H.B. Fuller Company (FUL) 2012 Q1 法說會逐字稿

Good morning and welcome to the H.B. Fuller first quarter 2012 investor conference call. This event has been scheduled for one hour. Following today's presentation, there will be a formal question-and-answer session. Instructions will be given at that time, should you wish to ask a question. Management in attendance on today's call includes Mr. Jim Owens, President and Chief Executive Officer; Mr. Jim Giertz, Senior Vice President and Chief Financial Officer; and Mr. Maximillian Marcy, Investor Relations Manager. At this time, I would like to turn the meeting over to Mr. Maximillian Marcy. Sir, you may now 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 diluted earnings per share; regional operating income; earnings before interest expense, taxes, depreciation expense, and amortization expense or EBITDA; and return on invested capital or ROIC. Regional 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 regional operating income less taxes at the effective rate plus equity earnings all 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 regions, as well as the comparability of results. The non-GAAP information discussed today may not be consistent with the methodologies used by other companies. All non-GAAP information is reconciled with reported GAAP results on the last pages of our presentation. For more information, please refer to our recent press release and annual report for the year ended December 3, 2011 on Form 10-K filed with the Securities and Exchange Commission. These documents are available on our website at www.hbfuller.com in the Investor Relations section. I will now turn the call over to our President and CEO, Jim Owens.

Thanks, Max, and good morning to everyone. We have had an exciting first quarter, one filled with strong business performance and significant steps to improve the Business for the future. We have a lot to talk about today so I will get right to the commentary. We will cover four main topics. I'll recap our first quarter results, talk about some of the performance drivers and trends in our business, discuss the Forbo Industrial Adhesives business acquisition, and then we will finish with some comments about our outlook for the remainder of the year and our earnings guidance. We had a great first quarter. We delivered 11% organic growth this quarter, our ninth consecutive quarter of solid organic growth. Higher prices accounted for 9 points of this growth, reflecting the cumulative effect of all the pricing actions we've taken over the past year to offset raw material inflation. Volume was up 2% in the quarter versus last year, an improvement over the trend in the last five quarters and in line with our expectations for the quarter.

Though our overall volume growth is still not where we want it to be, we are satisfied that we are driving solid growth, especially in our key markets of hygiene, packaging, and durable assembly. We are seeing good market share gains in our Construction Products business based on new products and new distribution wins. In addition, volume growth was solid in our key international adhesives markets of Latin America, EIMEA, and China. Gross profit margin improved significantly in the first quarter, sequentially and versus last year. Our entire Organization has worked hard to maintain and strengthen our margins during the recently wave of raw material inflations. Now that raw material cost inflation has eased, our margins have improved. In addition, we continue our efforts to adjust pricing levels on our offerings to reflect fully the value that we are providing to our customers and this ongoing effort, especially in our EIMEA region, is boosting our margin profile. Although we believe raw material costs will start to increase again throughout the year, we expect to maintain our gross margin for our core H.B. Fuller business near the first quarter level through the remainder of this year. Strong revenue growth combined with strong margins delivered operating profits improvement of 45% versus last year. Adjusted diluted earnings per share were $0.44 in the quarter, up 52% versus last year.

So clearly, the first quarter numbers were great. But beyond the strong numbers, a couple of things stood out for me that are especially gratifying. First, our EIMEA organization had a great quarter and good volume growth and improved margin. Initial benefits of the region's business transformation are being realized now and we expect steady improvement in the coming quarters as all the elements of this project get on stream. Second, we produced this great result while at the same time concluding and making integration plans for the most significant acquisition in the history of the Company. We got the acquisition done and did not get distracted from our commitment to driving our existing business and deliver the financial results. The integration work that we have in front of us is significant, but we embark on this journey with our core business running well and the planning initiated and well in place. The ability to execute successfully against multiple priorities will be critical for making the acquisition a success for our customers and our shareholders. So not only do I like the numbers we delivered this quarter but just as important is how we made the numbers. That makes me optimistic about what we have ahead of us.

