H.B. Fuller Company (FUL) 2009 Q4 法說會逐字稿

Good morning and welcome to the H.B. Fuller fourth quarter and full year 2009 investor conference call. This event has been scheduled for one hour. Following today's presentation there will be a formal question and answer session. Instructions will be given at that time should you wish to ask a question. Management and attendance on today's call include 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 to Mr. Steven Brazones. Sir, you may begin.

Thank you, and welcome everyone. Today's conference call is being webcast live and will be archived live on our website for future listening.

Before beginning I'd like to inform everyone 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 defined as gross profit less SG&A expense, EBITDA is defined as gross profit less SG&A expense, plus depreciation and amortization expense. Adjusted earnings per share is defined per our earnings release and varies depending on the period and ROGI is defined as trailing 12 month gross cash flow divided by gross investment.

All the non-GAAP measures discussed today should not be construed as an alternative to reported results determined in accordance with GAAP. Management believes 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, acquisitions and share repurchase programs. The non-GAAP information discussed today may not be consistent with 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 our website at www.HBFuller.com under the Investor Relations section. I'll now turn it over to Michele.

Thank you, Steven. Good morning, everyone, and thank you for joining us today. A year ago as we began our 2009 fiscal year, global financial Markets were essentially frozen and we were in the midst of a global demand recession. Obviously the outlook for the year was very uncertain. While we knew for sure it was that 2009 would be a challenging year and that it's exactly how it turned out. Now, H.B. Fuller has a strong track record of cutting back and retrenching, so taking this approach in 2009 would have been a familiar and safe approach for us. Instead, we decided to stay the course on our strategic transformation and continue our investments to create a platform for long term profitable growth. We aggressively pursued raw material and other cost reduction opportunities to help fund these investments. In the end, despite the fact that our volume was down more than 10% from the prior year, our earnings per share in 2009 increased.

Beyond our earnings performance I can confidently say that our Company is stronger today than it was a year ago across many dimensions including our customer intimacy, strength of the management team, employee engagement and committment, and our capital structure and liquidity. The fact that we did all of this against the back drop of global recession and uncertainty is something of which the entire organization is extremely proud.

Turning now to the fourth quarter results which we are sharing with you today. Economic conditions have improved somewhat. While year-over-year comparison began to improve as we lapped the significant declines in demand that occurred half way through last year's fourth quarter, underlying demand has remained subdued. Nevertheless we continue to execute our strategy and we are pleased with incremental progress we continue to make. Let me share with you just a few of the highlights.

First, sequential improvement in sales continued. Net revenue increased 8% versus the third quarter to $342 million. New customer wins, the expansion of existing customer relationships and slightly better end market demand principally drove the improvement. During the third quarter earnings call we provided fourth quarter revenue guidance of $330 million for the quarter and we exceeded this mark by approximately 4%, an indication that sequential improvement in demand has continued through the second half of 2009. Second, we largely maintained gross margin at historically high levels. Although raw material costs increased versus the third quarter, and pricing declined slightly, higher volumes and reformulation efforts mitigated a large portion of the impact and kept gross margins relatively stable. Third, we achieved an EBITDA margin of 14.1% in the fourth quarter and returned to our long term target range of 14 to 16% for the first time since 2007.

Next, we continued to generate particularly strong cash flow. In the fourth quarter before taking into account pension contributions, we generated $79 million in cash flow from operations and for the full year, we generated more than $205 million. On a per share basis, this equates to over $4 per share in cash generation for the year. From an EPS perspective despite all the challenges we faced in 2009, adjusted diluted earnings per share for the year grew more than 4% over fiscal year 2008. We are clearly quite pleased that we were able to grow the bottom line even though our volume and revenue were down more than 10% versus 2008.

Lastly, we took steps to significantly extend the maturities of our debt portfolio and improve our liquidity position through an agreement to issue $150 million in senior unsecured notes. Market receptivity was high and we are very pleased with the success of our offering. All in all, we are very satisfied with how our team responded to the challenging business conditions in 2009. Despite the many uncertainties they faced, they took on a number of initiatives to position the Company for growth and never took their eye off delivering the bottom line and outperforming the broader market. I will now turn the call over to Jim for a financial and operational review.

