H.B. Fuller Company (FUL) 2018 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the H.B. Fuller Second Quarter 2018 Investor Conference Call. This event has been scheduled for 1 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, Director Investor Relations and International Finance, Mr. Maximillian Marcy. Sir, you may begin.

Good morning, and welcome to our fiscal year 2018 second quarter earnings call. We have 2 speakers today, Jim Owens, our President and Chief Executive Officer; and John Corkrean, 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 by 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 comments may include references to non-GAAP financial measures. These results should not be confused with the GAAP numbers in yesterday's earnings release or with 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.

I want to also remind you that in March of this year, we've filed an 8-K that included pro forma 2017 results that illustrate what our consolidated and segment level financial performance would have looked like last year had we owned Royal. We chose to file this 8-K to provide you a baseline when comparing year-over-year performance. During our call today, we will make some references to our growth in 2018 versus the pro forma results included in that filing.

With that, I'll turn the call over to Jim Owens.

Thanks, Max, and thank you, everyone, for joining us today. We had a very strong second quarter, another positive milestone along the way to hitting our 2020 targets. We continue to make very good progress on the Royal integration and both the legacy H.B. Fuller and Royal business continue to perform well. And we're making great strides with synergies, which are reflected in our results. We delivered on the margin improvement and profit plans that we outlined during our last call. And we delivered a nice improvement in cash flow from operations as well as debt paydown during the quarter. Our financial performance this quarter was in line with our expectations, which will keep us on track to deliver on our targets this year and in 2020.

Revenue growth remained solid at about 8% versus the second quarter of 2017, pro forma for Royal. Adjusted gross margins improved by 30 basis points year-over-year on a Royal pro forma basis and 190 basis points sequentially, a strong result given that raw material prices were increasing in the second quarter of 2017. Revenue growth and margin expansion contributed to EBITDA of $123 million, which was in line with our expectations.

In Q1, we noted 3 areas of focus that were imperative to a successful 2018. The first was to realize over $50 million in annualized pricing in the second quarter to offset last year's raw material inflation, and we met this goal. The pricing actions that we took in the second quarter have ensured that we deliver this target and have helped to drive higher gross margins. This year-over-year improvement should widen as the year progresses. We continue to closely monitor raw materials, and we'll continue to implement the appropriate pricing actions needed to offset any cost increases as the year progresses.

The second imperative for 2018 we identified was to deliver $15 million of cost synergies from our Royal integration. We've achieved $4 million of synergies during the second quarter for a total of $6 million year-to-date. These synergies are primarily due to raw material sourcing savings. We remain on track to deliver the $15 million synergy target set for 2018.

The third imperative we identified for 2018 was free cash flow generation and debt paydown. During the second quarter, we generated operating cash flow of about $54 million and repaid $36 million in debt. We are confident that we can meet our target of reducing debt by $170 million by the end of 2018. The progress that we've made on pricing, synergy realization and cash flow delivery during the quarter puts us in a great position to deliver our full year 2018 objectives.

Next on Slide 5, I'd like to walk through the segment performance in the second quarter and then review our expectations for the remainder of the year and finally, give you a brief update on the Royal integration.

First in the Americas segment. Pro forma for Royal, revenue growth increased about 1% versus 2017, pricing was strong at 3% and volume mix was negative during the quarter driven by a few factors. We realized some attrition related to pricing actions taken in the quarter as expected, particularly on low-margin businesses. We also had a negative impact in the quarter related to a trucker strike in Brazil, which is now over, but occurred during the final 10 days of our quarter. And we also strategically exited some low-margin business that we acquired in the Wisdom acquisition. For the remainder of the year, we anticipate organic growth to be in the low-single digits with pricing outpacing volume. EBITDA margin in the Americas improved significantly versus the first quarter of 2018, driven by our solid pricing activities and acquisition-related synergies. We delivered EBITDA margin of 16% ahead of the 15% target we discussed during last quarter's call. The higher margin was enough to offset lower volume mix. We expect the Americas' EBITDA margin to continue to improve in the final 2 quarters of the year and to return to historical levels at 17% by the end of the fiscal year, driven by positive pricing actions, synergy capture and cost control.

