H.B. Fuller Company (FUL) 2014 Q1 法說會逐字稿

Please stand by. Good morning and welcome to the H.B. Fuller first-quarter 2014 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. Maximilian Marcy, Senior Manager Treasury and Investor Relations. At this time, I would like to turn the meeting over to Mr. Maximilian Marcy. Sir, you may begin.

Thank you, Jennifer, 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 (technical difficulty) 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 these 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 operating segments as well as the comparability of results. The non-GAAP information discussed today may not be consistent with the methodologies used by other companies.

All non-GAAP information is reconciled with reported GAAP results in the last pages of our presentation. For more information, please refer to our recent press release and annual report for the year ended November 30, 2013 on Form 10-K filed with the Securities and Exchange Commission. These documents are available on our website at www.HBFuller.com in the Investor Relations section.

I will now turn the call over to our President and CEO, Jim Owens.

Thanks, Max, and thank you, everyone, for joining us today. Sorry for the frog here in my voice. I feel great but it sounds a bit rough.

Following a strong 2013, we set an aggressive plan for 2014. I'm happy to report that after one quarter, we are on track to deliver our 2014 commitments and our 2015 strategic plan.

2014 is the fourth year of our current transformational five-year plan. Our key long-term financial objectives have remained unchanged since we launched the plan at the beginning of 2011 -- achieve organic growth between 5% and 8% per annum, increase our EBITDA margin to 15% by 2015, grow EPS by 15% per annum, and increase return on invested capital to 15% by 2015.

The primary topic of this conference call is the financial results of the first quarter. We feel it's important to reiterate these goals and our progress on a regular basis. Delivering these long-term metrics is the key focus of our leadership team, and the business decisions we make are focused on achieving these goals.

And we are striving to do more than just hit our financial metrics for growth and margin expansion. We are also building a new infrastructure, one that will sustain our growth and our profitability well into the future.

For this year, we have three primary goals -- first, get the revenue growth momentum back on track across all geographies and segments of our business; second, successfully complete the business integration project, and deliver the key milestones within Project ONE; and third, maintain our discipline in managing our contribution margins and operating expenses to support our margin improvement initiatives. In the first quarter, we largely achieved our goals with strong performance in most areas. I'll take a few minutes now to provide a bit more detail on each of these three focus areas.

On the revenue front, we grew volume by 2%, a bit below our internal plans for the quarter. We had several notable areas of strength. Our construction products business posted organic growth of about 17% driven by launching new business through the large channel and momentum carried forward from last year. Our Asia-Pacific region posted organic growth of about 11%, again driven by strong results in China and improving performance in Australia.

In our EIMEA segment, organic revenue declined by about 3%, in line with our internal plans. The region continues to be hampered by generally flat end market conditions and supply chain inefficiencies due to the business integration project. In addition, several of the emerging markets that had in prior quarters generated significant growth have slowed a bit due to various economic and political events in the region. We expect our revenue performance in EIMEA to improve quarter by quarter as we progress through the year.

In the Americas region, organic growth was less than 2%, falling short of our internal plans. Our first quarter is always difficult to evaluate since it includes the months of December, January and February, a period of extended holidays, customer year ends, and unpredictable weather in North America. Though the results in the Americas were disappointing, our revenue performance improved as the quarter progressed. And we have a strong pipeline of new business to support better performance in the second quarter and beyond.

So with respect to our growth objectives, overall we delivered a mixed performance in the first quarter, strong or expected performance in three of our segments with a bit of weakness in our Americas segment. We have a clear path to better results as the year goes along.

Our second area of focus is delivering on two key projects, the business integration and Project ONE. The business integration project moved ahead according to the revised schedule and is still on track to be substantially completed by the end of the third quarter this year. Starting with North America, the final planned production facility closure is now complete and the Americas portion of the business integration is now finished.

Moving onto China, we are in full swing with our integration plans. We anticipate the capital projects to be done in the summer and all products transitioned and two facilities effectively closed by the end of the third quarter. The benefits of this integration should be fully evident in our fourth-quarter results.

