H.B. Fuller Company (FUL) 2013 Q3 法說會逐字稿

Good morning, everyone, and welcome to the H.B. Fuller third-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, Executive 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, Christine, 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; 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.

Also, please note that we have changed the organization of the regional results that we share with you. There has been no change to the Europe, India, Middle East and Africa, or Asia-Pacific segments. We are now separately reporting our Construction Product segments in line with our segment reporting in our quarterly and annual filings. Also, we now combine the Adhesives businesses in North and Latin America into one region, Americas Adhesives.

We have provided tables in the back of the press release, which was issued last night, which compare the new regional format to the prior format. The new reporting format will mirror our revised segment reporting alignment, reflecting recent changes in our management structure. The revised segment reporting structure is effective in the fourth quarter of this year.

All of the non-GAAP measures discussed today should not be construed as an alternative to the reported results determined in accordance with GAAP. Management believes that a discussion of these measures is useful to investors, because it assists in understanding the operating performance of the Company and its operating regions, as well as the comparability of results. The non-GAAP information discussed today may not be consistent with the methodologies used by other companies. All non-GAAP information is reconciled with reported GAAP results on the last pages of our presentation.

For more information, please refer to our recent press release, quarterly reports on Form 10-Q dated June 28, and March 29, 2013, and annual report for the year ended December 1, 2012 on Form 10-K, all 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. I'm pleased to share with you today the details of our third-quarter results, and the great work our team is doing to drive our future growth and margin improvement. When we gathered at the end of our second quarter, we talked about the need to adjust our game plan for the second half of the year, in light of the lower revenue growth being generated. The new game plan for the second half of the year involved three key actions -- refocusing our commercial teams to win in the marketplace; reducing discretionary activity and the related costs; and continuing to drive the business integration project, which is critical to our long-term success. We expressed confidence in our ability to deliver a positive second half, and backed this up by reconfirming the earnings guidance that we provided at the beginning of the year.

Today, I'm pleased to say that we delivered on these key actions in the third quarter, and the results of our efforts are clearly evident in the financial results. We got our revenue growth moving in the right direction. We managed our margins and discretionary spending to deliver a 28% increase in operating earnings and a 40% increase in earnings per share, when compared to the third quarter of 2012.

At the same time, we successfully completed major milestones in our European business integration project, keeping us on track to fully deliver the promised financial and strategic benefits from the investment, and our committed target of 15% EBITDA margin by 2015. We have momentum for a strong final quarter, and to complete another successful transformational year as part of our current five-year plan. And we're backing this up by, again, confirming our earnings guidance for the year, this time committing to land in the upper half of the original EPS range provided at the beginning of the year.

Here's our short agenda for the call today. I want to spend a few minutes providing more details on our performance in the quarter, and also give you a complete update on our critical business integration project in Europe. Jim Giertz will provide a bit more color on our earnings guidance for the balance of this year, and also provide a broad outline for what you might expect in 2014 and '15. And of course, we take your questions.

Starting with this quarter's financial results at the top, organic revenue increased by 1.5%. Pricing was slightly positive, and volume improved over 1% versus last year's third quarter. To better understand the revenue picture, we need to look at the geographical regions separately.

So, let's start with Europe. This is the region where volume declined year over year. The general weakness in our volume delivery in the EIMEA region reflects several significant factors that we have been dealing with for several quarters. I think everyone recognizes that economic conditions in the broader European region remain stagnant, and indicators show end-market conditions flat to down in many countries. It's not impossible to grow the Business under these conditions, as we showed in 2011 and 2012, but it's certainly more difficult. And as we have mentioned in previous conference calls, we have several specific factors this year that are hindering our growth, as we execute our business integration project in the region.

Some of the volume decline is planned attrition that supports our strategic goal of reducing complexity in our Business. Some of the volume weakness is due to the distraction within our commercial teams, as we manage product substitutions and product transfers. The one final factor that I would note is that the third quarter is normally a relatively weak quarter in the region, due to traditional summer holiday periods, which this year seems to be a bit more pronounced than in other years.

With all that being said, I think our team in Europe produced a very good result in the third quarter, absorbing a slight volume decline, while at the same time effectively managing a host of other strategic initiatives and generating a significant profit improvement. Also, we know that the refocused commercial teams are producing tangible results in our growth pipeline that will provide better volume momentum in the fourth quarter.

Finally, we're pleased that several of key strategic areas continue to show strong results, including the Hygiene market, the Automotive space, and the emerging geographies. The European team is looking forward to being finished with the business integration, and having the opportunity to leverage their new state-of-the-art business platform for long-term growth. If the economy improves in the meantime, that would help as well.

