H.B. Fuller Company (FUL) 2013 Q4 法說會逐字稿

Good morning, and welcome to the H.B. Fuller fourth-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, Alicia, 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, segment 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. Segment operating income is defined as gross profit less SG&A expense, and EBITDA is defined as gross profit less SG&A expense plus depreciation and amortization expense.

All of the non-GAAP measures discussed today should not be construed as an alternative to the reported results determined in accordance with GAAP. We believe that the discussion of these measures is useful to investors because it assists in understanding our operating performance and our operating segments, as well as the comparability of results. All of 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 September 27, June 28 and March 29, 2013, and the annual report for the year ended December 1, 2012 on Form 10-K filed with the Securities and Exchange Commission. All of these documents are available on our website at www.hbfuller.com in the Investor Relations section. Now, I will turn the call over to our President and CEO, Jim Owens.

Thanks, Max, and thank you, everyone, for joining us today. In 2013, we delivered on our profit commitments and positioned ourselves for further success in 2014 and 2015. 2014 will represent the fourth year of our current transformational five-year plan. We have made great progress over the first three years of the plan, and we expect to take further significant steps toward our 2015 goal in 2014. Our key long-term financial objectives remain unchanged, namely achieve organic revenue growth of between 5% and 8% per year, increase our EBITDA margin to 15% by 2015, grow EPS by 15% per annum, and increase return on invested capital to 15% by 2015.

In 2014, we expect revenue growth at the low end of our long-term growth targets of 5% to 8%. Our Construction Products segment posted solid volume growth in 2013 and this is expected to continue into 2014. Our Asia Pacific region picked up the growth pace throughout the last year, especially in China, and this momentum will carry forward into 2014, as well.

We anticipate more modest revenue increases in the Americas and the EIMEA operating segments, with the EIMEA's revenue performance expected to improve in the second half of 2014 following the completion of the business integration project at the end of the second quarter.

Our gross profit margin is expected to increase in 2014, primarily driven by the cost benefits that will be realized upon the completion of the business integration project in Europe. And once again, our SG&A expenses should increase at a rate below the increase in net revenue. Overall, we expect our EBITDA margin to be about 14% for the full year, about 150 basis points higher than the level achieved in the fiscal 2013 year. Our core tax rate should remain steady at about 30%, excluding the impact of discrete items.

And all of this will come together to generate adjusted diluted earnings per share for the year within a range of $3.00 to $3.15 per diluted share. This represents an increase of between 16% and 22% over 2013. Clearly, achieving this financial plan for 2014 will put us in a strong position to hit the 2015 goals that we set for ourselves back in 2011. But we are striving to do more than just hit our financial metrics for organic growth and margin expansion. As we deliver our financial targets we are also building a new infrastructure that will sustain our growth and our profitability in the future.

We are investing in emerging markets, revitalizing our technology pipeline and strengthening our organization. We have significant projects underway to provide a stronger platform for sustained success. Our business integration project in Europe, which is nearing completion, and a new initiative that we refer to as Project ONE, which will create a state-of-the-art information technology platform.

We are also investing in growth market segments such as electronic adhesives, and in geographic expansion in Latin America and China. Our goal is to transform our Company, both in terms of the financial results and in the operational infrastructure that will sustain our success. We are making good progress on both fronts.

We expect another strong year in 2014 and our track record of meeting commitments gives us confidence that the 2014 plan will be achieved, as well. At the beginning of 2013 we set out a pretty aggressive game plan for the year. That plan consisted of solid organic growth, further EBITDA margin expansion to 12.5%, another year of strong double-digit EPS growth, and completion of the heaviest portion of our multi-year business integration project. As the year played out, the revenue growth goals we set became unattainable due to generally soft end market conditions, especially in Europe, and some negative impacts from the business integration project.

However, we reacted quickly during the year to refocus our commercial teams and to prioritize our discretionary spending. This business agility enabled us to deliver solid growth again this year and deliver on our key commitments. Let's take a step back and review our 2013 performance against the initial guidance we set for ourselves at the beginning of the year. We grew organically about 2% versus our initial plan of 3% to 5% growth. This marks the fourth year in a row that we posted solid organic growth. For the first three years of our current five-year plan we have grown organic revenue at an average annual rate of nearly 6%.

