H.B. Fuller Company (FUL) 2010 Q4 法說會逐字稿

Good morning, and welcome to the HB Fuller fourth quarter and full year 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. Jim Owens, President and Chief Executive Officer, Mr. Jim Giertz, Senior Vice President and Chief Financial Officer, and Mr. Maximillian Marcy, Manager Investor Relations.

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

Thank you, David, 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'll be discussing certain non-GAAP financial measures, specifically operating income, adjusted gross margin, earnings before interest expense, taxes, depreciation expense and amortization expense, or EBITDA, and return on gross investment or ROGI. Operating income is defined as gross profit less SG&A expense, EBITDA is defined as gross profit less SG&A expense plus depreciation and amortization expense, and ROGI is defined as trailing 12 month gross cash flow divided by gross investment.

All of the non-GAAP measures discussed today should not be construed as an alternative to the reported results determined in accordance with GAAP. Management believes that a discussion of these measures is useful to investors because it assists in understanding the operating performance of the Company and its operating segments, as well as the comparability of results. The non-GAAP information discussed today may not be consistent with the methodologies used by other companies. All non-GAAP information is reconciled with reported GAAP results on the last pages of our presentation. For more information please refer to our recent press release, 10-Q filings of March 21, 2010, June 30, 2010, and September 30, 2010, and the annual report for the year ended November 28, 2009, on form 10-K as amended, filed with the Securities & Exchange Commission. All of which are available on our website at www.hbfuller.com under the Investor Relations section.

I will now turn the call over to Jim Owens.

Thanks, Max, and good morning to everyone. And happy new year. Since this is my first quarterly conference call as the CEO of HB Fuller, I would like to make a couple of comments before we get too deep into the numbers and analysis.

I am grateful for the opportunity to lead this Company, particularly at this exciting time in our development. I am confident that we have the right strategy, and we have an excellent team around the globe that is committed to and capable of executing our plan. We have invested in some talented individuals, and this team is focused on delivering value for our customers. As this team delivers value for our customers with rigor, focus and speed, we will deliver for our shareholders the returns they expect, and they deserve.

I've traveled around the globe these last seven weeks, and I've met with HB Fuller's employees, our suppliers, our industry partners, and our customers. I have seen amazing work in action, and tremendous enthusiasm. I share that enthusiasm.

The future is bright here at HB Fuller. And since I want to focus on the future, I thought we might switch around things on today's call, and begin by discussing our outlook and guidance for 2011. We'll then circle back to review the 2010 full year results, and then the fourth quarter results.

Our three key leadership themes for 2011 are the following. First is to stay focused on, and true to our strategy, a strategy of demonstrating value for our customers through innovation and differentiation. This is the right strategy for our Company, and it will create long-term value for our customers, our shareholders, and our employees.

Second, we're going to accelerate the execution and the consistent delivery of our strategy. We know what we need to do. We must do it quicker and more effectively, as speed is a competitive advantage for us at HB Fuller.

Third, we must leverage the investments we have made in our organization over the last two years. For the most part, the people and resources are in place to be successful. Now we need to capture the return on this investment through profitable growth. If we can deliver on these three areas, we will have a very successful year in 2011.

We expect a strong top-line performance again in 2011, with revenue up between 8% and 10%. Raw material costs will be significantly higher in 2011. For the full year, our input costs are expected to be about 10% higher than 2010, as raw material costs escalate by about 4% from the levels we experienced in the last quarter of 2010. Despite these cost increases, our gross margin will improve from the fourth quarter exit rate, as past and planned pricing actions, along with other cost management steps we are taking, finally get in line with raw material price escalation. Operating expense investments will be leveraged in 2011.

Overall, we expect our operating income to improve by about 20% in 2011, with EPS in the range of $1.75 and $1.85. I think we all agree that by delivering these growth numbers for 2011, and recording another year of EPS growth would be a clear indication that something different is happening at HB Fuller, and that the strategy we put in place is delivering the results we all expect.

Our capital spending plans for 2011 are higher than in previous years. This reflects our confidence in our business, and the opportunities we see to improve the productivity of our business, and the opportunity to invest for growth, especially in emerging markets. Capital expenditures should total about $40 million in 2011, an increase of slightly over 10% from last year, and almost double the investments made in 2010.

Overall we have good momentum going into 2011. We have a solid plan that will deliver strong results, and we have a strong team. Our caution is mostly centered around the ongoing tightness in the raw material markets, and the potential impact this might have on margins and logistic costs. We will be diligent and focused on working with our customers and our suppliers in managing these issues, so they do not detract from our operating performance. Jim Giertz will provide some more details and perspective on our 2011 outlook and guidance later in the call.

