H.B. Fuller Company (FUL) 2010 Q2 法說會逐字稿

Good morning and welcome to the H.B. Fuller Second Quarter 2010 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 in attendance on today's call includes Mr. Michele Volpi, President and Chief Executive Officer, Mr. Jim Giertz, Senior Vice President and Chief Financial Officer, and Mr. Steven Brazones, Assistant Treasurer.

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

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

Before beginning, I would like to inform everyone that certain matters discussed during this call will include forward-looking statements as that term is defined under the Private Securities Litigation Reform Act of 1995; since such statements reflect our current expectations, actual results may differ. In addition, during today's conference call we will be discussing certain non-GAAP financial measures, specifically operating income, earnings before interest expense, taxes, depreciation expense, and amortization expense, or EBITDA, and return on gross investments, or ROGI.

Operating income is defined as gross profit less SG&A expense. EBITDA is defined as gross profit less SG&A expense, plus depreciation and amortization expense, and ROGI is defined as trailing twelve month gross cash flow divided by gross investment. Also, during today's call all references to gross profit, SG&A expense, operating income, EBITDA, and diluted earnings per share will be discussed on an adjusted basis. They will exclude the exit costs and non-cash impairment charges associated with the exiting of the Company's polysulfide insulating glass ceiling product line in Europe.

All non-GAAP measures discussed today should not be construed as an alternative to the recorded results determined in accordance with GAAP. Management believes the discussion of these measures is helpful because it assists in understanding the operating performance of the Company and its operating segments as well as the comparability of the results, and it provides insight into the ability of the Company to fund such things as debt reduction, acquisitions, and share repurchase programs. The non-GAAP information discussed today may not be consistent with the methodologies used by other companies. All non-GAAP information is reconciled with reported GAAP results on the last pages of our presentation.

For more information please refer to the recent press release, 10-Q filing of March 31st, 2010 and end report for the year ended nor November 28th, 2009 on Form 10-K, as amended, filed with the Securities and Exchange Commission, both of which are available on our website at www.hbfuller.com under the Investor Relations section.

I will now turn the call over to Michele.

Thank you, Steven.

Good morning everyone and thank you for joining us today. We are pleased with our second quarter results and the ability of the organization to deliver in the midst of a transformation, a transformation to a Company organized around and focused on driving consistent organic growth. We have taken several bold steps over the last year and a half to invest in this transformation, going against conventional wisdom. When others were downsizing and shutting down facilities, we increased our investment in people, training, and innovation, and took advantage of the unique talent opportunities that existed in the marketplace. As a result, today we are capitalizing on our investments and achieving strong organic growth, while others are being forced to play catch-up.

We are pleased with the position we are in, but more importantly, we are excited about the opportunities we see in front of us. This quarter's results, particularly from a sales perspective, are a strong indicator of the success we are experiencing and the momentum we are creating. Let me share with you in more detail a few of this quarter's highlights. First, on a consolidated basis, net revenue grew more than 16% year-over-year, adding nearly $50 million in sales, versus the second quarter of last year, and almost $40 million sequentially. Nearly all of the increase in net revenue was attributable to organic growth. Driven by strong volume gain, organic sales increased 13% year-over-year.

Our continued focus on investing in commercial resources even through the downturn to improve our customer relationships is beginning to meaningfully enhance our growth performance. Second, from a segment perspective, North America, year-on-year, and Asia Pacific, each achieved double digit organic growth. Most noteworthy, were the EMEA and Asia Pacific segments; they both achieved organic sales growth in the second quarter of more than 18% year-over-year. Asia Pacific continues to execute well and the new team in Europe is already having a very positive impact on results.

Next, H.B. Fuller construction products in North America, formerly known as Specialty Concession brands, grew organic sales by 18.4% year-over-year. The growth was primarily attributable to expanded business relationships and new business wins, amid a stabilized residential construction environment. In addition to the broad based sales improvements achieved in the second quarter, gross margin was maintained as historically high levels, despite the nearly double digit raw material cost inflation we faced. In the second quarter, gross margin was nearly 30%, and through the first six months of the year, gross margin was 30.5%.