Last is our European transformation plan. All work streams continue to progress. Although the project has been delayed into the summer, we made a great progress this quarter. About 60% of total product volume has been transitioned to the receiving facility. Nearly 40% of pre-integration SKUs have been eliminated. Recall that the original goal was a 45% reduction in SKUs, so we are nearly complete. Also, we have maintained the cost synergies achieved from our sourcing initiatives despite challenging market conditions for a few key raw materials, and this allowed us to achieve our contribution margin goals for the project.

The final push for this project is to complete the production facility investment programs on a revised timeline and complete the closure of three large facilities, one each in Austria, Italy and Germany. Completing this phase of the project will eliminate a significant amount of manufacturing expense and drive our gross margin toward the target level for the region.

We still expect to exit the year at a 14% EBITDA margin in the EIMEA operating segment and feel confident the results we committed to back in 2011 are achievable and now in close view.

Now just a few words about Project ONE, there's a great deal of activity in this quarter as we completed the build phase, progressed through most of the integration testing plans, and have launched intensive training programs to support our first go-live event which will occur before we have our next quarterly conference call. Overall, we are very pleased with the simple and standard configuration we have designed and built and we are confident in our ability to implement this system in North America with minimal business disruption. Three months from now, we should have some more tangible results to share with you.

Our third area of focus is margin and cost discipline. With respect to price, raw material and contribution margin management, we are delivering our expected results and maintaining synergies at the level we had targeted to deliver for our long-term profitability goals.

The raw material cost environment remains subdued overall, but we have experienced some price escalation for certain materials. Our teams are managing these issues effectively and delivering the margin expectations embedded in our plan.

Our operating expenses are also well controlled. Our spending actually declined about 1% versus last year and also declined as a percentage of net revenue. Our ability to effectively manage our margins and our discretionary spending has been demonstrated effectively over the past several years, and we expect to maintain this discipline going forward.

Although growth was slower than expected, strong cost management led to a growth in adjusted operating earnings of 5% and an uptick in our adjusted EBITDA margins versus the prior year. We are very pleased with our ability to adapt and deliver in the quarter as we deal with major internal projects and numerous external factors.

We delivered the expected level of performance in the first quarter and we expect another strong year in 2014. Our track record of meeting commitments gives us confidence that the 2014 plan will be achieved.

With that, I now turn the call over to Jim Giertz.

Okay, thanks Jim. I'll start by providing a bit more color on the first-quarter results. Jim Owens already provided a good summary of our revenue performance in the quarter, so I will skip over that.

Our adjusted gross profit margin in the first quarter was essentially flat versus the results in the prior year's first quarter. As we have mentioned numerous times in the past, we don't anticipate any significant change in our gross profit margin until we complete the business integration project in Europe.

Similar to our experience in the fourth quarter, we had some manufacturing costs in the quarter related to inefficiencies in the European plants scheduled for closure that could not be classified as special charges. We isolated a total of $1.3 million of these costs and eliminated them from our adjusted EPS numbers for the quarter.

There were other manufacturing inefficiencies related to the business integration that were not eliminated from our adjusted results. Eliminating these costs and also eliminating the excess manufacturing overhead associated with the surplus production facilities will generate the anticipated gross margin boost when the business integration project is complete.

Our contribution margin in the quarter was essentially flat relative to the previous quarter and in line with our internal expectations.

Selling, general and administrative expense declined 1% in the first quarter, or 40 basis points, as a percentage of net revenue versus the prior year. We continue to manage our discretionary spending to ensure we deliver our expected profitability.

Now a couple of other points relative to our operating margins in the first quarter. Our construction products segment generated significant volume growth but operating income declined year-over-year. This result was driven primarily by the start-up costs associated with the newly initiated program with Menards and to a lesser extent some temporary margin compression in our base business as product price reductions were offered in advance of cost reduction initiatives which are currently in process to restore margins. Both of these negative factors should be neutralized in the second quarter and beyond.

