H.B. Fuller Company (FUL) 2009 Q3 法說會逐字稿

Good day and welcome to the H.B. Fuller conference call to discuss the third quarter results. At the request of the Company, this 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. Instructions will be given at that time should you wish to ask a question. Management in attendance on today's cal 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'd like to turn the meeting over Mr. Steven Brazones.

Thank you, April, and welcome everyone. Today's conference call is being webcast live and will also be archived on our Web site for future listening. In addition, this call will be available for replay approximately one hour after we are finished with the question and answer portion of our call.

Before beginning I would like to inform everyone that certain matters discussed during this call will include forward-looking statements as that term is defined under the Private Securities Litigation Reform Act of 1995. 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, adjusted earnings per share, and return on gross investment or ROGI. Operating income is gross profit less SG&A expense. EBDA is defined as gross profit less SG&A expense plus depreciation and amortization expense. And ROGI is defined as trailing 12-month gross cashflow divided by gross investment. Also during today's call all EPS numbers referenced for the third quarter of 2009 will be discussed on an adjusted basis to exclude the Roanoke legal settlement.

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 comparability of results and provides insight into the ability of the Company to fund such things as debt reduction, acquisition 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 our presentation.

For more information, please refer to our recent press release, quarterly reports on Form 10-Q and annual report on Form 10-K filed with the Securities and Exchange Commission, all of which are available on the Web site at www.HBFuller.com under the Investor Relations section.

I would now like to turn it over to Michele.

Thank you, Steven. Good morning, everyone, and thank you for joining us today. In light of the challenging economic environment we continue to endure, we are quite pleased and satisfied with our performance in the third quarter. Let me share with you a few of the highlights. First, we started to see the initial signs of an improvement in our organic sales development. Although organic sales were still down nearly 10% in the third quarter, volume declines eased over 250 basis points on a sequential basis, primarily driven by new business wins in several segments of our business. Also our volume development improved slightly during the quarter since in most parts of the Company we exited the third quarter with stronger demand than we had at the beginning of the quarter.

Second, we did a good job of maintaining our gross margin. Our efforts to reduce raw material costs led to a decline in these costs of about 15% year over year. And a little more than 1% sequentially. These reductions, combined with our efforts to reformulate our product line to use less costly raw material components, and to the efficiencies we managed in the plans, principally drove the improvement in margin.

For the third quarter gross margin expanded by 680 basis points year over year and 190 basis points sequentially. Next, we grew EBITDA margin on a sequential basis by 70 basis points to 13.7%. The improvement was driven by the expansion of gross margin offset somewhat by higher selling general and administrative expenses. SG&A expenses were up about 11% versus the second quarter or about $6.8 million. On the surface, this level of increase appears high but in fact the increase is explained by several discrete factors. Nearly two-thirds of the increase relates to unfavorable foreign currency translation and the timing and magnitude of compensation costs. About $1.5 million of the increase reflects the investments we have recently made to build up our customer facing and technical organization. While the balance of the increase is a variety of other smaller items. This step up in spending comes after many quarters of extremely tight cost controls. And is necessary to support the growth expectations of our business.

The next highlight, cashflow from operations. Year over year it was up $37 million to $59 million. This is equivalent to over $1.20 per share. Improved profitability and favorable working capital developments largely led to the year over year increase. Lastly, the North America region's strong performance continued in the third quarter while the Asia Pacific region made progress in its turnaround efforts. North America increased its operating income over 50% year over year while Asia Pacific went from a loss of $500,000 in the second quarter to generating operating income of $2 million this quarter.

Overall we are pleased with our strong performance in the third quarter. It was not free of challenges. Most notably week end market demand. While it is encouraging that the trend in volumes improved slightly in the third quarter volumes were still down more than 12% year over year. This clearly continued to dampen the benefits generated through raw material cost reductions and product reformulations as we lost leverage on fixed manufacturing costs.

With that, I will now turn the call over to Jim to provide a summary of our financial and operational performance.

Thank you, Michele, and good morning to everyone. Let's start with a quick review of our financial score card which is derived from our five-year plan. The first key metric is organic growth. Here we have set a goal to grow between 3% and 5% on a compound annual basis from 2007 through 2012 which is the five years of our five-year plan. In the third quarter organic growth was down 9.6% year over year. While this is a long way from our target range we are confident based on our analysis of public data and other anecdotal evidence that we are performing better than the overall market in this challenging environment. We are winning new business now and enhanced commercial organizations are being put in place to sustain this growth in the future.

