H.B. Fuller Company (FUL) 2015 Q1 法說會逐字稿

Good morning and welcome to the H.B. Fuller first-quarter 2015 investor conference call. This event has been scheduled for one hour. (Operator Instructions)

Management in attendance on today's call is Mr. Jim Owens, President and Chief Executive Officer; Mr. Jim Giertz, Executive Vice President and Chief Financial Officer; and Mr. Maximilian Marcy, Senior Manager, Treasurer (sic), and Investor Relations. At this time, I'd like to turn the meeting over to Mr. Maximillian Marcy. Please begin.

Thanks, Karen, 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 quarterly reporting. 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 reported results determined in accordance with GAAP. We believe that the discussion of these measures is useful to investors because it assists in understanding our operating performance and our operating segments as well as the comparability of results.

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 we issued last night. For more information, please refer to our recent press release and annual report for the year ended November 29, 2014 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'll now turn the call over to our President and CEO, Jim Owens.

Thanks, Max. Thank you, everyone, for joining us today.

It has been a dynamic first quarter with the completion of our Tonsan acquisition in China, dramatic shifts in currency exchange rates relative to the US dollar, and movements in raw material costs. Many good things are happening in our core business, and we feel good to be able to confirm our commitment to deliver adjusted EPS this year of $2.60.

We expect our operating metrics to improve each quarter this year, setting us up for a strong 2016 and achievement of our EBITDA margin target of 15%. So the commitment is unchanged, but due to the dynamic conditions in the global economy, the plan to get there has been modified. And this is what I want to focus on today.

Let me start by talking about a couple of our growth initiatives that are in the plan for the year and are moving ahead, on schedule. First, we completed the acquisition of Tonsan Adhesive in early February, and our integration plan is in full swing. Unlike some of our recent acquisitions, the focus of the Tonsan integration is centered on accelerating revenue growth, both in our legacy business in China and the new adjacent markets served by Tonsan. We are working some very exciting opportunities for growth, and we're confident that we will see a positive impact in the short term.

Another area of our business that is moving ahead according to plan is the construction products segment. We laid out a big plan for this business for 2015, and we're on track. The team has completed most of the integration of the ProSpec business that we acquired last fall, begun the launch of a significant piece of new business with Lowe's, and managed a large capital spending project to improve our supply chain capabilities. I'll talk more about this later in my prepared remarks.

The most significant new dynamic for us is the accelerating strength of the US dollar, and this is having an adverse effect on our operations and a significant negative impact on our reported financial results. There are two major impacts from the US dollar strength.

The most evident is that the financial results of our international operations translate into fewer revenue and profit dollars on our consolidated income statement. The second impact is a bit below the surface but has a meaningful negative impact on our profit margins in the short term. In short, we have a disproportionate level of US dollar-based cost across our organization, relative to our mix of revenue.

Two cost areas generate most of the mismatch. Our top-level corporate costs support the entire Company but are almost entirely US dollar-based. And a portion of our raw material costs within our international operations are effectively US dollar-based.

When foreign currencies fluctuate over narrow bands, the effects of currency on our profit margins is less evident and generally managed as part of our overall margin management process. The large rate changes we've experienced in the last few months create margin pressure that is difficult to offset in the short term.

Fortunately, there's another emerging trend that is favorable to our business, namely, the reduction in costs of certain raw material categories. This trend is due to the drop in global oil prices and the improvement in the overall supply and demand situation within the upstream industries.

When we laid out our plan for the year, we noted that some benefit from raw material cost reduction was possible, but this impact was not fully incorporated into the plan. It represented some upside to the plan that required more time and effort to evaluate.

The picture is becoming clearer now. In fact, we began to see some benefits of lower raw material costs already at the end of the first quarter. In effect, our revised game plan for the year looks to offset the increasing negative impact of the strong US dollar with increased benefits from raw material cost savings.

And to complete the picture, we're modifying our organic growth expectations a bit, due to the slow start we got in December in the Americas and the EIMEA operating segments. The addition of Tonsan in our plan will more than offset this lower revenue outlook in our core business. Jim Giertz will provide a bit more detailed information, regarding our earnings guidance.

As a summary, we remain committed to our original earnings and cash flow plan for the year, though the path to achieve our goals is being changed as we adapt to market conditions. Foreign exchange rates will hurt us, and we plan to offset this with raw material cost reductions.

With that overview, I'll now walk through the performance of each of the operating segments. The performance of our Americas segment was a bit mixed in the quarter. On the positive side, the operational problems that we experienced, following the implementation of SAP software in North America, are now behind us.

The strengthening of the US dollar resulted in some margin pressure, due to foreign currency movement in geographic areas where US dollar-based costs matched against foreign currency revenue. Our business in Canada is one example.