Our EIMEA segment delivered solid pro forma revenue growth of 13%, 4% of which was organic. This was driven by solid pricing improvement across the region. On a pro forma basis, EIMEA adjusted EBITDA grew by 30% year-over-year and the EBITDA margin increased 160 basis points versus the prior year to 13%, driven by pricing actions and solid operational improvements. As we continue through 2018, EIMEA EBITDA and EBITDA margin will be slightly lower in the third quarter, representing the seasonality of the European business, which should remain near second quarter levels on average in the back half of the year. For the year, EBITDA margin is expected to improve by about 100 basis points on a pro forma basis versus 2017, reflecting pricing actions and operational efficiency gains.

Now turning to the Asia Pacific segment. We grew revenue by 15% in the second quarter, primarily driven by solid volume contributions from China and Southeast Asia and positive foreign currency translation. We expect to see mid- to high-single digit organic growth over the remainder of the year. Adjusted EBITDA was up versus the prior year, driven by volume improvement and supported by continued positive pricing. The EBITDA margin was essentially flat year-over-year due to raw material inflation, but was offset by pricing actions. We expect the EBITDA margins to expand during the remainder of the year and deliver a 100 basis point improvement in the EBITDA margin for the full year based on additional pricing actions and volume leverage.

Our Construction Adhesives pro forma revenue was essentially flat versus the second quarter of 2017. The combined H.B. Fuller and Royal flooring businesses were down slightly in the quarter due primarily to a weakness at a key customer. However, the commercial roofing business, which got a slow start in the quarter due to seasonality picked up and drove growth and offset the flooring declines. We've seen volumes pick up in the second -- in the third quarter, and we expect to deliver revenue growth in the low-single digits on a combined basis in the back half of the year. The Construction Adhesives EBITDA margin was nearly 20% in the second quarter. As we continue to improve the underlying performance of the flooring business and realize raw material and manufacturing cost synergies, we expect to improve EBITDA margin on a pro forma basis in 2018 by about 100 basis points to a margin of just under 18% for the full year.

Lastly in Engineering Adhesives. We continue to achieve strong results with organic growth in the high teens. Continued strong market wins along with the effective management of price contributed to revenue growth. As we move through the year, we expect to maintain a double-digit organic growth cadence. Our Engineering Adhesives adjusted EBITDA increased 30% versus the prior year on a Royal pro forma basis and EBITDA margin was up approximately 100 basis points. As we move through the year, we expect continued year-over-year improvements in EBITDA margin, finishing the year near 20%.

Overall, it was a very strong quarter for H.B. Fuller, and in line with our revenue growth and EBITDA expectations.

Before I turn the call over to John, let me provide some color on the progress of our Royal integration. Ted Clark, CEO of Royal, continues to lead the integration. We're leveraging our synergy tracking tools and a well-managed governance process to make sure that plans remain on track. Our procurement savings programs are delivering their expected benefits with $6 million of cost synergies recognized on a year-to-date basis. We remain on pace to deliver on our targeted $15 million in cost synergies for the year. In manufacturing, in the second quarter, we developed detailed plans around the closure of 2 small Fuller plants in Texas and California as well as other plants to consolidate volumes and leverage opportunities to drive specialization within our plants and drive efficiencies and cost savings. From a revenue synergy standpoint, we continue to identify new opportunities that support our $50 million revenue synergy target by 2020. Many of these synergies are expected to come from leveraging Royal's technologies through H.B. Fuller's extensive international network. Others are expected to come from packaging opportunities through Royal's specialty packaging equipment. We will share specifics on these growth synergies during our Investor Day in July.

Overall, it has been a great start to the Royal integration. And the business plans, which we envisioned for this combination are now coming to life. The Royal integration has proceeded exactly as expected with no surprises thus far. We're very pleased with what we're seeing as we move through the integration process.

With that, I'll now turn the call over to John.

Thanks, Jim. As Jim mentioned, we had a very strong second quarter. I'll provide you with some additional financial details behind that performance.

Net revenue grew by over 40% versus the second quarter of 2017, the majority of the growth came from the addition of the Royal business. On a pro forma basis for Royal, revenue growth was approximately 8%, of which half was organic growth. Foreign currency, primarily related to a stronger euro, had an approximately a 4% impact versus the prior year. Pricing was a strong contributor at over 3%, as we realized the impact of the pricing actions we took to offset last year's raw material inflation and volume mix were essentially flat for the quarter.

On a pro forma basis for Royal, adjusted gross profit margin improved by 30 basis points versus last year's pro forma results to 28.3% and 190 basis points versus the first quarter reflecting the positive pricing and synergy gains, more than offsetting raw material inflation. This improvement is a great result and supports our expectations for continued margin expansion for the remainder of the year.

