H.B. Fuller Company (FUL) 2011 Q4 法說會逐字稿

Good morning, and welcome to the H.B. Fuller fourth 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'd like to turn the meeting over to Mr. Maximillian Marcy. Sir, you may begin.

Thank you, Ryan, 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 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 September 23, 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 to everyone. I'm happy to share with you that in the fourth quarter we continued our progress towards our long-term strategic goals of organic revenue growth, margin expansion, proved return on invested capital and EPS growth. We accomplished these goals both in the fourth quarter and for the full 2011 fiscal year. This year presented some significant challenge with end market conditions less favorable and raw material cost inflation much higher than anticipated as we entered the year.

Despite this external environment, we over delivered against the financial performance guidance we provided at the beginning of the year. Our EPS guidance illustrates this fact. We started the year with diluted EPS projected at $1.75 to $1.85. At the end of the second quarter, we bumped that guidance up by $0.10 a share, to between $1.85 and $1.95. Last night, we reported adjusted diluted EPS in the middle of that upgraded guidance range at $1.90 per share.

We delivered on several other significant financial commitments during the year as well. We generated strong organic revenue growth, despite difficult market conditions in our core markets in North America and Europe. We improved our consolidated EBITDA margin performance by about 20 basis points for the full year, and exited the year at 12% in the fourth quarter, the highest level of the year. In addition, each of the business segments outside of North America produced operating margin expansion. This margin expansion around the globe is a critical element in achieving our long-term EBITDA margin goal of 15%.

We also delivered on our commitment to control gross margin volatility, and we improved our SG&A as a percentage of sales. We want to be known as an organization that does what it says and delivers on our commitments. Our performance in 2011 is a demonstration of our ability to do just that. As we said at the start of the year, and multiple times since, we viewed 2011 as a key indicator of the ongoing transformation taking place at H.B. Fuller. Having overachieved against our commitments, we are excited about the momentum we have created and look forward to doing more in 2012.

Let me take a moment to provide some specific comments on the financial results of the fourth quarter and the full year. I'll focus specifically on the three areas that we have focused on and benchmarked ourselves against this year, organic growth, gross margin management, and SG&A leverage. In the fourth quarter, we grew net revenue by 13% versus last year after adjusting for the extra week. Over 10% of the year-over-year growth was organic and marks an eighth straight quarter of solidly positive organic growth. For the full year, we grew nearly 15% in 2011, of which 9% was organic.

This is the second year in a row of nearly double-digit organic growth and we posted the highest level of net revenue in the Company's history. Although our revenue performance was strong, the volume growth in our business was less than we had projected as we began the year and less than we would expect on an ongoing basis as we fully implement our strategic plan. There are numerous explanations behind this, many relating to the external environment, and some relating to our actions to manage our portfolio.

The brightest spot on the volume performance was the emerging markets. We posted significant volume gains in the Middle East, Turkey, India, and China as a few examples, and driving volume growth in these markets is critical to our long-term strategic success. Our core markets in Europe and North America were sluggish and as we carefully managed our margins and customer relationships, we didn't generate solid volume growth in these regions. We are expecting that in 2012 we will get on the proper volume trend as our commercial teams spend less time managing raw material availability and cost inflation, and refocus on solving customer problems.

Now turning to margin management, gross profit margin in the fourth quarter were essentially unchanged from third quarter levels, and up 50 basis points versus last year. We improved margins throughout the year against nearly 20% raw material cost inflation. This is a departure from the performance of H.B. Fuller in the past. In fact, we saw similar inflation during the 2010 and 2008 fiscal years, and margins declined for both of those years. We're proud of our work and our accomplishments in this area. In this inflationary period, exiting the year with gross margins 50 basis points higher than we entered the year is a victory and sets us up nicely for margin expansion in 2012 and beyond.

Lastly, regarding leveraging of our investments, a commitment we made in the fourth quarter, we decreased SG&A expense as a percentage of net revenue by 60 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 to enhance our ability to innovate and serve customers. In terms of full-year performance, SG&A decreased as a percentage of net revenue by over 100 basis points by growing at approximately half the rate of net revenue. Our investments are returning value for our shareholders. Our stronger commercial teams are sustaining and growing market share in our key markets, while at the same time working effectively with our customers to manage cost inflation.

Successful performance against these three metrics translated to great operating results for the quarter and for the year. Operating income increased over 36% in the quarter and nearly 24% for the year versus 2010. After adjusting for the extra week, operating income increased 27% for the quarter and 21% for the year. Adjusted earnings per share increased 48% in the fourth quarter compared to the prior year. For the full year, adjusted earnings per diluted share were up 19% compared to the 2010 fiscal year.