Also, in the second quarter, we took a significant step toward improving the growth and profitability profile of our EMEA segment by exiting the polysulfide insulating glass ceiling product line in Europe. This is a commodity product line that failed to meet return on gross investment targets. Through the first six months of the year, this product line reduced operating margin for the segment by approximately 100 basis points and reduced the segment's growth rate by more than 4 percentage points year-over-year. Exiting this business will immediately improve ROGI and allow the region to focus on more innovative products for its core market segments.

Lastly, after adjusting for the impairment charges associated with the exited product line in Europe, second quarter earnings per share increased more than 8% year-over-year to $0.39 per diluted share. In the quarter, that included gross margin pressures from rising raw material costs; we are very happy with the growth in earnings per share achieved. With that, as a quick summary of our second quarter, I will now turn the call over to Jim for a review of the financial and operational performance.

Okay. Thank you, Michele, and good morning.

As we have done each quarter, I will start with a quick review of our financial score card. On the five year financial target that we originally set at our Investor Day event in 2007, and of course that date marked the beginning of our strategic transformation. In the second quarter, our organic growth trend continued to strengthen. Organic sales grew 13% year-over-year; strong double digit volume growth offset by a slightly lower average selling price led to the increase in organic sales. While volume benefited from a relatively easy comparison year-over-year, we continue to successfully add new business and grow existing customer relationships. Our goal is to achieve and maintain a compound annual growth rate in organic sales of between 3% to 5%. In fiscal year 2010, we will exceed this goal. But more importantly, the investments we are making this year will support future growth within or even above the target range.

EBITDA margin for the trailing 12 month period ending this quarter eased 50 basis points versus last quarter, to 12.7%. The decline was primarily the result of pricing actions lagging raw material costs increases and a higher level of SG&A spending associated with further investments for growth. Our goal for EBITDA margin is to be between 14% and 16% each year. We will achieve this profitability goal in the future, by slowing operating expense growth to a rate below revenue growth, thereby realizing the return on our infrastructure investments made in 2009 and 2010.

Return on gross investment in the second quarter expanded 20 basis points to 8.6%. The increase in ROGI was entirely attributable to the reduction in gross investment as gross cash flow declined slightly on a sequential basis. Gross investment was reduced mainly by the decline in the US dollar value of the European assets as a result of the weakening Euro, and the write down of the European insulating glass product line. Our ROGI goal is to be between 10% and 12%. As with our EBITDA goal, we also expect to reach our ROGI target in time as the benefits from our investments are fully realized. Our final metric is EPS growth. Our long term goal is to maintain a five year compound annual growth rate in diluted earnings per share between 10% and 15%. At the end of the second quarter, the five year compound annual growth rate was 19.5%.

So now let's turn to the balance sheet and cash flow. Cash on hand at the end of the period totaled $161 million, and total debt was $292 million. Net debt of $131 million was essentially flat with the first quarter. In April, we successfully renewed our revolving credit facility. The new facility provides us with $200 million in committed capacity and extends our maturity date from December of this year to June of 2013. Based upon the Company's current BBB corporate credit rating from Standard and Poor's, fully drawn pricing on the facility is LIBOR plus 225 basis points, up from the original revolving facility of LIBOR plus 62.5 basis points. Financial covenants remain unchanged. At the end of the second quarter, $26 million was drawn on this facility with $174 million of unused capacity.

Networking capital in the second quarter declined 260 basis points year-over-year from 18.2% of annualized net revenue to 15.6% this quarter. Sequentially, networking capital also declined on a percentage basis and all components improved on a day's basis. Cash flow from operations in the second quarter was $15 million, down approximately $40 million versus last year's second quarter. Higher networking capital requirements to support the significant increase in sales reduced cash flow. Last year as sales were declining, networking capital was a significant source of cash flow. This year, the opposite is true, and we have had to ramp up our investments to support growth. Lastly, regarding capital expenditures, we invested $6 million during the second quarter. This is about the same amount as we invested in last year's second quarter. Year-to-date we have invested $15.4 million, $5 million more than the first half of 2009. Most of this increase is associated with the completion of our new manufacturing facility in Nanjing, China, which became operational at the end of the second quarter.

