H.B. Fuller Company (FUL) 2015 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to HB Fuller fourth-quarter 2015 investor conference call. This event is been scheduled for one hour. Today's conference call is being webcast live and will also be archived on the Company's website for future listening. At this time I will turn the meeting over to our host, Senior Manager, Treasury and Investor Relations, Mr. Maximillian Marcy. Sir, you may begin.

Good morning and welcome to our FY15 fourth-quarter earnings call. We have two speakers today, Jim Owens, our President and Chief Executive Officer; and Jim Giertz, our Executive Vice President and Chief Financial Officer. As always, after our prepared remarks we will have plenty of time to take your questions.

Let me also remind you that comments made by me or others representing HB Fuller may contain forward looking statements which are subject to risks and uncertainties. Our SEC filings contain additional information about factors that could cause actual results to differ from management's expectations. These filings can be found in the investor relations section of our corporate website at www.HBFuller.com.

Also please note that our reported results include non-GAAP financial measures. These results should not be confused with the GAAP numbers in yesterday's earnings release or the GAAP numbers that we will report in our Form 10-K. We believe that a 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. A reconciliation of these non-GAAP measures to the nearest GAAP measure is provided in the earnings release our Company issued last night. With that, I'll turn the call over to Jim Owens.

Thanks, Max, and thank you, everyone, for joining us today. We had a strong finish to the year, as we met or exceeded the operating results and performance metrics that we forecast for the fourth quarter. Our adjusted gross margin was up nearly 400 basis points from the same quarter last year, despite the ongoing negative effects from the strong US dollar.

We drove EBITDA to $79 million, an 18% increase over the prior year and EBITDA margin was up to 14.4% in the fourth quarter. These are the highest quarterly dollar performance in our history and the highest quarterly margin we have achieved in the past eight years. Revenue was in line with our expectations with strong growth in key segments. This business is moving in the right direction as we enter the new year.

I think the primary topic of this call is the guidance we're providing for 2016. But before we get to that, I want to take a step back and reflect on several of the significant accomplishments over the past year, as well as some of the disappointments. Basically a short report card as we close the year. Overall, you will see that we have a relatively long list of positive accomplishments, offset by just a few notable challenges which we will tack on 2016 to make it an even better year.

The first highlight was the successful acquisition and integration of the TONSAN business in China. The TONSAN team joined HB Fuller with positive energy and a focus on growth. Despite a swelling China economy and the changes associated with integration, the TONSAN team generated strong results in 2015, meeting or exceeding all the targets we set at the time of the acquisition. And they laid the foundation for further success in the future. I am convinced that several years from now when we look back this acquisition will be viewed as a transformational event in our history.

Second highlight, we aggressively pursued raw material cost reductions and formulation changes to take advantage of the dramatic shift in the world price of oil and natural gas. These efforts generated the bulk of our gross margin recovery in the past year, with the majority of the savings generated in the Americas segment.

Third, early in 2015 we stabilized the supply chain in our North America region following the implementation of the SAP platform. And by the middle of 2015, we'd stabilized our supply chain in Europe following the completion of the investment phase of our business transformation project. Now both of these large core segments are operating with stronger customer service metrics in terms of lead time, quality and on-time delivery and able to support sustainable growth going forward.

Another key highlight was our construction products segment which generated growth of over 20% in 2015 and improved EBITDA margin by over 300 basis points compared to the prior year. Growth was primarily driven by winning additional market share with our key customer Lowe's, as well as the successful integration of the ProSpec acquisition completed in late 2014. At the same time, we initiated a significant investment program in the business to improve quality, increase capacity, improve customer service performance and lower costs. This project will be completed in mid 2016.

We also generated strong operating and free cash flow. Cash flows improved significantly compared to the prior year because we reduced our capital expenditures to more normal levels after completing the business transformation project in Europe. And we reduced the amount of special charges related to the business transformation project from $50 million in 2014 to under $5 million in 2015.

Beyond all of these specific accomplishments, we once again demonstrated that our organization is resilient and able to adjust to changing operating conditions on the fly. The foreign exchange environment and global end market conditions that we experienced in 2015 were significantly more negative than we anticipated in our plan for the year. But we effectively changed course during the year to mitigate a good portion of these negative impacts and produce the good result.