Now, let me share a few key performance drivers in our business, starting with an update on our key markets of focus. At our Investor Day last July, we identified three key markets we had targeted for growth -- hygiene, packaging, and durable assembly. I mentioned earlier that we are confident we are driving solid growth in these key markets and I can share some data with you to support this. This first column of this chart shows the revenue generated in these markets in 2010. This is the information we first shared at our Investor Day in July 2011. The second column shows the corresponding data for the 2011 fiscal year. As the chart shows, we grew 22%, 19%, and 7% respectively in the aforementioned markets. I can tell you for sure that the underlying markets in these key areas did not grow at these rates. The business we acquired from Forbo will significantly enhance our position in the packaging and durable assembly markets, and to a lesser extent, hygiene. The acquired business generated packaging revenue of over $100 million while durable assembly revenue was about $200 million. Success in these markets is the key element of our growth plan through the 2015 fiscal year and so far we are delivering on this objective and on track to further deliver as we move forward. Next I will discuss the raw material cost environment.

This chart shows the raw material index that we use internally. This chart is the basis for our discussions about raw material cost trends on these conference calls. Clearly, 2011 was an extremely year for raw material cost inflation. Prices for our basket of raw materials increased nearly 20% during 2011 versus 2010 and they remain at very high levels this year. The good news is that the extreme inflation we saw in 2010 and 2011 has mostly subsided for the time being and we expect a generally more benign cost environment as the year progresses. As this chart shows, our raw material index was down slightly in the first quarter relative to the fourth quarter of last year. We expect the index to increase beginning again in the second quarter versus the first quarter and then continue to modestly increase through the balance of the year. Specific factors driving this are continued global tightness of supply and rebounding petrochemical feedstock costs. We expect modest increase in tackifying resins, both hydrocarbon-based and naturally sourced. In addition materials such as VAM and acrylic monomers may be on the rise, especially in emerging economies where demand continues to be robust. Our approach to raw material volatility is to anticipate cost changes, use reformulation to optimize the cost of our products, and manage price effectively in all raw material market environments. We have done a good job of this over the last couple of years and we expect to continue our strong execution in the future.

Lastly, on the performance drivers regarding the EIMEA business transformation, we are well on our way to delivering on our commitment to expand EBITDA margin in the region to 14% by 2014. In the first quarter of this year, we more than tripled the EIMEA operating margin versus the first quarter of 2011. This improvement was due to the focus on product and price positioning as we work to reduce complexity in the region. In addition to the improvements already evident, we announced our intentions to close two production facility in Wels, Austria and Borgo, Italy, and to transfer certain shared services to a single location in Mindelo, Portugal. The cost associated with this announcement were detailed in an 8-K, dated January 26, 2012. A portion of the special charges included in our first quarter results relate to these actions. An additional cost will occur in future quarters as we complete the project. Note that going forward the EIMEA transformation project will become one with the Forbo business integration and we will not report on these activities separately. The goal and the commitment remains the same before and after the acquisition. Through a comprehensive restructuring of our business model in the region, we intend to improve the region's EBITDA margin to 14% by 2014.

The addition of the acquired business will make this project bigger and will provide more options for delivering the future business model. The acquisition will create significant opportunities for the future. I think the financial results in the first quarter indicate that we have a good start on this work and we are beginning the integration process with good momentum. This brings us to our discussion of the Industrial Adhesive acquisition from the Forbo Group. As I am sure you are all aware, we announced on March 5, 2012 that we had officially completed the Industrial Adhesives acquisition. On the day of closing, our leadership teams were spread across the world, at each and every H.B. Fuller and acquired Forbo facility. We discussed future plans and shared ideas to enable the smoothest integration of our business. What we found were great team players in Forbo and a business that will be complementary in our goal of being the best adhesive company in the world.

Since we have only owned the business for a little over three weeks, we are not ready to provide many details about the business, our future integration plans or the impact on our financial results. But I have traveled to the new sites around the world during these first few weeks and our regional teams are well-engaged in the details of the business and the integration. While I can't share financial projections yet, I will tell you what we have seen so far and talk briefly about the work that will happen over the next 60 days. I visited 17 sites around the world over the last few weeks, most of which were former Forbo sites and a few things were clear. First, the quality of the people in the acquired business is high. This is a business with people who know the details of the adhesive industry and our business and the Forbo team is excited and engaged in the process of becoming part of a great adhesive company. Second, the technology and the new capabilities we acquired are as good as we expected and can be leveraged for growth and will enhance the business portfolio. And finally, it is clear that the expected level of synergy related to procurement savings, overlap of personnel, and in manufacturing capabilities and complexity reduction are all realizable.

