H.B. Fuller Company (FUL) 2013 Q1 法說會逐字稿

Good morning and welcome to the H.B. Fuller first-quarter 2013 investor conference call. This event has been scheduled for one hour. Following today's presentation there will be a formal question-and-answer session. Instructions will be given at that time should you wish to ask a question. Management in attendance on today's call includes Mr. Jim Owens, President and Chief Executive Officer; Mr. Jim Giertz, Senior Vice President and Chief Financial Officer; and Mr. Maximillian Marcy, Senior Manager, Treasury and Investor Relations. At this time, I would like to turn the meeting over to Mr. Maximillian Marcy. Sir, you may begin.

Thank you, Lisa, and welcome, everyone. Today's conference call is being webcast live and will also be archived on our website for future listening. Before beginning, I would like to inform everyone that certain matters discussed during this call will include forward-looking statements as that term is defined under the Private Securities Litigation Reform Act of 1995. Since such statements reflect our current expectations, actual results may differ. In addition, during today's conference call, we will be discussing certain non-GAAP financial measures, specifically, adjusted earnings per diluted share 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 these 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. The non-GAAP information discussed today may not be consistent with the methodologies used by other companies. All non-GAAP information is reconciled with reported GAAP results on the last pages of our presentation. For more information, please refer to our recent press release and annual report for the year ended December 1, 2012 on Form 10-K filed with the Securities and Exchange Commission. These documents are available on our website at www.hbfuller.com in the Investor Relations section. I will now turn the call over to our President and CEO, Jim Owens.

Thanks, Max, and thank you everyone for joining us today. We are off to good start to the 2013 fiscal year. We are on target to achieve the 2013 results we committed to during last quarter's call and we are on track to achieve the 2015 strategic plan we reviewed during our investor day. This year we have three key interrelated goals. First, to deliver financial results consistent with our 2013 guidance, which includes organic growth of 3% to 5% and EPS improvement of 16% to 20%. Second, we must deliver the synergy from our business integration activities, especially in Europe. And third, we will deliver further progress towards our 2015 strategic goal of 15% EBITDA margin.

So far so good. During the first quarter, we achieved 20% earnings per share improvement and grew organically by more than 3%. Our operating profit grew 29%, slightly better than our internal operating plan. Regarding our business integration, we continue to deliver solid improvements. Our capital spending came in at around $20 million for the quarter, the highest capital spending in any one quarter for the past 10 years. This is clear evidence that the project is really getting into gear now. As a reminder, 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.

Let me dig a bit deeper into some of the key results and trends from the first quarter in each of our operating segments. Let's start at the top. We delivered over 3% organic growth this quarter, the start of our fourth consecutive year of organic growth. As we have said many times, consistent predictable organic growth is a key pillar of our long-term strategy. Pricing was about 1% above last year's first quarter levels, volume was up 2% in the quarter versus last year. This is once again good performance as the markets we serve continue to be sluggish.

In our North American construction products business segment, we grew volume nearly 5% in the first quarter, primarily through introducing new products and new merchandising strategies. Last year, first-quarter volume was unusually strong largely due to the unseasonably warm weather then. So the fact that we delivered solid growth versus this tough comparable indicates that the end markets are gradually improving and our business is executing its strategy. On the North America adhesive side, organic revenue was up 2.5%, with volume positive 1% and pricing accounting for the remainder. Our volume performance in North America was improved. Several of our key market segments generated solid growth in the quarter while a couple of others struggled.

We have our entire sales organization now focused on winning with customers since most of the business integration work in North America is now behind them. Growth performance should improve over the next several quarters. After a strong 2012, the Latin America segment got off to a slow start in the first quarter with organic revenue down by 2.4%, reflecting slightly less than a 2% volume decline. Some segments showed solid growth while we under-performed in other regional segments. More consistent modest growth is expected in the balance of this year.

Asia-Pacific organic revenue was up over 3%, with modestly lower pricing and over 4% volume growth. China delivered double-digit volume growth. Our Australia business remains relatively weak but year over year revenue was only slightly negative in the quarter, indicating that the negative trend in this region is bottoming out. Southeast Asia improved the trend after last year's erosion due to a shift in product mix. Getting Asia back on track is one of our key deliverables this year and this quarter was a good first step in that direction as the region hit all of its internal plans for the quarter.