Adjusted selling, general and administrative expenses grew by about 6% on a pro forma basis versus the second quarter of 2017 due to acquisitions and foreign exchange, but declined as a percentage of revenue versus the prior year by about 30 basis points due to sales leverage and overall cost controls. The net of all of these performance improvements resulted in an adjusted EBITDA of $123 million, up 12% versus the second quarter of 2017 on a pro forma basis for Royal and in line with our expectations and adjusted EPS of $0.89, up 44% versus the second quarter of 2017.

During the second quarter, we modified our calculation of EBITDA to conform with the definition of EBITDA in the SEC compliance and disclosure interpretations for non-GAAP measures. We've modified our calculations such that EBITDA now includes joint venture earnings as well as nonoperating income and expenses. This modification has been made for all historical periods. Using our historical methodology, adjusted EBITDA would have been $120 million in the second quarter of 2018 and $204 million on a year-to-date basis compared to $123 million for the quarter and $208 million on a year-to-date basis using our updated calculation. This modification is expected to have a favorable impact on EBITDA of about $6 million for the full year.

With that, let me now turn to our guidance for the 2018 fiscal year. We're narrowing adjusted full year EPS guidance range to between $3.15 and $3.40, slightly increasing the midpoint. This range represents growth of over 30% versus the 2017 fiscal year at the midpoint. Net revenue is expected to grow approximately 34% as a result of adding the Royal business. On a pro forma basis for Royal, we expect revenue to grow between 5% and 6% for the remainder of the year with acquisitions contributing about 1% to growth and currency having a neutral impact for the remainder of the year. Organic revenue growth will come from volume growth across all segments with pricing actions to offset the raw material cost increases we experienced in the 2017 fiscal year.

Positive pricing, underlying operational improvements and the addition of the Royal business, including synergies, will contribute to an adjusted EBITDA of approximately $470 million based on our revised calculation of EBITDA. This represents an increase of 60% versus 2017 or an increase of about 13% on a pro forma combined basis. We expect EBITDA to continue to improve over the remaining 2 quarters as we continue to realize our synergy target. We expect approximately $125 million in EBITDA and $0.90 in adjusted earnings per share in the third quarter based on normal revenue patterns and the impact of recently implemented price increases.

We expect full year depreciation and amortization to be about $148 million for the full year with about $58 million of new depreciation and amortization related to Royal. We also expect full year interest expense of about $100 million with about $65 million related to financing of Royal acquisition. Our 2018 core tax rate is expected to be between 25% and 27% in 2018 based on U.S. tax reform. Capital expenditures are now expected to total approximately $80 million in the 2018 fiscal year and includes approximately $10 million of investments for the integration of Royal. We expect to generate free cash flow that will be used to repay $170 million of debt in the 2018 fiscal year.

With that, I will now turn the call back over to Jim Owens to wrap us up.

Thanks, John. 2018 is progressing very well and in line with expectations. We're well on our way to successfully integrating the Royal business and realizing the cost and revenue synergies related to the deal and this momentum is already having a positive impact on our results. In addition to the Royal integration, we're seeing positive volume growth in both the legacy H.B. Fuller and Royal businesses, and we're delivering positive pricing across all of our businesses. The results of these actions will generate EBITDA of approximately $470 million and free cash flow that will be used to repay $170 million of debt during the year. With each passing quarter, our confidence in hitting our 2020 targets of $600 million of EBITDA and $600 million of cumulative debt paydown. We're gaining momentum in the business as we continue to grow our top line, improve our margins and deliver our operational performance.

Lastly, I invite all of you to attend our Investor Day scheduled for July 19 at the Grand Hyatt in New York. We plan to discuss, in detail, how each segment will perform and contribute to our commitment of $600 million in EBITDA, and we'll give you an opportunity to speak with our business leaders, including our new addition to the leadership team Ted Clark, former CEO of Royal and Zhiwei Cai, the leader of our Engineering Adhesives business. Registration is open through a link on our Investor Relations site. Please reach out to Max with any questions you might have.

This is the end of our prepared remarks. So now we look forward to answering your questions.

(Operator Instructions) And our first question will come from David Begleiter from Deutsche Bank.