Of course we had some disappointments as well. Our Americas segment's revenue performance was below prior year and did not meet our expectations. Although in Europe our customer service levels improved dramatically through the year, the cost to support these supply chain improvements was too high and the pace of improvement was too slow. In each of these situations, we ended the year with positive momentum and a clear plan to turn these negatives to positives in 2016.

For the upcoming 2016 fiscal year there are a few key levers that we will pull to generate growth in revenue and profit. First, we will extend the success of the construction products in Asia Pacific operating segments. The Asia Pacific segment will benefit from having the TONSAN business for a full year, as well as the realization of commercial synergy between our legacy and acquired businesses. Our construction products segment will benefit from an improving relationship with Lowe's and other key customer partners, as well as generally favorable end market conditions.

Second, we will generate margin improvement through productivity gains in our global supply chain, especially in Europe. Third, we will achieve benefits from price and raw material management, as the margin improvements realized in the second half of last year are carried forward for the full year in 2016.

Fourth, we expect further gains on our cash flow generation as we grow, increase margins, control capital expenditures and further reduce the cost of nonrecurring items. Fifth, we will generate positive growth in the Americas and Europe segments because of our stable supply chain and a strong list of new customer wins as we enter the new year. Finally, we look forward to the launch of our refreshed and sharpened strategic plan that will set our sights on 2020. I will let Jim G provide some more color on our 2016 guidance a little later. Let me now provide some insight into the current conditions within each of the operating segments.

The Americas segment volume came in about 3% below a very strong quarter last year. Though still not meeting our own expectation, the fourth-quarter result reflects a substantial improvement over the previous quarter. We have good momentum as we begin the first quarter of the new year and we expect to return to modest growth in the Americas in 2016. Solid margin management is the big story in the Americas for 2015 where the team delivered 19.1% margin in the quarter. The team did an excellent job of managing price strategies, raw material cost reductions and product reformulations to take advantage of the drop in global oil and natural gas prices. These benefits are expected to carry forward through the full year of 2016.

Our construction products segment had a great year in 2015 and delivered revenue growth of over 20% and adjusted EBITDA margin of 14.4%. We expect the momentum generated during the 2015 year will continue into 2016. Revenue is expected to grow in the high single-digits based on a growing end market and continued gains in our traditional distribution channels. The incremental business we gained with Lowe's in the late spring of last year will carry forward for the full year of 2016. We expect to maintain EBITDA margins near 15%. The investment program to be completed in mid 2016 will enable operational improvements, lower costs, improved quality, enhanced customer service levels in the short and long term.

Our Asia Pacific segment also had a great year with the integration of TONSAN in China. Revenue grew over 30% and EBITDA margins were over 11%, over a 400 basis point improvement versus the 2014 fiscal year. This is especially impressive when considering the headwind of the segment faced from the devaluation of the Australian dollar and other currencies in the region. In 2016 we expect growth of over 10% versus 2015. While it is clear that many end markets in Asia Pacific had slowed, the consumer markets we serve, notably the hygiene market, are still supportive of growth. In addition, we have a wider array of technologies and a larger product range to offer now after the TONSAN acquisition. This will open significant new opportunities for growth even as market conditions in some sectors moderate.

Lastly, our European business. We did a lot of work in 2015 to improve our operational metrics and deliver the financial results we know this segment can generate. EBITDA margins improved each quarter and the trend should continue throughout the next year. We expect to deliver more consistent constant-currency revenue growth in FY16 as we capitalize on available opportunities with ample capacity, much shorter lead times, plus an increased focus on growth in the emerging markets surrounding core Europe.

Although the financial and operational performance has lagged our expected timeframe, we have built a world-class manufacturing network in the EIMEA segment. Our operational metrics continue to improve each month and now the financial improvements are beginning to come through as well.

The business is a bit smaller today than we initially envisioned and therefore we announced some additional restructuring actions in November to more properly size the cost structure for the business. We remain committed to driving overall EBITDA margins into the mid teens in this segment and these recent actions are evidence of that continued commitment. With that as a summary of segment performance, I'll turn the call over to Jim Giertz to add some commentary on the fourth quarter and discuss our guidance for the 2016 fiscal year.

Okay, thanks, Jim. We've already provided much of the summary analysis of the operational results of the quarter so I will focus on several items of interest in the quarter that might require some elaboration. I will start by reviewing the positive cash flow and balance sheet results for the quarter and the full year.