Okay, thank you, Michele, and good morning to everyone. Let's review the financial scorecard derived from our strategic five year plan. The first metric we tracked is the year-over-year change in organic sales. While our results in the fourth quarter continued to be below our goal, we made meaningful progress in a challenging environment. In the fourth quarter, the rate of decline in organic sales was nearly cut in half from the previous quarter, from down 9.6% to down 4.9%. The sequential improvement was the result of easier volume comparisons, continued progress with new and existing customers, and generally more favorable end market conditions.

The second metric is trailing 12 month EBITDA margin. Our goal for this metric is to achieve and maintain a margin of between 14 and 16%. For the trailing 12 month period ending in the fourth quarter, EBITDA margin was 12.5%. Here too, we continued to make incremental progress with trailing 12 month EBITDA margin expanding nearly 100 basis points sequentially. Additionally, we ended the year inside our target range with a 14.1% EBITDA margin in the fourth quarter. The solid sequential improvement from the second quarter through the end of the year was driven largely by lower raw material costs year-over-year and a general improvement in product line profitability as a result of our reformulation efforts.

Next is return on gross investment or ROGI. In the fourth quarter of 2009, ROGI improved 50 basis points sequentially to 7.6%. Higher EBITDA, a continued focus on networking capital, and a general balance sheet asset management efforts led to the improvement. The final long term goal is to achieve a five year compound annual growth rate in diluted earnings per share of between 10 and 15%. As of the end of this year's fourth quarter, the trailing 12 months five year compound annual growth rate was 19.1% above the target range.

Now, I will provide you with an update on our balance sheet position and cash flow. During the fourth quarter we elected to make contributions into our two largest pension plans. In line with the performance of global equity markets, the market value of assets held in our pension plans declined significantly until the Spring of 2009 and then recovered substantially in the ensuing months until year-end. That said, our pension asset values declined by about $35 million between balance sheet measurement dates. In addition, the general decline in interest rates throughout the year reduced our actuarial discount rates and caused a meaningful increase in our projected benefit obligations or liabilities. Consequently, we elected to contribute $125 million, $75 million into our US pension plan and $50 million into our German pension plan. Cash on hand funded approximately $95 million of the contributions while additional borrowing under the revolving credit facility funded the remainder. These contributions brought both plans to essentially a fully funded status at fiscal year end and enabled us to avoid a large increase in pension expense in 2010.

Subsequent to the end of the year, we took a significant step towards improving our capital structure by extending the duration of our balance sheet debt and improving our short-term liquidity position. On December 16, we entered into an agreement to issue $150 million in fixed rate senior unsecured notes in the US private placement market. The proceeds of the issuance will be used to pay down our revolving credit facility and will leave this facility largely unutilized. In addition, concurrent with the private placement offering, we elected to swap half of the offering from a fixed to a floating rate of interest. As a result, our mix of debt will move from roughly 90% floating and 10% fixed to about 65% floating and 35% fixed. While this refinancing has several benefits, it will result in higher interest expense in 2010 of approximately $4 million given the higher proportion of fixed rate debt in the new structure.

Regarding net working capital, we continued to drive sequential improvement. As a percentage of annualized net revenue, networking capital declined from 16.4% in the third quarter to 15.5% in the fourth quarter. With higher volume versus the third quarter, all components increased in dollar terms; however, on both the percentage basis and a days basis, all components improved versus the third quarter.

From a cash flow perspective, the fourth quarter was another very strong quarter. Cash flow from operations before pension contributions was $79 million up over $70 million versus the prior year. Improved profitability and balance sheet management drove a large portion of the improvement in cash generation. In addition this year's fourth quarter cash flow was positively impacted by an $18.8 million legal settlement related to the Roanoke acquisition. Nearly the entire amount of this settlement benefited cash flow in the quarter as there was no immediate cash taxes due on the settlement.

With that as a summary of our financial performance, I'll now provide you a brief regional update. In North America, the region sustained a strong performance in the fourth quarter. With regard to external volume, construction related end markets remained weak and muted the sequential improvements achieved in the core adhesives end markets. While adhesives increased net revenue about 2% sequentially, specialty construction's net revenue declined more than 7%. The decline in specialty construction held net revenue for the entire region flat versus the third quarter.

