H.B. Fuller Company (FUL) 2012 Q3 法說會逐字稿

Good morning and welcome to the H.B. Fuller third-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 include Mr. Jim Owens, President and Chief Executive Officer; Mr. Jim Giertz, Senior Vice President and Chief Financial Officer; and Mr. Maximillian Marcy, Investor Relations Manager.

At this time I would like to turn the meeting over to Mr. Maximillian Marcy. Sir, you may begin.

Thank you, Tim, 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, and 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 from continuing operations, regional operating income and earnings before interest expense, taxes, depreciation expense and amortization expense, or EBITDA.

Regional operating income is defined as gross profit less SG&A expense. And EBITDA is defined as gross profit less SG&A expense plus depreciation and amortization expense. All of the non-GAAP measures discussed today should not be construed as an alternative to 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, quarterly reports on Form 10-Q dated July 6, 2012 and March 26, 2012, and the annual report for the year ended December 3, 2011 on Form 10-K filed with the Securities and Exchange Commission. All of 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 thank you to everyone for joining us today. During the third quarter we continued to deliver strong operating performance with 5% organic growth, nearly 40% operating earnings improvement and 20% EPS improvement, while successfully managing the Forbo integration and Paint sale.

We have quantified three clear interrelated commitments to our shareholders -- a 2012 earnings and EPS target; a 2015 EBITDA margin target, and a synergy plan related to Forbo. I am happy to report that in this quarter we again delivered on all three of these objectives.

We reconfirmed our earnings guidance for 2012 with a little more margin and less revenue than initially projected. We have taken another step toward our 15% EBITDA margin, and the synergy plan is on track. We developed a detailed plan within 90 days of completing the sale, and the entire organization has been working very hard to successfully deliver the action plan which will generate over $90 million in EBITDA improvement.

I'm happy to report that not only are we on or ahead of schedule in all aspects of the project plan, but the results of the work are evident in our improved margins and operating performance, and at the same time we continue to deliver organic volume and revenue growth. This is especially impressive as the ongoing sluggish end market conditions persist in the US and some international markets beginning to slow.

Altogether we produced a 42% increase in EBITDA and a 20% increase in our adjusted EPS relative to last year, and we exceeded our internal expectations for operating performance and EPS in the quarter.

In addition to all the business integration work in the last quarter, we also took steps to improve our business portfolio and business operations. During the quarter we completed the divestiture of our Latin America Paints business for $120 million in cash and a significant book gain. This long-held asset was the last non-adhesive, non-core business in our portfolio. We are now 100% focused on the sale of industrial adhesives and related polymers. This was an important strategic step to becoming the best adhesive company in the world.

After the end of the third quarter we announced the acquisition of Engent, a small company focused on the assembly of electronic components and devices. This small deal, in combination with other investments, is intended to form the basis of an integrated solution offerings to the electronics industry.

And we took actions to continuous improve our operations outside of Forbo integration as well. To make ourselves stronger in the Latin America adhesive market we made the decision to close our production facility in Costa Rica, transferring this production base to other H.B. Fuller facilities in South and North America, plus external partners. This represents one more step in our multiyear endeavor to strengthen our business in the Latin America region and serve customers better there.

Overall, this was another busy quarter, where we improved the portfolio, improved our operations and generated strong financial results.

Now I will take a step back and review some of the key results and trends from the third quarter in each of our operating segments. Let's start at the top of the P&L. We delivered 5% organic growth this quarter, our 11th consecutive quarter of organic growth, and solidly within the long-term growth metrics that we had established for ourselves.

Pricing was more than 3% above last year's third quarter levels, reflecting the cumulative carryover effect from all actions we have taken over the past year to offset raw material inflation and to properly position our products.

Volume was up 1.7% in the quarter versus last year. This is a solid result given the end market softness we continue to experience around the world.

In North America our adhesive and construction products business segments both experienced organic growth, but did so differently. Construction markets in the US overall remain relatively flat. We grew volume over 5% in this segment in the third quarter through share gains with existing customers as we continued to introduce new products and new technology.