It was an exciting trip where ideas and information are flowing from person-to-person and people are excited and heavily engaged in the process of integrating the business. Over the next 60 days, the combined teams are reviewing and refining all of our business integration plans, setting specific targets for all integration activities and beginning the work. At the end of the second quarter, we intend to provide a complete forward-look at the combined business and provide more detail on the acquired business in each of the geographic regions. This forward-look will include our commitments for synergy capture. I will say again, from what we have seen and learned so far, our initial projections for synergy capture are still valid and our commitment to deliver sequential progress each year as we deliver our target of 15% EBITDA in 2015 remains unchanged. At this point, I would like to turn the call over to Jim Giertz to discuss our outlook and our guidance. Jim?

Okay, thanks Jim. Before I review our 2012 guidance, I want to provide some more information about those special charges we recorded in the quarter and how these charges will be reported as we progress through the business integration project. Special charges net for the quarter totaled $6.5 million pre-tax and are recorded on a separate special charges line on our income statement. These charges fall outside of our non-GAAP definition of regional operating income, which is simply gross profit less SG&A expense. This quarter and going forward, the special charges will be allocated in four separate categories -- acquisition and transformation related costs; workforce reduction costs; facility exit costs; and all other direct costs associated with the business integration project. Acquisition and transformation related costs include of the professional service fees and the cost of securing bridge and permanent financing for the acquisition. In addition, the gains and losses on foreign exchange positions used to hedge the purchase price of the transaction are included in this category. Work force reduction costs are primarily severance costs. Facility exit costs include accelerated depreciation on assets to be idled in the future and other cost directly related to winding down a facility in preparation for sale. This category will also capture any gains on the sale of surplus property when we get to that stage of the project. The All Other category is just what the name implies.

We have provided a table in our press release which breaks down the costs in each category. In addition, the schedule provides some detail on the tax treatment of the special charges. As this table illustrates, the tax treatment on these charges can vary significantly depending on the tax jurisdiction in which the charge is recorded and the nature of the special charge. In general, charges taken in the US attract relatively high tax rates while charges taken in foreign jurisdictions have lower rates, reflecting the differences in the statutory rates between the regions. Also, certain charges related to the acquisition have no impact on current income taxes and instead, are captured in the basis of the equity that we have acquired. We will use this line item going forward to isolate one-time costs associated with this business integration project. Hopefully, this accounting treatment will provide good visibility into the integration costs, as well as the core business results.

Now turning to the 2012 earnings guidance, I will start with our guidance around the accretion from the Forbo acquisition. As you are all aware, there's essentially five significant factors that drive the incremental earnings from the acquisition and those are -- the operating income of the acquired company in the final nine months of 2012; the incremental depreciation and amortization of intangible assets on the opening balance sheet of the acquired business; the incremental interest expense associated with the acquisition price; the synergy captured in the remainder of the year and the tax rate that is applied to all of this. Of these five items, only the incremental interest cost can be determined with reasonable precision at this time. We successfully completed our permanent financing in advance of the closing and the acquisition. Due to a favorable interest rate environment and a solid investment grade credit rating, we successfully placed $250 million in 10-year notes with a group of private investors at 4.12%.

Additionally, we arranged a 5-year term loan from a syndicate of banks for $150 million at a rate of LIBOR plus 150 basis points. This loan is prepayable and also has annual principal amortizations, allowing us to pay down debt as we generate cash over the next several years. All in, the interest expense on the new debt will total approximately $10 million for the final three quarters of 2012, with the cost of the floating rate debt estimated based on the current forward curve. Based on what we know and can estimate today, we believe the acquired business will be accretive to net income by $0.05 to $0.15 per diluted share in the 2012 fiscal year. This estimate assumes that some of the synergy projects will benefit operating income in 2012. As we've said before, we intend to provide more detailed information regarding the accretion potential from the acquisition after we complete the second quarter. This allows us time to complete the purchase accounting, recast the budget for the remainder of the year and lock down our synergy capture targets.