Operating income for the region increased more than 35% year-over-year on lower raw material cost and reformulation benefits. Sequentially, operating income declined on a reported basis but was up on an adjusted basis. Restructuring costs associated with two plant realignments negatively impacted the region by approximately $3.5 million during the fourth quarter. Excluding these costs, operating income would have increased nearly 4% versus the third quarter and operating margin would have expanded 60 basis points quarter to quarter. Overall, we are very pleased with the performance of our North American region. They delivered a very strong finish to a very strong year.

In Europe, Middle East, and Africa, conditions remain stable and the business improved. Net revenue grew nearly 13% versus the third quarter. Higher volume more than offset the slight decline in average selling price to lead to the improved top line performance. The sequential volume gains were primarily attributable to new customer wins and a slight improvement in end market demand. Operating income for the region increased over 8% versus the third quarter to nearly $8 million. Higher volumes offset somewhat by additional investments for growth drove the expansion and operating income.

In Latin America, the region finished the year exceptionally strong. Net revenue increased more than 20% versus the previous quarter. While seasonality accounts for approximately half of the increase, the other half was driven by the regions efforts to improve its customer focus. New customer wins and expanded customer relationships in hygiene and packaging led to a significant sequential expansion in volume. Organic sales fell just 1.6% versus last year's fourth quarter but there was a notable difference between construction related end markets and the core adhesives markets. While adhesives posted positive organic growth of nearly 8%, paints declined 11% as they experienced a slower than normal end market demand in the normally robust painting season.

With regard to operating income, much work has been completed to enhance the regions profitability through process improvements. Reformulation has played a large role in helping to reduce product cost and the implementation of a shared services center in the region has helped keep operating expenses low. Overall, higher volumes and expense controls boosted operating income nearly 150% year-over-year and led to operating margin more than doubling to 8.8%.

Now finally, Asia Pacific continued to build momentum from the third quarter. Regarding net revenue, Asia Pacific was again the top performing region. Net revenue expanded nearly 10% sequentially and organic sales growth increased year-over-year from 2% in the third quarter to over 4% in the fourth quarter. Improved end market conditions, targeted geographic expansion and new business in packaging and hygiene drove the top line improvement. Operating income for the region was more than double last year's fourth quarter in dollar terms and nearly double in terms of margin to 7.9%. Improved volume together with operational efficiencies helped to drive this profitability improvement. And now I'd like to turn the call back to Michele for a look ahead to 2010.

Thank you, Jim. Last year, given the uncertainties in the global economy and lack of forward visibility, we decided to not provide specific earnings per share guidance for the 2009 fiscal year. Instead, we tried to provide a general picture of how we viewed our markets and we provided some more specific guidance as the year progressed. Again, this year, we will not provide specific earnings per share guidance. Instead, I'd like to share some general observations about what we see for the coming year.

As we look ahead to fiscal year 2010, there still remains some uncertainty with regard to market demand. While the worst is behind us, we do not anticipate a quick return to pre-recession demand levels. Nevertheless, given our current pipeline of new business, we expect to outperform the market with regards to net revenue growth in fiscal 2010. With respect to gross margin, we will strive to maintain profitability around current levels. With that said the raw material environment we will face in 2010 will be different. While 2009 was a year of significant raw material cost deflation, we expect low to mid single digit raw material cost inflation in 2010. As usual we will utilize the tools at our disposal to mitigate the impact of these uncertain inflationary raw material environment. In SG&A our investments in the business will accelerate in 2010 to further support organic growth especially in Europe and Asia Pacific but also in the technology area. We are committed to our long term growth strategy and will take the actions necessary to enable the organization to succeed in achieving and maintaining profitable growth. Capital expenditures are expected to be $25 million in 2010 and will again be below depreciation expense, and lastly the effective tax rate for 2010 is expected to be approximately 34% before discrete items, in line with 2009 on a comparable basis. All in all, a strong quarter and good prospects for the future.

Now before I conclude my prepared remarks, I would like to thank all of our dedicated associates around the world for their smart and hard work in navigating the difficult economic conditions that persist this year. Their strong efforts, dedication and focus on results are very much appreciated. We are today a much stronger Company and this gives us confidence in our growth agenda. I would now like to open the call up for your questions.

(Operator Instructions) We'll take our first question from Jeff Zekauskas from JPMorgan.

Hi, good morning.

Good morning, Jeff.