The $1.90 we delivered this year is the highest annual diluted earnings per share that this Company has ever delivered. These accomplishments have created momentum going into the 2012 fiscal year and give us confidence in providing guidance of 4% to 7% net revenue growth and earnings per diluted share of $2.05 to $2.15. When adjusting for the extra week in 2011, this translates to 6% to 9% net volume growth and EPS growth of 11% to 16% for 2011.

Now let me address a couple of specific areas of interest where I know you will have some questions, the raw material cost environment and end market demand conditions. During the fourth quarter, our raw material index reached a level nearly 16% higher than the average index level in the fourth quarter of 2010. This translates to full-year inflation of 12% versus the fourth quarter 2010 exit rate. Sequentially, the raw material index in the fourth quarter versus the third quarter was flat, marking the end of eight consecutive quarters of an increase in our raw material index, and providing an indication that the overall supply and demand dynamics that have been driving inflation have balanced somewhat recently.

As we look forward to next year, we expect to see reduced inflation pressure as global supply improve and feed stock costs decline significantly -- slightly. Our operating plan assumes a raw material index inflation of only about 4% for the full year 2012 versus the full year 2011, or about 0.5% above the 2011 fourth quarter level. As always, our goal is to remain 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. During the fourth quarter, global demand remained fairly consistent with the third quarter, that is to say that demand remains flat to down in most economies. In North America, we grew by over 19%, with the Adhesive segment up nearly 19%, and the Construction Products segment up over 20%. On a comparable basis, after adjusting for the extra week, the growth rates were closer to 10% and 12%. Volume in the Adhesive segment was again slightly negative, as US consumer goods volumes remained soft. Our Construction Products segment produced volume growth in the mid- to high-single-digits.

New product launches, in addition to geographical expansion with existing customers, drove the bulk of the volume improvement. Latin America continued its solid growth momentum, growing over 10% organically. The Paint segment grew by nearly 13% while the Adhesive segment grew nearly 9%. Although economic conditions have softened slightly, our teams continue implementing positive pricing actions and maintain market share in key market segments. The Asia-Pacific region returned 26% net revenue growth or 17% growth after adjusting for the extra week.

Over 12% was organic and the remainder was driven by appreciation of the Australian dollar and the Chinese RMB. The organic growth was evenly split between price realization and volume growth in our core markets. Economic growth in Australia remained weak during the final quarter of the year which diluted the very strong results coming out of China. Lastly, we'd like to address the EIMEA region. We nearly 24% during the fourth quarter, or nearly 15% when adjusting for the extra week. Of this, nearly 9% was organic growth. On an adjusted basis, when removing the impact of the businesses we exited last year, organic growth was over 12%, with the bulk of the improvement coming from price realization and slightly positive volume gains.

Industrial production remains soft across the region in developed as well as emerging economies and there remains uncertainty within the marketplace. We sell into fairly stable markets, namely hygiene and packaging, which are not as cyclical as construction markets. That said, we have continued to gain share in all of our key market segments which are showing up in our results. The transformation that we announced is underway and profitability is improving. EBITDA dollars nearly doubled in the fourth quarter versus last year, and the EBITDA margin improved 50%, going from 6.4% in 2010 to 9.3% in 2011. The improvements to date have come through complexity reduction in the way resource materials and the way we approach customer segmentation.

The EIMEA transformation project we announced in July is beginning to show in the numbers and further improvement is on the way in 2012. Before I turn the call over to Jim Giertz to discuss our financials, I'd like to take a few moments to discuss our recently announced agreement to acquire the industrial adhesive business from the Forbo Group. As we communicated in December, we are excited about this strategic consolidation opportunity. This is a good business with strong capable people, a diverse product portfolio and a number of unique competencies and capabilities.

There is a great deal of value in the combined companies, and we have the tools and capabilities to extract that value. 95% of the target business net revenue comes from market segments which we already serve. We understand these markets in great depth and know how to serve these customers. Second, we are gaining new technology in areas like reactive hot melts and VAE emulsions. These new technologies will supplement our current value approach of providing customer solutions using a variety of options.

