H.B. Fuller Company (FUL) 2012 Q4 法說會逐字稿

Good morning and welcome to the H.B. Fuller fourth-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 an 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, Senior Investor Relations Manager.

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

Thank you, James, 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 the quarterly results determined in accordance with GAAP. Management believes that the 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.

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 October 5, July 6, and March 26, 2012; 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.

(technical difficulty)

Pardon the interruption, this is the operator. We cannot hear you.

Thank you, operator. So none of that was heard, operator?

No, sir.

Thanks, everyone, for joining us today and sorry for that little technical difficulty. 2012 has been a transformative year for H.B. Fuller. I am pleased to report that while transforming the Company we had a record year in revenue, a record year in earnings per share, and a record year in EBITDA.

We are delivering on three specific interrelated sets of financial goals which we have communicated to our shareholders. These are our annual 2012 earnings guidance, our synergy targets related to our four-goal business integration project, and our 2015 strategic targets.

In 2012 we hit or beat our marks on all three. We beat our upgraded earnings guidance that we had committed to at midyear following the Forbo acquisition. The integration project remained on track, our execution on this integration work was a key driver of the performance improvement we saw in the fourth quarter, and clearly the actions taken this quarter, combined with the strong finish to the year, demonstrates we are on track to meet our 2015 growth goal and margin goal of 15% EBITDA.

Our goal is to be the best adhesive company in the world and in 2012 we took a huge step forward as we elevated our performance. It is human nature at the end of a year to look back and reflect on what has happened in the past 12 months. As we look back this year we are excited by how much we accomplished, by how effectively the initiatives where executed, and by the positive financial performance that resulted from all of this effort.

Here is a brief recap of what has happened at H.B. Fuller in the last 12 months. We made our business bigger and better with the acquisition of Forbo industrial adhesive business, the most significant acquisition in the history of H.B. Fuller. Today, through the acquisition, we have a broader and stronger product offering for our customers, a more efficient manufacturing network, a best-in-industry commercial organization, and interesting new technologies.

Our integration activity was well planned and so far all actions have been well executed in a timely manner.

The financial benefits of the acquisition are already clearly evident in the results of our North America adhesive business with the bulk of the benefits in our European region to follow in 2013.

2012 we focused our portfolio through the strategic divestiture of our Central American paints business. This action was often discussed and much appreciated by long-term followers of H.B. Fuller.

This was a good deal for both the buyer and the seller. Pintuco acquired a strategic asset and we got a very good price. Now we truly are a pure-play adhesive company.

Although the focus of 2012 was clearly the acquisition of Forbo and the divestiture of our paints business, this is not all we did. We continue to move forward with solid organic growth on our key markets of focus -- hygiene, packaging, and durable assembly.

We strengthened our adhesive business in Latin America and the work of our teams there as a result of a strong increase in margin, a key strategic objective for the Company. We commissioned a new manufacturing facility in Pune, India, and we posted strong growth in that emerging market. We completed the engine acquisition and made other investments to begin positioning ourselves to be a credible player in the electronics market globally.

And, of course, we delivered strong financial results as well. Revenue increased 30.6% with organic revenue up 6.2%, operating income increased 39%, and EBITDA margin expanded by 90 basis points. This 90 basis point expansion is especially noteworthy when you consider the acquired business from Forbo ran at a 6% margin in the year before the acquisition and, all things being equal, should have diluted our margin by around 100 basis points.

Our EPS grew by 28% and our stock price advanced from just over $22 at the beginning of the year to slightly under $33 on the last day of the year, an increase of approximately 50%. And the year ended on a high note. During the fourth quarter we continued to deliver strong operating performance with 3% organic growth, 36% operating earning improvement, and 23% EPS improvement on a comparable 13-week basis.

We exited the year at a 12.4% EBITDA margin. This is the most visible sign that the business integration project is working and that we are well on track to deliver our 2015 margin target of 15%. And we have laid out plans to do more in 2013.

Our guidance for 2013 calls for revenue growth of over 10% and operating income growth of about 20%. Our EBITDA margin, a key strategic metric, is expected to increase by nearly 100 basis points in 2013 to a target level of 12.5%. And the business integration efforts to be completed in 2013 will lay the foundation for additional growth and margin expansion in 2014 and beyond.

So we see 2012 as an eventful and successful year. This past year has been transformative, building the platform for future growth and moving us another step closer to being the best adhesive company in the world with EBITDA margins of 15% and strong compounded annual organic growth.

Now I will dig a bit deeper on some of the key results and trends from the fourth quarter in each of our operating segments. Let's start at the top.