Also, our Asia-Pacific operating segment posted significant volume increase without a corresponding increase in operating profit. This margin compression is expected to improve as the year progresses, as our mix of business tilts toward better margin segments, and margin management initiatives take full effect. The region was also hampered by business integration costs and higher manufacturing costs related to the start-up of new production facilities to support growth in the electronics segment.

Adjusted operating profit in the first quarter increased 5% compared to last year. Adjusted earnings per share were flat year-over-year, primarily due to higher foreign exchange translation losses in the current year and also a higher tax rate compared to the unusually low rate experienced in the first quarter of last year. The rate was low last year due to positive discrete items primarily driven by the retroactive enactment of the R&D tax credit in the United States.

On a sequential basis, net debt increased by about $80 million due to normal seasonal cash flow requirements and also to support capital spending related to the business integration project. Our inventory build was higher this year versus the prior year as we built safety stock ahead of scheduled product transfers and facility closures. All in, cash flow from operations was negative $17 million in the quarter, in line with normal seasonal patterns and slightly worse than last year primarily as a result of higher special charges in the quarter.

Now I'll turn briefly to our guidance for 2014. We are maintaining our diluted EPS guidance range of between $3.00 and $3.15 per share. Revenue growth should trend higher over the four quarters of the year as the inefficiencies related to the business integration project are 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 total capital expenditures will remain at a relatively high level in 2014. Our estimate remains at about $105 million.

Our core tax rate, excluding the impact of discrete items, is still expected to be around 30%, but there may be a slight upside to that number, as was the case in the first quarter, depending on the mix of the business as the year progresses.

And with that, I'll turn the call back to Jim Owens to wrap this up.

I think my microphone was off there, so I'm going to start that section again. So thanks, Jim. Sorry for the mic problem.

We have the first quarter now on the books and we feel good about our performance and meeting our profitability expectations despite slightly lower revenue during the winter months of December, January and February. Organic growth will improve as the year progresses. Double-digit growth in two of our operating segments were strong indicators of our growth capability.

This is an important year for H.B. Fuller as we finalize the business integration activities and are refocusing our assets on long-term organic growth development. Our teams continue to deliver profit growth while implement an important fundamental improvements in our business. It has been a fruitful yet busy two years as we continually improve business performance while navigating the complex business integration. And today, we are nearly to the end of the line on that effort.

We remain committed to delivering the benefits we communicated in conjunction with the business transformation. We still expect to deliver a 14% EBITDA margin in EIMEA during the fourth quarter, which will be a solid indication that we are garnering the promised results. And our five-year strategic plan to deliver 15% EBITDA margin is now within our sights.

I am proud of our current results and very excited about the future we are creating with this company. Thank you for your interest in H.B. Fuller and for joining us on today's call. Now I'd like to open the call up for your questions.

(Operator Instructions). Mike Ritzenthaler.

Good morning. It's actually Mike Klein filling in for Mike Ritzenthaler today. So construction products saw some solid topline growth in the quarter. Did weather impact you at all? And if so, to what extent do you expect to recoup some lost sales in upcoming quarters?

Yes, I would say the big driver of course was the new business win, so that drove it. We expect actually a little more revenue this quarter in construction products, and weather certainly was a factor as -- and I think it was all across a lot of the North American economy. People hunkered down a little bit, and deliveries to stores were a little difficult. So it certainly was a factor. The results probably would've been better if it wasn't as severe in North America.

Okay. And looking over to Europe now, to what extent are you able to offset some of the headwinds you're seeing there to drive margin expansion, or is that solely tied to the elimination of some of the supply-chain efficiencies?

Our plan in Europe on margin improvement is really around this transformation project. So a lot of the work -- so we are investing a lot today and we have a lot of duplicate costs as we are running all the new plants and the old plants at the same time. So we have a whole set of inefficiencies that are in our system and then we have a whole set of fixed costs that will go away as we go through the second half of the year. So the drive on our margin improvement is driven mostly around gross margin.

And I think when you look at the results our team has delivered in Europe, it's pretty remarkable considering the drag they have had on revenue. We do expect revenue to go positive in the second half of the year, and that's going to be -- that's going to of course enhance and help the work they are doing. But they are doing nice margin improvement even with that headwind.