EBITDA margin is our second key metric with our goal set between 14% and 16%. For the trailing 12 months ending in the third quarter of this year we reported an EBITDA margin of 11.4%. However, current performance is tracking much closer to our target range. In the third quarter, we achieved an EBITDA margin of 13.7%. There is still work to be done but we've made great progress this year in restoring our margin.

Our next metric is return on gross investment or ROGI with a long-term goal of between 10% and 12%. From the end of 2007 to the second quarter of this year ROGI declined steadily. However, given the significant improvement in gross cash flow in the third quarter, ROGI inched up by 30 basis points to 7.1%.

Our last key metric is based on the growth in diluted earnings per share. For this metric we have set a long-term goal to grow between 10% and 15% on a compound annual basis. Based on our earnings over the trailing 12 months, we are currently running at a 12.2% five-year compound annual growth rate, close to the middle of our target range.

Let me provide you a brief update on our cash flow and balance sheet position. The third quarter was another very strong cash flow quarter for us. Cash flow from operations increased $37 million year over year to $59 million, and was even up slightly over last quarter's very strong performance. Growth and profitability and more favorable quarter to quarter networking capital improvements primarily drove the improved cash flow during the quarter. It's also worth noting that the $18.7 million of cash from our legal settlement was not received until after the end of the third quarter. Consequently the positive impact of the settlement on cash flow will occur in the fourth quarter. Also we made a $10 million contribution to the US pension plan in the third quarter and still managed to increase cash flow from operations compared to the second quarter.

As I just mentioned, networking capital favorably contributed to cash flow in the third quarter. In total, networking capital contributed nearly $13 million to cash flow from operations. This compares to a neutral impact in the third quarter of last year. As a percentage of annualized net working capital was down 180 basis points versus the second quarter. All three components of net working capital improved as a percentage of annualized net revenue. Continued measures focused on reducing inventory levels and optimizing both payment and receivable terms led to the improved results.

As a result of the strong cash flow generation our balance sheet continued to strengthen. In the third quarter net debt was $64 million, down approximately $55 million versus the second quarter.

I'll now provide a brief regional update. Starting with North America. North America continued to deliver another solid performance this quarter. On the top line the region began to see a moderation in the decline of volume driven by adhesives. New customer wins from earlier in the year and the continued expansion of customer relationships were responsible for the majority of the improvement quarter to quarter. On the pricing front average selling price moderated from second quarter levels but still positively contributed to organic sales year over year by more than 4%.

Operating income posted strong improvement increasing more than 50% versus the third quarter of last year and nearly 7% sequentially. A lot of hard work was done to drive down raw material costs and improve formulations to capitalize on these lower cost raw materials.

In Europe, Middle East and Africa, the situation is more or less similar to what it was in the second quarter. On the top line, volumes declines eased in the third quarter building on the trend that began last quarter. On the pricing side, however, we struggled to maintain positive year over year comparisons, resulting in average selling price declining slightly in the third quarter versus last year. Operating income improved slightly on a sequential basis on higher volumes and lower raw material costs. However, relative to last year's third quarter operating income was down 17%. Unfavorable foreign currency translation depressed operating income by about 13% compared to last year. The remaining decline year over year was driven by weaker volumes.

Clearly we still have a lot of work to do to improve the financial performance of this region. We took a large step towards this end in the second quarter with the additions of two talented industry veterans to lead the European business. They will be instrumental in driving H.B. Fuller's transformation to profitable growth in EMEA. Through their leadership we will be well-positioned to capitalize on the many opportunities in front of us and unlock the tremendous potential of our second largest region.

In Latin America the region's macro environment continued to worsen especially in Mexico and Central American. Although this negatively impacted both businesses it had a more pronounced effect on the consumer paints business. On the top line both businesses reported a deterioration in organic sales development versus the second quarter. For the adhesives business, average selling price declines outweighed slightly higher volumes. For the paints business a further deterioration in consumer demand resulted in additional declines in volume versus the second quarter and a lower average selling price. As a result, organic sales for the region declined at a faster rate year over year than in the second quarter.

Regarding operating profit there was a clear divergence in performance between the two businesses. While the adhesives business achieved improved profitability both sequentially and year over year the paints business reported an operating loss for the quarter. Although adhesives grew its operating income more than 80% year over year it was not enough to offset the significant decline in paints. As a result, operating income declined both year over year and sequentially for the region.