We delivered 3% organic growth this quarter, our 12th consecutive quarter of organic growth. This track record of consistent organic growth is a confirmation that something different and good is happening inside H.B. Fuller and that our focused strategy is producing results. Pricing was about 1% above last year's fourth-quarter levels and was primarily driven by our more surgical price positioning actions rather than broad pricing actions common over the last several years of persistent raw material inflation.

Volume was up 2% in the quarter versus last year on a comparable 13-week basis. This is once again good performance as the markets we serve continue to be sluggish.

In our North America construction products business segment we grew volume over 17% in the fourth quarter, primarily through share gains with existing customers as we introduced new products and new technology. In addition, it appears that the underlying end-market is slowly starting to improve.

On the North American adhesive side, organic revenue was flat with volume slightly down and pricing slightly up. These markets have been very soft over the past few years, but our teams here have been continually working to gain share and secure new business. We are also seeing positive momentum from the integration of Forbo as our stronger product offering and revamped commercial organization have been introduced to the market.

In Latin America, organic revenue was up 2.8% driven by modest price improvements and solid volume gains with key customers in key end-markets.

Asia Pacific organic revenue was flat with modestly lower pricing and positive volume. China continues to produce good volume growth, albeit at a slightly slower mid single-digit level as the economy has slowed in recent months. Our Australia business remains weak due to the unfavorable macroeconomic conditions, but we see this bottoming out at this point and better performance is expected in the coming quarters.

In recent quarters in Southeast Asia our teams have been working to shift the mix of our business with respect to technology content and value, and in doing so we have lost volume on generating margins. That volume loss trend has now stopped and we have delivered volume growth of around 10% in this quarter. Overall, the results in the Asia region was far better than last quarter and we are back on track to deliver on our growth goals.

Lastly, EIMEA continue to grow organically. This quarter price contributed 1% and volume was up over 2%. 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 Western Europe.

In addition, EIMEA has had great success in driving growth in our key focus markets, especially hygiene and packaging, and this has supported our organic growth performance across the entire region. 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 we have put in place to ensure we are able to manage multiple priorities.

Now turning to the results of the Company overall, our gross profit margin percentage came in at 28% in the fourth quarter, a 120 basis point improvement versus the prior quarter. The improvement was 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 environment globally. The margin performance in the fourth quarter was ahead of our own expectations and reflects the pull forward of certain synergy realization.

Selling, general, and administrative expense from continuing operations thinned as a percentage of net revenue from 19.1% in last year's fourth quarter to 18.6% this quarter, a 50 basis point reduction. The primary driver of the thinning SG&A is the inclusion of the Forbo business, which historically ran at a lower level of operating expense as a percentage of net revenue.

Over the long term we believe that SG&A expensive as a percentage of revenue can be maintained closer to 18%, so temporary increases in spending to support 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 36% versus last year's fourth quarter. This translated to adjusted diluted earnings per share from continuing operations of $0.64 in the fourth quarter, a 23% decrease on a comparable basis from last year.

It is important to recall that last year's fourth quarter had 14 operating weeks compared to the normal 13 operating weeks that we had in this year's fourth quarter. Absent last year's extra week, EPS growth would have been higher approximately 23%.

I will now talk very briefly about our raw material cost environment. As you can see from the slide currently being displayed, or slide five if you downloaded the deck, raw material costs fell just over 1% sequentially. Although some of this decline due to a better raw material landscape, much of the decline was driven by us as we worked diligently to drive harmonization and improved our bulk purchasing opportunities as part of the business integration project.

The raw materials we buy remain in a balanced supply situation. As we have said previously, because of the specialty nature of our raw materials, the cost of the materials we buy is much more dependent on supply and demand dynamics than the cost of upstream feedstocks. Going forward into 2013 we expect a fairly benign raw material cost environment first half of next year with some modest upward pressure in the second half of the year.

Let's move on to a discussion of the business integration. The short version of our status report is that we are on track or ahead of schedule on all of the business integration activities in all of the regions. The progress is evident in our results, which as I said earlier, were better than our internal expectations. Let's quickly walk through the plan in each region and what we have accomplished thus far.

In North America we announced our intentions to close six production facilities. To date four of those plants are closed and we expect the final two to be close early in the 2013 fiscal year. That being said, we have shifted 80% of total production volume from the Forbo plants to their new home at existing H.B. Fuller facilities.

The new commercial organization is producing results and helped the North American adhesive business maintain market share. R&D and customer service functions were fully integrated and the benefit of scale and functional group is creating value. The integration helped to elevate EBITDA margins to 17% for the quarter. The plant is nearly complete and we feel confident we can maintain profitability at or above the current levels.

In the EIMEA business segment the integration is also progressing as planned. As we discussed during the last call, many actions have already been taken to fully plan out the integration. In addition to the actions we discussed last quarter, we have completed the implementation of our pan-European sales organization and have broken ground on a new reactors facility in Nienburg, Germany.

