H.B. Fuller Company (FUL) 2016 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the H.B. Fuller second-quarter 2016 investor conference call. This event has 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 FY16 second quarter earnings call. We have two speakers today, Jim Owens, our President and Chief Executive Officer, and John Corkrean, our newly appointed 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 H.B. 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 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 we will report in our Form 10-Q. 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 will turn the call over to Jim Owens.

Thank you, Max, and thank you, everyone, for joining us today. We posted a very good result in the second quarter; and with half of the year behind us, we remain on track to deliver the financial plan for the fiscal year. Some parts of our business are running ahead of our expectations for the year and others are trailing a bit behind. Overall, our current position is strong and we carry momentum into the second half.

Here are the important highlights from the second quarter. The most significant development in the quarter is the continued improvement of our profit margins. Gross margin improved 220 basis points versus the prior year. Our gross margin improved sequentially, as well, up about 70 basis points versus the first quarter results.

At about 30%, our adjusted gross margin now stands at the highest level achieved in recent history and on track to reach our long-term targets. Our global efforts to reduce raw material costs, improve supply chain efficiency, and increase productivity in our manufacturing operations is showing up in the financial results. The gross margin improvement drove adjusted EBITDA margins up to nearly 14%, which is our target for the year.

Our strong cash flow is enabling us to reinvest in our core business, bring our balance sheet leverage into our target range, and fund strategic acquisitions. Strong operating margins, improving revenue growth trends, and the elimination of almost all of our one-off costs associated with business transformation and restructuring should support stronger cash flow generation during the second half of the year. Realizing the returns and cash flow performance resulting from the large investments made over the past several years is a key deliverable in our 2020 plan and we're off to a good start.

The breadth and pace of the operating performance improvement within our EIMEA segment continues to exceed our internal expectations. One of the most significant aspects of the EIMEA operating performance is that we see improvement across almost every aspect of the business, a return to volume growth, a better raw material cost structure, lower manufacturing costs and streamlined operating expenses.

So we've had a good start to the year. In short, we're on track to meet our goals this year and create a solid foundation for delivering the 2020 strategic plan we reviewed with you in February.

With that overview, I will now discuss the performance of each operating segment in more detail. As expected, in the Americas segment, the overall trends we saw in the first quarter were extended into the second quarter. Margins were very strong, but revenue growth remained a challenge. In the second quarter, volume was down, as expected, by about 2% versus last year, which was an improvement in trend versus the previous quarter but not at the levels we expect for this business in the future.

Several different dynamics are impacting our growth. First, it's important to point out that we have certain business lines that are consistently showing solid revenue growth in the Americas, particularly within Durable Assembly. Second, the end markets across Latin America are not conducive to growth. About half of the year-over-year decline in volume for the Americas can be attributed to the difficult end market condition in parts of South America.

Third, although our Global Hygiene business remains strong and is posting solid growth this year, due to timing and other customer-specific issues, our Hygiene business in the Americas segment is down slightly compared to the prior year. This temporary soft spot in our business will reverse over the second half of the year and we expect to post solid growth again in 2017.

And finally, our Packaging business is restoring its momentum. Our pipeline of new business wins in Packaging indicates that we will return to growth in the second half of this year. At our last conference call three months ago, we said that the Americas would return to positive volume growth in the second half of this year, and this remains our outlook.

Margin management continues to be good news story in the Americas segment. In the second quarter, adjusted EBITDA margin was 20%, primarily due to pricing management and raw material cost management. Overall, an improving revenue performance in the second half of the year, combined with strong ongoing margin management, should generate a solid result in the Americas in 2016.

In our Construction Products segment, constant currency revenue declined over 10% versus the prior year and our adjusted EBITDA margin was below the prior year and our long-term target range. In short, we had a tough second quarter in CP.

The explanation for this starts with recognizing that this segment is more volatile than our other businesses and the second quarter of last year was an unusually strong period, both in terms of volume growth and operating margin. This peak in performance last year was primarily driven by the ramp-up of additional market share at our key customer, Lowe's.

After adjusting for the tough comparison from last year, our performance in the CP business in the second quarter was a bit below our expectations. Revenue was generally soft due to lower export sales to countries with declining end markets and some inventory rebalancing actions taken this year at Lowe's.

Our margins were impacted by lower volume and the excess costs associated with our new facility which is starting up in Aurora, Illinois and our related network investments. We expect our volume growth trends to improve over the balance of the year. Operating margins are also expected to improve, supported by additional volume and the elimination of excess costs associated with the current manufacturing investment project.

