H.B. Fuller Company (FUL) 2014 Q4 法說會逐字稿

Good morning, and welcome to the H.B. Fuller fourth-quarter 2014 investor conference call. This event has been scheduled for one hour.

(Operator Instructions)

Management in attendance on today's call include 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. Please go ahead, sir.

Thank you, Catherine, 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. 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 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. The non-GAAP information discussed today may not be consistent with the methodologies used by other companies.

A reconciliation of these non-GAAP measures to the nearest GAAP measure is provided in the earnings release our Company issued last night. For more information, please refer to our recent press release, quarterly reports on Form 10-Q dated September 26, June 27, and March 28, 2014, 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, under 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. During the middle of 2014, our business faced some significant challenges, but the team at H.B. Fuller stepped up to these challenges, and put us back on the path toward our strategic plan. In the fourth quarter, we deliver the improvements that we committed to within our two major projects, and delivered financial results, in line with our guidance.

The quarter marked a turning point for us, transitioning from project management to continuous improvement and growth. We're excited about the year ahead, and the momentum we are building. We're on track to have a strong 2015, and achieve our growth and EBITDA margin targets in 2016.

I will start today's call with a comprehensive discussion of our expectations for FY15, and also provide a brief update on Project One and the European business integration project. I will turn it over to Jim Giertz for a summary of our fourth-quarter results, and then we'll have time for your questions.

We've taken a slightly different approach to financial guidance for FY15. Rather than a range, we're providing a point estimate or target for our 2015 EPS, along with an expanded discussion of the main drivers of the operating plan for the year. This will enable you to make an informed judgment about the risks and the opportunities that we see, as we begin this new year.

As you know, our business had many moving parts in the last half of 2014, most of which had a generally negative impact on our short-term financial results. 2015 will also be an eventful transition for the year but in a positive way, as we continue to drive operating improvements in North America and Europe, and at the same time, capture some new and exciting growth opportunities across multiple segments of our business.

The pace at which we drive improvements in our operating performance, and the pace at which we capture revenue growth opportunities will largely determine the speed at which our overall financial performance in 2015 is realized. We remain highly confident that the business transformation we began in 2011 will make H.B. Fuller successful long into the future. The plan for 2015 represents the next phase in creating a stronger, more capable, and more sustainable platform for earnings growth.

Our plans for 2015 get us back on track to realizing our strategic EBITDA margin, and sustainable organic growth goals. This transition year should provide the bridge we need to realize the 15% EBITDA margin goal by FY16.

With that as background, our target for adjusted diluted EPS for FY15 is $2.60. We expect to generate approximately $280 million of EBITDA. Organic growth will be about 6%, and will be driven primarily by volume gains around the world. We expect an unfavorable foreign exchange translation will offset organic growth by about 300 basis points.

Our core tax rate, which excludes the impact of discrete items, should drop back to 30%, from slightly over 32% in 2014. Special charges are expected to be about $5 million, a dramatic decrease versus last year. And finally, capital expenditures are expected to be around $70 million for the full year.

With that overview, I will now walk through our operating plan in each operating segment. In our Americas segment, the SAP implementation is complete, and 2015 is the time to focus on the business of serving customers, and capitalizing on growth opportunities. 2014 was a difficult year for us in the Americas, as we worked through our first go-live event of SAP under Project One.

The supply chain difficulties related to Project One implementation in 2014 are largely behind us. Metrics such as available to promise, which were near 50% in Q2, and 80% at the end of Q3, are above 95% today. We were running near pre go-live productivity levels as we ended the first quarter, and we expect to see improving productivity from that point forward, as we leverage the benefits of the system.

The economy in North America is solid, and will support further organic growth. Some macro challenges exist in certain Latin American countries, but our plans call for additional growth, especially in countries like Brazil. No significant projects are planned in the Americas in 2015, so the decks are cleared for a strong year, for our largest and most profitable operating segment.

Our construction products segment had an active FY14, generating growth of nearly 20%. Early in the 2014 year, we captured all of the tile setting business at the Menards retail channel, and worked throughout the year to improve the operational efficiency of serving this important customer.

Near the end of the year, we completed the acquisition of ProSpec, which has enhanced our distribution network in the South and West regions of the US, and added manufacturing locations that help us serve all regions across the US more effectively. We expect another eventful year in 2015, with revenue growth expectations of about 30%.

There are three significant drivers of our planned growth and margin expansion for 2015: First, we will complete the integration of the ProSpec acquisition, and capture the benefits of the combination with our base business.

Second, we have landed significant new market share with Lowes, deepening the relationship we have built with this customer over the past five years. The new business will ramp up during the second quarter of this year. Key elements of the newly won business with Lowes is the introduction of a significant new product innovation. We're excited to see this new platform launch in selective Lowes stores later this year, at which time we'll share more specifics.

Finally, we are upgrading our manufacturing network to increase capacity and drive margin expansion and improve product quality. One important element of this project is the start-up of a new state-of-the-art manufacturing module at our existing Aurora, Illinois facility, and the closure of our Palatine, Illinois facility, significantly enhancing our capability to serve customers in the upper Midwest region, including Menards.