Completion of the sales reorganization includes the exit of 60 employees, 60 employees as originally planned. The cost savings associated with these departures will show up fully in our first-quarter results. The groundbreaking of our new facility is Nienburg is also a positive sign that things are progressing as planned in the region's integration plan.

Lastly, in China all plans are now in place. We announced the reorganization of our sales teams in July and shortly after the fourth quarter started we decided on our final footprint plans for the country. With the acquisition of Forbo we now have four facilities in China, two of which are very modern, newly constructed and two that are older and in need of incremental capital.

We have decided to close the older two facilities, one from legacy H.B. Fuller and one from legacy Forbo, and we will add to our existing capacity at the two newer facilities. These closure and investments should be completed by the middle of the 2014 fiscal year.

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 integrated business will be a stronger partner for our customers and a solid platform for growth in the future as we leverage the technology we acquired from Forbo to grow.

At this point I would like to turn the call over to Jim Giertz to discuss in more detail our financial results and our guidance for next year. Jim?

Okay. Thanks, Jim. I will start with just a few more comments on the fourth-quarter and full-year results. Starting at the top, organic growth in the fourth quarter was again positive in comparison to a 13-week quarter last year with a 2% improvement in volume and a 1% higher in price. For the full year organic growth was 6% on a comparable 52-week basis.

Our organic growth rate was within or above our strategic target range of 5% to 8% per annum growth for the third year in a row and I think with a solid result, given the generally sluggish end-market conditions that we have faced. I would also note that at the beginning of 2012 we provided our net revenue guidance, that growth of 6% to 9%, and we hit that forecast despite all the distraction of the acquisition and divestiture activity in 2012.

Now moving to gross margin, we have made considerable progress during the year. We finished the fourth quarter at 28%, which was 120 basis point improvement versus the previous quarter. The large majority of this margin improvement is in the contribution margin. The benefit of lower manufacturing conversion costs expected from the extensive rework and consolidation of our manufacturing network will be primarily realized in future periods.

For the full year gross margin fell by 40 basis points. But considering the significant dilution we experienced when adding the Forbo business in the second quarter this is an impressive result and certainly provides evidence that the price positioning and sourcing work we are pursuing as a part of our business integration project are working as anticipated.

Regarding SG&A, the performance in the fourth quarter was generally consistent with the previous quarter. Spending was up versus the prior year but thinned by 50 basis points as a percentage of revenue, primarily as a result of the inclusion of the lower operating expensed Forbo business. For the full year SG&A was up 24% but was down 110 basis points as a percentage of net revenue to 18.8%.

Part of the business integration plan is to save approximately $30 million on this line and we expect those savings to drive this metric down closer to 18% over the next two years. All of these factors working together drove EBITDA margin improvement in the quarter and year of 90 basis points, a good incremental step toward our 2015 goal of 15% EBITDA margin.

Now some comments on our guidance for the upcoming 2013 fiscal year. We expect modest organic growth in the mid-single digits built on an assumption that current end-market conditions will not change dramatically in the key markets we serve. Net revenue growth will be about 7 percentage points higher than organic growth due to the addition of a full year of the Forbo business, which was a part of H.B. Fuller for only the final three quarters of 2012.

The revenue growth will be driven by volume and mix, not pricing. Foreign exchange is expected to be a small positive in 2013 relative to 2012 with our plans built on a dollar to euro exchange rate of 1.30.

We are targeting an EBITDA margin in 2013 of 12.5%, about 100 basis points higher than the 2012 result. Our EBITDA target is between $260 million and $265 million. On the bottom line we anticipate achieving earnings per diluted share between $2.55 and $2.65, which represents growth of 16% to 20%. We expect the ongoing core tax rate, which excludes discrete items, to be 30% for the 2013 fiscal year.

As part of our business integration plans and our overall strategic plan, we intend to spend approximately $250 million in capital during the 2012 through 2015 fiscal years. In 2012 we spent $39 million, slightly lower than we initially expected. In 2013 we planned to spend approximately $110 million in capital as the bulk of the investment for the business integration project is completed. The remaining $100 million in capital will be allocated in 2014 and 2015 to complete the last pieces of the business integration and to fund ongoing requirements for growth.

At the time of the acquisition we indicated that our capital spending outlook was $65 million per year for the three years of the integration project or a total of $195 million. The more specific forecasts I just indicated are in line with this previous forecast, just modified to reflect a better estimate of the timing of expenditures and extended to the end of our current five-year strategic plan.

We believe our 2013 guidance provides an outlook for solid organic growth and margin expansion leveraging operating profit growth. Our results in 2013 should represent another significant step toward our 2015 strategic goals. And with that I will turn the call back to Jim Owens to wrap us up.