In Americas Adhesives, we reported volume growth of over 2%, which was a solid improvement from the 1% decline experienced in the second quarter. The volume improvement was the result of incremental improvements in both North America and Latin America. Market conditions did not materially improve in either region, but the results we delivered reflect improved focus on closing new business, and regaining some business lost during the business integration activities.

Our Construction Products businesses delivered strong volume gains again in the third quarter, boosted by a generally improving end market for new home construction and remodeling, and market share gains in key distribution channels. We continue investing to sustain our growth in this important segment.

In Asia, we continued our volume growth this quarter. The recent trends remain intact. Our Australia business is flat. Southeast Asia showed modest growth, and our China business continues to show solid organic growth. Going forward, we expect our revenue performance to improve as our teams continue to shift their focus from the business integration work toward winning new business, especially in Europe. Our commercial teams are well organized, well positioned, and now fully focused on winning in the marketplace; and we are confident that better revenue growth will continue.

Now, turning to the results of the Company overall, our gross-profit margin was up approximately 150 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 declined 3%, or 50 basis points, as a percentage of net revenue versus the prior quarter. As promised, we proactively managed our discretionary activity and the resulting costs as part of our focused second-half game plan.

To sum it up, we got our revenue line moving in the right direction, we managed our margins, and controlled our costs. In the end, we delivered a 28% increase in operating income, and EBITDA margin improved by 200 basis points versus the comparable period last year. Our year-over-year EPS growth was 40%, well above our targeted growth rate of 15%. And we set ourselves up for a strong finish to the current fiscal year, on track to deliver on the strong earnings guidance we provided at the beginning of this year.

Now a quick update on the business integration project, today focusing on Europe, where most of the action is, for the time being. As we noted last quarter, the integration in North America is essentially complete, with only a few investments in our production facilities complete over the next several months. In the EIMEA business segment, the integration overall is progressing as planned. Here are some highlights.

First, we successfully completed two of the five scheduled facility closures. These were located in Chatteris, UK and Vigo, Spain. Approximately 30% of the total volume that will be transferred from a legacy site to a new facility is now completed. Two more facilities will be closed in the first quarter of 2014, and the final production facility closure will occur in the second quarter of 2014.

Second, the SKU reduction project is on track. The initial plan was to eliminate 45% of total combined SKUs in the region. To date, we have eliminated 30% of the combined SKUs.

Third, our significant capital investment plan remains on track. Major investments in state-of-the-art production capacity in Germany, France and Portugal are taking shape, and will be ready to begin scale-up in the fourth quarter of this year.

Lastly, our shared service center in Portugal has taken on customer service and finance functions from eight legacy locations. The remaining consolidation of local staff units will be completed by the end of the fiscal year.

The results of these efforts continue to show up in our financial results, with the EBITDA margin in the region at 10.6% in the third quarter. Our internal forecasts indicate we should generate an EBITDA margin of 12% in the fourth quarter, in line with the commitment we made at our Investors Conference in February of this year. And the bulk of the synergy savings are still ahead, and will be bringing margin improvements through next year, as the production network rationalization is finalized.

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. We continue to apply lessons learned from the successful completion of the North America piece of this project. We remain confident that the EIMEA integration will deliver the benefits as planned.

Before I turn the call over to Jim Giertz to discuss our guidance for the final quarter of the year, I would like to provide a mid-term report on our margin improvement commitment, which is a key component of our five-year strategic plan. The slide before you, or slide 6 if you downloaded the deck, illustrates our progress towards our 2015 EBITDA margin goals. For each of the businesses on the chart, the left bar is the margin performance in 2010, the base year of our five-year plan. The right bar is the 2015 target, and the center bar is the actual margin posted in the third quarter. As you can see at the halfway point of our current strategic plan, we are more than halfway to our EBITDA margin targets.

From a regional perspective, Americas Adhesives is already over-achieving its target level of performance for 2015. Our Construction Products segment is also ahead of plan, and will more than likely deliver a higher level of performance than we originally anticipated. EIMEA is right on track, and we expect significant margin expansion in 2014, as the production network rationalization is completed. The only region that is slightly behind target is Asia-Pacific. The primary driver of the underperformance is slower revenue progression than we had originally anticipated when we created the plan back in 2010.

So, long story short, we are on track to achieve our targeted EBITDA margin of 15% by the 2015 fiscal year, despite the generally lower volume environment that we are experiencing relative to our original plans. The progress to date is evident in the results this year. The expected future improvements are supported with specific plans and active initiatives which will produce the targeted outcome.

At this point, I'd like to turn the call over to Jim Giertz to discuss our guidance for the remainder of the year. Jim?

Okay. Thanks, Jim. Our outlook for the fourth quarter essentially confirms our original earnings projections provided at the beginning of this year. Starting at the top, we expect net revenue in the fourth quarter of between $520 million and $530 million. This is in line with the current trends, and within the guidance range we set at the end of the second quarter.

