H.B. Fuller Company (FUL) 2011 Q3 法說會逐字稿

Good morning and welcome to the H.B. Fuller third-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 in attendance on today's call include -- 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, Catherine 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 Invested Capital or ROIC. 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 ROIC is defined as operating income less taxes at the effective tax rate plus equity earnings, divided by debt plus equity.

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 June 24 and 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, everyone. I'm pleased to report we achieved our objectives in the third quarter and are still on track to deliver a breakout year of financial performance. 2011 has been a key transformational year at H.B. Fuller, a year where the significant investments we've made in our strategy in the last few years are producing tangible results. This quarter, we saw more negative end market conditions and the challenge of ongoing raw material cost inflation, but still delivered results in line with our objectives for the quarter and we're confident that we will finish the year with a strong fourth quarter in this challenging environment.

We have been clear to judge our performance this year against 3 key tests. Are we sustaining our growth momentum? Are we managing our margins? And are we leveraging past investments in our commercial and technical organizations? I'm very happy to report that once again, we've delivered positive results against these 3 objectives and we expect further progress in the final quarter of the year.

Regarding the first measure, revenue growth. We delivered net revenue growth versus last years third quarter of 15% of which 9% was organic. Our EIMEA, Europe, India, Middle East and Africa, and our Asia Pacific businesses both delivered over 20% net revenue growth. Latin America delivered net revenue growth in the mid-teens while North America improved nearly 9%. We again improved gross margins. The sequential improvement of 30 basis points and the year-over-year improvement of 50 basis points is clear evidence that we have improved our execution capability across the organization.

Finally, regarding leverage of our investments, we decreased SG&A expense as a percentage of net revenue by over 100 basis points versus last year. As promised, we continue to grow our SG&A at a slower rate than net revenue while still making selective investments in our global teams. 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. The net effect of all of this is third quarter operating profit up 43% from the third quarter of last year. Year-to-date, operating profit is up 15% and on track to deliver a 25% increase for the full year. This is above the level we targeted when we delivered our fiscal year guidance in January of this year.

As we now are in the final quarter of the year, we can refine our fiscal year 2011 guidance. We now expect net revenue to be 14% to 15% higher than 2010 fiscal year. We are narrowing the range on EPS guidance to between $1.85 and $1.90 per diluted share for the fiscal 2011 year, or between $0.59 per diluted share and $0.64 per diluted share in the fourth quarter. This guidance is above the guidance given at the beginning of the year and is within the low range of our June guidance. As I mentioned a moment ago, we still expect 2011 operating income will be up about 25% and we will record our third consecutive year of adjusted EPS growth, with EPS up 16% to 19% from last years adjusted result of $1.60.

Now let me address a couple of specific areas of interest where I suspect some of you will have some questions; the raw material cost environment and end market demand conditions. Managing raw material inflation continues to be an area of great focus for the entire organization. During the third quarter, our raw material index reached a level 20% higher than last year. 20% inflation in raw material costs for the full year of 2011 versus 2010 remains our best guidance. This translates to 13% inflation versus the fourth quarter 2010 exit rate. Sequentially, the raw material index increased 5% in the third quarter versus the second quarter. This is lower than the previous sequential increase, but the overall supply and demand dynamics that are driving this inflation have not improved dramatically.

As we look forward to next quarter and next year, we expect to see inflation pressure reduce as global supply continues to improve. Our task is to be aware of potential future cost trends and quickly translate those changes into actions around reformulation, substitution, and pricing actions that support our business objective of profitable growth.

Now let me share a few thoughts on the end market demand situation. In the past few months, we have seen a general slowing of the global economic recovery, especially in Europe. In North America, we grew in this economic environment nearly 9% with the Adhesive segment up over 8% and the Construction Product segment up over 11%. Volume in the Adhesive segment was slightly negative as US manufacturing growth remained slow and the ISM index continued lower, reaching levels not seen since July of 2009. But Fuller's share gains with new technology continued and our year-over-year performance improved versus the second quarter. Our Construction Product segment produced volume growth in the mid- to high-single digits. Continued share gains with customers in new domestic geographies drove the bulk of the volume improvement.