Finally in Asia Pacific. We are pleased to report that Asia Pacific began a turnaround in operating performance in the third quarter. On the top line the volume development in Asia improved the most of all the regions. The return of certain markets which had all but disappeared in the first half of the year, together with new customer wins, led to much improved volume versus the second quarter. As a result, volume declines eased by over 800 basis points sequentially from down 11% to down less than 3%. Average selling price was down slightly versus the second quarter but up 4.6% year over year. Consequently Asia was the first region to start posting positive organic growth in the third quarter.

From a bottom line perspective Asia Pacific began a rebound in operating performance. Pricing actions taken to offset the sharp devaluation of the Australian dollar, the return of demand in certain end markets, reformulations, new customer wins, and the subsequent rebound in the Australian dollar were all factors leading to the markedly improved results. Also worth noting this quarter is the strong performance of our joint venture in Japan with Sekisui Chemical. Through knowledge sharing, raw material cost reductions and the adoption of more disciplined pricing tools and processes, the joint venture has considerably improved its financial performance.

I will now turn it over to Michele for some final remarks.

Thank you, Jim. I would like to provide you with an outlook for the fourth quarter of 2009. As you are all aware, the first three quarters of 2009 have been quite challenging from a demand perspective. However, during the third quarter we began to see some indications that the worse may be behind us. Looking ahead to the fourth quarter we are optimistic that we will continue to make incremental progress on the top line. Clearly the comparables will be easier in the fourth as we lack the dramatic decline in volume that occurred halfway through the fourth quarter of last year. While this will help, our optimism is based on the fact that we continue to win a meaningful amount of new business in this down environment. As a result, we believe we are on track to generate net revenue of approximately $330 million in the fourth quarter. If achieved, this would mark another sequential improvement in organic sales.

On the raw material front, the landscape is quickly changing. Supply and capacity utilizations secured throughout the year as demand fell. Additionally higher energy prices and the market expectation for a resurgence in demands are driving our raw material costs up in the fourth quarter. At this point we are anticipating low single-digit inflation past third quarter levels but exactly how much and how fast our costs increase remains a bit uncertain. As a result of this outlook, our sales and marketing teams are already in the process of implementing pricing actions to address these higher costs.

Lastly regarding our tax situation, we expect that our effective tax rate for the fourth quarter to be approximately 34.5% excluding any significant discrete items.

That concludes my prepared remarks and I would now like to open the call up for your questions. Thank you.

Thank you, the question and answer session will be conducted electronically. (Operator Instructions) We will first hear from Jeff Zekauskas from JP Morgan.

This is actually Olga here for Jeff. How are you.

Good morning, Olga.

Can you hear me well?

Yes. I have a quick question. Did you say that your raw material benefits this quarter were 15% year over year? Yes, they were actually 14.9% versus last year, and down 1.4% versus Q2.

Okay. So there was small sequential improvement, you said 1.4% versus the second quarter.

Yes.

And just a broad question. In your cost of goods sold, what is the fixed cost component and what happened with this component over, I don't know, like past two years?

Olga, this is Jim. Broadly speaking, in our cost of goods sold, about 75% of our cost of goods sold is raw materials and the balance is everything else, and some portion of the everything else is clearly fixed and other parts are partially fixed and some are variable.

And were you able to reduce your fixed cost component over time or it remains fixed?

Olga, you know that we are strong believes of Lean Six Sigma and we believe in continuous improvement so when you really look at our factory level, manufacturing overhead over the years, we have generated lots of efficiencies. We continue to that. And whenever needed, not just from an efficiency standpoint but also from a strategic perspective, we also adjust our work capacity. I think we've done a pretty good job over the years and that clearly that together with pricing actions, sourcing negotiations and product line reform raises is what is cribbing to these gross margin improvements. Jim, you want to add something?

Yes, the he other thing, Olga, I just point out, we mentioned in our press release that we had a facility restructuring in North America in the third quarter. That's a specific example of actions taken to manage down our fixed costs in our manufacturing operation here in North America.

So I take it that this restructuring charge is reflected in the cost of goods sold line on the income statement, is that correct?

That's correct, 100% is in the cost of goods sold line.

Great. Thank you.

We'll now hear from Jason Miner with Deutsche Bank.

Thank you, good morning. In the case of the raw materials I thought ethylene was up sequentially looking elsewhere. Could you elaborate on what basket of raws you saw helping your earnings sequentially.