Solid operating results drove solid operating cash flow in the quarter of $57 million. For FY15 operating cash flow was more than $210 million compared to operating cash flow of only $30 million in 2014. The primary driver the improved cash flow performance was the increase in reported earnings. And the increase in reported earnings was driven by the reduction in special charges and other nonrecurring charges in 2015.

Net debt was reduced by $38 million in the quarter and our key leverage ratio of total debt to EBITDA declined to 2.9 times at the end of the fourth quarter and should level off around 2.5 times in mid 2016. Our strong operating cash flow this year and reduced capital spending levels have allowed us to quickly reduce our leverage ratios following the acquisition of TONSAN earlier this year. Capital expenditures came in at $10 million in the fourth quarter and $59 million for the year. The full-year result is about $10 million below the estimate we communicated at the beginning of the year due to project delays.

I would also that in the fourth quarter we were awarded, through an arbitration process, financial relief from Accenture related to the services they provided leading up to and through the initial go-live of the SAP platform in North America. About $12 million of this award was recorded as a reduction to the SAP asset on our balance sheet and about $2 million was recorded in our income statement in operating expenses. Both impacts have been adjusted out of the numbers we're presenting today.

In the fourth quarter adjusted EBITDA margins increased year over year for the Americas, construction products and Asia Pacific operating segments. These operating segments posted significant margin gains for the full year as well. Special charges related to the European business transformation were only $62,000 for the quarter and $4.7 million for the year, reduced substantially from $50 million in 2014, and essentially in line with our expectations communicated at the beginning of the year.

Putting all this together, we delivered adjusted diluted earnings per share of $0.69 in the fourth quarter, essentially in line with our most recent guidance which represents a solid operational performance. Our full year result was $2.17 per diluted share. The primary factors which caused the difference between our initial guidance and the full-year actual results were: lower revenue in the Americas; the adverse impact of global foreign-exchange rates; higher than expected costs in our EIMEA segment; and a high effective tax rate. Many of the negative impacts were offset by the successful integration of the TONSAN business and effective price and raw material cost management.

Let me turn to our guidance for FY16, repeating and expanding on the comments already made by Jim O earlier in the call. We expect to deliver 4% constant-currency revenue growth, offset by 3% in negative foreign currency translation, resulting in about 1% overall revenue growth for the year.

Several key factors will support revenue growth in 2016. First, we expect growth to continue in the Asia Pacific segment primarily from growth in hygiene across the region, market share gains in our electronics business and the benefit of having TONSAN for the full year in 2016. Second, with stable supply chain networks in place the Americas and EIMEA segments are expected to deliver modest constant-currency growth after several quarters of sluggish performance. Then, third, our construction products segment should extend its growth trend based on incremental market share gains, the carryover benefit of market share gain during last year and generally favorable end market conditions.

One final note on revenue growth, we will have a 53rd week in our 2016 fiscal year. This will add over 1% to net revenue growth which is already contemplated in our guidance of 4% constant-currency revenue growth. The impact of the 53rd week on EPS is minimal and is also incorporated into our guidance.

We expect further gross margin expansion in 2016 following on the strong gains in 2015. There are two primary drivers of the planned margin increase. The first is continuous improvement in productivity in the manufacturing and supply chain networks globally, but especially in Europe. And second, the carry-forward of the lower raw material costs that were realized in the second half of 2015. Our long-term goal is to consistently operate at or above the 30% gross margin level. We expect to approach that level toward the end of the year.

SG&A expense is expected to increase at a rate slightly higher than net revenue as we invest to support growth in key market segments, record a full year of TONSAN in our results and provide for higher incentive compensation and other related employee benefit costs. Our long-term goal for SG&A is 18% of net revenue and we expect to be at or near that goal as we progress through the second half of the year.

We expect to deliver approximately $290 million in EBITDA for the full year or just short of 14 as a percent of revenue, up about 100 basis points compared to 2015. We expect to reach 15% EBITDA margin as we exit the fiscal year.

Our core tax rate is expected to drop to 33% in 2016 as the negative conditions and factors that drove our rate higher in 2015 are expected to be mitigated. Capital expenditures are expected to be $60 million again in 2016, just under 3% of revenue versus our long-term strategic target of 2.5% of revenue.

We're introducing adjusted diluted EPS guidance range of between $2.40 and $2.60. This represents growth of 15% at the midpoint of our guidance range, in line with our long-term goals.