On the North American adhesive side organic revenue was up 5.2%, but volume fell by about 0.5% during the quarter. This is improved volume performance versus the second quarter, and the improvement can be attributed to generally better success in the marketplace.

In addition, we are seeing some positive impact on the integration of Forbo, as our stronger product offering and revamped commercial organization have been introduced to the market. We expect the North America volume trend to continue to improve for the final quarter of the year.

In Latin America organic revenue was up 8%, with most of the improvement coming from volume gains, which were over 5%. Asia-Pacific organic revenue fell over 4%, with volumes down over 5%.

The region remains a mixed story. China continues to produce good volume growth, especially in the legacy H.B. Fuller businesses, but a decrease in the rate of growth in China, and attrition in the legacy of Forbo business as we reposition this business toward the higher end of the value period -- pyramid has [mired] our growth.

Our Australian business remains weak, primarily reflecting ongoing difficult and market conditions. And in Southeast Asia our teams have been working to shift the mix of our business with respect to technology content and value. In doing so we have lost volume while generating solid margins. Overall, the result in the Asian region was not up to our standards, and we are working diligently to reverse the trend.

Lastly, EIMEA again delivered solid positive volume growth during the third quarter of 5% and organic growth was 7.6%. The favorable results reflect the relatively strong performance in the emerging economies of the region, offset somewhat by lower growth rates in the mature markets of Europe.

Also, comparisons to last year are relatively favorable since the European market was unusually weak last year in the third quarter before rebounding in the final months of last year.

So far the integration work has not distracted us from running the core business, and we have maintained strong revenue momentum. This speaks highly of the teams and structure that we have put in place to ensure we are able to manage multiple priorities.

Our reported gross margin percentage was 26.8% in the quarter, down about 160 basis points versus last year. This year-over-year decline is due to the inclusion of a legacy Forbo business, which generated a lower gross margin. The legacy H.B. Fuller business again grew gross profit margin year-over-year.

Reported gross margin was up 90 basis points versus prior quarter, and our adjusted 30 basis point improvement was primarily the result of the quick action taken in North America to integrate the Forbo business and improve margins, plus the generally more favorable raw material cost situation in most regions of the world.

Selling, general and administrative expense from continuing operations thinned as a percentage of net revenue from 19.8% in last year's third quarter to 18.3% this year, a 150 basis point reduction.

The primary driver of the thinning SG&A is the inclusion of the Forbo business, which historically ran at lower level of operating expense as a percentage of net revenue. Over the longer term we believe that SG&A expenses as a percentage of revenue can be maintained in the 18% area, though temporary increases in spending to support the extra activity related to the extensive business integration project, particularly in Europe, could cause the ratio to be a bit higher in some periods

The end result of solid organic growth, strong gross margin management and thinning of SG&A led to a regional operating income improvement of nearly 40% versus last year's third quarter. This translated to adjusted diluted earnings per share from continuing operations of $0.53 in the third quarter, a 20% increase from last year.

I will now talk briefly about our raw material cost environment. As you can see from this slide currently being displayed, or slide 5 if you downloaded the deck, raw material costs fell just over 1% sequentially. For the remainder of the year we expect that raw materials remain at or slightly below current levels. This is a slight change from our previous expectation of flat raw material cost for the second half of this fiscal year.

For the entire year this translates to inflation versus 2011 of approximately 2% compared to the persistent inflation we experienced of nearly 20% per year in the previous two years.

The cost of some of our feed streams have eased over the past few months, and thus there has been some relief on the downstream raw materials we use in our formulations. That said, the raw materials we buy remain in a balance to tight supply situation. And as we have said previously, because of the specialty nature of our raw materials, the cost of the material we buy is much more dependent on supply and demand dynamics than the cost of upstream feedstocks.

Although there is has been some relief in the short term, the H.B. Fuller view is that the market will begin to see modest inflation in the first half of the 2013 fiscal year. As always, if this view changes we will communicate those changes appropriately. And you should know that we have the tools to quickly react to any upward pressure on raw material costs.