This is actually Katherine Griffin on for David. So I guess, first, if you could just talk about Americas Adhesives volumes being pretty weak. Could you discuss maybe what happened there beyond just the volume attrition? Was that -- and you said it was in line with your expectations. Does that mean that going forward, if you want to get to that mid-single-digit organic volume target, does that also include 3% price increase over the next 2 quarters? Kind of like what are the puts and takes there?

Great. Thanks for the question, Katherine. Yes, as I said in my comments, there are really 3 factors. One is Brazil. So the trucker strike that you might have heard about happened right at the end of our quarter so that was about 10 days. So that was about 1% of the impact in volume and some of that will come back, some of that was just a shutdown of the economy there. But in terms of volume impact in Q3, we wouldn't see any of that going forward. About 2% of it is repositioning of our Wisdom businesses or some of the business we bought from Wisdom in Q1 of 2017 was a lower-margin business that we strategically realigned and exited. So you'll see a bit of that, that will flow through the numbers as we go forward. In the past, that showed up in the acquisition line. Going forward, that shows up as volume, but that was strategically planned. And then the third piece is attrition related to price increases, mostly around lower-margin, lower-price businesses, I think, as we indicated in prior calls, we expected some level of attrition in those areas. So this is pretty much in line with what we expected. We've got the $50 million in increases that the expected to get last quarter. We had the 390-basis-point improvement quarter versus quarter in EBITDA margin and as part of that, repositioning our pricing method, we lost some volume in some of the lower-end businesses. So we're very happy with the performance of the Americas business, the volume losses that we got were planned. I'd say, going forward, the Brazil impact will go away. We're back on offense. So I think you'll see the volume numbers in terms of attrition go away -- we've had less price increases going forward, although we have some. And we also see more competitive activities. So I think, you see volumes improve and you'll also see pricing improve. So the organic number, net overall, will improve here in Q3 and Q4. And we expect, as I mentioned, continued EBITDA margins at current or higher levels going forward as a result of all this. So overall, very pleased with the approach the Americas business took to their price increases and the business that we did lose, we're not unhappy about and so. Does that help?

Yes, absolutely. And then I guess, on Engineering Adhesives, where organic growth was very strong. I'm just curious, which products or regions are you seeing contribute to that strong volume growth?

Yes. So we're seeing a broad based increase in our business. We've got a very strong electronics team, and they continue to gain share. They've moved into some microelectronics opportunities. So some of their newer wins are in that area in addition to our strength in assembly. Our automotive business continues to improve based on some nice early synergy wins from Royal as well as some of the specification work we've done leveraging our really strong team in Germany that's connected with BMW and Mercedes and leveraging their technology broadly across the market, especially into China. So the China market is really a positive one for us. We've also seen growth in the new energy space, both solar energy as well as some of the work we're doing in wind and car batteries showing up in the numbers. So broad based, the team is a very entrepreneurial team, finding new opportunities and continues to build on the organic growth strategy that we have there. So very pleased and the momentum continues there. And I think it'll be highlighted and people will learn more about that business at the Investor Day. So thanks for that questions, Katherine.

(Operator Instructions) And our next question comes from Dmitry Silversteyn with Longbow Research.

Let me follow up that line of questioning on the volume declines in EIMEA. It looks like volume is down 1.5 percentage points given that you just talked about Germany being a good automotive market for you for Engineering Adhesives. What was the offset for the volume decline that you saw year-over-year in Europe or EIMEA region?

Yes. So the auto business shows up in Engineering Adhesives, Dmitry. So I would say the -- but the same question applies to what happened in Europe? Similar impact in North America except we don't have the Brazil effect or the Wisdom effect. So fundamentally, I think, the team has done a very good job of managing pricing, but some of that results in our some losses in our lower margin pieces of the business. So -- as you know, we have a wide array of businesses, we have some high end durable assembly businesses and very specialized packaging and hygiene businesses, and we also have some more paper converting and polymer businesses. And those are the businesses that get pressure in the short term from a volume standpoint and that's where you'll see most of the pullback is on that lower end water board business.

So to follow up on that as well as your North American or your Americas losses in volume versus pricing gains, are you losing this volume to other major players that are not as proactive in pricing? Or are you losing that volume to smaller players, or is there a chance that you can get it back if the performance is not there or service is not there or whatever then you'll have a chance at that business later on?