Thanks, Jim. We finished the year strong; stronger than our initial budgets, stronger even than our recast budgets post-Forbo and paint which we announced midyear. It was a record year in sales and a record year in profits.

We accomplished this over-performance while working to integrate the largest acquisition in the Company's history and while divesting a profitable asset intertwined with our Latin American operations. The changes we have made inside the Company over the past few years are enabling us to drive this performance while completing the M&A activities.

We have been using the term elevate inside Fuller. This is not specific to our relative size or financial performance, but applies to everything we do. We are building the best commercial teams, an operationally efficient organizational structure, a fine-tuned strategy, an upgraded functional teams, and a strong culture of accountability.

The functional and commercial teams are led by world-class leaders who are experts in their specific areas. Talented people with hundreds of years of combined depth in the adhesive industry are leading this company, many coming to Fuller from suppliers, customers, competitors, and other leading companies. We have truly built a great team and elevated our strategy.

This elevation has created momentum that will carry us through the ongoing business integration and to our 2015 goals. We have performed consistently strong over the past three years, despite numerous changes and challenges in internal and external environments. We are a team that is winning and is well-poised to create more years of record profits and record revenue as we continue our success in 2013 and beyond.

Please join us at our investor day on February 7 in New York at the Grand Hyatt to meet some of our leadership team and learn more about our strategy and specifics about the various work streams of our business integration. Thank you for joining us today. Now I would like to open the call up for your questions.

(Operator Instructions) Mike Sison, KeyBanc.

Good morning. Great end to the year, guys. In terms of your organic sales growth, continue to be impressed that that is turning positive in all regions given the environment. Is some of the growth essentially in the bag, if you will, since you have taken share or generated new products that the visibility for that heading into 2013 is pretty good?

Yes, I would say organic growth is one of those things that is a momentum builder, Mike. So as you do it quarter after quarter of course you have rollover growth that comes through that. So, yes, I mean there are definitely wins that happened in the second half this year that are leading into 2013.

I think most important for us though is we are building, we have built organizations that understand how to win in the markets, and we are focused. So it is a big broad world where we can sell adhesives. There are targeted segments where we are winning and targeted customers where we continue to win. And those are the drivers.

So I don't know that I use the term in the bag, but I think we have really good momentum that is going in that should build on itself as we go forward.

Okay. It sounds like the integration of Forbo is going well. You gave us good detail in terms of what has been done so far. Is the $90 million number still the right number? Is it tracking a little bit better potentially? (multiple speakers)

Yes, I think Jim Giertz makes this point all the time in terms of how we measure the integration. So we have specific trackers that analyze each detail of the integration and on each line and each region we are on or above the targeted level. So, yes, when we look at the projected number we are at or above the $90 million.

But the key metric for us is this EBITDA target. There is a lot of things as you do the integration that happen in your business. So within each region and within each business making certain that we are delivering that bottom line EBITDA performance is the key metric we look at to make certain that it really comes back to shareholders.

So the short answer is, yes, as I said, we are at or above on every single line of our integration detailed plan, but I think the important metric is the EBITDA. Jim, do you want to add anything there? Okay.

Okay, and just last question. Your CapEx has gone up a lot this year. Can you just give us a little bit of detail of where you are going to be spending that and what projects are going to be tackled this year?

Okay. We will cover a lot of this at the investor day so I will try and cover it briefly. In North America the integration project was to take volume from six plants, they happen to be six of the Forbo plants, and move that into North American plants. Each one of those plants had a capacity upgrade that was needed as a part of that. Two of the largest plants are coming forward in this first quarter, so that is where some of the capital is going.

In Europe is the bigger transformation. There weren't a lot of plants that could just absorb the volume, so a big part of the project there is to take two or three plants and consolidate them into a plant that requires more substantial capital investment.

Really there is a transformation in terms of the capital structure of our business in Europe. I mentioned Nienburg in the script. That is one site where we have a significant project to take a site that is a long-term Fuller site; we are putting in a new reactives facility.

We used to make reactives in five facilities across Europe. We are going to make them in one in a state-of-the-art facility, much like we do in North America and Asia. So it is that kind of investment that is happening, but it is happening across a number of sites within Europe so that we have these centers of excellence in Europe instead of a patchy network.

Then, of course, we have the consolidations I mentioned in China, which is both a consolidation of the volume but also we are building capacity for expansion in China as part of the project. Jim, anything else on that? But that is where we are at on those, Mike.

Great, thank you.

Okay.

Mike Ritzenthaler, Piper Jaffray.

Congratulations, guys. My first question is on -- one aspect of the quarter I thought was interesting was the volume component growth at 2% versus 1% on price organically. Clearly, the construction end-markets were one that you had highlighted in your prepared comments, but I guess can you speak to which technologies were particularly strong outside of that or really was that the big driver for volume?