In contrast, the best story of the second quarter came from our EIMEA segment, where the recent efforts to improve our operating performance continue to show in the financial results. For the segment overall, volume growth was 3% versus the prior year. We saw solid revenue performance across most of our market segments and geographies. The most significant growth came from our Hygiene business line and continued steady growth across business lines in India.

The tone of our business and the new business pipeline is getting stronger, enabled by an improved and consistent supply chain performance. We expect continued positive volume progression for the remainder of the year.

From a profitability perspective, we improved adjusted EBITDA margin by 490 basis points versus the prior year second quarter. The elements of the improvement were broad-based, raw material cost reductions, price management, better supply chain efficiency, and lower manufacturing costs. We expect continued year-over-year improvement in EBITDA margin throughout the remainder of the 2016 year. At this point, we are confident that we have turned the corner and are on a steady pace to achieve our long-term strategic financial objectives in the region by the end of 2017.

Now turning to the Asia-Pacific segment, we grew constant currency revenue over 9% in the second quarter, with growth coming from all segments across all sub regions. Our core markets are weighted to consumer driven end markets where demand is still fairly strong in Asia-Pacific. Adjusted EBITDA margin in the segment was essentially flat versus the prior year. Strong margin management in our core business was offset somewhat by incremental costs as we ramp up investment in our new manufacturing facility in Indonesia.

And I'll wrap up with a short discussion of our Engineering Adhesives segment. We continued our strong growth, with volume up 15% versus last year's second quarter. The Tonsan business continues to deliver its targeted growth, and our Electronics and Automotive businesses have shown solid year-over-year growth, as well.

Our adjusted EBITDA margin in the second quarter was relatively low, at just 7.4%. For the year to date, adjusted EBITDA margin is about 8.5%. For the full year, we expect our adjusted EBITDA margin to be about 10%. Our operating margins will fluctuate quarter by quarter, as we steadily increase our investment in product and market development to support future growth. And of course, the acquisition of Cyberbond can change the trajectory of this business, based on the synergy potential with our existing business.

Speaking of Cyberbond, let me spend a few minutes talking about our recently announced acquisition. Cyberbond sells high-end cyanoacrylate, anaerobic and UV curable adhesive technology for electronics, medical, audio equipment, automotive, and structural applications. The addition of this business will enable us to strengthen our position in high margin, high growth engineering adhesive markets.

The Cyberbond business is intended to accelerate the global synergy plans we laid out at the time of the Tonsan acquisition, which we completed a little over one year ago. You will recall that the synergy opportunities available through Tonsan include expanding our market coverage in China, as well as moving the Tonsan platform out of China to Europe, North America and other key emerging markets. Cyberbond will support both elements of this synergy plan.

Within China, Cyberbond provides to Tonsan a more robust cyanoacrylate product portfolio and extensive market application knowledge. This is not an area of strength at Tonsan today. In addition, Cyberbond provides an excellent existing commercial channel to sell Tonsan products into Europe and North America. So the acquisition of Cyberbond expands our capability in China and accelerates our business development effort outside of China at the same time.

Cyberbond has about $15 million of revenue split about evenly between Europe and the US. The purchase agreement was signed on June 6 and we closed the transaction on June 8. The purchase price for the company was slightly over $40 million, representing an EBITDA multiple on the existing business of about 12 times.

The valuation of this transaction is appropriate, given the margin profile of the Cyberbond business, excellent growth prospects on a standalone basis in the dynamic engineering adhesive market space, and the opportunity to leverage the much larger Tonsan acquisition through the Cyberbond platform. We are very pleased to welcome the Cyberbond team to H.B. Fuller and look forward to joining with them to achieve our vision for the Engineering Adhesives segment.

Before I turn the call over, I want to quickly introduce you to our new Executive Vice President and Chief Financial Officer, John Corkrean. John is a seasoned financial executive who had a long career at Ecolab in a number of financial leadership positions. John has gotten up to speed on our business quickly and I am anxious for you to spend some time with him soon. And now I'll turn the call over to John.

Thank you, Jim. Jim provided a few highlights of the second quarter results, so I'll just provide some additional details.

Constant currency revenue growth was slightly lower than expected and fell 0.4% compared to last year. However, volume growth was strong in three of our five segments, and year-on-year volume growth in the quarter for Americas improved versus the first quarter.

As Jim mentioned, we had a tough quarter in our CP business, but we expect this segment to show improvement in the second half, based on a couple of key factors. First, our Lowe's business should get back on good footing following the recent period when some temporary inventory repositioning impacted our results. In addition, we expect our export sales to improve marginally from a very weak period in the second quarter. Finally, we have a series of specific initiatives that have launched that should support additional improvement across all of our distribution channels.