Okay, thank you.

Did that answer your question?

Yes, it did. I guess if I could squeeze one more in there, just a follow-up on that. Are you still confident you can achieve your target margins without much volume improvement?

Yes, I think we are very clear. I think the benchmark that we laid out last year was fourth quarter EBITDA margin in Europe. This year we are doing the same because we want to understand what they can expect, and 14% EBITDA margin in Q4 is a clear expectation.

And in terms of what's going to happen to volume, we will have less negative in Q2 and it will go positive in Q3 and Q4 because we won't have this project here hampering our ability to grow. But European success is going to be driven by the transformation project and some increase in volume in the second half of the year, but it's mostly the transformation that's going to drive it.

Okay. Thank you very much.

Dmitry Silversteyn, Longbow Research.

Good morning guys. A couple of questions, if I may. First of all, to follow up on the previous question on the construction side of the business, you had very good growth in the back end of 2013 and obviously another step up in 2014 with Menards. How much of the first-quarter volume should we be thinking about for the balance of the year versus perhaps some channel fill or store fill that you're referring to that took place. Is the business win big enough to start sustaining double-digit volume growth for the year, or was there some channel fill involved and we should see this business moderate, especially as we get into the second half of the year and going against very strong comps there as well?

Yes, so I'll try -- we don't give specific guidance on each segment, but I would say stronger than the full-year number in Q1, but double-digit growth for the year is what I would expect based on our plans today. I've got Jim checking on that. Anything you want to add on that?

No, I think we've said that we expect our construction products business for the full year to be up something just short of 20%, so I think there were some offsets in the first quarter. We loaded up Menards but we also have the weather issues, so I think you'll see a pretty steady performance across the balance of the year.

Okay, so the first-quarter volume was not sort of outsized in terms of the improvement versus what you expect for the rest of the year it sounds like.

Again, I think --

If you're looking for 20% upside.

Yes. Again, I don't think it was significant, the channel loading, and also -- or the channel filling. And then also, as I said, I think it was offset somewhat by the weather. But --

Okay, very good. And then secondly on the European part of the business, what are you seeing, now that we've gotten into 2014 and there's been some expectations that things are going to get a little bit better from the market perspective, sort of distancing yourself, if you will, from your own integration and SKU reduction issues. But if you look at the overall market dynamics, are they getting a little bit stronger for you? Is this going to be a tailwind that's going to get stronger for the rest of the year, or you still feel cautious on Europe?

Yes, so -- and it is tough because we are making a lot of changes in the business -- I mentioned the 45% SKU reduction and some other things --

Right.

-- to really get good visibility. But my view when I dig through to that is Europe is certainly not a tailwind but maybe less of a headwind than in the past. But the factor we have of course is you have got a little bit of a risk and slowdown in places like Turkey and potentially in the Ukraine and Russia. So I think the benefits from a market standpoint we're going to see with Europe not being quite as bad, core Europe, we do have less a positive environment in the Middle East, and potentially in the Ukraine and Russia.

Got it. Okay, Jim. Thank you very much. I'll get back into queue.

David Begleiter, Deutsche Bank.

Good morning. This is Ram Sivalingam. I'm sitting in for Dave.

A question quick question on volumes. I understand Q1 encompasses December, Jan. and Feb. That's impacted by holidays and weather potentially. But this deceleration from 5.7% to 2.1% in American adhesives, is it possible to quantify the impact weather had there either on a percentage basis or a dollar basis?

Yes, it's very difficult to quantify. There's certain variability. I think as you point out, we had 5.7% volume growth. That was a nice uptick from where we were in Q3. So when we look forward to the rest of the year and what we see in our business, we see more normal levels of volume growth. So I really -- a combination of things that happened in North America have us looking at Q1 as the exception here and a sizable uptick here in Q2.