I will now make a few comments about the full year 2010 results we released last night. The entire team at HB Fuller is proud of our accomplishments in this year, and we're ready to improve upon that performance in 2011. Here are some highlights of the year from my perspective. First, we increased our revenue by nearly 10% year-over-year, and this growth was real. That is, the growth was solid and sustainable volume growth in essentially every market segment and every geography of the world. It is the highest revenue growth HB Fuller has seen in the last 15 years. While most companies experienced growth in 2010 relative to the down year of 2009, we are confident that our growth rate exceeded the market growth rate, and we gained share in our core markets.

Second, although our markets declined in 2010 in a very difficult raw material environment, we posted an adjusted gross margin only 70 basis points below our all time peak of 2009. This compares favorably to the last time our industry faced sharply higher raw material costs in 2008. In that year HB Fuller saw gross margins drop by nearly 400 basis points, more than five times the margin compression we saw in 2010. We are never pleased or satisfied when margins contract, but given the difficult environment we faced, we think we've produced good results in 2010, and most importantly got the margin trending in the right direction as we enter 2011.

Finally, we made good progress in shifting our business portfolio for future strategic growth opportunities. Our Asia Pacific region posted nearly 10% organic revenue growth, opened a new production facility for high technology adhesives, and completed a strategic acquisition in Malaysia. Our EIMEA region got back on the growth track with organic growth of nearly 14% in 2010. Also, importantly, the region's business portfolio was strategically enhanced, as we exited a non-core product line, and accelerated growth in strategic emerging markets such as Egypt and Turkey.

Before I pass the microphone over to Jim Giertz, let me share my comments regarding the fourth quarter. We had a solid finish to the year in the fourth quarter. We posted another quarter of strong revenue growth, even as year on year comparables became more challenging. Our margins remained flat relative to the third quarter, indicating that our pricing actions and other cost mitigation activities have now caught up with the raw material escalation trend.

Finally, our operating expenses were well managed, and this allowed us to improve our operating profit margin versus the third quarter. Overall, the fourth quarter did not meet our standards, but it was a positive step in the right direction, and a solid foundation to create further positive results in 2011.

Now I turn things over to my friend, Jim Giertz, who will review some other metrics from the quarter and the full year, and provide additional perspective on our outlook for 2011.

Okay, thanks, Jim. I will start with a brief recap of our performance against the four key metrics in our financial score card. Landing each of these four financial metrics in the target range consistently is the ultimate objective of our business strategy. Our organic revenue growth was positive for the fourth consecutive quarter, an increase of 5.6% for the quarter, and just under 9% for the full year. Our 2011 outlook and guidance indicate that this trend will extend through 2011, as well.

Our four quarter trailing EBITDA margin declined again in the fourth quarter to 10.9%. Actually our EBITDA margin improved sequentially in the fourth quarter, but was still lower than the margin posted one year ago. Again, our 2011 outlook indicates that this metric will improve in the coming quarters. The ROGI and EPS growth metrics displayed a similar pattern. Our five-year compound EPS growth dropped throughout the year, ending at 8.7% in the fourth quarter. For 2010 alone, our adjusted EPS is up 9% over the previous year, just short of our target range of 10% to 15% annual growth. The 2011 guidance implies further growth of between 9% and 16%.

So, now we turn to the balance sheet and cash flow. We posted a strong cash flow quarter to end the year. Cash on hand at the end of the quarter and year totaled $133 million, and total debt was $251 million. Net debt of $118 million was down approximately $40 million from the third quarter level. Net working capital remained about flat in dollars in the fourth quarter, but declined by 90 basis points as a percentage of annualized net revenue relative to the prior quarter.

Inventory levels that had increased during the year were reduced substantially at year-end, providing a good boost to operating cash flow. In total, cash flow from operations was $47 million in the fourth quarter, our strongest cash flow performance of the year. For the full year, operating cash flow totaled $74 million, below last year's exceptionally strong performance due primarily to funding of working capital to support growth.

Finally, capital expenditures totaled $11.5 million in the fourth quarter, and about $36 million for the full year. The most significant capital expenditures in 2010 related to the construction of a manufacturing facility in China, capacity additions in Europe and Egypt, geographic expansion in India, and information technology enhancements.

With that as a summary of our financial performance, I will now provide you a brief segment update. In the fourth quarter, all regions achieved positive organic growth with notable performances in EIMEA and Latin America paints. End market demand continued to improve somewhat relative to last year, and pricing actions have begun to help offset raw material cost increases. Profitability for all segments was lower year-over-year, as raw material cost inflation compressed margins.