Despite this negative trend, the operating margin in the segment overall has started to improve, now moving back toward our long-term EBITDA margin target of over 16%. We expect continued margin improvement throughout the remainder of the year, as we streamline our manufacturing costs following the SAP implementation and take advantage of raw material costs.

Clearly our constant currency revenue growth, actually a year-over-year decline of about 2%, was a disappointment. We have aggressive plans for revenue growth in the Americas, which we still feel confident in achieving.

Last year, we posted several consecutive quarters of solid, organic growth, but December was down significantly, which we attribute to customer order patterns in our consumer goods business and other seasonal factors. Sales picked up for the remainder of the quarter but didn't overcome the December weakness.

Our quarterly organic growth last year averaged 2%, and we expect organic growth to increase to between 3% and 4% for the remainder of this year. All of this taken together, we feel confident in our ability to deliver in our largest and most profitable operating segment.

Our construction products segment is off to a very strong start, with volume growth of over 20%. The recently acquired ProSpec business has solidly contributed to our financial results.

Our business with Lowe's is moving forward in a very exciting way. We're introducing tintable grout to the market, launched exclusively with Lowe's.

Think about it like this -- when you buy paint, you choose from custom colors mixed on-site. Tintable grout works the same way. You pick your custom color, buy the tint in a cup, and mix it in when preparing the grout.

This new concept for grout has many benefits. Most importantly, Lowe's is only required to stock one standard base grout. This reduces supply chain costs for stores and cuts down on slower-moving inventory. In addition, customers can choose from a wider array of custom colors not previously available.

This type of innovation is a key reason why we continue to win business with our retail distribution partners. In April, we ramp up our volume with Lowe's as we capture additional share of the national network and introduce the new grout product.

While we're focused on the volume growth in our construction products segment, the operating margins are improving as well. The adjusted EBITDA margin in the first quarter was 11.7%, over 250 basis points above the same period last year.

Additional volume is coming on stream this year. Our investments in new manufacturing processes will improve efficiency. The integration benefits of the ProSpec acquisition will be realized, and discipline around product cost and pricing will all produce steadily increasing margins in this segment, as we progress throughout the year.

Our Asia-Pacific segment continued to grow, with volume up more than 10%. Constant currency growth was positive across all sub-segments. The Tonsan acquisition, which we completed in early February, contributed about 5 points of volume growth in the quarter.

As everyone is aware, there's a great deal of attention being paid to the current and expected business conditions in China. From our perspective, it's clear that the business conditions have softened in recent months.

That said, we are still optimistic about our future potential for a couple of reasons. First, we primarily serve consumer product oriented markets in China, most notably, the hygiene segment, where we anticipate ongoing strong growth. Second, we continue to build up our electronics business in China, and we have a strong pipeline of opportunities that will convert to revenue throughout the year. And finally, the Tonsan business provides us many opportunities for growth, based on the synergies of aligned sales organizations.

We're also seeing positive trends in operating margins in the Asia-Pacific segment. Our adjusted EBITDA margin in the first quarter was up more than 250 basis points compared to the prior year. The margin improvement is based on a variety of factors, including better pricing and overall customer margin management, richer mix of revenue, ongoing tight cost controls, somewhat offset by margin pressure derived from foreign currency rates. Overall, our Asia business is a good story with many new opportunities in front of us to grow and expand our market participation and market share.

Lastly, our European business. Mostly, as expected, our EIMEA segment had a tough first quarter. There are several broad external and internal forces across our European business which provide the context for our relatively weak operating performance in the first quarter. The key external forces, which continue to impact our business, are sluggish end market demand in core Europe, end market demand in the emerging markets around core Europe not increasing at previous rates, and the massive and rapid shift in the value of the euro relative to US dollar is putting pressure on operating margins for our EIMEA segment, as some US dollar costs in the region are matched with euro denominated revenue.

Our European performance plan is based on internal factors, namely restructuring and business transformation efforts. The project is now completed, and we're now working through the costs and inefficiencies of the operation. We expect to see significant improvements in our yields, logistic costs, and manufacturing costs as the year progresses.

We see steady improvement in the internal operating metrics, which indicate the health of our manufacturing network. Metrics such as schedule attainment and right-first-time are moving in the right direction. Our customer service metrics, such as on-time-in-full, are improving steadily, and for most business segments within the region, we're at target levels required to support ongoing and new business opportunities.

Excess costs are beginning to be eliminated across the network. One clear piece of evidence of this can be seen in the magnitude of special charges associated with the European transformation -- $2 million in the first quarter, compared to $14 million last quarter and $12 million in the first quarter of last year.

Progress is definitely happening. Our issue is that all of this is not happening fast enough, relative to what we think is possible. Our ability to accelerate the ongoing improvements in Europe will be an important factor in achieving our financial plan for the year, and our focus on this is intense.

So that's a quick summary of each operating segment in the first quarter. Before I turn the call over to Jim Giertz, I just want to touch on raw material costs.