As you can imagine, these initiatives provide a significant positive impact on earnings. However, the timing of the benefits have a high degree of uncertainty. The pace of the acquisition integration, the timing of the launch of new business with Lowes, the customer acceptance of our new product platform, and our ability to ramp up the additional production volume in a cost-effective manner, all while shifting production between facilities in Illinois, will impact our construction products results for 2015.

The major initiatives planned for construction products in 2015 will build a solid foundation for the future. We are strengthening our marketing position, and delivering value for our key retail distribution partners, Lowes and Menards, along with our other traditional wholesale distribution partners. We are upgrading and streamlining our manufacturing network, to create a cost-effective supply chain, to serve the entire United States, and our product innovations continue to set us apart from our competitors. As a result of all this work, we expect to see EBITDA margins approaching 14% in 2015, excluding restructuring and non-recurring launch costs associated with our new Lowes business.

Our Asia-Pacific segment performed well in 2014, growing volume over 11%. In 2015, we will continue to build on that success, and expect organic growth of about 15%. The revenue growth opportunities will primarily be focused on the hygiene market across the region, which has consistently been an area of success for us. In addition, we have significant opportunity in our durable assembly markets, especially in the electronics market, which has been a very fast growing business for us over the past few years.

We completed our major business integration project work in 2014, specifically the consolidation of production facilities in China, and much like the Americas operating segment, we have no plans for significant projects in FY15. Our teams there will be free to focus on serving customers, while continually improving offering performance. All of our planned actions together should drive EBITDA margins higher by about 100 basis points, versus 2014.

Lastly, our European business has begun its transition into continuous improvement mode. In the fourth quarter of 2014, the investment phase of the transformation project was essentially completed. The first quarter of 2015 is a period of transition for the business, moving from project mode to stable mode.

As we exit the first quarter, we expect to see the benefits of improving customer service levels, and higher productivity across our manufacturing network. Our base operating plan for 2015 calls for organic revenue growth rates to turn positive in Q2, and increase throughout the year, as our production facilities return to normal service levels, and identify the market opportunities are realized.

In addition, manufacturing costs are expected to decline quarter by quarter, as we leverage the productivity improvements made possible by our capital investments. Since EIMEA is our second-largest operating segment, its performance has a significant impact on our consolidated results. The biggest variables in the 2015 results will be how swiftly we transition from negative revenue progression to positive organic growth, and how quickly we move past the operational inefficiency experience in the second half of FY14, and generate margin improvement.

So that's a quick summary of the plans we have for each operating segment in 2015. I want to switch gears a bit and discuss several factors that will broadly influence the results of the Company across all segments.

Let's start with the discussion of the outlook for raw material cost and availability. This is a topic of great interest, given the dramatic decline in crude oil prices over the last several months. We have been clear over the years that the price we pay for our basket of raw materials is more heavily influenced by the specific supply and demand dynamics of the materials we purchase, rather than the price of crude oil and natural gas.

That said, over the long term, lower oil prices should result in lower costs for us, and for our industry overall. Generally speaking, because the raw materials we use for adhesives are far downstream of the basic refining process, the impact on our raw material costs, due to changes in oil prices, is dampened and delayed.

Given the current price of crude oil, we believe there's a fair assumption that our raw material costs will broadly decline, as we move through FY15. Offsetting the potentially favorable downward trend in raw material costs is ongoing tightness is supply and corresponding higher prices of certain resins that are critical for adhesive formulations.

As raw material costs decline, some of the impact will be passed on to customers, which will dampen the beneficial impact to margins. Based on these various uncertainties, we decided to build our base plan for 2015, assuming no significant impact on margins. As always, we monitor and manage the dynamics of our raw material cost environment continuously throughout the year, and we'll be prepared to take maximum advantage of whatever market conditions we experience.

Now, moving on to another topic that has gathered quite a bit of attention recently, foreign currency exchange rates. The short message on this topic is that we expect a meaningful drag on our operating performance in 2015 relative to 2014, due to the translation of foreign entity results into US dollars. The most significant currency relationship we contend with is the euro versus the US dollar.

Our actual average translation rate in 2014 was $1.36 per euro, and our plan for 2015 is based on an average translation rate of $1.24. This represents a decline in euro value of nearly 10%, and a decline in the value of our euro-denominated financial results. In rough numbers, a 10% change in the euro versus US dollar exchange rate generates a 3% change in our consolidated financial results, both at the revenue and pretax operating level.

We also have exposure to a variety of other foreign currency dynamics, but the potential impacts are smaller. For example, local currency weaknesses in places like Brazil, Russia, Venezuela, and Australia could dampen local demand, but the impact to our consolidated results will not be as significant as the euro. So two major external factors, raw material costs and foreign exchange rates, will have a significant impact on the results in 2015.

Now let me turn to a couple of internal factors that are also important when evaluating our 2015 operating plan. First, a few comments about the quality of our earnings, or perhaps better stated, the cash flow characteristics associated with our earnings guidance. As you know, we have invested a significant amount in special charges over the past three years to complete the business integration and European business transformation.

