Good morning, and welcome to the H.B. Fuller First Quarter 2012 Investor Conference Call. [Operator Instructions] Management in attendance on today's call include Mr. Jim Owens, President and Chief Executive Officer; Mr. Jim Giertz, Senior Vice President and Chief Financial Officer; and Mr. Maximillian Marcy, Investor Relations Manager. At this time, I'd like to turn the meeting over to Mr. Maximillian Marcy. Sir, you may now begin.

Thank you, Katharine, and welcome, everyone. Today's conference call is being webcast live and will also be archived on our website for future listening. Before beginning, I would like to inform everyone that certain matters discussed during this call will include forward-looking statements as that term is defined under the Private Securities Litigation Reform Act of 1995. Since such statements reflect our current expectations, actual results may differ. In addition, during today's conference call, we will be discussing certain non-GAAP financial measures, specifically, adjusted diluted earnings per share; regional operating income; earnings before interest expense, taxes, depreciation expense and amortization expense or EBITDA; and return on invested capital or ROIC. Regional operating income is defined as gross profit less SG&A expense. EBITDA is defined as gross profit less SG&A expense, plus depreciation and amortization expense. And ROIC is defined as regional operating income less taxes at the effective rate plus equity earnings, all divided by debt plus equity. All of the non-GAAP measures discussed today should not be construed as an alternative to the reported results determined in accordance with GAAP. Management believes that a discussion of these measures is useful to investors because it assists in understanding the operating performance of the company and its operating regions as well as the comparability of results. The non-GAAP information discussed today may not be consistent with the methodologies used by other companies. All non-GAAP information is reconciled with reported GAAP results on the last pages of our presentation. For more information, please refer to our recent press release and annual report for the year ended December 3, 2011, on Form 10-K, filed with the Securities and Exchange Commission. These documents are available on our website at www.hbfuller.com in the Investor Relations section. I will now turn the call over to our President and CEO, Jim Owens.

Thanks, Max, and good morning to everyone. We've had an exciting first quarter, one filled with strong business performance and significant steps to improve the business for the future. We have a lot of talk about today, so I'll get right to the commentary. We'll cover 4 main topics, I'll recap our first quarter results, talk about some of the performance drivers and trends in our business, discuss the Forbo industrial adhesives business acquisition and then we'll finish with some comments about our outlook for the remainder of the year and our earnings guidance. We had a great first quarter. We delivered 11% organic growth this quarter, our ninth consecutive quarter of solid organic growth. Higher prices accounted for 9 points of this growth, reflecting the cumulative effect of all the pricing actions we've taken over the past year to offset raw material inflation. Volume was up 2% in the quarter versus last year, an improvement over the trend in the last 5 quarters and in line with our expectations for the quarter. Though overall volume growth is still not where we want it to be, we are satisfied that we are driving solid growth especially in our key markets of hygiene, packaging and durable assembly. We are seeing good market share gains in our Construction Products business based on new products and new distribution wins. In addition, volume growth was solid in our key international adhesives markets of Latin America, EIMEA and China. Gross profit margin improved significantly in the first quarter sequentially and versus last year. Our entire organization has worked hard to maintain and strengthen our margins during the recent wave of raw material inflation. Now that raw material cost inflation has eased, our margins have improved. In addition, we continue our efforts to adjust pricing levels…

Okay, thanks, Jim. Before I review our 2012 guidance, I want to provide some more information about the special charges we recorded in the quarter and how these charges will be reported as we progress through the business integration project. Special charges net for the quarter totaled $6.5 million pretax and are recorded on a separate special charges line on our income statement. These charges fall outside of our non-GAAP definition of regional operating income, which is simply gross profit less SG&A expense. This quarter and going forward, the special charges will be allocated in 4 separate categories: acquisition and transformation-related costs, workforce-reduction costs, facility exit costs and all other direct costs associated with the business integration project. Acquisition and transformation-related costs include all the professional service fees and the cost of securing bridge and permanent financing for the acquisition. In addition, the gains and losses on foreign exchange position used to hedge the purchase price of the transaction are included in this category. Workforce reduction costs are primarily severance cost. Facility exit costs include accelerated depreciation on assets to be idled in the future and other cost directly related to winding down the facility in preparation for sale. This category will also capture any gains on the sale of surplus property when we get to that stage of the project. The all other category is just what the name implies. We have provided a table in our press release which breaks down the costs in each category. In addition, the schedule provides some detail on the tax treatment of the special charges. As this table illustrates, the tax treatment on these charges can vary significantly depending on the tax jurisdiction in which the charge is recorded and the nature of the special charge. In general, charges taken in the…