Our savings related to reduced petrochemical feed streams are generally delayed by six to nine months, since most of our raw materials are specialty materials whose prices are based on supply and demand dynamics. More commoditized raw materials, such as vinyl acetate monomer, ethylene, certain oils, and waxes are beginning to see decreases, which will provide benefits throughout the rest of this year. More downstream materials have seen less decreases thus far and, in some cases, increases due to supply and demand dynamics.

We are intensely working with suppliers who are getting feed stream reductions to pass on these savings to us. And where there's insufficient action, we're working to replace these materials with alternatives. The magnitude of savings will be reduced in Europe and geographies where there's sizable currency deflation versus the US dollar.

With that summary of the regional performance, I'll turn the call over to Jim Giertz to share more specifics on the financials and to update our guidance for the remainder of the year.

Okay. Thanks, Jim.

Our guidance for first-quarter adjusted EPS was $0.35 per share, and the actual result was $0.30 for the quarter. We estimate that about $0.03 of the negative variance is attributable to negative impacts of foreign exchange rate movements, so the constant currency results fell short of our guidance by about $0.02 per share. Operating performance in our construction products and Asia-Pacific segments was slightly ahead of our plan, while the Americas and EIMEA segments fell a bit short of our plan in the first quarter.

Overall, the revenue development and soft in the quarter, with constant currency revenue growth of just 1.4%. ProSpec and Tonsan together contributed less than 2% constant currency growth.

The Americas segment experienced a slow start in December, and order patterns have generally improved in subsequent months. Our EIMEA business continues to suffer the negative effects of the sluggish end market and constraints created by the business integration project. Foreign currency translation lowered revenue by 4.6% in the first quarter.

Our adjusted gross margin in the first quarter was down over 200 basis points versus last year's first quarter. The large majority of the variance, both relative to prior-year and our plan, was driven by excess manufacturing costs in our EIMEA segment and, to a lesser extent, the Americas segment.

On a positive note, adjusted gross margin was up 60 basis points sequentially, as we made progress returning to target operating levels in North America and Europe. And as many of you know, our gross margin percentage normally dips down in our first quarter due to seasonal factors, so the sequential increase this year is an encouraging sign.

Adjusted SG&A spending was down 3% versus last year's first quarter. The strength of the US dollar tends to reduce our nominal expense level, but because a disproportionate amount of our operating expenses are US dollar denominated, our SG&A expenses as a percentage of revenue remained essentially flat year-over-year at 20%.

Operating cash flow was very strong in the quarter, primarily driven by reduced working capital requirements. Net debt increased by only $195 million in the quarter, despite completing the acquisition of Tonsan with $225 million paid at closing. Capital expenditures came in at $28 million in the first quarter, in line with our plan for the year.

Let me now turn to our guidance for the remainder of the year. Foreign currency rates globally have continued to weaken versus the US dollar and present a much larger challenge than we initially planned for.

We now expect that year-over-year revenue growth will be negatively impacted by about 600 basis points in 2015, due to foreign exchange rate movements. And this compares to our original estimate of only 300 basis points of negative impact. In total, we now expect our net revenue for the full year to be about $2.15 billion, up about 2% from the prior year.

Organic revenue is now expected to increase by about 4% year-over-year, revised down from our original plan of about 6%, largely due to the slow start we experienced in the first quarter. The Tonsan business is expected to add about $80 million in revenue in 2015, or about 400 basis points of growth. We currently estimate the net income contribution of Tonsan to be approximately $3 million in 2015, or about $0.05 per diluted share.

Our core tax rate before the impact of discrete items is expected to be slightly higher than anticipated, due to our current estimate of the mix of earnings for the full year. We now expect the full-year core tax rate to be 31% versus our previous guidance of 30% and last year's comparable rate of 32%.

Capital expenditures are still expected to be $70 million for the year. The most significant capital project this year is supporting expansion and productivity enhancements for our construction products operating segment.

As I mentioned earlier, cash flow from operations was strong in the first quarter, primarily due to the benefits of reduced working capital. We expect strong free cash flow generation performance for the remainder of the year, as we mostly eliminate special charges related to the business integration project, reduce other one-off costs, improve profitability steadily through the year, and implement a reduced capital spending plan relative to prior years. We will use the bulk of any excess cash flow to reduce our debt levels back to levels consistent with our target leverage ratios.

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

We're off to a solid start to the 2015 year, and we continue to transform H.B. Fuller. Our plans are moving in the direction we committed it, and our goals are sound. We expect to deliver double-digit growth in adjusted earnings per share despite currency challenges, as we take advantage of market opportunities for growth and margin expansion.

I'm very excited to welcome the Tonsan team to the H.B. Fuller family. Together, we will create a profitable growth vehicle in China that will be leveraged around the world.