These costs were varied and represented unusual or nonrecurring costs, associated with the multi-year business integration project, which began after the completion of the Forbo acquisition in 2012. Although we have removed the impact of special charges from adjusted earnings, special charges have a very real impact from a cash flow perspective.

In FY14 we expensed $45 million of cast cost through special charges. During FY15, we anticipate that number to drop substantially to approximately $5 million, primarily related to the cost of maintaining idle facilities in anticipation of their sale. The significant reduction in special charges, the sharp reduction in capital spending associated with the business integration, along with the elimination of other non-recurring costs related to Project One will significantly improve our free cash flow in 2015.

One final note on the financial performance guidance. Based on all of these factors we have discussed thus far, we expect the phasing of our earnings to be more heavily weighted to the second half of FY15, versus our normal earnings pattern. Traditionally, we deliver 45% of earnings in the first half of the fiscal year, with the remaining 55% in the second half. In FY15, we expect that split to look more like 40% in the first half and 60% in the second half.

There are four factors driving this phasing: First, operational efficiency in North America will improve through the year, as the SAP platform allows for enhanced productivity. Second, we expect improved operating results in Europe in the second half of the year, as we move through our continuous improvement phase.

Third, new business with Lowes in the construction products segment ramps up during the second quarter. And finally, our Asia-Pacific operating segment is seasonally strong in the final quarter of the year, and is becoming a more meaningful contributor to overall results, with its solid growth over the past few years.

Our first quarter of the year is always our weakest quarter, and this year will be no different, especially considering the factors I just discussed. We estimate our first-quarter adjusted diluted EPS to be about $0.35.

Please note that we have not included in our guidance any financial impact attributed to the pending acquisition of Tonsan Adhesives in China. The Tonsan acquisition, which was announced in June of 2014, is expected to close next month. We intend to update our guidance following the completion of the Tonsan deal.

I hope this broad discussion of our 2015 plan and guidance has provided you with a clear picture of the opportunities and the challenges that we will face this year. As I mentioned before, we are excited and energized as we enter this new year. I know everyone on the team is especially looking forward to a year in which we focus primarily on customers and winning in the market, rather than managing these large business integration projects.

And speaking of major projects, let me provide a brief status report. Let's begin with Project One. As I mentioned last quarter, the effort required to adopt a new system and return to normal productivity levels has taken longer, and been more costly than we initially anticipated. We are committed to making future launches happen smoothly, and as a result, I've elected to suspend any additional implementations of the SAP platform until after 2015.

We expect three significant benefits from taking this action: First, we will allow our operating segments to focus on operational excellence and winning with customers, without the distraction of an upcoming systems implementation. Second, we will enable our North America team to become experts in the system, before launching it in another segment. And third, we will save the expense and corresponding cash flow that is associated with these implementations.

What we will do in 2015 within Project One is continue to refine our capabilities, by optimizing the performance of the SAP platform in North America, to improve the performance of our business in this region, and to create the more robust template for implementation in other regions of the world. We will also be working to create a new plan for the rollout of the SAP platform to our other regions.

This plan will incorporate our learnings from the initial implementation, and will have a lower risk profile than the original global implementation plan. And in 2015, we will also be building our internal technical capability with the SAP platform, so that we can more effectively and efficiently manage future implementations, and provide ongoing support of the system.

Our second major project is the business integration. The investment phase of the European transformation is essentially complete, and during the first quarter, we are finalizing a few minor capital projects, and any remaining work streams we have put in place at the end of the third quarter.

For the remainder of 2015, we will focus on continuous improvement, which we have referenced a few times today. Specifically, we will improve customer service levels to support organic growth targets. This includes shorter lead times, and an overall enhanced customer experience.

We will continue to focus on driving manufacturing productivity across all facilities. Some expected tangible benefits include less overtime, fewer temporary employees, lower freight costs, higher yield, and more efficient equipment utilization.

Both of these projects represent huge complex undertakings. Both were designed to fundamentally change and enhance our business platform for the future. We were disappointed with the degree of execution challenges that we had in the middle of the year on both projects.

That said, we have made course corrections to quickly complete the ongoing project work, and to reduce the risk associated with future implementations within Project One. We will be successful in completing these projects, and delivering the benefits, just as we envisioned them when we embarked on these investments. With that, I'll now turn the call over to Jim Giertz to provide more details on the quarter just completed, and our financial guidance for 2015.

Okay, thanks Jim. The fourth-quarter results came in very much in line with the guidance that we provided at the end of the third quarter, and reflected a significant improvement in performance relative to the prior quarter. We're still not performing at the desired productivity level, but we feel that, at minimum, we have turned the corner towards continuous improvement, as we enter the new fiscal year.

We posted relatively strong organic revenue growth in the fourth quarter in each operating segment, other than EIMEA. The Americas adhesive segment increased volume by over 2% in the fourth quarter, and over 3% for the full year, and we feel this is a pretty solid result, considering the significant operational issues that impacted our customer service levels, as we went live on Project One in North America.

With these project-related issues mostly behind us and an improving end market environment in the US, we have good momentum as we enter 2015. Our construction products volume was up 24% of the quarter, and over 20% for the full year. The full-year results were positively impacted by the newly acquired business with Menards. The incremental volume increase in the fourth quarter came from the acquired ProSpec business, which we account for as organic revenue growth.