We anticipate achieving an EBITDA margin for the full year of about 12.5%, in line with our expectations when we initially set guidance at the beginning of the fiscal year. That said, the absolute EBITDA dollars earned will be a bit less than our original guidance, as revenue is lower than we initially planned. Our EBITDA guidance for the year is now $255 million to $260 million, or $68 million to $73 million in the fourth quarter.

We are narrowing our earnings per share guidance range by increasing the bottom end by $0.05 per share. The new full-year guidance is $2.60 to $2.65 per diluted share, or $0.70 to $0.75 per diluted share in the fourth quarter.

The core tax rate, excluding discrete items, was 30% in the third quarter, and we expect this core tax rate to again be 30% in the fourth quarter and for the 2013 fiscal year overall. In the third quarter, we had positive discrete tax items totaling about $1 million, which boosted our EPS by about $0.02.

Capital spending guidance this year remains $110 million to support the ongoing business integration activities, primarily in the EIMEA region. Our capital expenditures totaled $35 million in the third quarter, and $83 million for the year to date.

Now, before I turn the call back to Jim O., a few comments about next year and our 2015 financial targets. As I think everyone is aware, at our Investor Day conference in July of 2011, we announced aggressive targets for the 2015 fiscal year. And then following the acquisition of Forbo's adhesives business in 2012, we ratcheted these targets up. The key target metrics for 2015 are organic revenue growth of 5% to 8% per annum, and a 15% EBITDA margin.

So, now as we complete the third year of our five-year plan, and set specific guidance for the fourth year, the question is -- are the 2015 targets still valid? And to this question, my short answer is yes. Jim Owens showed our EBITDA margin progression earlier, so I think that our plan and prospects to achieve the 15% EBITDA margin target are well understood. The larger unknown is the expected revenue trend for the next two years.

Based on our 2013 revenue performance and the current global economic backdrop, we are updating our growth numbers to reflect our current situation, and have established a revenue target range of $2.2 billion to $2.4 billion for 2015. In other words, from our current position, we are continuing our commitment to achieve revenue growth of 5% to 8% per annum. The plans for 2014 and 2015 will reflect our focus on generating higher and consistent organic revenue growth, especially from our key target markets of Hygiene, Packaging, and Durable Assembly. Also, we will maximize our opportunity to grow our Construction Products business in North America, leveraging our improved competitive position, and improving end markets.

We will provide specific guidance for 2014 during our fourth-quarter conference call in January of 2014. But for now, we can say that the 2014 plan will include an improvement in our organic revenue growth relative to 2013, and a significant further step in our EBITDA margin improvement plan, primarily driven by the completion of our business integration in Europe, and improving market conditions in our Construction Products segment. In addition, our 2014 plan will include other strategic initiatives to provide a foundation for future sustainable growth, and completion of our aggressive five-year plan.

And now, I will turn the call back to Jim Owens to wrap us up.

Thanks, Jim. This was a solid quarter which brings us one step closer to our long-term goals. Not only did we return to growth this quarter, we also continued our margin management by delivering 13.5% EBITDA margin, and EPS growth of 40%. At the onset of the business integration project, we were clear in 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, and that we have a team at H.B. Fuller who will deliver. We are on track to deliver 2013 EPS performance at the high end of our guidance range, which will deliver full-year EPS growth of 18% to 20%. We have also taken the necessary steps to deliver our 2015 EBITDA margin and growth goals, as we move back toward our strategic growth rates.

Thank you for your interest in H.B. Fuller, and for joining us on the call today. Now I'd like to open the call up for your questions.

Thank you. The Company would like to provide everyone the opportunity to ask a question. You may requeue as often as you would like, time permitting.

(Operator Instructions)

We'll go first to Mike Ritzenthaler from Piper Jaffray. Your line is open.

Guys, great quarter.

Thanks, Mike.

Just for our understanding, Jim G., you had added some color in your prepared remarks, but taking up the midpoint of EPS guidance but lowering the midpoint of EBITDA, is it fair to assume that the delta between the two is on the top line as opposed to some new change in the outlook for the end markets, or is it somehow an artifact of the business integration costs or some other factor?

This is Jim G. You want me to answer that?

Yes.

It's Jim G. I think if I understood your question right, the answer is yes. The EBITDA dollar guidance that we've given originally, we just ratcheted that down just a little bit, just because our revenue is lower. But the EBITDA margin expectation for the full year is still according to our original guidance and our original plans that we set out at the beginning of the year. I hope that answered your question.