The impact of product pricing became a more significant factor in our results in the second quarter. Normally, we'll see some price erosion during periods of prolonged raw material cost deflation. That said, we believe we are effectively handling this normal process of managing pricing with our customers.

The best evidence of this is the sequential improvement in gross margin that we've delivered. Going forward, we expect the raw material cost environment to stabilize and further incremental benefits from lower input costs should be minimal, with pricing stabilizing, as well.

Selling, general and administrative expenses were a little bit higher in the second quarter. A couple of factors are at play here. First, incentive compensation costs are higher in 2016 relative to last year, based on the improved performance of the business. In the second quarter, over half the year-on-year increase in adjusted SG&A is accounted for by this factor alone. Second, we have increased spending to support our growth in the Engineering Adhesives business, as mentioned earlier by Jim.

One note on our tax rate, given the improved geographic mix of earnings -- in this case, more favorable results coming from our European operations, which operate in a lower tax rate environment -- our core tax rate assumption for the fiscal year dropped to about 32% from our previous expectation of 33%. The lower tax rate in the second quarter includes a catch up to record the benefit from the higher rate previously recorded in the first quarter.

All-in adjusted diluted earnings per share were $0.67, in line with our expectations. The second quarter results included relatively high foreign currency losses, primarily related to exposures in Latin America and other emerging markets that shaved about $0.02 per share off our adjusted EPS relative to the prior year's results. For the year to date, these unusually high foreign currency losses have negatively impacted our adjusted EPS by about $0.09 per share relative to the prior year. We believe the risk of additional significant foreign currency losses in the second half of the year has been substantially mitigated.

With that, now let me turn to our guidance for the remainder of the year. Foreign currency has been less of an impact on revenue this year than initially planned. We now expect FX to negatively impact revenue growth by about 100 basis points. Also, due to lower pricing levels and the slow progression of revenue in the Americas in Construction Products, we now expect to deliver constant currency growth of around 3% versus our previous expectation of 4%. EBITDA margin is still expected to improve and average around 14% for the full year.

Capital expenditures are still expected to be around $60 million for the year. The most significant capital projects this year are supporting expansion and productivity enhancements for our Construction Products operating segment and completing our greenfield investment in Indonesia.

Cash flow from operations was strong in the second quarter, driven by solid net income. We expect strong free cash flow generation performance for the remainder of the year, as we reduce one-off costs, reduce working capital, and improve profitability steadily through the year.

All of these factors considered, we are narrowing our EPS guidance range to between $2.45 and $2.60 from the previous range of $2.40 and $2.60, with year-on-year growth improving as we move from Q3 to Q4. With that, I'll turn the call back over to Jim Owens to wrap us up.

Thank you, John. We are growing the business in our focus areas and improving the overall cost structure, which is driving our margins higher. This is what we said we would do when we laid out our strategic plan.

This year is about capitalizing on our strong foundation and delivering results based on the investments we've made. It's the first year of our 2020 strategic plan. The plan revolves around driving continued growth in our Engineering Adhesive business, along with growth in emerging economies, while optimizing margin performance in our other segments. Our 2020 plan is a solid continuation of what has gone well in our business, with a clear vision of what will improve going forward.

Our second quarter results are in line with our strategic direction and momentum is building throughout our business. Our EBITDA margin of 13.9% was the highest achieved in a second quarter at H.B. Fuller and puts us on pace to hit our 2016 and long-term plans. I have confidence in continued success for the remainder of this year, which we will then leverage into the coming years.

We have built a strong foundation at H.B. Fuller. We have a clear vision of where we are headed and we have an outstanding team of people that are experts in our business, and they are executing our plans effectively around the globe. We had a solid second quarter. But more importantly, we have strong momentum and a solid path forward into our future.

This is the end of our prepared remarks, so now I look forward to answering your questions.

The Company would like to provide everybody the opportunity to ask a question. You may requeue as often as you would like, time permitting.

(Operator instructions)

We will take our first question from David Begleiter from Deutsche Bank.

Thank you. Good morning. Jim, just in Americas Adhesives, in terms of volume growth in the back half of the year, what level are you expecting in the second half of this year?

I'll let John try and give you a specific. But it would be positive single, low single digits the second half of the year, would be the way I'd think about it. So we're turning from negative to positive here and that will be in the single digits.

I think that's right, David. And I think you're going to see that more in the back half of the third quarter and in the fourth quarter that we'll make that turn as we get through, get into the second half, the last half of the year.