And now I will turn to our guidance for our base business for the 2012 fiscal 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 have offset raw material cost increases. Given our expectations for a more benign cost environment in 2012, we expect pricing to play a lesser role in the back half of this year, as we lap last year's price increases. We still expect net revenue to increase 6% to 9% in 2012 on a comparable basis after adjusting for the 53rd week in last year 2011. The actual percentage increase versus 2011 reported results would be 4% to 7%, but the extra week impact will only be evident in the final quarter and full-year results. The net revenue growth should be fairly evenly split between price carryover and new volume, while we assume foreign exchange translation at current exchange rates will reduce year-over-year revenue growth by about 2 percentage points.

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 are targeting regional 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% of net revenue in capital expenditures and this would equate to approximately $40 million in the 2012 fiscal year and that is our current forecast for 2012, essentially flat compared to 2011 on the base business. And finally, we expect our tax rate on the base business 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 business integration project. During the second quarter earnings call, we will update all guidance to reflect plans for the combined businesses. And with that, I will now turn the call back to Jim Owens to wrap this up.

Thanks, Jim. I'm really excited about the start to our current fiscal year. We continue to deliver on our plans and are making progress each quarter to achieving our long-term goals. A phrase that describes the atmosphere inside H.B. Fuller is optimistic yet careful. Here at H.B. Fuller, it means that we feel, the whole team feels, optimistic about the future of our Business because we have the right people, the right tools, and the right focus to win quarter after quarter, year after year. However, we are careful enough to keep our eye on the ball and ensure we make the proper decisions each and every day that will allow us to succeed and deliver in the future. We have a lot of work to do to successfully integrate the newly acquired business but we have the positive momentum, the focus, and a clear plan to deliver.

Many good things are happening. We grew sizeably in each of our three areas of strategic focus and have specific plans on how to continue gaining share over the next few years. The strategic markets we have chosen for special focus are sound, and H.B. Fuller is poised as a leader in each. We are capitalizing on new opportunities with our expert sales and technical teams and depth of innovation experience. Europe is moving in the right direction and the Forbo Industrial Adhesive integration is off to a good start. If you can't tell, I'm excited to be leading this Organizations during such a transformational and opportunistic time. I really look forward to these conference calls and the chance to update all of you each quarter as we execute and achieve the goals that we have laid out to you. Thank you for joining us today. Now I'd like to open the call up for your questions.

Thank you.

(Operator Instructions)

We will take our first question from Steve Schwartz with First Analysis.

Well, good morning everyone.

Good morning, Steve.

Jim G., if you could help us understand, in the press release, you noted that the stronger earnings performance in the first quarter would be offset by a less favorable foreign currency headwind and so if your revenue guidance remains the same, it presumes that that affect headwind is offset by pricing and volume. I would then expect that pricing and volume, which is stronger at operating profit, to give you a boost to earnings. Am I missing something in that whole equation or the way that plays out?

No, Steve, I think you are generally correct. Just to reset, at the end of the fourth quarter, or three months ago when we gave our guidance, we gave our earnings per share guidance and revenue guidance. EPS guidance was $2.05 to $2.15. But, we said that at the current exchange rates at that time, that our operating plan that gave us those guidance numbers were billed at a more favorable exchange rate. So we just said that we had a gap between our guidance and the exchange rates that were in effect at the time. And really all we are saying today is that because our business is performing slightly better than our own internal expectations in the first quarter, that we have closed that gap and now we can reconfirm our guidance at the current foreign exchange rates.

I see.

That's the way I would look at it.

Okay. So there was a little bit of a plug or a gap in what you had offered to us a quarter ago. Okay. Regarding gross margin, you guys have done an outstanding job and are showing some incredible savings over the past couple quarters. Is there any part of that that is coming just by virtue of the timing of price increases coming through and raw materials taking that temporary dip toward the end of 2011?

Yes so, we, as you saw last year, I mean I think the performance was really all throughout last year, quarter-after-quarter. We moved our pricing in line with raw materials, lock step and actually ticked up slowly as the year went on. As raw materials flattened, that certainly helped us having that momentum on raw materials, as raw materials flattened at the end of the year, this year. Additionally, Steve, we are doing, as we have laid out in the past, good work around complexity reduction and pricing management around the world and you can see that really standing out in the European numbers. So those two factors combined, certainly the good momentum and the good work we did last year to manage pricing and raw materials, paid off in this quarter's numbers but it paid off all last year and this ongoing work on managing pricing and complexity reduction is also paying off and, as I said, particularly in the European numbers.