Lastly, EIMEA continued to grow organically. This quarter, price contributed over 2% and volume was up nearly 3%. The favorable results reflect the relatively strong performance in the emerging economies of the region, in addition to continued growth in the mature markets of Western Europe. All macro factors point to weak, and in some cases, down markets. We continue to gain share in the region and have consistently done so many quarters in a row while at the same time managing our business integration project on schedule.

Now turning to the results of the Company overall, our gross profit from continuing operations was down approximately 190 basis points compared to the prior year due to the inclusion of the lower-margin Forbo business. However, we estimate that on a comparable basis, gross margin is up nearly 200 basis points versus last year's combined results. Selling, general, and administrative expense from continuing operations thinned as a percentage of net revenue from 21.7% in last year's quarter to 20.3% in this quarter, a 140 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. The end result of solid organic growth, strong gross margin management, and thinning of SG&A led to a regional operating improvement of 29% versus last year's first quarter. This translated to adjusted earnings per share from continuing operations of $0.49 in the first quarter, a 20% increase from last year.

I can now talk very briefly about our raw material cost environment. As you can see from the slide currently being displayed, or slide 5 if you downloaded the deck, raw material costs were essentially flat sequentially. We estimate that market conditions remain balanced and without any integration activity, raw material cost would have risen slightly sequentially. Going forward into 2013, we expect a fairly benign raw material cost environment in the first half of this year with some modest upward market pressure in the second half of year. Our business integration project remains on track. The progress is evident in our operating results which, as I said earlier, were slightly ahead of our internal expectations. Let's quickly walk through the plan in each region and what we have accomplished thus far.

In North America, we've announced our intention to close six production facilities. To date, five of those plants are closed and we expect the final site be closed in the coming months. The new commercial organization is producing results and helped the North America business maintain its position in a tough macro environment. The synergy realization garnered from the integration helped to elevate EBITDA margin by 30 basis points versus last year through price realization and favorable raw material movements. The plan is nearly complete and we feel confident that we can maintain long-term profitability trends.

In the EIMEA business segment, the integration is also progressing as planned. In addition to the detail provided during last month's investor day, we have made progress on a few additional action items. The final Works Council agreement is signed. In total, we have negotiated and completed eight separate agreements to ensure our employees are fairly compensated and that we can progress with our transformation in the region on schedule. We've begun the initial product shifts from closing plans to receiving plants. Thus far, we have transferred nearly 10% of total volume and are happy to report that there were no issues with production or customer impacts.

Lastly, capital plans remain on track, which includes purchase orders and permits, in addition to the detailed plant designs. We all understand that the EIMEA project is a large and complex undertaking. At the half-way point, we are still on track and expect the full transformation to be completed by the end of the second quarter of 2014. Our key metric here is the EBITDA margin target as we exit the fourth quarter of this year. The various integration projects begin to generate meaningful synergy savings as the year progresses, and as we stated during our investor day, we expected to exit the year in EIMEA at 12% EBITDA.

Lastly, in China, we still expect the plant consolidation to be completed by mid- 2014 and our teams are working diligently toward this goal. The new commercial teams continue to produce results, which is evident in this quarter's volume growth, which was better than any quarter in 2012. 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 strong partner for our customers and a solid platform for growth in the future as we leverage the technology acquired from Forbo. At this point, I'd 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 first-quarter results. Starting at the top, organic growth was again positive with a 2% improvement in volume and 1% higher price. Our organic growth rate was within our organic growth guidance range of 3% to 5% for the year. Recall that there are two significant reasons why our expected organic growth rate for 2013 is lower than our long-term target for growth of 5% to 8% per annum. First, the end market conditions remain relatively flat in most of the markets we serve; and second, we expect some volume erosion in the legacy Forbo business as a result of various actions taken as part of the business integration project. Our revenue guidance provided at the beginning of the year, essentially targeting a full-year revenue of about $2.1 billion, is confirmed.