But to quantify exactly how that works, certain customers were down because they couldn't get product from a delivery standpoint. Certain customers shut down their factories for various days in certain parts of the country. Then in some of these fast-moving and durable assembly areas, people were hunkering down in America and not buying things, not buying physical goods. So a few of those factors that are out there that definitely were impacting it, quantifying it is tough. We don't have a number on it do we?

No.

That would be my summary, Ram.

Okay, perfect. That's helpful. Just another quick one. Can you provide any sort of nuance on pricing by region, Europe, North America, Asia? I know there was some variability last quarter.

Yes. We have the PVM in the charts. What you'll see is that our -- and I mentioned this in last quarter's call -- pricing would uptick. I think Asia was actually negative last quarter and they're positive this quarter. We had indicated there were some raw material moves and we needed to get on top of those from a pricing standpoint. We're probably half a step behind where we need to be there, but that's where you see the positive pricing move there.

EIMEA is still some repositioning work as we change SKUs and do some work there. Jim mentioned the construction products story, where we have done some readjusting on certain product lines.

And then the Americas adhesives, that's a very slight variation. We had a year in 2013 where raw materials slightly downticked, so the fact that we were down 0.6% in price is modest. So, I would say generally a benign environment with the exception of Asia where we've had to make some sizable moves because of certain raw materials.

Got it. Thank you very much.

Rosemarie Morbelli, Gabelli and Company.

Good morning all. I was wondering if you could give us a little more on what you did on construction. If I understood properly, you lowered your price in order to get volume, and you did that because you think that you can lower your cost. Could you give us a better feel as to what you actually did there and what we should expect in terms of margin, just the relationship between cost versus pricing?

I'll give it a go and then I'll let Jim add more color as we need to. I think the big story in construction products is growth. So I think we need -- we've got growth in the underlying market. We are winning share with customers with new product improvements that are gaining momentum. And of course, we said some success in this Menards channel is a driver here in the quarter. So those are the three factors there.

I think the question around price is simply a matter of, on certain parts of our product line, we are adjusting both the cost basis and the price basis. And that's really not a volume driven initiative. It's part of the normal course of business that you see in the numbers this quarter, but not a sizable change in our historic margins. The changes you see this quarter in our margins are all about start-up costs in our Menards channel business.

Okay. That's what I was wondering. Why has the margin declined so much.

Yes, there's a sizable start-up cost both in terms of how we have to deliver the product, other things we need to do in terms of restocking and costs associated with filling that pipeline. So that's a one quarter event in the margins.

Okay. And if I may ask a second question, in EIMEA, what is the percentage of those revenues going into Russia, Ukraine, Turkey, where the political situation is affecting them?

I would say Russia is less than -- Russia/Ukraine is less than 5% of our sales.

Of total sales, or EIMEA sales?

Of regional sales, less than 5% of our regional sales. So one of the things geopolitically, interestingly, we've actually talk strategically, our investments, as you've seen, we've made some in Latin America, we have a Polish view of Indonesia and parts of China. And for strategic reasons, we had opted to hold back on Russian investments. So I think it's a potential area for the long term but we are glad we are not more invested in Russia and Ukraine right now.

Okay. And just lastly if I may, a very quick one. Are you still making products in Finland and shipping them to mainland Europe? And if yes, when is this going to be over?

Are we still making products where? I didn't hear the question.

In Finland? Last quarter, you had higher manufacturing costs because you were producing in Finland and then shipping to mainland Europe. Is that still going on? And if it is not, are there any other similar issues?

Yes, so we are still doing a lot of inefficiencies in Europe. I'm glad you point that out. We didn't talk about it all here. But we are shipping a lot of -- we're making product in plants that we shouldn't be making at, shipping across the region, and there's other inefficiencies in the system. So those are costs that we are incurring ongoing in our P&L this quarter, and we will have some again next quarter.

Jim, do you want to give anymore view on that?

So, yes, definitely Rosemarie those things we talked about last quarter are happening this quarter, and will continue into second but not third.

Okay, not the third. Okay, thank you.

Mike Sison, KeyBanc.

