods. And so, I would say that December, which is part of our first quarter, was really the worst of the worst. But as you can see, with our own inventory, it doesn't take one month to adjust inventory. Right? Because we're speaking of volumes that are significantly down and even if you start doing all the right things, it takes time to work it down. That's why I just said before that this sizable impact, which I believe to be 5 to 8 percentage points, is going to start fading down in May. And I don't think we are an exception.

So, it sounds like from a -- coming to an end standpoint that that's not something that you're seeing then, at this point?

Well, I think that March and April is gradually going to phase down. But I think that we are going to see the stocking really going away completely, unless further shocks in the marketplace, which I don't know at this point in time, in the third quarter.

Now, help me out with SG&A. And once again this quarter, you were able to cut costs. You had pointed out to that. I've gotten to the point that I keep expecting diminishing returns on your ability to cut costs out of SG&A. Is there something that you could say that would help me understand the fact that you seem to be able to continue to cut costs quarter over quarter and looking forward be able to put that into my numbers?

Well, I think that cost management is a continuous improvement process. I think every day that you know better your business and you have Lean Six Sigma processes that bring you projects every day to reduce waste in the organization, which is not just in the factories. You can get better. And that's what we have been doing. If you remember [in global] and this is in 2005. Now clearly, I agree with you that there are rates of diminishing returns. Also because while you keep doing a great job on that, you also have to invest and specifically to protect revenue generation items, which is what we are doing.

If we were breaking out the model, which we're not going to do here, there is really a big effort in terms of reducing inefficiencies and waste. But at the same time, we've been developing internal talents, acquiring talent from the outside. We've been investing, like you have seen, in China, both in technology and in commercial efforts. And that's what we intend to continue doing. Clearly, we're doing that judiciously and managing the short and the long term. So clearly, it also gets accelerated or decelerated, which is one of the things we're most proud of when we speak of having a variable cost structure, according to how the demand situation and the net working capital situation goes.

That's why I'm always very, very careful before, on one side, promising that we are going to cut massively because we have our five-year plan to deliver upon. And I think that companies that will manage these turbulent times in the right way, will end up winning. I have tried, as much as possible for now, I cannot tell you the future, to avoid knee-jerk reactions and just cutting across the board. Because at the end, your biggest assets are your employees and your customers and you want to make sure that everyone is ready to work for the future. And there is going to be a future.

And circling back to the guidance, your top line guidance, could you give us an idea, how confident are you in this number? Is this something that is just a stake in the sand right now, that will be adjusted accordingly, or is this something that you have confidence in at this point?

Well, as I said, I'm confident in the destocking, based on what I believe is -- more than that, nobody can do because you need to keep the shop open. I am confident on what our teams are doing to make sure that we work with customers on innovation, in getting better business and priced accordingly. But clearly, there are some things that are macro economically driven, like; What is going to be the effect and the time of return of the stimulus spend? That's still something that, like everyone else, I'm looking for indications. Overall, I think that a lot of things are done. And I am, right now, far less dire than others but we have still to be careful. What we don't want is just to throw away the strategic plan because that would be not to the interest of our shareholders.

And in that number, what are you looking for for foreign currency at this point?

Well, currency, we expect, Jim, still to be a negative factor for the year. Would you like to add something?

I think that if you look at our guidance for revenue of down 10% to 12% and very high level, you think about the volume being down about 10% to 12%. And then, currency would be a negative and pricing would be a positive. The currency effect, I think, is a negative 5% or 6% for the full year. And then, the pricing would be about the same amount favorable. They're completely unrelated but they just happen to offset each other.

And just quickly, the volumes in North America, I must have missed that number when you gave it earlier.

Down 17%.

Thank you for your time.

Thank you, Chris.

And your next question comes from Dmitry Silversteyn with Longbow Research.

Good morning. This is Jonathan Grassi in for Dmitry. Just to talk about the revenue outlook for 2009, can you break it down by region as far as what your expectations are in which region? Is it still going to be Europe and the US that's driving that 10% to 12% decline? And if you could just talk a little bit more also about China and what your expectations for that region is going forward? Thank you.