No, that's the clarification that I was looking for. I guess secondly then, on the integration update, in the prepared comments, you've got two of the five facilities closed. Basically on the closure side of 2013 milestones have been completed. The SKU reduction is at 30%. Looking at the table in the release, it seems like the workforce reduction and facility exit costs are the two categories that have the farthest to go to attain the expected costs. To what degree does further progress depend on Sewerborg and Mondelo and some of the other significant CapEx projects? And I guess what I'm trying to -- the spirit of the question is the additional 100 basis points in EIMEA sequentially, what has to happen there in terms of head count, or is it really more on the operational side, on products and SKUs?

Okay. So this is Jim G. I will take the first -- I'll take one part of that question, which you ask about our workforce reduction costs that have been recorded in the income statement so far, relative to our total estimate, I believe. The reason that that's lagging is essentially all of the discussions and the negotiations to establish what the severance payments and other arrangements will be, when these facilities are closed, those discussions are essentially completed. But from an accounting point of view, we amortize in the cost from today into the estimated date of the closure of the facility. So that's -- and those costs will come in basically in line with our estimate that they will come into our income statement as special charges, up until the time that the facility is closed. So I think that -- hopefully that answers that part of your question.

Yes.

And then in terms of the broader question, in terms of margin improvement, Mike, the Q4 margin improvement is built on a stronger top line in Q4 versus Q3. That's a natural phenomena, along with some of the things that are going on in the business, combined with, more importantly, the actions we've taken this quarter. So the two slight closures will come through, the customer service consolidation, some of the other work we're doing on raw materials and margin. So those are imbedded in by actions that have happened or are in the process of happening, in terms of Q4 margin improvement. And then the big step-up next year is a result of the fact that the largest capital investments come online Q1 of next year, and the largest two closures happen in Q1 and Q2 of next year. So the big changes, from a production footprint happen, are those ones that happen in Q1 and Q2 of next year, and that's when you see that other step-up in the margin, as a result of those changes.

All right. Super. Thanks so much, guys.

Okay. Thank you, Mike.

And we'll take our next question from Rosemarie Morbelli with Gabelli and Company. Your line is open.

Thank you. Good morning, and congratulations again.

Good morning, Rosemarie. Thanks.

I was wondering if you could give us a better feel for whether you get to your EBITDA margin more from the SG&A decline than the gross margin decline? And linked to that, 18.3% of sales in SG&A is the lowest level going back to 2005, and on the gross margin side, can you get back to 30.1%, which you had in 2009? If you could help understand where you are benefiting the most. And still linked to this, is that $91 million, let's call it, SG&A, on a quarterly basis, something sustainable, or you cut really too much of your discretionary items in order to continue in that path? So it is all really the same question.

This is Jim. G. So I'll start the answer to that. To get to 15% EBITDA margin in 2015, we've communicated a generic model of our P&L. And that is, 30% gross margin, 18% at the SG&A level, and 3 points of depreciation and amortization. So it's 30 minus 18 is 12, plus 3 is 15, right? So that's generally the model that we're moving to. The gross margin improvement from 28%, where we are today, to 30% is -- there's many factors there -- but the primary driver of that is next year in Europe, when the plant rationalization will really take effect and we'll work to improve our gross margin, as our manufacturing expenses are reduced. So that, I think, answers the first part.

Then you ask about our SG&A levels this year -- this quarter, and then is this sustainable? I would say, well, first of all, we were pleasantly surprised that our operating expenses came in a little bit lower than even we thought they would in the third quarter. I would say that in the fourth quarter of the year, our operating expenses will again be well controlled. But if I had to guess, I would say they'd be just a tick higher than they are -- than they were in Q3.

And generally, how sustainable is this, Rosemarie?

Yes.

We've made a commitment to grow our SG&A at a lower rate than our revenue growth. And as a company, we've made decision on things that we were going to -- how we were going to spend differently on the second half of this year, and you see that in the numbers. So we're going to continue to invest in the business, and as we generate growth, we'll spend more on SG&A. And if growth is lower, we've shown an ability that we'll be able to manage discretionary spending in a controlled fashion, while still investing for the long term in the business.

Just a couple of clarifications, if I may. What are you basing your -- you are maintaining your top line growth organically at 5% to 8%, and the economy certainly is not conducive to that. I understand you have new programs. I understand that people are going to be focused and they are not going to be concentrating on the integration as much. But it is still a high number, considering the global economy out there.

So you're right, the economy isn't going to help us a lot here, Rosemarie. And we're not counting on that when we look forward. I think if you look back to our performance in 2010, '11, and '12, it was certainly up at or above these kind of ranges. And also, I think today, more importantly, if you look at certain segments of our business, where we are performing well and where they are isolated from the integration, there's really strong growth. Our Hygiene business is showing double-digit growth because of the great work we're doing to win share with customers.