The solid operational performance will generate a significant amount of operating cash again in 2016. We intend to use the cash to pay down debt, finance capital investments and dividends and continue our share repurchase program to offset dilution from equity compensation plans. We will provide more detail in our long-range strategy for capital deployment at the upcoming investor event. That is all I have for today, so now back to Jim Owens for some summary comments.

Thanks, Jim. 2015 was a year of building momentum and improving financial results in an economic environment that was working against us. As the year progressed, currency and economic conditions deteriorated and added challenges to our business but our results continued to improve, ending with a quarter of record EBITDA and continued strong cash flow.

Our teams around the world worked hard and adapted to changing conditions as we successfully integrated a transformational acquisition, delivered constant-currency growth of 5%, absorbing a $125 million currency impact to our top line. We generated the necessary improvements in the Americas and European operations to enable our growth going forward. Our construction products business grew 20% and delivered EBITDA of 14.4%. Each of our businesses ended the year with EBITDA margins in excess of 10%.

Overall the business generated 100 basis point increase in EBITDA margin as we delivered a full-year margin for the Company of nearly 13%. Our growth platforms of engineering adhesives and electronics performed well, as did our business in hygiene and our investments in India and other emerging markets. We have strong momentum across all of our segments as we enter the new year.

We have laid out a solid plan for 2016 which enables us to focus on adding value to customers, growing our business and improving our operations to deliver further margin expansion. This is the first step in our new strategic plan which outlines our path over the next few years. We look forward to sharing the details with you at our investor event in New York on February 3. We will provide a comprehensive update on current business conditions and introduce a refreshed strategic plan looking forward to 2020. If you need more information or the link to register, please contact Max. This is the end of our prepared remarks and now I'd like to open the call for your questions.

(Operator Instructions)

David Begleiter, Deutsche Bank.

Jim, on America's adhesive volumes, typical year in 2015, volumes down over 4%. What is going to change in 2016 to drive volumes up year over year?

I think the biggest cause of our 2015 results was the fact that we had poor momentum coming into the year related to the SAP transformation. So the service issues and the problems we had going that entered the year really impacted our results certainly more than we expected.

If you look at the differences here in Q3 to Q4 and what we expect in Q1, first off, the losses of stock, we had our last loss in July of any customers that had moved against us. We have a number of regains that are coming in. These are long-term customers that want to come back to us because of the value of our products and our service. And the team is back on the offense. We have a number of key wins that we have gotten here just in the last quarter that are coming through in the pipeline.

All the negatives are gone and the positive momentum is coming in the numbers. You will see that progress quarter by quarter as we go into 2016. I think good evidence is the fact that we went from a very negative Q3 to a much less negative Q4.

Understood. It may be a good segue into Q1. How should Q1 be overall EBITDA for the Company vis-a-vis last year? Up modestly? Up more than modestly? Any color on Q1 year over year?

As you know, our EBITDA levels are always lower in Q1 because for us we have December in our Q1 and we have a China business that has February which is Chinese new year in it. So we always have this contraction plus construction products has a weaker winter. Maybe I can ask Jim to give you some more specifics on how much EBITDA growth we expect to see in Q1 versus the prior year.

I don't think I can really provide a real specific answer to the question, beyond what Jim has already offered up. Obviously the momentum we had in the second half, I think the second half of the year is more reflective of the proper profile that we should see carrying into the first half of 2016, if that helps.

Thank you very much.

Rosemarie Morbelli, Gabelli & Company.

I was wondering if you could give us a feel for Asia Pacific volume growth if you exclude TONSAN. And then the same question with ProSpec in construction. What is the underlying business?

Rosemarie, I'll give you a technical answer. In Asia Pacific in the fourth quarter our legacy volume growth was middle single-digits. And then with respect to CP in the fourth quarter, we had lapped ProSpec acquisition in the fourth quarter, so the numbers are all apples to apples with ProSpec in both quarters.

And so that strong growth rate in volume, is that more or less the level you are expecting for next year?

Yes, we expect continued -- and Jim just talked about the growth in our core business, we also had good solid growth in Q4 in TONSAN. I think we expect continued growth. Certain segments of the Chinese economy are certainly slowing but a lot of the areas we are focusing are not slowing and our team is gaining share.

We are positive on the Asia business despite slowing in certain sectors. We have really strong growth in some others. Jim, you want to give a little more specific color on Asia growth?

No, I think that's it. Rosemarie, were you just asking about Asia or also CP?