The first question I have is on Latin American profitability, the $5 million in the quarter. Is that in any way a representative number going forward for you or is there something unusual in that profitability?

Well, I think we started doing better work on the (inaudible) side, there was improvement in all areas specifically on the profitability side. We started really getting more focused on the core segment so I would say we're pretty happy with that trend that is really expected to continue. On the paint side, we clearly had an environment that didn't help and that I clearly do not expect to continue.

Secondly, in terms of your estimate of gross margins being roughly flat next year or comparable to where you are now, I take it though that there will be a normal seasonal decrease in the first quarter and then you would expect some recovery later in the year?

Well, we are trying to change lots of things here, Jeff, and I think that if we do a good job we'll be able to also change some of the seasonality, so top line and gross margin. Clearly as for SG&A since we are investing heavily and some of that you've seen it already in 2009 and that, is money getting out first and the returns coming back later, there maybe would be a bit counter cyclical.

And then lastly before I get back in the queue, would you expect your volumes to grow next year?

Yes.

All things being equal?

Yes.

Thank you.

From KeyBanc we'll move now to Mike Sison.

Hi guys, congrats on a good end of the year.

Thank you, Mike.

In terms of volume growth next year, you've talked about your new product efforts and some new product wins. How much growth do you have sort of in the bag from these wins and heading into next year that you feel pretty comfortable with?

Well, I think a lot of new business has already been landed. That's why we are fairly optimistic on the top line, but the most important thing is that there is great momentum at H.B. Fuller all over the world in landing new business and in doing that in a disciplined way, working better with customers and clearly part of that is through new products, so that's why we feel pretty optimistic about the top line growth.

And then when you think about volume growth sequentially going forward, you had a nice improvement in the fourth quarter versus the third quarter of '09. Are you sort of thinking sort of a normalized based on a low growth recovery sort of the first quarter tends to be down from the fourth, second tends to be better than the first, third tends to be better than the second and back down in the fourth?

Well, Mike, without getting into specific numbers, I can tell you that even if sequentially in the fourth quarter we improved we were still on the negative side which is not acceptable for a transformation strategy, so clearly our expectation for 2010 is to be clearly on the positive side outperforming the market and given our low share, I think there is a lot of opportunity to do that and based on what I've seen over the last five, six months, a lot of new business is supporting that.

And just last question, when you think about, I mean I think the perception out there is for low growth economic recovery globally. What would the adhesives markets grow? What's sort of the growth rate should the industry grow in light of that type of a recovery?

Well, I think that the way that I see it if you'd remember in 2007, I was one of the most pessimistic, I think that maybe today I'm on the other side. I think in North America, there is clearly stabilization from a macroeconomic standpoint and now it's not going gangbusters but the stocking has been finished and the situation is becoming more stable and I think that North America will recover faster than Europe.

Now as far as our performance in those two regions I think we are going to exceed the market because there is a lot to recover in terms of volume and revenue from the past so I think we will outperform the markets, with North America being more stable, call it growing at maybe around 2% the market and we expect to do better than that, and Europe I think will suffer a bit, specifically Western Europe from a macroeconomic standpoint, but the momentum that I see, the customer wins that I see make me optimistic as far as really outperforming that macroeconomic trend, and as for Asia, it's going to continue to accelerate. We're going to help that region with farther investments, acquisitions, investments not just in SG&A but also investments in potentially building new plants and getting into new markets with infrastructure. Same for the Middle East and India which are part of our macro European region so they are two different stories at the same time and Latin America we also see it recovering and doing better also from a macroeconomic standpoint.

Great. Thank you.

Thank you, Mike.

Our next question comes from Jason Miner with Deutsche Bank.

Thank you, good morning.

Good morning, Jason.

Michele, on reformulation, how much farther can it go? Can you offset SG&A investments and what you expect in ROS in 2010 through reformulations?

Well, I think that reformulation is clearly an area where we've got better but there is still clearly room to go because every day you are learning something new and the more you talk to customers and the more you learn from them the more you can be there to help them out but the other component that is going to help us from a gross margin perspective to try to -- basically to strive for maintaining gross margins is also the volume leverage. Clearly that's going to help, plus some of the restructuring actions that we took in 2009 plus some of the efficiencies that's going to help us on the gross margin line.