Third, we are committed to delivering the annual pre-tax synergies of $50 million that we laid out in December. When you take into the numbers, it's clear that these synergies are realistic and deliverable. Unfortunately, we can't discuss the details until we have closed on the deal and the opportunities become actionable plans, which we will deliver in conjunction with the Forbo team. Our thorough analysis and our detailed modeling of the Forbo business shows that the value of this transaction is highly positive. We are confident the proposed transaction will generate value for customers, employees, suppliers and shareholders for years to come. That is my brief summary of the highlights of our fourth quarter and fiscal year performance. Now I'll turn the call over to Jim Giertz, who will provide some more detail on our financial performance and our 2012 guidance.

Okay, thanks, Jim. Here is a scorecard of performance against our four key metrics. We grew organically by over 10% versus the fourth quarter of 2010. We've now delivered eight quarters in a row of highly positive organic growth which gives more weight to our long-term guidance and strategic plan to extend this growth and reach the targets we provided at our investor day last year.

Our four-quarter trailing EBITDA margin improved again in the fourth quarter to 10.9%. This metric steadily improves throughout the year due to our solid gross margin management, and the promised reduction of SG&A expense as a percentage of net revenue. Our 2012 outlook indicates that this metric will continue to improve. During the fourth quarter, we improved adjusted EPS by 48% versus last year's fourth quarter. For the full year, we increased adjusted EPS versus 2010 by 19%, which is above our target range of 15% growth per year.

Our ROIC metric has improved the past three quarters due to improved operating results and a fairly stable invested capital base, and is now 10.5% and at the highest full-year level since 2008. As we discussed at our investor day, this metric should continue to improve as we generate sustained revenue growth and deliver on our objectives for margin expansion. Before I move on, let me make a few comments about the special charges we recorded in the fourth quarter related to our business transformation in the EIMEA region, and the pending acquisition of Forbo's industrial adhesives business.

Special charges for the quarter totaled $7.5 million pre-tax, and are recorded on a separate line item on the income statement. These charges fall outside of our definition of operating income, which as you know, is simply gross profit less SG&A expense. In the fourth quarter, the special charges were in two parts. A bit more than half of the special charges relate to direct expenses for professional advisors, such as integration consultants, due diligence experts and legal counsel. The remainder of the special charges reflects the cost of hedging a portion of the foreign exchange exposure that was associated with the potential purchase of the Forbo business since the deal value was established as a fixed Swiss franc amount.

The large majority of the special charges in the quarter related to the acquisition project rather than our internal EIMEA transformation project. We will use this line item going forward to isolate one-time costs associated with these projects. Assuming the Forbo acquisition closes, the EIMEA transformation project and the acquisition integration will become one project and the cost of each will not be measured separately. Hopefully, this accounting treatment will provide good visibility into the integration costs of the projects, as well as the impact of the integration and synergy capture on our core business results.

I'd now like to discuss in slightly more detail a few bits of our guidance for the 2012 fiscal year that Jim touched upon at the beginning of the call. We laid out a long-term strategic plan at our investor day in July of last year. That plan included two basic goals, grow consistently, and improve profitability as measured by EBITDA margin percentage. In order to achieve those goals, we must make incremental progress each and every year. Our stated goal is to grow organically by 5% to 8% per year.

For the past two years, we have outpaced this level due to positive pricing actions, as we offset raw material cost increases. Given our expectations for a more benign cost environment in 2012, we expect pricing to play a lesser role going forward. We expect net revenue to increase 6% to 9% in 2012 on a comparable basis after adjusting for the 53rd week in 2011. The actual percentage increase versus 2011 reported results would be 4% to 7%. The net revenue growth should be fairly evenly split between price and new volume, while we assume foreign exchange translation will reduce year-over-year revenue growth by about 1 percentage point.

Our expectations for EPS in 2012 are to deliver between $2.05 and $2.15 per diluted share. On a comparable basis, this is between 11% and 16% growth versus 2011 adjusted results. We're targeting operating income growth of nearly 20% in 2012 relative to the 2011 level adjusted for the extra week. Over the long-term, we plan to invest approximately 2.5% of net revenue in capital expenditures. This would equate to approximate $40 million in 2012 fiscal year, and that is our current forecast for 2012, essentially flat impaired 2011.

Lastly, we expect our tax rate to be 31% before discrete items. As a final note, the guidance we just reviewed is for our base business and excludes special charges related to our EIMEA transformation and the pending acquisition of Forbo's industrial adhesives business. After the acquisition closes, which is expected as early as March of this year, we will update all guidance to reflect plans for the combined businesses. And with that, I now turn it back to Jim Owens to wrap us up.