I think when you look at the size of our construction products it wasn't a huge driver of volume. It was in our core segment, so we did well in the hygiene business where it is a good, solid growth market and we continue to gain share. Around the world we did well in the packaging market and durable assembly was a little bit stronger.

But packaging, and hygiene in particular as I mentioned, in Europe they did particularly well. So those markets where we are focusing our resources and our strategy are the ones that are getting the greater volume growth.

Sure. Then one question; it's sort of a broad one about Asia Pacific. One of the things we have spoken about in the past is how growth in Asia will better fill out the cost structure in the geography. You touched on this a little bit in your prepared remarks, but the 4Q results showed progress on margins better than we had expected certainly.

My question is I guess how important to the 100 basis points of EBITDA margin expansion for 2013 is Asia and I guess I would include Australia in there as well. How important is Asia growing into its cost structure as it reaches for that sort of $250 million, $300 million in revenue milestone?

So when you look at the size of our Asia business, the movement in Asia is not a big driver in our overall business because of the relative size. So I would say for us in 2013 what we want to see is that volume and organic growth move.

So that will drive some improvement, but I don't think we are going to see -- this plan isn't built on a dramatic change in Europe. We do want to see a change, particularly strategically, in the growth trajectory of our business there.

As I said in the script, Australia has really dragged us down as well as some of the things that happened strategically in Southeast Asia through the first part of this year. We see Australia as stabilizing; good signs in what we are doing in the business. The investments we have made this year really starting to come about and then I see accelerated growth for us in China next year.

So I am optimistic that we are going to get on the right path, but I would say for the overall corporation that is not a huge driver of our numbers for next year.

That makes sense. That makes sense. Then just lastly for me, the explosion at the super absorbent polymer plant in Japan, I can't remember, was that in October I guess it was? Was there any sort of idiosyncratic driver within the EU results that were results of diaper supply issues or, I suppose, fear of supply issues? Or did it more serve to kind of drive interest in material minimization technologies that you guys bring to the table?

I would say that there was no impact in our European business and really not much in our Asian business outside of Japan. Our strong position with certain customers it was a net positive for us JV in Japan, but no big huge impact from the SAP shortage this year. Except, as you point out, makes people aware of the importance of having a supplier they can rely on. And I think our key strategic partners recognize how important that is with key raw materials.

Okay, perfect. Thanks, guys, and congrats.

Thanks.

David Begleiter, Deutsche Bank.

Thank you, good morning. You have done a very good job taking share. Are you seeing any competitor response from your competitors in response to your share gains?

Yes, competitors are always responding; it's a competitive market. I think the key for us is to make certain that the share gains we do are based on providing real value.

When you look at the shares of our position in these markets, it is incremental movements in share. So it is not like we are dramatically transforming the share, but we are incrementally taking share in various segments. So, no, I wouldn't say there is some -- I mean there is plenty of competitive responses in various segments but nothing dramatic that I can point to.

In North America, Jim, how much faster than the market do you guys think you can grow over the next two to three years and what is the growth in the market in your estimation?

It is a great question in terms of the growth in the market the next couple years. I don't know that I have a good answer for that.

I think there is a volume drag in a lot of the consumer goods markets that we are in. So while revenue for some of our customers is still holding up, the volume drag on all kinds of consumer and packaged goods, if you dig into the numbers of a lot of our customers, it is not strong. And that should improve, I mean as the economy picks up.

And what we like to do is beat that by a couple points. So our goal overall is 5% to 8% organic in the long run, and that means that we are beating the growth rates in our markets by a few points in each one of our core markets.

Thank you very much.

Rosemarie Morbelli, Gabelli & Co.

Good morning and congratulations.

Good morning, Rosemarie, and thank you.

Jim, looking at what you just said about 5% to 8% organic growth, based on your definition of organic it is volume plus price. With raw material costs having stabilized, you won't get much in terms of pricing. Do you think -- what do you need in order to get 5% to 8% volume growth? What do you need to do?

Well, I guess a couple comments on the slide. I mean 5% to 8% is our compounded annual growth rate target over the cycle of the plan. And as you know, Rosemarie, last couple years we have been above the top of the 8%; this year we are right in the middle of it. It is going to vary based on the conditions internally and externally.

And I think in tough economic times where there is no price raw material movement, and particularly when we are doing some of the things we are doing to reposition the Forbo products, we will have less growth than we would in times where it is a little different. So I don't think -- I think the price component will change depending on the market conditions. And the market conditions right now are any price movement that we are going to get is going to be about strategic repositioning, and some of that strategic repositioning that we will do with Forbo will lead to some attrition of business as we strategically realign their business.

Okay, so this is continuing to improve the mix?

Correct.