Okay Jim. So just to help us understand what is sustainable going forward, would you roughly estimate that maybe 20% of this quarter's gains came from that raw material pricing spread and 80% is from the more sustainable actions you are taking in Europe?

Yes, I would say -- I don't know that I could characterize it in an 80/20 rule, but I would say that our objectives are to maintain margins close to where they are now. If, as raw materials go up, there is slight bleeding of the margin, that is possible, but fundamentally, I think we've said, in the long term, our goals are to be in this 30%ish range and this was a real good quarter in that regard. And we don't see this as a temporary blip, but of course margins will go up and down each quarter a little bitt.

Sure, sure, all right, well fantastic results--

But mostly sustainable, I guess, is the short answer to your question.

Yes, yes, okay, great, thanks.

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

Hello. Good morning. This is Youyou Yan filling in for Jeff. So my first question is in terms of the growth guidance you provided, because this quarter you delivered roughly 9% in price 2.3% in volume. So going forward, you mentioned that the growth is going to split evenly between price and volume. So does it mean that do you expect volume to be higher sequentially and pricing increase to be relatively lower sequentially?

Yes, that's exactly what it means. We have a price carryover from last year that is flowing through into the first quarter numbers and we have good momentum that is happening on the volume side. So I think we have laid out the guidance to say roughly the targeted revenue will be for the full year, half and half, volume and price. So that ratio will change.

Okay. So secondly, if I may, the tax rate for your first quarter, adjusted tax rate is roughly 29.4% which is lower than your target of 31%. So going forward, do you expect the tax rate to be higher in the second and third quarter and lowering down in the fourth quarter? Is that how should we should think about it as split?

Yes, let me let Jim Giertz tackle that one for you, Yoyo.

Thank you.

So our tax rate in the first quarter, our core tax rate was about 30.5% and we had some favorable discrete items that brought the rate a little bit lower than that. So the core rate was actually about 30.5% and that is aligned to our guidance of 31%.

Okay. So, if you account for the Forbo acquisition, do you expect the tax rate including the acquisition to be higher or lower than your guidance of 31%?

That is one of the -- as been mentioned before -- that is one of the elements that has to be estimated or that has to be projected to get a complete forward-looking me Forbo acquisition. Our best guess right now is that the tax rate on the acquired business will be close to the 31% effective rate on our core business.

Okay. Okay. That is helpful. Thank you.

Thanks, Yoyo.

Thank you. We'll take our next question from Peter Cozzone with KeyBanc.

Good morning, guys. Great quarter.

Thanks, Peter.

In terms of Forbo, can you share with us any updates on how the business performed in the first quarter? Maybe in terms of volume and pricing generally? And also, I know it's a month in, but with your experience thus far, are there any pieces of the business that you were may be surprised by, as far as potential opportunities going forward?

Yes, so I would say, we are not in a position to share a lot of details at this point but the Forbo business performed well. So we feel good about where they are at. In terms of surprises, I would say, I mentioned I travelled constantly from -- actually, it was a week before the close and from March 5 up until last week, meeting with people and teams around the world. And a lot of good positive things that we saw specifically around technology in some of the core markets like bottle labeling and packaging and reactive hot melts. Some of the opportunities we thought we would see, we saw the VAE business that we purchased, we see opportunities there. So a lot of good positive, early indications that what we thought we would see in terms of opportunities are there, Peter.

Okay and then volumes in EIMEA were very solid in the first quarter. Are these types of gains sustainable? Can you maybe walk us through the drivers there as far as new products, new business wins and so forth? And maybe comment a little bit on the underlying market rate of growth?

Yes, so I think, as everyone knows, right, Europe in general is not a robust market area but our team there are doing a great job focusing on some of our innovations, delivering value to customers, which when you have a value proposition that is compelling in this kind of environment, doors are open for opportunities. But fundamentally the markets where we are winning are the three that we focused on strategically. So there have been good opportunities in the packaging market and our team is doing a great job there. We have got a very strong team in hygiene and we are winning in hygiene both in core Europe as well as the Middle East and India. And in the durable assembly markets, our team there is finding opportunities to help customers and win business there as well. So it's really those three market segments where we are doing good work.