Thanks, Jim. I'm pleased with our performance in the fourth quarter and throughout 2011. We executed well all year long with three key financial tests and did so in an uncertain economic environment. 2011 prove to be a breakout year of financial performance. Operationally, we've proved that we can adjust to changing market conditions and deliver result, as evidenced by our gross margin management in a rapid raw material cost inflation environment.

Raw material costs was a sizable distraction during the 2011 fiscal year. We expect these inflationary pressures to ease in 2012 and give us a substantial boost to our selling power. Our selling organization will be able to spend more time addressing new opportunities and working diligently to deliver value to our customers through innovative adhesives solutions. The past fiscal year was the first time we provided EPS guidance after taking a break for two years. We beat our initial guidance amid fairly soft macroeconomic environments. We are a strong organization and in 2011 have proven our ability to forecast and manage our business.

This provides us and should provide you greater confidence in the ability of our team to deliver on our commitments and our long-term targets. The targets we laid out at the investor day in July and the synergy targets we provided in conjunction with the acquisition of the industrial adhesives business from the Forbo Group are commitments, commitments which you can expect us to deliver. We're winning in the market and delivering on our plans and we have a great team, a team with experience in this industry and a track record of success.

The economic backdrop will affect how we deliver our strategic plan, but not our ability or commitment to deliver the plan. The team here at H.B. Fuller is really excited about the coming year, as we continue to build the best adhesive Company in the world. Thank you for joining us today. Now I'd like to open the call up for your questions.

Thank you. (Operator Instructions) And we'll take our first question from David Begleiter with Deutsche Bank.

Hi, good morning. This is actually Ram Sivalingam stepping in for David. Jim, quick question. It seems like your performance in construction was relatively positive in Q4. Could you just elaborate a little bit on what you are expecting on the housing and construction front going into 2012?

Yes. So the housing and construction market itself is not particularly strong, so I would say we did extremely well when you look at the numbers from a -- particularly on a revenue standpoint. Now we had a couple of major customer wins. One, at one of the big boxes that started coming through in the quarter. So I think our team is focused on understanding where growth opportunities are and where they can add value. They've introduced a couple of new products and those are coming through in the top line growth and the volume growth. But the construction markets themselves, Ram, are not something we see any uptick at all in North America.

Understood. And just on recent demand trend, post the end of the quarter, can you elaborate maybe on a regional basis what you're seeing? If there is any notable signs of weakness or strength?

Yes. So I'll start and maybe Jim Giertz wants to add something, but, yes, post the end of the quarter, we don't see a dramatic change. I think what we saw going through fourth quarter continued into first quarter. So we see a relatively benign environment in North America and Europe and some good growth in some other parts of the world.

Thank you very much.

You're welcome, Ram. Thank you.

And we'll take our next question from Steve Schwartz with First Analysis.

Good morning, guys.

Morning, Steve.

To what extent is the restructuring in Europe been affected by the pending Forbo deal?

Yes. So we laid out in July a very specific plan on how we were going to move forward with Europe. We then, since July, built very detailed plans and, rather than implement those plans in fourth quarter, we wanted to make certain this Forbo deal moved forward. I think as we went through the plans, we designed them with the potential for two pads. One was with the Forbo deal and one was without the Forbo deal. And now that the deal is here, we can move forward with a set of plans that look most likely around that. And when I say that, I think that is some of the people and infrastructure that we need to restructure.

As I said in the last call in December, the acquisition of Forbo makes the ability to run this project faster, easier and cheaper. Our ability to pull together these combined businesses -- it's a more complex project, obviously, because it's a bigger organization, but our ability to get the right footprint, the right product line, manage all those details, is enhanced as a result of the Forbo deal. And as far as fourth quarter was concerned, we were able to start some of the actions that are related to complexity, reduction, better segmentation and price management of the portfolio. So that's some of the benefits we got to see in fourth quarter, some of the other benefits are going to start moving forward as we go into 2012 and 2013. Does that answer your question?

Yes. And I ask primarily because of the fourth quarter and it sounds from the way you described it in your prepared comments that, as we model the first half of 2012, some of those gains appear to be sustainable.

Yes, and if you go back into the details of the transformation project, there's a whole series of actions we need to take about managing our product portfolio and the complexity there a little differently. And the team started those. Every step they could take, they have taken or they've initiated at least. And we started seeing some of that in the quarter. So there's a lot of action going on in Europe to improve our business, and Steve and the team there have invested a lot of resources. You don't get to see all the details of the work we are doing but you can see some of the output of those. Jim, do you want to add something to all that? Okay, good. Okay, Steve.