Well, I don't think it makes sense really to get into all the detail by region. Let me give you some color. As far as Asia Pacific, I think we are doing all the right things to really make this a much more meaningful and strategic region for H.B. Fuller. Evidence of that is all the investments we are doing. Clearly, China as well, had, I would say, a reduced growth effect because of the exports to western countries that we are slowing down. At the same time, China has been very, very aggressive with stimulus spending. And it may well be that they will correct the situation faster than others. Clearly, that's a macro economic factor that may play one way or another. But I have to say that the momentum that we have in the region is not stopping. And clearly has been, I would say, a bit slower than expected because of the market demand but everyone is pretty energized and we are pretty confident.

I would say in Latin America, even if there have been drawbacks and there are the typical issues that you have in areas of the world, like Venezuela and Argentina. Brazil is doing pretty well. And our teams are really doing a good job with customers. So, I would say that there are good prospect there. North America, we have very, very strong revitalized organization, lots of customer wins, lots of enthusiasm in spite of the dire environment. We have really invested heavily on the sales and marking side of the equation. Jim Owens and his team are working very close well Barry Snyder, which is really revamping innovation throughout the organization. So I would say that the prospects there are pretty good, of course, relative to market.

And Europe, clearly, is the region that suffered the most by extended shutdowns, also around the Christmas period. And clearly, we are following very closely the situation there and there is work to do. But that, I would say, is the color I can give you at this point in time.

Okay. Then on China, how much of your production in China is used for internal within the country? And then, how much is exported? And then, with the extended holidays or production shutdowns, not being as prevalent in the second quarter, with those not being as prevalent, should we expect for that -- in the destocking then, should we expect for the revenue to turn positive in the second quarter?

Well clearly, we are mainly selling to customers that produce in China but clearly, a lot of that goes outside of China. Still, I think that everyone, starting with the Chinese government, is banking on the stimulus spending to revitalize the Chinese consumer and the Chinese investment. And that is also what we're focused on with our investment. Because at the end, our technology lab and our plants, our investments for China, in China, for China and for the Asia Pacific region; are not considered a place to ship jobs abroad.

Okay, thank you.

And your next question comes from Robert Felice of Gabelli & Company.

Hi guys, most of mine have been answered. Just a couple more. So first, what was the absolute amount of your price cost of spread during the quarter? And given your underlying volume assumptions for the full year, perhaps you could share with us the magnitude of the tail wind you think you'll capture in 2009 from that dynamic? So instead of looking at an absolute level of price, we can think of it in terms of the tail wind you'll get from a price/cost spread.

Well, what I can tell you is that clearly pricing was a significant contributor in Q1 year-over-year. And we are speaking on something like $0.22 of positives. And raw materials was still a negative, in terms, that that was nearly $0.08. Clearly, the reason for the decline was, the biggest contributor being, volume impacting our bottom line. Now, taking into account that volume had an impact also on the gross margin percentage of the equation because we clearly lost leverage there. And we had part of our factory labor in manufacturing overhear that is a fixed cost. That is what I can tell you right now. So, if you were asking me the biggest drivers of decline would be number one, volume. And number two, raw materials. By a factor of 1 to 3 between those two elements. And the biggest driver of growth was clearly pricing.

Okay. So the spread between the two was $0.14. And obviously, you're going to work very hard to control price, given that raw material costs are declining significantly, or have declined significantly. Should I think that that $0.14 spread increases in the second quarter before decreasing in the back half? How should I think about that spread through the next three quarters?

Well, we are trying to, as I said, do whatever is in our power to maintain that spread. At the same time, we are balancing the equation with long-term growth and in collaboration with customers, Rob. So that's clearly the challenge. We are making sure that our pricing becomes smarter and smarter. That we look at the volume but also we look at all the components of the cost to serve economics. Including, in an environment like this one, payment terms conditions because clearly, the quality of receivables is an important factor to work on. It's not just inventory. And clearly, that needs to be added to the equation, together with the mix. So lots of balls up in the air. I think we have pretty good processes. The processes are getting better. People are getting more experienced around them. At this point in time, telling you exactly what spread is going to do is like answering the question that I answered before on price.