Despite lower than expected revenue in the year we generated an adjusted EBITDA margin of 12.5%, exactly in line with our guidance. Margin expansion in our EIMEA segment is a critical component of our five-year plan and a key indicator of progress in our business integration project. But we put a stake in the ground at the beginning of the year targeting a 12% exit rate for our EBITDA margin rate in Europe.

Our actual result in the EIMEA in the fourth quarter was 11.5%, just slightly below the 12% we targeted. And the lower margin was primarily the result of some non-recurring manufacturing costs associated with the ongoing business integration project, not a reflection of the ongoing earnings potential of our revitalized business in Europe.

All of our actions in the year produced adjusted diluted earnings per share of $2.58, well within the original February guidance range. As is true every year, we did not get to the end result exactly as we planned when the year began, but we got there nonetheless and hit our marks along the way.

I've given you a high-level view of our plans for 2014 and a quick review of our success in 2013. For the remainder of the call, I would like to review the status of two important projects underway within the Company, our ongoing business integration project and the new information technology project we call Project ONE.

Then, I'll turn the call over to Jim Giertz for more discussion of our fourth-quarter performance and to add some more detail to our 2014 guidance. Finally, we'll be happy to take your questions. Let's start with a quick status report on our business integration project. Starting with North America, we completed the bulk of the integration project on time and on budget and are capturing the expected synergies as evidenced by the strong margin performance in the Americas segment.

The closure of one facility has been postponed relative to the original plan as we experienced some delays in commissioning new production assets at the receiving facility. This last facility will be closed in the first quarter of 2014 and the integration in North America will be fully complete. Moving onto China, we are in full swing with our integration plans. As you recall, we are consolidating from four plants to two in China, closing two outdated plants and putting capital into the newer facilities to ensure that they are world-class and meet our growing demand in the region.

We anticipate the capital projects to be done in the summer and all products transitioned and facilities closed by the end of the year. The benefits of this integration should be fully evident in our fourth-quarter results. Last and certainly not least is our European transformation plan. We have been working tirelessly over the past two years to completely rebuild our business in the region and we're nearing the finish line.

A few highlights from this year are the closure of two facilities, our SKU reduction project reduced 35% of the pre-integration SKU count, we transferred nearly 60% of our products to the new state-of-the-art facilities, we reduced the number of packaging formats by 65%, and we deployed automation in our production sites to allow better throughput using more bulk handling, technology specialization, and higher productivity. The impact of this year is evident in our results as EBITDA margin in the EIMEA segment increased nearly 200 basis points versus last year. The last significant tasks remaining of the European integration are the completion of new manufacturing investments, primarily in Germany, and then the closure of three large manufacturing sites, one each in Austria, Italy and Germany.

The final production runs in these facilities will occur by the summer of 2014. The project has not been free of distraction or minor delays, but we are building something for the future that will pay dividends for decades to come. We're committed to doing it right and protecting our position with customers so we can sustain the benefits we achieve. To summarize, the business integration is on track to realize and retain the synergy benefits that we committed to at the time of the Forbo acquisition. We have experienced some minor timing delays, but the final completion of this complex project is now in our sight.

Now I want to switch gears and discuss another very significant project that we have undertaken that we refer to as Project ONE. Following the acquisition of the Forbo business, we formed a team to evaluate our existing information technology platforms, which are highly fragmented and aging. As a result, the team recommended, and our Board of Directors has approved, a multi-year project to replace and enhance our existing core information technology platforms with SAP application software. The scope for this project is quite broad and includes most of the basic transaction processing for the Company including customer orders, procurement, manufacturing and financial reporting.

We named this initiative Project ONE because we are moving to one harmonized business process for all of our operating segments supported with one standard software configuration. Some of the key metrics and milestones for the project include the project will be completed by the end of fiscal year 2016. Total capital expenditures over the life of the project are estimated at $60 million, of which $22 million has been spent to date. Rollout of the new platform will be accomplished in four waves generally aligned to geographic regions. The first go-live will be in the USA and Canada geography of our Americas adhesive operating segment before the end of June 2014.