It's been to be honest, Jason, all over the place. I think we have a team now that is more experienced and is more able to partner with the suppliers and drive down continuously but also collaboratively the raw material prices. But more than that we have a very, very good connection between the sales and marketing and technology teams to address reformulations and making sure that we mitigate together with our customers the impact of inflation. So from that perspective I think we are generating a lot of good momentum. We are taking advantage of the situation and we are doing that with the clear idea of long-term growth in mind and therefore not putting volume at risk. And as I told, you based on what we have seen in the first half of the year based on results we think it's working.

Let me look at the volumes for a minute then. On some of these new wins, are you gaining market share in North America in a significant way?

I think that we are winning new business both with new accounts and existing accounts. But I also think that we got much better at also protecting our current business and at building customer loyalty. So it's both new accounts, it's existing accounts and I think that some of the changes we made in the organization and some of the training we've been investing into are already paying back.

Can you characterize it in more specialized products where you are winning business or more commoditized products?

It's in all the points of the product line. Clearly the marketing and the business directors are pushing really for new product lines and new market segment entry and we are getting some inroads there. But I think we are getting more and more effective in terms of managing also the core of our business and making sure that we have pricing that is aligned with the complexity the and with the cost of service.

Last question and I'll get back in queue, if we look at your guidance for $330 million, next quarter, can you talk to how much volume improvement versus price improvement? You mentioned you are implementing price increases. How much might be assumed in that?

Directionally -- and then maybe Jim can add something to that -- I can tell you that through the third quarter there was a positive trend within the quarter of the volume. So we started basically at minus 15% and we ended up minus 10%. And clearly from a pricing perspective, remember we started raising prices in the third quarter and even more in the fourth quarter of last year so clearly what you can expect in the fourth quarter, even if clearly we are going to do whatever it takes to maintain our margins or get close to the third quarter levels, there is going to be clearly a more difficult comparison year over year in terms of price increases. So will you see more of volume and less of pricing compared to third quarter. Jim, if you want to add something here?

Yes, I can give you more specific numbers to back up what Michele said. I think on the $330 million of revenue the volume would be down about 6% to 7%. And all the other factors would be fairly small. So price might be up slightly. I think currency would be a slight positive in the fourth quarter for us. But the other factors are pretty minor. About 6% to 7% down in volume would be correlated to the $330 million of revenue forecast.

Okay. Then just I thought I heard you say there was a sequential easing in prices in the third quarter. Did I hear that right? In North America.

Did I misspeak on that one? So price would be a slight negative year over year.

On the sequential trends back in the script, no in regard to what just said but I thought I heard something about sequential price moderated from Q2 levels. I just want to make sure that that's what you said and is that going to continue sequentially.

It's going to be down sequentially in Q4 slightly.

Thank you very much.

Next we'll hear from Douglas Chudy from KeyBanc Capital Markets.

Good morning, nice quarter. You've certainly done a nice job in North America on the profitability front. Can you give us a sense of the longer term operating margin potential for the various international segments and maybe do you see these other segments having the potential to get on par with North America at some point?

I think that really the margin first of all that we look at, we clarified that in 2007, is EBITDA margin and is ROGI margin because it is clear that we need also the volume to come through and we need to have profitable growth. So, yes, let's talk about gross margin but let's understand that our key metrics in terms of profitability are ROGI and EBITDA margin. As for us, in North America, Jim Owens and his team have done a terrific job specifically in the current environment, specifically with very weak volume, and it's been a combination of really managing well the negotiations with the suppliers, aligning pricing with costs to serve economics, reformulate raw materials, making sure we had the right sweet spot of capacity utilization in the plants. But it's also a team that is driving to really do the proper market segmentation. I can tell you a lot of that has started also in the other regions both in Europe and Latin America and Asia Pacific. And clearly is one of the areas that is going to help us maintain gross margin as much as we can by taking into account that the margin we look at is EBITDA and ROGI.

Just one quick additional question. You have cited some pretty good new product win momentum here heading into the fourth quarter and into 2010. Can you quantify what level of wins you've seen or similar, frame that up for us?

As I said before to Jason of Deutsche Bank, we are really winning both in the core in the new market segment and the new products. I don't think we have yet something in terms of a breakthrough platform, and even if Barry Snyder and his technology team are working on that and are making good progress. So therefore a lot of that has been more product tweaks. But there is a very, very good collaboration between technology, manufacturing, sales and marketing, also making sure that we have the right product feeds and we don't have just over engineered products.

Okay. Thank you.

Next we'll hear from Christopher Butler of Sidoti & Company.

