H.B. Fuller Company (FUL) 2011 Q1 法說會逐字稿

Good morning and welcome to the H.B. Fuller first quarter 2011 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, Investor Relations Manager. At this time I would like to turn the meeting over to Mr. Maximillian Marcy. Sir, you may begin.

Thank you, Laura, 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 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 and annual report for the year ended November 27, 2010, on form 10-K filed with the Securities and Exchange Commission. These documents are available on our website at www.hbfuller.com in the investor relations section.

I will now turn the call over to our President and CEO, Jim Owens.

Thanks, Max, and good morning to everyone. We are off to a solid start in 2011.

Obviously, our primary objective this year is to achieve the financial results that we laid out in our guidance at the beginning of the year. But beyond just making the numbers, we want to demonstrate that our business strategy is getting traction and that we've created a Company that's fundamentally different than the H.B. Fuller many of you remember from the past, a Company that can grow, innovate and improve our profit margin. To do this, we have to pass a few key financial tests each quarter.

First, did we sustain our growth momentum? Second, did we manage our margins well? And finally, did we leverage our recent investments and operating expenses? Being able to answer yes to each of these questions would be a solid win for us and an indication to you that we are on the right path.

In the first quarter, we measured up well against all three of these tests and I'm confident that we will continue to do this throughout 2011. Organic revenue was up 9% compared to last year. The growth was broad-based across market segments and geographies. Specifically, our EIMEA region continued its robust organic growth trend. After growing 18% last year, EIMEA began the year by posting a 13% increase. Our Asia Pacific region posted a net revenue increase of over 30%.

While extending our organic growth trend, we also improved our gross margins by 20 basis points in the first quarter relative to the prior quarter, despite persistent raw material cost increases. It is a significant departure from the past that Fuller has been able to grow our top-line and increase margins in an inflationary environment.

And on our third performance target, we reduced our operating expense as a percentage of net revenue by 80 basis points in the first quarter relative to last year's first quarter. We are committed to growing our operating expense at a lower rate than our sales growth.

You may recall that during our January conference call, we said that our first quarter EPS would be down about 40% from the fourth quarter, effectively, putting our first quarter guidance at about $0.26 per share. We met our expectations for profitability in the first quarter and we are able to reaffirm our EPS guidance for the full year of between the $1.75 and $1.85. Our guidance points to a year of double digit revenue growth, 20% growth in operating income and a third consecutive year of adjusted earnings per share growth.

Achieving this level of performance will make 2011 a breakout year for H.B. Fuller in terms of performance and position us well for the future. After one quarter, we are well on track.

I've read through the transcript from previous conference calls and a clear pattern emerged. You are interested in hearing more about three things -- the raw material cost environment; the end market demand conditions; and the pricing actions we have already taken in those plants. So, let me address each of these three, key performance drivers up-front and we can fill in more details in the open question period.

Our raw material costs continue to increase during the first quarter with a bit more escalation than we had originally anticipated. As the year began we expected our raw material cost for the full year to be about 4% higher than the fourth quarter exit rate. At this point we would bump that estimate up to an 8% increase. We believe that raw material costs will increase at a lesser rate in the second half of the year than the first, but with that said, the situation is clearly fluid and we will remain vigilant and respond proactively to whatever conditions we are faced with.

If you are measuring our raw material costs from a year over year perspective, our current forecast is for this year's raw material costs to be 14% above last year. We will mitigate a significant portion of these higher costs through form -- through reformulation and product substitution. While oil and ethylene dynamics impact our macro environment, the raw materials that have been particularly tight for us are selected polymers and resins that are used in our hot melt formulations. As global economic recoveries progress underlying demand for these materials has increased, not only for adhesive related applications, but also from other industry segments which compete for the same resources.

At the same time, supply has been constrained due to planned and unplanned production outages. Also, most US ethylene manufactures are still maximizing the use of natural gas, which relative to cracking petroleum, produces less of the specific feedstocks needed for these specialized raw materials. These factors, increased demand and tightened supply, have restricted availability and driven costs higher.

Later in the year some additional capacity should be online for our specific raw materials and the unplanned outages should be remedied, leading to a more balanced supply and demand relationship and more stable prices. Although supply has been short, we have been able to serve our customers by utilizing our global sourcing networks and expert reformulation abilities. Up to this point we have not lost sales due to the supply constraints, but we have had to forgo a few growth opportunities.