Latin America once again returned the most robust results of all of our regions in this quarter by growing over 13% organically. Both the Adhesive and Paint segments grew pricing and volume amid a continued improved economic backdrop. The Asia Pacific region returned over 20% net revenue growth, of which nearly 10% was organic and the remainder was driven by appreciation of the Australian dollar and Chinese RMB. The organic growth was evenly split between price realization and volume growth in our core markets. As we mentioned last quarter, economic growth in Australia has been weak and our Australia business is a sizeable portion of the Asia Pacific region. Thus, the volume growth and other strategic parts of Asia, such as China and Southeast Asia, were mid-teens relative to the prior year.

I would also like to update you on our Japanese operations. As we discussed during last quarter's conference call, customers stocked up during the second quarter ahead of rolling power blackouts this summer, then demand softened slightly in the summer months. Although the sequential results are slightly negative, the joint venture delivered improved earnings of nearly 13% versus last year's third quarter, and year-to-date, our business is showing an improvement of over 19%. This was driven by better volume and modest price improvements.

EIMEA has experienced the most notable demand slowdown, although the numbers that we reported for the quarter make this slowdown appear more severe than we think the underlying fundamentals indicate. Net revenue growth was up over 20%. Organic growth was under 6% driven by double-digit price improvements. Industrial production has slowed across the region in developed, as well as emerging economies, and there remains uncertainty within the marketplace. That said, recall that we exited 2 product lines last year that had accounted for a meaningful amount of volume. After adjusting for these portfolio moves, H.B. Fuller's volume growth would have been slightly positive during the quarter.

In addition, some changes we made in our distribution networks and tightness in raw material supply pushed some volume out of the quarter that will be recovered in future periods. So, while the economic situation in Europe is more difficult and will affect our business, we expect to have a result in the fourth quarter which will finish off a strong 2011 and the work we are doing to drive performance in Europe will put us on track for another solid year again in 2012.

We had the opportunity to speak with many of you at our Investor Conference in mid-July. If you had not had the opportunity to see the presentations from this conference, I'd encourage you to go to our website and review this material. We have a well-defined strategy, specific actions and targets and clear financial goals for the Company to achieve by 2015. $2 billion on the top line, $300 million in EBITDA, 2 times the result in the base year of 2010. To achieve these goals, we are committed to do 2 things -- grow at a more rapid pace than Fuller's norms over the last few years and to expand the margins in our international business segments to levels closer to the profit profile of our North American business.

The current fiscal year 2011 is the first year of the 5-year journey and we think we're making great progress toward our objectives right from the start. On the first goal, 2011 has clearly been a year of strong revenue growth. This is due in large part to price increases offsetting raw material inflation. But revenue growth has also been built on key market wins partially offsetting subdued volumes and strategic exits. Overall, we are pleased with the progress we have made so far this year in improving our position in emerging geographic markets and our key market segments of hygiene, packaging and durable assembly.

On the second goal, margin improvement, our international businesses have posted strong year-over-year improvements so far this year and we expect a strong finish in the fourth quarter. For the first 3 quarters, operating income in EIMEA is up 36% versus adjusted results of last year. Latin America is up 35% and Asia Pacific is up 38%. This represents a good start towards our strategic goal of improving EBITDA margin and a solid foundation on which to build further improvements in 2012.

After we finish the 2011 fiscal year, we will provide some updates on our progress on some of the specific objectives outlined in our Investor Day, such as progress in our key markets of hygiene, packaging and durable assembly, plus our ongoing initiatives to build margins outside North America, especially in EIMEA. That's my brief summary of the highlights of our third quarter and a sense of how the quarter fits with our strategic plan. Now, I'll turn the call over to Jim Giertz who will provide some more detail of our financial performance and 2011 guidance.

Okay, thanks, Jim. So as many of you know, at our Investor Day in July, we made some adjustments to the metrics and targets we will be using to gauge our financial performance going forward. We replaced our asset utilization metric, discontinuing the Return On Gross Investment measure, or ROGI, in favor of the more commonly used Return On Invested Capital, or ROIC. Also, going forward we increased our annual organic revenue growth targets to between 5% and 8% from the previous target of between 3% and 5%. We also adjusted our EPS growth target to be simply 15% annual growth over the next 5 years as opposed to the previous target range. The target for EBITDA margin remains the same at 14% to 16%.