So kind of assuming Europe doesn't get any worse, but given the kind of success you have had on the strategic initiatives and I think you had mentioned some new wins on the last call, the expectation for that business on the volume front, I mean, we would not expect to see a significant slowing in those gains, is that correct?

Yes, we are optimistic about the volume performance in Europe and if you look back at the last couple of years, the team in Europe has done from a volume standpoint in general, with a couple hiccups along the way but real good positive momentum there and a very strong commercial team.

Great and then lastly, as far as raw material inflation, can you remind us what your expectations are as far as the rate of inflation baked into your core 2012 guidance and maybe remind us how the pricing flows through and your ability to keep up with input costs, as far as your comment to hold gross margins steady throughout the rest of the year?

I'm going to look to Jim to give the exact number but I think we said off on exit rates, we would be up about a 0.5% and year-over-year, 4%, and most of that is carryover. So roughly flat from Q4 and you can see that in the chart that we shared in the presentations.

That was for inflation or pricing?

That is inflation. So [should vault] your inflation off of Q4 exit rate, up a 0.5%, off of the full year 2011, up 4%.

Okay and then assuming raw materials kind of moderately increase here, there would still be some lag to get that incremental pricing. Is that correct?

I'm sorry, are talking about to recover the 0.5%?

Yes, to recover that. I mean is there a typical lag -- is it typically, two to three months is, I think, historically is kind of the way you guys have framed it?

Yes, I think we are trying to do a better job, Peter, of anticipating and moving in lock step so I would say we are trying to minimize any lag there, and I think if you look at our results over the last five, six quarters, you'll see that we have done a pretty good job at doing that. So, as I say, we've got three pieces to our margin strategy. First is to do it a real good job of anticipating changes. Second is to reformulate and introduce alternative products to customers to manage through that and then third is to make certain we are managing pricing effectively, so all three of those make up the strategy to maintain margins.

Great, thank you very much for the color.

Okay. Thanks Peter.

Thank you. And we will now go to Eugene Fedotoff with Longbow Research.

Good morning, guys.

Good morning Eugene.

First, can you comment on North American market, what are you seeing there and in the past you provided a split between Construction Products and Adhesives, how was growth in each individual product line there?

Right. So yes, growth was stronger in our Construction Products business than the core Adhesives business. The Construction Products is really driven off of wins not market conditions. We've had a few good wins with new products and with key customers that have driven that. But I would say generally, the volume performance that we have seen in North American adhesives has been less than Construction Products, as well as less than Europe, and it's a real opportunity for us going forward is to get North American adhesives volume back to the kind of levels we are seeing in other parts of the world and in our construction business with wins.

Great, thanks. And can I comment on separating [profit] in Asia. It was a little bit lower than we expected. What is going on there?

Yes, so, Asia is an interesting story. It's a pretty diverse business that we have in here. Our China business did extremely well this quarter, very strong top line and volume growth, as well as good operating profit improvement. Our business in Southeast Asia did not do as well and that was -- while we had good growth in Vietnam and Thailand and the Philippines, our business in Malaysia and especially our business in Australia suffered. If you look at the Australian economy, it's a tale of two cities. You've got this very strong robust mining environment that is happening, but the manufacturing sector, where we sell, is really struggling and with that being an important driver of our business, that took a drag on the overall Asian business, the performance in Australia.

Thanks for the color. And just a last question, just want to make sure I understand that correctly. Forbo contribution is now expected to be $0.05 to $0.15 to EPS versus prior expectations of neutral impact. Is all driven by assumption of lower interest expense? Do I understand that correctly?

Yes, Let me let Jim explain that a little bit to you.

Right. So, the original guidance that we gave for accretion in 2012 for the Forbo acquisition was $0.00. You're correct. And now we're saying $0.05 to $0.15 of accretion. And you're question is, what is driving that? Primarily, it is not a different assumption on interest expense because our interest expense is coming in almost exactly as we had forecasted to date. What it is, is a more optimistic about the timing of the synergy capture. So the bulk of that is coming from a more optimistic forecast of when the initial synergy benefits of the transaction will occur. There's a couple of other factors there but that's the primary factor.