All right. I was wondering when you say that you are ahead of your $90 million worth of savings from the restructuring and integration, I guess a combination of both, shouldn't that translate into a 2015 margin above 15% if you get more in terms of savings?

Okay. So I would say -- when I say above I don't mean we are way above, Rosemary. I would say each one of the numbers is on or above.

Would I love to exceed the 15%? Certainly. But I think that is a good strong stretch target for us in 2015 and we are stepping along nicely to it. When I said in my previous answer we are on target, we are slightly above on each one of them. But I think the $90 million is the right number to think about.

Okay. One last question if I may. You are building a new plant in Germany. Is that a good location? Isn't that a high cost location?

Well, we have a plant in Germany. In fact, we have a number of plants in Germany. So net through the plan, Rosemary, we will be down one plant in Germany.

Between us and Forbo there were three and through this consolidation we will actually close one plant in Germany and one plant in Austria. So I think our strategic footprint is moving in the right direction.

The plants that we have added the last couple of years, when you look at countries we have added to, it has been Malaysia, Egypt, India which we opened up this year. So I think the shift of our portfolio plants is a good one. Moving from three to two plants and moving to a more efficient plant in Germany is a good move.

Okay. Thank you very much and good luck.

Thanks, Rosemarie.

Jeff Zekauskas, JPMorgan.

Good morning. You have that very helpful raw material table and when I look at it it looks like your raw materials were down about 10% year over year, or at least 10% in the table. Does the table represent what you actually spend or is it an industry basket? And are you doing better than the table or does the table represent what you have done?

I knew you would ask me a question that I could turn it over to Jim Giertz for, Jeff, so I'm going to let him try and give you a little bit of explanation on the table.

Well, I'll answer your specific question and then you can ask more to Jim. But the graphs that we show are an internal basket, so it is a theoretical measure of what a basket of raw materials that we have recently purchased would cost us in the marketplace.

Then our actual raw material cost is actually better than that because we do all sorts of things to reformulate or otherwise mitigate the costs that we see coming that would be indicated in the index. And then actually when we file our K next week you will see the actual numbers of our raw material cost by segment and total. You get a much better look at the details when we publish our SEC documents for you.

But in terms of what is happening, Jeff, to our raw material cost is we have done good work on the price harmonization, so taken the best of both of our price and the Forbo price. That has helped us from a raw material standpoint.

We are also leveraging the fact that we had multiple suppliers and consolidating in certain product categories. And we are also moving to some bulk material. So there is a few things we are doing on raw materials that are really positive. And I would say in terms of the environment itself, it is definitely flat to maybe slightly down.

Okay, that is helpful. In terms of the -- so you have indicated that you have spent or you have booked $57 million in cash costs. How much have you actually spent of the $57 million to date?

This is Jim G., Jeff. So the special charges we call them cash costs because -- just to clarify, I think you know this. But we call them cash costs because they are ultimately going to be cash out the door. We have another column that is non-cash, which is more like accelerate depreciation.

But to your question, for the full year of 2012 the cash portion of the restructuring costs or the special charges was approximately $24 million.

$24 million, okay. So you have been talking about this $90 million in synergies that you are going to achieve. What was the run rate of the synergies as you left fiscal 2012 and how much did you achieve in the fourth quarter?

So, yes, we -- and I am sure you will appreciate this, Jeff, these things get integrated with your number so to get a specific number on that would be tough to actually give you. But I would say, overall, if I were to try and give you a sense of where things are from a run rate standpoint, certainly more than half of the synergies are left for us to deliver when you consider the fact that most of the bulk of our manufacturing benefits in Europe are to come, part of the benefits of the manufacturing benefits in North America, and then some of the margin improvement numbers are there.

So it is a -- the early stages we have got consolidation on some of the SG&A and a big piece of some of the contribution margin effects of raw material increases and then some of the price positioning this year. Then the returns on the manufacturing piece will come on the later phase of the project. So it's not a number for you, Jeff, but it conceptually gives you a sense of where we are at.

And then lastly, your profits in Europe went from $6 million to $12 million sequentially. How did you do that and is the $12 million number, all things being equal, a run rate number? Now -- I mean, obviously, your first-quarter revenues in 2013 will be down from where you were in the fourth quarter of 2012, and so there will be some adjustment downward because the revenue growth or the total number of revenues was lower. But, order of magnitude, is that sort of where we are going forward for that revenue total, for that kind of quarterly revenue total?

Let me tackle it in a broad way and then maybe Jim can give you a little more color. I think the first thing, Jeff, is, particularly the way our calendar year is set up, Q4 is a lot stronger than Q3 because our Q4 has August in Europe and the whole summer. I mean our Q3 has August and our Q4 does not have December.