We have been working on this acquisition over a year and are poised to take advantage of the depth of knowledge they bring to us in the high-margin engineering adhesives market. We fully expect this business to drive margin enhancement and organic growth for many years to come.

As we discussed in January, this year has a number of moving parts, and the financial delivery is heavily weighted to the second half of the year. We're confident in delivering our target, as some of the growth and profit drivers have begun, such as new product shipments at Lowe's, Project ONE cost reductions in North America, efficiency optimization in Europe, and Tonsan adding to the strength of our Asia-Pacific business. We will exit 2015 with EBITDA margins near 15% and be in a position to deliver our targeted plans for EBITDA margin and organic growth in 2016 and beyond.

This is the end of our prepared remarks. And now I'd like to open the call up for your questions.

(Operator Instructions) Mike Sison, KeyBanc.

In terms of the FX headwind, I think the math is pretty simple. It's maybe minus $0.05 to $0.10 incremental. And you're going to offset that by raw materials of the same degree -- kind of a $0.10 benefit this year?

Yes. I don't think we laid out the details on EPS, but it is significant headwind on the -- and as I mentioned in the script, it's not just a translational issue because you have costs that are misaligned with revenues.

So overall, it's 6% for the year, I think, from a revenue standpoint, the impact; and I think as you look at the year, we had almost 5% first quarter. We'll probably over 7% the next two and 5% again, the end of the year. So it's a sizable number that we'll offset with what were able to do with raw.

And then, when you gave us the new outlook for organic sales growth of 4%, does that assume that your pricing will still be positive or flat? Or does it come down and then the volume growth, actually, even better than the 4%?

Yes. I think we have a combination of price increases and decreases in the business that are going to net out roughly flat. I think pricing pressure will come the second half of the year, but I think the net impact overall will be roughly flat on price.

Okay.

We have had some price increases, as we've had to deal with some increased raw materials early on in the year.

Okay.

Jim, do you want to add anything to that?

No, that was good.

And then, as a quick follow-up, when you think about Europe improving in 2Q and beyond, it sounds like maybe you're not exactly where you wanted to be, but you're sort of heading in the right direction. What do you think -- where do you think you're at, and how should we see the improvement in profitability as the year unfolds?

Yes. So where we're at is, the project work is complete, and we're now optimizing. I think what you'd find if you looked on a plant by plant operation, that the problem now is -- where we're really putting a lot of effort and energy around -- is one, maybe two plants where we really need to stabilize things.

But across the whole system, there are savings opportunities that we're attacking. Freight is un-optimized. We have a new network, and freight is un-optimized. We have a specific project on that.

Warehousing is un-optimized. So we have warehousing costs that we can pull out of the business.

Each one of the new plants that are now pretty well can run a lot better than they're running. And as I said, this one facility is the one where we have costs well above what we want.

There's also a yield issue in the business. So all of these plants aren't running at the yield levels we had prior to the transformation, and which are just industry standards we know we can hit.

All those costs will work their way through. I think -- I wouldn't count a lot of those benefits in Europe in Q2, but I would expect to see, from a margin standpoint, things improve sizably in Q3 and certainly in Q4 as we finish out the year. That's sort of a picture. I think, it's a Q3, Q4 uptick.

Great. Thank you.

Thank you Mike.

Christopher Butler, Sidoti & Company.

As we look at this last couple of plants, what exactly is different with these plants than the other plants that you've had success with this transformation? Could you give us a little detail on what's kind of dragging this out, at this point?

Yes. I'm trying to think about the detail, without going into too much detail, because I have a lot of it, Chris.

First off, these are the later ones to transform, so it's a matter of the whole project being a bit behind the curve. One of the plants involved the consolidation of three different manufacturing processes, so it's not just three different plants, but three different manufacturing processes that we put in a highly automated process.

So I would say the complexity -- the technical complexity of that project was probably higher -- and that's probably why it was last in line -- than the other projects. So it's really related to -- and when I say technical complexity, it's both the capital but also the chemistry associated with those products. So you're running the business while you're fixing problems product by product or issue by issue in the system -- in the operating system.

It's a very impressive facility that's not running nearly at the rates that we designed. But we have a path on each one of the issues. But it's the complexity of that versus the others, technically.

And if we look at the quarter from where we missed your guidance, excluding the $0.03 of FX, it comes to about $1.5 million by my calculation. It sounds like the demand side -- that might've been a lot in December on the recovery plan side. Was that throughout the whole quarter, or did we see improvement as the quarter progressed?

Yes so the revenue piece in December was mostly an Americas issue. The Americas started December weak. And if I take the next two months, they were back to normal levels, but that weakness couldn't be overcome.

Why was it weak? We don't -- we can't say exactly why. But certainly, we think there was some customer ordering -- as we had issues with SAP last year, so there's a little bit of destocking. There may have been some destocking in the consumer goods business in general.

