H.B. Fuller Company (FUL) 2011 Q2 法說會逐字稿

Good morning and welcome to the H.B. Fuller second quarter 2011 investor conference call. This event has been scheduled for 1 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 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 call over to Mr. Maximillian Marcy. Sir, you may begin.

Thank you, John, 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, adjusted earnings per diluted share, 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 growth 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 filing of March 28, 2011 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 halfway through the 2011 fiscal year. This year is a key period of transformation at H.B. Fuller. It's a year for investors to gauge and to recalibrate the future path of H.B. Fuller from a growth and profitability standpoint. We are of course pleased with the results to date, but we also see them as an indication of the strength and capability of H.B. Fuller. Particularly when you consider that these results were delivered in the face of a lackluster US economic environment and accelerating raw material inflation, environments that don't normally work to H.B. Fuller's benefit. The performance of this team in Q2 and year to date is particularly impressive when you consider that backdrop.

To judge how we are performing in this difficult environment or other environments, it is best to again measure ourselves against the same 3 financial tests that we spoke about last quarter. One, did we sustain our growth? Two, did we manage our margins? And three, did we leverage past investments in our organization? I am very pleased to report that we again made great progress against all 3 of these key measurements. In fact, we performed better than expected in a number of areas, and we anticipate that this will continue, which is why we are increasing our revenue and EPS guidance for the fiscal year.

Regarding the first measure, revenue growth, we grew over 13% versus last year's second quarter of which 8.5% was organic. Europe, India, Middle East and Africa continued its double-digit growth trend, delivering organic growth of just over 10%. In addition, our Latin American region grew over 13% organically versus the previous year. Asia-Pacific again grew net revenue of over 30% helped by the impact of the Revertex with Finewaters acquisition at the beginning of last year's third quarter. While growth was strong, it has not come at the expense of margins. In fact, in the face of persistent and accelerated raw material cost inflation, we again improved our gross margin versus the previous quarter, this time by 10 basis points. Incremental sequential improvements in gross profit margin in this inflationary environment are a clear indication of the strength of the business and the strength of the team. We anticipate further incremental improvements in the final 2 quarters of this year.

Finally, regarding leverage of our investments, we decreased SG&A expense as a percent of net revenue to below 20%, a nearly 2 percentage point reduction from last year and the first time we have been below 20% since 2008. Our investments are returning value for our shareholders. Our stronger commercial teams are sustaining growth in our key markets while at the same time working effectively with our customers to manage cost inflation.

As I mentioned a minute ago, due the solid performance so far this year, we are increasing our fiscal year 2011 guidance. We now expect net revenue to be 13% to 15% higher than the 2010 fiscal year. This will be driven mainly by additional pricing to offset inflationary raw material costs. We also are raising EPS guidance by $0.10 to between $1.85 per diluted share to $1.95 per diluted share. We expect the 2011 operating income will be up about 25%, and we will record our third year in a row of increased adjusted EPS with EPS up 16% to 22% from last year's adjusted results of $1.60.

I would like to address again this quarter the 3 performance drivers which have typically generated the most questions and interest from investors during these quarterly calls, the raw material cost environment, the end market demand conditions and the pricing actions we have already taken and those planned. Raw materials have continued their nearly 2-year long cost escalation and are now above on an absolute basis those levels experienced at the peak in 2008. The prices are rising faster than we or the industry had anticipated. We provided revised guidance last quarter of 8% raw material cost inflation from the fourth quarter 2010 exit rate. The expected inflation as of today is approximately 13% above that exit rate. From a full-year comparison, 2011 raw material cost is expected to be nearly 20% higher than 2010. We believe the sequential raw material increases in the second half of the year will be lower than those experienced so far, but the situation has not improved dramatically. However, we have been diligent in our efforts to overcome the raw material cost situation and as our sequential gross profit margin improvements demonstrated, our hard work is paying off.