If I could just ask one simple [quant] follow-up on SG&A in the fourth quarter, it appears as if of the $85 million, about $11 million was related to the additional week in the quarter. Is that an appropriate number?

Yes. Steve, this is the other Jim. Yes, it's all just pro rata, so you take the total, divide by 14 and multiply by 13 and I think you get the adjusted SG&A rate. Yes. So if you actually do that comparison you will see that our SG&A in the fourth quarter, adjusted for the extra week, adjusted down for the extra week, or excluding the extra week, is essentially flat versus the third quarter which had the normal 13 weeks.

Got you. Okay. Thanks.

Thanks, Steve.

And we'll take our next question from Jeff Zekauskas with JPMorgan.

Hi, good morning.

Hi, Jeff.

Hi. So I will try to ask one question with three parts.

Okay.

I'm a little bit puzzled as to why there was no operating profit growth in North America year-over-year in the fourth quarter? Because your revenues are up about $27 million and you had excellent pricing, you had double-digit pricing, and usually with higher volumes and that kind of pricing, you can get good incremental margins, and your incremental margins have been pretty good for the last couple of quarters. And then, secondly, can you -- maybe the other Jim can talk about the other income benefit of whatever it was, $2.8 million or $2.9 million, and why that tax rate was low?

Okay. Well, the other Jim can help me with all three of these. But, so, yes, on the operating profit growth in North America, Jeff, I mentioned the Construction Products win that we had. There's certain costs associated with gaining that kind of business. Costs we have internally and costs with our partner when you fill a pipeline in one of the big boxes. So that was probably the biggest difference. So when you look at our margin in North America Adhesives it was relatively flat. When you look at the Construction Products margin, even though volumes were up very nicely, the construction margins -- the Construction Products margins were down. And that was predominantly driven by this phenomenon related to this big customer win we had. So I will throw it to Jim, if he wants to add something to that or go on to the next two questions.

Sure. I think that's fine for the first part. I think you asked about the below the line items. That's fairly straightforward. In the fourth quarter, we had slightly higher interest income, is a small part of it, but we had the opportunity to sell some surplus real estate basically in three separate areas, in Chile, Panama and the United States. So those three transactions all taken together that just happened to come together in the fourth quarter added about $1.6 million to pre-tax income.

And then your other question was about taxes. Right. So in the fourth quarter, our tax rate was very low, 26.7%. Actually, though, just to reset for the full year, our tax rate was just slightly over 30%, which is below our 31% kind of guidance range. It was actually higher than last year. Last year our rate was below 29%. So our full-year tax rate was actually slightly higher in 2011 versus 2010.

I think your question is about the fourth quarter. Yes, the rate was low for a couple of reasons. Basically, it has to do with favorable effects that we got from foreign tax credit positions as we repatriated dividends into our parent Company in the US in the fourth quarter. That's a significant piece of it. And then, the other part of it is, as always in the fourth quarter, we tend to catch up. We do catch-up, and so to the extent that in the early quarters we estimate our tax rate, our core tax rate is slightly higher than it actually will end up to be. All the catch-up for the overestimation happens in the fourth quarter and that gave us a positive impact as well. So that is my explanation of that. And then, again, we gave guidance for next year that our core rate without discrete should be about 31%, or just right around where we were this year or a tick higher.

Okay. Do expect to sell land next year? Is this a normal ongoing -- your other income this year, I guess, was something like $4.6 million? Is that similar for next year or lower or higher?

Yes, well, there's always some of this activity that is going on and, I guess, one of the beauties of having a Company that is spread out all over the world is you've got real estate laying all over the place. And there is always some action we can take to streamline our portfolio a little bit. So there's always little bit of this stuff. But we don't really put it into our guidance. It's just kind of extra.

Yes, we bought land in India last year, with the Forbo acquisition we are going to get a bunch of land, so I think it comes and goes. But sometimes -- but there's no ongoing effort to sell real estate, Jeff.

Okay, good. Thank you very much.

And we'll take our next question from Rosemarie Morbelli with Gabelli & Co.

Good morning, all. And congratulations for a great quarter.

Thanks, Rosemarie.

Jim, you gave us the impact of the extra week on the operating income and the revenues. But could you help us with the contribution on volume and on EPS? I am assuming that the operating income, obviously, does not flow all the way down to the EPS?

Well, I'll tell it at a high level and I'll let Jim give you the numbers, Rosemarie. It's interesting, Jim Giertz has a great line which is which week is the extra week, right? Because --

The last one.