The Asia-Pacific segment extended its volume growth in the fourth quarter, up nearly 13% from the prior year. The growth was broad-based across the business, including good gains in our developing electronics market segment.

Finally, the EIMEA segment posted a small year-over-year volume increase in the fourth quarter. As mentioned earlier, we expect this segment to transition to consistent organic revenue growth as we move through FY15. And as expected, gross margin was down in the fourth quarter and full year versus the comparable periods last year. The vast majority of the negative impacts are attributable to the European business integration, and the disruption in North America following the go-live of Project One.

Reported SG&A spending was negatively impacted by incremental costs related to our Project One implementation, and a non-recurring restructuring charge associated with the reduction in force executed in the fourth quarter. Adjusted SG&A was only $86.5 million in the fourth quarter, down over $6 million from the prior-year, reflecting very tight control of discretionary expenses, and the benefit of lower incentive compensation accural.

I'd like to provide a bit more information on the non-recurring items that we adjusted from our EPS results in the fourth quarter. The schedules we provide in our press release get financial performance metrics for our operating segments on an as-reported basis, and are not adjusted. We think the adjusted results for the fourth quarter provide a better indication of our run rate of operating margin, as we enter 2015.

So with that in mind, I'll just run through the four segments, and provide the pretax adjustment amounts for you. For Americas adhesives, the Q4 adjustment totaled $4.2 million, increasing EBITDA margins from 12.7% to 14.5%. For EIMEA, adjustments totaled $3.3 million, increasing EBITDA margins from 8.5% to 10.4%.

For Asia-Pacific, adjustments totaled $1.3 million, increasing EBITDA margin from 8.5% to 10.2%. And finally, for our construction products segment, adjustments totaled $1.7 million, increasing EBITDA margins from 8.0% to 11.3%. For H.B. Fuller overall, adjustments totaled $10.5 million, increasing EBITDA margin from 10.3% to 12.2%.

Nearly all of the items that were adjusted out of the fourth-quarter results are either clearly one-time items, such as the severance costs associated with the reduction in force, or have been eliminated as major projects stabilize, such as the Project One core team cost, or have been absorbed into our operating plan for 2015. Therefore, we believe the adjusted margins in the fourth quarter provide a relatively accurate picture of our operating performance level, as we enter the new year. And as mentioned earlier, the reduction in non-recurring items and special charges will improve cash flows significantly in 2015.

One additional item was adjusted from our fourth-quarter earnings. During our year-end processes, we determined that an accounting error was made in 2007, as we increased our ownership stake in our Japan joint venture from 40% to 50%. In short, in 2007, we deemed all of the excess purchase price associated with the transaction to be goodwill, when a portion of the excess should have been assigned to other assets, including certain intangible assets that amortize.

Therefore, since 2007 we have slightly overstated our equity earnings in the joint venture, by the cumulative amount of the intangible amortization that should have been recorded in each period. We corrected this in the fourth quarter, with an after-tax charge of $1.7 million. This is why the income from our Japan JV was essentially zero in the fourth quarter. We excluded this amount from our adjusted EPS, and going forward, the income from the JV will return to normal levels.

Our core tax rate on adjusted earnings for the fourth quarter came in just slightly above 32%, generally in line with our guidance provided after the third-quarter. Our reported tax rate in the fourth quarter was over 50%, reflecting the very low tax rate on the special charges taken in the quarter, primarily in the European region. We reset our core tax rate on adjusted earnings for 2015 based on our forecasts of the geographic mix of earnings in 2015, and primarily driven by expected profit improvements in Europe, our 2015 core tax rate is expected to be 30%.

Pulling it all together, adjusted diluted earnings per share in the fourth quarter of 2014 was $0.64, in line with our guidance, the slightly higher tax rate in the quarter and unfavorable foreign currency translation relative to the assumptions in our third quarter guidance dropped $0.02 from our fourth-quarter results. Cash flow from operations was positive $42 million in the fourth quarter, capital expenditures came in at $24 million in the fourth quarter, and $140 million for the full year, generally in line with the most recent guidance we provided at the end of the third-quarter.

And as we noted earlier, we expect to reduce our capital expenditures substantially in 2015 to about $70 million, or just slightly more than 3% of net revenue. And with all that, I'll turn the call back to Jim Owens to wrap us up.

Thanks, Jim. 2014 was a year disrupted with two large unexpected challenges. Our teams responded to the challenges, and put our business back on track toward our strategic goal.

I'm proud of what was accomplished this quarter. The team righted the ship, and at the same time, we drove solid organic growth overall, and drove outstanding growth in certain segments. We developed a plan for 2015 that provides double-digit growth in EBITDA and EPS, and margins expanding throughout the year. On top of the plan, we had the exciting Tonsan acquisition, and the potential for raw material related margin expansion later in the year.

When I say I'm excited about 2015, I really mean it. We had an outstanding leadership team that was tested hard in 2014, and came through stronger. We have organic growth momentum exiting the year, and we have a series of initiatives ahead this year which will sustain that momentum.