Okay. Great, thanks.

Yes.

Thank you. And we will continue on with Rosemarie Morbelli with Gabelli & Company.

Good morning, all, and congratulations.

Thank you Rosemarie, good morning.

Following up on the strong quarter results, which areas did you see performance much better than what you were previously anticipated? And were there any areas which actually did not do as well?

So we -- I think in a portfolio like ours, you always have some ups and downs. Generally everything did well, Rosemarie. We had a really good quarter across the patch. I think we've got a good leadership team around the world that's really focused on delivering their commitments. The European results were really encouraging. I'd say the China results were very encouraging and positive although we did anticipate some of those. Australia and Southeast Asia is probably a little weaker than we expected. And Construction Products North America, while again we expected a good quarter, came in a little stronger than we expected. So I'd say, overall, we expected strong results and we a couple areas did better than the strong performance we expected and Australia would stand -- Southeast Asia and in particular, Australia, turn out as the area that was weaker than we expected.

And following up on the construction side, is that mostly new products and new accounts, as you mentioned earlier, or do you also see some pick-up in construction overall or are you picking up share within a not moving anywhere type of marketplace?

It's all is tough to separate those through to completely, Rosemarie, but generally, this is about product gains and market share gains and not some pick-up in the construction business from what we can see.

Okay. And then lastly, if I may, regarding Europe, you mentioned that the margins are now about three times higher than they were. Would you mind reminding us where they were, where you are today and whether they could get above the 14% by a 2014?

I love your question, Rosemarie. I will share with Steve Kenny, the guy who is heading that business. So I think we were 1.9% first quarter of last year and we were 6.3% this quarter. So significant improvement this quarter, but still a ways to go to the 14% and I think it's very solid progress, but there's a lot of work to be done, both in terms of managing the manufacturing footprint, doing some of the work we are doing on the procurement, as well as this whole complexity piece. The Forbo integration gives us a lot more levers to enable that to happen but it adds to the size of this project. So it's a big project that should deliver quarter-after-quarter and going into 2014, I think you'll see some good results. Let me let Jim give you a little more details on the numbers, though, maybe, Rosemarie.

Thanks.

I just want to clarify, Rosemarie, on the Europe. In EIMEA in the first quarter, our EBITDA margin was 8.5%. Okay? And our target is 14%. So you can see the gap. And then just recall that the first quarter of our year, our EBITDA margins are always low because we have all of our expenses but we don't have all of our revenue because of the seasonal nature of our business. So, 8.5% adjusted for the slow quarter, would be a little bit better than that. So you can see the gap between where we are and where our goal of 14% is.

Okay. Thanks, I appreciate it.

Thank you.

(Operator Instructions)

And we will go to David Begleiter with Deutsche Bank.

Hello. Good morning. This is actually [Rom Siffling]. I'm sitting in for David. Not to belabor the raw material point but trying to get a sense for the price to raw material gap in the quarter. Can you remind us how much raws were actually up in Q1?

Raws were actually down in Q1.

Down in Q1. Okay.

By about 1.5%.

That is on a year-over-year basis or sequentially?

Sequentially.

Okay, and year-over-year?

Year-over-year, they were up almost 10%.

Almost 10%? Okay perfect. That's very helpful. Thank you very much.

Thank you. And Christopher Butler with Sidoti & Company. Please go ahead.

Hello, good morning guys.

Good morning. How are you today, Chris?

Good. Good. I was hoping you might be able to give us some insight on volume as it progressed through the quarter and, we have touched on this a little bit, but expectations for the spring seasonal build, is that about normal at this point in time?

Yes, so maybe I will give you a high-level color and if Jim wants to share some specific numbers, I will throw that to him, but generally volume progressed nicely through the quarter. So I hate looking at month-to-month numbers. Chinese New Year fell in a different month this year than it did last year, so it is tough enough managing quarter-to-quarter than month-to-month. But generally we saw a good positive trend during the quarter. And the second question--?

The seasonal build, as we look towards spring, any sense there on strong versus normal?