Next I will talk about end market demand. Overall, we are seeing a slowly improving global economy. But a recovery that has lagged previous expectations. In North America, we grew by more than 6% with the adhesive segment up over 5% and the construction products segment up over 7%. Volume in the adhesive segment was slightly negative as US manufacturing growth slowed and the ISM index fell to its lowest point since September of 2009. On a positive note, our construction products segment produced volume growth in the mid-single digits. We saw more demand for construction-related materials during the quarter, primarily on the export side, and as we gain share with key domestic customers. Latin America returned the most robust results of all our regions in this quarter, growing over 13% organically. Both the adhesive and paint segments grew pricing and volume amid a steadily improving economic backdrop which has no signs of slowing down.

As mentioned earlier, Asia-Pacific again returned over 30% net revenue growth, which was driven by last year's acquisition of Revertex Finewaters and appreciation of the Australian dollar and the Chinese RMB. Organic growth for the region was over 8%, fairly evenly split between volume and price realization in our core markets. In Japan, volume has remained strong. In the wake of the recent disasters, customers have continued to order, in some cases ahead of plan to ensure ample supply through the summer due to the scheduled rolling blackouts which may impact production capabilities. Our local team has so far been able to fulfill all orders without interruption. In the EIMEA, net revenue growth was over 16%, of which over 10% was organic.

Lastly, regarding customer pricing, we performed well in this area. As our raw material costs have continued to push higher, properly pricing our products continues to be a focus for us, given the overall value that we provide. We continue to work closely with our customers to find adequate substitute products and creative alternatives to help offset the additional costs. If the raw material situation continues to progress as it has, we will take additional steps to ensure that we probably manage our margins.

Next, I would like to quickly provide you with an innovation update. The commercialization of Advantra Encore, our exciting new product that we mentioned last quarter, is progressing well. We have performed many customer demonstrations around the world. And production orders are now starting. This is an important new product platform that provides superior performance ports for our customers' applications based on product formulations that make the most efficient use of scarce raw materials.

Also, we closed on the acquisition of the Liquamelt adhesive business which is a unique system including both adhesive and equipment. The adhesive is delivered in a liquid form and provides immediate bonding characteristics, similar to hot melt adhesives. This cool on demand -- I'm sorry, cool on delivery, hot on demand technology is a new category of adhesives and will enable us to help our customers drive cost and complexity from their process with technology that's based on sustainable and available raw materials. The acquisition of the Liquamelt adhesive system demonstrates our continued commitment to rapid innovation and leadership in the delivery of new product solutions to the adhesive industry.

Another highlight I'd like to discuss is the EIMEA organic growth rate. I will share a bit of detail regarding the reasons for organic growth trend in a region that is not generally considered a high-growth area. First, I should point out that our organic growth, which was reported at 10% in Q2, would have been 16% had we excluded the polysulfide and certain polymer market segments which we discontinued last year. Likewise our volume growth would have been over 5%. This is part of our strategic effort to focus our resources in market segments where we are strong and have the best capability to gain share. Second, we have structured the organization around end market segments so that we can focus on finding customer and market needs and provide innovative solutions, delivered through our team of end market experts.

Third, we focused on developing a sales and technical team that's well-trained, specifically focusing on sales excellence. This is not about selling our wares, it's about creating a sales team that understands our customers' needs and dedicates our Company's resources toward targeted customers. We've also been successful in EIMEA, partially because we've been able to grow in India, Turkey and Egypt. But utilizing and developing local talent, connected to a global support team, we have created a model which provides above market growth rates.

The fundamental drive behind these changes in Europe are the leadership upgrades we made in 2009. We brought in Steve Kenny and Stephen Ringsdore, who are both 25 plus years seasoned global professionals. These guys know how to grow profitably in the adhesive business. They're identifying market opportunities and allocating the resources and skills necessary to create growth. This H.B. Fuller business model of strategic focused market segmentation, local presence, sales excellence, and recruitment and development of strong, experienced leaders is delivering organic growth in all of our regions. While the results in EIMEA using this business model are particularly impressive, I want to point out that all our organic growth is based on this model and H.B. Fuller's strategic view of how best to run our business and win in the adhesive industry. I'd now like to turn the call over to Jim Giertz who will review our detailed financial performance and 2011 guidance.