We have action plans and investments that were designed to drive sizable gross margin improvements, which will be realized this year, and we had the first year of a significant shift in cash flow generation. We will exit 2015 with the financial position to deliver our targeted plans in 2016 and beyond.

I thank our employees and our investors who have supported us through these investments with their time and their money. The returns on these investments will be realized as we progress through 2015. This is the end of our prepared remarks, so now I'd like to open up the call for your questions.

(Operator Instructions)

David Begleiter, Deutsche Bank.

Good morning, this is actually Jermaine Brown, filling in for David Begleiter. A few questions. Can you specify which raw material supply chains are seeing some supply demand tightness?

Yes it's certain tackifier resins are the ones that are showing the highest degree of tightness, but we buy a wide pool of resins, but currently that would be the area where we see that tightness.

Okay. Thank you. And then, of the 5% shift from the first half to the back half, you mentioned the four components of that. Can you quantify the impact of each?

It would probably be difficult to spell those out, but I think when you dig into the details of each you can see them, and you have to pull through the math. Jim, we don't have a specific element of each one, right?

I wouldn't try to quantify it, no.

Okay. Then. I guess finally how are the volumes currently trending in Q1?

We generally don't comment on numbers through the quarter, but I think, as we stated, we expect the second half of our volume year to be stronger than the first half, because of some of these shifts. So I wouldn't say we are concerned at all about any kind of volume trends, if you are asking about a macro issue based on a very early look at the quarter.

Understood. That's all that I have. Thank you.

Rosemarie Morbelli, Gabelli & Co.

Jim, when you look at your entities at 6% growth rate in revenues, do you have the negative 3% from FX in that, or is it a net 3% growth?

It's 6% organic, and then our current projection, which is based on $1.24 is 300 basis points down. So net growth of 3%.

Okay. Thank you. And then when you look at your 2016 targets, and I'm assuming that translates into about 6% or so. 6% or 7% top line growth including everything, and margin of -- EBITDA margin of 15%. Do you need a lot of help from the outside world, or do you think that you can reach that based on your internal action, and is that a number for the full year, or just a number that you think you will reach towards year end?

A couple of comments I'll make. First off, we're laying out a plan here for 2015. As I said clearly, based on that plan, we think we are positioned well to deliver the plan in 2016.

So I think the general philosophy we've taken from macro assumptions is that the world will be a lot like it is now. I don't think there's a sense that it's going to get a lot better, but there's also not a plan that is going to get a lot worse, would be the way I would consider that.

Thanks, and if I may we ask one last question regarding Tonsan's contribution, if we look at it on an annualized basis, when you announced the acquisition, it was, I think, it generated about $100 million in revenues and close to $19 million also of EBITDA. Is this what we should be expecting for 2015, or as you're getting closer to closing the deal, you are seeing a big deviation from those numbers?

I would say the business, we're close to the business and the things that are going on. The business ran well in 2014, so we don't see major deviations from where we were. Exactly how it is going to flow through to our business is something that we'll learn a lot more as the purchase accounting is sorted, and we look at exactly what investments we need to put in. Is there anything you want to add to that, Jim?

No, I think that's right. We have to close the transaction, so first of all, it will happen two months -- at best, it will happen two months into the year. We'll only have 10 months of the business maximum, and then as Jim said, we'll have to go through the calculations. And we'll refresh our guidance for you probably when we get together for the first-quarter conference call.

Back to the core question, the business is running well, we're very excited about what we see. This is a company that brings us into new market segments, that we haven't been in.

Their ability to win versus Dow Corning and Loctite and local Chinese customers is very clear, and apparent and we think the things that we're going to bring as we partner are very positive. So this is a really good positive acquisition for us, particularly for the long-term, bringing us into a new spaces that are attractive.

Thank you.

Mike Ritzenthaler, Piper Jaffray.

A couple questions, Jim, on Fuller's ability to pursue pricing initiatives in 2015. Timing of how that flows through the P&L, and your current expectations for more or less flat pricing in 2015. I guess the spirit of the question is around the supply chain piece, as it comes into Fuller, and then your ability to pass that through or drag your feet, so to speak?

Well, it's an interesting dynamic. Again, it's part of how we gave out the guidance, because there's a few dynamics working. So some of our raw materials are moving up, and we're talking with customers about increases there.

There are some price increases, we entered into late in 2014, that were related to some materials that took some time to get through the system. Those are going to impact us in 2015.

And on the flip side, as raw materials come down, some of that will go back to customers. So there's going to be a couple of different pricing dynamics that will flow through the year, that again, in our base assumption, we've with a net flat for the year.

I think it's a fair assumption. I think our ability, and the market's ability to generate more raw material reductions in the long run will be favorable to margins.

I would say, historically, and we've got to deliver on this, when raw materials go down, we give some of that back to the market, but margins improve. So that would be my long-term expectation, or mid-medium-term expectation, if oil stayed low, and raw materials came down. Does that help?

That makes sense. Just one other follow-up on the 2015 outlook. I heard the 14% EBITDA margins in construction, expansion of 100 basis points in Asia-Pacific, to get to 13% EBITDA margins for the full year.