As I mentioned earlier, we are determined to make the smart investments necessary to build infrastructure to sustain and support growth and profitability of this Company for many years to come. This project, together with our business integration project and our ongoing investments in new business development and emerging markets, are evidence of our commitment to achieve our objectives the right way, achieving our financial goals in the short term while at the same time building a strong platform for the future.

We'll keep you posted on our progress as we implement each of these important projects. With that, I'll turn the call over to Jim Giertz to provide more information about our fourth-quarter and our 2014 guidance.

Okay, thanks, Jim. I'll start by providing a bit more color on the fourth-quarter results. Starting at the top, organic revenue increased by 3.6%.

Volume growth was over 4% and pricing was slightly negative, reflecting the ongoing trend of gradually falling raw material costs. The general weakness in our volume delivery in the EIMEA region reflects several significant factors that we've been dealing with for the past several quarters. I think everyone recognizes that economic conditions in the broader European region remain stagnant and many indicators show end market conditions flat to down in many countries.

And as we've mentioned in previous conference calls, we have several specific factors 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. Although volume was down versus the prior year, the trend has improved in both of the last two quarters.

In Americas adhesives, we delivered volume growth of nearly 6% which was a solid improvement from the prior two quarters. The volume improvement was the result of incremental improvements in both North America and Latin America. Market conditions did not materially improved 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 business delivered over 12% volume growth in the fourth quarter. The growth in this segment was supported by generally more favorable end market conditions and market share gains.

We gained new business with a large customer in the fourth quarter that will drive further significant volume gains in 2014. In Asia, we delivered nearly 17% volume growth this quarter. The recent trends remain intact. Our Australian and Southeast Asia businesses are fairly flat and our China business showed very strong organic growth, creating strong momentum as we entered 2014.

Now turning to the results of the Company overall, our gross profit margin was down approximately 100 basis point from adjusted results in the prior quarter. This sequential drop in gross profit margin was the primary reason our operating earnings and EPS fell short of the guidance we provided at the end of the third quarter.

We had some non-recurring manufacturing costs in the quarter in both the Americas and the EIMEA, primarily in facilities still involved in the business integration. But importantly, our contribution margin in the quarter was essentially flat relative to our full-year average and in line with our own internal expectations. We expect some of these additional manufacturing costs to persist in the first quarter as we work through the next wave of product transfers in Europe.

Selling, general and administrative expense declined 3% in the fourth quarter, or 120 basis points, as a percentage of net revenue versus the prior year. As promised, we continued to proactively manage our discretionary activity and the resulting costs as part of our focused second half game plan. For the full year, SG& A was up by only 6%, but down 50 basis points as a percentage of net revenue.

To sum it up, in the fourth quarter we got our revenue line moving in the right direction, we managed our margins, and we controlled our costs. We delivered year-over-year improvement in EBITDA margin and diluted EPS. Our integration project experienced some minor delays and caused some unexpected costs which tempered our financial results. Overall, we finished strong with good momentum for the new year.

And now I'll turn to our guidance for 2014. Jim Owens provided the summary of our plans earlier and I will now just fill in some of the details. We have an aggressive plan for 2014, another solid step toward our 2015 goals. This year we expect our financial performance to improve as the fiscal year progresses. Revenue growth should trend higher over the four quarters of the year as the distraction from the business integration project is reduced and major phases of the project are completed.

Our margins will improve in the second half of the year as more of the benefits of the business integration are realized. Our first quarter results, measured in terms of adjusted EPS, will be the lowest quarter of the year, in line with normal seasonal patterns and impacted somewhat by some residual non-recurring manufacturing cost around our integration project. All factors considered, our best estimate for adjusted EPS in the first quarter is $0.50 per share. Our total capital expenditures will remain at a relatively high level in 2014. Our core capital expenditures to fund ongoing operations will be about $45 million representing about 2% of net revenue, which is exactly in line with our long-term strategic cash generation model.

We expect capital expenditures for Project ONE to be about $20 million in 2014, and the completion of the business integration project to add $40 million to our capital expenditure plan, bringing the total 2014 capital plan to $105 million. In 2015, our capital expenditures should move back toward more normal levels, or about 2% of net revenue, plus any residual capital requirements for Project ONE. And with that, I will turn the call back to Jim Owens to wrap this up.