With that as a summary of the financial performance, I will now provide a brief segment update. In the second quarter, all segments achieved strong organic growth; North America, EMEA and Asia Pacific each achieved double digit growth. In general, each segment benefited from improved end market demand, new customer wins and expanded business with existing customers. Profitability for most of the segments eased slightly year-over-year as pricing actions temporarily lag raw material cost increases and incremental investments for growth led to higher SG&A expenses versus the prior year. In North America, both business components delivered strong organic growth, adhesives grew 8.2% versus the second quarter of 2009 and construction products increased organic sales 18.6%. Nearly all adhesive market segments exhibited stronger volumes in the second quarter. Our new and rejuvenated sales and marketing teams were successful in landing meaningful new business and improved economic conditions led to stronger order growth with existing customers.

In construction products, stabilized conditions, end market conditions, helped, but the most significant driver of the growth was the expansion of business with a key customer. During the quarter one of America's largest big box retailers awarded us additional product lines and expanded the number of stores that carry our products. Our team has been very successful in partnering with this customer and delivering new products. The unique and innovative product, Grout Boost, is a prime example. In Europe, India, Middle East Africa, the segment generated organic growth of 18.2%, significantly outperforming the broader market.

Volume growth was more than 20%, as all key market segments exhibited strong new business gains. Strong underlying market demand in both the Middle East and Africa coupled with the success the sales teams have had in landing new business in these emerging markets has meaningfully benefited the entire segment. For example, in Turkey, net revenue expanded more than 25% year-over-year in the second quarter.

During the quarter we announced the exit of the polysulfide insulating glass product line in Europe. As a result of that decision, the EMEA segment incurred pretax exit charges of $2.6 million. These charges reduced both segment operating income and EBITDA in the second quarter. Now, as Michele mentioned in the opening comments, this product line was an underperforming asset which diluted the relatively more positive results of our core adhesives business. To put this into context, as reported organic growth in the first half of the year for EMEA was 13.4%. However, without the polysulfide product line, organic growth would have been 17.7%. Adjusted operating margin, which excludes exit costs was 5% in the first half of the year; without the exited product line, adjusted operating margin would have been about 6% or about 100 basis points higher. Going forward, our regional team will be able to more effectively focus on growing the value-added portions of their portfolio.

In Latin America, adhesives continued to fair better than paints, but each experienced very different end market conditions. Adhesives experienced improved end market conditions and successfully expanded relationships with global accounts. As a result, adhesives organic sales increased more than 18% year-over-year in the second quarter. For paints, the significant slow down in construction-related activity continued to hamper growth. In the second quarter, organic sales for paints declined 3% year-over-year commensurate with the decline in the overall market in the region.

Lastly, our Asia Pacific segment continued to post strong organic growth of 18% year-over-year. Growth was driven by higher volumes across most countries and market segments as the regional economic recovery began to pick up and additional business was won. Most encouraging is the fact that more than 10% of the region's net revenue year-to-date came from products that were developed at the new Regional Technical Center in Shanghai. This is an excellent example of how our recent investment program is paying dividends by enhancing growth. Also, at the end of the second quarter the new manufacturing facility in China, which was completed on time and on budget, began production of reactive adhesives; together with a new commercial team in China and a new, fully-operational regional technical center, the sales and marketing teams have been very successful in getting into new markets within the region. Overall, profitability for the segment improved significantly year-over-year.

With that as a segment update, I would like to now turn the call back to Michele for a brief discussion of our expectations for the remainder of the year.

Thank you, Jim.

As we enter the second half of the year, we have, clearly, momentum. We are strengthening customer relationships and winning new business. Organic growth is strong and broad-based. It is clear to us that our investments for innovation and growth are enhancing the organization and this gives us increased confidence. For fiscal year 2010, we expect the sales momentum we have created to continue and for net revenue to grow between 10% and 12%.

Despite the recent weakening of the Euro, we increasing the outlook for the year, as organic growth is running stronger than we previously anticipated. Consequently, the anticipated detriment from exchange rate movements on net revenue growth from the second half of the year is expected to be more than offset by incremental organic growth. Regarding the impact from our recent acquisition of [Reboteck's Fine Waters] on net revenue, we expect its contribution to be completely offset by the loss of sales from the exited product line in Europe. Regarding raw materials, we now expect 2010 costs to increase about 8%, up from our previous expectation of 6% for the full year. Production outages are limiting the supply of water-based raw materials and the economics of cracking gas instead of oil are keeping the supply of hot metal materials very tight. To offset these increased costs, we started implementing pricing actions already in second quarter and additional pricing actions are planned for the second half of the year.