So you're talking 1% to 2% in Q3 probably, in that range, or --

Something like that. I would say single digits, zero to 2%.

Right.

Got it. And in terms of the margins, given the recent, or somewhat recent increase in oil prices, are you expecting some of these tailwinds from raws to reverse to become headwinds at some point either late this year or early next year? Does that mean that margins may have peaked here?

As you know, oil price -- we had a lag, a sizable lag off of oil prices. So I think oil prices would have to move up significantly and sustainably for us to have any real pressure on our raw materials. So I think what we're looking at is if oil prices and feed stream prices stay about where they are, our raw material costs will stay relatively stable for the rest of this year and into next year. If you see a significant uptick from where they are now, it would probably be a nine-month lag before we saw any pressure. So we really don't see that as a risk (Inaudible). So that would be my view of this year and next year on that.

And just last, Jim, some of the pricing pressure you saw in Q2, especially in America Adhesives, should that be a little less of a headwind or is that what we should expect going forward, at least this year?

Yes, I think roughly about the same for the rest of this year. What we're doing, when you think about our business and price, is we have to manage both ends of it. We have to make certain we manage things with our suppliers. And then when suppliers are moving prices up, there are a lot of alternate raw materials that we can bring into the market in order to help our customers.

So you'll see, both on the way up and on the way down, us working with customers to introduce new technologies, introduce new raw materials that will allow us to manage this price. And we've gotten very good at that. If you look back a couple of years, as raw materials were going up, we managed our gross margins pretty effectively; and as they've gone down, we've managed them effectively. And that's because of the way we collaborate with customers in both of those situations. And I think this positive and dampened effect that you see in our business is one that I expect to continue, on the margins.

Thank you very much.

Thank you, David.

(Operator Instructions)

We will take our next question from Mike Harrison from Seaport Global Securities.

Hello. Good morning.

Good morning, Mike.

Jim, when I look at the pricing component of your growth, it looks like that was under the most pressure in the Americas. And I would think that within Latin America, you're seeing an inflationary environment and the pricing is actually up, which suggests to me that North America is actually under even more pressure. Is that just a function of the lower raw material costs, or can you maybe talk about how much might be related to any discounting or other efforts around regaining some lost share in North America?

I would say predominantly, first off, we don't sell businesses based on our raw material costs. We provide a value added product which meets a set of needs, and then we manage ourselves to the market dynamics that exist out there in the market. We have some customers, less than 10%, that we move their prices up and down at a certain margin with raw materials. Most of our business is negotiated pricing.

And I wouldn't say the pressures are any different in Latin America than North America. So I don't think there's an inflationary pressure down there in our business. It's pretty much a situation where as oil prices have now stayed down for a couple years, there's some raw material relief that's happening, and we are appropriately giving that to customers as we negotiate prices with them and maintain their business, while continuing to improve our margins.

So that's the balance we're trying to make in the business, is find ways to appropriately be competitive, but also to improve our margins. And I wouldn't say there's a big discounting effect going on in our Americas business. I think you'd see that we have the same kind of effect in our Asia-Pacific business and our Latin America business that you see in Asia. John, did you want to add anything to that?

No, I think that's exactly right, Jim. It is definitely a function of the raw material market as opposed to discounting. I would say also important for Latin America businesses, significant part of our business is denominated in the local currency, as far as revenue goes there. So that would mitigate any inflationary opportunity.

Does that answer your question, Mike? Is that good?

(Inaudible) -- the Engineering Adhesives business, I understand that you're adding some sales resources and investing for the longer term there. Did I understand correctly, though, that your expectation is that margin is significantly better as we get into the second half and getting us to a full year of around 10% EBITDA margin? Does that just step higher from Q2 to Q3 to Q4, or what could the trajectory look like there?

I think at the highest level, we're focused on generating the growth there. If you think about this last quarter, it's probably got about $3 million more expense in it than it had the prior year. Most of that is selling and R&D costs. So those are investments that we've made to help drive the technology and the overall performance. And I'd say going forward, based on the numbers we have in our business, we expect margins to expand. But again, that business will be a little lumpy quarter to quarter, as we make the investments we need to in various parts of the segment. But yes, the short answer is we see a step up here in the second half in the margins of that business.

And then the last question I had is for John. I was hoping maybe you could comment on what attracted you to the opportunity at Fuller, aside from a change of scenery on the commute, and maybe how do you plan to implement some of the approaches that you've learned at Ecolab now that you're at H.B. Fuller?

