H.B. Fuller Company (FUL) 2013 Q2 法說會逐字稿

Good morning, and welcome to the H.B. Fuller second-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 include 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, Catherine, and welcome, everyone. Today's conference call is being webcast live, and will also be archived on the 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, regional operating income, and earnings before interest expense, taxes, depreciation expense, and amortization expense or EBITDA. Adjusted diluted earnings per share are defined in the quarter reported, typically excluding the impact of special charges related to the ongoing business integration project. 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 reported results determined in accordance with GAAP. Management believes that the discussion of these measures is useful to investors, because it assists in understanding operating performance of the Company and its operating segments, as well as the comparability of results.

The non-GAAP information discussed today may not be consistent with the methodologies used by other companies. All non-GAAP information is reconciled with reported GAAP results on the last pages of our presentation. For more information, please refer to our recent press release, quarterly report on Form 10-Q dated March 29, 2013, and end 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, thank you everyone for joining us today. My objective today is to highlight the positive aspects of our second-quarter financial results, while explaining what we are doing to address the revenue shortfall we saw in the second-quarter. In addition, we will review our full-year 2013 and 2015 targets which we are reconfirming today. One of the things we are most proud of at H.B. Fuller is the culture of the agility and accountability that we have developed and enhanced over the past several years. This new attitude served us well in the second quarter, as we shifted priorities in response to a revised growth outlook, and it will also help us manage through the second half of year. Clearly, our revenue performance was a disappointment this quarter. There are some valid explanations for this which I will discuss later in the call.

We have initiated a global action plan to return to growth in the second half of this year, and you will see better revenue numbers from us in the coming quarters. We saw many positives to point to in our second-quarter results as well. We manage our margins well in the quarter. Gross margin improved sequentially by 40 basis points despite the lower than expected volume in our production facilities. The synergy from the Forbo acquisition is being delivered in lower raw material costs and lower production costs. Our operating expenses declined relative to the prior quarter, as we took early action to reduce discretionary spending. Our business integration project moved forward, and remains on track for all significant milestones.

The EBITDA margin in our EIMEA business segment exceeded 10% in the quarter demonstrating that the integration project in Europe is gaining traction. Again, despite the relatively weak volume environment. And we announced the acquisition of Flexbond, which is an important step in our strategic plan to strengthen our competitive position in Brazil and the South American region. In summary, the organization was successful in executing our strategic plans, while at the same time shifting our short-term tactics to deliver our fiscal year commitments. Our ability to adjust to changing dynamics gives us the confidence to reconfirm our earnings per guidance -- our earnings per share guidance for the year. Also our strategic direction is unchanged, and our commitment implants to deliver consistent organic growth and 15% EBITDA margin in 2015 are unchanged.

Let me dig a bit deeper on some of the key results and trends from the second-quarter in each of our operating segments. Starting at the top, organic revenue declined by a little over 1%. Although pricing was slightly positive, it was not enough to overcome the volume losses. To more fully understand the revenue picture, we need to look at the geographic region separately.

Let's start with Europe. This is the only region where volume actually declined year over year. The reasons for this decline are several. The end market conditions in Europe are not strong, especially in the southern tier. Several of our key durable assembly markets, for example, woodworking are weak, as consumer discretionary spending is constrained. Second, we have experienced some planned attrition of the acquired Forbo revenue. The cause of the attrition is a combination of factors stemming from product line rationalization, repositioning, and other factors related to the change in organization structure and personnel in the region. This attrition was expected and planned for in the business integration project, and now is recognized in our results.

Additionally, the growth initiatives in several key market segments have slowed a bit in recent months. In part, because our teams are focused on delivering the integration project. And finally, while we continue to show solid growth in emerging parts of the reason in India, Middle East, and Africa, the growth is not as strong as in prior quarters. We are, however, seeing strong growth in our core hygiene markets, and we continue to grow and gain share in this segment across the region. We expect all the factors noted here to improve in the second half of this year.