Our Construction Products business, nice work by the team there to gain key wins in channels. Some of the Durable Assembly work we're doing in Electronics is gaining some momentum in terms of meaningful growth. So there are pieces of our business where we're seeing solid growth today. And I think to your point, as we get through the integration, those parts of our business that are distracted by integration will also be on that offensive track. So this is about innovation and winning in the market and the investments we've made there. So that's the reason for the confidence.

Okay. Thank you. I will get back in queue.

Thanks, Rosemarie.

And our next question comes from David Begleiter from Deutsche Bank. Your line is open.

Good morning. This is actually Ram Sivalingam sitting in for David. Jim, just a quick question. Very clear on the cost side of things, both at the SG&A line and the gross profit line, but regionally what I found was interesting, EMEA volumes were down 3.8%, yet that was the only region to post pricing gains. So could you talk a little bit about what drove that pricing gain in the quarter, whether it be mix shift or some supply/demand changes at the product level?

So the pricing gains are a product of some of the integration work. So as we manage the integration, reduce SKUs, but also make certain that pricing is in line with the value we deliver, so there are certain products that are -- that were under priced relative to the value we delivered, so that's a part of generating the value and the margins that we expect in our European business. That's probably the biggest driver of that price gain in Europe. And I would just comment that we do that generally across the business, across the world. Getting good at pricing is a fundamental part of something that's changed in this company over the last couple of years. Understanding where value is delivered and making certain that we price appropriately is a skill set that the company's acquired, and we actively manage that much better than we did a few years ago.

Understood. That's very helpful. Thank you.

Thank you.

And our next question comes from Peter Cozzone with KeyBanc Capital Markets. Your line is open.

Good morning, guys. Great quarter.

Thanks, Peter. Good morning.

Can you provide some more color on the organic sales growth initiatives? How have those been progressing? Are they better than expected thus far? And then any specific wins or markets that you can point us to in terms of visible progress? Should these benefits accelerate as we head into 2014?

So I think the one that we've highlighted most clearly is the Hygiene business, which is a nice attractive space, but our team is clearly winning. And that comes, as we talked a little bit in the Investor Day, about having the right relationships on the right projects with the right customers. So as people innovate, decide they want to make a thinner diaper or a stretchier diaper, or a new product that has higher productivity in their lines, we win those opportunities by being the technology expert in that field. That's the same approach we apply to other segments, whether they're in Packaging or Durable Assembly. We've identified those three areas as the targeted areas.

A second area where we've made investments is our Electronics business. I think it's another good example of a place where we've taken dedicated resources, put them in a market segment, and we're seeing real tangible gains in the business as a result of those investments. So it is a business where there's not one huge customer that you can point to. But as you look at the details around these various customer initiatives and innovation initiatives, you can see the traction on a number of them.

The final one I would point out, Peter, is our Construction Products team. If you look at the organic growth rate the last couple of years there, you'll see that that's driven by market share gains relative to what's happened with others in that market. And again, that's this innovation philosophy of what new products, what new problems can we solve and win in the market. And that's generating some nice wins, and the team had another nice one they announced this quarter that will kick in the first half of 2014. So good progress there would be something else I'd see that's a good example.

Great. Thank you. And then expanding on earlier questions, am I clear in assuming that the margin expansion in Europe during fourth quarter is a function of milestones already completed, and that the next big milestones or step-ups should come in the first half of '14?

I think that's a fair way to look at it. The team has done a great job this year. I think you'll see that. We saw that result in Q3 and you'll see more of it in Q4. And then those big milestones of the new investments coming online and the closure of two large facilities both happen in 2014, Q1 and Q2.

So in relation to the 12 plants targeted for closure noted in the Investor Day slides from earlier this year, can you just give us an update of where we are? I know you got the two closed in 3Q here and two more in the first half of '14 here, but can you just give us an update of where we are there?

So 5 in North America, 5 of the 6 in North America are fully closed. There's one that's finalizing this quarter. In Europe, 2 of the 5 are closed. And in China, there's 2 to be closed in 2014. None of those are closed at this point. Those are smaller impact in terms of the overall transformation. But those both happen in 2014.

Great. Thank you very much.

You're welcome.

And our next question comes from Christopher Butler with Sidoti and Company. Your line is open.

Hello. Good morning, everyone.

Good morning, Chris.

Looking at the North American Adhesives business, on similar revenue, your profitability increased; and I noticed that this occurred last year. Is there a seasonality to the mix as you move into the third quarter that -- or anything else that accounts for that change on a second quarter to third quarter sequential basis?