In North America, organic sales grew by 2.2% versus last year's fourth quarter. Adhesives grew 3.2% organically, while construction products declined by 1.8%. Growth in the adhesives component came from pricing actions. In construction products, end market demand continues to be sluggish due to ongoing weakness in the residential construction market in the United States.

The Europe, India, Middle East and Africa segment achieved the Company's strongest organic growth for the third straight quarter. The growth has been consistently distributed across all geographies and market segments. While volume was again positive, pricing actions also helped to boost organic growth to nearly 10%.

During last quarter's conference call, we announced that there had been a fire at our Mindelo, Portugal facility. Although the fire was disruptive to business, the total financial impact was relatively modest. We estimate that we forfeited about $2.2 million in revenue in the quarter, and the costs associated with the fire damage, clean up and business inefficiency totaled less than $1 million. The bulk of these charges were absorbed in cost of sales.

In Latin America, both business components delivered positive organic growth, with adhesives up 5.9% and paints up 8.5%. In adhesives, volume was flat in the quarter, but up over 8% for the full year. In paints, volume was positive for the first time in nine quarters, but pricing actions provided the bulk of the benefit.

And finally, in Asia Pacific, the organic growth trend continued, up over 4% versus last year's fourth quarter, and the sixth straight quarter of organic growth. Growth was seen across most end markets and geographies, as the economic conditions in the region remain at fairly robust levels. The completion of the plant in Nanjing, China, and the lab in Shanghai have had a positive impact on the region's performance. Reactive chemistries produced at the Nanjing plant have been the strongest growth area. The integration of Revertex Finewaters in Malaysia is progressing as planned, and added over 15 points to net revenue growth in the region during the quarter.

Now to finish off my comments, I would like to provide a little more detail on some perspective on the 2011 outlook and guidance that we're providing today, and that Jim Owens spoke of at the beginning of the call. Our revenue outlook of 8% to 10% growth can be broken down into our standard components. We expect volume growth of 2 points to 3 points, and price escalation to add 4 points to 5 points. Acquisitions and foreign exchange are expected to be a net neutral factor.

Also, every five or six years we have a 53rd week in our fiscal year, and 2011 is one of those years. The extra week should add just less than 2 points to our revenue growth. For the full year, raw material costs are expected to be about 10% higher in 2011 relative to 2010, or about 4% higher than the exit rate of the fourth quarter. Some of this raw material cost increase should be mitigated by cost reduction and reformulation activity.

To the extent that raw material cost inflation differs from this forecast, our plans for pricing and reformulation may change as well. This could lead to changes in our revenue outlook and profit expectations as the year progresses. Jim Owens noted that our operating profit should increase by about 20% in 2011. And at the same time, we indicate that our EPS should increase at a lesser rate, between 9% and 16%. The primary reason our EPS growth rate lags the operating income growth is that our all in effective tax rate is expected to increase to 32% in 2011 from the unusually favorable rate of 29% posted for the full year 2010. Although our core tax rate is actually declining relative to prior years, our outlook does not anticipate the favorable discreet tax items that we booked in 2010.

One final note with respect to the quarterly phasing of our EPS guidance. In general, our earnings performance is expected to improve as the year progresses for a couple of reasons. First, we expect our margins to improve as the year progresses as pricing actions, cost reduction activity, and more stable raw material costs fully develop. Also, our first quarter is historically our weakest quarter, and we expect that pattern again in 2011. Our first quarter is holiday intensive, typically producing a revenue drop of about 10% relative to the fourth quarter.

When our ongoing fixed costs are applied to this lower revenue base, our earnings normally drop about 40% in the first quarter of the year relative to the prior fourth quarter, all other factors being equal. And we would expect that general pattern to repeat in 2011. And then finally, note that the extra week in the 2011 fiscal year is in the fourth quarter of the year.

Now, with all that said, I will turn the call back to Jim Owens for some final thoughts before we take your questions.

Thanks, Jim. We are well on our way to developing a Company capable of consistent top-line growth with strong profit performance. Our customers are telling this through the increased sales growth we are seeing, as they purchase more adhesives from HB Fuller. Our employees are telling this through the internal engagement surveys we take, where employees demonstrate higher marks and engagement and passion for our Company. Our suppliers and our business partners are telling this as they interact with us. Confidence among these stakeholders is high. Many of the investments we need are in place, and as we capitalize on the employee and market positioning we have created, and deliver accelerated profit growth, I am confident our investors will feel that same level of optimism as we go forward.