So here is our scorecard of performance against these 4 key metrics. We grew organically by nearly 9% versus the third quarter of 2010. We have now delivered nearly 2 years of quarter-after-quarter organic growth and have provided long-term guidance and a strategic plan to extend this growth and trend in the fourth quarter and the next several years. Our 4-quarter trailing EBITDA margin improved in the third quarter to 10.7%. This metric has improved throughout the year due to our gross margin management plus the thinning of SG&A expenses as a percentage of revenue. Our 2011 outlook indicates that this metric will continue to improve next quarter and we plan to end the year above 11%. We've targeted EPS growth of 15%.

During the third quarter we improved EPS by 24% versus last year's third quarter. EPS growth in the quarter was substantially less than the growth in operating profit in the quarter primarily because our effective tax rate was unusually low last year, due to one-time favorable discrete items, while we recorded unfavorable discrete tax items in this year's third quarter. Our 2011 updated guidance indicates EPS growth of between 16% and 19% in the current year, which is above our target range of 15% growth per year. Our new metric, ROIC, has improved the past 2 quarters due to improved operating results and a fairly stable invested capital base. As we discussed at our Investor Conference, this metric should continue to improve as we generate sustained revenue growth and deliver on our objectives for margin expansion.

Now just a quick review of our guidance for 2011 that Jim touched upon at the beginning of the call. We are tightening our net revenue guidance range to 14% to 15% growth versus the 2010 fiscal year, the upper end of our previous range. 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. This translates to fourth quarter net revenue of between $425 million and $440 million or 18% to 22% growth versus last year's fourth quarter. Absent the extra week, net revenue is expected to be 10% to 14% higher, driven primarily by the cumulative impact of pricing activities in 2011. We are also tightening our EPS range to between $1.85 to $1.90 per diluted share in 2011. This final guidance for the year is above our original guidance provided in January and was in the revised guidance provided in June of this year. Also, we still expect operating income growth of around 25% for the full year 2011.

Next, we plan to invest approximately $40 million in capital expenditures as we continue construction of our facility in India and additional capacity additions to product lines around the world. Finally, we reaffirm our tax rate forecast of 31% before discrete items. And now I'll turn the call back to Jim Owens to wrap us up.

Thanks, Jim. I'm really pleased with our performance. We once again performed well against our 3 key financial tests and did so in an environment that is rapidly changing and certainly not improving. The sequential improvement in the business may have been muted by the economic softness we experienced, but on a year-over-year basis we made some very solid improvements. We're winning in the market and delivering on our strategic plan. The economic back drop will affect how we deliver our strategic plan but not whether we deliver the plan. As we are showing this year and we discussed at the Investor Day, we have a team capable of delivering and responding to whatever dynamic external conditions we face.

Raw materials continue to be an area of focus. We feel we have a good handle on this situation as evidenced by a 50 basis point improvement in gross margin year-over-year, even though raw material costs increased 20%. Operating profit in the third quarter was up 43% from last year. We believe this is a strong indication that something different is happening at H.B. Fuller. We are well on our way to delivering the commitments we laid out at the beginning of this fiscal year and based on the strategy and plans we laid out at our recent Investor Conference, we believe we can extend this success to the next 5 years and beyond.

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

Thank you. The Company would like to provide everyone the opportunity to ask a question, so if you could please limit yourselves to one question at a time, that would be greatly appreciated. You may requeue as often as you like, time permitting. And we'll take our first question from Jeffrey Zeskauskas with JP Morgan.

Hi, good morning.

Good morning, Jeff.

At your Investor Conference, you said that the restructuring for the improvement of your European business over the next 2 years would cost about $70 million in addition to your capital expenditures, in cash. Have you refined that number further and can you now distribute it between CapEx and costs that might pass through the income statement and give us an idea of when the spending will take place?

Yes, so yes, Jeff. As I mentioned in the script, we -- so the short answer is yes, we're refining the estimates and defining our plan and as I said in the script, our intention is to share more details on how we're going to drive the transformation in Europe through the end of this year. Jim, anything you want to add to that?