In the Americas, we see a continuation of recent trends. Our construction products business in North America posted solid organic revenue gains again in the second-quarter, boosted by a generally improving end market for new home construction and remodeling, and market share gains in key distribution channels. We are investing to accelerate our growth in this important segment. Our industrial adhesive business in North America and Latin America remains subdued, with organic revenue development slightly negative in both North America and Latin America year over year. Again, there is some valid explanations for the sluggish revenue performance in recent quarters, including generally flat end market conditions in some key market segments such as end-of-line packaging and some revenue attrition from the integration of Forbo. That said, we are not meeting our own expectations for growth in these regions for the second-quarter. However, we are seeing a change in the trend for the second half of the year.

In Asia, we are getting back on track with volume growth again this quarter. The recent trends in volume remain intact. Our Australian business is flat, Southeast Asia showed modest growth, and our China business continues to show solid organic growth. Our business in Japan also showed solid organic growth in the quarter, though this does not impact our revenue line since it is a non-consolidated joint venture. Going forward, we expect our revenue performance to improve as our teams shift their focus from the business integration work, toward winning new business. Our commercial teams are well-organized, well-positioned, and now fully focused on winning in the marketplace. And we are confident that better results are just ahead.

Now turning to the results of the Company overall, our gross profit margin from continuing operations was up approximately 170 basis points compared to the prior year. The bulk of the benefit is being driven from the business integration project including lower raw material costs. Selling, general and administrative expense from continuing operations declined 4% or 230 basis points, as a percentage of net revenue versus last quarter. We were proactive in reducing discretionary spending, as it became evident that organic growth was coming in lower than we initially expected.

To sum it up, although we did not grow our revenue in the second-quarter, we managed our margins, controlled our costs, and took another step toward completion of the business integration project. We delivered a 13% increase in operating income, and EBITDA margin improvement of over 100 basis points versus the comparable period last year. Our year over year EPS growth was 8%, lower than our operating income growth mainly due to various below the line items. Most notable were FX translation losses on our core business, as well as the reduction in the reported earnings from our Japanese joint venture due to the weaker yen.

Now a quick update on the business integration project. In summary, the project remains on track and our progress is evident in our operating results. Here is a brief update on our status in each region. In North America, the integration is essentially complete. We have one final production facility to close, but much of the volume from this plant has already been shifted to the receiving plant. The remaining facility will be fully retired at the end of the third quarter.

Now that all the dust has settled, we can look back and review the outcome. Our North American business, running at 17% EBITDA margin prior to the acquisition, acquired a 6% EBITDA margin business, and restored the EBITDA margin of the combined businesses to 17% in just five quarters. It took a great deal of work, and significant change was implemented in a short period of time. In the process, the team created a new and stronger sales organization, unified the supporting administration and infrastructure, consolidated product lines, and created a new manufacturing network of 35% fewer production facilities. It is mission accomplished in North America.

In the EIMIA business segment, the integration overall is progressing as planned. Here are some highlights. First the shared service center in Mindelo was completed ahead of schedule and on budget. This creates a significant benefit for us, as we consolidate functions into a single location, and leverage learning across business segments and countries. You will recall that we and Forbo had separate shared service facilities across all countries in Europe. Second, 50% of the product line consolidation has been completed, and nearly 20% of the product volume transfer has been transitioned to new sites, with essentially no disruption to our customers.

Lastly, our significant capital investment plan remains on track. Major investments in state-of-the-art production capacity in Germany, France, Portugal are taking shape, and we will be ready to begin scale up production in the fourth quarter of this year as we close five sites across the region. The first two sites will close during the third quarter. The result of these efforts are beginning to show in our financial results, with the EBITDA margin in the region above 10% for the first time since 2009. The bulk of the synergies savings are still ahead, and we will bring -- and will be bringing margin improvements in the later part of this year, and through next year as the production network rationalization is finalized.

And finally in China, we remain on track regarding synergy targets. The Asia-Pacific sourcing team has been integrated into the global sourcing organization, and products are becoming more localized to better suit the regions' needs. Our plan is to consolidate from four production sites to two. And this investment project is on track, with the focus now on consolidating our two plants in Guangzhou into one state-of-the-art facility. To summarize, the business integration is right on track to realize and retain the synergy benefits that we committed to at the time of the acquisition. The successful completion of the North America piece of this project gives us even more confidence that the important EIMEA integration will deliver the benefits as planned. At this point, I would like to turn the call over to Jim Giertz to discuss our guidance for the remainder of the year. Jim?