Now we would like to open the call for your questions.

(Operator Instructions) We'll take our first question from Jeff Zekauskas with JP Morgan.

Hi. Good morning.

Good morning, Jeff.

When you think about your raw material forecasts for next year, have you already factored in the apparent very sharp rise in propylene prices that should happen in January or were your forecasts made before that occurred?

I think our forecasts were made as they were occurring, Jeff, so as you know, raw material markets move regularly, so that would be the short answer to the question.

So right now you seem to be more or less pricing in line with your raw material cost inflation. Do you think that in the first quarter you will be ahead of the curve or you will be behind the curve? How do you see that?

We're taking steps, Jeff, over last quarter and this quarter to make certain that our margins at least move up in line with raw material costs, so the expectation is that we're going to move our margins up, particularly as we manage our volumes and we manage the business going forward, so I would say positive growth trend is what we're expecting there. That's a combination of what we do with pricing and also what we do from a reformulation and cost control in terms of our formulations.

So just lastly, your prices, for example, seem to have moved up very, very nicely in the quarter where as -- and we can see the year-over-year changes, but it is a little difficult to see the changes from the first quarter. So, for example, your prices were down about 4.5% in Europe in Q1 and they were up a little bit more than 6% in Q4, so does that mean in Q1 of 2011 your prices in Europe will be up around 10% or is that not the way to think about it? It is difficult to see the sequential changes and there is a similar pattern that goes on in the United States although it is not as marked.

One thing I would comment, and I will throw this to Jim Giertz for more comments, but one of the things that's always a challenge, Jeff, is the numbers we show are year-over-year comparisons and not quarter over quarter successive moves. So, if your question is are we moving prices in Europe in line with raw materials and in line with improving our margins, the answer is yes. Jim, do you want to add something to that?

Well, the only thing I would add is I actually don't have at my finger tips, Jeff, the answer to the specific question that you asked, but I think you're on the right track. Basically at this time last year prices were still declining.

Yes.

And now there are rising. So, the year-over-year comparisons are going to look pretty robust both this quarter and next quarter certainly.

Okay, thank you very much.

We'll take our next question from Michael Sison with KeyBanc Capital Markets.

This is actually [Jerry Revervano], I'm a private shareholder. Jim, congratulations on your promotion first of all. A couple of questions. Can you provide your vision for e-commerce going forward and what are you guys doing to work with your retailers and distributors more effectively to help them sell more, either through their websites or through their channel partners as well?

Hi, Jerry. We had somebody different up here on the screen. So, nice to meet you. It is very important for us to work closely with our distribution channel. It is an important part of our business and they are important partners for us. It is not the largest part of how we sell our business, but winning with our distribution channels is an important part of that we do and in a number of cases that includes an e-commerce component to our work.

And our next question is Christopher Butler with Sidoti and Company.

Hi, good morning, guys.

Hi, Chris.

Just going back to the conversation on pricing and raw materials, thinking back to the third quarter conference call, reformulation was a big component that hasn't been in the numbers in 2010 to the degree that I think you would want due to shortages. Where do you stand on that and I know some other companies have been stocking up on inventory of anything that they think might be in short supply, yet your inventory numbers are coming down. Are you doing anything of that nature as well?

So a couple parts to your question, Chris. I think in terms of reformulating flexibility there still are the shortages that we saw in third quarter. I think what we're trying to do is find technological innovations that allow us to move out of that, so I wouldn't say it has gotten a lot easier to reformulate but we're certainly managing those shortages in a different way, so that we have a few more levers to pull as we try to meet the needs of our customers and manage the costs. So, it is more of a technology innovation approach, although we are doing the classic reformulation work that we have done in the past as well. In terms of inventories, where materials are on short supply and we have made commitments with suppliers to buy only what we need, then that's what we're buying. So, we're not stockpiling -- if we can and strategically it makes sense we are building inventories, but fundamentally we're working closely with our suppliers and that helps them and it helps us to meet the needs we have for our customers.

And could you help us out on the SG&A front? We had significant decline here for the fourth quarter. What do we expect -- should we expect looking into 2011 as far as the investments that you have made and the pension related changes, things of that nature?

I will start out and then I will throw it to Jim. Our overall goal, Chris, is to leverage the investments we've made over the last couple of years. So, fundamentally having our SG&A grow at a lower rate than what our revenue growth is. So, that's an underlying principle that we have in terms of how we're going to move going forward. And we have made some good investments, particularly on the commercial side and we think we can generate some good value for customers out of those investments we have made and I will let Jim answer in a little more depth if he would like.