Now, let's turn to end market demand. Our revenue is up 10% versus the prior year, so clearly some good things are happening in the market. In North America, organic revenue was up 6% in the first quarter, with our adhesive business up 7% and the construction products business up just 1%. In general, end market conditions in our consumer oriented market segments have been a little sluggish, while demand has been stronger in industrial market applications. Latin America has also been faced with subdued demand in our core consumer oriented markets and further impacted by the availability of raw materials, which has delayed some shipments to customers.

As I mentioned earlier, we posted some strong numbers in the EIMEA and Asia Pacific. Our Asia Pacific region has improved across most end markets, especially now [more with] markets in mainland China, where we have had many new customer wins. The story is similar in EIMEA, as a combination of healthy volume and price contributed to organic growth of over 13% in the quarter. The region continues to benefit from emerging market economies where our core markets of packaging and hygiene are experiencing robust end market demand.

I'd like to take a moment to mention that driving volume higher is not a strategic objective. Organic revenue growth is our objective. The financial score card we review each quarter tracks organic revenue not volume. And the distinction is this; by working collaboratively with a customer, we may find a solution that involves using less adhesive.

That adhesive solution may exhibit much better performance attributes and it will likely sell at a higher price point. When we help a customers solve a problem, we grow organically and our customers benefit by receiving a solution that performs at or above their expectations. So, even when our reported volume metrics do not look robust, our market wins might be better reflected in organic revenue metrics.

And now, just a few words on the pricing environment in our industry and our pricing actions, specifically. As you recall, we executed significant price increases in the fourth quarter of last year and again at the beginning of the first quarter of this year. We are currently executing price increases about equal in magnitude to the first quarter actions. Further price actions will be taken in subsequent quarters as warranted by raw material cost developments.

We are not alone in this. Our competitors procure the same raw materials as we do and they have, in general, been actively increasing price levels in the market. With all of that said, we try to work actively with customers to find creative and value generating solutions to rising raw material costs.

In fact, when product prices are rising the ability of our sales and our technical teams to find adequate substitute products or other creative alternatives helps increase our position as a preferred supplier in this industry. We are committed to delivering our margin targets and we will do this while still helping our customers manage their total costs. Our new Advantra Encore product platform, which while -- I will explain in more detail in the next slide, is an example of how we are leveraging our technical capability to add value to customers in this environment of escalating material costs and critical supply shortages.

We have said that innovation is a key element of our strategy, a strategy of delivering value and differentiation. So, let me talk for a few minutes about a very important new product introduction. On March 10, we announced that a new platform technology for high-performance adhesives, Advantra Encore, is now commercially available to H.B. Fuller customers.

This new platform for case and carton sealing builds upon our original introduction of Advantra over a decade ago. Advantra has been the gold standard for high-performance adhesives in the rigid packaging market since it was introduced . No other adhesive supplier has been able to upgrade the performance standards of Advantra , until now. Not only does Advantra Encore provide superior bonding and broader application temperature range, but it also delivers higher mileage than other types of hot melt adhesives. It also can replace a variety of special-purpose products with one personal formulation.

So, in a world where adhesive prices are increasing on a quarterly basis, H.B. Fuller can offer a valuable proposition to customers, the chance to offset material cost increases with productivity and process complexity savings. In addition, this new proprietary product formulation uses less of the base materials that are currently in very tight supply. The availability and cost of this new formulation will be much more stable and predictable relative to the existing competitive offerings. Since the case and carton market is a key business segment for H.B. Fuller and represents a global market potential of over $1 billion, this is an important new technology offering for H.B. Fuller, and is one example of our new business strategy in action.

I would now like to turn the call over to Jim Giertz, who will review our financial performance and our

Okay, thanks, Jim. I'd like to quickly review our performance against the four key metrics in our financial score card. As we've said before, consistently achieving our targets in each of these four financial metrics is the ultimate objective of our business strategy.

Our organic revenue growth was positive again, our fifth consecutive quarter of organic growth, up 9% versus the first quarter of 2010. Our fiscal year 2011 guidance indicates that we expect this positive trend to continue through the remainder of the year. Our four quarter trailing EBITDA margin declined in the first quarter to 10.3%, primarily reflecting the impact of steadily rising raw material costs since the first quarter of 2010. Once again, our 2011 outlook indicates that this metric will improve in the coming quarters due to improving operating performance and easier comparisons beginning in the second quarter of this year.