Thanks, Jim. It was another great year for our Company. We delivered record levels of revenue, operating income and adjusted earnings per share. We produced organic growth for the fourth year in a row and again improved EBITDA margins towards our 2015 goal of 15%, and we're on track to deliver our 2015 commitments.

We were quick to react when conditions, both internal and external, changed. We proved this by delivering full-year EPS in line with our initial guidance even while revenue was softer than we anticipated and transformation delays needed to be managed. The performance we delivered in the second half of the year helped us to gain momentum in organic growth across the world as we deal with slower growth in Europe.

We did all this while executing important investments for our future; capital investments in Europe driving our profitability improvements, investments in electronics in Asia and Latin America which will drive our sales growth, and investments in our core operating systems which will drive our overall productivity.

2013 was a remarkable year and it is a great springboard into 2014. We have laid out another aggressive plan for 2014 and we're confident that we will deliver. This plan represents a further significant step towards our long-term goals.

We have demonstrated over the last few years that this management team at H.B. Fuller sets aggressive targets and delivers the results. And they're able to do it under varying external conditions while tackling numerous challenges. 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.

(Operator Instructions) We will go first to Mike Sison of KeyBanc.

Good morning, guys.

Good morning, Mike.

In terms of these manufacturing costs that came up in the fourth quarter, is that going to be about a similar size in the first quarter?

I'll let Jim tackle that.

No, Mike. We don't expect that those costs are all going to continue into the first quarter. There's a variety of different things, we can talk about more if anyone is interested, but not all of those costs are going to continue into Q1.

So we tried to say that some of those residual costs will remain in Q1, that's why we're being a little bit cautious about our Q1 performance. But clearly, there was some of the costs in Q4 that we know we've clamped off and should not recur in Q1. That being said, obviously, there's a lot of activity going on, so being precise about forecasting right now is a little bit difficult for us.

Sure.

But a big chunk of them will continue, Mike. I think the main point is, as we saw the these delays we really took our efforts to protect our customers and we're doing what it takes to make certain we provide good service to customers during the transformation.

Right. And then, is Project ONE impacting the first half more pointedly than the second half? Is there any -- can you maybe help us on the costs there?

Yes, Mike. I don't think there's a big difference between the expenses that are going to hit the P& L. I don't think there will be a big difference in the phasing across the year. I think we called out that the direct project expenses are estimated about $4 million for 2014 which are about similar to what we had in 2013. These should be pretty evenly spread. If I had to guess, they would be a little bit front end loaded into the first half of the year.

Okay. And then, real quickly on the organic sales growth outlook, you sort of noted to be at the lower end of your goals of 5% to 8%. Are you sort of in that range for the first quarter, or is that why the first quarter is a little bit weak, is it maybe trending a little bit less and you are hoping it would improve as the year unfolds?

I would say, Mike, we certainly see progress throughout the year, but we have good momentum on organic growth exiting the year. And we see it strengthening throughout the year. So netting out in that 5% range. So we do see momentum, especially in Europe the second half of the year. The ability to grow will significantly change once we hit mid-year. So hopefully that gives you a sense.

And, sorry, just one quick one, and Plexibond is included in that organic sales outlook for 2014?

Yes, well, for the first half of the year. As you know, Plexibond came on board about mid-year this year.

Okay, great. Thank you.

Steve Schwartz, First Analysis.

Hi, good morning. It is actually Mike Harrison sitting in for Steve.

Hi, Mike.

I was wondering if maybe we could just dig in a little bit more on the non-recurring manufacturing costs? First of all, you mentioned that those were partially in Europe, partially in North America. Was it roughly 50/50, or a little bit more one than the other?

This is Jim G. I don't want to get too specific about it, but it was primarily in Europe was where we had our challenges, and to a lesser extent in North America.

All right. And just help me understand why that didn't meet the threshold for -- to be a special item, even though you are kind of calling it out as being non-recurring in nature?

So we have a line item on our P&L that we've had since the business integration began which we call special charges net, and we have a very specific set of guidelines and parameters that we use to determine whether any costs that we have or expense would fit into that definition. And so, these costs didn't fit into that definition.