It's more the lower end competitors, Dmitry, and I think we see relatively good pricing action from Henkel that just announced a surcharge in North America this last week. So we see activity there. We are finally seeing more activity from our Bostik friends at Arkema. So I think we see pricing activity from the major players, but less at this point from smaller competitors. And it's typical, as you know, for those guys to lag the market. So I do think as they have service issues, some of that business will come back over time.

Okay. And then on your raw material outlook, it sounds like you're still experiencing a little bit of inflation. Is the price that you've gotten in the second quarter enough to cover what you see in the second half of the year? Or do you feel right now that if this continues, you're going to have to go out with another price increase in the back end of the year?

Yes. I would say, right now, we've put forth a pretty aggressive price increase so some of that actually is being implemented in the third quarter. It's a little early to predict whether or not the price increase will be in fourth quarter or first quarter next year, but we see generally an inflationary environment and whether it's fourth quarter this year or early next year, I'd expect there'd be some more pricing action that we probably have to take at some point here down from road, Dmitry. But it is, I would say, overall the level of inflation is a little lower than it's been in the first half of the year. Still inflationary, but not at the same rate we saw in the first half of the year.

Our next question will come from Eric Petrie with Citi.

Could you -- I was looking at the charges that you backed out for your organizational realignment or year-to-date totals. You've done quite a bit in both Construction Adhesives and EIMEA. What actions are you taking? And how long shall we expect these charges to extend throughout this year and may be into next year?

I could take that one, Eric. It's John. The organizational realignment for this year are primarily a carryover of some of the restructuring actions we announced in January of 2017. So within EIMEA, I would say, the majority of that is headcount related with Construction Adhesives it's related to some of the facility rationalizations we've done and that will tail off this year and basically be done.

Okay. And then -- so the 2 plants that you identified to close is that within the roughly $5.5 million year-to-date? Or is that...

Yes, those actions will actually be reflected in the Royal restructuring integration and, for those we've yet to record anything specifically on that yet. So we're still in the planning stages, but we're very close to completing and those will show up in that Royal restructuring line.

Okay. And secondly, just in terms of Engineering Adhesives, nice growth. How much of that growth would you say is from new business versus legacy business and taking opportunity to leverage some of that acquisitions and the new technologies acquired?

I don't have a great number for you. I don't think you do either John.

No I don't.

So I think we're in -- our strategy and Engineering Adhesives is 2 things, one is to pick the most attractive segments and then the second is to be faster in solving problems. So targeting those opportunities which is win. So there is a combination in there that I would say these businesses grow in aggregate probably in the mid-single digits, maybe mid- to high-single digits and then we're building wins and market share gains on top of that.

Okay. And then would there be any lumpiness or changes in activity or builds for like solar or wind that attributed to any positive volume growth and Engineering Adhesives in a specific quarter versus the full year?

Yes. I would say, there can be. There haven't been huge shifts, I would say, over the last couple of years in solar panel production. It can be driven a bit by subsidies in various countries around the world, the volumes there. Right now, the biggest impact in that business is what's happening with the price of silicon. So there's a sizable increase in the cost of silicon material, which is driving pricing and some share dynamics. But overall, I think the build rates -- first of all, much bigger than solar than wind, we have a -- we've nice some early wins and wind, but it would be much bigger than solar. And I would say, overall, there's not a huge shift right now in the volume of solar, but there will be some tailing off in the second half of the year, but not a dramatic impact for us.

Our next question comes from Rosemarie Morbelli with Gabelli & Company.

So Jim, you mentioned how strong your business is within Engineering Adhesives related to the automotive, which I am guessing is most likely China. So what could be the potential impact from tariffs and the brewing trade war that we seem to be having with China given your strong business there?

Yes. I think we're in a very good position relative to the tariffs. Most of what we do around the world, Rosemarie, is make in local countries for local countries. So as you know, we have 7 facilities in China, and we produce products there for China. We've done a pretty -- so I'd say, overall pretty benign for us, really not a big impact. We have done a deep dive. This first set of tariffs that's supposed to come in here in a couple of weeks really has very little impact on us. The only impact will be pass-through on steel drums, which is pretty insignificant, I think, overall for us and that will be U.S. steel drums. The second set of tariffs, we've looked at all the pass-through potential there, it adds up to a total of $11 million through our supply chain. Again, most of our stuff is local. We could mitigate at least half of that by making some changes in suppliers. So we don't see the tariff situation as one that impacts our business because we're not exporting from country to country and most of our raw materials that we purchase are bought in country or in region.

Any -- do you see any sign of retaliation against American companies at this stage?