No, I think, Jeff the plan is still being worked internally with ourselves and with our various constituencies that we need to consult with. And so we're in kind of a quiet period I guess you would say. We're doing a lot of work on it internally and with our constituencies and the intention is that by the time we have our next call in January, we'll be able to give you much more detail on this.

Okay, and then for my, I guess, if I can just do one follow-up. So, when you provide more detail, does that mean that come the fourth quarter you'll have a pretty good idea as to whether the $70 million is too high or too low and might there be restructuring charges in the fourth quarter?

Yes, well we're going to be able to refine it when we give you -- during our conference call in the fourth quarter and we don't know about restructuring charges. There's going to be some during the restructuring project but whether they happen in the fourth quarter or not I don't know. I suspect not but I'm not really sure.

Okay, thank you very much.

Thank you. We'll now hear from Mike Sison with KeyBanc.

Hi guys. Good results in tough times.

Thanks, Mike.

In the third quarter for Europe or the EIMEA division, I think you noted that volumes are down 7% but if you take away some of the exited products that the base demand is sort of flattish, is that sort of what you're indicating? In addition, if you look at the fourth quarter, and you look at volume growth for that region, any thoughts of what's underpinned in your outlook?

Yes, so the answer to your question is, yes, if you take out the businesses we exited we would be slightly positive in Europe and we would be positive for the whole Company. So those exits deflate those numbers and you want to look at the underlying business you have to pull those out. But if you look at -- so, with that said, the growth we saw in Europe, slightly positive, is less than the growth we saw in second quarter which was plus 5% and that difference is a result of some economic conditions that we definitely have seen in third quarter underlying some of our customers. And then a mix of wins/losses related to how we managed various price challenges for things like vinyl acetate monomer. So I would say that the economic conditions we expect to be similar to slightly worse in Q4. We certainly don't expect any improvement and we factored in a little bit of downturn. Some of the other issues we see more positive, so some of that piece, that bucket of the Q3 move off of 5% volume growth that we saw in Q2 will come back. So economic conditions we see remaining to be a problem in Q4.

Okay, and then one quick follow-up. In terms of the gap between raw materials and pricing by the end of the year, you'll be even or as we head into 2012 will be even?

I'm not sure exactly what metric we're talking about here, Jim. I mean--

Pricing overall.

-- margins, you can see, Mike that our margins are positive versus Q3 of last year. So the net of what's happened with raw materials, what's happening with pricing, what's happening with raw material substitutions, product substitutions is a net positive and we expect that to continue into Q4. So I think we have turned the point here in Q3 where we've overcome all that inflation with lots of actions, not just pricing actions but a lot of work with our customers to deliver what's positive margin versus a year ago by about 50 basis points.

Great. Thank you.

Did I answer your question there, Mike?

Yes, I think I got it.

Good.

Thank you. We'll take our next question from Steve Schwartz with First Analysis Research.

Hi, good morning guys.

Good morning, Steve.

Just to carryover a question from Mike, in Europe, when you talk about the divested businesses -- if I calculate that out it looks like that was worth about $7 million in the quarter. I think in the second quarter, it was worth about $5.5 million. On the last call, you talked about a kind of tailing off in the second half of the year. So do I have those numbers right and is it in fact tailing off? Should it disappear as a headwind by the fourth quarter?

So yes, let me -- so, first off, I think a keen observation on the numbers on polymers and window business. If you recall we discontinued into Q3 but we saw a fairly robust third quarter in those businesses last year. And I think if you look back at the transcripts, I think it was Jim that answered that question, what he said was by the end of the year, you would see that. So certainly not Q3/Q4 but by 2012, I think is what he said. So I don't know if you want to add further to that, Jim.

No, that's right. The polymer business, that piece of it was ended abruptly at the end of the fourth quarter last year. And then in the polysulfide business that we exited, generally trended down over the year. But we had kind of the perverse outcome last year that as soon as we announced that we were getting out of the business, we actually started selling more of the stuff over a certain period of time. So this is just the timing of the volume that went through during the last year, but the main point is that by the end of the year, this will all be lapped and behind us.