Now, so, I suppose in terms of adjusting things out of our earnings, I guess, we probably take a more conservative view to this than many others, but we disclose them to you, we decided not to adjust them out of our earnings, I think maybe we could have but we didn't. But we disclose them to you as non-recurring because we don't think they really are relevant to the ongoing earning power of the businesses, but they were temporary and unusual in nature.

So let me give you a sense of what we're talking about here, Mike, in terms of cost. So as things got delayed we had to implement contracts with [tolers] to make some products for us. We had to produce some products at sites that we hadn't originally planned in Europe. We were making product in Finland and shipping it into mainland Europe, some things in the UK, shipping it into mainland Europe.

We're making products on the assets that we hadn't originally planned, and our whole philosophy here was make certain that we did the things to support our customers. When this delay went in place if there was extra freight charges, if we had to locate a product in Finland and ship it into Europe, or run it on a less efficient asset. In some cases we substituted a higher cost product in for a customer, but it was all centered around making certain we did a good job of supporting our customers. Hopefully, that gives you color on the type of costs we're talking about here.

No, that's very helpful -- go ahead.

And, Mike, this is Jim G. Not to go beyond answering more of your questions then you asked, now based on Jim's explanation of what these costs are they don't really qualify as special charges for us because they relate to making products and selling products to customers today. Okay, so they are just extra costs that we incurred to make the products and sell products today. Those don't classify as special charges for us. Special charges only relate to costs that are directly around the execution of the project.

Okay.

But I think your point is right, there probably could've been a case made to call them out, we decided not to.

I understand now why you treated them that way. So maybe just one more, on Project ONE you mentioned the capital budget is $60 million, you mentioned it's expected to return well over internal hurdle rates. So once that kind of the hits stride, I'm sure you're not going to see a full savings rate in 2016, but is the annual rate savings rate something in the $12 million to $18 million range or is it going to be something north of that?

Yes, well, I think you're right, we won't see these benefits until 2016 and 2017 as we finish up the project. And what we've decided, Mike, is to be clear that it's going to hit our current hurdle rates. As we get later into the year and we start laying out our new five-year plan we'll be more precise and specific about what we see as the returns. But there are sizable returns and it is a good financial risk. But they're in 2016 in 2017.

Maybe just a housekeeping question for Jim G. Any guidance on interest expense in D&A and any other non-operating expense for next year?

Sure. Let me just grab my paper here, the right one, okay, so depreciation will increase next year. It's -- our current forecast is $43 million. I can just give you the precise estimate that we have. It is $43 million of depreciation, which is up somewhat from last year. Amortization is $23 million, which is what it was last year. The total is $66 million. So that's what's in our current internal plan. Interest expense, I can give you that number as well, our internal forecast is $20.5 million of interest expense in 2014.

All right, great. Thanks very much.

Christopher Butler, Sidoti & Company.

Hi, good morning, guys.

Good morning, Chris.

Continuing on Project ONE, you had mentioned that there was about $4 million of expenses this year from that. Could you kind of break that out by quarter so that we have a sense on where there's some extra costs?

I'll let Jim give you -- I've got an answer but his will be more accurate.

The question was Project ONE costs in 2013?

2013.

Yes. They were -- oh, boy, that's a tough one. I don't know precisely -- they were heavier in the first quarter, and, hang on, I'm just going to not answer the question because I don't know the answer, Chris.

I would have said, Chris, they are spread out over quarters two, three and four. We didn't have them in Q1, and they're relatively even, I think, in the quarter, but it's a relatively small number.

Just wanted to be sure they weren't bunched somewhere.

No, they weren't bunched in the fourth quarter. They were spread out over the last three quarters of the year.

And if we're looking at the decline in prices that we've seen in most of your regions, you had mentioned raw materials. Is that exclusively what's occurring there?

I would say the -- well, pricing was actually up in Europe and that's part of our transformation project of repositioning. In Asia and in the Americas it was definitely about raw materials concessions related to that or contractual commitments. In the Construction Products business there was some of that, but there was also -- this year was a high volume level so some of our customers were able to reach a volume thresholds that gave higher level of rebate than we've had in past years. So that came through in some of those numbers, but mostly raw materials, Chris.