Let's now move on to a discussion of the business integration. As you are aware, we have announced all of our plans regarding plant closures and commercial changes regarding the business integration we will implement in both North America and EIMEA. I am pleased to report that all of those plans are in full motion, and we are on or ahead of schedule in each region.

In North America we have announced our intentions to close six production facilities. To date two of those plants are closed and we expect two more to be closed by the end of the fiscal year. The new commercial organization is in place and we have completed the pricing realignment and sourcing harmonization.

The great news from the integration project in the North American region is that not only is the project being move along quickly, the synergy that is being captured is evident in our improved margin and overall financial performance.

Our overall global integration plan look to our North American team to get the early wins, and they have delivered.

In the EIMEA business segment the integration is also progressing as planned. However, as you all know, the process in Europe is more complicated and takes much longer. No plants have been closed to date, but we still expect all the facility rebuilding and plant closures to be completed as scheduled on time by mid-2014.

What we have completed so far, however, is significant. The sourcing harmonization has been completed, and the Forbo data has been integrated into our business intelligence systems. The new manufacturing network and specific engineering plans have been defined for each of the sites.

The negotiations with works councils have progressed extremely well, with agreements in place in France, Italy, and Spain. These are typically more challenging environments. The sales and marketing organization has been conformed to a pan-European market-focused structure.

We have also done extensive work in defining our combined product offering. Once implemented, this will provide clarity to [present] customers and reduce the complexity of the business.

And, finally, the team in Europe has done a great job of communicating. Our strategic plan is well-communicated to the key constituencies in the region, and we are working in a collaborative way with the people impacted by these decisions to make this necessary integration happen as well as possible. Changing Europe takes longer, but the impressive work this team is doing is creating great success.

So, in short, the business integration is right on track to realize and retain the synergy benefits that we committed to at the time of the acquisition. In addition, with each passing month we become more optimistic about how the combined business will provide a stronger partner for our customers and a solid platform for growth in the future.

At this point I would like to turn the call over to Jim Giertz to discuss our financial guidance for the remainder of the year. Jim.

Thanks, Jim. Now some comments on our guidance for the final quarter of this fiscal year. We are lowering our net revenue guidance to reflect generally slow end market conditions globally, and our adjusted view of the Forbo revenue. The new range we expect to achieve in the fourth quarter is approximately $500 million to $525 million.

Setting aside the extra week in last year's fourth quarter, the middle of this revenue guidance range implies a small increase in price and volume relative to last year.

Last quarter we reset our earnings per diluted share guidance to reflect the acquired Forbo business and the divestiture of the Latin American Paints business. That refreshed guidance was a range for the 2012 fiscal year of $2.10 to $2.15 per diluted share.

Although we are reducing our net revenue guidance, we are not changing our EPS guidance, as slightly lower revenue will be offset by stronger margins, mostly benefiting from the business integration activity in North America and Europe. The full-year result translates to EPS in the fourth quarter of $0.54 to $0.59 per diluted share.

This fourth-quarter guidance excludes all special charges associated with the business integration project, and the full-year guidance excludes the one-time negative impact of the fair value inventory step-up portion of the acquisition in purchase accounting, which was recorded in the second quarter and totaled $0.05 per diluted share.

Guidance for continuing operations results exclude all income statement impacts of the Paints business. We still expect the ongoing core tax rate, which excludes discrete items, to be 30% for the 2012 fiscal year.

In the third quarter we recorded a variety of one-time tax items which are detailed in a table in our press release. I won't try to explain all this now, but the bottom line is the core tax rate on our continuing operations, excluding special charges, is tracking at just under 30% for the year-to-date, which is right in line with the rate we communicated in our earnings guidance.

Capital expenditures are now expected to be approximately $40 million for this fiscal year, or about $25 million lower than we last estimated. We are not reducing our estimates for the total capital investment required to implement the business integration project, rather this is a timing adjustment to our guidance.