Okay, thanks, Jim. I'd like to quickly review our performance against the 4 key metrics in our financial score card. As we have said before, consistently achieving our targets in each of these 4 financial metrics is the ultimate objective of our business strategy. We grew organically by over 8% versus the second quarter of 2010, which was itself a strong quarter of 13% growth. These results mark 6 quarters in a grow of solid positive organic growth. Our fiscal year 2011 guidance indicates that we expect this positive trend to continue through the remainder of the year.

Our 4 quarter trailing EBITDA margin improved in the second quarter to 10.4%. This is the first improvement in this metric since the start of the latest raw material inflation cycle which began in the first quarter of 2010. Our 2011 outlook indicates that this metric will continue to improve in the coming quarters, due to improving operating performance and easier comparisons in the second half of this year. The ROGI and EPS growth metrics display similar pattern. Our 5-year compound EPS growth has improved versus the previous quarter. Our 2011 updated guidance indicates EPS growth of between 16% and 22% in the current year, which is above our target range of 10% to 15% growth per year.

Now, just a quick review of our guidance for 2011. We are again bumping up our revenue guidance a few points, primarily to reflect plans for additional price increases to recover higher than planned raw material costs. Our revised net revenue expectation is 13% to 15% growth versus the 2010 fiscal year. As we mentioned during our previous 2 calls, 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 previous guidance implied a core growth rate of 8% to 10% in each quarter with about 8 points of incremental growth in the fourth quarter from the extra week. We exceeded that forecast in the first half through strong volume developments in Asia-Pacific and Latin America and price realization across all regions. We expect this positive net revenue growth trend to continue through the remainder of the fiscal year.

We now expect our EPS to land between $1.85 and $1.95 per diluted share in 2011. This guidance assumes continued sequential improvements in gross profit margin, and that SG&A expense will continue to grow at a slower rate than net revenue. These factors together will drive operating income growth of over 25% on net revenue growth of 13% to 15%. Next, we still plan to invest approximately $40 million in capital expenditures, which will be back-loaded in the fiscal year as we continue construction on our facility in India. Finally, we are reducing our tax rate forecast slightly to 31% before discrete items, due to the strength of our operating income outside of the United States. And now, I'll turn the call back to Jim Owens to wrap us up.

Thanks, Jim. I'm pleased with our performance so far this fiscal year. We are performing ahead of plan and able to increase our full-year guidance. We grew over 13%, expanded our gross profit margins despite continued unprecedented raw material cost escalation and we leveraged the investments in SG&A to expand our operating margin. We also continued our investments in technology and made a great technology-based acquisition. We continue to find ways to grow this business in a profitable way. This positive momentum should continue throughout the remainder of the year and beyond as we execute on our long-term strategy quickly and boldly.

I said at the outset of the call that this is a year to recalibrate the future trajectory of H.B. Fuller. I expect you're gaining insight through these conference calls as to why we believe this is true. In order to shed further light and share specifics regarding our future plans, we are hosting an Analyst and Investor Day in New York on July 14. We will be discussing important topics which include strategic objectives, innovation, EIMEA profitability and the long-term financial outlook. Joining me will be Barry Snyder, our Chief Technology Officer, Traci Jensen, VP of North America Adhesives, Kevin Gilligan, VP of Asia-Pacific, Steve Kenny, Senior VP of EIMEA, and of course Jim Giertz, Senior VP and CFO. We look forward to seeing many of you there. For those of you unable to attend in person, the event will be webcast live on our Investor Relations website. Thank you for joining us today. Now I'd like to open the call up for your questions.

Ladies and gentlemen, the Company would like to provide everyone an opportunity to ask a question, so if you could please limit yourself to one question at a time it would be greatly appreciated. You may re-queue as often as you like, time permitting. (Operator Instructions) Steve Schwartz, First Analysis Securities.

Hi, good morning, everyone.

Good morning, Steve.

Hi, guys, nice quarter. I guess the first question is just in North America, with the volume there, you had mentioned in the first quarter that there were some weather-related hiccups, perhaps to your shipments or manufacturing demand related. You thought that might help the second quarter. Did that in fact help or did it -- was it not there? Can you give us an idea?