The ROGI and EPS growth metrics display a similar pattern. Although our five-year compound EPS growth has slowly declined over the past four quarters, our 2011 guidance indicates EPS growth of between 9% and 16% in the current year, within our target range of 10% to 15% growth per year.

Now, just a quick review of our guidance for 2011. We're bumping up our revenue guidance a few points, primarily to reflect plans for additional pricing actions to recover higher than planned raw material costs. Our revised net revenue expectation is 10% to 12% growth versus the 2010 fiscal year. As we mentioned during last quarter's call, the current fiscal year has 53 weeks and the extra week will add approximately 2 points of growth in net revenue for the full year, all in the fourth quarter. Therefore, our original guidance implied a core growth rate of 6% to 8% in each quarter, with about 8 points of incremental growth in the fourth quarter from the extra week.

We exceeded this forecast in the first quarter through strong volume developments in Asia Pacific and EIMEA and price realization across all segments and we expect this positive net revenue growth trend to continue through the remainder of the fiscal year. We expect our EPS to land between $1.75 and $1.85 per diluted share in 2011. This guidance assumes continued sequential improvements in gross margin and that SG&A expense will grow at a slower rate than net revenue. These factors together will drive operating income growth of over 20% on net revenue growth of 10% to 12%.

Next, we still expect to invest approximately $40 million in capital expenditures, which will be backloaded in the fiscal year as we ramp-up construction of our facility in India. Finally, our tax rate forecast of 32% before discrete items is also confirmed.

And with that, now I'll turn the call back to Jim Owens to wrap us up.

Thanks, Jim.

As I said at the outset of the call, we had a solid start to the year. We met our stated performance expectations and we passed our three key tests. We sustained our growth momentum with 9% organic growth. We increased our gross margin and we reduced SG&A as a percentage of sales. We leveraged our investments in our innovation and commercial organizations to create and capture value with customers in the market. Most importantly, we are on track to build on this success through the balance of 2011 and in the years ahead.

Thank you for joining us today and now I'd like to open up the call for your questions.

Thank you Mr. Owens.The question and answer session will be conducted electronically. (Operator Instructions). Our first questions comes from the line of Mr. Jeff Zekauskas with JPMorgan.

Good morning this is Silke Kueck for Jeff.How are you?

Hi Silke.

I have a general question on the SG&A expenses. So, in general terms, if I look back to 2006, 2007, 2008, the SG&A expenses as a percentage of sales were in the 18% or 19% range and I understand for a period of time due to regional focus those expense levels went up and is the longer term focus to bring SG&A levels back to a level that is below 20% of sales? Is that doable in this environment or is it too competitive?

So, I'll -- on the specif -- so, generally, as we've said, Silke, our goal is to leverage the investments we've made in the last couple years and thin out those expenses, but maybe Jim can share with you some specifics in terms of what we are thinking about.

Yet, sure. So, well, as you said, our SG&A as a percentage of sales was quite a bit lower in 2007, 2008, but as we changed the business strategy we had to bump up our SG&A spending, rebuilt the commercial teams, rebuilt the technical teams which drove our SG&A up. So, definitely, as -- now as we go forward we should be -- we've essentially finished those investments in our business strategy change, and so now as we go forward the key focus is to get leverage from those investments, and as we've said several times, our SG&A as a percentage of sales should thin out. Of course, it's always a little thick in the first quarter because seasonally our volumes are so low, but over the full year I think you should see sequential reductions in our SG&A as a percentage of sales.

And, Silke, we've indicated our long-term targets are hit that 14% to 16% EBITDA margin, and when you do the math, as we keep our margins at that 30% level, or 29% to 31% level we will, of course, need to send those out to make that happen. So, that's where we're going in the long-term for sure.

If I can ask one follow-up question and where I'm going with this is that in the fourth quarter of 2010 I think your SG&A expense was $70 million on sales of $360 million and this quarter the SG&A is close to $76 million on sales of $340 million. Why is that? Was there seasonal aspect to that?

Okay, I'll -- Jim's --.

(Multiple speakers) because not only as a percentage of sales but in absolute dollar terms the SG&A moved higher.

This is Jim G. Yes, SG&A expenses in a quarter can vary quite a bit for a number of different reasons. There's certain items that hit from time to time and it's -- it creates kind of a lumpy pattern.

So, what I like to do is look at multiple quarters and look at averages and trends. So, I think if you look at 2010 for the full year, and you -- our SG&A run rate, our average quarterly SG&A rate last year was just under $73 million. Okay? And, so I think that's really the base to compare first quarter and all of our subsequent quarters to that.