The commute -- with my last role at Ecolab was in Houston, and commuting there was not an easy effort. So this is much better. It's nice to be back in Minnesota.

What attracted me is really the person sitting across the table, I would say for the most part, really getting to know Jim and getting to understand his vision for the Company and what he thought we were capable of doing and how he planned to get there was very exciting to me. Ecolab's a great company. I hopefully can bring a lot of things that I've learned there. And I think one of the things we talked about is getting more consistent. And I think this business is one that, with some of the operational challenges that they've had over the last couple of years, I think you're starting to see more consistency now and I think that's something that we are going to put a high premium on, and I think hopefully I can help in that regard.

Sounds good. Thanks very much.

Thank you, Mike.

We will take our next question from Rosemarie Morbelli from Gabelli and Company

Thank you. Good morning, everyone.

Good morning, [Rosemary].

And welcome, John.

Thank you.

When we look at EIMEA, that 7.9% margin, did you say that it was going to continue to improve in the second half or was that comment solely referring to Engineered Adhesives?

I think it's going to improve relative to prior year, is the commitment we have the second half, [Rosemary]. So I think we're seeing -- I think we started the year saying we'd be a couple hundred basis point quarter on quarter versus the prior year, and we've exceeded that the last two quarters. I think we'll do at least that good going forward. So the expectation you should have is 200 basis points versus Q3 and then 200 basis points versus Q4, or better.

Okay. And then you also mentioned that most markets were up, showed some improvement in EIMEA. And I was wondering if you could give us a feel for the markets, which ones are doing better and why, and then which ones are lagging or maybe worsening?

I'd say the markets that did particularly well in the quarter were our Hygiene business. Our India business continues to be a really strong performing business for us in our EIMEA business. Everything else did well, [Rosemary]. The only things that were a little bit of a laggard, I think, I want to say there were certain parts of our Russia business that were down this quarter. But again, it's a smaller business for us. Sop generally positive performance on the volume growth across the board in the quarter.

And looking at that Hygiene business in the Americas, volume was down, which is kind of surprising, everyone seems to be popping babies. So I was wondering if you have lost some share or if there was other reasons for that decline?

The biggest reason for the decline is tied to the Latin America story. I think there are some changes in the dynamics of Latin America that are really tough right now for the people of Latin America and also for people who supply into that region broadly. So that's the biggest driver. But we also had a specific customer that made some design changes that resulted in our business having less adhesive volume, not really a loss of share but a change in design. And as I said, it's improving each quarter going forward and we'll be back on track, as we have always been, in the Hygiene business.

Okay. That is helpful. Thank you. And lastly, on the Construction Products, any other reason why the decline, other than Lowe's adjusting its margin? The environment is still quite strong on both new construction and remodeling. Can you help us with that?

I think you're right. The market overall is very strong. Last year in Q2, we were up 33%. And part of that was pipeline filling, and I think that's the biggest driver. We also had, Q2 of this year, some destocking on the part of Lowe's. Those were the two biggest drivers. I think I mentioned briefly in the script, we have this export business that was down. That was an effect. But really the two Lowe's effects, how strong they were last year and this destocking, were the volume drivers.

And on the margins, we have these two plants running right now. So we've invested in a new facility, but right now we have double operating costs. So those all came together in Q2 and we'll see some of that same effect in Q3. But the business overall is very strong. Our business has been growing at double digits on a consistent basis over the last five years, margins have improved, innovations have been introduced. So it is a lump in the business related to pipeline stocking, predominantly.

And where were you exporting, Jim?

It's a very specific business that's part of that that exports actually into the Middle East for liquid natural gas construction. It's tied in with that business. And some of those infrastructure projects that happened this time last year didn't happen this time this year. So it's a few million dollars in revenue that added to the impact.

Thank you.

We will take our next question from Jeff Zekauskas with JPMorgan.

Hello. Thank you very much. In Construction, your revenues were down $8.2 million year-over-year and your EBIT was down $6 million. Why such a large drop in EBIT relative to the revenues?

I would say, if I were to take it, it's is mostly volume, as you might imagine. These are relatively high margin businesses on a contribution margin business. So our ratios, if you think about it in terms of pricing versus raws, contribution margin was in line. But we did have extra manufacturing costs associated with these dual plants. So that was the second factor. And then OpEx was up in that business in line with what we expected in terms of some growth, and that can be ratcheted down going forward. So the biggest driver is volume, but the second is manufacturing costs, which were higher, and the third was a marginal increase in OpEx.