Yes, I'm not sure the specific reference. It's probably in a Q&A. (sic) We did have a little bit of weather impact on the construction products business, but I wouldn't say it was a sizable impact from the quarter standpoint, from the overall North America business. So maybe a little bit of weather hurt our construction products and helped it but not sizably, I would say would be my answer there, Steve.

Okay and then just as my follow up, so it sounds like your operating income guidance for the year up 25% year over year. I think the prior guidance you were giving was about 20%. So are we to interpret that your pricing up an additional couple percent with the revenue guidance is going to be more than the revised expectation for raw material inflation that you're now giving?

I would say that the overall guidance we're giving is that gross margin will continue to tick up and with a higher level of raw material inflation and keeping those same gross margin projections, you'll see a little bit better impact on the operating income. You want to add to that, Jim?

No, I think that's right. I mean I think the key is that-- we're signaling that our gross margin percentage should continue to increase sequentially which means we're not only recovering raw material costs but recovering the margin on those raw materials as well and--

Got it.

And increasing percentages.

Okay. Sounds good. Thanks for taking the questions.

Thank you, Steve.

Christopher Butler with Sidoti & Company.

Hi, good morning, guys.

Hi, Chris, how are you today?

Good. Kind of wanted to come at the raw material question from a different direction. If we're looking at your full-year guidance with raw materials as they stand today, what would happen to get to the top end of the guidance and what would happen to get to the low end with raw materials?

So I think we only gave 1 number on raw material guidance, right? So we gave a window on revenue and 1 number on raw material guidance. I think we're -- as we pointed out, we didn't quite get it right on what was going to happen on Q2 and I'm pretty sure we'll be off a little bit in Q3 and Q4, right. It's a changing world out there. I think what's important for us and for you is that whatever that environment is, we're building an organization that's able to respond to those changes. So that would be my short answer. We're getting better and better, predicting the future on raw materials, but what we're mostly focusing is on is being able to be an organization that responds to whatever those conditions are.

And shifting gears, you had mentioned that demand in the United States had slowed a bit here for you. With your more optimistic outlook, are you looking at that as a temporary situation versus a longer term trend?

Well I think on a comparable basis to last year, the numbers on volume are a little weaker. Part of that is because the comparables in Q2 last year were extremely high. So that's part of the reasoning. But I would say generally I think we all see a little bit of economic slowdown from a volume basis, so that'll continue I think on both sides of our business. And our wins are about gaining share in target markets. So we made some investments, for instance, the Nordic acquisition that we made in flexible packaging, that's showing up in our numbers in terms of volume growth and we expect more of that to continue. So any volume optimism we have as we go forward is really built on market and customer wins.

And similarly, you had given us an idea of what volumes would have been in Europe if you weren't walking away from business, could you do the same Company-wide or through the other regions?

So specifically in Europe we discontinued a couple businesses. So I think we're always choosing customers in market segments, so there's always a mix phenomenon, that's all in our business. But we made a significant strategic decision to exit a couple businesses so that's why we call that out. There's always a mix shift that goes on in our business. So I don't know that I have a specific number that we calculate on that. We're winning and losing all the time.

I appreciate your time.

Thanks.

James Sheehan from Deutsche Bank.

Hi, I just wanted to ask about your margins in the EIMEA segment. It looks like you had a good sequential increase there and part of that was due to some one time factors from Q1. I just want to get your view as to how sustainable you think these margins are in the EIMEA segment.

Yes, so as we said overall, our expectations are that -- so you're right, part of the benefit we see, because there's a big jump in EIMEA, part of that is the fact that we had some extra costs in Q1 related to the disruption in Egypt that deflated the margins in Q1. But we do see across the Company upward movement in margins and I would say that applies generally across the world.

Okay. Just you referenced some slowing in demand in the US, are you seeing any issues like that in Asia?