Now next moving to gross margin, we continue to make progress. As mentioned previously, gross margin was down 190 basis points versus last year's reported results but down just slightly from the prior quarter despite the seasonal drop in revenue. Our gross margin in the first quarter exceeded our internal plans for the quarter. Our full-year guidance indicates that our gross margin should increase marginally in the final three quarters of this year and then increase more significantly next year as the business integration benefits in Europe fully materialize.

Selling, general, and administrative expense was approximately 30% higher than last year's first quarter, but was down 140 basis points as a percentage of net revenue. The thinning is primarily the result of adding the Forbo business, which ran at a lower rate of expense, offset by the higher amortization expense from the acquisition. Sequentially, SG&A was higher both as a percentage of revenue and in terms of absolute dollars. The driving force behind the percentage increase was seasonality as we have a relatively low revenue base in the quarter due to the year-end holidays while operating expenses are relatively fixed. For the full-year, we expect operating expenses to increase at a lower rate than revenue growth.

All these factors working together helped us come full circle and complete the first full year with the acquired Forbo business with our EBITDA margin at the same level as we achieved just prior to the acquisition. Now some comments on our guidance for the remainder of the 2013 fiscal year. We expect continued modest organic growth in the 3% to 5% range built on an assumption that current end market conditions will not change dramatically in the key markets we serve. Net revenue growth for the remaining quarters will be essentially in line with organic growth as there will be no incremental benefit from last year's Forbo acquisition since that deal closed on the first day of last year's second quarter. The revenue growth will be driven primarily by volume and mix, with little incremental pricing.

Foreign exchange is expected to be a small positive in 2013 relative to 2012. We are targeting an EBITDA margin in 2013 of 12.5%, which indicates that EBITDA margins will improve in the final three quarters of this year, which is our normal pattern. Our EBITDA target is between $260 million and $265 million. On the bottom line, we confirm our previous guidance of 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.

The core tax rate in the first quarter was slightly under the target 30% level and several discrete tax items further reduced our effective rate in the quarter. Capital spending guidance remains $110 million to support the ongoing business integration activities, primarily in the EIMEA region. So with one quarter under our belt, our guidance for the year remains unchanged. And with that, I'll now turn the call back to Jim Owens to wrap us up.

Thanks, Jim. We continued the strong momentum from the 2012 year with a good start to 2013. Our teams continue to deliver solid growth and profitability improvement while at the same time executing on our business integration activities. We achieved a 20% improvement in EPS this quarter and expect that trend to continue for the remainder of the year. I hope that for those of you unable to attend in person you were able to listen to a replay of our February 7 investor day. In that meeting, we laid out clear plans toward our 2015 goals in terms of organic growth and further details on the business integration. You should expect us to continue our profitable growth trends while at the same time working to be consistent and predictable as we deliver long-term value to shareholders. We appreciate your continued support as we work to become the best adhesive Company in the world. Thank you for joining us today. Now I'd like to open the call for your questions.

(Operator Instructions)

Mike Ritzenthaler, Piper Jaffray.

My first question is around -- it's around the gross margins. Did competitive dynamics in the most recent quarter have a different quality than in 4Q in share shifting and so forth or are we just getting a better glimpse of the new 1Q seasonality post-Forbo?

Yes, you hit on it, Mike. The -- and it's not really seasonality as much as it is the size of the quarter. With us having our December, January, and February together, and the fact that we have this larger Europe component with post-Forbo, the trend in our volumes goes down and -- in Q1 relative to Q4. So, and that does fall through into the gross margin line.

Okay, and then on organic growth, you guys went through the stated goal, 3% to 5% for this year. Is there any read through on the 3.2% growth in 1Q for the rest of the year? Is it more likely that you come in at the lower end of that range or is that something -- is that momentum that can build through the year or is it just too difficult to call at this point?

Yes, it's tough for me to give you an exact number, I would definitely stick with that range. So we have a lot of good activity, both from an innovation standpoint, some things that have hit this quarter with wins and some of the activities we have put forward with some key customers. So that work is very positive. You can see already in North America some of the distraction of the business integration work that they had to go through last year, allowing our sales teams to generate some wins. And we are getting some good momentum with construction products. So, do I feel optimistic about the projected path for the rest of the year? Yes. Am I willing to say that, well, that means we are going to be at the high-end versus low-end -- we are saying clearly 3% to 5%. Jim, do you want anything that? No? Okay, it's fine.