Our commitments for capital projects are (technical difficulty) according to our plan, the cash payments for capital are lagging our earlier estimates. And with that I will now turn the call back to Jim Owens to wrap this up.

Thanks, Jim. It has now been six months since we completed the acquisition of the Forbo adhesive business and just over a month since closing on the Paint sale. The importance of these two events is significant. Not only are we now 100% focused on being the best industrial adhesive company in the world, but we are on track to deliver our 15% EBITDA margin targets.

The integration activities are progressing as planned. As you can see from our operating results, the business is getting stronger each quarter. The economic conditions are still weak, and in Asia have gotten slightly weaker, which will have some impact on revenue. This will not impact our ability to deliver profitability improvements.

As you know, the bulk of the margin improvement is under our control, and we have a team committed to deliver our bottom line and margin targets in whichever economic conditions we experience. We have great momentum and our execution continues to drive the business toward our long-term goals.

There is still a great deal of work to be done to optimize our manufacturing network, our product offering and build out our infrastructure, especially in Europe. But we have a great start, and our work thus far has produced real results on the P&L.

I look forward to updating you in the coming quarters and years on our progress. Thank you for joining us today. Now I would like to open the call for your questions.

(Operator Instructions). Jeff Zekauskas, JPMorgan..

What were -- what was the cash flow from operations in the quarter?

Jeff, we don't have the number fully calculated right now, because --.

How about roughly?

Well, you can see from our net debt level that the cash flow from ops in total -- the reason we don't have the number -- the number I said that we don't have calculated is splitting between the discontinued ops and the continuing ops.

But you can see from the net debt calculation that we gave you that we had very strong cash performance in the quarter. So beyond the proceeds from the sale of the Paints business we generate free cash flow beyond that.

So I noticed in your Reg G filing that your -- so you indicated that your domestic tax rate was roughly 38% and your offshore tax rate is roughly 6%. Is that a semipermanent condition that your offshore tax rate is 6% or is that a function of the charges that you took in the quarter?

Well, it is a function of where -- of which jurisdiction the tax is being paid. So generally speaking, in Asia our tax rates are lower. Generally speaking, in Europe our marginal tax rate is lower on the legacy Fuller business, and that is because we have a structure -- a corporate structure in Europe that allows us to have a tax efficient -- well, an efficient tax rate in the European environment. So it is strictly related to the particular country and the jurisdiction that expense, in this case, is being taken.

Okay. And then, lastly, your European profitability shrank sharply sequentially. Is that from lower volumes or is that from some other factor?

So at a high level, Jeff, you're right. There is seasonality normally in the European business because August is in the third quarter. So if you look at the trends typically at Fuller that has been part of the phenomena.

But we also have the situation where we are investing now to deliver the integration, and the savings are not coming out at the same rate that we need to build out plants and build our plans within the region. So we have a little double expense in the early days of integration.

Okay, thank you very much.

Peter Cozzone, KeyBanc Capital Markets.

Volumes were up 4% in the quarter year-over-year. How did volumes progress sequentially? And then could you maybe provide some more color on base market growth rates in your core adhesives markets of packaging, durable goods and hygiene?

So I don't have specific numbers for packaging, durable goods and hygiene, but generally those are the areas where we are seeing good, solid volume improvements. That is where we are getting the market wins. That is where we have the focus on our business.

So when you look at the details behind each one of the regions, the success in those regions -- those parts of the business are what stand out in terms of driving the overall performance. And that would be year-over-year and sequentially in terms of what is happening within the business.

Okay, and then relative to your commentary around the softening global industrial activity, any regions and markets in particular where you're feeling this slowdown the most?

And am I correct in understanding most of the incremental weakness in the outlook is driven by the Asia-Pacific region?

Yes, that is the big difference, I think, in the quarter. I mean, if you look at our volume performance this quarter, Construction Products up 5%, Latin America up 5%, EIMEA up 5%, although some of that was against a easier comparable quarter a quarter ago. And North America the volumes are better this quarter -- North American adhesive is better this quarter than last quarter. So across each one of our segments we saw really good volume performance, except for Asia.