I think it is true the last two years, I'd have to look back to see if it was true. I think it's just a matter of milestones being hit. The North American team, as we've talked about, did some great work. The integration started right away last year. So they saw some benefits in Q3 of 2012, did a lot of work throughout the year last year. And some of their final steps happened in Q2 of 2013, which resulted in the step-up they saw here. So I'm not sure it's a seasonality issue, Chris, as much as it's a good, solid performance by the team in North America to continue to deliver on their commitments.

Okay. That was the reason I asked is that last year, I knew that there were a lot of improvements being made but I wasn't aware that there was a big chunk that was going to be taken place in the second quarter.

A number of things finished through and found their way through the P&L in the second quarter that impacted us in third quarter. And I also point out that, as I said, we took a conscious effort to manage discretionary spending for the second half of the year, so that's also impacting the Q3 results.

And touching on that, the forecast out of the last conference call was for $94 million of SG&A. Could you give us an idea of what the delta was from what your expectation was to where the reality is?

So I'll give this one to Jim Giertz and he can give you a flavor of -- I think we give broad guidance on SG&A, not specific on a quarterly basis, but Jim can give you a sense of where some of the savings came from.

Yes. So that's my fault, because I was the one that said it was -- your number that you said is what I said in the last conference call. So yes, we overestimated what our operating expenses are going to be. I don't think there were -- as is true in every quarter, there were some good things that happened and some bad things that happened in the quarter. So I don't think it really relates to, in any material way, to unusual items that happened in the quarter. What I think is the fact is that we were actively cutting back on our hiring. We were leaving positions open, we were cutting back on outside services, cutting back on travel. And we came in a little bit better than we thought. I think that is the core explanation. And as I said earlier, I think if I had to give a forecast for next quarter, I'd say it would probably be a little bit higher than we were in the third quarter.

I appreciate your time.

Thank you.

And our next question comes from Jeff Zekauskas with JPMorgan. Your line is open.

Hello. Good morning.

Good morning, Jeff.

Do you expect your European volume to grow year over year in the fourth quarter? And some people believe that the European economies are really beginning to gather a little bit of speed. Is that your experience, or do you have a different point of view?

Yes, so as you know, Jeff, we don't give specific volume numbers on regions specifically by quarter.

I was just wondering up or down.

But I think we will improve in Q4 versus Q3. Whether it will be a positive volume number, I think that would be a large step for the group. So somewhere between where it is and zero would be the right progress from where we're at today. But it will be better Q4 than it was in Q3. We don't see -- from our standpoint, we try to dig into, on a quarterly basis, what's happening in the region from an underlying versus what we've done.

As you know, the last couple of years, Europe was down and we were generating volume growth. So we -- our results are more driven by what we do than the economy. But what we see in our customer base is not a strengthening in Europe, from our perspective. And in fact, as I mentioned in the script, we saw the summer shutdown in some areas actually being a little longer and more pronounced than we would have seen last year. But generally, I think the general statement is we see Europe like it's been, very stagnant.

Okay. So over the past couple of months, oil prices have moved up. Has that changed your raw material outlook, either in the United States or in Europe? Or are your raw materials still pretty flat? And what's your view of the year ahead, in terms of overall pricing and overall raw materials? Is the base case that both raw materials and pricing will be flat over the next 12 months, or do you see them differently?

As you know, for most of our raw materials, Jeff, it's a supply/demand phenomena. But the long term trends of the feed streams have an impact. So I would say most of the benefit we're getting right now is a result of the integration and the work we're doing there. But in terms of market trends, they've been flat to slightly down this year in terms of market trends. I think you're right, if oil stays over $100 a barrel, $105, $110, we'll see some pressure sometime in 2014 on raw materials. But the supply/demand issue is the bigger driver. So if the economies remain the way they are now, I think that will be very muted effect, because this is the huge driver of raw materials. So our current view is slight pressure second half of 2014, but relatively flat between now and then.

In your margin targets, the one area where there's a good distance to hit your target is Asia. And you mentioned that you would close a couple of small facilities. So is really hitting your target in Asia dependent on volume growth? Is that the core dynamic there?

Yes. So I think as I said in the script, we are going to hit the overall target as a Company. We're probably going to over deliver in Construction Products, maybe a little bit in North America. And I think the Asian business is a little stretched at this point, the 2015 target, because that was built on volume growth. We do have the volume growth coming around there, which is good progress. I think there's also some things we can do on the cost side, including the work we'll have by consolidating.

And I will just point out in Asia, this is a consolidation and an investment. Because we have growth, both the plants are in China. There were four smaller plants, Forbo had two and we had two. We're making investments to have two sizable, built-for-growth facilities in our China business. So these are really growth investments more than cost investments, or cost-cutting investments, though there are some cost savings. So the short answer to your question is yes, we are going to move toward those targets. Volume is a part of it. But there's also a part of not spending at the same kind of rates we had anticipated in the original '15 plan.