Good morning guys. In terms of America adhesives, I suspect that the commentary that we will be back at more normal volumes would be kind of like that low to mid single digits for the rest of the year? And if so, can you maybe bifurcate between the different pockets in adhesives, packaging, hygiene, build assembly, where do you expect to see the growth from?

Yes, so even in this quarter, we're doing well in our hygiene business and we expect that to continue going forward. Durable assemblies, positive. Our automotive business is positive in the Americas.

Packaging is the one we expect to see an uptick as we go forward. It's been a bit of a drag here this first quarter, a combination of some customer wins and some change in the market dynamics. So I would say those are the areas we see change in packaging from negative to slightly positive and the strength and durable assembly, some automotive wins on our small automotive business, and good progress in our hygiene business.

Okay. So, I know March isn't over. So you're actually seeing the growth now in terms of relative to what you saw in the February quarter?

Yes, we usually don't talk about that, but yes. We wouldn't be as bullish I would say about Q2 if we weren't -- we watch orders every day, but I'm not going to predict a quarter based on the first few weeks. But certainly I think I mentioned, as the quarter went on in the Americas, it got better, and certainly we are seeing that continue here in March with strength this quarter.

Great. Jim, you talked about, I think several times, the confidence in hitting the 15% EBITDA margin by 2015. When you think about getting there from where you're at now, how much help do you need from the economy, if any, or can you basically get there on what you're doing on your own?

We are not counting on a lot of economic help to get us there.

Okay.

I think the big driver, and you've got the models, the big driver you're looking at for 2014, an exit rate of 14% in EIMEA, and then the math becomes a small step to get to 15% overall as we deliver what we are expecting in construction products in North America. There's a little drag in margins in Asia but we've got a few things going on to fix that. So, I think it's all about that 14% EBITDA margin this fourth quarter this year, and then the 15% is right within your sights beyond that.

And no impact?

And no, it's not built on some economic model that we're going to get some tailwind.

Right. And then finally, Project ONE, any thoughts on maybe what the benefits could be longer-term? I know it's very early in implementation, but just maybe any update there?

Yes, so I would just say that we -- I think we were asked this question last quarter and I will let Jim talk a little bit more about it. But our goal is to -- is that goes on the back end of the project. So 16%, 17%, 18%, we will have a number on that. But I think any preliminary numbers we pull together, it may be a little too early to commit to those. But we definitely see a return on the investment would be my short answer.

Yes.

And we expect, certainly within the next 12 months, probably 12 months from now, to come out with some specifics related to Project ONE. Jim, do you want to add something?

I think that's well said. And then obviously, all of our attention right now is on implementing the project in the least disruptive manner possible, so that's all of our focus right now. And so far, we've been successful with that.

Great. Thanks guys.

Steve Schwartz, First Analysis.

Just on the SG&A expense line, so you noted the reduction in absolute dollars relative to sales, though it was consistent with where you typically are. What can we expect for the rest of the year? Will there be a dollar make-up for the reduction in the first quarter, or will you hold it the same relative percentage to sales?

I would say, first off, I think, in Q1, we were 40 basis points below the same period last year. Let me let Jim give you some feedback on what to expect for the whole year.

Yes, we've consistently said that we try to grow our SG&A at a rate lower than our revenue growth, and so that is still the plan for this year. And I think when you model that out, we might see some modest increases in our SG&A as we go forward through the year, but the increase would be less than the revenue increase, and so we should overall see a thinning of our SG&A as a percentage of sales relative to the prior year.

When you were giving your revenue guidance, you have a longer-term range of 5% to 8%. You've said that you expect to be at the lower end of that range. That is all-encompassing, right? That 5% to 8% is not just organic. Is that correct?

The guidance we gave for this year was, as you say, the low end, and that was everything but FX for this year.

Okay, okay. And you are still getting a little bit of contribution from Plexbond, right?

Yes, two more quarters of that small acquisition.

Okay. And then just as my follow up, can you give us a little more color on electronics initiative? I --

I'm sorry, one more quarter of benefit out of Plex, yes. Sorry.

So just into the second quarter here?

Second quarter, yes.