So you'll notice the Asia organic growth rate is 8%, that includes a sizable business in Australia. And really the economic situation that we all read about in the US economy is equally as bad in Asia. I think GDP in Q1 was down 1.5%, in Australia, I'm sorry. So the Australia problem has impacted our numbers. So our results in Southeast Asia related to the Revertex acquisition, China, all the rest of Asia are pretty significantly positive and we have a little bit of a drag there. So the 2 places that are dragging from an economic standpoint are Australia and North America. But there's a lot of wins that are showing up in the numbers as well.

Okay. Thanks a lot.

Peter (inaudible) with KeyBanc Capital Markets.

Hi, guys, great quarter. On the SG&A front, it looks like you're doing a good job leveraging those investments and keeping those costs as a percent of sales down. On the last call you noted some expectations of sequential improvement as the year progressed. Given the kind of step-up or improvement we saw in the second quarter here, I guess I'm just trying to get an update on your expectations for the second half of the year here on the SG&A front.

Yes, so let me let Jim give you a little more color on that.

Yes, sure. So well first of all, as we've said, we continue to focus on making our SG&A grow at a significantly slower rate than our revenue grow, and that's going to continue to be our focus in the second half of the year. I would anticipate in absolute dollars that our SG&A expenses are going to increase sequentially, Q3 and Q4 from Q2. There's a couple of things that will impact SG&A calculations in the second half of the year. Part of it is currency. For example, in our European region right now our SG&A in euros is relatively flat sequentially, but on a US dollar adjusted basis you're seeing pretty significant increases that come through. So currency is an impact that's generally pushing our SG&A in dollars up in the second half of the year. And that was less of a factor in the first half of the year.

And then if you look on a year over year basis you're comparing recall that last year our SG&A was actually tailing off in the second half of the year. We were a little more conservative in our spending patterns in the second half of the year. So you could probably see year over year increases are going to be higher in the second half of the year than in the first half of the year. Does that help you out?

Yes, no, certainly, I appreciate the color. And then on the raw material front, any relief on the supply front? I know there was some expectation of additional supply maybe coming on in the second half of the year. Is that still the expectation? And then are competitors still kind of using allocation with certain customers and have you been able to kind of capitalize at all on any of those situations?

Yes, so, in some cases things are a little looser, right, I'd still call them very tight. Certain tackifiers that come out of Asia are a little more available. Some of the really tough tightness on acrylates and vinyl acetates are a little better. So generally I would say getting a little better, although still a very tough dynamic to manage. And I would say in terms of our competitive position, we said early in the year we were going to operate with a level of urgency and rigor. I think that's what's allowing us to win in the market. So to those opportunities that come up, because of shortages or because of a need to change technology, the team has been able to respond in general more quickly than competition. So I'd say that's part of the reason for our growth is an ability to respond to market dynamics.

Great. Thank you.

Thank you, Peter.

Rosemarie Morbelli from Gabelli & Company.

Good morning, all.

Good morning, Rosemarie.

Could you give us a feel for if you look at that 8.2% price increase, could you give us a feel for how much came from a better mix of translating in higher prices and pure selling prices as a response to higher raw material costs?

So I'm not sure the distinction you're trying the to point out in terms of price increase, Rosemarie.

Well I am trying to figure out what would be the expectation in terms of price increases going forward in a non-inflationary environment as you are changing your mix to higher margin and possibly higher priced products.

Right. Yes, I don't think I have a specific number I can give you. We'll try and continue to give more color around that. Generally, we're strengthening our mix as we move, for instance, in Asia, right, we opened our Nanjing facility last year. Those products we produce there are reactive hot melts that are higher priced materials, higher value materials. That's generally a good, positive mix shift for us. But I don't know that we have a specific number we can throw out to you to give you that sense. Jim?

No, I don't think that -- in the short term, those kinds of mix changes are not going to drive these numbers and I think over a longer period of time as we shift our mix to higher value products, you should see it in the margins, basically. I'd just look to the margins and not necessarily to the period over period price or volume statistics that we disclose to you.

I guess I was trying to get to my favorite question, the long-term organic growth when you are no longer in an inflationary environment, if that ever happens.