Both of them. Then, if you could also address the margin. I don't understand why the margin was so much lower in Q4 for both that those businesses compared to the nine months level.

Let me comment broadly. I'd say on CP, I think we said in the script we will be high single-digits of growth. And I would say in Asia our expectation is double-digit growth into next year.

With respect to margins, I think construction products, we have mentioned this in prior conference calls, but there is a pretty heavy fixed cost load in CP. When we have volume fluctuations because of seasonality or margins that swing around, I think it is probably better to look at CP on a longer-term multiple-quarter full-year basis.

Just to add to that, generally speaking, Q2 and Q3 will be better than Q4 and Q1 in that business.

Exactly. In Asia Pacific our adjusted EBITDA margins are up 200 basis points year over year in the fourth quarter. So a solid margin performance there.

I was referring to sequentially.

Oh, sequentially. I do not have that one in front of me, I'm sorry. I do not have a ready answer for that one.

Okay, thanks. I'll get back with Max.

Mike Ritzenthaler, Piper Jaffray.

A couple of follow ups on TONSAN. Are the effects of Fuller's multi-national backing resulting in share gains in TONSAN? Is that something that is palpable to the extent that organic growth is outpacing the end markets there? And as a nuance there, are you more optimistic about personal devices and other key electronic end markets like that now versus, say, early 2015?

Okay, there are a couple questions there. I would say, certainly the synergy between the two Companies is real and we are seeing it in some of the numbers, although I would say a lot of the 2015 performance was because we bought a good business and gave it the resources it needed to win.

The synergies come in three flavors for us. One, is TONSAN now has new products to sell because they can bring HB Fuller products into their portfolio. Two, we helped TONSAN win with multi-nationals and that is coming through in some of the numbers. So where companies have headquarters and other opportunities around the world, we are able to bring resources to help them win.

And then of course expanding TONSAN around the world. That really hasn't happened yet but that is certainly part of the 2016 and 2017. But the first two have started in 2015 and we will see good momentum there. And all three of those elements of commercial offensive synergy are real and tangible benefits of bringing the two Companies together.

As far as electronic personal devices, it is a new space for us so the wins we have are in new opportunities. Exactly what happens to the market is less important than where and how we serve customer needs. We see that as a good opportunity for us as well, Mike, as we continue to focus resources and penetrate in that area.

Okay, that makes sense. Helpful, thanks. and for Jim G, on the convergence between GAAP and non-GAAP for 2016, some of the new restructuring being announced late calendar 2015, obviously the channel fill at Lowe's and that European restructuring charges being the most notable there, I'm curious about how much those two metrics might converge in 2016.

Okay, so let's see if I interpret your question properly. You are asking what our expectations are for nonrecurring adjustments in 2016?

Yes, particularly about Lowe's and these new initiatives in Europe.

With respect to Lowe's -- or with respect to the CP business overall, there will be minimal adjustments. In our plan, we do not have any new product or new launches with Lowe's anticipated which would normally drive those kind of charges.

With respect to Europe, there is a residual GAAP entry that has to be made for the restructuring charges that we announced in our 8K earlier in the quarter. I think that is somewhere around $4 million, Bob? About $4 million that we'd expect to take as residual charges for that program that was announced in the fourth quarter. It will happen in 2016.

Then I think the only other one that I can really think of, maybe it is a good time to point out that with respect to Project ONE, the actual timing of the launch of the next wave of Project ONE implementation has not yet been settled. So to the extent that we have extraordinary costs around that, we will either adjust our guidance or we will have to adjust it out of our numbers or something. But we will have to communicate to you later exactly how we're going to handle that. Other than base costs of the Project ONE work that we have ongoing, we have not put any other incremental costs into our guidance for 2016.

Since Jim brought it up, our plan now is a longer-term plan in smaller steps. If we move forward with Project ONE, it will be the second half of this year, it will be just in Latin America and we wouldn't have any go-lives in 2016. The next go-live would be in 2017.

Okay, thanks, guys.

Jeff Zekauskas, JPMorgan.

Can you talk about your general price trends? That is, are prices going up, are they going down? What is the general trend for next year?

They are doing both. I think one of the things that we have really focused on over the last few years, Jeff, is being very clear about our value proposition and our partnering with customers and managing our prices in a way that is effectively reflecting the value that we create. Some customers, as raw materials come down our prices go down with them, and we do that lock-step as our costs go down and move forward.