Hi, good morning, guys. You had mentioned along with some of your new business wins you've talked about how demand seems to have improved during the course of the quarter. Could you touch on whether this is a continuation of what we've seen from your second quarter that the supply chain inventory levels have really depleted at this point and that things are flowing through, or if you are actually seeing end customers start to get out and buy more?

I think that some is clearly beginning to an end of the destocking levels. That's what most likely when everybody else would report in the third quarter, you will see also from the others. Still I think we are over performing the market, as Jim said in his script. And when you look at the first half published results from our most direct compare year, specifically the industrial business segments of these competitors, you will see that there has been several points difference in terms of revenue and volume evolution. So clearly a component is the destocking that is broad-based and is going to affect everyone in the industry and that's a positive. I don't see yet a resurgence in demand and hopefully we see that in 2010 and I'm getting more on the optimistic side than two years ago when we prepared for the downturn. And because of that optimism is why we have been investing for growth and really making sure we are ready for that. But I think that when the market starts picking up we will be in a better position than some of our competitors.

And following up on that, you made a distinction in Latin America as to the adhesives business versus the paints business and how they are shaping up. Are you seeing similar differences in adhesives versus more construction related adhesives here in North America as well?

Yes. As Jim said, adhesives has been performing relatively better than our specialty construction brands, there is a lot of good work being delivered in spite of Roanoke story, that now we finally we put to an end. But also there, you see North American team inherited not necessarily successful story with Roanoke and together with our legal team they fought for what we were owed and they ended up with a very good settlement. So construction is still down but this is very, very good momentum but we are committed on both our North American construction business and our consumer paints business in Latin America to improve performance.

I appreciate your time. I'll go back in the queue.

Steve Schwartz, First Analysis.

Hi, good morning everyone. With respect to Asia, Jim gave a nice commentary on what's happening there but can you give us an idea of what part of that business is exposed to the Chinese stimulus because I know do you a lot of business in New Zealand and Australia as well.

To be honest, pretty limited because we are not really in the infrastructure which is where the majority of the money has been spent. We are not in the capital equipment. We are not in really the basic, basic materials. So a lot of this has been us doing a better job in the region. And let me say that it has not just been on the top line nor on the margin management, it has been also on the net working capital side because we are also very happy and very proud of the cash generation that the corporate team has done but also of the amazing work that has been done from an inventory standpoint and receivables standpoint in this tough environment. In Asia Pacific which had hiccups in the first and second quarter has really started hitting the ball right and getting very good inventory numbers. And that helps the cash flow generation so it means we can invest in the business.

Okay. And it's mostly being done then through New Zealand and Australia and some of your larger end markets for that region.

No, no, we have grown in China but it has been in the packaging, in the (inaudible), in the woodworking markets that are not really benefiting a lot from the stimulus money of the Chinese government.

Okay. And then second question is on pension. Jim, you mentioned making a $10 million contribution. What is your current position going into 2010 from an expense standpoint?

Just recall that our measurement date for our pension was August 31 last year, so the end of our third quarter we measured all of our pensions. And then the next measurement date is the end of our fiscal year this year so it's November 30 we will measure at the end of the fourth quarter. So the first part of the answer is that we really don't know because things are going to change between now and the end of the fourth quarter in terms of market value of our assets and discount rates that we have to use to assess the liabilities and so forth. So we are not going to know for sure where we stand with our pension expense until after the end of the fourth quarter. Our intention would be, therefore, when we come out with our fourth quarter conference call in January that we will give you many more specifics about what's going on with our pension plan in terms of funding but also the expense level that we are seeing as we go into 2010.

Now with all that said as background, we were nearly fully funded in our US plans at our last measurement date. Clearly we are going to be less funded, absent any other funding activity we will be less funded when we re-measure at the end of the fourth quarter, and so on the face of it that would indicate that our pension expense will increase somewhat in 2010 versus 2009. Part of that though I think you have to appreciate is that in 2009 in the US plans our pension expense is actually an income item still. Due to other factors from prior years. So when I say our pension expense will be increasing, part of that is that we will actually be returning more to a normal condition where we actually have a pension expense in a year as opposed to an income item. So we are working on various strategies for funding and how to manage the pension expense, and we are going to just have to roll all that together and give you more details when we come out with our fourth quarter in a couple of months.

Okay. Thank you for the color on it, though.

(Operator Instructions) We'll now here from Dmitry Silversteyn of Longbow Research.