So for a lot of companies they have this third and fourth quarter that are relatively similar because they have two weak months. We don't. We have a pretty weak month summer period and then a fourth quarter that doesn't have a Christmas holiday for Europe. So I think that is a natural trend in our business that is there that you should always see a stronger fourth quarter.

With that said, I would say if you look at our numbers overall over the last couple of years in Europe there is good progression. Then you add that to the fact that we have seen the first phase of some of the Forbo integration work and we are starting to make the progress that we expect.

So there is nothing exceptional or unusual in the fourth quarter; we will have normal seasonal patterns. But we have said for some time that driving the European performance is the key driver to reaching our 15% target. The work we are doing is happening in a good way. We are keeping the organic revenue while we are doing all the restructuring work.

It is really impressive -- when you dig into the details of all the actions, all the things we are doing to drive that business forward in Europe, it is an impressive performance. I am looking forward to the investor day, because Steve will be there to present directly, Steve Kenny, and you will get a sense to talk to him. He will be presenting some of the details and you will get a chance to taste it.

But, yes, good progress in Europe this year and we are going to have even better progress next year. Europe is a key performance driver for our business 2013 and 2014, and we are on good track. So, Jim, was there anything specific to add? Okay.

Okay, thank you very much.

Did that answer your question, Jeff?

Yes, thank you.

Okay, good.

Steve Schwartz, First Analysis.

Good morning, guys.

Good morning. How are you today, Steve?

Good, good. Jim G. mentioned like $30 million in savings as a target for SG&A and, Jim, you mentioned in Europe the headcount reduction that should kick in in 1Q 2013. So just to build a little on Jeff's question prior, how much savings is there and how does that impact the profitability in Europe for the next few quarters?

So, again, I'm not going to dig into the details of every number on our synergy target, but at 60 people you could imagine that being [$6] billion annually. Some of that came in this quarter and then most of it will start hitting next quarter.

One of the things about this transformation project, we talked about it early on, there are many, many pieces to this. So each one of those pieces is being executed in as quick fashion as we can and as each one of those comes they provide incremental benefits to the business. So that one in particular, that is a way I think to look at it.

That is very helpful though, the $6 million number helps. Then just as my follow-up, I think we all understand that adhesives and paint plants typically run at a low utilization. But given that you are taking so many plants out and expanding other plants, how do we think about your capacity once this is all done? Will there be a net add or are you reducing?

I would say it is a net reduction. I mean, as you say, it is not an item we talk a lot about because it is not the key driver of the costs because it is not an overly capital intensive kind of chemical business.

But, yes, overall in North America a lot of capacity came out if you combine us and Forbo and close six plants. We did expand to add some in certain areas but overall that was a net consolidation of capacity. The same thing will happen in Europe.

In Asia, it will probably be a net plus when you get to the end of the project because of some of the things we are doing, but in both cases we are taking out overall capacity in the industry.

Great. Okay, thanks, Jim.

Thank you, Steve.

Dmitry Silversteyn, Longbow Research.

Let me add my congratulations to everybody else's for the strong finish to the year.

Thanks, Dmitry.

Couple of questions, if I may. First of all, what jumps out at you when you look at the numbers, both for the fourth quarter and the year, was that your best performing region seemed to have been Europe which everybody always thinks of as being the worst region from an economic point of view. Certainly in 2012.

So can you talk about where your strength in Europe is coming from? Especially in light of the Forbo integration and that being primarily a European business, than you would expect or is typical to expect when companies are merging and customers are merging that you're going to have some customer loss.

You would think that Europe would actually be sort of a weaker than economic conditions would suggest for you, and yet it has been not only stronger, but it is the strongest of all your regions. So can you talk a vote that about your successes in Europe?

Before you go there, I don't want to -- I got to say that the North American performance was pretty good as well. So they did a great job of integrating and driving and were a high-performing business, but I think you are right and your point is spot on. It is very impressive what has happened in Europe.

I think, well, a few things. Fundamentally some good work was done in 2010 and 2011 to improve the organization. We structured ourselves to be focused on core markets that allowed us to win and focus on customers.

We did some good investments in Egypt and we now have one in India, which is all part of the region, to make certain that we were positioned well to serve customers there. And we have built a culture of winning and organic growth, which we have seen coming into the acquisition.

Then when we went into the acquisition we knew it was a big undertaking, so the team structured themselves so that they could focus a lot of resources on getting the acquisition and the integration right while we continued to drive the business forward. It is minimizing that distraction that has really helped them. They are able to manage both of those very big, tough initiatives in a tough economic environment as you point out.

So I think it is about leadership and organizational structure that really enabled it. In terms of end-markets and where we are winning and losing, clearly, as I mentioned, packaging and hygiene are two businesses where our teams are doing a particularly good job of introducing technology, adding value for customers. And then geographically, the Middle East and India are stronger than our business in Western Europe.