And the story I have been sharing each quarter on Asia is negative volume performance in Australia and Southeast Asia, offset by a very strong performance in China. And the difference this quarter is we had the same weakness in Australia, New Zealand and Southeast Asia, and we have volume growth in China but not nearly as strong as it has been in prior quarters. So that is the fundamentally different thing in our business from a core volume standpoint.

Kind of a follow-up in that regard, North America and Europe, I mean, the outlooks there are relatively intact, it sounds like for the rest of the year?

Yes, the volume performance there has -- we continue to do well in North America and Europe. So the balance between the two has been relatively positive and we expect it to continue roughly in that same vein on a year-over-year basis.

Now this next quarter, of course, we have got an extra week in there, which throws some things off on the -- in terms of the year-over-year comparisons, but fundamentally the net of Europe and North America should be comparable to what you're seeing.

Okay, and then you touched on this a bit, but in the EIMEA segment sequentially you have the net cost coming out right now. When can we expect that to flip, and when would you expect to see some of the net benefits roll in from some of the integration efforts there?

Yes, so it is two different worlds when you're doing these kinds of projects in North America and Europe. So in North America, we were able to announce in the first quarter and begin implementing in the first quarter. As I said, the first two plants we have been able to move on. Moving sales teams together can be done very quickly. A lot of change management can happen very fast in North America.

We will have two more plants out by the end of this quarter, and then by the first quarter of next year we will have all of the plants essentially closed. The first quarter of next year is when we will close the first of the plants in Europe, so -- and the two biggest plants in Europe we won't be able to close until first quarter of 2014.

There are two fundamental things that happen in Europe that slow us down. One is in each country and at each site there is a negotiation that has to happen with the works councils. And in order to really get your plan operating well and making certain that you have a team that you want, both on the sales side, on the manufacturing side, managing that process well has to be done. And we are doing that and we are in the final stages of each one of those agreements this quarter.

The other thing that is happening in Europe is much more significant investment in plants. So those investments need to be put in place before we can transfer the production. So that is why it is a lot different in Europe. In terms of timing you will start to see the benefits third and fourth quarter of next year, and the most significant will happen early 2014. But I think that is the kind of timing we ought to expect in Europe.

Some improvements in between as we move out some SG&A and do some margin work, but most of the bigger benefits will come at the end of 2013 and 2014.

Great, thank you very much.

Steve Schwartz, First Analysis.

You're still on track to spend for the restructuring $90 million, is that right?

That is $115 million cash expense total for the project.

So of the remainder that is to be spent, because you're maybe 45% of the way here, what will that be spent on considering that you have closed so few plants yet of what you expect to close?

Let me let Jim give you some of the specifics there, Steve.

Yes, Steve, so basically we have announced the closures of these facilities. So that triggers the start of the accounting for the cost of the redundancies of the staff reductions in those facilities once the decision has been made and it is announced that these plants are closing.

So what you see -- and we have a table in the press release that gives some of the details. But what you see is that, particularly in Europe, the announcement of the closure will trigger the accrual of like the statutory minimum amount of redundancy payments that are due to the employees that are being let go. And then once the consultation with the Work Councils are finalized, and the details are known, these accruals for the expected redundancy costs will be topped up to the actual amount that will be paid.

And then there is some other nuances and complexities about how the timing of these cost flow in under US GAAP. But you will basically see now that the restructuring charges related to workforce reductions will -- well, you will see a lump of those come through in either Q4 or Q1 as we complete the works councils negotiations or discussions.

But it won't be related to new decisions or new closures that are being made, it is just going to be truing up the accruals that are made for announcements that have already been made.

But if you look at the chart, Steve, you will see things like facility exit, which we have said will be $17 million; today we have $1 million. Those costs don't start happening until you actually exit the facility. I think Jim clearly laid out what is going on with the workforce reduction, a lot of that will be clarified as we make those steps.