Earlier in the call, you talked about the business getting better. Do you mean that it's getting less worse or do you mean it's getting better year-over-year in the second half?

I think the way I'd look at is sequentially. I mentioned that last year, we were up 33% in Q2. We were also up 30% in Q3. So we have a little bit of this pipeline effect that will affect us in Q3. So the typical pattern of this business, Jeff, for us is Q2 is the peak here. Q3 is slightly below Q2. So I would say expect that in terms of revenue, which would be on the normal pattern. And then I'd expect us to be in a growth versus the prior year by the end of the year.

How much is your incentive comp going to be up year-over-year for the year?

So our incentive comp is probably, would be up. It's probably paid out at about 70% last year and it probably is going to be $1 million, I would say.

I'm sorry, how much?

About $10 million more.

$10 million.

Because we were below target last year, we were $10 million below target. We'll be at or about target this year for the overall organization.

Your SG&A as a percentage of sales, you've done such a nice job on your gross margin, but your SG&A as a percentage of sales I think used to be maybe 17.5% and now maybe it's, I don't know, it's almost touching 19 for the year. Do you think you need to fix that, or does it depend on sales that you might deliver in the future or are you satisfied with what's going on the SG&A line?

I think when you look at what we're saying about our business long term, Jeff, our 2020 plan, we talk about a gross margin of about 31% and an SG&A of about 17%. And that's what gets us to our 17% EBITDA margin. And we see that as the long-term target. So if you look at it on a quarter basis, it's higher than we would have wanted. It is because we invested in emerging markets and a little bit because CP was a little bit higher. But I think you're right to model our business in the long term tracking down into that 17-ish percent range, and this is more of a higher peak level would be the way I'd look at it. John, anything you want to add to that?

That's exactly right. We've got a couple of businesses that are getting heavier investments now that are not at scale yet. So I think as you start to see those businesses continue to grow at the level they're growing, EA in particular, you're going to see that ratio improve.

So it's going to improve because sales are going to grow faster or because the absolute level of SG&A is going to go down?

Really volume leverage is the primary driver.

Volume leverage. Okay.

And it various by business, Jeff. Some of our businesses are going to get better leverage. We've said we want to improve the margins of our Asian and our European businesses, our packaging business, so we have SG&A coming out of those businesses as we invest in some others.

Did you buy back any shares this quarter and what are your share repurchase intentions?

We didn't buy back any shares this quarter, Jeff. I think we had about $4 million of share repurchase in the first quarter. We took a pause, as we had a couple of acquisitions that we funded in the second and third quarter. But I would expect that we'll probably be back on the pace we were at the end of last year and the first quarter, as we exit this year.

Okay. And then lastly, where do you think you're gaining market share and where do you think you're losing market share?

Certainly, our EA business in each one of their segments is doing very well. So we see good market share gains there. We see good market share gains in our Hygiene business overall. So that's a good positive story for us. Certain geographies, India's certainly a market share gain story. Right now in Southeast Asia, the investments we've made in Indonesia are creating sizable growth there in our Southeast Asia business overall. Those would be some of the areas where we have really sizable market share gains.

If you look just in the quarter, we had good gains in Europe and decreases in the Americas. But I think if you look maybe more broadly, we see sustained market share in the Americas, Europe having market share gains overall, given the geographic dynamics of our business. And I would say, again, different this quarter than what we've seen, our Construction Products business has had a very sizable market share gain over the last few years. So it's a very positive market share story in our Construction Products business in North America.

Over the last couple quarters, clearly the biggest issue for us is our biggest, most profitable business hasn't been gaining share, and that's what's going to change in the second half of this year, and that's the Americas business.

Okay. Great. Thank you so much.

Thank you, Jeff.

We will take our next question from Curt Siegmeyer with KeyBanc Capital Markets.

Hello. Good morning, guys.

Good morning, Kurt.

Just a couple. One, on Engineering Adhesives. Obviously, you talked about some of the investments that have been going on there. With your long-term EBITDA margin target of 20%, where obviously, it's obviously a pretty big gap to get there. I guess there's a couple different ways of asking this. If you -- excluding the investments, maybe what would margins have been and what else needs to happen? Do you need volume growth to hit a certain level, or what all needs to happen to bridge that gap to achieve your long-term target?

To give you an idea, just this quarter alone, I said year-over-year we invested about $3 million in OpEx relative to prior year. If we had not invested that extra $3 million, instead of being down 150 basis points, we would have been up 250 basis points. So that alone could make a 400 or 500 basis point difference. And when you look at the underpinnings of this business, the contribution margins and the gross margins of this business are just fundamentally higher than our business.