Okay, great and then if I may, as my colleagues did just go for a follow-up, as we start to tighten up our FY12 estimates, from an SG&A standpoint, it looks like in FY11, you're going to be up about 8% or 9% year-over-year, similar to what you were up in FY10. What do you think for FY12? Do you think that expense is going to be up high-single digits again?

Yes, so our commitment is to keep SG&A expense below our net revenue expense, and that will be an ongoing commitment in 2012. Maybe Jim can comment on the 8% number this year because I think there's some factors in there that we want to talk about.

Yes, Steve, I think actually our OpEx performance for the quarter, the third quarter was pretty good. That's the way we see it and so I'm trying to answer your question by saying that we have some discipline around this and we think the discipline will continue into fourth quarter and next year. So just to give you some numbers -- so our OpEx year-over-year was up about $6 million in the third quarter and that's the 8% that you referenced. Probably half of that is accounted for by foreign exchange, and so it's really only up 4%. And by the way, last year, 2010, the third quarter SG&A was one of the lowest quarters that we had for the whole year so this is all against a pretty tough comparable from last year. And then if you look into that 4% real growth, about half of that can be accounted for just by the variation in our incentive compensation accruals from quarter to quarter. And so that really brings you down to more like a 2% real growth in SG&A in the third quarter, again, against a pretty tough comp. So our reading of our SG&A is -- the headline is up 8% which is a little high, but when you dig through it, we think we're pretty disciplined on it right now.

And sure, there's no doubt, I mean that 8% or 9% -- 8% is still in line with what you've guided us to, so you're keeping your word there. I'm just wondering in terms of 2012 at this point, do you think it then is more like 2% or 3% or does it again run at about 8% from what you can tell acknowledging that there's a huge, potentially huge ForEx component in there?

Yes, and we can't get too specific about 2012 right now. We'll do that in January when we have our call. But again, I'll just reiterate what Jim said before. I mean, obviously we have long term commitments that our revenue growth is going to be significantly higher than our OpEx growth and so you'll see that pattern again in 2012.

Okay, got it. Thanks guys.

We'll now hear from David Begleiter with Deutsche Bank.

Thank you, good morning.

Good morning, David.

Jim, can you just comment on more recent demand trends, what are you seeing in terms of your order book visibility and -- it's particularly in North America, are you seeing further signs of weakness in the last few weeks here?

Yes, so I would say through the quarter, I think overall, August was a little better than July, so I don't think we see any trends that happen through the quarter and as we see the early orders for September we don't see negative trends overall, so the economic situation isn't helpful but we don't see it deteriorating when we look at our core base of customers.

And Jim, are there levers you can pull on the cost side if demand trends do become worse than perhaps you're expecting?

Yes, well as I said at Investor Day, I think our strength is our ability to respond to whatever conditions we get faced with. We have an excellent team that understands the market, understands our business, understands which levers to pull when, and this year has been a great example of that. We -- no one would have predicted the kind of raw material inflation we saw this year and in that kind of environment, it got worse, certainly as the year started. We improved our margins and I think people look at that and they say that that's a great performance. Look at the economic conditions we faced this last quarter. I don't think most people looked at 2011 early in the year saying that this kind of economic situation was going to start happening where we were going to have slower underlying demand. And again our team's responding, so yes. The short answer is yes, as we see changing conditions, we're going to respond to them, but in the revenue growth side and the volume discussion, there's 4 or 5 things that we need to do to drive our revenue growth. We need to get pricing right. We need to do raw material substitutions. We need to win share with certain customers. We're going to lose certain customers and we've got economic conditions that affect us. If I look at all those buckets, 4 of them are in our control, the economy is not. But we manage how we do things within those, so hopefully that gives you some insight. Certainly that's the way we look at it as we look forward to the challenges ahead.

That's helpful. Just one more thing, Jim. In North America, the minus 2% volume decline, what end markets were the worst?

So as we said, the construction products business was up mid-single digits, again another great example of a team gaining share in a business area that clearly the construction products business isn't there. And I think our strategy is to look at each segment and decide when and how to win. But the underlying data we see economically shows that certain consumer goods, while revenue is up in some of those areas, the actual volume of products produced and sold is down, areas like windows, which had some positive momentum this time last year, not as strong as it was last year, so certain durable goods are also not as robust, underlying within the business. Now for us, that means choosing where and how we gain share and that's what we've been doing.