No. We've seen none of that.

And you haven't heard any tidbit about the potential?

Yes, I think people we talk to -- I mean, of course, everybody likes to talk about what's in the news, but I think in terms of the real action on the ground, I don't think there is, it's very preliminary. And again, our company, while we're U.S. owned, is very local in the leadership and the approach we take to the market. So in China, we're well integrated as a Chinese company. As you know, of course, the cornerstone of our business is Tonsan, where the founders of the company are still part of our organization. So we're pretty comfortable with our position in China, but we'll see where the world goes. I think, we're well positioned relative to others can control what happens with tariffs, but we're certainly well positioned.

Okay. And then, if I may, on the volume mix decline, I mean, you have mentioned several locations for different segments, the elimination of the low-margin products, which would make me think that the mix would increase. So if you separate the mix from the volume, how much of a volume decline did you actually experience?

Yes. I think you got to look at the business is a combination of volume and mix together, Rosemarie. So I think, parsing those out, one of the challenges I think if you dig under the covers of these volume numbers, we sell products in 5 milliliter vials, and we sell products in tank trucks, and that whole mix of all those products and the way mix is calculated by segment can get pretty complicated. So I think, your question, overall, is how do we feel about the volume mix loss? I'd say it's very much on those lower margin businesses and segments that are less of our growth initiatives. So -- and -- but, again, your question on maybe, I missed the point there.

No. I mean, I was wondering what real volume decline was?

Yes, we'll...

If you eliminate the mix, it has to have been positive...

Yes, I think you got to be very careful about looking at real volume, right? So a product that we sell for $15 or in a higher $15 a pound versus one that we buy at $0.70 a pound or a product that we convert into a new package that you double in price per pound is a very or all part of our mix and our products. So the short answer is, I don't have a number for you because we don't even look at the business that way.

Okay. I understand.

And if we look at the Royal acquisition, do you think -- I mean, in your opinion, while I don't want to steal your thunder for the Investor Day on July 19, but any potential of higher targets for 2020 since you have made the acquisition following your last Investor Day?

Yes. I think our $600 million target is a -- it creates the huge amount of value for shareholders. So are we striving to achieve more than that? And is there a potential to do that? Possibly. But I think $600 million target is a good balanced view of where the organization can deliver and should deliver, and we're on track to deliver that Rosemarie. So I think you see very consistent performance, I think, we've been very clear about what we're delivering each quarter, we were last quarter, we overdelivered that slightly -- we were this quarter, we overdelivered that slightly. So I think we're on a really good path and under John's leadership in finance, we've got a very good handle on exactly what it's going to take and the team is delivering.

(Operator Instructions) And our next question will come from Ghansham Panjabi with Baird.

This is actually Matt Krueger sitting in for Ghansham. Can you provide some additional details on the underlying assumptions that are baked into your guidance? So for example, what are you assuming as far as FX rates, key raw material costs and any other related parameters would be helpful?

Yes. So I'll cover the raw material side, and I'll let John talk about the FX rates. In terms of raw materials, we see a total for the full year about 3% inflation after our synergies. So it would have been probably closer to 4% before our synergies. And as I said to Dmitry earlier was more front-end loaded than back-end loaded, going forward we see more -- 2% to 3% inflationary pressures. As part of the exchange rates, John can give you specifics there.

Sure, Matt. So we've generally just assumed that the spot rate is going to be the rate for the remainder of the year. So that's been a little bit of a moving target recently, but with the euro at $1.16, $1.17 and the renminbi in the CNY 6.55 range, those are our assumptions and those are the 2 major currencies that impact us.

Okay. That's definitely very helpful. And then given some of the volume variability across segments and geographies, can you provide an update on the macroeconomic conditions by region across your various businesses? And then if you could provide a little bit of a brief outlook for each of the regions that'd be helpful as well? Just from your perspective.

Right. So just a perspective on the market. Yes, I would say our volume and organic performance was by segments pretty much in line. So we've strategically defined where we want to grow, and we're growing there and where we had different expectations, we're not as the base prices and as we talked about already. As far as our perspective on what's happening in the world, generally speaking, we see positive growth around the world. China continues to be robust. India and the Middle East, underlying performance in the markets continues to be positive. The U.S., we see good activity in the manufacturing sector. Western Europe, it's still positive. And then the only place where, I think, we see some weakness is Latin America. I think the combination of some economic things that are happening there as well as upcoming elections has led to maybe a little bit less robust growth underlying. So that would be my around the world book of what we see as a supplier to lots of manufacturers around the world.