So I would say there are some very positive indications in this quarter's numbers, Rosemarie. We talked about Asia-Pacific 8% organic, 4% volume, that's with a big drag in Australia on those numbers. You see good, positive growth there. Europe and the businesses that are not discontinued, we grew volume by 5%. Latin America, again, sizable volume increases and even our construction business in North America, we grew mid-single digits. That's clearly not the construction market, that's us gaining share. So the only place where we didn't see volume growth is the adhesives part of our North American business when you look at this quarter and if you look back at the details of Q2 of last year, that's against some very significant volume gains that we've made Q2 of 2010 versus Q2 2009. So I think all that together points a picture of a Company that's winning in the market.

Okay. No, that is very helpful, actually. And if I could follow up with the equity in the joint ventures in Europe and Asia which increased substantially, could you give us a better flavor from what is happening there, is it business, is it the currency translation which helped in the higher numbers compared to last year and compared to the first quarter?

So I'll give you a little color and I'll let Jim comment on the numbers. We have a very strong Asian business and we have a great partner in Sekisui Chemical. And in (inaudible) having a strong business and a strong partner is a great way to run your business. So customers we have, have been able to count on us. Customers who needed a reliable supplier have come to us and our team has done a great job of securing materials.

Also, as far as Japan is concerned, we're 100% insulated from the transportation business and from the electronics business in Asia, which are the 2 areas that have really had some economic downturn. And then finally, we have a sizable piece of business tied to housing, so as the housing needs come back, we actually see some upside there. So that gives a little shape to why we're optimistic about our -- why we're seeing the good results and optimistic going forward and hopefully that gives you a good answer there, Rosemarie.

Yes, no, it does, it does help. And if I may ask one last question, while you are gaining customers and gaining business, do you see a change in the order trend? Do you see them becoming smaller and more-- and closer to one another or you have seen anticipating some uncertainty or do you see a continuation of the current trend?

Are you asking about Japan now or --?

No, no, just Company overall, order trends, the changes that you are seeing, if you are seeing any.

Yes, I wouldn't say there's any short-term significant order changes that we see in the last -- you're talking about the last couple months or this month?

Yes, right, since the end of the quarter.

Yes, no significant change, Rosemarie.

Okay. Thanks.

(Operator Instructions) Dmitry Silversteyn with Longbow Research.

Good morning, everybody. Congratulations on another good quarter. A couple of questions--

Good morning, Dmitry.

A lot of them have been answered indirectly, but I just want to actually ask a little bit more near-term questions. We've seen some worsening data coming out of Europe where you have had good growth, so my question is, is it going to make -- assuming that the industrial production which is really what's been driving Europe and particularly core Europe results, if that begins to slow down, A, are you seeing it and B, is it going to make your price realization a little bit more difficult or are you willing to-- continue to be willing to walk away from business to get to pricing?

Okay so of course, right, the economic environment in Europe will have an impact on us. As I said, part of Europe for us is Middle East, Turkey and India, so you need to look at both parts. But European economy will affect us to a degree, although I'd say with the volume growth we've gotten, it's really about market share more than an underlying economic boost that we've gotten in Europe. But that's something we're keeping an eye on but if Europe slows down that'll happen around the world to everyone.

And the second question was on pricing. I don't think that will have any impact on our pricing or our margin management. For us, margin management is about working closely individually with the customers to figure out what the adhesive solution for them is. So if we need to substitute product, we need to substitute raws or we need to raise prices, we'll act appropriately in whichever the market conditions and we'll act in cooperation with our customers. So I don't see it having a big impact for us, Dmitry.

Okay, thanks. And then just a quick follow up on Europe. When is the -- when are you going to anniversary the voluntary loss of business there, the polysulfides that you're referring about to earlier?

I think that happens now, right? I'll throw that to Jim, Dmitry.

Yes, okay well it's happening over time. So we exited the polysulfide sealant business related to windows, starting in the second quarter of last year and it tailed off through the balance of 2010 fiscal year. We exited the polymer business I think more abruptly at the end of the 2010 fiscal year.

Okay. So basically through the balance of this year, you're still going -- we're still going to be comping against in the reported numbers I guess the business that you no longer have, so we should expect to see reported numbers perhaps being a little bit muted versus what your businesses are really seeing out there.