Okay, and then just on the margins, I think the pricing environment in the second half of '09 turned out sort of surprisingly stronger than perhaps we had feared. What's it like now for prices when we look into 2010?

Well, it's a delicate balance but it's clear that we have good processes, that we are not going to go away and that we are going to work diligently with our customers to make sure that it is not just reformulations, it's not just volume leverage, it's not just mix of new, better products, it's not just new markets more profitable but it's also pricing, right? Clearly we have learned to be judicious about that and working collaboratively with customers, but clearly with low to mid single digits expected inflation, pricing will have to do its part.

So can price go up now that raws are rising in short?

Yes.

Okay, well, last -- that's very helpful, thanks and lastly I just wondered since you mentioned acquisitions I think in pasting, remind us what you're thinking these days about where you might be interested?

Well, clearly, and I always go back. I don't want to be sounding like a broken record but, you know, the plan is the one that we announced in October of '07 and we said that it was for sure geographic expansion in some of the fast growing regions and we are going to execute on that so stay tuned there, plus we are always actively scouting for opportunities of companies that are getting distressed out of this recessionary environment and provide opportunities for consolidation. I think that with our performance that I think has been much better than all our peers, we can take on acquisitions and generate pretty good synergies. Specifically in the core areas that we know very well.

Thank you very much.

Thanks, Jason.

We'll move now to Steve Schwartz with First Analysis.

Hi, good morning everyone.

Good morning, Steve.

Michele, the SG&A trend, you're up around $70 million a quarter right now, you mentioned it could be higher in 2010. Can you give us an idea of where that might go?

Well, I think a lot of this has started already in 2009 and clearly, there were lots of costs were in the past that maybe were too much in some areas, plus we see lots of opportunities in the marketplace for us to do different work with customers. There is a lot of need for technical service, a lot of opportunity for innovation, plus from our customer facing perspective, there is a lot of opportunity for develop the talent we have and upgrade with additional talent that is available in the marketplace, so we have to capture that opportunity. It's been done judiciously. We're not changing our D&A but it is clear that we are looking at that SG&A not as a spend but as an investment, and I have to tell you that so far, I'm pretty happy with the quality of talent we have acquired with the development actions we have started with the internal talent, engagement in the Company and committment from the employees is at record highs and we're going to feel that enthusiasm of course in a judicious way, but you can expect SG&A to go up, acquisitions to continue like we did with (inaudible) and investments to continue as well. I think that's the key for our future success. That's what is going to make us grow faster than the market and do it in a profitable way.

Okay and so the cost of doing those things in FY '10 might be an extra $5 million or so?

I'm not providing specific guidance at this point but I can tell you that we are making sure that we are building something that is there to last.

Okay, and then just my follow-up. With respect to Europe and the negative pricing, can you talk just a little bit about the dynamic there? I think in the past you'd mentioned that it was a highly competitive environment. How do you see this playing out over the next couple quarters with what we saw in the Fourth Quarter?

Well, you seen that we have made significant changes in the leadership team. We've brought terrific talent there and we are pretty enthusiastic. Most importantly the employees of Europe are enthusiastic. They see fantastic leadership. There is developing talent. There is acquired talent. It is investing in the business and it's knowledgeable and that speaks of very positive prospects for next year on the top line, clearly there are lots of things to be rebuilt in Europe, so a lot of investments to be made there and remember the investments are going to be on one side of customer facing so that's what is going to propel faster than market growth, plus lots of investments to get into India, into Middle East, into call it the Asian past of Europe.

Yes and so do you think those things will help support pricing or at least hold the pricing versus where it looks like maybe you've had to reduce prices to maintain some volume?

I think that we are becoming let's put it that way much more competitive in Europe but also much smarter. I think that we have understood very well how to align pricing with cost economics and I'm pretty confident about the European prospects, not just the African and Indian and Middle East part but also the Western Europe part. We have terrific leadership there and I tell you it's fun to watch.

I agree with you on the management changes. Thanks for taking the questions, Michele.

Thank you, Steve.

From Sidoti & Company we'll move to Christopher Butler.

Hi, good morning guys.

Hi, Chris.

Just wanted to kind of circle back to the SG&A question. I heard that Jim mentioned that there was restructuring that took place in North America. Is this part of the reason that SG&A is a little bit more inflated than we had seen in prior quarters and also could you sort of give us the details of the restructuring and the thought process behind that?