Thank you.

Thank you. We'll take our next question from Eugene Fedotoff with Longbow Research.

Good morning guys.

Good morning, Eugene.

A question mostly on Europe. The sulfur demand and I guess raw materials were stabilizing a little bit there. Are you still able to announce new price increases and raise prices or are you just realizing the price increases that have been announced already? Also, are you seeing anything as far as competition, more pressure, more pricing pressure from competitors out there in Europe?

Yes, so the short answer is, as raw materials go up, the whole market needs to respond to those and we've had a lot of that this year and that's continued, right. So it's not like it's not continuing as we go forward. So overall I would say competition has moved and the whole market has had to move. And I mentioned in the answer to one of the questions, we had one situation where vinyl acetate monomer went up dramatically and we moved our price dramatically. Some of our competitors didn't move as quickly. They need to move if they are going to make any money in those segments. So it might cause a blip in a quarter but not long term. But that's more of a one-off in a small segment, more than a trend. I would say generally, as raw materials move up, the market needs to move up and is generally moving up, Eugene.

Okay, thank you.

We'll continue on to Christopher Butler with Sidoti & Company.

Hi, good morning guys.

Good morning, Chris.

Just wanted to circle back to revenue. You'd touched on this in a few different places in the conversation, but the forecast for the fourth quarter is 18% to 22% growth. I compare that to the 8.5% organic growth that we saw here in the third quarter, understanding that extra week and grandfathering some of the businesses in Europe, but could you kind of bridge that gap for me?

Okay, so the 53rd week gets you to 10% to 14%, and then I'll let Jim fill in the rest of the gaps, specifically.

Okay, so I think without the 53rd week, I think if we're at 14% up on the PVM, on the basis that we report externally, that's going to be -- I would put the 14% at about 2 points for currency and 12 points for price, and volume would be reported at about 0, I would say for fourth quarter, so that's generally what's in our guidance. Does that answer your question, Chris? I think that's what you're asking.

Yes, I think so.

That's not adjusted for the exits, of course, of those businesses, the [fez] report.

Right, and the other income line in the gain that you had there, is that FX related as well?

No, Chris. That was -- about a year or so ago, you may recall we exited a production facility in Canada and then this is a gain on the sale of the -- ultimate sale of that property. So, it's a little bit over $1 million of that is the sale of property. And by the way, I just want to point out that, to the extent that anybody thinks that we made the quarter because we sold a building, I mean, you can offset that against a negative discrete tax item that we've got, you can net those 2 off and they end up being about a push relative to our original guidance.

I appreciate your time.

Yes.

Thank you. Rosemarie Morbelli with Gabelli & Company, your line is open.

Thank you. Jim, when we read the newspapers, it looks as though we are just about to hit the end of the world in terms of economic growth or lack thereof. How much of a decline in demand in your end markets do you think you can effect by your own action?

Well, the end of the world would be tough, Rosemarie

I'm sorry?

I said -- so thanks for the question. I said the end of the world would be tough for us to deal with, but yes, I think in our business, there are a lot of opportunities. Generally speaking, customers are looking for us to help them with their problems. So in an economic downturn, people are going to look to be more productive with their processes. They are going to look to design different products, so we look at those kind of economic challenges as opportunities for us to help customers. So certainly, some core customers would be down in that environment but we'll work with customers that are looking to improve productivity; we'll work with customers that are introducing new processes, and we'll help them win in the market in tough times. So it doesn't specifically answer how much economic downturn can we handle, but I think this quarter was a good example.

There's clearly downturn in Europe and North America in terms of the manufacturing sectors and we delivered 43% in profit improvement and strong performance and that's sustainable because we're doing really great work with customers. And at this conference call, once a quarter, we only talk about the highlights on the numbers. Underneath of this, in this Company there's a lot of great work focused on customers that's driving the results. And we'll have to do -- that's what we'll do in tough economic times. So if you have a more specific question I'll be happy to answer but hopefully that gives you a sense of the approach we're taking.