So there is a lot of work to be done. Some -- quite a bit in North America. As I said, we only have closed two plants so far and [a lot in Europe].

Okay, all right, well, thanks for the color on that. And then just from a strategic standpoint, Jim O, Engent, the acquisition, did you guys pick up -- first off, how much of your business right now is serving electronics?

A very small part.

Okay. And so do you expect that that acquisition is going to feed into your R&D efforts or do you expect that it will more directly relate to volume gains in that end market?

So that end market is very adjacent to our durable assembly market. So we do a lot of work on assembly, and we have the chemistry and technology, and as I said, we have some business in that segment.

But we needed to acquire was the technical field capability to do the testing, do the qualification, the work that describes in the customer's terms in that market the benefits that we can deliver it, as well as connections with customers. So that is what we are trying to do through the Engent acquisition is give us both of those pieces, to take what is an inherent set of capabilities inside Fuller and some business and expand it in a much larger way.

Do you think that it would be at some point an end market that is the size or where it would be significant enough to call out like you do hygiene and assembly and packaging?

So I would consider it today a subsegment within durable assembly. But certainly that would be the aspiration that someday this thing would grow to be a very significant business.

Okay, very good. Thank you.

Christopher Butler, Sidoti & Company.

If we were to look at Fuller's legacy gross margin in the third quarter in comparison to the third quarter of last year, how would that have compared?

Do you have that number exactly?

I will try to answer the question. This is Jim G. Thanks, Chris. The gross margin in the legacy Fuller business -- well, first of all, this is probably the last time we will talk about it, because it is getting harder and harder to actually calculate it. But we made a comment that it is up sequentially, that it will be slightly higher than it was a year ago as well according to general trends. There has been a general trend up in our gross margin over the last quarters.

It is just a reference that the core business continues on the trends that we have seen over the last six to eight quarters with solid to slightly increasing gross margin levels. Again, it gets more and more difficult to measure right now, but that is our best assessment of it.

Especially as we integrate the North American businesses, those two businesses become into related, and you have plant costs at both. But generally as you parse it apart across the world you can see clear positive trends on the legacy Fuller business.

If we are looking at the United States and Europe and comparing what the industry is doing and what people -- the sentiment is compared to the volume that Fuller is putting up, what is it that you're doing in Europe that is having so much success that in comparison to the US, which seems to have a lot more optimism, you are not generating the same amount of volume growth?

I think it is really about how we are executing in the market. So these aren't robust markets that we are working in, Europe or North America. And in our business we have got a lot of capabilities to gain share and change things for our customers. So in Europe the value propositions that we've designed are gaining traction, and we are getting volume.

Take the example on our construction products business. We are doing a better job of that in the North America adhesives business, and that is why I note the optimism going forward. But that is not necessarily optimism over the economy, that is optimism about the work we are doing and what I see in terms of customer wins.

So in both Europe and North America we have got a non-robust economic environment that we are working in. And we are winning by doing things for customers that improve their products, improve their processes, reduce their costs. Help them run their business better. And that is what we are doing better in Europe. That is what we are doing in Latin America. That is what we are doing in construction products business. And we are getting there in North America for sure.

And, just finally, if we are looking at Asia, you had mentioned that some of the story here is a product mix shift that is going on. When do we start to see the benefits of that and the operating margin getting better in Asia?

As I said, it is a story -- it is three tales. So the shift mix is in Southeast Asia. Australia, New Zealand is about really rough economic environments, and we got some plans to improve our performance there.

The Southeast Asia work is something we have been doing the last couple of quarters, so that should start coming through in next quarter and certainly the final quarter because we made some product mix shifts here. And then the China story is one where we have had continued growth. I mean, it has been great growth in China. We don't show those numbers, but I have said each quarter what a great job they have done in China.

We still have growth this quarter, it is just not as much. And that is the issue, it is not overcoming the really strong -- the weakness we see in the other two parts of Asia.

I appreciate your time.