Yes, Chris, the restructuring cost that we had in North America were essentially all in cost of goods sold, so they don't impact the SG&A number at all. The restructuring, there were just two events in North America. The one that we had disclosed in the third quarter was just following through, it was the tail of that that followed through in the fourth quarter and then there was one additional one in our North American operations that happened to be in Canada and I think as we mentioned the total charge in the Fourth Quarter of those two together was $3.5 million. All in cost of goods sold, essentially all.

And shifting gears a little bit, as we move here into 2010, you're going to start to benefit from some much easier comparisons due to the inventory destocking that really kind of took hold at the November-December of last year or two years ago I guess at this point. Could you give us some indication of the impact there that is going to alleviate as far as your numbers are concerned this year?

Well, actually, it creates then the reduction in the destocking trends we've already started seeing in the fourth quarter so that's what we were referring to in terms of improved demand but clearly the panorama is a bit less dramatic than it was 12 months ago so clearly we are going to have easier comps plus we're going to have our added investments for growth that are already paying back but are going to accelerate.

Could we see as much as 5% volume growth just from the alleviation of the destocking and then you add-on any market share gains or improvement over the course of the year to that number?

At this point in time, I think that I have said what is my perspective on the macroeconomic trends that are better than what others see. That is not just destocking but it is also underlying demand and I have said and I repeat it here that we are going to outperform that, so overall I would say a pretty positive picture but I would say let's stay tuned and let's watch this quarter-over-quarter. The reason why we aren't giving guidance is specifically because still while we have our good positive sentiment, the environment is still cautious out there so like you we will monitor this and we'll be judicious but one thing is clear, growth is going to come.

And I noticed in your commentary that you're very forthcoming with the SG&A and some possible build there to go after organic growth initiatives whereas acquisitions seemed to come later. Is that the pecking order now? Do you have better internal investments than external investments?

No. We are pursuing both, different areas of the business in terms of market segments and different geographies call for different approaches, you know? Everywhere we go and we look at what's the best way to manage with our own forces versus putting steel on the ground versus acquiring or making joint ventures and we have projects all over the place in terms of those options. We have our process internally that looks at all (inaudible) and we try to be very creative, very determined but you're going to see investments either acquisitions are organic in the areas we're talking in October of '07 and we have things in the pipeline that we are trying to execute. Basically we are trying to make sure that our portfolio is aligned with the strategy.

I appreciate your time.

Thanks, Chris.

(Operator Instructions) We'll move now to Dmitry Silversteyn of Longbow Research.

Good morning gentlemen. A couple of follow-up questions if I may. Michele, you've talked several types about market share gains and outperforming the market both in 2009 with what you've done and also the ground work that you've laid last year for the upcoming 2010 fiscal year. Can you give us an idea of if you have an estimate of how much market share you thought -- you think you've picked up or maybe put it differently, what do you think the market has done in terms of growth versus what the Company has been able to accomplish?

Well, Dmitry, a lot of this is anecdotal because you know very well that few of our competitors report, they report typically later so we will need a bit more time to give our impression on what specific numbers would be, plus a big number of competitors are private companies that don't report or the market segments are embedded into much bigger companies. Overall, I think that we are pretty sure that we have been doing a good job with customers both existing and new customers, we've been doing that diligently from a pricing perspective, we expect that to continue. Speaking right now of specific market share gains, I don't think is yet the time. Hopefully during 2010 we will be able to be more clear and quantitative and solid about that.

Fair enough. On the raw material front you talked about expecting low to mid single digit increases in raw material pricing in 2010 versus 2009. Just kind of looking at the charts of some of the chemicals would it be fair to say the first half of the year will be more challenging than the back end?

Well, I'm not so sure about that. I expect demand to pick up progressively during the year so with the inflation together with it.

Okay, you saw most of the price declines kind of occur in the Spring of 2009 so as you're coming up against comping versus that I thought maybe the comps will be particularly negative in the first couple of quarters. One of the things that we heard in talking to various players in the industry is that part of the reason for pricing stability, not just in adhesives and sealants, but pretty much across the chemical space was that there's really no volume to be had out there so there was no point in chasing it by trying to play the pricing game. Given that you expect volumes to improve perhaps low to mid single digits without quantifying it, is there a possibility that the pricing competition may reemerge as there is volume to be chased in 2010?