And just looking at that, on the European side you had mentioned you had been raising prices as you fully bring Forbo into the fold, with 3% volume loss over 2013, how much of that do you think was the business that just kind of went away because you are raising prices and it was a little bit lower margin than you were interested in?

Yes, I would say I wouldn't directly point it at the price increase itself, but I would point it toward the transformation. So we have a lot of moving parts. Very small SKUs had to be eliminated. We had to change and reposition customers as we consolidated products. We had to move some customers to different channels and also we have to reposition pricing.

So I wouldn't say it was about pricing. I think we were very careful in being fair about our pricing and making certain that we were not losing business related to that. It was -- but the combination of all of those things together definitely had an impact in our results in 2013, most of which we anticipated, some of it was especially early in the year, was a little more than we anticipated.

And when would be get a point where we start to lap some of that, or was that a continual effort through the year so we -- it is still going to be ongoing?

It was a continual effort throughout the year. I think, as I said, I see us being able to be in the aggressive offense Q3 this year. I think we've got a lot of work here to do to make certain we finish that. But as we said, big chunks of the transformation, the SKU reduction, the product container elimination, big chunks of that work happened this year and won't be continuing but we still have the distraction factor. So look for mid-year for this -- to start seeing the trends to change.

I appreciate your time.

David Begleiter, Deutsche Bank.

Thank you, good morning.

Morning, David.

Jim and Jim, how should we think about working capital in 2014? Is it going to be a use of cash again in 2014?

This is Jim G. I think that our basic working capital structure is not going to change in 2014, so there will be a working capital use to the extent that we grow our business. One of the things that's showing up in our working capital numbers right now is that there's a lot of capital expenditures going on. So for example, you see our payables went up this quarter. That really is not so much a reflection of any change in the core operations of our business, but it's a temporary phenomenon related to the acquisition of our capital and the payment for capital.

So, but if you're just asking about our core operations, our net working capital ratios would remain similar in 2014 as they were in 2013. And I think they'll only change fundamentally once we have SAP up and running and start taking advantage of some of the opportunities that we have to improve our inventory management there.

Understood. And just on business integration, Jim, what's the delta from a savings impact in 2014 versus 2013?

From the business integration project itself?

Right. What's the --

That one is -- that's another one I can't answer. That's probably a good question, but I don't know that number.

Understood.

But I think it nets out in this EBITDA improvement which a big chunk of that is related to the business integration. So, particularly on the gross margin improvement that we expect to see in 2014.

Right. And just lastly, looking at the Americas adhesives, the volume growth of 5.7%, was there any market share gains or other -- what really -- were there market share gains better than that number?

Yes, I would say we had some nice wins. The team did some good work, particularly our hygiene team and our durable assembly teams had good solid progress that we expect to see momentum going forward. So I think if -- and I know you recall this, David, the middle of the year we hit a soft patch on organic growth and we reallocated a lot of our effort toward, A, managing discretionary spending but also getting the sales pipeline moving.

We call that project [win] dedicated a different level of resource and focus on key wins, and that was a successful project and it really helped us kick start some of the organic growth everywhere outside of Europe where we're still managing the distractions. So definitely some wins in the quarter.

Thank you very much.

Thanks, David.

Dmitry Silversteyn, Longbow Research.

Good morning, guys. Just, I have a couple questions, if you would. On the -- first of all, just to get this out of the way, on the D&A guidance, the depreciation increase year-over-year to $243 million, is that going to be mainly in EIMEA construction segments or is it going to be equally split between the companies, and sort of what's driving that since your closing plants and, I think, at least in Europe and China, sort of what's driving the higher depreciation year-over-year?

Yes, Dmitry, it's just the commissioning and putting into use the capital that we're employing in Europe is the primary driver of that. Plus we will begin the depreciation of our Project ONE investment, as well.

Got it.

I think those are two bigger drivers.

Okay, so that's going to offset -- so the new -- the expensing of new capital basically is going to offset the savings you have gotten from plant closures, so you're going to get a net up in Europe and then Project ONE will be more or less US centric, at least, in 2014 in terms of depreciation?