Yes, I would say generally we don't have seasonal builds in our business, except in Construction Products. So, could there have been a seasonal building in Construction Products, that is one of the questions I had, Chris. But I wouldn't say that have a big evidence that that is part of it.

And looking at the Forbo deal, a lot of the benefits come down the road, but the negative synergies from sales would probably happen pretty quickly with the European volume growth that you saw here in the quarter. Do think there was any impact from that?

Yes, we projected as we went into the acquisition that there would be limited overlap of customers. And there were. We, early on, tackled that issue with our sales teams, getting our sales teams together where there was overlap. We have had detailed meetings with customers and we feel really good about managing any negative synergies. So limited overlap, where there is, we are working very closely with customers to make certain that there is no negative impact. So, no, I don't see a big negative impact on the overlap customers, Chris.

And just finally, to be clear on the gross margin story, you had indicated that somewhere around 30% is what you're targeting, but as we look to the second quarter, we are now including Forbo, which has at least on the operating margin line and I assume on the gross margin line as well, lower margins than your existing business so you would have to imagine from a modeling standpoint that gross margin takes a bit of a hit here for the rest of the year?

Yes, Forbo will dilute the margin, on the gross margin. So any commentary -- first off, what I tried to say with the base business is that it would stay about the same level, maybe decrease slightly as we go forward. But Forbo will certainly dilute that number, as we go forward because it's a lower gross margin business.

Great, that's what I thought you were saying. Just wanted to be clear. Thanks for your time.

Yes. Okay. Thanks, Chris.

We will take our next question from Tom Claugus with Graham Partners.

Hello, guys, I have four questions but I will try and keep it to two. The volume growth in Europe. Why, since you are more established here and, I call people in the glue business, so think I'm pretty well dialed in. Seems like business in the US is good and so what I am surprised by is why is your volume growth stronger in Europe than it would be in the US?

Yes, so, I would say a couple things. One, we have an EIMEA business. Middle East, Africa, and India business that helps to pull up some of the growth. So we have a broader geography there and there are certainly geographies in Europe and certain market segments where we are underrepresented relative to what we should be given the value propositions we have. So there are good win opportunities that the team is executing over in Europe.

Okay. And then my next question is, is I've heard in the field that there are some raw increases this year. So far, wax is starting to be a problem. And my understanding was that Henkel took 6% to 8% pricing this quarter and I think somebody else did, too. I was wondering if, you guys did not take any additional pricing in this year, and are you planning on taking additional pricing in this quarter?

So we are managing our margins to what we see in the marketplace. So and I think we've done a better job than most in the market of anticipating raw material changes in 2011. And we managed our pricing to that all throughout 2011. As we go into 2012, as we see raw material increases, we are going to manage in an anticipatory way toward those on price increases. So that's the strategy we are taking along with working closely with customers on reformulation, so.

Okay. But you did not take pricing this quarter? I know, not in the quarter but I mean, after this year? After December 31?

So we don't go into the details of what we do with price increases specifically. But generally, yes, we need to change prices all the time, and we have, as I said, repositioning of products in Europe is something that is ongoing process, where raw materials are affecting certain product classes, we are definitely raising prices to compensate for those. So it's tough to make a general statement, there are certainly places where price increases of 6% to 8% are happening because of what is happening with raw materials or repositioning in our market. For this call, we lay out the general view of what's happening for raw materials and pricing.

Okay. And then I guess I'll throw in one more. There is a decent bump in inventory this quarter. Is that to preempt the Forbo integration? Or was that pre-buy to try and offset some of the oncoming increases in raws?

Let me let Jim comment.

Yes, it's Jim G. That's a normal seasonal development in our business. Our inventory tends to be at its lowest point at the end of the fourth quarter and then it builds up through the first quarter as our volumes improve -- or in expectation of higher volumes in the second quarter.

Okay. It just looked bigger than normal, even on that basis. But, okay.

Just one last comment on pricing, Tom, some of our competitors are having to catch up on some of the things that they maybe didn't execute on Q4, as well.

Thank you.

Thank you.

(Operator Instructions)

Okay, I think that is all the questions. Thanks everyone for your time and your interest in H.B. Fuller. Look forward to talking next quarter.

Thank you, Mr. Marcy. Ladies and gentlemen, that does conclude today's conference. We thank you for your participation. Have a great afternoon.