I agree with that. I think, Chris, the best way to look at our SG&A for 2010 is to look at the full year and because there is a lot of things that kind of swing back and forth quarter to quarter. So, if you just look at the full year, Jim said next year we're going to try to -- well, obviously our objective is to have SG&A growth below revenue growth. This year it was just slightly above and I think that's just the way to look at it. We finished a lot of our investments this year. We said we were going to have kind of a big SG&A spending plan for the year and we mostly did that and now we'll see some leverage as we go into 2011.

And just quickly, you had said a few times leveraging the investments that you have made the volumes grew 1% in the fourth quarter and you're looking for 2% to 3% for 2011. That sounds more like market growth as opposed to capturing market share.

Yes. I think if you look deeper into the numbers, right, there is certainly a volume mix effect. So it depends on the market segment, but what we see in the market segments where we compete is that we're growing at rates higher than those markets and you have to look at the mix by geography and by market segment to dig into those details, Chris. But yes, volume growth is a part, but it is not the whole driver. We certainly have other issues that are driving our revenue growth next year.

So you might be getting -- you might be letting go of less appealing volume that's keeping those numbers down, something of that nature?

I think whenever you are managing a portfolio of a business right you want to focus on those areas that drive the most value and areas that have less value you may not grow as much in. And that is part of our strategic plan.

I appreciate your time.

And our next question is Dmitry Silversteyn with Longbow Research.

Good morning, gentlemen. A couple of questions to follow up. Can you -- if you look at your components or if your expectations for 2011 and the top-line components, pricing seems to be playing a big role in there. I understand that everybody seems to be raising pricing given the raw material environment that we're facing this year and likely to face throughout 2011. Has the pricing environment -- I know it is never easy but has it gotten easier for you. Are more of your competitors onboard with price increases so you're not likely to lose as much volume when you try to stay disciplined on pricing or have things have gotten worse and your customers are kind of reaching their end of the rope as far as accepting price increases from their suppliers?

So, Dmitry, customers never want to take price increases, right? So, I think it is always a matter of us working closely with our customers to meet their needs. If we can introduce a new technology, a product that's a lower cost for us and can help them mitigate pricing, find some way to improve their productivity, those are all the things we do to help make certain we serve our customers and meet our needs from a margin standpoint. So, the key to managing our margins is working closely with our customers in a way that makes sense, as well as working with our suppliers to introduce some new technologies. So that would be an overall view of our business strategy. With respect to the competitive environment, we did see late in the quarter, early the first quarter this year some public announcements from major competitors that I think have helped. But I would say overall people at all levels in the industry felt a lot of pressure in 2010 and at some point all of them had to find a way to relieve that in order to meet their needs. So, it took awhile for some of our competitors, but in the end everybody has had to move in the market.

So it sounds like in terms of at least uniformity of strategy that 2011 looks like it is going to be a better year with more people on board from the supplier side with price increases and customers, I guess, have to do what they have to do?

We're off to a good start.

Okay, very good. Secondly, to follow up on a previous question about volume growth expectations for 2011. Much of your growth in kind of last 12 to 18 months, let's say, was a function of gaining some share, particularly with big boxes and mass merchants for your adhesives business, but also what I would call kind of one-time gains where you were -- where you became the second supplier after the consolidation of your top competitor. Without those repeating, is there any acceleration in your end markets that you are seeing that gives you confidence that a second year into a recovery you are still going to be able to deliver what I would call to be above trend line growth for the adhesives and sealants market?

So I won't characterize our prior gains, only to say that customers are buying from us because we're adding value, right? So, it is important that we find ways to add value and that's why we had to make the investments we did and we are delivering a lot of value in some core segments. In terms of the future I think a couple of really good things are happening for us. You see the growth that we're getting in Asia and the investments we have made starting paying off. In terms of an underlying region with a lot of underlying growth, that's an area that we're a lot stronger at than we were a year ago or two years ago, so our ability to grow there is a real strength. Same thing in Middle East and India. So, some of the areas where there is some good growth going underlying geography, we're in a stronger position. Likewise, some of the moves we have made in terms of resources are targeted at segments that are growing and by investing our resource in some of those segments we're able to grow. So, I would say the overall portfolio of where our resources are and where our strengths are is better that will also help us underlying from a growth standpoint.

Okay, that's very good. And then the one final question on the SG&A reduction in the fourth quarter that we saw with revenues going up sequentially, meaningfully, and SG&A in dollar terms coming down sequentially meaningfully. After the investments that were made that you keep referring to, a lot of them were made on the SG&A line, what changed between the third and the fourth quarter and what kind of a run rate should we expect for 2011?