And then, there's also a little difference in the timing of when our year ended. We had that November end, and that may have actually shifted a little bit of revenue.

A few things happened there in the Americas revenue. But yes. I think, in terms of the overall performance, it was over delivery and, as Jim said, in Asia and construction products and then the shortfall split between Americas and Europe.

And on the recovery plan side of the story, did you sort of catch up over the course of the quarter? Or was this sort of an ongoing issue that's going to linger into 2Q as well?

Well, I would say on the Americas, the margin improvements we expected to see in operations happened as planned. And they're continuing to happen. So all this worked to improve our margins -- and when I say margins, I mean our gross margins.

The plans we had in place happened, and the numbers came through as we expected. And even going forward, we have two plants that we put on seven days last summer to meet some of the issues we had on SAP. And these are two of our larger plants.

One of them is going to five days, effective March 1; another one is going to five days, effective April 1. So all this is on track with what we expected in North America.

Europe is, again, a little bit behind, in terms of some of those savings that we expected. We expect to see some of them.

When I think about what we wanted to do, in terms of reducing our freight rates, which have gotten higher, we didn't hit the number that we expected this quarter. Some of those projects are weeks or a month or two behind, not way behind, from where we started the year.

I appreciate your time.

Thank you, Chris.

Jeff Zekauskas, JPMorgan.

This is [Yoyo], in for Jeff.

If I look at your organic growth rates guidance of 4% for 2015 -- and also, your organic growth rate is maybe even weaker than that in the first quarter -- and I think about your longer-term organic growth target is something around like high single-digit, there seems to be some mismatch between what you look for, for the year, and what you look for, for the longer-term. So why is that?

Well, I think what we look for, for the year, is 4% overall, which would mean that the next three quarters you'll see something between 4% and 6%. So I don't think it's widely mismatched for the second half -- for the last three quarters of the year.

And the growth we're seeing is -- and I mentioned the Lowe's win; I mentioned, in there, some of the good work we're doing in electronics. We do see some extra growth coming from the Tonsan acquisition.

And really fundamentally, one thing that drags down our numbers is Europe. But with this transformation project, Europe prior to transformation was a solid positive deliverer. And now it's a negative drag on our organic growth.

So just getting Europe up into the low single digits, with everything else we have -- construction products plus 20%, the things we're doing in Asia -- will bring our numbers up into that mid- 5% to 6%, 7% organic growth rate. That's the way I'd look at it. If you change the dynamic in Europe, which we're confident we'll do, then you'll see a very different net number, Yoyo.

So for Europe -- is it the industry in general and the market in general? Or do you also see some maybe shift in market share?

I think for us, in the last year in Europe, we've had a decrease in our market share, as we been distracted with a lot of the issues. So if you take our European business overall -- included in there is the Middle East, Africa, India -- we have really solid growth rates in Turkey, very nice growth in India, a good business -- we made an investment in the Middle East. It's helping us grow. We just made that small acquisition in Africa.

So there's a lot of positive dynamics geographically in our European business. But these issues in core Europe -- core Europe's never going to be a growth engine, but it shouldn't be the drag that it is. So that's the dynamic that's happening in Europe, that we're working our way out of.

Today, I would say we have four businesses in Europe, as we segment our business. Three of them are in a position to go and win business, and one of them is, as we solve the issues in this last plant, will be able to go out and grow.

Maybe just one follow-up. (Multiple speakers) Right. Maybe just -- thank you.

For the one follow-up is -- what do you expect the working capital contribution is for your cash flow for the year, as your raw material costs step down?

Okay. So I'd say, generally, working capital is going to be positive for a couple reasons. One, we had extra stock related to SAP and the European transformation. We mentioned currency.

But let me let Jim try and give you some more specifics on that, Yoyo.

Well, I don't have that number on the top of my head, so I can't really answer it specifically. But I think, if I was to throw out some rough numbers, over a period of time, I think our working capital was running at about 20% of sales as we exited last year. We think that's high by at least 100 basis points, structurally.

So I think you can -- obviously, our working capital numbers bounce around quite a bit, quarter to quarter. So if I try to translate into longer-term trends, I think moving down to 19% and then, ultimately, lower than that would be the way you might want to think about it.

Okay. Thank you very much.

You're welcome.

David Begleiter, Deutsche Bank.

It's Ram Sivalingam, sitting in for David.

Quick question. Obviously going to be a back-end loaded year. I was just looking at some of the historical seasonality in your businesses. I think, first half is usually 45%, back half 55%.

If you could take a stab for this year, is it something like 40%, 60% or 35%, 65%? I think that would be helpful just to get a sense of -- (multiple speakers)

Yes. I think we said last call, it was going to be 40%, 60%. But it actually may be a little less. I'll let Jim -- if he's got a view on that -- give you a sense of it.