I guess in that framework, expansion in the Americas and EIMEA would be pretty modest in that scenario. I'm just wondering if there is any specific targets for those segments, maybe as they exit the year, or some other sort of milestone to gauge performance in those two segments?

They have a very specific targets, so we don't drive each one. But I would say the math, and you see as you did through your own models, but it ties with our plan, the margin expansion is nice in the second half of the year in both of those businesses, and we have a lot of optimism that is going to happen. Jim, is there something more specific to add?

Just in the Americas, Mike, maybe I'll reference you back to 2013 when EBITDA margins in the Americas was about 16%. So that's kind of a target level, so we're pretty close to that as we exit the year, so I think that's probably a range that you could think of, for the Americas.

And then Europe, I guess you can solve for the Europe one. Everybody has to make up their own mind where they think that's going to land.

All right. Thank you very much.

Jeff Zekauskas, JPMorgan.

I think the gross profit margin fell about 250 basis points in the quarter on an adjusted basis. Can you analyze that?

Well, you're talking about year-over-year, Jeff?

Yes, year-over-year.

As we said in the script, it's basically-- I can't quantify every detail of it, but it's related to the -- almost entirely related to the excess cost of running the system with the European integration, and the residual impacts of the Project ONE complications in North America. And if you just looking at the reported as opposed to -- you're talking about reported gross margin, not adjusted, correct?

I'm talking about adjusted.

Oh, adjusted. Okay. So that's still the answer.

I would say while we had a lot of improvements in the quarter, Jeff. Both of those projects, they were operating performance. So I look at things that happened inside those businesses, we invested the money to get the businesses both running well, but we had extra freight costs, extra labor costs, extra overtime costs, we had yield losses.

All of those things that are part of the productivity improvements, we're going to drive into this year. We can define item by item what is different, and we have, and those are the things that are going to drive the improvements we're talking about delivering in 2015.

All right. So 2014 was a tough year, both on a GAAP basis and on an adjusted basis. And part of what you have been doing over the last several years is, you've bought Forbo, and you're integrating and changing H.B. Fuller. Can you say something about what kind of cost reduction was actually achieved in 2014, or the kind of cost reduction you expect to achieve in 2015 from all of the investments that you have made?

Let me try. Jeff, the main driver of the improvement that we'll see, that we are planning to see in 2015, is a significant improvement in gross margin, and it relates to all of the issues that you asking about. We have to methodically drive out these excess costs that have been introduced into our system in North America and in Europe, particularly in Europe, and realize that we're talking about close to 200 basis points of gross margin improvement that we need in 2015 to make this plan come together. So that's the payout. That the ultimate payout that's been delayed from all the investments, that needs to be realized in 2015.

In summary, when you think about it from an action standpoint, Jeff, we invested in new facilities. We invested in bulk capabilities for raw materials. We invested in new automated packaging equipment.

All of those things are running, but it's a whole new process with a complex product line in a different network, and all of the work that you do to drive OEE and freight efficiencies and yield efficiencies need to happen within that system. So the potential, item by item, is very clearly there, and that's what we are going to tackle this year.

Just a couple more. My impression is that customers want price reductions quickly, in the light of so many chemical prices falling in the spot markets. My guess is that your inventories right now are relatively high, and you've got higher cost raw materials embedded, and you'll work your way -- I take it, you'll work your way through those in the first half, and then your margins should widen out in the second half.

But do you expect your average prices in the first half actually to be down year-over-year, in the light of the pressure from customers, or do you think that you can actually hold your pricing flat or even up in the first half?

So customers in our lot more sophisticated than they once were, Jeff, and they recognize that we're downstream here. I was with customers this week, in fact, and had exactly this discussion.

The short answer is yes. I think that we will hold off any kind of price decreases until we start seeing those decreases in our raw materials.

The first step is getting the decreases in our raw materials. So those things don't happen automatically when the fee streams come, we need to create leverage around certain supply demand dynamics to get those, then we have to work those through our system, and then we have to then negotiate with customers on those. But I would say that earlier in the year, we were actually probably receiving more benefits from increases from late in last year, and then, any kind of decreases will happen later in the year.

And then lastly, what we hear from talking to companies is that Europe has slowed down, and different people assess it differently, as to the magnitude of the slowness, and there are some pocket that are doing well, and some pockets that are doing less well. Can you assess -- can you make an assessment of your prospects in Europe, in terms of volume growth?

You spoke of the first half being weak. How weak? And you talked of a second half rebound. How strong? And what is the basis for that?

So I think for us, Jeff, we are less exposed to Eastern Europe and Russia. I think people have that in their European number, it hurts them more. We benefit from that, from a relative European standpoint.

We also benefit from the fact that we have some pent-up demand. We've held off on some opportunities that we haven't really been in a great position to deliver because of some of the operational efficiencies. We have that.

In our EIMEA segment, we have Africa and India, which -- we have made some investments that have generated good growth for us. So that's the dynamics that help us relative to maybe somebody else in terms of Europe. This quarter, we had positive organic growth.

What we said in the script is, we expect Q2 to be sustainably positive. I would like to see us positive in Q1.

But I think we're hovering around that flat range, maybe a little down moving toward a little positive in Q2, and then net positive as the year goes on. And I think when we net out our numbers, that's a good solid view of our business, and what's going to happen this year.