So the investments we're making are technology for growth in the business for the future. And we see this, given the technology we have, the position of the businesses we bought and where they're at, that there's a lot of market share gains for us to gain in a segment of the market that's very high margin. So we see it as a very important thing for us to do for our investors to take some of the profits that we're generating in some of these more mature areas and invest them in these areas where we can build a strong, long-term growth business.

And as you know our expectation is this business will be at 20% EBITDA margin by 2020. So that's the path we're on and we're going to invest here in the short term to make certain we get there in the long term.

Great. And then maybe just a follow-up. You lowered your constant currency revenue outlook. Is that mostly just CP or is the lower pricing that you saw in the quarter that you expect to remain similar to in the second half, is that a part of that or what are the components of the lower revenue outlook?

I think it's primarily a pricing thing. But let me let John give you a little more color on that.

That's exactly right, Curt. Jim's right. It's more pricing. Pricing is a little more of a headwind, both in the second quarter and the full year, than we probably had thought at the beginning of the year, which is a reflection of the fact raw materials have stayed down longer than anticipated. But for us, if you consider the cost of sales impact, that's a net to favorable impact at gross profit.

Got it. And how big is the export business in Construction Products that you mentioned?

I would say it's about a -- I should know it off the top of my head - it's less than $15 million. So they had a really rough quarter for it to be sizable. So it's a small part of the business, but they had a couple -- and it's project driven. So normally, one of those things that's way in the background, but less than $15 million overall.

Okay. Got it. Thank you.

We will take our next question from Christopher [Perla] with Bloomberg Intelligence.

Good morning. Thank you for taking my call. Just a quick follow-up question. Where are you in terms of the SAP implementation? And what does the spend look like on that going forward?

The SAP implementation, as you know, has been delayed for the global rollout so that we could stabilize and strengthen our business in North America. Our operating systems in North America are running very well. So our business, the investments we made there, while they created some problems in 2014 that affected our results in 2015, today are helping our business improve and run at a much higher level than it had historically. We're pleased with the system.

We're likely to roll that out starting in 2017. We'll kick off the project late this year and then have our first go-live sometime late in 2017. We're going to do it, though, in a very different fashion than we did North America. We did our biggest business all in one bang on one day. We're going to take a smaller business, like the Latin America business, and do it in three pieces on three different events. So a very different strategy. It will be extended over time. The cost will be extended over time. But it is an important investment for our business and is will strengthen our Company. So the short answer is our next go-live will probably be late in 2017, with us investing later this year and then most of 2017 to make that a success.

Okay. Thank you very much.

Thank you.

Our next question comes from Dmitry Silversteyn with Longbow Research.

Good morning, guys and thanks for taking my --

Good morning, Dmitry.

A lot of my questions have been answered, but I'd just like to follow up on a question that was asked earlier about the Americas pricing, but also the FX number that you've put up, or the FX impact in Americas. I think you said that you really didn't have a significant price increase in Latin America, which is contrary to coating manufacturers and a lot of other related businesses that are trying to offset the deflation in currency with some more aggressive pricing. So I'd just like to understand what's preventing you or the market for adhesives overall from following a typical path in emerging markets when currencies deflate, you raise pricing to compensate for that?

And then secondly, again, on the foreign exchange, you've put up a much lower than I expected, 30 basis points decline in foreign exchange year-over-year, with second half of the year being -- the second half of last year being a pretty significant decline in real and some other currencies in Latin America, as well as in Canada. Why is your foreign exchange impact not higher than you've reported?

The answer to both questions is related. And it's because H.B. Fuller has been in Latin America for a long time and we've established ourselves in Latin America mostly based on dollar-based pricing. So we price our products based on dollars, dollar-based currency. So our pricing underneath of this fluctuates in local terms, but when we quote prices with customers. There are some exceptions to that, and where there are exceptions, we've raised prices, of course, and that comes through. But mostly it's dollar-based pricing to all of our customers in Latin America, and that's why you don't see the currency effects that you might see with other people who are pricing their products in (Inaudible).

I got it. So basically, because you're pricing it in dollars, that your customers are seeing the higher prices in their local currencies, but for you, there's no need to translate, because you're already priced in dollars.

Exactly. That's correct.

Got it. Got it. Okay. Also let me follow up on the Asia-Pacific growth, we're seeing double digit growth there in the current quarter and you had mid-single growth in the first quarter. What are your expectations for the balance of the year? Your main markets there, I believe, are Electronics and Automotive, and I'm talking about Engineered Adhesives, as well, because it's primarily Asian-based, from what I understand. Those markets look to be getting a little bit softer. So I'm wondering if the share gains with the Tonsan and a more focused approach to Asia are allowing you to offset what could be slowing end market conditions or general conditions and what your expectations for the growth of that business in the second half of the year is?