Yes. I think in our last -- when we gave our original guidance for the year, we said we were going to have an abnormal split this year, back weighted to the second half of the year. And I think we said 40% first half, 60% second half. Roughly in line, there, but I think now -- it's really technical -- we're probably a couple points less in the first half and a couple points higher in the second half.

Okay. That's helpful.

And if I can have one quick follow-up -- you mentioned extra, or excess business integration costs in Q1. Is there any way to quantify that number on an earnings basis?

You know, it's become such a part of our operational costs. So we pull out the special charges. But I wouldn't say we could pull those out, but I would say -- at each line of our P&L, relative to historic standards, whether it's our yield rates, it's our freight rates, the amount of temporary labor, each one of those adds up to a sizable number.

I'd say that the way to look at this overall is that we were going to, from where we started, improve our margins a few hundred basis points out of these operational improvements. And that's what we're looking to do.

Okay. Thanks very much, guys.

Thank you.

Dmitry Silversteyn, Longbow Research.

Just a couple of follow-ups, if I can. On the raw material discussion, you talked about working aggressively with your suppliers to get pricing down quicker or to benefit from lower oil prices quicker. Are you seeing your customers engage with you in similar types of discussions? And if so, is there any particular region or product line that seems to be more susceptible to quicker pass-through mechanics on lower material costs?

Yes I would say the ones where there's a faster movement are on the waterbornes, those are the ones we're seeing earlier. And those are the ones where there's a little more expectation sooner.

There's really a broad range of dynamics where some materials are going up. Our customers understand those, and we're working with them jointly to try and manage the situation. But that would be a view of the customers.

And in terms of the savings, as I said, it's those commoditized materials that we're seeing already coming through in the P&L [through the end of the quarter].

Great.

If you sort of expect the raw material benefit to hit you as second quarter progresses but more so in the second half of the year, at which time do you think you're going to start seeing your pricing starting to come down and erode some of that benefit? Would that be sort of fourth quarter, or do we have to look to 2016 for those price adjustments to happen?

Yes. It's very different by segment, right? Some of our segments are completely unrelated to what happens to raw materials. Some of them have pass-throughs that we would see a quarter or six-week lag.

And then, others would be negotiated. But I think where it nets out in the numbers is, you'll see some impact in Q4.

Okay.

And then, looking at Tonsan, you got about -- if I did my math correctly -- a little bit over $3 million in revenues for owning the business for about three weeks or so. So let's say, $1 million a week. You need to, obviously, accelerate that growth meaningfully to get to your $80 million guide that you've given for the year.

So is that going to be all sort of internal execution and getting Tonsan products outside of the region and perhaps using Tonsan platforms for some of your own products inside China? Or is there going to be sort of a seasonal step up? Was February not a good month to look at, given there's a Chinese holiday and things like that happening there?

Yes. I'll let Jim answer it in detail, but the Tonsan business is moving right on plan and is very solid and strong. But let me let him give you the numbers.

Right, yes. So I think the revenue contribution from Tonsan in the quarter, which is basically the month of February, was pretty much what you said -- about $4 million -- which is obviously not the run rate that we're anticipating. We said full-year guidance is for $80 million.

And there were a variety of factors in February. One, which you mentioned, is Chinese New Year. Some conversion of their revenue recognition policies from their ways to US GAAP revenue recognition and some of the normal kind of pull forward of revenue that you get when you switch from prior owners to new owners in an acquisition.

So we're still viewing that it's a -- we've always said it's about a $100 million a year business. The $80 million full-year guidance is $25 million a quarter for the last three quarters and a weak February.

So it's right in line with our original guidance. It's about $100 million of revenue for the full year, and that's what we're seeing at the operating level of the Company.

And those numbers don't bake in synergy growth. That's just the business.

Okay. So there's a chance that you can do better than that, if in the second half of the year, you start getting some traction with some of your programs?

Correct.

Okay. Thank you.

Yes.

Mike Ritzenthaler, Piper Jaffray.

If we set aside some of the new business from Lowe's and the inorganic growth from ProSpec, I'm curious about Fuller's construction end markets and their growth. Obviously, the volumes have been extremely good. But just kind of the health of the end markets there -- US non-resi, resi -- comments around that would be useful.

Yes. So I would say, probably, we have such an impact from what we're doing with customers that it's tough to sift all the way down to that. But when we do that work, I would say it's generally positive.

Now keep in mind, we're a little lagged on housing starts and residential work, but we see a generally positive dynamic. Clearly not these kind of numbers. Most of the volume growth we're seeing this year and last is related to our market share wins.

Right.

A longer-term question, then, on cost structure. Over the next couple years, I guess strategically, how do you think about reinvesting in growth and innovation, looking out to fiscal 2016, 2017, once Project ONE, the various integration projects and so forth are sort of behind us?