Okay. Great. Thank you so much.

Mike Sison, KeyBanc.

We think about the $3 to $3.15 you had hoped to hit in 2014, and the $2.60 you have now, is the delta from that still the ongoing cost from Europe, and it sounds like SAP is going well, and will that -- I think about that $0.50 as the slam dunk heading into 2016.

Let me have Jim take you through some of the numbers so that you get a sense.

Mike, so I'm going to generally agree with your first statement. I don't know if you just -- if our original 2014 look was $3 a share, and then you want to bridge the $2.60 that we're talking about for this year, where the difference. About $0.05 is just non-op. It's interest expense, it's the JV equity earnings and a few technical things like that.

But you are right. The bulk of the difference between our 2015 plan and our 2014 plan is that our expectations for Europe are quite a bit lower, and that's really driving the difference. There is parts of that. The business is a little bit smaller than we thought it would be, because we had some attrition this year, and we had attrition based on the complications of the project. So that's part it.

Foreign exchange is another piece of it. It's going to be smaller on a dollar basis because of the currency issues that we talked about.

But the biggest piece of it is that the gross margin percentage is lower. We're on a slower trend up in gross margin than we had originally anticipated, and that's the most significant delta between our original plan for Europe and where we are today.

Okay.

So when we look forward, Mike, the world changes. Europe changes, but our business, especially heading into 2016 in construction products, is bigger and stronger than we expected, and our business in Asia will be bigger and stronger than we expected. That's the net impact on the overall company, and why we still remain very positive about the 2016 target.

Okay. And then when you think about 2016, you have talked about hitting your 15% EBITDA margin goal. I should add to whatever you earn in 2015, then grow the business into 2016, and the earnings growth should be pretty potent, right? That's kind of how the math works?

Absolutely.

Absolutely.

In the second half. That is all based on just the fact that, as we have mentioned, the second half of this 2015 year should be substantially better. So you'll be working off a second-half base going into 2016. That is the idea.

Okay.

And when you work through the issues, right, and we tried to go through a lot of details today, on lots of items, you can see the momentum, SAP, Europe, organic growth, raw materials, the things that we're doing in the construction products business, and the investments we're making there. The momentum in Asia, all of those things are heading in the right direction. Those are the actions that flows through in the numbers.

Okay. And for the $2.60 in 2015 I just want to make sure I understood. Do you have a benefit from pricing over raw materials, or in that $2.60, are you assuming no benefit?

No benefit.

No benefit. Okay. But there could be benefit if you do a better job in pricing. Is that sort of maybe the potential cushion that you have, as you head into the year?

I had less than five things just a second ago, that could all go better than we expected. We are laying out the plan if we have it. I think you could argue on any one of them, they can go better or worse than we laid out. Raw materials is an obvious one that we all know, but it could be better.

Okay. Just on a qualitative basis Jim, you touched on this a little bit, but can you walk us through? Nienburg is running, right? The one plant is down, Nienburg is up and running. We are you at in terms of operating rates? Where does it need to get to, to sort of get on this 2016 plan?

We closed this quarter the Bordeaux site. I think we might have said that in a press release. And our three sites that had sizable investments, Luneberg, Nienburg, and Blois now have all of the products that they need to make there. They're not operating as efficiently as they need to, but we are getting the output that we need to serve customers, and delivering the benefits. The automated production lines that I talked about last quarter that weren't doing some of the packaging work, for the most part, those are now running and operating as they need to be.

So the four parts to what we need to do going forward in Europe, first and foremost is around production efficiency. So tackling the OEE, making certain that we have the right loading, the schedules right. The operations don't have downtime, and they're performing at the rates. The material flow design, getting the material flow design in these sites the right way.

Improving freight efficiencies, both in terms of rates, as well as minimizing any kind of expedited freight, which is still part of our process, and then driving yields. You start out a whole new plant, you put all these products in there, laying out all of the benefits related to bulk, getting all the campaigns right, optimizing exactly how we use those plants.

So there's four big elements that are not being experienced by our customer, but they are being experienced from a cost standpoint that we have lined out, and we have very specific plans on what we're tackling and how we are going to tackle it. But in terms of the sites themselves, all the sites are meeting customer needs now, as they need to, just at a higher cost than maybe less yields and higher freight cost than they need to be.

Okay. Great. Thank you.

Dmitry Silversteyn, Longbow Research.

A lot of my questions have been answered, but I'd like to follow up on a couple of things that I'm looking for some clarification. In construction products, the growth you delivered in the fourth quarter, did I hear you right, that it includes the acquisition that you made, and you're counting it as organic growth?

Yes.

Okay, so if I exclude that acquisition which I'm assuming did about $7 million in sales in the quarter, or more or less, then your organic growth comes out to be about 8%. Is that the right way to think about it? Price plus volume. 9% or so?

I don't have that math in front of me, Dmitry, but that's basically it. Yes.

Okay. So the 30% growth in construction which you expect for next year, that includes probably about 12% or 30% from this acquisition, correct?

Correct.

Okay. So net growth next year is still going to be a very impressive 22%, I guess is what I'm trying to get to.