All right. Fair enough. The last one from me for Mr. Giertz on the share repurchase program, can you update on any activities there or plans for 2013 now that the blackout period is over?

Yes, so, as we reviewed at the investor day, our normal share repurchase strategy would be to acquire shares at a minimum level to eliminate the dilution that we have naturally from our incentive compensation or other compensation plans. In the first quarter, we did not acquire shares and, so, it is anticipated that we will probably get back on the share repurchase program soon, sometime during this fiscal year.

All right. Fair enough, thanks, guys.

David Begleiter, Deutsche Bank.

Can you just discussed March trends -- what you've seen so far and how your order book looks for April, first in North America and then the rest of the world?

Yes, so I would say no unusual trends. Right? What we see is what we expected to see in March and April.

Fair enough.

And I would that's -- if I were to try and [guess] for it around the world, generally true around the world, I would say -- you asked specifically about North America and North America again it's very early in the quarter, but it looks at or if not slightly better than what we had thought in North America. So, but overall, what we would expect.

Fair enough and just if you look at EIMEA sequentially, sales fell $12 million and EBIT fell $6 million. Is there anything -- how should we think about that type of sequential action in that segment?

You're saying the sales revenue from Q4 to Q1, is that your question, David?

Correct. Correct.

Yes. Yes -- and Jim and I have talked about this -- seasonality is probably the wrong word because it's not really seasonality as much as it is the size of the billing quarter. For most companies, December is lumped with October and November, which are pretty active months in most businesses. For us, December is lumped with January and February because of the way our quarter falls. And that particularly affects our business in Europe, Latin America, and -- CP is probably -- construction products is probably more of a seasonality, it's the only place we have real seasonality. But the size the quarter in Europe and Latin America is just less billing days because of the level of economic activity around the holidays. You also have Chinese New Year right in the middle of our quarter whether it's January or February every year. So it's just a lower active quarter. So I would say, Mike made the point, it's a -- it's our seasonality or our change in order patterns actually changed with the Forbo acquisition but it's been typical of us because of the way the quarters line. Nothing unusual there.

And lastly, just thinking about the gross margin in Q2, obviously should be up versus Q1. Are we looking in the 28.5% range? Is that a good starting point for the quarter?

I'll let Jim Giertz -- I always get in trouble when I give specific number so I will let Jim give a range there on Q2 margins but certainly improved as you point out because of volume pulls away from our margins and because of the integration activities, right? So the integration activities are -- we won't see as much impact this quarter but we see a little bit of benefit each quarter and certainly the big benefits in Europe will come in the back end of the year. So, Jim?

He said he was going to let me answer it but then he gave the whole answer, so.

Yes.

Yes, we said in the script that our gross margin should improve marginally in each of the next three quarters as we go into the end of the year so I'll probably leave it at that. We -- you should expect our gross margin to exceed 28% though and go from there.

Thank you very much.

Rosemarie Morbelli, Gabelli & Co.

You said that you gained some market share in Western Europe. Can you give us a better feel as to which areas you gained share?

Yes, I would say the area where we've had that -- and you know about our strategic plan -- one of the areas -- one of our key target areas is the hygiene business. And I would say some of the innovation, some of the work we've done there with key customers that we shared during the investor day, that's coming through in some of the numbers. So certainly in Europe, very solid performance in our hygiene business would stand out.

Okay. And then a similar question for Latin America, you said that some markets were strong, somewhere weak-- could you also help us understand which ones were which?

Yes, I would say in Latin America it's a small part of our business overall, so, one or two customers can have a big impact. If you think about a $1 million shift in the quarter that would be almost 3%. So, it's really isolated to a couple of key customers in one of our regions, Rosemarie, and not an overall trend in Latin America. And we have recovery plans -- you will see some improvement in Q2 and much better improvement in Q3 and Q4.