I guess. I guess, right. But it does -- if you think about an extra week at the end of the year, it is varied by business and there are various ways you could actually calculate it. The way I calculate it, which is certainly not as technical, is about an 8% impact in the quarter, and a little less than 2% for the whole year. And I think that's good round math, especially if you're looking at the macro of the business. But Jim can tell you some more specifics.

Yes, that's right. I think the same is true on the EPS. So I think that we, I'm just looking for the numbers again here, but I think we said our EPS growth was 11% to 16% -- no, hang on.

That's for next year.

Fourth quarter was 48%.

Right, for the fourth quarter. I think it's basically the same answer that Jim gave. I don't have the numbers in front of me. I don't want to confuse this by giving the wrong numbers but it is basically an 8% -- for any number that we measure the easiest way to recalculate it without the extra week is to deduct 8% for the -- 8% of the number for the fourth quarter and 2% for the full year.

Okay, all the way down?

Yes. All the way down.

Okay. And then, if you could talk about the situation at your suppliers? Everyone seems to be benefiting from the lower cost of natural gas and, therefore, the lower cost of producing ethylene and, therefore, the lower cost of producing your raw materials. Are you benefiting from any of those benefits, or does it stop somewhere before it gets to you?

Yes, so, Rosemary, we are a step removed from certain companies. It depends on who you are comparing us to, but we don't buy ethylene or propylene and really, commodity materials that fluctuate a lot month-to-month, really only make up about 13% of our raw material spend. So the kinds of volatility that other companies will see in very short-term swings, we don't see in our raw material spend, in the short term. In the long term, it has an impact. So if there was a sustained, lower ethylene and propylene cost as a result of the lighter cracking in natural gas, then we would see those in our costs.

So the big question for us when you look at HB Fuller is ethylene/propylene, they are in the mid-50s, they've been stable the last couple of months. Is that going to go up a lot in 2012 or down? And while we won't see that right away, we will see that in the longer term. So I think the short answer to your question is we are a step removed from a lot of companies that buy these kinds of materials, so it takes a while for it to hit us, those kinds of very volatile changes.

So of these three you are not benefiting from the fact that your raw material suppliers are obviously benefiting from their own lower cost? They are hanging on to their pricing?

It doesn't hit us as quickly. So if you look at the extremes that thing went up in raw materials, it was more than the 20% we saw in the middle of this year, and when it comes down it doesn't hit us as quickly. So in the short term, no, Rosemarie, in the long-term, absolutely.

Could you benefit from it, then let's say that it stays at today's level? Could you benefit from it by the first quarter? Or will it take until the second before you actually see it?

Yes, I would say we've said raw materials first quarter for us will go up, I think, 0.5%, Rosemarie, I think that's a pretty good projection for us. So it varies, flat, is what I would say for us. And then in second quarter, it will depend on exactly which way these markets are going as to what happens to our raws. But there is certainly a potential and a camp that says our raws will go down second half of this year. There's another camp that says things will tick back up.

Okay. And if I may, could you touch on the recession everyone is talking about in Europe? Are you actually seeing it in your end markets, or is it more a question of customers being cautious but not a real recession yet?

Most of our markets, Rosemarie, are not as cyclical as other markets, so we don't see a huge downturn. Europe for us has been weak all year and the gains we have gotten in volume and revenue are market share gains. North America, the construction market is still weak and our standard, durable goods, and this consumer related products, again, the volumes are soft. So I would say no change in the market is what we have said, but certainly not a robust market in either of those areas.

And if I just may ask when very quick one. The additional cost of filling up the pipeline at the big box, in addition to, I am sure, some advertisement cost, will that be gone by the end of the first quarter or do you see it going on for another couple of quarters?

Yes, Rosemarie, that is a one-time event, so that is basically buying the old -- the competitors' inventory off the shelf and replacing it with your own. So it happens all at once.

And dollar amount, can you share that?

No, I just don't think that I could do that.

Okay. Thanks.

And we'll take our next question from Mike Sison with KeyBanc.

Hey, guys. Nice quarter.

Thanks, Mike.

In terms of Forbo, can you share with us any updates, how they've done through the end of the year; volume, pricing, so and so forth?

No, we can't share any financial results. I can say the integration is going well. Our teams are moving forward with the action plans we have. There is, by law there are certain things we can do in terms of preparation and planning in collaboration with Forbo, and to the degree we can do those things, we've got those things started so that we are off to a really good start.