Okay. Thanks, Jim. As we have noted previously, we are confirming our key guidance ranges for earnings per share, EBITDA, and our capital spending. At the end of the first quarter, we indicated that we expected organic revenue growth for the full-year to be between 3% and 5%. Given that the second-quarter results fell below this range, we now believe the best estimate for revenue for the year is 1% to 3%, rather than the previous target of 3% to 5%, and both ranges excluding the Forbo acquisition impact. Depending on market conditions, we may hit the bottom end of the -- of our original range, but it is clear that we will not hit the top end. The revenue growth will be driven primarily by volume gains with little incremental pricing. This assumes end market conditions remain at or near current levels.

We are still targeting an EBITDA margin in 2013 above 12.5%, which indicates that EBITDA margins will continue to improve in the final half of this year. Our EBITDA target remains 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% over prior year. We expect the ongoing core tax rate which excludes discrete items to be 30% for the 2013 fiscal year, and capital spending guidance remains $110 million to support the ongoing business integration activities, primarily in the EIMEA region. Our capital expenditures totaled $28 million in the second-quarter, and $48 million for year-to-date. And with that, I will turn the call back to Jim Owens to wrap us up.

Thanks, Jim. We are delivering the strategic improvements in acquisition synergies which we committed to in our strategic plan during our Investor Day. Volume was not as strong as we had expected this quarter, but in spite of that, we delivered on the bottom line. We have reacted quickly and reduced costs when necessary. We are nimble organization, with employees at every level mindful of our long-term goals for the Company and capable of responding to short-term challenges. We are seeing solid growth in parts of our Asia business, global hygiene, North American construction products, India and the Middle East. And we have initiatives in the pipeline for the rest of our business, which will help us improve overall revenues, as the year progresses even if the macro conditions do not improve.

At the onset of the business integration project, we were clear on our long-term commitments, and equally clear that not every quarter would happen exactly as planned. We showed this quarter that when conditions change, we remain committed to reaching our profitability goals. We are on track to deliver our targeted EPS and EBITDA performance for 2013, and have taken the necessary steps to deliver our 2015 EBITDA and growth goals. We have averaged year over year organic growth of 7.1% over the last 14 quarters, and we have plans in place to move back toward our strategic growth rates in the near future. Thank you for your interest in H.B. Fuller, and for joining us on the call today. Now I would like to open up the call for your questions.

Thank you.

(Operator Instructions)

We will take our first question from Mike Ritzenthaler with Piper Jaffray.

Good morning. It sounds like the gross margin upside in the quarter came from raw materials and the EBITDA margin upside came from cost savings. Is that a fair characterization? And in terms of raw materials, are the savings in procurement, or something else that has some good degree of permanence going forward?

Okay. So, yes, I think, again, that is a generalization overall. But I think you are right, we have done good work on the raw material side. And on EBITDA margins, we did good work on the cost side this quarter when we saw the revenue numbers. There is permanency to the raw material savings. Some of that is -- a lot of that is related to the synergy work we did in pulling the two organizations together. So we were able to leverage suppliers and get the best of both, in terms of our out pricing positions in the market. There is still further synergy savings as we move to more levels of bulk deliveries. Certainly, some of that has gone through the pipe in North America, but there is more of that come in Europe. So, Jim, anything you want to add to that?

Okay. And then, was there any effect of product mix that was hidden in the pricing line item, or was it mainly ASPs?

It's -- it is well, yes, pricing gas pricing is separate from mix. Mix shows up for us in the volume line.

Okay. I guess it was perhaps a little disconcerting that pricing was not a little better. Given some of the lofty margin targets at your largest competitors, it doesn't seem like there should be a lot of pressure on price. So I guess, are we seeing some tactical moves by the other adhesive companies reflected in current pricing that could abate over time? Or is there -- has there been pressure from customers accepting price increases, or is it something else entirely?

Yes, well, pricing was up in Europe. It was flat in North America, and it was negative in Latin America and Asia. And, I think that's -- that is product line by product line response to changes in the markets. Probably not from major competitors, but with more availability, a response to actions by smaller competitors. So, but I would say in line and probably favorable, as you can see the margins to what is happening in the market.