And then lastly, for Jim Giertz, are there tax items that you expect in the fourth quarter, either positive or negative?

In terms of discrete items?

Yes.

Well, those are a little bit hard for us to predict, but I would say our best guess would be there'd be some small positive discrete items, perhaps.

Okay. Great. Thank you very much.

And our next question comes from Dmitry Silversteyn with Longbow Research. Your line is open.

Good morning, guys. Most of my questions have been answered. But just to follow up on the question that Rosemarie asked earlier, when you look at your top line growth expectations of 5% to 8% for 2014 and 2015, Jim, I think you referenced that in 2011 and 2012, you've done better than that, largely on higher pricing. Your volume was up, I think, 2% in 2011, and just a little bit over 1% in 2012, and maybe flattish this year. So how do you get from 1% to 2% volume growth to 5% to 6% volume growth and a little bit of pricing to get to you that 5% to 8% top line that you're looking for over the next couple of years?

So again, Dmitry, I think the key issue is building on the strengths we have. So we have good solid growth in Construction Products. We think we can do better than that. We have some wins that are already logged that will drive very significant growth. Plus the fact that our Construction Products business is on the later end of the housing recovery, we haven't even seen all the benefits that come there. We see some good positives there.

Our Hygiene business continues to generate wins. So that's a piece of our business where we see positive growth. I indicated we're seeing good progress on this Electronics business. We have a number of parts of our business that are generating nice growth. And the difference between where we are now and where we're going to be is the other chunks of our business delivering what we'd expect. So our Packaging business, some of the innovations that we have there coming to market, some of the other segments of our Durable Assembly business, delivering what we'd expect. So I think what we have in the organization is parts of the organization that aren't distracted by Forbo delivering very nice growth, parts of the organization that are distracted by the business integration that are getting rolling in terms of the growth agenda.

Got it. Got it. Okay. On the Construction and Americas business -- and I'm not sure where the acquisition fits in, so I'm asking about both -- but is the Plexbond acquisition in the numbers there somewhere? And if it is in the quarter, what would the organic growth have been if you excluded Plexbond?

So the number, the Plexbond business is in the integration numbers. It's in the -- I'm sorry, it's in the Americas numbers. I'm sorry, I misspoke there.

How big are --

It's about 1% overall, I think, for the growth.

1% was contributed from Plexbond. Okay.

And then final question. The pricing weakness that you're seeing outside of EMEA, is that raw material pass-through driven? Is that sort of end market environment driven? Are you going after volume? Can you explain to me the dynamic of lower prices in regions where you're not out mixing customers through the Forbo acquisition integration?

So I think the pricing overall is relatively flat overall, so I think there's a mix phenomena of us managing our pricing across our market segments there. As I mentioned, raw materials are generally favorable, so that generally results in pricing flat to down, but relatively flat in the other regions. With the exception, as you point out, is EIMEA, where we're actively managing prices as we restructure the business. So there's big segments our business where we're making changes to better reflect the value proposition that we have in the business.

So the -- or whatever, the 1% of price declines that we've seen in Americas and Asia-Pacific, that's primarily mix, what you're saying?

It's primarily driven by us managing to what the cost structure is in the market. So as we win business -- as raw materials drop and we win business at lower prices, or in other segments where raw materials are up, we gain business at higher prices, mixes out to a net of about 1%.

Got it. Okay. Thank you very much.

Jim will follow up on that.

And Dmitry, the other thing, this is just to remind that you these -- the way we are measuring price here is, it's year over year, so --

Right.

It's picking up all the different price changes that have happened over the last year, so it's not always a very good indicator of what's happening right now, in terms of price. Like for example, Asia, price is down, but if you ask where are prices going in Asia, going forward, I would say they're probably going to go up. And that has to do with just the swings and valleys of the raw material cost environment that we see in that region, for example.

Got it. Okay. Thank you.

And our next question comes from Steve Schwartz with First Analysis. Your line is open.

Hello. Good morning, guys.

Good morning, Steve.

Just one question for you. Jim O., you recognized last quarter that you had taken your eye off the ball on some growth initiatives. In this call, you noted that you're getting back on track with furthering those initiatives. Can you give us an idea of how big was that gap last quarter from maybe what your original targets were on those initiatives, how much have you closed it, and at what point do you get back to the growth pace that you originally set?

Yes. So as I said last quarter, Steve, we had two factors that were in our business second quarter, they're still in our business this quarter. One is, we had, through all of the business that we had integrated, changes in our business by eliminating SKUs, transferring products, eliminating products, that was going to result in volume decreases. Those are finding their way through the numbers and they're part of the net number that you had last quarter, they're part of the net number you have this quarter. And the second thing that we had was, we have sales organizations that had to be combined. So the end of last year, we had two sales teams came together to form one. They're calling on new customers, they're getting comfortable with new product lines, and they're the team that's managing all of these product and price transformations.