Good morning, guys, this is Eugene Fedotoff sitting in for Dmitry. Most of my questions have been answered. Just actually a follow up on the raw material costs, you mentioned you expect lower single-digit increase sequentially in fourth quarter. But what are you expecting in terms of year over year? You saw 15% decline in raw material costs in third quarter. Do you expect that to increase being more than 15% decline in fourth quarter or do you expect that decline to be lower on a year over year basis?

Basically we would expect still a decline year over year but clearly that decline to abate from third quarter levels. So if we were at 14.9%, 15% in the third quarter, we would end up being a bit lower than that number based on what inflation will do, and also based on what our teams will be able to do in terms of managing that inflation both through negotiations and through reformulations. But it is clear that we will strive to maintain our margins at these high levels but we will make sure that we do that without compromising customer relations.

Okay. And could you also provide what's happening with material costs sequentially in different regions in Europe versus North America? I know last time, last year when raw materials were increasing they were increasing more rapidly in North America versus Europe. Is that something you are seeing this time, as well?

What I can tell you is that somehow there is not a major difference between the regions. We are speaking of plus, minus 1% variance between the regions expected in fourth quarter. We are speaking of the same, actually even less than that of what happened in Q3. So dynamics are pretty similar, also because the process to address the raw material inflation has been similar and there has been a lot of global knowledge sharing and collaboration. I am pretty happy of the grasp that the teams are starting to have on this, how they fight together with the sales and marketing guys and collaborate with the customers, as well.

If I understand you correctly, currency is expected to be positive in fourth quarter for top line. Are you expecting positive benefit on the margin from currency as well?

Typically there wouldn't be any significant impact on margin from currency. But we would expect that year over year the currency effect for us will be positive in the fourth quarter just as it was slightly positive for us in the third quarter.

Okay. And just a last question, you announced leadership changes in Europe. Just what is your strategy there? What are your expectations from new leaders? And also on Latin America, on your paints business there, what is it that you are doing to turn that business around? Thank you.

I think that with the new leaders we brought in from several companies in the last year and a half we have gained a lot in terms of experience. We have found them to have the same values that we always had at Fuller which is a very important heritage, Plus we have found very competent people. We have empowered them and we will empower them even more. They have responded with a lot of accountability and they have shown great leadership abilities in terms of building, developing and growing teams below them.

So the entire cultural change and the talent that we are speaking about and committing to in October of '07 at our investor conference here in Minnesota is happening. And clearly these people, starting for instance with Jim Giertz, Jim Owens, Barry Snyder and the individuals we have hired in Europe, but together with our wonderful development of talent we had already internally at HB Fuller is starting to get results in a very tough environment. So that's why we are optimistic even if maybe the market is still down and that's how we are performing in this environment.

Thanks a lot.

(Operator Instructions) We'll now here from Rosemarie Morbelli of Ingalls & Snyder.

Good morning all. And congratulations on a good quarter. Michele, you are making a point of concentrating on the EBIT margin which I am assuming is more or less the operating income at the different region levels. So in the third quarter North America hit 15.4%. What do you think, first of all, what is the outlook for North America? What is a reasonable goal for that particular business alone in terms of margin? What do you think you can accomplish given what you have done in restructuring and in changing more or less the way you are operating when the economy actually turns around?

First of all let me clarify one point. I meant EBDA instead of EBIT and that's what we published in October of '07 because we want to make sure that we do what is right in terms of investments for growth. That's why we talked about EBDA and not just EBIT.

With that said, I think that North America clearly so far this year has done a very good job at basically strengthening the profitability profile, getting back and even exceeding of 2007 levels when we met in Minnesota, Rosemarie, you remember that. And clearly the challenge for Jim and his team which is also what we committed to in October of '07 is to grow from the high profitability profile achieved because it is clear that also growth will give us the leverage to manage better and more efficiently the assets we have. So clearly the focus is on growth, the commitment is on growth and our intention is to post to positive organic growth next year absent any major turmoils in the economy. But I think we have started to put in place a machine that is starting to hit on all cylinders.

So are you saying that you are planning to invest in the North American business in such a way that you are going to grow the top line but the margin, the profitability, is just about at the top, is that what I am hearing?

The truth is that we already started investing in the last 12 months and that's why you heard Jim speaking about the SG&A inching up because there has been investment. And investment has not been in just upgrading the organization. There are costs for employing people but a lot has been on training and on providing tools through the sales and marketing and through the technology team to deliver long-term sustainable growth which is what this company needs and is what we are committed to.