Right. Okay, thank you.

Thank you. We will go on to Michael Sison with KeyBanc.

Good morning.

Good morning, Mike.

In terms of your outlook for 2013, you reduced the outlook for organic sales growth a little bit. Can you just help us maybe understand where you made -- where you are making that up?

Where we are making it up on the bottom line, or where we are making up the sales growth?

On the EPS line. Meaning you reduced organic sales growth, I think the last quarter was 3% to 5% down to 2% to 3%, would imply earnings should have come down. But you had some positives to offset that it sounds like?

Right, yes, and significant work on -- well I will let Jim cover some of the details. A couple of things that are happening in the business, Mike. Certainly, we are doing a really good job of the integration project, and you can see in the North America numbers, a very solid performance there. Additionally, we have a mantra within the organization, that we are going to flex our spending, in line with what happens to our revenue growth. So as we saw lower revenue growth, we flexed down discretionary spending. There are lots of ideas on areas that we can invest in improving the business. Staging those in line with revenue growth is an important part of what we have done the last few years, and it is what we will do going forward. So, I think that the high-level summary of what we're doing. Jim, do you want to add a little more color?

Yes, excuse me, sure. But just on the subject of operating expense which Jim was referring to, I think in the last call we indicated that our outlook was generally that our first-quarter -- the operating expense level that we saw the first quarter would carry on flat through the end of the year. Well now, I think it would be better to think about our Q2 operating expense level continuing on through the rest of the year. So that is a step down in our operating expense levels, which should persist in the second half of year. And again, that is coming from both benefits from the integration project and our decisions to cut back on some of our discretionary spending. So, that is part of the answer, Mike, is we are stepping down our operating expenses.

I think our margin outlook has probably got a little bit better since the first quarter because of the raw material environment. I also think in general, that we have always thought that our margin improvement was more backloaded this year, than maybe some of other people have looked at our year and try to forecast our year because the synergy benefits come later in the year for us. So, I think those are some of the main factors that are driving the improved -- our ability to hold our guidance even though we slipped our revenue in the second quarter.

Right. Okay, great. And then in terms of Europe, or EIMEA, you talked about various factors that caused the 5% decline in the second-quarter. The outlook for the year for the full Company would suggest that would maybe improve or other areas of the business would improve on an organic basis. So if you think about the EIMEA business, can you sort of walk through what gets a little bit better in the second half, maybe the product rationalization efforts subside a little bit, or emerging markets pick up a little bit? And it doesn't sound like Europe generally is getting any better, right? I mean, I wouldn't say?

Yes, well, as you know, Mike, we have done very well in Europe over the last couple of years in a pretty bad environment. And it is because we have a really strong team focused on where we can win and deliver value, across core Europe as well as in the emerging parts of the region, the India, Middle East, and Africa. So up through this quarter, clearly they have over-delivered relative to the economy. I think there are two main factors that happened in Europe, one planned -- beyond the economy, there are two main factors one planned, one unplanned. We expected as we made significant changes in the business that there would be a certain level of attrition. It was in the in the plans when we built the plan. We have consolidated 2,500 products. We have taken two sales forces, put them together. We have moved shared services. We have moved some customers through new channels. All of those had a certain level of planned attrition. That attrition has come through just about as planned, in terms of the numbers.

I think what has happened that was a little less planned was, was we had a number of growth initiatives that we expected to kick it in. And with our teams very focused on driving the business integration, those growth initiatives didn't come in at the rate or the speed that was expected. They are still in the pipeline. Our team now is a lot more focused on those initiatives. That focus has shifted in the last 30 to 60 days, and we are already seeing some progress. So I think the big thing that you will see differently in Europe, the second half of year versus what we saw this quarter, is closure of these wins and initiatives.

I would also say that is true in North America. In North America, they are even in a better position. Again, lots of change happening in North America. Sales force has changed in the second half of last year. We are now in a position where there -- those sales teams are turning their full attention towards driving some of the innovative growth initiatives that we have, and we are seeing some traction there. So, that is fundamentally I think what is going to change in the second half of this year versus what we saw in Q2.

Okay. And last -- (Multiple Speakers).

Answer --?