So I'm pretty pleased with the level of activity already in these first couple of weeks. And we're getting revved up to make certain this thing goes smoothly, but no financial numbers I can share.

Got it. And then, in terms of your outlook for 2012, which doesn't include Forbo, as I recall, what type of improvement were you expecting in Europe, the EIMEA segment on its own, this year?

In terms of guidance?

Yes, embedded in your outlook, were you expecting EIMEA to improve on its own by another 100 basis points in margin or -- any color there?

No, I can, Mike, this is Jim G. I don't want to give you the specifics of our guidance by region, okay? But I can tell you that the trends that we are seeing, and basically the game plan that we have laid out in our strategic plan, you will see the main elements of those in our budget for 2012. And that goes for -- really every element of the strategic plan you can see the evidence of it in our budget. So, in other words, you would expect to see margin improvement in EIMEA because that is a critical component of our strategic plan. Right? And so you will see margin expansion in all of our international operations because that's a critical component of the plant, including the EIMEA.

Got it. Then in terms of volume growth that you're looking for in 2012, how much of that is sort of new product wins, market share gains, that might have sort of tapered over from 2011 into 2012?

Yes. So we're -- I think if you pick apart the revenue guidance, we've got about an 8% improvement in organic, and I would say about half of that is price and half of that is volume.

Right. Okay.

And in terms of the volume and price, there's a number of wins in the second half of the year, I mentioned one of them, but there are some other ones in the pipeline, as well.

Okay. And then last question, Jim, when you think about your total portfolio now, as Forbo is integrated, you have non-adhesives businesses still there. What are the long-term fits of those businesses now that you've really become a much bigger adhesives player?

Right. Yes, so there is only one non-adhesives business, I think that you are referencing, which is our paints business in Central America. And I think I've been clear in these calls all along that's not a core strategic business. I don't think this acquisition makes it more core, as you point out, so -- that's my view on that.

Okay. Great. Thank you.

And we'll take our next question from Dmitry Silversteyn with Longbow Research.

Good morning, guys, and congratulations on a solid quarter. Good way to finish a year.

Thanks, Dmitry.

You had your share of challenges. Couple of questions, if I may. The first one, in the very top of the Q&A, there was a question about what you're seeing in kind of current environment and post the quarter's closing. With the November fiscal year end, you really haven't had to talk about December very much, but we've seen several companies, albeit in more commodity companies, put out warnings about a sudden softness in their markets in December and significant customer destocking. Now you mentioned that you're still seeing your business fairly benign in North America and Europe, I think is the way you put it, and growing in emerging regions. Is that speaks to the strength of your specific actions and share gains in the markets that you are in? Or is it a question of you just haven't -- the softness that the commodity players are seeing and warning about as the fourth quarter comes to an end, just hasn't gotten to you yet?

Yes. So there's a lot of pieces to your question, right? I would say, so I'll make two comments. One, we don't see a dramatic downturn in our customers' demand in the beginning of the quarter. So I think that was a question that was asked before. Very clearly, it's not a great economic environment, but no dramatic downturn in the demand we see from customers. I'm pleased with the start of the quarter. I don't know, Jim, do you want to add something?

Yes, if you're asking about what's happened after the end of our fourth quarter, I guess one perspective that I always like to take is, are we hitting -- are we making our plan? Are we hitting our plan for the first month, which is already in the books, and our outlooks for the other months of the quarter? And the answer to that is, yes. So we are hitting our mark so far.

I understand that, Jim, but I guess my question had more to do with the reason you are not seeing the softness that other people are seeing, people upstream of you. Is it a question of the markets that you are in? Is it a question of the actions that you have taken in terms of share gains and new products and everything that you've talked about in turning the Company around? Or is a question of you being a quarter or a quarter and a half, whatever, pick a timeframe, lagging what the commodity players upstream of you may be seeing?

Yes, okay. Thanks. Thanks for the clarity. We are -- the lag we see versus the commodity players is not in demand. It's in pricing, right? So raw material pricing and how that happens. So I wouldn't say there isn't any lag between us and other players.

I would say, if you are tied to the construction market, if you're tied to things that have new investment areas, people in Europe aren't investing in new, well, state-of-the-art ideas. Maybe a little bit the automotive sector, big purchases, then you are going to [see] the effect that we are seeing. So that's probably a difference to pick through when you are comparing companies. And we are doing well and have had good momentum in Europe all year, in fact, the last two years in terms of winning in the market. But, yes, we don't see -- so I think there's a little difference in the market segments is probably the biggest difference you will see between us and some other people because of where we are focused.