No, it does. I was also wondering you talked of slow downs but yet you also said in answer to 1 question that August was better than July and you didn't see any real change in the trend in September, and I realize it is in North America. Did you see the economic outlook worsening at the end of September? I mean, what are your customers saying? What do you see in terms of the suppliers. And if you could give us a feel for both North America and Europe, I mean with a little more specifics than you have already said.

Okay. So I'll try, Rosemarie. Yes, I mean, I think we all got to be careful because headlines in a news story, right, are not what's really happening on the ground. What we saw in the data was July was a little worse than August. In Europe, as you know, there are shut downs in factories in August. Those factories -- a lot them extended those shut downs, because they felt like they could. But fundamentally, when we dig through all that data and some changes in what happened in some factories, we don't see a sizeable all-of-a-sudden dip like you would read in the newspapers. So clearly, Q3 underlying same customers find the same products is weaker than Q2 and that's a --but it's not a dramatic downturn and we haven't seen that when we look at the detailed specifics, we haven't seen that occur in September.

Okay, so you are not seeing your customers suddenly changing the pattern of orders, either ordering more in smaller amounts, more often, for example, if you look at what is going on now versus what was going on last month?

No. No dramatic changes in September, Rosemarie.

Okay, that was for Europe and in North America I am assuming it is the same story?

Very much the same story.

And if I could ask one last question. As raw material costs seem to be at least stabilizing if not coming down, how long do you think you can maintain those price increases that you have instituted?

Well, they aren't coming down now, Rosemarie, not yet. So we see some materials coming down and that's driving some substitutions, so we saw less inflation in Q3. Right now we're projecting still inflation in Q4 but less inflation in Q4. But time will tell as to what happens in 2012. But I would say generally speaking, when raw materials come down, it's a net positive to our business from a margin standpoint.

For how long?

Well, again, it depends on exactly what happens and when but during the last raw material decrease in 2009, our margins escalated for 4 quarters.

Okay, thanks. That's helpful.

Thank you.

(Operator Instructions)

We'll take a follow-up question from Jeffrey Zeskauskas with JP Morgan.

Thanks very much. Is it fair to say that in the fourth quarter, your prices will be sequentially higher and your raw materials sequentially lower?

I would say pricing will be sequentially higher and raw materials will be sequentially higher.

Okay, and--

Both at a lower rate of growth than we saw in the third quarter.

And in Europe, there's so much controversy about credit conditions because of the predicaments of European financial institutions. Is that anything that touches your business or have you noticed any difficulties in doing business with European customers because of financial institutions?

No, Jeff. We haven't seen any of that. I mean, our receivables are in line and so -- no, the financial institutions haven't impacted our customers.

And then lastly, which raw materials should be up sequentially in the fourth quarter versus the third quarter?

Yes, so broadly speaking, it's the materials that are built off of heavier feed streams. So there's still a drive toward -- a big delta between, even though oil prices are coming down, oil prices and natural gas. A lot of our hot melt raw materials come off of these heavy feed streams and as long as that differential sits in the petrochemical industry, we got the supply/demand dynamics. So heavier streams, we're seeing pressure, and of course anything that's driven off of propylene, for instance, you'd see a little bit more positive support, as well as rosin ester as a tackifier that comes out of China and the dynamics have changed pretty positively to lower pricing there. So that's a positive for us in the quarter.

Okay, thank you very much.

Thank you. We'll take our next question from Steve Schwartz with First Analysis Research.

Well thanks for the follow-up. Just one question, again regarding Europe. At the analyst day, you highlighted that the European business is stronger in the North than the South. Can you give us an idea of what direct exposure you have to countries that are putting through the strongest austerity measures, the PIIGS essentially?

Yes, so we don't give details on each one of our countries, but you correctly point out, Steve, that our business has a strong dynamic in Germany and Austria. And of course those are key areas and we have relatively less market share in Italy, France, Spain for instance.

Okay. Thanks.

Thank you. We'll take a follow-up from Rosemarie Morbelli.