Okay. And if I may ask one last question. Your end markets are hygiene, packaging, and durable assembly so you are obviously doing better -- making great progress on hygiene. Could you touch on the other two markets?

Yes, so one of the things we said during the investor day was we had a lot of work in the pipeline in durable assembly and we are seeing some of that come through. So I feel pretty good about the wins around the world in durable assembly. Those are work that we did in 2012 and some of it in 2011 that are coming through in the numbers. So those are good wins that are coming forward. Packaging, not as strong a growth, I would say, as we have in hygiene or durable assembly at the beginning of the year, but still optimistic about where we are headed there.

Okay, thanks.

Jeff Zekauskas, JPMorgan.

Should your SG&A expense in absolute terms go up from the first quarter number through the course of the year?

Yes, Jeff, this is Jim G. So on SG&A, as we said when we gave our guidance, that and I actually also reiterated in the script today that our SG&A is going to increase or we expect it to increase in 2013 at a rate slightly below our revenue growth rate. So our revenue growth rate is, let's say, 11%, so we are talking about 10% or less increase in SG&A. So that is the context. To answer your question specifically, that would show that -- our models would show that our absolute dollars spending of SG&A in the final three quarters would be about equivalent to the first quarter rate. The first quarter amount.

Okay.

Flat for the last three quarters of the year at the Q1 rate. And that is basically -- what is happening there is that the normal upward pressure exists -- the inflation, the growth of SG&A that happens over time is being mitigated by synergy effects.

Okay. Second question, what were the tax items in the quarter? Do they relate to prior periods? Does it affect your tax rate for the year?

Well, the core tax rate was just under 30% as is our guidance. And then the difference between the reported rate and that core rate were discrete items. It's, as typical, it's a variety of things -- there's a small valuation allowance adjustment we made, there is some R&D tax credits that got picked up retroactively from last year. So it's a collection of things, but we typically have a couple of discrete items every quarter but the core tax rate is 30% and that's what we -- that's what our guidance for the last three quarters is built around.

Okay. And then lastly, in terms of your EIMEA operations, order of magnitude year over year, in the quarter, revenues were up, I don't know, $65 million or so and the operating income was flat. Did everything go right in the quarter or were there some items that pushed your operating income down?

Yes, I would say we are very pleased with what happened in Europe this quarter, Jeff, to get the revenue growth that we got with all the work we're doing with the integration is a key objective. The thing you are seeing in the results is, we're doing everything it takes to continue to grow the business and to drive this integration, which drives some incremental expense into the business that is short-lived during the integration. So, as you think about what it takes to -- we haven't shut down any plants but we are transferring products. We are managing product line consolidations. We are managing issues with customers so all of that activity provide the level of expense either in the operations or into our SG&A. And, as I had said originally, we are pretty pleased with our performance relative to our internal plans. We had anticipated some of those costs as we looked at the quarter.

Okay, thanks very much.

Dmitry Silversteyn, Longbow Research.

I have a couple of questions. First of all you talked about the 200 basis point improvement in gross margin year over year on a pro-forma basis for -- if you would have had Forbo in the first quarter of last year. Can you give us a similar commentary on what SG&A improvement would've been year over year? On pro-forma basis?

Yes I'm not sure we have that right at hand here. Do you have that?

Yes, I'm not sure how to answer the question, Dmitry. We said our SG&A -- the drop in our SG&A as a percentage of sales was what, 140 basis points, and that is after the incremental amortization that we have which is about 40 basis points penalty for us. So we would've been down 180 basis points. But again, I go back to the long-term goals. We -- through the synergy, through the business integration project, as we get the end of that, you should see our SG&A as a percentage of revenue driven down towards the, right around the 18% level, so that would be the goal. And we are going to run a little higher than that this year, but next year when the synergy benefits are more fully realized we should be driving towards the 18% level.

Okay, fair enough. There was several companies -- excuse me -- in the chemical space as well as in some other industrial basic material areas talked about seeing fairly significant destocking event amongst their customers and therefore a pretty sharp drop in their revenues at the end of December and then a rebound in January. Given that both December and January were in your same quarter, can you comment if you've seen similar events or is your more consumer -- higher consumer exposure -- or higher exposure in perhaps markets that didn't go through a destocking event, can you just talk about the monthly trends you saw during the quarter?