So, the first quarter was really only about 4% higher than our quarterly run rate of last year. So, that's the way I look at it, as opposed to looking at sequentially quarter to quarter. Does that help?

Yes. Thanks. I will get back in the queue.

Okay.

And our next question comes from the line of Steve Schwartz with First Analysis.

Good morning, guys.

Good morning, Steve.

It's nice to see the direction of organic revenue growth. Jim O., you mentioned that you didn't lose any sales because of the raw material situation, but you had to forgo growth opportunities. Can you just give us a little more color around that? Exactly how that plays out as a salesperson finds an opportunity and how you have to walk away and whether or not you can come back to that opportunity again?

Yes , so, in a world where raw materials are tight, we're committed to serving our customers. So, we make certain we do a good job of meeting the needs of our customers. Sometimes that requires some creative reformulation, new product introductions, but whatever it takes. Some of our competitors, one in particular in the market segment, has had to put customers on allocation. That's led a lot of people to our door wanting business and maybe we could've filled some short-term opportunities, but, put some of our existing business in jeopardy.

So, those allocations at some of our competitors have put their customers on it provided some short-term opportunities, but we need to be careful how we manage those. So, where there's a long-term relationship with a customer, where there's an opportunity to gain business for the long-term we leveraged those. And some of the work -- the work we're doing is about how we build a strong, long-term growth opportunity. So, does that give you a good sense,

Yes, it does, and, I think then that what that means is, for those of us out here, we have to be careful about maybe modeling some of those opportunities, because as you gain the -- as the situation improves to where you could serve those customers, it sounds like, so will your competitors be able to be incumbent competitor, be able to serve them.

Yes. I would say in some cases that's true, but generally, we'll see what the future brings, but we've done a very good job, probably relatively better than the market, in leveraging our global relationships with suppliers and also, as I mentioned with the Advantra Encore story, finding new technology to bring to customers and will continue to do that. So, the Advantra Encore story and other stories we have on product introductions should differentially enable us to win those opportunities.

Okay. And then Jim G, in mentioning or answering Silke's question, you referenced bolstering your commercial and technical teams. Can you quantify for us exactly how much you've added to the sales force and basically the customer facing function. Is it a 10% or 20% increase in the sales force? Can you help us there?

Well, we don't -- we haven't and we don't normally disclose all the details of that.But what I can tell you is that when you look at our census numbers, which are reported, essentially all of the increase in our census, give -- some gives-and-takes, but essentially all the increase in the census that we've had, outside of our manufacturing and production facilities, is related to what we're talking about here is the investment in commercial and technical resources.

So, it's a sizable difference in what we've done in SG&A in that area.

Okay. Okay. All right. Great, thanks for the color.

Our next question comes from the line of Christopher Butler with Sidoti and Company.

Hi, good morning, guys.

Hi Chris.

With the reiteration of your full year guidance, interested to know what kind of headwinds do you expect to face from Japan over the rest of this year?

Yes.

So, I'll kick it off, maybe I'll let Jim talk in more detail. In fact, I was in Japan when the earthquake hit visiting our facilities and working with our team there, and, we also had a board meeting. So, our plants are in the south of the country in Hamamatsu and Shiga, and so unaffected by the earthquake directly.Of course, there are some power, rolling power issues going across the country, as well as some supply issues. But, generally speaking, these first couple of weeks we've seen demand strong.

The area that was hit was not a big customer base area for us and the two major customers that were in that area, they've actually transferred their production to other facilities that they have in Japan. So, overall, early returns are limited. We are in the construction market so we see some need for construction materials as we go forward. So, while it's a big human tragedy that we're supporting locally, our employees are safe and that's been good news, and we are doing our work to help support the community. From a business side standpoint the effect has been muted.

Jim, you want to add to that?

Yes, sure. I would just add just specifically as it relates to our full year earnings guidance, clearly our joint venture in Japan, even though it only represents one line item on our P&L, it is a significant operation and a significant contributor to our bottom-line.So, just a point of reference, last year we put $8 million of after-tax income on to our P&L from our JV in Japan. So, it is a significant piece of our business and our financial results.

Our current guidance assumes that, that in the end of the day, by the end of the year that we won't have any interruption in the profitability or the results that come out of our Japan operation. So, I think the way we look at it right now is that there may be some short-term disruption, but we are going to assume that whatever disruption we have we'll be able to recover before the end of the year and the net for the full year will be about the same.