Actually, I don't know how the depreciation is going to get allocated out by the segments, I'm not quite sure I know that right now but, it will be -- yes -- it will start the depreciation -- we have some depreciation already from Project ONE, but more of the depreciation will start in the second quarter of this year.

Got it, okay, thank you. In terms of Plexibond's contribution to revenue, I think it was 1% of the divisional revenue in the third quarter, is that the similar level in the fourth quarter that we need to back out before looking at organic growth?

Yes, 1%.

Okay. So that's -- takes care of that. The strong growth in construction that you've seen, you talked about some business wins in general and then a specific large business win in the fourth quarter. If you had to sort of look at market growth versus your broader share gains versus this one customer when how would you sort of apportion the very strong top line you saw in the fourth quarter, and given that I think you said the large customer win was in the fourth quarter should we see that momentum carry into 2014?

So the large customer win that we talked about, Dmitry, actually did not show up in the fourth quarter results, it's one that we see -- that will start hitting in 2014. So these results actually are without that, and it was part of the discussion about why we're optimistic about that and other wins that are happening in the Company that are driving organic growth. So, yes, we had a good quarter. The Construction Products business had a good year, and it's tough for me to parse out what part of that is market and what part of that is wins. And if you look back over the last couple years, our team has outperformed the market throughout the downturn.

If you look at our CP business versus what has happened in the market, and that's because that team focuses on driving innovative projects and then getting on the front end of being in the channels that are winning. Those are the two things we're doing. If I were to try and pick a number I'd say it is 50/50, maybe it's a little different than that, but there's definitely a good, positive environment in that market and the team is definitely doing a nice job winning in the market. And as I said, this big win we've got is going to help accelerate that in 2014 and we're pretty excited about the growth we're going to see in CP next year.

Excellent. Excellent. On the pricing environment, as you sort of look forward to 2014, it was not a significant contributor one way or the other to 2013 results. Do you see that changing in 2014 at all in terms of either being a slightly positive contributor, or do you think if raw material prices continue to come down that you're going to have to pass that through? Conversely, is the competitive environment such that if raw materials start to accelerate, and there's several companies that have been reporting earnings recently that talked about that possibility, particularly in Europe, would you be able to pass through pricing at sort of the same pace you did in the past?

So, yes, in terms of what we see, we see another benign year in terms of pricing which allows us to focus on doing our business of growing the business. If anything, we see late in the year some uptick, but that would probably only happen if the economies got stronger or stayed strong throughout the year. So we see a relatively benign, maybe a little bit of a slight decline throughout the year. But if things did pick up, we built a machine that understands how to manage the complexities of our product line, raw material substitutions and pricing and we're very confident in that process and system we've set up. So we would be able to react very quickly, Dmitry, if something happened that was a shock to the system. But at this point we're not expecting that but we're prepared to adapt if raws go up.

Very good. And then, final question on corporate costs. I know you guys don't break them out as many companies do as a separate line item, so it is part of your divisional results. But if you look at sort of 2014 deltas versus 2013, can you talk us through sort of what the impact would be of anything from pension funding obligations or reversals? Any other items that could be of size in corporate costs one way or another? American or Affordable Care Act or anything else that sort of comes to mind when you look at deltas in corporate expenses?

Dmitry, Jim G. Yes, I can give you some broad answers to those questions. We will be seeing some benefit from our pension expense. We'll be -- actually, we have pension income, or it is actually an income item for us, I think, net. And it will be favorable in 2014 versus 2013 by single-digit millions of dollars.

I can't think of anything else that really would be material. We have no particular pension funding recourse. From a cash flow perspective that won't be an issue in 2014. I can't think of off top of my head anything else of a particular note that's changing in our cost structure in the kind of corporate areas that you're referring to.

Okay. Thank you very much, that's helpful.

Thanks, Dmitry.

(Operator Instructions) Jeff Zekauskas, JPMorgan.

Hi, good morning.

Good morning, Jeff.

Hi. Even if you strip out the $4 million in cost of goods sold from manufacturing and efficiencies your cost of goods sold was up 4%. Why was it up so much in an easing raw material environment?

Okay, Jeff, this is Jim G. I'm not sure what cost of goods -- so can we just talk about gross margin percentage?