So, again, I will kick this off and I will let Jim maybe fill in some details. We want to make certain we finish the year strong and we did some good solid cost control work in fourth quarter. Some of that is sustainable. Some of that was one-off to make certain that we did what we needed to do for the quarter, but going forward we have a good solid plan to leverage our costs with some investments where we need them and maybe I will let Jim cover with a little more depth.

I think that's right. And then just for the run rate going forward I guess there is really -- I just restate what we have already said is just our SG&A is going to go up next year. There is no question about that. We're going to spend more. But the growth of the SG&A is going to be less than our revenue growth and then you just calculate that and divide it by four and that's our -- that should be our quarterly run rates.

Got you, got you. So we should be seeing growth in dollar terms, but actually a better performance as a percentage of sales. Okay.

That's exactly right.

That's all I had, guys. Thank you.

Okay, thanks.

Our next question is Mike Sison with KeyBanc.

Hi, guys, I think this one is me.

Hi, Mike, the real Mike.

Nice end to the year. I am not sure what happened. In terms of your guidance for the first quarter, should we be using the sort of $0.44 that you put in, in terms of the 40% decline, or do we sort of take out that $0.05 special item stuff that you had and use $0.49 and move that down 40%?

Well, we don't like to give too specific a quarterly guidance, Mike, but I would take the $0.44 as my starting point.

As the base. Okay. And then Jim, oh, there's two of you now. I guess Jim Owens, when you think about the geographic regions and think about Europe, Latin America, Asia, clearly North America is where generally speaking is in good shape, good profitability. What's it going to take to get those three segments or really what's the potential for those segments over the next couple of years and if you make good improvements there, that probably goes a long, long way in driving earnings growth.

Yes, Mike, that's our chief priority, right. I think we have some good ideas, but we have a very strong EBITDA margin in North America above our target of 14% to 16% and the key is how do we get each one of them up to that level. Europe is a big business and a priority for us in Europe is taking step-wise moves over the next couple years to move that forward. I think in Europe it is a lot of detailed work. There is work we can do from a pricing standpoint, from a raw material cost standpoint, and from an overall SG&A standpoint. In Asia our challenge is a little different. We have the right infrastructure there for a bigger business, so we need to grow into the cost structure that we have. In Latin America there is a couple different challenges. We have got some very strong businesses in certain countries, but probably not a strong enough position in Brazil. So, there is a real opportunity for us to grow in Brazil going forward. It is a different solution in each one of the regions, but fundamentally what you've talked about is what we're focused on is how do we change the operating performance in each one of those regions to deliver the overall performance of the business. And we have plans in place for each of those.

Right. And then, Jim Giertz this time, in terms of your comment SG&A is going to grow in '11 less than sales, is it -- yes, I understand that, but most of the sales is pricing to some degree. Should it be growing at the same rate of volume when I do the math? I mean, I don't -- I guess I don't understand why you need the SG&A to grow so fast going forward.

Which Jim do you want to answer that question, Mike?

Either.

I will start off and I'll pitch it back to the other Jim. We still -- we say we have made most of our investments that we want to make, but we still have got a long list of things that we would like to do to make the Company better, so there is never any shortage of ideas about how to invest to make ourselves better. I think that's certainly the case. It is a dynamic process, Mike. We're going to first focus on getting our margins up and making sure that we have a strong profit profile as we enter the year and hopefully that will be able to fund some of our ambitions on our operating expenses, but we understand that we need to get leverage and that's what on our OpEx we're going to do that and -- but it is a dynamic environment where we're going to manage our spending plans as we go through the year. We're going to deliver our commitments for 2011 and we are going to also invest so that we can deliver bigger commitments in 2012, 2013 and 2014. And we'll manage that as we go forward, but underlying statement is we are going to invest less in SG&A than moves on the revenue, because as you pointed out in order to deliver our EBITDA targets overall, we need to thin out that SG&A cost in various parts of the world.

So, to monitor whether the SG&A investments was the right move, we would see, let's say, in '12, '13, '14 an acceleration of volume growth sort of signaling to us that they were the right moves? Is that sort of the best way to sort of gauge whether the increases make sense?

Yes, well, the strategy here is to grow, right, grow on the top-line, grow our volumes, particularly in core markets and core regions, with the goal being to do that in a way that allows us to improve our operating margins to the levels that we have committed to in our long-term plan. So, if you take all of that together the answer is yes.

Okay. Great. I will get back in queue. Thanks, guys.