Okay, that is helpful. I hadn't realized that India was also part of your European business.

Secondly, can you talk a little bit about this small electronic adhesives that you bought? Sort of where in the electronics -- it is a fairly broad definition of a market, so where in the electronics do they play?

And sort of what are your strategic plans for this asset? Are we going to be hearing three to five years from now of another leg to your targeted market stool emerge in addition to the hygiene packaging and durable assembly with electronics, or was it just an opportunistic business to sort of dip your toe into the electronics market and see how things go?

I would say what we are trying to do is build for our future, so this isn't something that you are going to see big transformations between now and 2015. But when we come to 2015 we are going to have to lay out a plan for the next five years and part of that is building a foundation. Strategically, we see electronics will continue to evolve and grow as a market with new and different needs.

What Engent brought to us was some very talented individuals and some unique capabilities to analyze and assess the technologies as they emerge in the market. So combined with that we're making other investments in personnel and gaining some business with customers.

All of those are relatively small at this point, but I think you will see over time a more focus. But that is more extended; I would say it is not, in terms of hitting the numbers over the next couple of years, a big driver. But certainly as we look out into the future we should be a -- our long-term intention is to be a sizable player in that segment.

So hopefully that gives you a sense of the timing of what we're trying to do. But this is capability building that enables us to be able to make the right decisions on where and how to grow in that market as it continues to change.

That is helpful, Jim, and thanks for laying out that. The only follow up I would have is just if you can address where in the electronics market does this business currently play? Is it in finished product assembly, is it --? I mean electronics is a pretty broad marketplace.

Right, right, right. I think the biggest earlier opportunities for us are in finished product assembly. So it is assembling products and some of the technologies associated with that are things that we are good at and some of the areas where some of that chemistry is moving. For instance, reactive hot melt is an area of strength for us. More of that is being used in the electronics space than had been in the past.

But that doesn't mean that is all we will do, but I think that is a good early entry point for us. It is good extension from where we are in assembly, leveraging technology but doing it in a different way to win in electronics.

Got it. Thank you very much.

Okay, thanks.

Christopher Butler, Sidoti & Co.

A few questions, kind of piggy-backing on previous questions that were asked. Can you quantify the synergies that you think were pulled forward a little bit into the fourth quarter and were those, it sounded like, specific to Europe?

Yes, I would say -- again, it is tough to quantify, but I would say the synergy pull forward was more North America than in Europe. Then more of it was on what we were able to do on the procurement side than some of the other areas.

Staying on that topic then, if we are looking at the favorable raw material costs that you talked about in the quarter, were those then specific to North America as well then?

No, I think we saw a better raw material environment around the world generally.

And shifting gears a little bit to growth. With good growth in Europe relatively in 2012, as you look forward with your forecasts do you see volume growth organically again this year in Europe with all of the restructuring that you have going on?

That is what the team is driving for. I think they have good momentum on organic and the drive is to continue to do that. As we have said in the past, we have factored in the fact that all this disruption could create some attrition, so that is part of our plans to consider that some of that may happen as well. But it is a volume growth, again, in Europe for us.

And looking to 2013, expectations on your pension costs and how they may change, contributions that we could expect. And then also, while I am sort of lumping these all together, the restructuring cash costs that you are looking for in 2013.

Let me let Jim go into some detail there.

It's Jim G. I don't have the number in front of me. Pension costs will be higher in 2013. I am thinking it is a number around $5 million or something higher. As you can maybe recall, we have actually had pretty favorable pension expense recent history for various reasons and I think we are kind of reverting back to the norm with more normal pension expense load.

But that is all absorbed in our guidance of course. We are recovering all of that day, but it's in that order of magnitude.

Oh, cash costs of special charges. I don't have that number. The cash -- you can see from the chart where we are going to spend the money.

The bulk of the restructuring costs that we have in front of us is our severance payments, so those are going to be timed out as we close facilities. And these are primarily in Europe. So it is based on the timing of closures, so my guess is it's pretty much backloaded into the end of 2013, end 2014 is when the cash is actually going to be going out the door in bulk. But I don't have a specific number but that will give you some idea.

Any contribution to the pension plan this year?

I think that it would be modest. We had modest contributions, less than $10 million, this year into our pension plans globally and I think the number for next year would be lower or about the same to that. We make (multiple speakers) from time to time.

I appreciate your time. Thank you for your time.

Thanks, Chris.

Thank you, Chris.

At this time I will turn the conference over to Mr. Owens for any additional or closing comments.

Thanks, everybody, for your time. We do really look forward to you joining us for our investor day on February 7. Bye now.

Thank you. Ladies and gentlemen, this does conclude today's H.B. Fuller fourth-quarter 2012 investor conference call. You may now disconnect.