Well, I was interested in why your cost of goods sold went up? If you do it on a gross margin percentage basis, I guess, you are roughly flat year-over-year, maybe flat to up notwithstanding the sales growth.

Yes, so I think that was pretty much what the plan was for the year. I don't think that we -- I think our gross margin, when you adjust out these unusual expenses in the fourth quarter, would have come in closer to 28% which has been pretty much what our gross margin percentages have been through the entire year. And I think that was pretty much in line with our plan. We never really anticipated a lot of gross margin improvement until 2014 when the business integration is complete.

Maybe put another way your sequential sales went up $18 million and your gross margin adjusted for the costs went down 30 basis points. So why did that happen?

I can't give you a specific answer to that, Jeff. I can't do that online right now, I don't know how to answer to the question.

Sure.

To your question sequential, Jeff, as to -- you would expect that because there's more volume in fourth quarter than third quarter there's some margin improvement, is that what you're saying? Is this a sequential question or a year-over-year question?

You can do it either way. All I'm remarking on is that the gross profit margin sequentially declined a little bit even though your sales went up $15 million if you adjust for the extra manufacturing costs. And so I was wondering why that was the case. You could do it year-over-year in terms of why did cost of goods sales go up 4% ex-manufacturing costs.

Well, Jeff, let me, again, I just -- I don't -- I am obviously working it from a different paradigm than you are.

Approach.

I'm not able to answer your question very articulately so I apologize for that. But I can come back from the other side and just tell you if you're asking is there any fundamental change like our contribution margin sequentially or year-over-year, no. In our manufacturing cost structure, year-over-year sequentially, no. So any variance that you're referring to would be just, I guess, normal swings and variations between quarters is what I would say.

Okay.

And I guess what -- let me see if I can rephrase the question here, Jeff.

Sure.

What you're saying is if you strip out the $4 million in costs we would have moved from 28.3% gross margin to 28.1% or 28.0%. Is that what you're saying?

Right, right. Even though sales went up, yes, so why wouldn't the incremental margins be higher? Why wouldn't your gross margin be higher?

I would just classify that as normal fluctuations from quarter-to-quarter. I just don't think there is any real significant explanation to it.

Okay.

That I could offer to you.

Yes, and our fixed costs are spread over the volume over the year, so when we have a higher volume quarter it is different than a lower volume quarter. And if you look back at our history you'll see that, as well. There is no big jump from -- even though our Q3 is lower than Q4 there's not a big jump in the gross margin from Q3 to Q4, Jeff. So I would say 28.3% to 28.0% or 28.1% would be pretty normal and just normal variation.

Okay. How many employees work at your Company now?

The number is -- just under 3,700.

Great. Is your expectation for 2014 that average price mix falls in the United States and Asia and rises in Europe? Is that your general operating plan for next year?

The average price.

Average price mix.

I would say if anything slightly, but relatively benign in all three of those areas, and I think directionally I would agree with your view. So slightly down in North America, slightly down in Asia, slightly up in Europe.

Okay. And then lastly, can you characterize your sort of the raw material experience that you've had this year? What happens by quarter and what's your outlook for next year?

So I would say for us, Jeff, there is a combination of two things happening here. We're generating savings relative to the integration, plus there's some market dynamics that are happening. There's a mix of those two things in here. But if I look at the overall fundamental market, it was across our raw materials flat to slightly down throughout the year, and I would expect that to continue for the first quarter or two, but for the most part the word I'd use is flat throughout that period. And in terms of next year, I think the general view is later in the year is when we would expect to see any uptick if it were to happen.

Okay. Do you expect EIMEA volumes to grow in the first half of 2014?

I don't think we're giving specific numbers on that but given the trend --

Just roughly, up or down.

I would say roughly we expect to move from negative to positive throughout the year in EIMEA and see very strong growth rates Asia Construction Products, and then solid rates in the Americas.

Okay, great. Thank you for your patience.

Thanks for your questions, Jeff, and your time.

(Operator Instructions) At this time -- actually, we just got a question in the queue. We'll go next to Richard O'Reilly of Revere Associates. We have no further questions in queue.

Okay. Okay, thank you, operator, and thanks, everyone, for your time on the call, and for your support of our Company and your support of our strategy.

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