Well, I think that the inflation will keep that in check.

So you think the raw material costs going up from these levels even though they aren't as high as they were in 2008 would be a sufficient deterrent from less disciplined players lowering pricing?

That's my expectation at the point in time plus they count a lot of the distressed companies have a lot to recoup from what they lost in 2009 so I expect everybody to be very very cautious before using the price lever to go for volume.

Okay, and to kind of look at the other side of the coin, are your customers in a position to accept price increases given that the values aren't going to be particularly robust this year either?

Some areas yes, some areas not. I think segmentation will be key and I feel much stronger about our marketing intelligence today than it was two years ago.

Would you say that the efforts that you've made since you were at the helm in trying to kind of sell more value and really differentiate your customers by profitability and where you can provide service and where you aren't getting paid for service is to make pricing decisions a little bit more laser like and fine tuned across the board and hopefully allow you a better chance to get pricing?

Yes, the short answer is yes. Clearly, there is always room for improvement but I think that today we have found a much better balance than years ago as far as alignment between price and cost to serve but also maintaining customer relationships . That's why everybody here feels pretty comfortable about growing sales in a profitable manner in the long term and not just one quarter, one

And then the last question on the SG&A line, you talked about making investments last year in SG&A and this upcoming year. Can you give us some idea on kind of what are some of the specific things you're working on that will consume a big chunk of your incremental SG&A increases in 2010 as well as what can we look for to try to understand that the payback and the return on this investment that you're getting?

Well, a lot of the investments are on the customer's facing side so call it sales, technical service so the way that we track the return on that investment is are we first of all moving from negative organic growth to positive and then second step, are we actually outperforming in the market in terms of organic growth rates versus what the market is doing. So a lot of customer facing investments, a lot of that is additional people and some of that is upgrading the current team and some of that is developing the team and providing training and tools that we have been doing in the previous years.

Is there a specific region, you've talked about Europe being a particular focus for you. Are there some regions that are further ahead in this curve and others?

Well, I think that North America did very good job in 2009 and you've seen the results which have been terrific this year. That's going to continue and I think there is some catchup that Europe needs to do but with the new leadership I already see and I've seen the plans is pretty good. Asia Pacific has also started maybe a bit later than North America but is also moving at fast speed. We have terrific talent there and are committed to profitable sales growth and Latin America will follow.

Okay, thank you very much, Michele. Very helpful.

The next question comes from Rosemarie Morbelli from Ingalls & Snyder.

Good morning, all.

Good morning, Rosemarie.

Michele, could you give us a feel as to whether -- I mean, you are talking about the fact that there is not much in terms of visibility but do you see any change in that visibility? In other words, last quarter did you see customers placing orders three weeks ahead of time and now they have moved out one month, two months? Could you give us a better feel for what you actually see?

Well, the point in time is a lot is anecdotal right, and plus it is a bit blurred by our own actions which are much more proactive and commercially sound than in the past but overall, destocking we haven't seen anymore of that. We have seen far less restructurings from our customers. The payment conditions are better than they were six months ago so those are some of the key indicators where we see that demand is picking up a bit. Clearly, one other factor that blurs the vision still is what was really the impact of all of the incentives that have been given in different industries around the world, so maybe in one quarter from now we can be a bit more explicit not only to the question of (inaudible) market share but also as to us this visibility, but so far, we see it a bit better than others see it and we see things starting to stabilize specifically in North America, things moving very well in Asia Pacific and Middle East and Africa also moving very fast. Europe, there is a big question mark as far as what will be the impact from a macroeconomic standpoint of those incentives drying up, plus the different social mechanisms that they have been using so far so what will happen also with unemployment there. We don't know that but you know what? With our market share that is around 5%, a lot is going to be driven by what we do in the marketplace with our own forces.

And thank you, that is helpful. And just following up you said that destocking has stopped. Do you see any inventory build up or do you have, can you tell if your customers are actually selling whatever they buy from you?

We haven't seen yet really massive inventory upticks from customers. I think first of all people are still cautious out there, plus I think that 2009 has been a great lesson in terms of improving efficiencies for several companies and some of the inefficiencies call it inventory, one of those, partially are gone forever.

Okay, and while you cannot talk specifically as to your market share gain, could you give us a feel as to which areas you're gaining new business or seeing your customers growing faster than in other areas?