As a result of higher raw material costs and shortages, we will continue to aggressively pursue reformulation opportunities, not only to reduce costs, but also to help sustain supply to our customers. As a combination of these actions, close the gap with raw material costs, we would expect gross margin to improve sequentially through the end of the year. For 2010, given the pipeline of new investments in our current unrated expense, we are increasing our expectation for capital expenditures from $25 million to a range of $25 million to $30 million. Lastly, regarding taxes, we continue to expect an expected tax rate, before discrete items, of approximately 34% for the second half of the year.

With that said, I would now like to open the call up for your questions.

Thank you. The question-and-answer session will be conducted electronically. The Company would like to provide everyone the opportunity to ask a question, so if you could please limit yourself to one question at that time, it would be greatly appreciated. You may re-queue as offer as you would like time permitting. (Operator Instructions).

We will go to Jeff Zekauskas of JPMorgan.

Hi. Good morning.

Good morning, Jeff.

Your pricing actions that you have begun to offset raw material price increases, is this on the order of 2% or 3% currently and you expect to push something similar through in the second half, and is this a global increase or mainly the US or Europe? Can you talk about some of the magnitudes in the region?

Yes, Jeff. Clearly, raw materials year-over-year, mid-year, are up 8%, and sequentially, in the second quarter, they were up 5%. So, clearly, 2, 3% price increase doesn't cut it. Also because we expect, sequentially, even if diminishing, but still sequentially to go up higher, in Q3 and also some in Q4, so we believe in a smart way, very collaborative with customers, but we started implementing already in the second half of the quarter. We have already seen it in our price volume mix analysis that it is really hitting the ground but clearly more is expected to take place in Q3.

Those increases, I am very confident, have been properly done, to make sure that not only we restore our profitability, but also we keep our sales growth momentum with customers. And they are done on a global basis, because, clearly, the increases in waxes, oils and hydrocarbons have been pretty hard and have been hitting us globally; they have been hitting our competitors, and we have been executing on that and we will continue executing on that.

Thank you.

Finally, in terms of your SG&A expenses, I think they were up about $13 million in the quarter or more than 20% year-over-year; the increase in the first fiscal quarter was lower but similar. So is this a level of spending that is the $70 million to $75 million quarterly rate that you expect to continue in the second half?

And do these numbers actually come down in 2011 because the spending, spending levels are so unusually elevated and can you talk about what it is you are actually spending on that pushes up SG&A so much?

Yes, absolutely, Jeff. Look, it is clear that in '08, even more in '09 and then in 2010 this year, we have been investing and we're continuing to invest, basically, in people, in training in innovation. We have done that because we really needed an upgrade and an investment in our, mainly commercial, organization to deliver faster growth in the years to come. Clearly, when you look at those $13 million of SG&A increases, the vast majority of that is related to investments for growth. So we are speaking of more and better people in the sales and marketing area, but we are also speaking of more and better people in the R&D area.

We are also speaking a lot about training and development of people. I have been personally engaged in some of those actions and I am extremely supportive and really very optimistic towards the returns on that investment. Really, there are some things that are -- call it external factors, (inaudible) medical, currency we really feel it hitting us, the impact of acquisitions which clearly are not necessarily investments for growth that we have driven. Clearly there is more travel, we are more in front of customers, trying to gain additional share of those customers. We are trying to gain, and as you have seen we have been successful in gaining new business and I would say we are, we are very proud, Jeff, and very convinced of what we are doing, again investing, not spending and also taking into account that 2008, '09 and 2010 have been providing opportunities for acquiring talent.

Remember everybody was retrenching; everybody now is trying to ramp up again and they're having issues because they cut too much. Instead, we have a very engaged employee population, and customers that are very engaged with us, so what we have done is the right thing to do is going to pay back. Speaking of 2011 and beyond, it's clearly our intention to increase the leverage of that SG&A, and I am sure that you are going to see that in 2011. Starting this year, I would say we are strengthening our core. At the same time we are growing it and it was the right thing to do.

Okay. Thank you very much.

Thank you.

We will go to James Sheehan of Deutsche Bank.

Yes. Thank you, just on the price increases, Jeff, had asked you about earlier; at what point do you expect your price increases to exceed raw materials, and at what point do you have to give back price increases as raw materials decline?