Thanks, Jim. I'm really excited about the start to our current fiscal year. We continue to deliver on our plans and are making progress each quarter to achieving our long-term goals. A phrase that describes the atmosphere inside H.B. Fuller is optimistic yet careful. Here at H.B. Fuller, it means that we feel, the whole team feels optimistic about the future of our business because we have the right people, the right tools and the right focus to win quarter-after-quarter, year-after-year. However, we are careful enough to keep our eye on the ball and ensure we make the proper decisions each and every day that will allow us to succeed and deliver in the future. We have lot of work to do to successfully integrate the newly acquired business, but we have the positive momentum, the focus and a clear plan to deliver. Many good things are happening. We grew sizably in each of our 3 areas of strategic focus and have specific plans on how to continue gaining share over the next few years. The strategic markets we have chosen for special focus are sound, and H.B. Fuller is poised as a leader in each. We are capitalizing on new opportunities with our expert sales and technical teams and depth of innovation experience. Europe is moving in the right direction, and the Forbo industrial Adhesive integration is off to a good start. If you can't tell, I'm excited to be leading this organization during such a transformational and opportunistic time. I really look forward to these conference calls and the chance to update all of you each quarter as we execute and achieve the goals that we've laid out to you. Thank you for joining us today. Now I'd like to open the call up for your questions.

[Operator Instructions] We'll take our first question from Steve Schwartz with First Analysis.

Jim G., if you could help us understand, in the press release, you noted that the stronger earnings performance in the first quarter would be offset by less favorable foreign currency headwind. And so if your revenue guidance remains the same, it presumes that, that FX headwind is offset by pricing and volume. I would then expect the pricing and volume, which is stronger at operating profit, to give you a boost to earnings. Am I missing something in that whole equation or the way that plays out?

No, Steve. I think you're generally correct. Just to reset, at the end of the fourth quarter or 3 months ago when we gave our guidance, we gave earnings per share guidance, revenue guidance, EPS guidance was $2.05 to $2.15. But we said that at the current exchange rates at that time that our operating plan that gave us those guidance numbers were billed at a more favorable exchange rate. So we just said that we had a gap between our guidance and the exchange rates that were in effect at that time. And really, all we're saying today is that because our business is performing slightly better than our own internal expectations in the first quarter, now we've closed that gap and now we can reconfirm our guidance at the current foreign exchange rates. That's I see -- that's the way I would look at it.

Okay. So there was a little bit of a flaw -- okay, a gap in what you'd offered to us a quarter ago, okay. Regarding gross margin, you guys have done an outstanding job and are showing some incredible savings over the past couple of quarters. Is there any part of that, that is coming just by virtue of the timing of price increases coming through and raw materials taking that temporary dip toward the end of 2011?

Yes. So we -- as you saw last year, I mean, I think the performance was really all throughout last quarter -- last year, quarter-after-quarter. We moved our pricing in line with raw materials lockstep, and actually ticked up slowly as the year went on. When -- as raw materials flattened, that certainly helped us having that momentum on raw materials as raw materials flattened at the end of the year this year. Additionally, Steve, we're doing, as we've laid out in the past, good work around complexity reduction and pricing management around the world. And you can see that really standing out in the European numbers. So those 2 factors combined, certainly, the good momentum and the good work we did last year to manage pricing and raw materials paid off in this quarter's numbers, but it paid off all last year. And this ongoing work on managing pricing and complexity reduction is also paying off, and as I said, particularly in the European numbers.

Okay, Jim. So just to help us understand what is sustainable going forward, would you roughly estimate that maybe 20% of this quarter's gains came from that raw material pricing spread and 80% is from the more sustainable actions you're taking in Europe?

Yes. I would say -- I don't know that I could characterize it in an 80-20 rule, but I would say that our objectives are to maintain margins close to where they are now. If those raw materials go up, there's slight bleeding in the margin, that's possible. But fundamentally, I think we said in the long term our goals are to be in this 30-ish range, and this is a real good quarter in that regard. And we don't see this is a temporary blip, but of course, margins will go up and down each quarter a little bit. But mostly sustainable, I guess, is the short answer to your question.

We'll take our next question from Jeff Zekauskas with JPMorgan.

This is Youyou Yan filling in for Jeff. So my first question is in terms of the guidance, like the growth guidance you provided, because this quarter you delivered roughly 9% in price and 2.3% in volume. So going forward, you mentioned that the growth is going to split evenly between price and the volume. So do you -- does it mean that do you expect volume to be higher sequentially and pricing increase to be relatively lower sequentially?

Yes, that's exactly what it means. We have a price carryover from last year that's flowing through into the first quarter numbers, and we have good momentum that's happening on the volume side. So I think we've laid out the guidance to say roughly the targeted revenue will be for the full year half and half volume and price. So that ratio will change.

Okay. So secondly, if I may, the tax rate for your first quarter, adjusted tax rate is roughly 29.4%, which is lower than your target of 31%. So going forward, do you expect the tax rate to be higher in the second, third quarter and lowering down in the fourth quarter. Is that how we should think about the split?

Yes, let me let Jim Giertz tackle that one for you, Youyou.

Yes, so our tax rate in the first quarter, our core tax rate was about 30.5%, and we had some favorable discrete items that brought the rate a little bit lower than that. So the core rate was actually about 30.5%, and that's the line to our guidance of 31%.

Okay. So if you account for the Forbo acquisition, do you expect the tax rate, including the acquisition, to be higher or lower than your guidance of 31%?