Thanks, Chris.

And our next question is Steve Schwartz with First Analysis Securities.

Good morning, guys.

Good morning, Steve.

I guess the first one just for clarification, the severance charge did fall in SG&A, is that right?

Yes.

Okay. And just among the segments or regions, was it all in North America?

It is evenly spread as allocated, peanut buttered across the regions.

Got you, okay. And then just on to something a little broader. Jim, you mentioned a number of initiatives, things you're working on in the various regions. Do you think your internal initiatives trump the basic differences in growth rates of the regions or do you still think growth next year among the different regions for your business will kind of match the differences generally for GDP from region to

Okay. Let me think about your question here for a second.

In other words--?

I see where you're headed. We see a combination of places like Asia and the Middle East being good solid growth markets and our ability to invest in those areas makes them pretty attractive areas for us. So, I think we'll mirror or do better in those particular parts of the world from a growth standpoint. I think that answers your question.

Yes. No, it does. Okay, thank you much.

(Operator Instructions) And we'll go next to Rosemarie Morbelli with Ingalls & Snyder.

Good morning, all. Congratulations and I hope I won't be the one to be cut off after my first question. So, I have actually two if I may. If you could touch on what you are seeing, Jim, in the housing market and whether in your numbers you expect some kind of an improvement next year and then if you could give us your latest thoughts on the paint business in Latin America?

Okay. Are those both questions or is that the first one, Rosemarie?

Well, we'll see depending on--?

Okay. So, hi, Rosemarie. As far as the construction market, we're not counting on any expansion there. We are doing some good work in that business to work with customers and gain some share and we hope to do some good things there in 2011, but that's not built on any optimistic view of what's going to happen with the housing market this year. As far as the paints business, we're pleased that we improved the profitability of that business this year. It is a business with strong bands and strong positions in the Central American region of the world and it was good to see the team leverage with our cable oven and we hope to see them do more of that this year.

Okay. So back to the housing, have you seen any kind of different trends recently which means that you could actually do even better than what your expectations are or would an improvement in housing get you to the higher end of the range?

So, yes, I would say, as you know, Rosemarie, the construction business is only a limited part of our portfolio, right, so it is not like it is going to drive our business. It does have an effect and especially one that was as dramatic as it was for a few years. We all saw in the middle of this year what looked like an uptick in the housing market and then that easing off. Any recent data that shows an uptick, I guess, personally I am a bit skeptical of, but certainly if the housing market did well that would be good for us, but as far as that team is concerned, their goal is how to add value for customers and gain share with that part of the housing markets that's there.

Okay. And if I can just have one clarification on what you said earlier. When you are talking about getting your margins up in line with the higher costs, are you talking about the dollar margin, sales minus your costs, or are you talking about catching up on a percentage basis?

On the gross margin question?

Yes.

Yes. As I said in the script, Rosemarie, our expectation is to improve this year from the exit rate of 2010.

On a percentage basis?

Yes.

Okay, great. Thank you.

Okay, good.

Our next question is David Begleiter with Deutsche Bank.

Thank you. Good morning.

Good morning, David.

I guess back on volume growth, what is your expectation for volume growth in North America and looking longer-term at market share gains and really above market growth in adhesives in North America, is material market share growth gains possible in this mature market or is that more difficult given the dynamics of the competitive structure?

Okay. And that's all of those questions are about North America, David?

Correct.

So, we don't report specifically our outlooks for next year by region in terms of volume growth, but the team in North America is doing some good work in various segments, so in certain market segments we're gaining share and we'll continue to do that. Those are the areas where we're gaining value. In others we're following the market. So, overall I think step-wise some gain in share is what we'd expect in the North American adhesives business for us. We have got a strong mature business and we sell to a manufacturing industry that is mature and strong. So, to your question of do you see sizable gains, well, those happen sizably after many years, but not in any single year. So, can we gain share, yes. Is it going to be dramatic in 2011, probably not.

(inaudible - technical difficulty) gaining share right now in North America, Jim?

Excuse me.

What segments are you gaining share in, in North America?

Again, we don't report at that revel of detail, but there are certain segments of the assembly market where we are doing pretty well, for instance.

And just on M&A, how is the pipeline looking going forward?

How is it looking? Well, we're doing a lot of work there. The team is looking at the right strategic opportunities. I think it is the kind of work that we need to do on an ongoing basis. We need to find the right fit strategically, make certain that anything we purchase we purchase at the right price, and I mean, there are a lot of opportunities out there. When they're for sale and whether they're for sale at the right price is always the question.