Well, I think that our Q3 efforts are going to deliver results. I think that the gross margin, sequentially, is going to improve from Q3 to Q2, and same for Q4. So, you can do the math, but clearly we expect to fully recover the raw material hit that is done by price increases, but is also done by reformulations, is also done by mix management, and is also done by volume leverage which clearly has a significant impact into our P&L. So, our objective is that that is going to 6.

Now, going to the second part of your question, which is for how long will those price increases stick and when will have to give that back to customers, I think a lot depends on our ability to manage the mix strategically, to increase our innovation rate, and make sure that we separate our (inaudible) more and more from the (inaudible) and the reasons why we are doing all the investments in R&D, in marketing, sales is exactly because of that. It's not just to get short term sales growth. It is to get sustainable profitable growth.

Thank you.

And also, just referring to the market share gains, could you please elaborate on, what regions, what end markets, and from whom are you gaining market share?

Well, as you have seen based on what GDP has been doing, what investor production has been doing, we believe we have been gaining share everywhere. It has been done in a very disciplined rational and, we believe, professional way, which means adding value to customers. That is, we believe the secret of our success long term.

So it has been done globally throughout all of the product lines. Clearly, we are putting the biggest focus on the specialty product lines. We are making sure that we deliver volume to customers and that we do profit value pricing. I will tell you the best stories we have got have been stories at very, very good contribution margins and gross margins and really situations where customers have appreciated the work we have done.

We have not been targeting any competitor in particular. We are targeting specific customers that for us are strategic. We are delivering very good value propositions and we hear from customers they like it because we are gaining share everywhere; and also in the market segments of focus, we are clearly gaining share and also gaining new customers.

Thank you very much.

Thank you, James.

We will go next to Peter Cozzone of KeyBanc.

Good morning, guys.

Morning.

I was hoping you could give some more color on the organic volume growth of that 14% during the quarter. How much was better based demand versus new product wins or any -- or with any of that re-stocking activity on the part of customers and what do you expect concerning these trends heading into the back half of year?

Well, clearly, there has been some re-stocking. Clearly, there has been increased demand. Clearly, there are easier comparables. But also, there is share and share due to new customers, and share to existing customers. Clearly, what we see from our underlying demand standpoint is the situation is definitely better than in 2009.

Instead of retrenching, people are trying to work around their production outages, their backlogs, and seeing how do they get back to full capacity utilization. That is the point that I made before. Some companies having cut back too much. Clearly, we are not in that position, so that gives us better options than some of our competitors, but overall, underlying demand is better, customers are taking projects off the shelves and starting to work on them rather than just speaking and doing restructuring moves.

We see a better sentiment and that makes us optimistic, so that's the underlying demand. Clearly, the restocking is some part of that and I think that will abate in the third and fourth quarter. But, I think that our share gains are there to stay and done the right way.

Could you discuss what you are seeing in Europe? Any slow down activity thus far in the fiscal 3Q and maybe what are your expectations here going forward as austerity measures gain traction, heading into 2011? Is growth -- will that impact in the EMEA segment going forward?

Let's speak first of Western Europe. There, we've seen so far in the first half of the year, a bit of a separation between all of the news in the press, the currencies, the Euro issues, because we have seen pretty good demand and I have been talking also to other CEOs around the world and they have seen exactly the same. So kind of separation between some micro economic conversations and what is really going on in the real world, which I think is doing better.

As for us, clearly, we are gaining a lot of momentum. We are been growing both in the India, Middle East, North Africa, Eastern Europe part. Clearly some of that is us, some of that is shared, some of that is acquisitions with we made like Norbig and (inaudible), but overall, also based on what we see, the visibility that we have toward June, which is part of the third quarter, and July, demand is pretty strong.

Great. Thank you.

We will go next to Steve Schwartz of First Analysis.

Good morning, guys.

Good morning, Steve.

Jim in his regional review talked about the positive impact that the Shanghai Tech Center is having on Asia Pacific, and usually when you introduce new products, it gives you an opportunity to go after better pricing, so can you just talk a little bit about what's going on with pricing in Asia PAC versus this impact from new products?

Well, I think Jim was totally right in speaking about that, because it was a bold move that we decided more than two years ago. It was making sure that we were becoming faster in innovating, but also in reformulating in Asia Pacific. It was bold move in terms of investing in China for China and not just to re-export products to the rest of the world and it's paying back, so that we are very happy.