Okay. So now in terms of (inaudible), 15.4% is something that you guys are happy with and will probably stay there, if I am translating what you are saying properly. Now looking at Europe, Latin America and Asia Pacific, obviously the level is substantially lower. What would be a reasonable expectation when those businesses, and I understand you are investing there as well, but when they go on all cylinders? Is that profitability, is it reasonable to expect that it will reach the North American level or the expenses are such that it cannot reach the 15%?

Let's separate Europe from Asia Pacific and Latin America. I think Europe we have some of our best opportunities. Clearly on one side it's much more complex from a geography standpoint, cultural standpoint, regulation standpoint in North America because it's a collection of separate countries. We all know that. But I think that that complexity also is a great opportunity with (inaudible) we will be able to address that in a very successful way on top of that in Europe, or call it the EMEA as a region. We have also fast growing developing economies. We have Eastern Europe. We have North Africa and the Middle East which are part of that region. So I think great opportunities there not only to improve the top line but also to improve the profitability. And I am extremely confident based on what Kenny and (inaudible) are going to bring.

Now as for Latin America and Asia Pacific, on top what have we said for Europe, there is clearly a critical mass point that we need to take into consideration and it is clear that those are two regions where even more than in the others we have to grow to really be effective to be profitable. So where can we get, working long, long-term I would like to have four regions that are of comparable size and of comparable profitability. Now how long it will take to get there is the real question and we will talk about that over the next quarters.

Okay. And then you talked previously about the growth being helped by new products being sold into new customers and with your old customers. What is the percentage of the new products revenues as a percentage of revenues? And you said you were not really happy with that particular level yet. Could you remind us where you were last year, where you are this year and what the goal is?

We are always in the mid 20s, Rosemarie I think that in the last year because of the emergencies on the raw material side, the need to reformulate, a lot of focus has been on the tactical side to make sure that we were really having the right formulas. But I know that Barry Snyder is working a lot on the breakthrough innovation on platforms on new stuff but clearly that takes time and that requires investment which is what we have been doing, and that, again, is reflecting the SG&A. What's the time it will take, I really cannot tell you at this point in time but I'm also very, very positive.

If I may ask one last question regarding the competitive landscape, now raw material costs are going up you have been gaining market share. Do you feel that the competition has not become particularly disciplined and that there could be some kind of a price war as they do not raise pricing in order to get back the share you took away?

I can tell what I have seen and what I have heard so far has been more disciplined behavior than in the past. As far as what will happen in the future I don't know, but what I always tell my teams is we have to manage our own destiny and make sure that we don't depend on competitors. We have several levers to pull. I'm very happy that the teams are pulling all of them and that's why I am confident.

What do you mean by pulling leverage.

Pulling levers, it means working on pricing, and pricing is not just price increases, it's alignment with cost to serve, it's working on raw material negotiations with suppliers, it's working on raw material reformulations, it's working on efficiencies in the plants. So all of that is making sure that we get good gross margins but also that we balance the volume and price equation and we don't lose customers and actually we grow with them as we see that we are gaining new business.

Thanks a lot.

(Operator Instructions) We'll now hear from Robert Patrick of Cardinal Capital.

Good morning and congratulations. As you think about the capital on your balance sheet, the $180 million, how much of that is likely to be needed to support the growth that you are expecting in the coming year?

First I'm going to give a directional answer and then maybe Jim can add something to that. When we spoke in October of '07 of investments for growth we spoke both of capex, we spoke of acquisitions and we spoke of investments in SG&A. And that's exactly what we are doing. You look at the capex here today that I think is around $50 million. We will end up maybe at $25 million versus the original forecast of $30 million. But we are doing all the needed investments. We will do more. But it is always going to be prudent, commensurate and making sure that we invest, we don't spend.

We have really made a lot in terms of changing the culture here, making sure that everybody is accountable, and we are pretty happy about that. And investments is not just capex. It is also in M&A. We all know the story of Roanoke and I think everybody here is committed to do make sure that when we make acquisitions they are going to work better. And as I can see the Nordic acquisition and Egymelt acquisition are working pretty well so far. Jim, you warrant to add something?

The only thing I would add is, Rob, I think you remember that our balance sheet, our excess liquidity is typically offshore so our excess cash is sitting offshore outside the United States whereas our debt is in the United States. Hopefully I'm also answering part of your question. I think the good news, that causes us some issues. Our balance sheet looks a little strange sometimes because of that.