So, in our guidance today we have our joint venture income from Japan, just a tick higher than last year, essentially flat from last year, and we're going to stick with that guidance or that outlook and if something changes we'll make an adjustment.

And, Chris, our GM from Japan was here in Minneapolis this week and we did do a detailed review of that as well.

And shifting gears, you had talked about some success that you're now having with reformulation, some of the shortages that you faced have been going on a year now. What kind of margin expansion do you think we can expect from further success on reformulation over the course of the year?

So, we're not giving specifics there, Chris, but I think our clear guidance is that we're going to tick up on gross margin as the year progresses. So, the net of a very significant raw material increases, combined with our pricing increases and our ability to reformulate will be a net positive on the gross margin line, quarter after quarter.

Thank you,I'll go back in the queue.

Our next question comes from the line of Dmitry Silversteyn with Longbow Research.

Good morning, gentlemen.Congratulations on meeting your expectations for the first quarter. A couple of questions if I may. It sounded like from what you were talking about in volume, differentiating volume growth versus organic growth, and kind of how you described the mechanism of getting incremental new business without necessarily reflecting it in volumes. Do I understand then in your breakdown of volume pricing, acquisitions and FX that the price also has a mix component as opposed to volume line having the mix component?

Well, volume has the mix component. Right?

Okay. So, I guess I've been struggling to understand the differentiation between volume and revenue growth -- and organic revenue growth as an indication of how well you executing. Are we then to judge your execution by, strictly by your ability to get pricing?

No. I think the ability to get pricing is certainly an important part of our ability to win, but I think the important element is customer can -- we can sell to a customer. So, a customer is buying adhesive A. We take that customer and we change him to a different higher value product. He may pay the same -- in a non-inflationary environment he may pay the same or more in terms of revenue dollars to us, but purchased from us less volume.

So, that would not show up as a mix effect that would -- and it would show up as a positive price effect. Does that help, Dmitry?

Okay. So, then price -- so the mix is in the price line then, from what you just said?

No, it -- well, it isn't today. I think what Jim is just saying is basically a lot of customers one of their major goals is use less of what we sell. They like to use less glue .

Absolute.

If they can, and we like to help them do that. And the way we do that is we sell them a different product that has a higher average selling price per pound .

Right.

That's one of our core strategies. So, we are trying to -- we want to measure the results of our core strategy, I think, is what we are trying to say.

I understand that, but that's why and I'm sorry if I am talking in circles here, but that's what I am trying to get that. If the mix and price -- if the mix and volume are in the same line and you're giving up volume to gain mix, then I would understand that your overall line would not change that much and most of the growth you would get incrementally would be from pricing.

Is that how I should be thinking about that? In other words, when you say volume is up 2%, that may not necessarily be true, you can have mix up 5% and volume off 3% and average the 2% volume line. Is that the right way?

Yes, I think the difference is that the way we actually calculate volume here is that we are calculated it by -- in smaller groups. So, we can move from one group to another and it will show up, well not necessarily show up as a volume increase or a change in volume. It's an arcane methodology that we use to calculate these PVMs. We're just saying that it doesn't, because of the way we calculate it, we don't think it's a true reflection of the results of all of our business strategy, I guess that's what we're saying.

Yes, and another mix effect that shows up here, Dmitry, that may work its way through on the organic revenue, but not show itself as well in the volume number. For instance, a market like the book binding industry, right. It's obviously down in an environment like this. It's a lower value industry.

We may be up in an area with reactive hot melts. Those have higher average selling prices then the book binding industry, for instance. So, those effects flow-through as an organic revenue and not as a volume mix.

Got you. Okay. That's helpful.

If you strip out the small Asia Pacific business, it look like most of your volume growth in the quarter came from EIMEA. Can you talk about what's behind the strength and how sustainable that is going forward? And also, if you can talk through why the Latin American pricing was down year over year after being down year over year in the first quarter of last year. Is it just something about the region where you have to give up pricing in the beginning of the year and then you try to claw it back at the end of year?

Okay, so there's a few questions there. I'll try and take the EIMEA and I'll toss it to Jim, he can do his research on the Latin America question that you just asked.

Yes, EIMEA has been a great success story, led by the fact that we put in place a new leadership team well over a year ago that's really gotten some good traction in terms of delivering results in the business. We've focused on delivering value for our customers. We've reorganized how we've led our sales team and how we go to market and we've recommitted ourselves to the region in the Middle East.