Yes, and that is the combination of the new business landed with Lowes that comes in sometime in the second quarter, and just organic growth on the base business.

Right. Okay, very good. In terms of EIMEA segment, you talked about expecting sort of volume declines still to happen in the first quarter, but then to see volumes improve in the following three quarters and faster, so in the second half of the year. I still don't understand the decline on a year-over-year basis in the first quarter, given that we're going against very difficult comps in Europe, just in general, in the economy, on a year-over-year basis.

First half of last year was pretty positive environment certainly compared to this year. Besides the economy getting better, what's going to reverse the trend that you've had over the last year to year and a half of losses in the business, in terms of volume? Is it sort of stabilizing at the levels that you are and gaining new business, or do you expect some help from some sectors of the economy that you have particularly good exposure to that are may be doing better than the overall economy in the region?

So as I said just a second ago, Dmitry, I think we had positive momentum here in Q4. We're not expecting that necessarily to build, but to stabilize.

We have good exposure, and a growing exposure in India, which is part of our EIMEA region, and good growth in Africa, which helps our business. But most importantly, we're by now stabilizing our business, being able to meet the needs of customers.

We're in a position to go after opportunities that we had. So we have a bit of a pent up demand list of opportunities.

So I wouldn't say this is driven by a certain macro segment, and I think when you compare us to others, we're a little less exposed out in Eastern Europe. That is helping us, but it's not really macro driven as much as the fact that our business has stabilized and able to meet some of these needs that we haven't been able to meet.

Got it. And a last question on the Asia-Pacific, you delivered very strong organic growth the last couple of years, mid-single digits including some negative pricing in 2013, and looks like double digits this year. And you provided for very strong 15% growth expectations for 2015. What has changed over the last couple of years that's allowing you to gain new business in hygiene and durable assembly that you talked about, versus your bigger international competitors, as well as the local players in the market?

I would say all of our organic growth, it's pronounced when you see it in Asia, but all of our growth organic growth initiatives, are driven by designing our business around market segments with market experts, so by having -- which we didn't have in the past, a series of market experts in these targeted markets, like hygiene, like electronics, they can understand and tackle the opportunities that are there.

Combined with innovation agenda. So by developing new products, solving customer problems, we are meeting those needs. And that's what we've done in Asia.

Okay. And then one final question on construction materials. Two years in a row, you've grow the business very nicely, but it came at the expense of margin. Should we be expecting margin to start moving in the upward direction, driven by the volumes that you're getting here, once you get out of the second quarter, where what I understand you're going to have some lower margin business because of the channel sale with Lowes?

I think I was clear in the script, we expect margins to tick up, approaching 14% this year, so a sizable uptick, and get some benefit out of this growth that we've been delivering. So when you take out, some costs you have to take out to get there, but we'll see some good margin improvement in that business this year.

And is that a function of the business that you're getting being higher margins in the business that you got in the past, the year-over-year volumes, or is it the business that you have gotten in the past at a low margin now getting sort of the right margin?

It's a combination of many things, but it's driving the efficiencies. When you take on new business, then you have to do the things, to be able to run our facilities and run our business efficient, and that's happening in all of our wins.

Combined with some products with and higher margins.

All right. Thank you.

Steve Schwartz, First Analysis.

Thanks for going over the hour. Just to review some of the things. Back to Jeff's question about the initial savings expectation, so you had the $90 million figure around that, maybe going back two years. It sounds like maybe now you still have $90 million to gain, or is it more, or is it less? Should we just throw the $90 million figure out the door at this point?

So I guess what we can do is come back and spell out all the numbers there and where they all stand today, but a lot of that money was realized, the North American business drove their margins up quickly, and got to where they needed to be. Our Asia business has a lot of benefits that are there, and part of the benefits in Europe that we were driving were around shared services, around some SG&A reduction. So a lot of the money is right there.

And the piece that we're talking about being delayed is this piece related to gross margins in Europe. We can pull out that number and talk to you about it. I don't have that right in front of me, to go back to the exact details, there. But most of that benefit is right there in the P&Ls, as you look forward here in 2015.

Okay. Very good. Thank you for the concise color, Jim.

Christopher Butler, Sidoti & Company.

Thanks for squeezing me in. Just a question, with the lower CapEx and expenditures on restructuring, you had mentioned that your cash flow is better. Could you talk to us about the acquisitions that you are looking at beyond Tonsan disclosure here, and any other -- any changes or other uses of cash that you're looking at?

So our intention is to cover this sometime around midyear, because we will be toward the end of this year, generating a lot more cash. But fundamentally we don't the us doing major acquisitions. Certainly not for the first few quarters of 2015, so it would be a 2016 initiative.

Bringing Tonsan in, delivering these benefits, delivering the results that we're looking for, is the goal for 2015. And then beyond, you're right, there is a sizable cash generation that we need to address in terms of how we return that to shareholders, and how much we invest in future valuable acquisitions. Jim, do you want to add anything to that?

No.

Okay.

I appreciate your time.

Okay, thanks everyone for their time, sorry for going over here, we did want to bring you a lot of the details. And especially thanks for your support here at H.B. Fuller.

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