So maybe Jim can give some more detail here in a second but I would say we didn't see a big destocking in the quarter. Of course we don't follow as tightly obviously because of the December to January, but you pointed out extremely well, the size of the purchases of adhesives is not a huge destocking item for our customers, because of the impacts of -- so if somebody is going to do some destocking, they will take some high-volume materials typically more than adhesives and destock them. So the short answer is no, we did not see a major destocking event in December into January.

Okay, very good. And then the final question just to your guidance for this year of 3% to 5% organic growth versus your longer-term guidance of 5% to 8% organic growth. How much of that incremental increase in what you can do internally is driven by completing the Forbo acquisition and really focusing externally on going after the business and driving your growth in the key markets and how much of that improvement is tied to some sort of a normalization in European economies and perhaps return to some reasonable growth levels in Asia and Latin America?

Yes, I don't know if I have a good number for that, but 50% and 50% would be what I would say. So if it's a 2 point move -- we are clearly doing work, Dmitry, to reposition products from a pricing standpoint as we talked about the gross margins in the Forbo business were very different. Eliminate complexity, Forbo had a very complex product line -- we are consolidating that and streamlining it. And some of that work while we are not purposely trying to lose business will result in some attrition. So that is part of the business plan, it was right from day one and then of course as you say there's a -- we are not in a robust economic environment, so.

Great, okay.

Any more to add to that Jim? No. Okay.

Thank you much.

Steve Schwartz, First Analysis.

First question on North America, you saw both price and volume growth year over year and you even closed a few plants which would imply you've got higher throughput through the existing footprint, but the operating margin stayed about the same year over year. What has happened there? Where have those seeming gains been absorbed?

Well, remember year over year, Steve, has -- there's a dilution effect of the Forbo business. So there was a huge dilution effect that happened and then we have all of the synergy benefits that we've created throughout the year. So we've taken a business that was much lower in margin, integrated it, built the synergy, and built us up to a level that is at where our business was prior to it. So, it's a strong indication that the integration worked well. All of it is not through the P&L is showing clearly coming through the P&L.

Okay, so in other words, closing the five plants so far has really just gotten the Forbo element back to where Fuller was?

Yes that is a way to look at it.

Okay, and then just as my follow-up, to just try and get an understanding of where your pricing trends are, clearly -- you guys did say that you don't really expect much for pricing gains for the remainder of the year, even though the comps get easier. So since you had pricing in this first quarter, is that just the tail end of pricing actions you had taken say three quarters back and if that is the case, given how benign raw material costs were in the quarter, was there a little bit of a tailwind to gross margin, is that the reason why maybe gross margin was a little better than you expected?

Well this is Jim G. I'll try to -- I'll start the answer to that question. So your first part of your question, the answer is yes. The year over year pricing numbers that we are showing you really reflect the cumulative effect of price changes over the last year and most of that relates to several quarters ago when pricing was still going up, not sequential pricing. That was your first question.

Yes that's right. Yes.

Yes, so, and then -- let's see -- tell me the second question again, or the second part of--?

Well and then -- to the extent there pricing was -- or costs were benign in the first quarter, was there a bit of a tailwind then to your gross margin number because of the spread between continued pricing and a lack of cost increases?

Yes, I would say that the best answer I could give you to that is not really anything material. So it was pretty benign -- both in pricing and in raw material costs sequentially in the quarter was pretty neutral I would say. And then also it depends on what part of the world you're talking about. We had a little different situation in different parts of the world. So I would say it was neutral in the quarter. That--

Okay, sounds good. Thank you.

And then the upside going forward, Steve, is of course the benefits of synergy and the fact that we will have more volume coming through in the following quarters.

Okay.

Christopher Butler, Sidoti & Company.

Staying on that same subject on -- of pricing, as we look to Europe and your shift towards a value-based pricing for the acquired Forbo sales, shouldn't we be looking for price increases as you drive more value out of those products during the year? And could you touch on maybe what inning you are in that process?