So rather than being on the offense and selling, they're managing all those kinds of activities with customers. And it was that activity that we strongly addressed this quarter. We put in place a program we call Project WIN, What's Important Now, identified clearly the targets that needed to get closed this year that would drive growth for the second half of this year and into 2014, and we dedicated a lot more resources of our sales leadership, as well as the commercial leadership and the sales management all the way up through the organization to focus on this growth effort. And it made an impact this quarter, it will make an impact next quarter, and you'll see it as we go into 2014. So my expectation, Steve, is you'll see positive movements in that organic growth rate quarter after quarter to get us up into the range that we're talking about, as what we think is sustainable. So moving last quarter, this quarter, next quarter, we should see another positive jump, and the same thing in the first couple quarters of next year. And I don't have a specific number to put on that today, but -- and I think this quarter was a good positive step, and I'd expect a similar good, positive step next quarter.

Okay. Sounds good. Thanks, Jim.

Okay. Thanks, Steve. Thanks for the question.

(Operator Instructions)

We'll go next to Rosemarie Morbelli. Your line is open.

Hello. I would just like to follow up on the pricing issue. If you are eliminating SKUs that are marginally profitable and are learning as an organization to raise prices for the value-added products, shouldn't price be up just by definition, even if volume is not and even if raw material costs are stable to down?

The pricing -- and I think the question was particularly targeted at Europe -- and pricing is up in Europe, Rosemarie. So I think that was the point is that in our European business, would have some volume declines, part of that was planned, but it is offset by some pricing changes that we see as part of a strategic effort. And as far as the rest of the businesses, there's both activities that go on at the same time, as well.

Okay. And if we look at volume being up 1.4% for the corporation, and then you eliminate 1% from the acquisition, that leaves you with volume growth of 0.4%. What would it have been if you had not consciously eliminated some of the SKUs and, I am assuming, marginally profitable customers?

It's tough to exactly target that number, Rosemarie. Because we don't purposefully try to lose customers, right? We want them to buy these products for us, but at the right price; or in some cases, we want to substitute product A for product B. The net, if you're looking for a number, the net impact that we said early on in the transformation plan was that there'd be, out of the revenue that we acquired, $50 million, that through that process we expected to lose. We certainly didn't target to lose any of it. And I would say as we dig into our details, we see, in each segment of the program, the kind of numbers that we planned. So that's probably a good overall number in the business on an annualized basis.

So you will have lost this year about $50 million in revenues from your conscious efforts?

I think overall, through what happened the end of last year and this year, $50 million is a good number, overall, for the corporation, as a result of this.

Okay. And just one quick explanation -- well, not explanation. Clarification is the word I was looking for. On Asia-Pacific, you had two plants, Forbo had two plants. Are you shutting down all of those four plants and replacing them by two state-of-the-art manufacturing facilities? Is that what you are doing, or did I miss something?

No, that's not what we're doing, Rosemarie. So we are -- we each had a plant in Guangzhou. Forbo's was a newer facility. We're taking our production competencies and moving that to that facility. So in Guangzhou, we're closing the former H.B. Fuller plant and investing in that facility there, in [Yeunghu]. And then in the northern part of China, Forbo had a plant in Shanghai at a lease site. We have a state-of-the-art facility in Nanjing. We're making a sizable investment in Nanjing. So in both cases, it's on an existing site. In one case, it was the former Forbo site, and the other, it was the former H.B. Fuller site. And different product lines also associated with each.

Okay. So you are adding capacity plus equipment to produce additional product lines?

Correct.

Okay. Thanks.

You're welcome. Thank you.

And our next question comes from Mike Ritzenthaler with Piper Jaffray. Your line is open.

Hello. Just one follow-up for me for our edification, on the rationale for breaking out the construction separately. Given the fact that the Company is more focused on things like Hygiene, Durables and Packaging, is there anything else that's leading to the decision to break out Construction separately that -- other than what it seems like on the surface, I guess?

I'll let -- well, it's always been a reportable segment and an important part of our business. But let me let Jim tackle that.

I think, Mike -- I don't think there's any great message here. We have been reporting Construction Products as a reportable segment in our Q's and K. So the information was always available the day after we have our conference call. And we are changing our segment reporting alignment because of changes in our organization, so we just thought it was a good time to align the reporting that we do in our press release to what we actually do in the Q, which comes the day after. So it was a little bit of a mismatch, and we're just aligning it. That's all.

That makes sense. Thanks for clarifying that.

And we have no more questions at this time. I'll turn it back to you for closing remarks.

Okay. Great. Thanks, everybody, for all your time, attention and support of H.B. Fuller.

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