Okay. So flipping gears, a bigger picture question and you alluded to the stimulus earlier. But do you have an early sense of the potential impact a potential stimulus out of Washington could have in the back half of '09 and into 2010? A good portion of it is geared toward infrastructure, industry, construction. A good portion of it's geared toward energy efficiency in terms of buildings and infrastructure. All of which play nicely to some of Fuller's products.

Well, some of what I can tell you is anecdotal, like some customers in North America, specifically, in the construction related segment, hiring back people. I think that people are still waiting to see how it scopes out and a bit more of the details. And if everything goes well, I'm sure people will go back investing. I think that clearly in China, it's going to be faster than in western economies. I think within the western economies, it's going to be faster in North America than in Europe, for obvious structure reasons. as far as H.B. Fuller is concerned, I think that stimulus spend will have a direct impact on our construction and consumer related businesses but will have a roll-over confidence effect through the rest of the economy. So, let's make sure we all do our part and we contribute to this recovery.

Okay. And then lastly, maybe this is a little premature to ask, but in the event that stimulus does impact demand and you see a pickup in the back half of the year and into 2010, how well positioned is the supply chain to respond to that? I would imagine, at this point, it's getting fairly depleted and you think you can handle the push on the way back up?

Well, I would say that, as it is right now, H.B. Fuller is better positioned than others because we have, for now, resisted some of the drastic across the board actions that others have done. Clearly, that's not a guarantee for the future but that's at least our intention. So when the economy will recover and let's hope it's sooner than later, I think we are pretty well positioned for that. As for us, our suppliers are concerned, clearly, there would be some work to be done there because some have cut pretty dramatically. But I know that both the sales, marketing and technology teams here are working for alternatives, not just short-term but also long-term. And I'm pretty confident on that.

Okay, great. Thanks for taking my questions.

Thank you, Rob.

And your next question is from Steve Schwartz with First Analysis.

Good morning.

Good morning.

As far as interest expense is concerned, a little bit lower despite higher debt balances. Are you able to lock in that lower rate for the rest of the year?

I think our interest expense was not too much different. It's LIBOR based and it's very favorable. We have a very favorable interest expense environment right now. And it will most likely continue through the end of the year but basically, once we refinance our revolver, which is a large part of our borrowings, will have some negative impact on our interest expense. But our intention is to continue to pay down our debt, so that's the other dynamic that we have at play.

Okay. So you were at about $15 million in '08 and you think you might be right around that same level for this year?

I don't have the number in front of me here but I'm being told it should be lower, based on lower debt balances.

Okay. And then, just one last one on the Nordic Adhesives. You guys, I think, beat a lot of larger competitors to this one. How did you end up pulling that off?

Well, again, some of these acquisitions and we have more in the pipeline, are the result of years of scouring the market and having relationships in the marketplace. But also, making sure that we go for the right players that can make our strategy a meaningful strategy, which is creating sustainable competitive advantage. We are not really getting into that market for volume. But we're getting there to make sure that we are a specialty supplier, able to give value to our customers, as is the rest of our strategy. But we think that the flexible packaging market, based on some of the tests we already had before, is a very attractive market. It's not only profitable, it's not only growing more than rigid packaging, it has also some interesting global accounts. And we believe we can create some synergies and have an interesting role in that market.

Was there competitive bidding on this, for the company?

If you allow me, we don't disclose that. But I can tell you that I am very, very pleased with everything that has happened with this acquisition. And I think that overall, as an organization, we are getting better and better.

Thanks, Michele.

Thank you.

And your next question comes from Rosemarie Morbelli from Ingalls & Snyder.

Good morning all. Thank you for quizzing me in right on the dot. Michele, could you give us a feel for the percentage of revenues in China going to their domestic market, as opposed to export?

Well, I don't know but I think that our current customer base is not really different than the markets. So if you're looking at like 1/3 of the materials being exported, that that could be a fair guess. But we should look more into that to give you some assumption that is more reasonable.

And I missed -- I know you gave it but I was not writing fast enough, the volume decline Asia Pacific.

Let me just go back. It was 6.5%. The volume, which we said, nearly offset by the increase in price.