Yes, that is great. Last question, you talked about resuming some confidence in hitting your 2015 outlook. Is that more, clearly and part of that outlook was a much stronger organic sales growth outlook for '14 and '15? Do you feel better about that, or is it just the ability to control your costs and generate the synergy that gives you confidence to get there?

Yes. No, we have two clear elements to this strategy for '14 and '15. One is the EBITDA margin, and one is the growth aspect, and we have got plans well in place for both of those. I think the level of change and distraction that happens when you go through as quickly as we did, the transformation we have been going through, slowed down some of that growth this quarter, but our optimism for '14 and '15 and our ability to grow is unwaned.

Great, thank you.

Okay, thanks. And, Mike, just on that point. I think if you look at our track record over the last couple of years, our organic growth relative to peers, and our organic growth relative to those targets has been in those areas. So I --and I think you can see the track record on that. So, thanks, Mike.

Great, thank you.

Thank you. And we will now hear from David Begleiter with Deutsche Bank.

Thank you. Jim, going back to North American volumes. Still not totally clear what happened in Q2, which actually was a pretty good comp year-over-year, and actually had showed some decent growth in Q4 and Q1, which I assume there was also integration going on then. So, was there a destocking, or was this quarter the impact of the Forbo lost business? What changed between Q1 and Q2 in North America volumes?

Yes, so, there is some specifics under there. I think at the high level, it is very much the same story I talked about in Europe. We had a sales team, if you think about some of the changes we made, we took two customer service teams and consolidate them, many of the customer service people didn't actually come up to our facility. We had to train up a customer service team that interfaces with customers. Nearly 60% of the customers had a new sales pro. So the teams had to reorganize their focus, in terms of their customers. So new relationships had to be built with customers.

We shifted production sites. We consolidated some products, we had to -- all the sales team had to learn two new product lines. When you take all those factors into place, especially the back end of last year, our sales teams were very focused on making the integration work. Then when you look at a business with a six to nine month sales cycle between initiation of closes and closes, you can see that, that activity in the second half of last year starts showing up in Q2 umbers. So attrition was no different, but the level of growth and gains was different, if you dig into the details of the products. So that would be the summary of what happened in North America this quarter.

And Jim given that, and don't want to get too granular, but June trends in North America, July order books, would they be consistent with an improvement in volume growth year-over-year?

Yes, they are better. And we are obviously, David, we are doing a lot of work to dig into lots of granularity business by business, area by area. And we understand very fully, exactly what we expected. We have a lot of metrics around it. And we have an early view on the quarter, and it is just halfway through the first month -- it's better than what we saw at the second half of last quarter.

And -- thanks -- just for Jim Giertz, Jim, on SG&A this $94 million number in Q2, is that a good number for Q3 as well? Or did you cut back spending temporarily that will come back into Q3?

I think that's -- I think that is a good number for both quarters Q3 and Q4.

And lastly, should gross margin do think be up in Q3 versus Q2 or flattish?

Yes, I don't think you will see a lot of change in gross margin. So I would say -- let's call it flattish -- or within forecasting errors, yes.

Thank you.

Yes.

Thank you. And we will take our next question from Rosemarie Morbelli with Gabelli & Company.

Good morning, all.

Good morning.

Jim, you said that the new focus is now going to be on sales and gaining some new business, which I can see happening in North America, since you are done with the restructuring. But you are not done with the restructuring in the EIMEA region. So, what are you doing? Do you have a different team, one focusing now on new business? And then you have added some focusing on the rest of the restructuring? Could you give us a better feel, as to why there is suddenly so much time to focus on new business, while you are still in the middle of restructuring?

Right. Yes, so come I couple points -- and I think it is a good point, that we have had a lot of discussion on internally, Rosemarie. So North America is ahead certainly on the plant consolidations, but Europe has done a lot of customer changes already. So the sales force consolidation happened within a few months of the North American consolidation. So that change happened last year. Product line consolidations, a large product of the product line consolidation has already happened ahead of the transfers. In North America, they happen during and after the product transfers. So that's a big customer facing activity that the customer that sales team was working on.