We have staffed appropriately. We have found the right way to manage intellectual property; to manage, motivate, and engage people; customers leveraging that; and I think we have become much, much more local in China but also in the rest of Asia and much faster, because invasion is also about being fast. It is about speed.

Clearly, there has been a lot of effort on reformulations and on insuring availability of raw materials because of the shortages we had so far. So that has been, clearly, a lot of the short term focus, but it is definitely our intention over the long term, to boost the rate of innovation in China and that is, clearly, going to affect our profitability profile in that country and in the region.

Remember, that when we decided to do that lab center, in Shanghai, it was yes to cover all of the product lines, but we have specific focus on reactive hot melts to specifically support the development of sales in the new Nanjing factory that is upstream and up and running as we speak. Clearly, those are product lines that are more specification oriented and are higher margins and clearly, longer term, they're expected to be a bigger part of our mix, so therefore, include, increasing profitability.

Okay.

Then, just looking at the specialty construction, as a quick follow up, you had nice growth, 18.6%. If you were not adding products to shelves, if you are not stocking new stores, what would that number have looked like?

Well, I can tell you that clearly we have made lots of changes there. I think Jim always has put not only new and strong leadership and very confident there, but has really re-vamped and re-energized that entire business, and definitely the growth of more than 18%, we have got in the second quarter is not just gaining new stores or big box retailer, but it is really re-vamping customer relationships, distributor relationships, and I would say it is a platform for growth that is well balanced, big box retailers, end customers, specification related businesses and distributors. So that's what makes us very, very confident, actually pretty buoyant on a business that has been suffering for years also due to the well-known acquisitions in the past.

Okay. So, do you think that without the opportunity this big box would have given you still would've had double digit growth in that business?

I cannot tell you if it was exactly high-end single digits or double digit, but I can tell you it was balanced growth. The fact that we call on big box retailers is because I think it is great success and in the past we were hit by failures at big box retailers. So there is pride behind that, but it is just a component of the growth.

Got you. Thank you, Michele.

Thank you, Steve.

We will go to Dmitri Silversteyn of Longbow Research.

Good morning, guys. This is Adrian Sannier sitting in for Dmitri.

Thank you. Good morning.

The question on the inventory re-stocking in Europe, that helped volumes in the quarter, can it provide a little more color if there were just seasonal re-stocking or if you think it is beyond just seasonal and increasing inventories and you might see some de-stocking later on in the year?

As I said earlier, Adrian, re-stocking is just one of the four components of our growth in Europe, and I wouldn't say it is the biggest. There is underlying demand that is better, than expected.

There is also a mixed component in Europe, North Africa, Middle East, and India, running very strongly, and still that is part of the region; clearly, there is us, doing a much better job with new leadership, but also with a stronger focus on profitable sales, more people on the field, better people on the field, and better trained people in the field plus a much more engaged population. So there is a lot of new customer wins and we believe that our momentum and even if there may be some abatement on this re-stocking, we are just going to continue doing very well.

Thank you.

Second question on currency, you mentioned that you are expecting currency to be headwind in the second, in the second half. Can you provide some sensitivity, or just help us to understand what the impact will be on margins and EPS?

You see FX and and I don't know if Jim has something to add. Clearly a sizable part of our portfolio, 30% around the sales, is just going to get bigger because we have a lot of momentum and in the past, the Euro was clearly a good guy for us, and now is going the other direction.

How low will it go? We don't know. We are worried that the same price you read, but clearly we are trying to make sure that we manage for that and we, basically, work more on controllables, which is strong organic growth, good price management, mixed management and also acquisitions to offset that. I think as Jim said, Revertex Finewaters is going to offset the lost revenue from the windows Europe insulation business and our core growth and pricing is going to offset a lot of the effect.

Jim do you have anything to add on this one?

I can try to quantify some of this. Our full year revenue forecast now is up 10% to 12%. Within that forecast, we have recalibrated to the -- basically, to the current existing currency rate. The revenue guidance we gave you is consistent with current foreign exchange rates, and we are primarily exposed to the Euro and Aussie dollar.