In other situations we are reformulating and reintroducing new products in the segment to allow us to take advantage of new raw materials. And those are at the same prices or even sometimes lower prices but higher margin. The whole process of how we manage our margins is both.

If I were to take a step back and look overall, I think you will see a net negative on pricing with some areas going up in some areas going down. But not a dramatic impact on our -- the numbers will be low single-digits.

How does your acquisition pipeline look? Or is it that in the integration of TONSAN, you are taking a break from buying things for a while?

A think we're always active -- we understand the market really well. We're focused in the adhesive space and things that are very close to where we are at. So acquisitions are about what opportunities come up when and at what valuation.

I think financially, we will be in a position to do more deals if they came available. I think capacity-wise with TONSAN moving as well as it is going, we have the capacity to do more. So it is a matter of whether there were other opportunities.

I do not see us doing huge deals. I see us finding the right incremental deals that enhance our businesses, whether that is geographically or adding the right kind of chemistry or technology or market segment. Not a huge program but I think it is possible, especially if valuations come down which is, I think, likely this year, that we do some small bolt-on acquisitions.

Can you speak briefly on business conditions in the United States and Europe generally? There has been all of this turmoil in the stock market and people wonder whether that reflects underlying fundamentals or whether it doesn't.

I would say most of the fundamental slowdown is happening outside the US and Europe. I would not say there is an accelerated strong economy in North America and Europe, but we do not see a fundamental slowdown in our customers in either North America or Europe here over the last few months. That would be my take on what we see in terms of the manufacturing sector which is who we sell to broadly.

Your volume growth in Europe and in the United States was negative in the fourth quarter. Do you expect it to be positive in the first half of 2016 or you can't tell?

I would say -- I haven't looked at the first half altogether.

Or the first quarter.

I think the Americas will be less negative but probably still negative. They are targeted to get to flat, I think we'll be in the low negative single-digits but definitely much better than where we are at today.

I think Europe we will do a little better, so I think they will be on the plus side of zero in the first quarter. That is the kind of momentum we see here in Q1. And we are five or six weeks into the quarter so we have some transparency into that.

Lastly, what's your tax rate look like for next year?

The tax rate is -- the core tax rate is projected at 33%.

33%. Is that the same as your cash tax rate?

Yes, basically, yes, essentially.

Okay, great. Thank you so much.

Dmitry Silversteyn, Longbow Research.

I would like to follow on a little bit, first of all in the EIMEA segment. I think there's still a small acquisition that you guys are anniversarying, maybe through the first quarter of next year. Can you tell us what the impact of that on revenue was in the November quarter?

I think that was -- let me just -- it's a very small acquisition.

Yes, that is the answer, it is very, very small.

I just wanted to make sure that it was part of the overall results.

Yes, think it is $1 million or $2 million, less than $2 million.

Less than $2 million. Okay, so that is the same run rate that it has been for most of the year.

Switching gears to Asia Pacific, you mentioned the expectations for 2016 of double-digit growth there on revenue. 5% to 6% is going to be one more quarter of TONSAN being treated as acquisition. Does that imply that organic growth is going to be basically mid single-digits in that business or in that division in 2016? Is that what your expectations are?

Yes.

Okay.

TONSAN has two months. We closed that deal February 1.

Right, exactly. But it's still going to be, if you translate for the year roughly, my math at least suggests, it's about 5.5% impact for the full 2016 from that two months. Is that too high? Am I being overly optimistic on what you can do with TONSAN in the February quarter?

I do not know about the last part of your statement but your estimate is pretty close. That is a good estimate, yes.

Okay, very good. Then on the 400 BPS improvement in the Asia-Pacific margins which is pretty dramatic, congratulations on that. How much of that was your moving into, more into the hygiene in some of these higher-value markets? And how much of that was the impact of TONSAN, perhaps hitting a high-margin business in your core business if that is the case?

It was both. We certainly managed the core business very well. The team in Asia did some really nice work in terms of strategically focusing on the right segments and then doing the right things in terms of managing our pricing and our costs. So there's a lot of good work in our core. And then TONSAN has a positive impact from a percentage, I don't know if I can quantify the two, but both were very positive.

I will just add two other points while we are at it. One is actually the margin improvement is even more impressive when you consider that our Australian business was under a lot of pressure during the year because of the currency was pressuring margin. The devaluation on the Australian dollar put a lot of margin pressure on us.