Just quickly, if you could -- regarding your recently announced, as in only a couple of hours ago, partnership with Graco, they make the equipment, you make the adhesive, I understand that. Are there any -- so they will make money on their side, you will make money on yours. Are there any other arrangements and of those pieces of equipment, I mean, can they only be used with your own adhesives or are there some similar adhesives, low temp adhesives in the marketplace that could be used in those pieces?

Yes, so thanks for the question, Rosemarie. Liquamelt is a great new technology. If you recall, it was an investment we made earlier this year and it's patented technology, so we've brought it in-house. The relationship with Graco started prior to us buying the company but really solidified over the last few months as we've evaluated their equipment and worked with them to develop some real state-of-the-art equipment. So we're really pleased with the Graco relationship. We think this has great potential for them and for us. The specifics on this technology, Rosemarie are that it is patented technology. It's only available from H.B Fuller and the equipment itself would be aligned only with this patented Liquamelt technology.

So any other liquid melt put in it will just ruin the equipment?

Well any other liquid adhesives, yes, wouldn't work. Liquamelt is a certain type of chemistry and I won't get into the chemistry of it but the Liquamelt itself is patented technology. So the equipment is designed to run Liquamelt adhesives.

Okay, so the partnership really only means that Graco sells more pieces of equipment and because of the equipment you sell more adhesives; am I correct?

Correct and it's always the case, Rosemarie in our business, the application partnership is important, having a good relationship with your equipment partners as we do say with a Nordson in the area of hot melt. And in Liquamelt, we've worked very closely with Graco, and we see this as a great new launch for the 2 of us together. But this chemistry will only work with that equipment and vice versa. That equipment will only work with this chemistry.

Okay, and then lastly, if you could give us an update on your investment in new facilities -- I mean, the new plant in India and your expansions in China, when do you expect the additional capacity to come on stream?

So, yes, so India, I saw some pictures this week. Amazingly, we broke ground about this time last year and we'll be producing adhesive by December of this year. And to get a facility up and running from the first shovel of dirt to producing adhesive in 14 months in India is quite an accomplishment and when it happens in December, it will be a real feather in the cap for the team that's done that great coordinated effort. Our sales are up in India in anticipation of this. There's a lot of excitement around it and we're real pleased with that.

In China, the investment is running. It's our Nanjing facility. I mentioned the 17% volume growth. You'll also note some good margin performance. The margin performance we're seeing is because we're selling these high-end products. So for the volume growth in Asia is driven in part off of that Nanjing investment, so very solid volume growth but also with high end products at high margins. So we're seeing that come through in the China and southeast Asia numbers today.

How much did you invest all together?

So we do about $40 million a year. The India plant I think we said is $11 million and the China plant we've said is about the same.

And do you have a feel of, Jim, for CapEx in 2012?

Well nothing specific. I think at the investor conference, we said that over the long term that we would be running between 2% and 2.5% of sales this CapEx.

Okay, thank you.

Thank you.

Thanks, Rosemarie.

We'll take a follow-up question from Christopher Butler.

Hi, thanks for taking my follow-up. Shifting gears to Latin America as you look into the seasonally stronger fourth quarter, the third quarter had good price increase, some volume gains, yet the profitability really fell off sequentially. Could you talk to that? Is that just seasonal there and how does the fourth quarter look, at this point?

Yes, it's a good point, Chris. The fourth quarter in Latin America is very strong, particularly in our paints business, but both businesses show stronger fourth quarters. And we did operating reviews with all of the team just this week, in fact, and both the Latin America businesses are optimistic about Q4. And from a margin standpoint, that increased volume generally drives to the bottom line in fourth quarter results, so I think we'll see good solid performance.

And Chris, this is the other Jim. I think on the margin side in Latin America, I wouldn't be too distressed about the third quarter. I don't think that's a trend. There was some kind of unusual one-time items that went through there that are not recurring. So I think you are going to see not only, as Jim said, our revenue will look pretty strong in the fourth quarter, but our margins will get back in line as well, based on our understanding of the situation today.

Thank you for taking the follow-up.

Thanks for the question.

Thank you.

(Operator Instructions)

Okay, so I think that's our final question. Thanks, everyone for your participation today and your interest.

Thank you. Ladies and gentlemen, this does conclude today's H.B Fuller third-quarter 2011 investor conference call. You may now disconnect.