Okay. And then on the electronics initiative, I think you had mentioned there was a small impact to operating margin on your initiatives there. Can you give us a little more color on what you've got going on?

Yes, so most of that revenue is in Asia. Most of the expense is in Asia. And certainly today we are investing more than we are getting back. But we are seeing some of the revenue and we are definitely seeing some of the expense come through in our Asia performance. We do have some good success there, and we expect that to help us as the year goes on. We think it's going to help our margins a bit in our Asian segment as the investments we've made over the last couple of years start gaining some traction.

The Engine acquisition, that was a North American business?

That's in North America, and I think, as we identified that acquisition, it was an enabler. So what we have is we have an ongoing business there that's -- it's got some growth in 2014, but really what we purchased there was a lot of confidence and capability so that we could drive success into the electronics business. So, that business is performing to plan this year. There is some slight growth, but the real heavier investment and the heavier revenue growth will come in Asia.

Okay. And they are working in similar areas, is that correct?

So, they work together.

They do work together, okay.

Yes, the Engine team is our center of applications expertise on certain key technologies, and that's enabling us to qualify and develop technology that's enabling us to grow around the world.

Okay, great. Thank you.

Christopher Butler, Sidoti and Company.

Good morning guys. I was hoping you might be able to talk a little bit more about the North American adhesives and the pricing that declined there. You talked about the construction products. But how do you see prices in raw materials in conjunction as we move into the second and third quarters?

So, that 0.6% reduction in price, that's a year-over-year number. So throughout 2013, there were slight declines in raw materials. Eventually that finds its way through our pricing with our customers. So, I would say that is a culmination of just various market factors throughout the last year.

Going forward, I think we see more upward pressure than downward this year. So I can see that number going slightly positive as the year goes on. But I think, from an overall business standpoint, I don't see this being a sizable change. And certainly from a margin standpoint, it hasn't had any impact. I think, as we've talked about before, our plan is to make certain we manage our contribution margins in line with what happens to raw materials in our core business.

And as we look to the second quarter, the challenges with weather from this non-ending winter don't seem to -- haven't really factored into your conversation and it sounds like the start-up cost from Menards was a first-quarter issue as well. So nothing lingering into the second quarter from any of those?

Certainly not from those issues. I think we expect business as normal in North America. The momentum we built in our construction products business, which had a good year last year, should grow going into 2014. So on the construction products, we are very bullish, and on the Americas business, we see certainly a lot of positive progress versus where we were in Q1.

And just finally, what was the impact of FX on operating income out of Asia-Pacific? Do you have that number?

I will let Jim give you a little bit of that.

I don't know the number. You said the FX impact on operating income in Asia?

You are asking for a specific number? I mean the big impact of course was Australia because Australia, New Zealand, the Australian dollar weakened, and that was the biggest impact on our business, which is a sizable piece. But maybe Jim can give you some more specifics.

Again, I just have to pass on the question. Just as it relates to the operating income in the region, I just don't know the number off the top of my head, so I would have to pass on that one.

But it was a drag as we -- yes, go ahead.

I guess I was just getting at year-over-year margin decline in Asia, and at least some of that, if not all of that, could be attributed to FX year-over-year.

Okay, well, qualitatively, we still see margin pressure in Australia because of the devaluation of the Australian dollar has increased our costs, and we haven't fully recovered them in price. So I think that is absolutely true. I can't quantify that. I probably could but I don't have the numbers in front of me. So that's clearly an issue for us.

And I think the other issue was in China where some of our raw material costs have gone up and we haven't fully recovered those in price yet, as Jim mentioned earlier. Those are the two major factors, I believe.

All right. Thank you for your time.

(Operator Instructions). Dmitry Silversteyn, Longbow Research.

Yes, just a couple of follow-ups, if I may. Good morning again. On the European pricing component of sales, and we've seen that trend down a little bit and right now it's below 1%. I would have thought it would still be benefiting from sort of the SKU reduction and the up-mixing of Forbo customers. Are there some offsets there, or are we just simply -- have you guys just gotten to the end of that process and going forward we should see sort of a more normal pricing behavior in the region?