Eugene Fedotoff, Longbow Research.

A question on Latin America. You showed pretty strong volume growth there in third quarter after volume declines in first and second quarter. Can you comment on that, provide a little bit more color what is going on there?

Again, it is market wins that are making the difference there. The team has got some solid performance with some key customers. We have also had a bit of a focus on our durable assembly business there. So if you are to parse down into our business, you would see that of all the regions, they have strong hygiene, strong packaging, but a relatively smaller share of the assembly business.

So some of the value propositions that we bring to the other regions of the world we are gaining better traction with in Latin America. So that is one of the drivers behind that success.

And just a follow-up on European volume. Was the volume actually up? It sounds like the comps were easier. So was your volume up year-over-year in Europe, and how do you trend sequentially?

Both the volumes were up and it was easier comps. So both are true, and that is why I pointed it out. Sequentially Europe is always weaker in the third quarter because you have holidays in a lot of Europe that impact things. So sequentially the volumes are down, but that is normal. But when you look at it year-over-year, clearly up, but clearly easier comps, again, when you adjust for the seasonality that is normal in Europe.

Thank you.

Rosemarie Morbelli, Gabelli & Co.

Jim O, when we talked last quarter one of the concerns was that Europe was going to shut down for a longer period of time given the economic environment there, and it would take until September before you got a better feel as to whether things would pick up or not. So could you give us a feel for what is happening there since the end of August? Are we back to normal -- whatever normal is?

Yes, whatever normal is. Yes, I think what we see in Europe is a weak, but not weakening economy would be the way I would say it. So any progress you see -- and 5% volume improvement in Europe, I would say is a pretty impressive performance -- that is not the economy turning around, that is the work our team is doing. And we have seen good volume performance at various levels from our team there for the last two years.

So I would say we are in a weak, but not improving environment, in Europe would be how I describe it.

Did you see any extension of the August holidays? Plants being shut down for an extra couple of weeks, for example, which would affect your fourth quarter?

Yes, no worse than last year.

Okay. And then when you talk about the slower industrial adhesive markets, I am assuming that industrial adhesives translates into durable goods for you. Are there any categories which are affected more than others? Are there any categories which are actually growing? Could you give us a better picture of what is happening there?

So when I said industrial adhesives, I was talking broadly about all industrial adhesives. But I would say of -- the only area where there is a significant change, particularly in the quarter, is exports out of China. So any kind of durable assembly work out of China would certainly be an area where you would see a bigger slowdown than you would see anywhere else.

In terms of things that have just dramatically picked up recently, I wouldn't say. There are some markets that are better than others. Certainly, hygiene is a market that has got good, solid growth and still solid investment around the world, and we are doing well in conjunction with that as an example. But in terms of changes this quarter it would be the exports from China.

And are we talking about furniture -- are we talking -- which categories really are exported less than they were in the previous quarter?

It depends on the customers. So certain customers are for domestic consumption and others are export consumption. But, no, I would say for us it is durable assembled products -- durable assembled panels, those kind of things that if they are exported they would be a little slower.

And the domestic market, have you seen it slow down as well, the Chinese domestic market?

Yes, I would say across our market in China we had a very nice growth rate that is still, by most standards around the world, a -- you know, we were significant double-digit growth rates moving to middle of the range single-digit growth rates in China, would give you a sense of the changes.

Yes, that is very helpful, thanks. And if I can ask one last question. What are the contributions from Forbo in the third quarter, and can you pull it out?

The specific amount of synergy contribution -- what is your question again?

What they contributed to the bottom line really.

So it is very difficult to pull that out as a specific number, but I can say that in North America we -- well, across the world we got some impact from price harmonization that we can clearly quantify, that was positive as we took the best of both prices.

In North America we did consolidate the sales team, so that became a benefit. And we had very small impact from some of these manufacturing savings.

In Europe all we got was the price harmonization. And as I mentioned, we had some -- actually some extra expense to make certain that we ran the integration well. And in Asia we did have a small savings related to bringing the two sales teams together. So that would be a summary of some of the benefits.