Our next question comes from Mike Harrison with Seaport Global Securities.

This is Jacob on for Mike. Could you talk a little bit more on that key customer weakness you were seeing in flooring? Is that expected to continue in the back half of the year? Or has that kind of run its course in the first 2 quarters?

Yes. I think, overall, our flooring volumes are weaker than our roofing volumes, where we're aligned with the 2 of the 3 big box manufacturers and the third one is the one, who was having the biggest growth challenges in the flooring space. So that will depend on the market dynamics there. So we're tied to our customers in that regard. But I'll say, overall, we expect our Construction Adhesives business to be positive growth going forward. We're seeing very strong performance in our roofing business as we get into the third quarter. So I think any weakness we see in flooring will be overcome with our roofing business.

All right. And then you guys seem pretty confident in the 600 -- or $465 million EBITDA guide in Q1. And if I was being picky, I would say that the increase of $5 million versus the $6 million calculation benefit, it nets out to sort of $1 million reduction, just being picky. So given the...

Yes, it's interesting we had an internal discussion about that. So the guidance is unchanged, right? We didn't want to say $471 million because it sounded a little too precise. That was John's point. This is an approximation. So $471 million sounded a little too precise for us, which is why we rounded to $470 million.

No. I think if that number for the additional impact is $6 million, then our target will be $471 million. And if it's $7 million, it'll be $472 million. We're trying not to be giving the impression we're that precise.

Is it a range on that number?

Okay. But we haven't changed our guidance at all on EBITDA, and we're still very confident to deliver that.

Yes. I guess, I was just asking was the confidence unchanged, but it sounds like it is.

It's unchanged, yes.

(Operator Instructions) And our next question comes from Curt Siegmeyer, who is an analyst at KeyBanc.

So not to get too ahead of the Investor Day next month, but when you think about your prior long-term EBITDA target and sort of the walk to get there, the assumption was volume sort of in the mid single-digit range. So some of the raw material volatility and the attrition that you guys have seen, how should we kind of think about the walk now? Is it more price and maybe less volume potentially and that mix just changes? Or is there a certain recovery in volume sort of back to that mid single-digit range by next year given your guidance for the second half? Or maybe just a little bit more color on how we should sort of think about the contribution of each?

Yes. Well, I would say, at a high level, the target's unchanged, right? And the expectation is unchanged. And we think that given the long-term trends in adhesives and our ability to gain share by targeting the right segments, this 4 to 5, 3 to 5 range is the right kind of thinking for our business. If you look, last year, we had some very robust volume numbers in some of our segments. This year, this quarter, actually, we have less robust. That's all about us driving the margin performance we expect out of the business. So I think, what you need to take away from that is, irrespective of volume, we are usually committed in this company to get to that $600 million EBITDA and pay down the debt. And as circumstances present themselves and market dynamics move, we'll pull the pricing lever harder or softer depending on what we need to do to deliver that. So but as a long-term, we're gaining share in the right segments. Those are higher growth segments. I think you'd expect to see volumes closer to those numbers over the span of time. But in a quarter where we had to, as I said, in the Americas, we improved our margin 390 basis points. We were lower in margin than we wanted to be last quarter. We had to correct that. That meant, we had to -- through that process, shed some volume, but it doesn't mean there is a change in the direction. And I think that's what you'll see at Investor Day. Do you want to add to that, John, I missed anything?

I think that's exactly right. I mean, I think you're it's -- I think you've got to concentrate on the what the overall expected growth rate is, including pricing and volume and that's unchanged.

Yes. Thanks for the question.

Okay. Yes. And if I could have one quick follow-up on CapEx reduction, I apologize if I missed it, but what was the $10 million in reduction attributable to?

That was a little bit of it was timing on projects. Some projects are sliding a little bit into 2019. I think we're also finding through our integration that there is some opportunity to capture synergies at a lower capital investment. So it's a little bit of both -- so I think a little bit of it is a permanent reduction and a little bit is timing.

(Operator Instructions)

Yes. Well, I'd like to thank everyone for your time today and for your continued support of H.B. Fuller and our business strategy.

Thank you, ladies and gentlemen. This does conclude today's H.B. Fuller Second Quarter 2018 Investor Conference Call. You may now disconnect.