Now, in the first half of the year, as you can see from our press release, currency boosted revenue by 3.5%. If you take our full year guidance of 10% to 12%, that number for the full year will turn around and go negative, so probably about negative 1% would be the currency component of the full year revenue guidance. if that's helpful. In the first half of the year, we got -- the 3.5% pick up that we got in revenue in the first half of the year was -- a lot it is the Euro, but the Aussie dollar was really -- had a big impact in the first half. That will be more muted in the second.

So that's on the revenue side, and then, on the earnings side, I think in the first half of the year, currency contributed probably only about $0.01 a share to our earnings per share. So I don't think it will have a material impact one way or the other for us.

That's helpful. Thank you very much.

Thank you.

We will go next to Christopher Butler of Sidoti & Company.

Hi, good morning, guys.

Good morning, Chris.

I just wanted to circle back to the SG&A question a little bit. I know that the previous strategy that you were a part of and then inherited as CEO was keeping a very tight lid on overhead costs. Was that lid a little too tight? Was innovation quelled a little due to that strategy and you are making up a little ground now?

Well, I think that SG&A needs to follow a plan which typically is the result of a strategy. I think that we announced a clear departure from the past at the end of '07. It takes some time to really put the plan in place and start executing on it, but, basically, we have been doing exactly what we said.

We had a turn around in '05, '06, and '07 mainly the global adhesives area deliver good results, but we all know that turn arounds are short lived. So we knew we needed to invest and the difference between investing and spending for us is "do you have a strategy that is going to produce meaningful profitable growth in the future?" We believe we have it today. We believe we have the right people in place, to execute on it and we are extremely confident on that. And we are, as I said before, extremely confident that there will be substantial leverage of these SG&A investments in 2011.

If we are looking at the $3 million sequential increase in the second quarter, can we attribute that entirely to these investments?

Clearly, there is -- if that number is 100%, I would say that half of that is really investment. The rest is acquisition-related expenses, is currency, is medical and other things not necessarily related to that. So if it is $3.1 million, $1.5 million, $1.6 million is really investments for growth.

Remind me, do you have a long term target for where you want SG&A as a percentage of sales?

We never gave that guidance. We gave guidance in EBITDA of basically 14% to 16%. We gave ROGI from 10% to 12%, and we stick to those profitability profile measurements.

Finally, could you just talk a little bit about your growth strategy in relation to the pricing that you're putting through now and how they come into conflict a little bit with each other. I know that you are getting a lot of great growth out of Europe, out of Asia, but in comparison to the North American business, that's, that tends to be lower margin and you had mentioned that you were expanding sales to a big box retailer, which I would have to imagine is a lower margin business as well.

Well, I am I would say extremely confident on how we will be able and we have been able to far to manage this commodity between price and volume. I think in the past we did very, very well on the price. We didn't do as well on the volume.

I think today we have the best team in the adhesive market to manage this. Of course, we will all see that through public results over time, also compares to competitors. And the reason why I am so confident in that is because that's a combination of strategic segmentation, which are the market segments, geographies, customers, and technologies we are focused on, is based on really, alignment of pricing and costs to serve economics and really, based on strategic management. I think that this team has a great ability to do both of the things at the same time which is actually our commitment also through the long term financials.

I appreciate your time.

Thanks, Chris.

We will go to rose ma Rosemarie Morbelli, Ingalls & Snyder.

Could you give us a feel for how large is Western Europe as part of the EMEA?

Well, so far today, still a big portion of that. Clearly, North Africa, Middle East, Eastern Europe, and India are getting a lot of our focus; a lot of our resources are growing faster than western Europe, but the most encouraging thing is that core Western Europe is growing as well and it is growing in a profitable manner and you will see that even more in the future.

So, yes, we are still extremely weighted toward Western Europe, but there are plans in place, very good momentum, toward growing the rest of the region. I have, really, a more balanced mix in the region.

Is it, what, 75% of the total group in terms of revenues or is it smaller than that?

Rosemarie, we are not really providing guidance to that level of detail, but I think we can be fine in saying that it is the vast majority of the region today.

Okay. So that brings me to the next question.

A lot of European countries have announced austeritinian measures for either 2011 or 2012 or both. When you talk to your customers, do you have a feel as to whether they are getting a lot more cautious, whether they are concerned, whether they don't think it is going to make a big difference? Can you help us with what is going on out there?

Well, as I said earlier, so far what we have seen is stronger than publicized underlying demand; as we said some is that, some is restocking. We see a bit of a difference between the real economy and we are not the only ones because also other companies that we've talked to are experiencing the same.