Yes, exactly. And then I think maybe directly to your question then, by the time we get to the 2012 fiscal year, we should be clean.

It should be all washed out. Got it. Secondly on Japan, you mentioned about good business in Japan, as your customers may be even pre-buying a little bit. Obviously there was not a lot of reconstruction that was done after the earthquakes, probably until we got into late May, early June. Are you seeing maybe a continuing level of demand that's not just inventory building but actually people beginning to get the building and construction market impacting -- being impacted by the rebuilding efforts or you're still not seeing that? Is it still just a matter of people trying to kind of pre-buy in anticipation of not having available electricity at some point?

Yes I would say most of what we see right now is-- well most of the country of course is operating as normal and so you see ongoing demand and then a little bit of pre-buying. And I think most of the construction benefits that we anticipate are still to come. So if there's a bit in there, it's a small bit at this point, Dmitry, and -- but could continue as the year goes on.

Okay. So not much in reconstruction help there but that's something that you may look forward to in the second half of the year?

Correct. That's my answer.

All right. Thank you very much.

Thank you, Dmitry.

(Operator Instructions) Jeff Zekauskas with JPMorgan.

Hi, good morning, this is Olga Guteneva sitting in for Jeff. How are you?

Hi, Olga, how are you today?

Good. First, just a quick housekeeping question, could you please remind me what is the raw material inflation in the quarter and what's your expectation for the year?

So as I said in the script -- well let me let Jim give you the exact numbers on the--

You're looking for quarter over quarter or versus Q4?

Yes.

Hang on. We just have to get it for you, Olga. I don't have it in front of me right now.

Thank you.

Okay so in the second quarter, if we talk about year over year change in our raw material index, it's 20%.

So this is for the second quarter year over year, 20% increase. And your expectation for the full year versus 2010?

Full year over full year is I think in the script we said 20%.

Okay. And so my question --

Olga --

Yes?

Keep going.

So if we go to the cash flow statement and you said in the press release that the cash from operations was $32 million in the quarter and that leaves me with some positive item, the magnitude, I don't know like $10 million to $12 million, so what was that positive cash inflow in the quarter?

Right. Olga, the main difference is just the timing of tax payments. So there was a favorable of nearly $9 million in our cash flow, just from the change in our prepaid tax items and that's essentially the whole difference.

Will it reverse in the coming quarters or that's a one-time thing?

It's just timing. It's just payments that either happen at the end of a period or early in the next period. It's just timing.

Okay. And just in general, can you comment on competitive pricing environment in Europe in particular? Do you -- like are you more aggressive in pricing or less aggressive versus the competition? What do you think?

Yes, I would say overall, Olga, everyone in the adhesive industry is moving pricing, so there's a general pricing movement and vary competitor to competitor as to how aggressive people are being and the timing and it would also vary by market segment. So I don't know that I can make a general statement. But as you can see, we've taken the necessary steps to improve our margin. So in some cases we needed to recover there. But it's been a good, positive movement and recognize always when you look at the margins, this is not just about pricing, right. So a lot of what happens in our business is substitutions of raw materials, introduction of new products. So the net numbers of raw material inflation don't flow through because a lot of that work is how we serve customers' needs in solving these problems.

Okay. In your annual revenue growth, you expect 13% to 15%. What's the volume improvement there, what do you expect?

Yes, so I think the indication we've given, Olga, is there's about 2% to 3% volume overall. There's a couple points related to our fifty-third week, and then the rest is as we've laid out.

Okay. Thank you.

James Sheehan, Deutsche Bank.

Yes. Thank you. Just in your -- in Latin America, could you give us the break down in volume and price during Q2?

Well, that's -- in Latin America?

Yes.

That's as is reported in our press release, right?

That's about 9% on volume and 4% in -- I'm sorry, 4% in volume and 9% in price.

Okay. Thanks a lot.

You're welcome.

And thank you, ladies and gentlemen, this does conclude today's H.B. Fuller second quarter 2011 investor conference call. You may now disconnect.

Thank you, everyone.