Well, clearly, in the core areas that we declare in 2007, call it packaging and hygiene for instance, we've been doing a great job, customers have been understanding that, plus there are market segments where we have made good end roads like flexible packaging and we are very determined to be successful there. On top of that you have areas like Egypt or India where we were underrepresented before and, the acquisitions and the investments we have made are paying back, so it's an overall theme of doing things better and smarter and starting to pay back. That's why we are speaking of outperforming the market from a top line perspective.

All right, and you talked about growing by adding maybe steel in the ground $25 million in CapEx based on the pattern of your capital expenditure annually doesn't seem to be doing it, so are you planning on first looking at acquisition an then if you don't find what you like you will start putting steel in the ground and that therefore may be a couple of years out? Could you give us a better feel for that?

No, actually, without getting into specifics that I cannot talk about that right now, we have in the pipeline both acquisitions and putting steel in the ground.

And $25 million already covers that? I mean not acquisition obviously.

Yes, of course, everything has to be properly adjusted so the three projects they are all going to hit and they are all going to hit at the same time so when you put the phasing and timing, and the likely ability, that was our most educated guess at this point in time. If things accelerate because instead of one project we feel like we can do three and we will clearly provide guidance to that number on the next quarter. Jim, do you want to add something here?

Yes, Rosemarie, we've mentioned in the past that just as a rule of thumb for our capital expenditures about -- if $25 million is our forecast for this year, about half of that relates to just ongoing maintenance and spending and the other half is discretionary for capacity increases in certain areas or geographic expansion so there's still -- within the $25 million number there's still quite a bit of room for capacity and other expansion investments. We're finishing off our investment in China for example, and then we still have a lot of room to do some other incremental expansions beyond that.

Thanks, that is helpful. And if I may ask just one last question. Michele, you said that you were more optimistic than other people on the Street in your business, how does your optimism compare to that of your customers?

Well, I think that a lot of this is derived from what we hear from the customers and as far as investments for the future I think still people are cautious out there and again a lot of our optimism is derived also from what we can do with our own forces, but I already hear people starting to speak again about long term investment projects, new product development projects, new applications that before everybody was in a fire fighting mode, so those are the feelings, the vibes we get at the point in time and we will keep updating you on a quarterly basis.

Thank you. That is very helpful.

Thank you, Rosemarie.

(Operator Instructions) We have a follow-up from Jeff Zekauskas with JPMorgan.

Thanks very much. I guess a question from Jim, what did the discount rate change to for the pension plan and how much did the change in the discount rate affect your pension liability?

Well, I don't have the answer to the first one right in front of me. The second part of your question, how much did it affect our pension liabilities, Oh, the bulk of the underfunded status that we generated between measurement dates, the more than half of it related to discount rate changes if that's a place to start on your answer, and so that's probably in the magnitude of 70 million to $80 million, something like that. I'm looking here, we're going to file our 10-K next week. You'll see all of our discount rate and all of our assumptions in great detail. Our discount rate, so I don't actually have the number on the discount rate in front of me right now, Jeff.

Okay.

Did that help you at all?

No, but I can see it in the K or we can follow-up.

Okay, hang on. While I stumble along here, other people dig for numbers, okay? And so now I have some numbers in front of me here.

Okay, great.

Let's see. So discount rate for the US pension plan is 5.72% at the end of 2009 as compared to 6.94% at our measurement date of last year. The new one is 5.72%, the old was 6.94%. That's the US pension plan. Okay?

And then just lastly for Michele, can you just give us a sense of how the general construction markets are changing? A theme of your conversation has been how adhesive markets are stronger and construction is lagging. Do you see construction markets turning around relatively soon or do you think that will be a tough area for 2010?

Well, for sure, it's going to be less worse than 2009, it is stabilizing and we expect some growth. Clearly I don't think we're going to go back up to $2 million houses but it's stabilizing at the bottom and starting to grow from there but I don't think we're going to have doubling the volume that some may expect. Still I think we are at historical highs and inventory is starting to move and I think that together with some of the changes we made in our construction businesses and consumer businesses is going to get a more positive picture in 2010 from a top line perspective for us.

So you think it will grow though?

Slightly.

Okay, thank you very much.

Thank you, Jeff.

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