All right, thanks, Jim, that's helpful. The second question has to do with foreign exchange, both your $1.38 guidance, I was just wondering how you came up with that, given that, currently, we are at $1.28 to the euro, or $1.29, this morning, I guess. And, secondly, can you bracket the sensitivity of your earnings, either specifically in EIMEA or just in the Company overall in the move in the current exchange rate?

Yes, Dmitry, the way we set our exchange rates in our budgets, our plans, which are the basis for our guidance based on the market rates that we see at the time we are doing the budgets. So it's basically rates that are in effect in the fourth quarter of our year, early fourth quarter of the year. So that's -- and that's about where the dollar/euro exchange rate was, $1.38, around that area in the fourth quarter of the year. And at that rate, even at the budget rate, as we indicated, we were going to see about 100 basis points of drag on our revenue growth based on that exchange rate versus the prior year. So we already had 100 basis points of drag from currency on our revenue line in the guidance that we've given you.

Okay, and --

If you work through, at the current exchange rates and the $1.29 rate on the euro, I think in rough figures, that is about $0.04 of earnings per share, as I read it, relative to our guidance, that we are kind of in the whole about $0.04. If the euro was to stay at a $1.29 for the rest of year, which obviously won't happen, something different will happen, but it would be about a $0.04 drag to our guidance.

Okay. So it sounded like, roughly speaking, for every $0.025 move in foreign exchange rate, you have about an annual impact of $0.01?

I haven't done that math. But you can go and look at our European business and see the operating income that it earns. And then, just recall that some of their expenses are in dollars and not in euros, so you can pretty much calculate into it.

Okay. And then just final bookkeeping question on the Forbo business. Have you been able to come up with a figure for what the D&A increase will be to your depreciation/amortization run rate once the business is acquired, assuming that the acquisition goes through?

Yes. We have not. Dmitry. We really won't be able to finish that -- we will have it finished at the end of our second quarter. But we won't really be able to say much more about that with any certainty until we get the actual opening balance sheet work finished.

Fair enough.

Tedious, as you know.

Got it. All right, thank you very much.

Thank you, Dmitry.

And we'll take our next question from Christopher Butler with Sidoti & Company.

Hi, good morning, guys.

Hi, Chris.

Just a question on the European improvement plan as far as timing on further details there and in your guidance, what potential impact as far as savings are you expecting this year?

Okay, so I'm going to throw this to Jim, quickly. I'd say, certainly between now and when -- we have our next call in March -- we will be able to give you more details in terms of some of the plans that we have in place. Jim, do you want to comment on the guidance?

Yes, so on the guidance, I guess the way I would characterize it is there is a -- as I mentioned earlier, the plan for EIMEA includes margin expansion and that is in our base plan. And that is the basis of our guidance for the year. Once we get our more detailed plans put together now, I think that you would expect to see some further improvement in our European business as we now begin the integration of Forbo and really start into some of the more substantive pieces of the transformation project.

So I think when we retool our guidance, after the acquisition of Forbo is complete, you would reasonably expect to see some further margin enhancement and profitability improvement out of the European business, based on both an acceleration of the transformation plan and the integration of Forbo.

And exactly the timing of that is something we need to work on, Chris. We know where we are going to be in 2014, what's coming in 2012 and what's coming in 2013 is something that we need to work on.

All right. Jim's comments kind of dovetailed into my second question, which is you had mentioned that the guidance will be adjusted when the acquisition closes. At this time, you are still expecting this to be a relatively neutral event for 2012? I think that was the announcement with -- when the deal was first announced?

That's correct. Yes.

And, with Forbo, do you think that there's going to be any significant change to your exposure to the euro with their increased revenue there, but also increased assets on the ground there?

Yes. Well, as you recall, the Forbo business that we are acquiring, about 50% of the revenue is European-based. So we'll obviously be increasing our exposure -- translation exposure to the euro. But, again, also as you all know, it's really just translation exposure. Our business in Europe runs as a European business. Our costs are euro denominated primarily, and our revenues are euro denominated. So within the European business itself there is no significant currency risk added. It's just the translation risk is increased and, of course, that goes up and it goes down over time.

I appreciate your time.

Yes.

(Operator Instructions) And we have no further questions in the queue at this time.

Okay. Thank you, everyone, for your time and attention and support.

Thank you, ladies and gentlemen. That does conclude today's HB Fuller's conference call. You may now disconnect.