Additionally, the transfer of very small customers, and Forbo had a lot of very small customers, to our distribution channel, that has happened already in Europe. So big chunks of the disruptive activity have moved forward in Europe. The other thing we are doing is exactly what you said. I think learning from the North American experience, bringing a higher level of focus on the gains, and making certain that the retention piece and the disruption piece is not being managed by our sales team so that our sales team can be focused on the wins, is a difference in how were trying to drive the organization going forward. So, yes, there is still more changes to come in Europe. But I think we have a different focus in our sales organization that will very much have them focused on growth. But we do expect to see more growth in North America than in Europe the second half of year.

And the growth in North America, is that mostly for product lines related to the construction or is there some progress on other areas as well? Do you see some better trends in the other markets you serve?

Yes. So we certainly see good trends in construction products and we expect to accelerate that. We have got some big wins there, one with a major retailer that will come through. But in the core business, some of the good things we have had in our hygiene business around the world, we have a major win there that will be rolling through in North America. In our packaging business, where we haven't seen the strength that we saw in hygiene, we have got a redirected focus towards some of the issues that are defined there and we see that improving. And then, we have a couple of innovation programs that are kicking in. So there are a number of things that are specifically in the pipeline there in North America.

And then if I may, could you give us a little more details on your recent Brazilian acquisition? What you expect from it over the short-term and then longer-term, obviously?

So, yes, I mean short-term it is not a huge acquisition so I would not say it's going to move the dial dramatically in the short-term, Rosemarie, although it is positive and accretive. The business strengthens our position in flexible packaging. We haven't had any production assets in Latin America in flexible packaging, which has limited our ability to grow. They also have a process capability that we don't have in other parts of world, so that is a process capability that we can leverage. So, it gives us a strong position in flex pack in Brazil that we can leverage across the rest of the region. It also gives us a production facility in Brazil. So, up to this point, we have been supplying our Brazil market from production facilities in Argentina and Colombia. We will now have a manufacturing footprint in Brazil which is important for us strategically. So strategically, it strengthens us a lot in Latin America, fundamentally as an organization, and it strengthens us in an important market of flexible packaging.

Okay. Thank you.

Thank you, Rosemarie.

And we will continue on to Steve Schwartz with FirstAnalysis.

Good morning.

Good morning.

I think when you talked about Asia-Pacific, you mentioned that you are seeing growth in China. And I know, Jim, you don't normally quantify that for us quarter to quarter, but can you give us a idea of how the growth rate is trending over the past couple of quarters?

Yes. So, without getting too specific, as you know we don't report those. But I would say -- I would say -- when I say solid growth, not double digit growth. So something in the high single digits would be the way to look at what we have going in China.

Okay, so --?

(Multiple Speakers) -- it's as good as it has been in a few years past, but still solid.

So high single digits year-over-year, and that is lower or higher than the level you had in the first quarter, in the fourth quarter?

Yes, so, I would say generally this is -- and again without getting specific quarter by quarter, generally these -- this is the kind of number we have been seeing over the last few quarters. And I would say a year or two ago we were seeing double-digit -- mid-teens kind of growth. So we have gone from that kind of growth rate to the high single digits over the last few quarters.

I see. Okay. And then, you had mentioned weakness in packaging, and we have heard similar comments from PolyOne and Eastman. Can you give us a little bit of color on exactly where you are seeing that weakness, or is it pretty broadly dispersed across your packaging business?

Yes, I wouldn't say there is a specific region where we would say it is worse than any other. I think it's broadly dispersed.

Okay. And then just lastly, on the five or six facilities in North America. You have that number for quite some time. I think even when I noticed in the K, you were still listing some facilities in North America that were already noted as being closed. Are you still carrying costs with some of those five facilities?

Well, I will let Jim, and on the costs, because I assume some of those -- if there are any costs that carry in there, they are under special charges. But Jim, you can comment --

Yes, because Jim always answers the question, then he -- (Laughter). (Multiple Speakers).

Yes.

So I don't know -- (Laughter). (Multiple Speakers).

He ribs me well on these things. (Laughter).

I think the situation in the K, is if we own the facility, even if it is not operating it is listed. I believe that is the case. They are not in commission. I think that is the situation. And then as Jim indicates, if to the extent that the plant is closed and but we are still maintaining it, those costs of maintaining that plant are in our special charges. Okay? And not in our operating results.