So, we have one in Turkey. We've generated a lot of value out of our Egypt acquisition and, as Jim mentioned, we're investing now in India, which is all part of that EIMEA. So, real solid work to be a better value added contributor in core Europe and targeting the right customers with the right products, as well as winning in the growth areas in the market.

Could also comment on Egypt that we had a disruption in Egypt, obviously, this quarter coming out of our facility and the strength of Fuller really came through as we were able to serve customers. We were shipping product from North America and, in fact, had to airship a significant amount of product to serve our customers in Turkey, who were being served from that Egypt plant. So, it was a great example of the strength of Fuller and us investing whatever it took to deliver results in meeting our customers, including some significant expense to meet those needs as a result of the Egypt disruption.

Is that why your margins saw in the region have dropped so much, both sequentially and year over year?

Will, certainly, there was an impact. So, the EIMEA business definitely had a significant cost that we incurred in Q1 as a result of those needs and they, I think overall for the Company, they impacted our margins by about 30 basis points, the expense related to Egypt.

That's 30 basis points for the Company, so almost a point then for the region itself then?

That's right.

That's correct.

Okay. So, you should see that margin come back as your operations in Egypt get back to more normal levels of functionality?

Yes. We are at a more normal level of functionality today at our facility in Egypt and we expect margins to come to more normal levels.

Okay. And I'm sorry, on the Latin America, I meant to say volumes that were down versus down volumes a year ago, not pricing. So, I apologize if I confused you with the question.

Now I need another five minutes to process that question. No, go ahead Jim

Just to reset the numbers. So, price in line America was actually up over 10% and volume was down [2], right? So, you're asking why the volume is down.

Right. Especial after going a down volume quarter in the first quarter of 2010 as well. So, it is the easiest comp you are going to have this year on year over year basis it looks like.

Yes. So, what the story is, basically, just what we said when we read our script, which is that a -- couple different things. Some of the consumer markets have been a little softer than some of the other markets in Latin America and then consumer driven markets. And, then the other effect is that, especially in Latin America, our volumes have been hurt temporarily by material shortages, which has caused us to delay shipments in some cases. So, those are the basic explanations.

And I'd add to that, that you know we've taken -- on the paints business, which is part of Latin America, we've taken a focus on focusing on the value added segments. So that's helped improve our profitability, but detracted from our margins in (invest). Taken away from our volumes, not margins.

Got you. One final bookkeeping question. What was the CapEx in the quarter?

6. -- hang on. $6.1 million.

Thank you very much, gentlemen, that's all.

Okay, thanks, Dmitry.

Our next question comes from the line of Rosemarie Morbelli with Gabelli & Co.

Good morning, all.

Hi, Rosemarie.

I am actually glad that Dmitry asked the question because that was one of my issue, as well, in terms of volume. What happens in a deflationary environment when you cannot get any pricing and you are kind of forgoing some volume.

So, let's say, next year that there is no inflation, for some reason everything comes down, oil stays where it is, raw material cost maybe decline. Are we going to watch that line going down, the organic growth? Because you won't have the volume, since you are swapping higher volume products for lower volume, pricing will come down generally speaking.Would the value added of your new products be strong enough to actually show an organic growth?

So, I'm not sure that's a specific question about the numbers in 2012 or a general question?

Well, wondering what happens in a deflationary environment or at least a flat, no change in pricing?Whether it is on your cost side or on your sales side.

So, clearly, Rosemarie, in this environment our organic revenue is impacted by price positively and we won't have as much of that impact in this environment. The approach we're taking to the market is we're focusing on value added segments and value added products. And those drive more revenue generation and that's about winning share of customers wallet, not necessarily share of their volume.

So, our clear plans and our clear expectation is in a non-inflationary environment, you would see organic growth rates that'd be positive. Our stated goals are 3% to 5%. Our expectation is that we would be at or above those levels in inflationary or flat environments. And, so, hopefully that gives you some perspective.

But, our long-term goal is 3% to 5% and I think given what we see in our business, hitting those numbers or higher are something that we would expect from ourselves in non-inflationary environments Jim, you want to add something to that?

No, I think that's the right answer.