Okay. And if I could go back to that SG&A line, which at 22.5% of revenues is really quite high, it is actually the highest since, if we were to annualize at this level, higher since 1999. And I understand that volume was down and all of this is hurting but you are expecting volume to continue to decline for the balance of the year. What are you doing about cost cutting on that particular line? Some companies are announcing salary freeze, no bonuses, and so on. Could you help us on what Fuller is doing in that category?

Well, for now, we have had pretty different approach, Rosemarie. And our approach has been what we consider a more balanced approach. That is managing the short and the long-term. I s also the result of having caught these far earlier than anybody else. We started with some of these actions that were processed based already in 2005. We were already pretty aggressive with our reduction spend in 2008. And I think we are in a better position but at the same time, we have the need to invest for the long term. We were together in October '07, here in Minneapolis, when we discussed about what we needed to do. And while I think we have been judicious, compared to what we expected for the year, to delay some of the things and really scrutinize even more between revenue generation and non revenue generation items, I think that so far we have kept everyone in the game engaged. We are doing what is right. We are not breaking the bank. And we believe that ultimately is what is going to make sure that, like Gabelli was asking before, when the recovery comes, we are ready to take advantage of that. Taking into account, at the same time, we are continuously scrutinizing our spending as we have been doing for years. I think we have a good track record on that.

So, you are not freezing any salary. Are you increasing them? Are bonuses going out even though we are expecting earnings to be down some 25%, if my number is correct, versus last year? In this environment where everyone is losing their jobs, wouldn't people be happy with the salary freeze and still remaining employed?

I think we have a very judicious approach in this, balance. And for now, we are sticking to it. And we are actually making sure that everyone keeps some optimism and is focused on profitable growth. Clearly, we are monitoring like everyone the situation. But again, there is a strategic plan to deliver upon and in the current environment, I think we report always one month earlier. If you go back to public data, this is already [satisfied] by the fourth quarter results, we are doing relatively better, also on the short term than some of our competitors. And I think our shareholders will be pleased with our approach that is managing turbulent times but also positioning for the future.

Okay. And if I may, you talk in the press release about an appropriate gross margin level. Could you give us a feel for what your definition of an appropriate margin level is?

Well, I would say, we are trying to normalize. So I would say get back before the raw material charge. You remember very well what started happening in the second quarter and then really peaked in third and fourth quarter. But again, in October of '07, we -- you remember, we changed our financial goals. And instead of speaking of gross margin percentage, we switched to ROGI because we believe it's more closely related to shareholder value. ROGI, more than gross margin percentage, also incorporates the volume side of the equation. And we all have seen, with those double-digit sense of EPS loss, how volume impacts everything from the revenue, to the gross margin percentage, to the bottom line. And ultimately, ROGI also allows to you scrutinize better your asset base and your net working capital. So, that's really what we're looking at, more than gross margin percentage. So, I am not going to put back on the plate the gross margin percentage target that was put there under the previous administration.

Okay. And then lastly, if I may, could you bring us up to date on how Roanoke is doing in this environment?

Well, I would say that the goodwill impairment was not a nice story but it was the right thing to do. And what I can tell you, is that we lost some accounts, we learned a lot of lessons, which are very valuable for recently made acquisitions and new acquisitions. I think the team has landed new business. Lowe's is an example of that. And I think we are going, long-term, to correct but clearly, short-term we have to take a goodwill impairment. Clearly, the construction market is still in a difficult situation in North America. But I think we are doing lots of the good things that need to be done in this environment, not only to weather the storm but to position for future growth. That's our recurrent theme, Rosemarie.

Okay, thanks. And just for clarification, you have nothing left in terms of businesses going to the automotive industry? It all went, when you sold that particular business?

We sold our exposure to the automotive business, you remember, at the end of 2007 and we are clearly not into that market segment. That doesn't mean that we don't have some filter businesses that tangentially end up in that market segment. But I think that our risk profile has been greatly diminished.

Okay. Thanks a it lot.

Thank you, Rosemarie.

Thank you, ladies and gentlemen. We have reached our time limit and this does conclude today's H.B. Fuller first quarter 2009 investor conference call. You may now disconnect.