The other one is a real technical thing but you will see it right away in our first-quarter numbers. We do not allocate corporate expenses to our acquired revenue. So the margins were a little artificially high because the TONSAN revenue was not attracting a corporate allocation during the year. I can't quantify that one right off the top of my head here, but just to let you know, that was another factor.

Got you. Okay, that's helpful. Finally, on EMEA, it sounds like things there are improving as 2015 came to an end, calendar 2015. And assuming, John, it does not weigh on them too much, it looks like 2016 is going to be at least a slightly positive year.

In that environment, do you expect your growth there with the new customer gains you mentioned swinging into mid single-digit growth by the second half of the year as you anniversary some of the customer losses that you mentioned you've suffered through the middle of 2015? Or is that too aggressive? Is low single-digit a better way to look at the second half of 2016?

That is two questions, one is what are we targeting? We're targeting to get to the mid single-digits. But I think realistically we think low single-digits in Europe is the right number and given the momentum, very attainable.

Once we get that momentum, more than that is possible. You've been around a few years with Fuller, 2011, 2012 and 2013 we were well up in the high single-digits in Europe when you consider the whole EIMEA segment. Our plan is built on low single-digits not mid single-digits.

One final philosophical question, I guess. Or not philosophical, but a big-picture question. It took you a while, but you got the cost structure in Europe that you envisioned when you bought Forbo and you came up with your restructuring plans and SKU rationalization and more effective manufacturing and things like that. It sounds like you are pretty much there in terms of cost.

What you need now is basically volume growth. How much of volume growth do you think you will need over the next couple of years to let this business come up to the mid teens EBITDA margin you are targeting?

It's a combination. I think there's still some costs to pull out. As I said, we're still doing some work to pull out costs of that business. So there is some of that along with more volume growth.

I can give you a specific number on that but I think that is a great question in New York. I will be prepared for it, Dmitry, if you are going to be there in a few weeks. In fact, we'll have a specific presentation on Europe so you can see what the path is going forward, so we can talk about that.

You are right, we do have to generate some volume but there is still costs to pull out of that business. And we're doing a nice job here, quarter by quarter, pulling those out.

Is the cost situation looking too broad? Is that more consolidation or is it back office getting rid of some of the stranded costs, if you will, after you did the first big round of consolidations? So what -- this respect of the program (multiple speakers) rationalization? Or is it (multiple speakers)

We just did some restructuring, so that is one piece. But the bigger piece is in the operations. I would say our operations now are serving customers and meeting their needs, but there's still a lot of waste.

As we now can focus on attacking that waste quarter by quarter, our manufacturing costs as a percentage of sales, will go down. That is where the cost is more than in the SG&A. A combination of growth and then taking out some of that waste in our operations.

Great, thank you very much.

(Operator Instructions)

Rosemarie Morbelli, Gabelli & Company.

If I understood properly, Jim, I think you mentioned that you were going to introduce construction projects into Asia Pacific? First of all, did I understand properly? And can you elaborate on what you are doing?

No, no, I did not say that, sorry if I misspoke.

It is my misunderstanding then.

Sorry if I was confusing there. Our construction products business is a North America business. We do have some construction products business in Australia and a little bit in Europe, but those are reported under the Asia and the European businesses. Our construction products business is a North American business.

Okay, so there is no plan in introducing that particular product line into Asia Pacific?

I think it is a strategic opportunity and I think that is a great question to ask with respect to the strategy. But, no, there is no specific plan to introduce that product line to Asia Pacific.

Lastly, could you remind me of where your debt location is, US versus Europe?

The currency of our debt?

Yes.

I am going to say, essentially all is dollar-based, US-based.

Is it mostly all fixed?

It is about half and half floating and fixed. It's actually 55% floating and 45% fixed.

Thank you.

Dmitry Silverstein, Longbow Research.

I'm sorry, one question I forgot to ask or clarified. From what you said, mid single-digit growth in Asia Pacific ex TONSAN, that sounds like TONSAN did about $32 million, $33 million in the quarter. Is that right?

We're not reporting the details on TONSAN. I think what we said is it was a $100 million business and it was pretty evenly spread throughout the year. That would be the way to look at the underlying TONSAN.

All right, fair enough. Thanks.

Okay, great. Thanks, everybody, for your time today and for your support of the business. Look forward to seeing many of you in New York in a few weeks when we can talk about our strategic plan. Thanks.

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