Ah, okay. Very good. Thanks for the color.

Thank you.

Thank you. And we will now hear from Dmitry Silversteyn with Longbow Research.

Good morning, Jim and Jim. A couple of questions if I can. And some of these have been asked maybe a little bit differently. But you mentioned the benefits of the longer term projects like the integration of Forbo driving your margin, and you also talked about some discretionary cuts that you have made. Is there any way for you to qualify or quantify what those cuts were or what the split was? And then sort of as a follow-up, do you have any more that you can do about discretionary spending assuming that -- or in case the second-half revenues don't come back as strongly as you believe? And how long can you maintain this sort of lean and austere operating environment before you have to let those costs creep back in?

Okay. So, let me let Jim try and answer the first question of the split between -- since he wants the tough question, the split between what is going on in costs on discretionary versus the integration. Now -- I will come back to our cost savings.

Yes, so, it's really difficult to quantify, but I would say -- if you go back -- reference back to my answer earlier about operating expenses. Obviously, if we were indicating that we thought we were running at a $97 million per quarter spend rate, and now we are more like $94 million, our synergy outlook hasn't really changed very much. So most of the delta is coming from our decisions to cut back on, what we call discretionary spending. So, maybe that answers the first part of your question.

Yes, that's all --

Then on the second part, so let me start by saying I have a lot of confidence in our revenue projections. Right? We have got good work going on. We got an organization that has shown long-term growth. And it is very clear when we dig into the details what has happened with respect to the Forbo impact, both on unplanned attrition and the lack of growth that has come in some of our targeted areas.

With that said, if revenue came in shorter -- so that plans we have now in terms of discretionary work, are some delayed hiring, some T&E, some internal meetings. So it's not a huge level of austerity. The opportunity to cut farther if we had to certainly exists. So could we sustain the level of spending that we are talking about here for a long period of time? Absolutely. Could we cut deeper? Yes, definitely if we had to, Dmitry, because we are not in a super cost-cutting mode. And then, that is the cutting mode that maybe couldn't sustain if you keep that for a long period of time without major changes. But we are confident on the growth trajectory going forward.

Sounds good, Jim. And then, if I could follow-up on sort the pricing dynamics that you're seeing. As you mentioned, it was the secondary Latin America, Asia-Pacific markets that saw some pricing pressure. You were able to the pricing, and actually increase prices in Europe. As demand there continues to quote/unquote fail to recover, and North American demand is what it is, are you -- is the patience of market participants perhaps running out, and sort of waiting for the volumes to come back? Are they starting to get more anxious about filling their facilities and maybe sacrificing pricing a little bit? Or is it just a case of everybody sort of learned the lessons from the past, or the raw material costs are just too high to be able to cut price and maintain margins? Can you talk about the pricing dynamic you are seeing in the developed markets?

Yes. So, the decision on adhesives is not a price volume decision for customers. These are small volume products that drive a lot of value for them. So, I think the pricing dynamics come when -- related to pricing volume, when companies are not demonstrating the value that they are delivering of their products. And it is in new opportunities that pop up.

So fundamentally, I would say that the strategy we have is to continue to manage our margins solidly through the cycle. And I think you saw that is raw materials went up, our margins actually moved up through that process in '10 and '11. As -- if pricing were to decline, then I think you would see our margins maintain and show strong, as we manage the dynamics of competitive pressures. So I don't see a big competitive push on volume and price. And frankly, I am not sure that is a real effective strategy for people to try to employ in this market.

Okay, Jim. Thank you much.

Okay. You are welcome, Dmitry. Thank you.

Thank you. And we will now continue on to Christopher Butler with Sidoti & Company.

Good morning.

Good morning, Chris.

Yes, a lot of good questions thus far. If we are looking at the North American segment in the second quarter, there was good expansion of margin. When we are looking at that, is that directly attributed to the structural changes that you've made in the US, in North America, seeing as there were no price increases year-over-year? So, no value based pricing boost, or any synergies from that standpoint, is that an effective read on the segment in the quarter?