Yes, any kind of mix effect doesn't show up in the price. It shows up netted out in volume. So this is specific price on products that existed before and after the transformation, so the mix effect doesn't show up there as much.

But I think you're right. We are on the back of this. We certainly have another quarter. As I said, we're going to reduce 45% of our SKUs, 40% are gone and 5% will happen within next quarter or two. So that number --

And then keep in mind there was also some other slight raw material deflationary environment there, so we have that factor going into the business as well. So that number will shrink to closer to zero I think as the year goes on.

But I would say there are other factors that are happening in the market that may tick it up. There's a vinyl acetate shortage, temporary shortage, right now that's going to have an uptick on our pricing, and that will certainly impact, in a positive way, our price in EIMEA in this upcoming quarter.

Got it. Okay. You mentioned that Plexbond is going to be a benefit for another quarter in terms of your revenue, but you didn't highlight it as a contributor in 2014 first-quarter results. So am I assuming it was de minimis in the winter months, or was that part of your volume?

It shows up in the volume, and we don't report the details of these small acquisitions as you know.

Okay.

Pulling out specific data on a deal like that provides all kinds of disclosure and details that we, just as you basically point out, put in the volume.

Got it. Okay, that's fine.

I would say there's not a huge seasonal element to that business if that's your question. It's relatively consistent throughout the year.

Right. Okay, so there's no -- I know some electronic business (technical difficulty) second half of the year coming out of the Chinese holiday and getting into the back to school and the Christmas shopping season. That's not sort of the behavior of this business then?

Plex is the FlexPak business in Brazil.

Okay.

And no, there's no seasonal piece to that one.

Okay, thank you. That's all I have.

Rosemarie Morbelli, Gabelli and Company.

Thanks for taking my question. I am looking at your organic growth, so 2% in the first quarter. You expect to be at about 5% for the full year, which really requires quite a bit of growth in the next three quarter. And that goal of 5% to 8% over the long-term when we are not in an inflationary environment has always seemed to be a little high to me, but I could be wrong. I hope I am wrong.

What needs to happen for you to reach that 5% for the full year, and eventually the 8% over time? And assuming that organic also excludes acquisition, or maybe it doesn't, can you give us a little more flavor on this?

Yes, so I think -- let me comment specifically on this year. Two big things are going to happen that will change the dynamic from the 2%. Europe will go from negative 3% to a slightly negative number to a positive and a strong positive in Q3 and Q4. So, you'll see an uptick along the way. And then North America will be more in line with the kind of numbers we saw in Q4 in terms of organic growth potential going through the rest of the year. As Jim mentioned, we expect construction products to stay in that high teens. So those things together will drive the number where we need it to be at around that -- and we said the low end, so around that 5% number.

Now, we are a little behind, so does that mean we're going to be a little behind the 5%? Potentially, but it's around that number that we still see for the year.

In terms of long-term, Rosemarie, I talk a lot about the investments we are making in our business, and we talk about the ones that are tangible in terms of infrastructure and new systems. We are also making a lot of investments in our ability to grow.

I got a question earlier about the investments we are making in our electronics business, very exciting growth. Some of that is in its early stages. Those are happening. The work we are doing in our hygiene business is exemplary and the team there has really done some nice work with customers.

One of the businesses we bought from Forbo was only centered in Germany. It was a very nice segment within the automotive business. We are leveraging that around the world and that's creating growth for us. And so it's those types of things. The work we doing in construction products is another example where we continue to develop products that are allowing us to grow.

So, when we look at our business in terms of the long-term 5% to 8%, there's an underlying market that's going to grow low single digits, and then we're going to do the kind of work, and entering new market segments and innovating that allows us to be in that 5% to 8% range.

Okay, thanks.

(Operator Instructions).

Okay. Thank you operator. Thanks, everyone, for your time and attention on today's call and for your interest in H.B. Fuller and our strategy.

Thank you, ladies and gentlemen. This does conclude today's H.B. Fuller first-quarter 2014 investor conference call. You may now disconnect.