Clearly, longer term, how much (inaudible) is happening in the financial markets will be paid by European companies, we don't know. The best thing we can do to manage that potential risk is just to run faster and run smarter.

Okay. No, I understand that demand is still good, but I was wondering if anyone had a feel for how bad it could get whether that would trigger a double dip in Europe or whether it would just mean that the growth would flatten as opposed to really having a big negative impact. And no feel for that?

I would say at this point in time, what we can do is to keep monitoring the situation and I would say it is a great question to give an update to the third quarter conference call.

Okay. And then I am not too sure I got properly what you said regarding the demand. Did you say you expected the demand to be slower over the next two quarters than it was in the first half of the year? And if the answer is yes is it because your comparison inventory buildup, real demand going down as everyone is now sitting on inventory, can you give a better color on that?

Clearly, in the first half of the year, we had easier comps, and those are there for everybody. So even if we continue to accelerate on our own development, on a year-over-year comparison is going to be slower, but the reason why we increased the guidance is we feel stronger and stronger about our own legs.

One more question, if I may. With raw material cost increases and with your instituting selling price increases, what is behind or what was behind the price decline in EMEA and Asia Pacific in the second quarter?

Those are quarterly numbers as I mentioned before. I was very happy with the progress we see in quarter and clearly, the numbers went into a different direction toward the end of the quarter and are continuing to go into that direction. I think that some of this is the typical lag that you have in this market, specifically when you want to make sure customer relationships are not put in danger and you manage that profitability volume polarity.

Okay. You did say in the first quarter that you were already instituting selling price increases, so if the competition is more ferocious in those two regions and you have to give up some pricing?

No, I think that actually everybody is having good visibility on what has happened in raw materials, pretty steep raw material increases, everybody is doing its own part from what we know today, and I think, simply is a matter of timing and really seeing things going through and making sure we have a win-win with customers.

Okay. Thank you.

Thank you, Rosemarie.

We will go to Jeff Zekauskas with JPMorgan.

A couple of small questions for Jim. What's the other income item of $1.3 million in the quarter?

My voice is bad today, I apologize. We about $1 million of that or essentially all of that is surplus land and billing sales we made in the quarter. One in the UK and one in Central America, that's about a million. There is a big negative that compares to a big negative from last year. Last year we had a fairly significant FX loss on that line and we had no essentially no FX losses or gains this year, so between the two of those, that explains plains all of variance there.

Why should the tax rate be higher in the second half than it was in the first half?

I don't think it will be higher in the second half. Tax rate of 34%. In the first quarter we had a discrete item that lowered our tax rate and when we project forward we never project discrete items, so that's part of it.

Basically, our core tax rate in Q2 was 34%. Just right under the guidance and the core rate in the first quarter was 34%. And we are forecasting that our core tax rate without discretes is going to be 34% for the full year, so that implies in the second half it will be the same. The difference is the discrete item that we took in the first quarter that we have already taken and then obviously in the second quarter, we had an impact from the impairment charge that we took. That basically added about 600 basis points to our tax rate in the second quarter. That won't recur.

And thirdly, what was your polysulfide revenues in Europe in 2009?

We don't disclose it really, Jeff, but it was in the order of magnitude of EUR20 million.

EUR20 million.

Order of magnitude.

You won't have any of this going forward?

We will have some in the second half of this year, and then we will have, essentially, none in 2011. The tail off of the polysulfide business in the second half is in our revenue outlook, so it is already accounted for.

Okay. Thanks very much.

We will go to Steve Schwartz of First Analysis.

Thank you for taking the follow on.

Just a question about Latin American paints. There's been some news that came out in May that World Bank IFC is going to give $10 million to LabCo in Guatemala for them to build a new facility and strengthen their distribution network. How do you see the impact of that affecting your Central American business?

Well, we will see what is the effectiveness of that, the speed of that. It is not something that is in our plans that we are banking on. I think there is a lot that we are doing, good stuff, to really improve the underlying profitability of that business and basically improve the ROGI of the business, and that Guatemala is for now not in our plans.

Okay. Thank you.

Thank you, Steve.

Thank you, ladies and gentlemen, this does conclude today's H.B. Fuller Second Quarter 2010 Investor Conference Call. You may now disconnect.