Is 17%, 18% of sales the right level to be thinking about, in terms of total overhead costs? Or could that be materially lower? Are there levers there that you can flex?

This is Jim G. So I'll start that one out, Mike.

I think we've -- when we started off with the 2015 plan and driving towards the 15% EBITDA margin, we had a basic construct of what our P&L should look like. And that's basically a gross margin of 30%, operating expenses around 18%. And that gives you 12% at the EBIT line and add 3% for D&A, and you've got 15%.

That's basically the model that we're still working towards. As you can see and as we repeat over and over, obviously, the shortfall is in the gross margin area. And that's where all these excess manufacturing costs in Europe and, to a lesser extent, US is hurting us.

Our SG&A levels are actually running pretty close to our target level. So I think that starts to answer your question, anyway.

Yes. And I would say, going forward, we have a richer mix of businesses that you'll see, right? When I talk about the Tonsan business, the electronics business, they have higher gross margins but a little more SG&A associated with R&D and some of the service elements in those businesses.

But netting that out with some savings opportunity in our other businesses, I wouldn't say we're going to vary widely off of those numbers. I do think we're going to have, over time, slightly expanding gross margins and slightly declining SG&A as a percentage of sales. But broadly, jumping off of that 30% and 18% and then slowly seeing those two numbers move, as we do a combination of investing in innovation and growth and saving and managing the leverage we have and scale.

Okay. Great. Thank you very much.

Thank you.

(Operator Instructions) Steve Schwartz, First Analysis.

So in the Americas, is there a way to index the cost of fulfilling orders -- I mean, where you stand, relative to prior to starting SAP? I mean, are you at 100% or 80% or 120%? Do you understand where I'm coming from, in trying to identify that?

Yes. I'm going to let Jim dig through his notes there -- see if he can come up with an index.

I can say that we saw big improvements throughout this quarter, in terms of getting close to what I would call normal levels. But there's still some more work going on this upcoming quarter. I mentioned two of them.

Two of our factories that were on seven days -- we put them on seven last year -- are going to five. We still have some yield numbers in some of our plants that are out of whack.

We still have some temporary people that are doing work that need to be stabilized. Overtime levels are still a little higher than pre- level.

So it's definitely there, but it's not like we're wildly off of there. So I'll let Jim try and index it for you, or maybe give you a little more color on the numbers.

That's a tough one. Well, I always try to step back a little bit.

So, Steve, I think we're trying to run an EBITDA margin in Europe -- or in Americas -- trying to get to around 16%, right? In the first quarter, we ran just around 13%. Now that's a 300 basis point gap.

So first thing you've got to realize is in the first quarter, we always run low because it's such a low-revenue quarter. So the gap isn't really 300; it's something less than that.

I think you can start to narrow into it. There's probably at least 100 basis points of excess costs in the Americas still that we can drive out to get to our target levels, which I think we can see a path forward to. And that's why we're optimistic about the Americas region.

Okay. No, that's helpful, framing it up that way.

And as my follow on -- if I could ask a little bit longer-perspective question around SAP and Project ONE. And I realize you've stepped back for the year on this, but can you give us an idea -- when you did the Americas, did any part of that existing system run on SAP?

And when we go to Europe at some point, I think you're currently running on two different systems. Is either of those two systems SAP? And I'm just trying to gauge, with what we went through for North America, what are we looking at in 2016 or 2017 when you start to consider Europe?

Okay, Steve. I'll start that one again.

Well, you're correct. We're in a pause on our implementation of SAP around the world -- focused this year on stabilizing and enhancing the platform that we've put in place in North America.

I think you asked what systems were we running in North America. We had no SAP system running in North America. Maybe one site, but it was very minimal. We were on our legacy systems in North America.

You also ask in Europe what are we running? It's a combination of a couple of legacy systems. And then, also, all of Forbo businesses that we acquired a couple years ago are running on a version of SAP. But the setup of that SAP platform is completely different than the one that we will implement, ultimately, in Europe.

We are re-planning the whole project. We anticipate that we will have at least one go-live of a geography on SAP next year, in 2016. If I had to guess today, it would probably be in Latin America. It certainly will not be in Europe.

And I think you can probably imagine that our focus in the re-planning of the project is to make sure that we take advantage of all the learnings that we've done in North America, that we make sure that the platform that's running in North America that we're going to globalize is stable and efficient and robust, and we're going to take much more of a risk-adverse orientation to the implementations, so we minimize the risks that happen just as you go live in these particular regions.

So I think that we're doing the right thing by taking some time off, here. And I think we're -- by the time we've prepared to go live in our next region, we're going to be supremely confident that we're going to be able to execute at a level more like in-line with our own expectations.

And just to add to that, many of our metrics in our business in North America are now above pre-SAP levels -- not all of them, but a lot of them, the performance metrics. By the time we go live with the next one, we'll mostly be running at higher levels, so there's a lot of learning we're going to capture. This pause is really going to pay off for us, going forward.