Yes, so, and again, it's not the biggest part of the business but there are segments of the business that need to be reposition. So there will be some upward price as things get repositioned and some of that starts in Q2, some of that is actually slated to happen later in the year as we shift products. So there is a phasing to that part of the business and then there is a little bit of attrition that factors out of that. So where are we? There was a first -- from a European standpoint, there was a first phase that happened early last year, there is a second phase that happens in Q2 and then a final phase that happens somewhere toward the end of the year. So I would say we are starting the middle of the game, maybe we are at the third inning at the end of the quarter. Is that a good way to look at it, Jim?

Yes.

That would be the way I'd look at it.

And shifting gears, you had mentioned getting Asia back on track. Could you talk about Asia in relation to your fiscal '13 guidance and your 2015 target? Where do you need to get to and where might this present some upside?

Yes, so, we haven't shared a specific guidance number on Asia. The only one we have out there is Europe. But, we've been clear that our '15 goal is to get Asia to 12% EBITDA. So this year is an important year for us to get things moving in the right direction. We need to get that China volume growth -- that is a cornerstone to this -- at good margins and the team is off to great start there. And getting through the Forbo integration last year was, again, another one of those situations like North America where the team is now one team able to focus on winning in the market with our value proposition.

So that's a good news story, as well as Australia, which is a good performing from a profitability standpoint business, not being a drag on the business. So this year is one where we want to see solid incremental improvement in our margin along with solid China growth and then build on that momentum to next year. So I know that doesn't give you a number, but we do look for a good solid and we put a lot of resources in to make certain that we have a good solid both top-line and bottom-line improvement this year in Asia.

I appreciate your time.

Dmitry Silversteyn, Longbow Research.

Actually my question had been answered. It had to do with pricing but you guys took care of it. Thank you much.

Richard O'Reilly.

Your European margins were the only segment that was lower year over year and that's related to the acquisition. When do you see the margins returning to prior levels or back to the legacy margins?

Yes, so thanks for the question, Richard. As we said, our target and our expectation is that the European EBITDA margins will exit the year at 12% and we see the synergy starting to kick in the second half of this year. This first quarter has less volume and it also had incremental expenses associated with the fact that we are driving this integration project through the business. So I have very clear specific plans detailed out on how that margin is going to move to 12% exiting this year and then -- the other -- the second goal we have in Europe is 14% in 2014 and for both of those numbers, we are on track.

Okay, thank you then.

Mike Ritzenthaler, Piper Jaffray.

Yes, just wanted to follow-up real quickly on the Asian piece that was just asked about. Are there -- I know it's really -- it's a small contributor to the overall business, but are there any inferences about the broader integration plans, since you were closing plants there as well and you're continuing to drive volume there. Are there any inferences about the broader integration plan that we can draw from Asia and apply them to other geographies or is it idiosyncratic?

Yes, I would say, I'm not sure there are things that you can draw in terms of the numbers. I would say we are taking the lessons from North America and Europe and applying them in Asia in terms of processes and programs, but in Asia, we are managing two things with the integration project. One is in both the south, where we had two plants, Forbo and us had a plant in Guangzhou, and in the north, Shanghai and Nanjing, we each had a plant. So we've got a plant consolidation program but at the same time we are building capacity for growth. So there is significant volume growth built into the integration plans in both of those sites. So, that's how it is a little different, because there is as much bigger growth element to the China integration plans. So, but maybe I didn't -- did I hit your question, Mike, or was there more to it?

Yes, I think so. It was just -- obviously, this is the first quarter that there is a good success that was shown in Asia -- substantial year over year growth in both profitability and in organic growth, but if there was anything that we could drop on of the broader -- and maybe not in terms of specific numbers but you're also closing plants in Europe and North America and driving volumes there as well, organic volumes. So, is there -- I just wanted to get a flavor if this is a taste of what is to come in the other geographies?

Yes, well, I would say it's definitely a lot easier for our teams to grow the business when we get through the integration as we are in North America than it is when you are in the thick of it. Right? So that would be one thing is a fair conclusion.

Fair enough, thanks, guys.

(Operator Instructions)

Okay, thanks everyone for your time today and the continued support of our business and our strategy. Take care.

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