Is that 3% to 5% organic growth from things that can increase over time as you -- I mean, when you say that your long-term goal, how far out are you going? And as you are bringing to the markets some new value added products, wouldn't you expect that to grow faster? I mean, it's not a particularly strong growth rate, I guess, is where I am going. And I am trying to figure out how do we go from 3% to 5% to higher than that without having an inflationary environment, just based on what you are doing.

So, clearly our performance last year at close to 10%, this year with the numbers that we've given you a 10% to 12%, will be well above those numbers, Rosemarie.To predict what the environment will be and exactly what our growth rates will be at this point for 2012 and beyond, is a little fuzzy. But, I would say that the way we've invested, Rosemarie, is to be a Company that can grow and win.We're winning share in our core markets and we're investing to grow in attractive, new market segments. Another press release we put out this quarter was our Flextra technology. So, there was a problem in the market.

There is some new films, sustainable films for food packaging, for potato chips and other materials that were introduced, but they were too noisy. And we were able to solve that problem with adhesive technology and we worked closely with the people that had the problem and we solved the problem technically. That's an example of us entering a market segment that's new, adding a lot of value and growing our business.

So, I think those are the examples of the kinds of wins we have and that's -- that gaining us share and we'll continue to gain a share as we go forward. But winning in the market in existing segments and also growing into new segments is clearly underpinning what we're doing around here.

Okay.

Does that help give some color to it, Rosemarie, does that help?

Yes, a little bit, because when we -- again I'll -- we'll always go back and consistent to the organic growth, which was strong last year as from this year, but those are two years with inflationary, in an inflationary environment. So, we're still helped by those selling price increases. But, I understand what you are doing.

And, looking at the selling price increases, you talked about the fact that you expect your gross margin to improve sequentially, quarter over quarter -- I mean, every quarter. Do you anticipate that you can get above last year's gross margin by the second quarter or will it take until the third before you can actually catch up and go back to the 29.6% plus level?

Sounds like you are asking for specific gross margin guidance, Rosemarie.

I love specific.

I don't think we can -- but let me throw it to Jim and see if he can give you a little more (multiple speakers).

I can rephrase it. Can you catch up in one quarter or do you need two quarters to catch up?

Yes, I hear your question and I'll ask Jim to give you some more specifics.It will go up from where we are today, Rosemarie.

For the full, are you talking --

For Q2 and Q3. Jim?

From where you are in Q1, yes? I understand that, I was wondering if by the nine months you could be above last year or because your raw material costs are going up continuously whether that lag will continue maybe throughout the end of the year?

Okay, so, this is Jim G. So, I basically go back to Jim Owens comment, which is, I really don't want to get into giving quarterly guidance on gross margin percentages. But, I think the answer to your question is, it is most likely that our gross margin, year over year gross margin will be favorable in the last three quarters of the year. I think that's what you asked.

Yes, it was. Thank you. I appreciate it. And could you give us a little bit -- I was surprised by the differential in Asia Pacific where you had strong volume, but very little in terms of pricing. So, is it real pricing that you were not getting there or is it that your mix of value added product did not improve as much as elsewhere?

Yes, Rosemarie, I will start that one and then give it back to Jim. Actually, the biggest difference that I saw in Asia is that the raw material situation in Asia was quite a bit different in the first quarter than our other regions of the world.Where we have a substantial business in Australia, in Asia and the Australian dollar was extremely strong in the quarter and so therefore material costs were actually, in some cases, lower year over year, than they -- then, because of the strength of the currency.

Also because of the mix of our business, we tend to make more water-based product there, which are not affected as much as the hot melts. The -- but clearly, now, the raw material costs are beginning to escalate in Asia as well. And so I think you're going to see more of the similar dynamic in Asia in terms of price increases in Q2 and going forward more similar to the other regions of our Company.

And I would just add, Rosemarie, that the increases as we did early in the quarter in other parts of the world happened more toward the middle of the quarter in Asia.

Okay. Thanks.

Okay, thank you, Rosemarie.

Our next question comes from the line of James Sheehan with Deutsche Bank.

Are raw material shortages still forcing you to forgo growth opportunities in emerging markets in Q2?Is that your view?

Hi James. Yes, I think it's a challenge, right, to get the raw materials we need for every opportunity. But, we are committed to that so a lot of the work that's going on with our teams is finding products made out of available raw materials to meet the needs of existing customers.

There are a lot of opportunities out there and we are trying to find ways to meet those, but clearly in Q1, and we mentioned specifically in Latin America, we had to delay some things. We'll -- we're pushing hard to make certain we can capitalize on each one of those opportunities that comes out. So, I would say, time will tell, we're working closely, but if we can get customers to buy the products that we think we can supply to them, we'll be a -- we'll do a good job of capitalizing on some of those opportunities.