Okay. Thank you, guys.

Thank you, Steve.

(Operator Instructions) Dmitry Silversteyn, Longbow Research.

Yes. I just want to understand the decline in profitability we saw in the EIMEA region in the quarter, where it actually turned negative. And even adjusted numbers, it looks like, were still about $1 million loss -- maybe a little bit less than that.

Can you sort of parcel that out into issues you have internally with costs versus markets slowing down? Or -- I'm kind of struggling to understand the step down from almost $9 million in November quarter to a $1 million loss in February.

Yes. So November quarter was -- we actually had positive organic growth, which was better than we expected in the November quarter.

This quarter was negative organic growth, and that was probably a little worse than we expected. We expected it to be negative, but it was a little worse than we expected.

But the overall results were in-line with our expectations, Dmitry. It was a little worse, but I would say we understood the challenges we had from a cost standpoint.

We continue to invest heavily in Europe to make certain we serve customers. So the priority, here, is even though it's more cost to make certain that we minimize damaging the market, make sure we minimize issues with customers -- and that's costly.

So I'd say, relative to our expectations, revenue, although it was better in Q4 than we expected, was a little worse than we expected. Why was it worse? I'd say one of our business segments related to this plant had some lost revenue.

And then, the areas around Europe I mentioned -- we don't have a big business in Eastern Europe, but Eastern Europe sales weren't what we expected. Middle East and Africa weren't what we expected. So some of the areas that drive some of the growth were a little lower.

And then, of course, you have the euro impact that I mentioned. The euro was more negative than anticipated in the quarter, and that had an impact.

So we're managing all those things. We've got a very specific plan on how we're going to drive and tackle each one of them. And you'll see market improvements, quarter by quarter, as the year goes on.

Excellent.

So if I can follow-up on that -- if your expectations were, let's say, for breakeven profitability or something in the low-single-digits, in terms of profit dollars in the first quarter, how do you -- what's the ramp to go from that to high-single-digit, let's say, profitability in the second quarter and then continue to improve from there to be able to get to your $2.60 number for the year?

What's between sort of the May and the February quarter, considering that the foreign exchange comps, at least on year-over-year basis and as well as sequentially, are going to be worse? Where is that $8 million or so lift going to come from?

Well, Dmitry, it's got to come all the way across -- all the way from top to bottom on the P&L, right? So better revenue performance, slightly higher contribution margins all taken together, lower manufacturing costs, and probably holding our SG&A in tight control. It's going to come across all the elements of the P&L.

(multiple speakers) That's just you finishing up the integration projects on the two plants that are still giving you issues, right?

Correct. And all these factors blend together, right? So as we improve our operating performance in our plants, our ability to grow our revenue increases and costs come down. And so it's a very integrated situation that we have there, which, according to our plan, all these things have to improve steadily month by month, quarter by quarter, to get us to where we want to be at the end of the year.

Got you.

And we have very specific, detailed plants at each one of those. But I think Jim's right on the integration. Think about something like bulk raw materials, which are part of the plan -- we're not leveraging those as well as we'd like to. As we get things moving efficiently, we can do those.

To your point about the plants, there's two elements. There's those one or two plants that are behind schedule. Getting those on schedule is right, but the other plants in the system -- there's a whole optimization efficiency program that's moving forward. So that's the whole European project there.

Maybe I can just add one other thing. It's not completely responsive to your question, but just to put more context on it.

You know, if you look at what was going on in Europe all of last year and also in the fourth quarter, and you look at their performance and not exclude special charges and then look at their performance in Q1, I think you'll see evidence of change there. Because special charges in fourth quarter were probably -- I don't have that number in front of me -- were probably in excess of $10 million in fourth quarter, and they were probably around $2 million in the first quarter. So you can imagine the amount of effort and initiative that it takes to drive that level of cost out of the system, off the P&L.

And then in the adjusted numbers, we're going to be doing the same as we go through the year. So just to frame it a little bit differently and give you some context.

Yes. Give you a sense of the trajectory of improvement that's happening right now. Good.

All right. Thank you.

Thank you.

Mike Ritzenthaler, Piper Jaffray.

Thanks. Just a quick sort of housekeeping piece on EBITDA for 2015 -- maintaining the $2.60 for the year. Is it correct to imply that $2.80 is still in the cards for an EBITDA level for 2015?

Yes. That's our --

Different movements of tax and stuff?

Yes. That was our original guidance at the end of Q4, beginning of the year. And we're -- we can confirm that's our target today.

Okay. Perfect. Thank you.

It looks like we have no further questions at this time.

Thanks, everyone, for their time, their support, and the detailed questions today and the ongoing support.

Thank you. Ladies and gentlemen, this does conclude today's H.B. Fuller first-quarter 2015 investor conference call. You may now disconnect.