I don't know that is 100% accurate. There are some pricing dynamics that have happened over time through the year. I think the way to look at it, Chris, is, we were at 17%, we bought a business that was at 6%. And there were various elements that had to get layered on. Some of that definitely was pricing, which happened throughout year, for products that were -- that needed to be repositioned. Some of that was reformulating. Some of it was the manufacturing synergy. Some of it was the SG&A benefits that we were able to create. So each of those things phased through the year. And I think we saw an element of each of those in this last quarter that helped with the margins. Maybe Jim can give a little more color on that?

Yes. So all those comments that Jim made I think relate to North American adhesives. And, of course, the numbers you are looking at in our release are the region overall, which CP, our construction products business. So I would just add onto what Jim said, that our construction products business had a very good quarter and margin. And that is based on a lot of hard work on managing their input costs. But also a little bit of volume coming through that business is very, very helpful to margin. So you are starting to see some of the lift in the North American region coming out of improved margins in our construction products business as well, in addition to what Jim said about adhesives.

So could you help me understand then why, as you get the Forbo sales up to the same speed as the Fuller sales in North America we're not seeing price increases year-over-year? This is the first quarter that we have got a good year-over-year read on Forbo. Is it in the mix, and that is in the volume as well, or is there something else going on?

Yes. So let me try and cover at a high level, and I will let Jim try -- I think you see a mix of things by segment below the North American business. So where there was overlap and where there were clear movements on pricing, those went through the P&L. In some other segments, for instance, in the polymer business, where -- where there were raw material contractions, we saw some price declines. So there is a variation of things that happened below the surface that net out to that number. But very much in that Forbo piece of the business, you see the price numbers that come through in the numbers and the details below the overall North America. Jim?

And shifting gears --

I think --

Go ahead, Jim, sorry. (Multiple Speakers).

Go ahead, Chris, I don't have much to add, so go ahead, Chris. I think that will be -- (Laughter).

So shifting gears, you generated cash flow from operations of $52 million, working capital came down quarter over quarter significantly. Have you made changes there? Anything unusual going on that allowed you to generate so much cash in the quarter?

Well, I think we had a good cash flow quarter, but I think it was pretty much in line with what we expected. So, I think our working capital was slightly negative in the quarter, but it was pretty close to a push. No, I think what you are seeing in our working capital is some seasonal changes. So we tend to -- because it is between first quarter and second quarter our business grows, our accounts receivable balances go up, that is pretty normal. Inventory for us is -- will bounce around a little bit quarter by quarter, because with all these plant consolidations we are doing, sometimes there are inventory builds in front of those. And then the inventory comes down afterwards, so the inventory is bouncing around a little bit. But I would say the answer to your question is, there hasn't been any structural changes in the way we are managing our working capital over the last number of quarters.

And thoughts on use of cash going forward?

Well, if -- I would reference back to our investor day. We said that we thought our operating cash flow would be about $160 million this year, excluding special charges. And based on what we seen through the first half and our outlook for the second half, I would say we stick with that number.

I appreciate your time.

Yes.

Thanks, Chris.

(Operator Instructions)

We will take a follow up from Rosemarie Morbelli with Gabelli & Company.

Jim, just quickly, you talked about price pressure in Latin America and Asia coming from small competitors compare to your major competitors. Any sign of consolidation within all of those small companies?

So as you know, Rosemarie, there has been some consolidation over the years. So, as the world progresses, I think there was a deal that was announced not too long ago in North America. We did it a deal in Malaysia couple of years ago. We did at deal in Egypt. We just did one in Brazil. So, yes, some of those things have happened.

But you don't see any acceleration?

I don't think there is any indication externally in the market that, that is happening.

Okay. And then one last question if I may. CapEx for 2013 is $110 million, what are you looking at for next year?

I don't carry that number in my head. I think it is around $50 million, so we are moving back towards our -- about 2% -- about 2% of revenue. We should be moving back towards that number. I think that is about right, $50 million to $60 million would be my guess for next year.

Okay, thanks.

Thank you, and that is all the time we have for questions. I would like to like to go ahead turn the conference back over to Mr. Jim Owens for any additional or closing remarks.

Thanks everyone for your time today and for all your support and interest in H.B. Fuller.

Thank you, ladies and gentlemen. That does conclude today's H.B. Fuller second-quarter 2013 investor conference call. You may now disconnect.