Okay. And just on organic growth in North America, we had 5.8% attributed to price, could you sort of roughly characterize what portion of that was pricing to cover raw materials and what was more a mix effect?

So, yes, I'd say one big factor, of course, is we have a sizable construction business in North America. So, that was negatively impacted. Not just by the slow construction market, but we also had pretty bad weather in North America, so that led to less construction and some seasonal changing of some orders from Q1 out into Q2. And in our more core business we saw a little more softness in some of the consumer oriented markets than we did in some of our assembly and industrial applications.

So, those are more of the high-value operations, and I mentioned book binding as an example of a market that's slow, underlying, but that gives you sort of a high-level market segment view.Areas like flexible packaging and assembly, we saw good growth. In some consumer oriented we saw less. Jim, do you want anything to that, or?

No. It's good.

Okay, so, just with respect to that break down that you just gave, does that indicate that you gained any market share in North America during the quarter or how would you characterize the shift in market share going forward?

Yes, I wouldn't say there was a sizable gain in market share in North America in Q1.

Okay. Thank you very much.

(Operator Instructions). Our next question comes from the line of Christopher Butler with Sidoti and Company.

Hi guys.Thanks for taking my follow up.You had mentioned that construction is -- continues to be on its back. Do you have any -- have you run any sensitivity analysis to get a sense of what, maybe a million starts would mean to you when we get down the road, we get back to that level?

Yes, we've run some of that, Chris, I don't know that we're sharing it in any kind of detail. We're certainly not counting on it. The work that our team has done, they've done nice work to size our business to the level that the market is at today and also introduce some new technologies and gain share with key customers. So, we have a few key customers we're betting on who we see as the winners, whether that's in the distribution channel or in the retail channel and we're doing more work to expand our presence with those customers and we think that's a winning strategy for us.

So, I think, whatever the market does we feel pretty good about the work the team's done to position us to do relatively well for the construction market, but I don't think we have specific numbers. Certainly none that we'd be able to share today on what a million housing starts would do for us. But it would be good for us.

Well, that was it. Thank you for your time.

Okay.

Our next question comes from the line of Summit Roshan with KeyBanc.

Most of my questions have been answered, but one quick one on the margin front.Talk a lot about reformulation and pricing initiatives to recapture some of that margin. Do you have an idea of how much of -- are you relying on one more than the other or is that kind of a 50-50 split?

I'm sorry, was -- you said a split between reformulation and -- ?

And pricing to recapture margins.

Yes, I would say if you were to take a high-level view, I don't know that we actually have a number split out the way, but 50-50 sounds about right.

Okay. And just as a reminder, raw materials as a percentage of your cost of sales, is about 70%, 75% a good way to think about that?

75%, yes.

All right, thanks.

Our next question comes from the line of Rosemarie Morbelli with Gabelli and Company.

Hi, I was just wondering, Jim O, if you could talk a little bit about the new hot melt adhesive for solar panel applications? What kind of -- it is a big market, but what kind of an impact do you think it could have on your business?

For solar panel?

Yes.

Yes, so, for us solar panel is a new market entry. We don't have a sizable position. We do have a sizable and very strong position in insulated glass and window businesses and we've been able to leverage that understanding as well as our reactive hot melt position to enter this market. So, as we announced, we had some new [level] approvals this quarter that should help us gain some share. So, I would say, if you're looking at 2011, Rosemarie, it's a small impact, but it's a great investment for us in the years ahead.

What -- how big do you think that business could be five years out or three years out, whichever number you like best?

I don't think we have a number there we can share, but it's not hundreds of millions, right, it's tens of millions in terms of revenue.

Okay. That is helpful.And, lastly, have you seen any change in the trend of -- in the growth trend in the different markets or geographies that you serve since the end of the quarter?

No. No and surprisingly, as I mentioned, even Japan hasn't been dramatically affected. So, I would say we see -- we're positive on Q2 as outlined in our guidance.

Okay. Thank you.

It appears there are no further questions in the queue at this time. I would now like to turn the conference back over to our management team for any additional or closing remarks.

Good, thanks to everyone for attending on today's conference call.

Ladies and gentlemen, thank you. This does conclude today's H.B. Fuller first quarter 2011 earnings conference call. You may now disconnect.