So, just one more thing. Just on real pricing, not mix improvement, is real pricing again possible in these mature markets in North America and Europe in adhesives?

David, it is necessary, right, so there are raw materials that are moving up dramatically and where customers need to buy those products we need to move the pricing up. So, as I say, the mix is us finding new solutions for customers that enable them to make their products with different adhesives or lower cost raw materials, but where customers need to buy that same adhesive, the price needs to go up because the feed streams and the raw materials are going up.

Thank you.

We'll go to our next question, Jeremy Butler with Value Line.

It is Jerry Revervano, a private shareholder. You gave a kind of a vague answer early on, on the e-commerce component. Can you provide a more clear detail for us shareholders today as to what you guys are doing to work with distributors and channel partners to increase revenue more through e-commerce, as it seems like it is going to be taking (inaudible) in 2011?

Okay. So, yes, I think it is the same question you asked last time, Jerry, and I appreciate you sharing it and appreciate the importance of e-commerce. If you look, we have invested on our website. Fuller has been a -- has had an E-store ahead of many other companies in terms of how we interact on a business to business standpoint. E-commerce in our environment is about our business to business interactions with our customers. So, we have used it as much as a marketing tool than anything else. You will see we have got a blog that's probably one of the most active blogs out there in the market. So, the work we're doing is about marketing for our customers more than e-commerce to an end-user, as we might all see as retailers, and it has been good work.

Our next question is follow-up from Jeff Zekauskas with JPMorgan.

Thanks very much. You talked about how quickly you're growing in Asia, though the profitability of the Asian operations really hasn't moved up probably as much as you had hoped in that your revenues are sharply above where you were in the first quarter, but there is really no appreciable change in profits and it doesn't look like prices are moving up in Asia, so is that just a tough market or how do you expect to improve things next year?

So, yes, I think our profit challenge is there in Asia on two dimensions, Jeff. One is we've made some good sizable investments there to help us grow, so that is something that we have done and we need to manage. And pricing activity is a challenge in Asia. But we're accelerating the efforts there. We're committed and focused on delivering there. I think you will see some improvements, particularly on that front as we go through the year in 2011. Our team is focused on delivering that. The other thing, and Jim can correct me if I'm wrong, the Asian numbers include the acquisitions. Sometimes it is tough to suss through exactly what's behind all those numbers because they do include the acquisition we made, so that can dilute some of the efforts there. But profitability improvement in Asia will be driven by us growing and in some cases us improving our gross margins.

So conversely in Latin America, you really had a very sharp increase sequentially in your profitability and of course it is a seasonally stronger quarter, but still the incremental margins were, I don't know, in the high 30s. Is there something unusual? Was there a sale of a business or an unusual item in Latin America in the quarter?

No, Jeff. The team did good work, right? I think the third quarter was a difficult one for them. They did good work on pricing and margins. As I said -- as Jim said earlier, our paints business did a nice job of leveraging some of the value they had, but I wouldn't say there is exceptionals other than as you point out it's a very seasonal -- our fourth quarter in Latin America is generally a strong one and seasonality helps us in Latin America.

I guess lastly, your volumes in the US contracted in the quarter. Were you disappointed or did something happen there? Did you lose a customer or -- I would have expected that you thought that you would have grown in North America and so why didn't you grow in the quarter?

North America adhesives was up in volume and construction products was down, so North America overall was down. And I'd say the other piece of that, Jeff, is we report it as volume, but it is mix effect. So, if a higher value area is up and a lower value area is down, that has an effect on the overall aggregate number.

Okay. Thanks very much, Jim.

(Operator Instructions) And our next question is Christopher Butler with Sidoti and Company.

Hi, guys. Thanks for the follow-up. Just wanted to circle back a little bit on acquisitions with your capital expenditure budget increasing. Is that giving us an indication that valuations are a little bit higher than you want right now, especially for some of the larger type deals that might be out there?

No, I wouldn't say it is an indication of that at all. I think the increase in capital expenditure is simply a matter of we have some good projects that we think can deliver returns in terms of productivity to the business and we have some areas of the world where we want to grow and we need to invest.

And just finally, in the earnings guidance for 2011 where do you have the euro pegged?

Our budgets or our outlooks are calibrated on the euro rate just about where we are today, which I officially or technically our budget rate is 1.305 or something like that for the euro. So, it is basically right at today's rates.

Thank you again.

Thanks, Chris.

And we have no further questions in queue at this time. And thank you, ladies and gentlemen. This does conclude today's H.B. Fuller fourth quarter 2010 investor conference call. You may now disconnect.