Let me pull it into chunks. So Engineering Adhesives, you're right, the overall market condition isn't as robust as it's been in the past. But this is a share gain opportunity where we're bringing people, technology and opportunities to what was a very strong company. So this business has delivered 15% volume growth in what's a less robust China and Asian environment. So very solid. That includes our investments in Electronics, where we're winning some nice wins in Electronics. So I think it's a very good news story in Engineering Adhesives, despite the economy.

Similarly, in the rest of our AP business, I agree with you, Dmitry, we don't have that robust underpinnings in Asia Pacific. But two things for us. One, a lot of our businesses are tied toward local consumer goods, and those parts of the economy are just fine, so Packaging, Hygiene, those parts of the business continue to be positive. Maybe not as positive as before, but very positive in terms of how they operate. And we continue to win. We made a big investment in Indonesia that's helping us in Southeast Asia. And our team in China is very strong in targeting the areas where we can bring value for customers.

So will we deliver double-digit volume growth? That's probably a high aspiration. But high single digits in our Asia-Pacific business is something I think we can achieve in the second half of this year.

Okay. That's great to hear. And then just one final question on Asia-Pacific margins, the step down sequentially in the second quarter versus the first quarter. What's that a driver of, or what's the driver for that and how do you think about margin progression in your Asia-Pacific business for the balance of the year?

Overall for the first half, we're on target with where we expected for the first half, and that's what we'd expect for the second half of the year. So I'd look at the average of the two as a good target and a good progression. The difference between the quarters was some investment in this Indonesia facility which we're ramping up.

Okay. Got it.

But on target overall.

Okay. Thank you, Jim.

Thank you, Dmitry.

(Operator instructions)

We will take our next question from Bruce Zessar with Advisory Research.

Thank you. I wanted to come back to the Cyberbond acquisition, Jim. How much did you say their sales were, I guess trailing 12 months?

About $15 million.

Oh, $15 million, okay. And do you have any estimates -- that's 1-5 million, right, $15 million is what you said? Okay. And then in terms of potential synergies, you mentioned the multiple was 12 X, and we can back into whatever the EBITDA was. But do you have any estimate of what you think the synergies you may get off of that transaction?

I don't have that at hand, Bruce, but they are sizable synergies. What happens is we have set of synergies we expected out of Tonsan. And then we see an acceleration of those synergies, mostly, as a result of this opportunity. The Tonsan plant was built essentially on an organic development of an infrastructure in North America and Europe, which was moving ahead at pace, but all that work that we've done over the last year now gets on an accelerator, in terms of what's possible in driving the revenue growth.

So I don't have a specific number. It's all on revenue. I think the earliest, easiest revenue opportunities are in China, actually, because the Cyberbond technology in the hands what's a very strong team in China will generate growth later this year that we weren't expecting, bringing that technology. And the Cyberbond guys have already been to China, meeting with our team there and talking about how to make that happen. And then the back half of this year and next year, we'll see the revenue synergies.

Okay. And then this is a question for John. Jim Giertz on the last call said that he expected cash flow from operations for the current fiscal year to be a little in excess of $210 million. Is that still the expectation?

Yes, it is, Bruce. If you look at the normal profile for the company, cash flow tends to be back half weighted. So with $80 million of operating cash flow to date, that should put us on target for the number that Jim talked about.

Okay. Thank you.

Thank you, Bruce. Okay, thank you, everyone, for your participation -- is there another question?

Yes. We have one more question from Rosemarie Morbelli.

Thank you for taking it. Jim, just quickly, looking at Cyberbond, do they have complementary product lines with Tonsan or are there totally new engineering adhesives going into different markets or different applications?

The largest product line that they have is something that Tonsan had but wasn't as strong at. The other product lines they weren't as strong at as Tonsan was. So it's complementary in that regard. The market knowledge of the people that were acquired with the business is very strong across all of these spaces. So lots of market knowledge to share, technologically, one piece of technology that Cyberbond had can help us in China, and most of what Tonsan has can really accelerate the growth of Cyberbond.

Okay. Thank you.

Thank you, [Rosemary]. Okay. Thank you, everyone, for your support and your participation today in today's call.

Thank you, ladies and gentlemen. This does conclude today's H.B. Fuller second-quarter 2016 investor conference call. You may now disconnect.