I think the good news, though, is that a lot of the capital expenditures plans we have and some of the more aggressive growth plans we have are outside of the United States. So our excess liquidity that we have offshore does align with our growth strategy. For example, where are we spending capital right now? It's in China where we are building a new facility. We are adding capacity in Egypt, for example, and places like this. So here that's where we are easily able to access our excess liquidity to fund projects like that.

Okay. Then, Michele, perhaps you can comment on how you see the M&A environment playing out over the next year generally within the industry in which you operate?

I think that lots of people got scared because of what happened in 2008 and 2009. I think some players are starting to understand that consolidation has its benefits. But I think it's still requires some time. What I can tell you is we are working very actively on our pipeline and making sure that we have our relationships on the ground and we are ready to capture what is right at the right price.

Have you seen a narrowing of the spread between bid and ask for the properties that have come around or is it more that you've seen more properties coming around after a dearth of them being available for a year or so?

I don't think we are there yet but discussions are starting to be a bit more rational. But I think it will still take one or two quarters to make sure that people come to that conclusion.

Great. Thank you so much and congratulations.

We will take a follow up from Dmitry Silversteyn of Longbow Research.

This is Eugene, thanks again for taking my question. Could you provide a little bit more color on your main end markets and what are you seeing in those markets both in Europe and North America and where the stimulus is playing and your expectations for fourth quarter for those markets? Thank you.

Yes, so far what I can tell you is all the stimulus money that has been really pumped into the market, some is still unfortunately into the books, and we have heard it both in Asia or in North America has been mainly into the infrastructure side. There has been some money that has been seen in the automotive side but as you know we divested our automotive presence two years ago. So really not a lot has been hitting our business. So I would really call it as performance growth the volume development of H.B. Fuller.

Okay, thanks again.

Rosemarie Morbelli, Ingalls & Snyder.

Just a couple of quick questions. Is the $68 million in SG&A a new base in dollar terms on a quarterly basis going forward?

Rosemarie, it's Jim. To answer that let me start back, let me take a step back and try to look at SG&A for the full year because there is a lot of timing issues in SG&A expenses which we referred to in our press release. But last year for the full year our total SG&A spend was $255 million for last year. And year to date we've spent $192 million. Let's just say in the fourth quarter we again spend $68 million so it remains at the level of Q3. That will put our SG&A for the full year at $260 million. So under that scenario, that hypothetical scenario, we will be at $260 million for the full year versus $255 million for last year. That's a 4% increase.

But it was really a lot lower in the first half.

Again a lot of it is timing. It's how currencies play out. How the timing of our compensation accruals work and other factors. Now is our spend level higher at the end of this year than it was at the beginning of the year? Yes. And that's because of what Michele referred to is the active decision to invest in customer facing organization. But the sequential increase we saw in SG&A looks more dramatic than what's really happening in the core. So I think we first take a look at the year over year numbers for the full year which is a great comparison, and then we'll give you some more guidance at the end of the fourth quarter about what our SG&A spend will be next year as we finish laying in all of our plans for next year.

Okay. And then are you satisfied with your new inventory level? Is that getting low? Do you think you can get it down some more? I think so Michele made some comments but I did not catch them all.

I think that's a never ending story. I think we had major hiccups in the first and the second quarter. I think we are correcting those. But I think that if we work well in terms of market segmentation and service levels with customers, inventory still has some room for improvement. And I believe that the processes we have put in place specifically in some areas of the world are giving fruition and will continue to give.

Okay. And then my last question, still to the inventory, but this time to your customers, you have seen the demand growing. Do you have a feel as to whether they are rebuilding their inventories to a certain degree or are they ordering by small amounts and actually filling them? Is the demand coming from their customers or are they just getting ready for when things pick up? Can you tell?

Actually I think that this recessionary environment has given a good inventory management lesson to everybody. And I think that, yes, some inventory will come back but some is gone forever because I think that companies out of necessity have learned to become more efficient.

So your guess is that whenever you get an order your customer is actually selling that amount as opposed to putting it back into inventory?

On a broad basis, yes.

Okay. All right. Thanks.

Thank you, Rose Marie.

It appears there are no further questions at this time. I'd like to turn the conference back over to Mr. Steve Brazones for any closing or additional comments.

Just want to thank everyone for joining us today for our third quarter conference call. Have a good day.

Thank you, ladies and gentlemen. This does conclude today's HB Fuller third quarter 2009 investor conference call. You may now disconnect.