But it is early days on the Forbo synergy delivery. Good progress and really good progress in North America in terms of hitting the bottom line.

Okay, thanks a lot.

(Operator Instructions). Jeff Zekauskas, JPMorgan.

In the business integration and special charges table, I take it that these cash costs that you talk about are the costs that are booked and not the costs that have been incurred yet. Maybe I am mistaken about that. But how much -- how many -- what is the magnitude of the cash costs that have been incurred and paid so far through the third quarter of 2012?

This is Jim G. So, first of all, you are correct. The table is showing the accounting -- what has actually flowed through our P&L with respect to these charges. The amount of cash that has been paid out, to be quite honest with you, I don't have the number in front of me. The number is going to be far, far lower. For the workforce reduction category the number is going to be far, far lower than that. For the acquisition and transformation related the cash flow matches the -- generally more closely matches the accounting.

Will that show up in the Q?

The cash flow aspects of it?

Yes, especially in the (multiple speakers).

Probably not directly. I'm just trying to think. I don't think directly. You'll see it in some of the accruals and other current assets and liability items that we have, but maybe not directly.

Okay. How long do you expect Asia to shrink?

I don't have a specific answer to that, Jeff, but we got a specific plan on how we're going to move forward there. So we see -- and a lot of the answer to that question depends on what we are able to deliver in China. Our China team is pretty optimistic that they are seeing some signs of turnaround. But for me to predict exactly what is going to happen in China would be difficult.

I would say it in Southeast Asia we are turning the corner, and that in Australia and New Zealand I can see us pulling closer to neutral. So I would say it will be better year-over-year in Q4 than it was in Q3. And then much better going forward would be my projection.

But a lot of that depends on what happens in China, because China has been the real positive that we have had in Asia relative to some weakness in Australia.

And in answer to Rosemarie's question about the magnitude of the cost savings, you cited price harmonization as being an important element of it this quarter. Was the price harmonization 1 percentage point or 2 percentage points or 0.5 point -- what was the magnitude?

I would say roughly $3 million plus was the impact of that.

$3 million plus. Okay, great, thank you very much.

Rosemarie Morbelli, Gabelli & Co.

Just two quick ones. Do you see any change in the construction market in North America as far as your product lines going into that market are concerned?

There has been a little bit of more positive news, but I am always resistant to jump on that too quickly. But as things get better in the construction markets -- our products are further along on the construction cycle, so we are six to nine months after construction starts when you get to the use of adhesives on interior tiles and other things. So any uptick that happens in the construction markets will follow by six to nine months.

So we are hoping, but our team has really taken an attitude that we are going to control our own destiny by winning share. And they have really done a nice job of that over the last couple of years. So that is what we see.

Any change in the order patterns that you are getting in all of your businesses? Are they becoming a little less volatile, more consistent from one month or one quarter to another?

I can't say that is happening necessarily one way or the other. We are -- so I wouldn't say there is anything unusual about order patterns, either more or less consistent.

Okay. And then, lastly, what need to happen either at Fuller or in the marketplace for you to end the year at the high end of your guidance? And if the market doesn't help, can you internally do enough to get there?

So are you asking about revenue guidance or --?

No, bottom line.

Bottom line. So we are tracking well on the integration, so I think that moves so will -- that will drive some of our EPS guidance. So we are -- and we are pretty -- and that is a lot under our control, so we are targeting to make certain that those things happen as effectively as they possibly can.

And so I would say I am optimistic about where we are at. We laid out very clearly a plan on where we are going to get to on EPS. We actually beat that plan for Q2, as I mentioned. And we have got a bit of a headwind with what is going on in Asia, but despite that, we are pretty optimistic that we will do well this quarter again.

Okay, thanks and good luck.

(Operator Instructions).

Okay, great. Thanks everyone for your time and attention and support of H.B. Fuller.

That concludes today's conference call, the H.B. Fuller third-quarter 2012 investor conference call. You may now disconnect.