Yes, that's one of the -- that's, as I mentioned before, that's one of the elements that has to be estimated or that has to be projected to get a complete forward look on the Forbo acquisition. Our best guess right now is that the tax rate on the acquired business will be close to the 31% effective rate on our core business.

We will take our next question from Peter Cozzone with KeyBanc.

In terms of Forbo, can you share with us any updates on how that business performed in the first quarter maybe in terms of volume and pricing generally? And also, I know it's a month in, but with your experience thus far, are there any pieces of the business that you were maybe surprised by as far as potential opportunities going forward?

Yes. So I would say we're not in a position to share a lot of details at this point, but the Forbo business performed well. So we feel good about the way they're at. In terms of surprises, I would say -- I mentioned I traveled constantly from -- actually, it was a week before the close and from March 5 up till last week, meeting with people and teams around the world, and yes, a lot of good of positive things that we saw specifically around technology in some of the core markets like bottle labeling and packaging and reactive hot melts. Some of the opportunities we thought we'd see, we saw. The VAE business that we purchased, we see opportunities there. So a lot of good positive early indications that what we thought we'd see in terms of opportunities are there, Peter.

Okay. And then volumes in EIMEA were very solid the first quarter. Are these types of gain sustainable? Can you maybe walk us through the drivers there as far as new products, new business wins and so forth and maybe come out a little bit on the underlying market rate of growth?

Yes, so I think as everyone knows, right, Europe in general is not a robust market area, but our teams there are doing a great job focusing on some of our innovations, delivering value to customers, which when you have a value proposition that's compelling in this kind of environment, doors are open for opportunities. But fundamentally, the markets where we're winning are the 3 that we focused on strategically. So there have been good opportunities in the packaging market, and our team is doing a great job there. We got a very strong team in hygiene, and we're winning in hygiene both in core Europe as well as the Middle East and India. In the durable assembly markets, our team there is finding opportunities to help customers and win business there as well. So it's really those 3 market segments where we're doing good work.

So kind of assuming Europe doesn't get any worse, but given the kind of success you've had on the strategic initiatives and I think you had mentioned from new wins on the last call, the expectations for that business on a volume front, I mean, we won't expect to see a significant slowing in those gains. Is that correct?

Yes. We're optimistic about the volume performance in Europe. And if you look back in the last couple of years, the team in Europe has down good work from a volume standpoint in general, with a couple of hiccups along the way. But real good positive momentum there and a very strong commercial team.

Great. And lastly, as far as raw material inflation, can you remind us what your expectations are as far as the rate of inflation we can bake into your core 2012 guidance and maybe remind us how the pricing flows through and your ability to keep up with input cost as far as your comment to hold gross margins steady throughout the rest of the year?

We're going to look to Jim to give the exact number, but I think we said off, exit rates will be up about 0.5%, and then year-over-year, 4%. And most of that is carryover. So roughly flat from Q4, and you can see that in the chart that we shared in the presentation.

That was for inflation or pricing?

That's inflation. So it's raw material inflation, off of Q4 exit rate, up 0.5%, off of the full year 2011, up 4%.

Okay. And then assuming raw materials kind of moderately increase here, there would still be some lag to get that incremental pricing. Is that correct?

I'm sorry. You're talking about to recover the 0.5%?

Yes. To recover, I mean is there a typical lag? Is it typically 2, 3 months? I think historically is kind of where you guys have framed it?

Yes. I think we're trying to do a better job, Peter, of anticipating and moving in lockstep, so I would say we're trying to minimize any the lag there. And I think if you look at our results over the last 5, 6 quarters, you'll see that we've done a pretty good job in doing that. So as I say, we've got 3 pieces to our margin strategy. First is to do a real good job of anticipating changes. Second is to reformulate, introduce alternative products to customers to manage through that. And then third is to make sure we're managing pricing effectively. So all 3 of those make up the strategy to maintain margins.

And we will now go to Eugene Fedotoff with Longbow Research.

First, can you comment on North American market, what are you seeing there? And then in the past, you provided a split between Construction Products and Adhesives. How was growth in each individual product line there?

Right. So growth was stronger in our Construction Products business than the core Adhesives business. The Construction Products is really driven off of wins, not market conditions. We've had a few good wins with new products and with key customers that have driven that. But I would say generally the volume performance that we've seen in North American Adhesives has been less than Construction Products, as well as less than Europe. And it's a real opportunity for us going forward is to get North American Adhesives volume back to the kind of levels we're seeing in the other parts of the world and in our construction business with wins.

Great. And I comment on, I guess, [indiscernible] in Asia. It was a little bit lower than the expected. What's going on there?

Yes, so Asia is an interesting story. It's a pretty diverse business that we have in here. Our China business did extremely well this quarter, very strong, top line in volume growth, as well as good operating profit improvement. Our business in Southeast Asia did not do as well. And that was -- while we had good growth in Vietnam and Thailand and the Philippines, so our business in Malaysia and especially our business in Australia suffered. If you look at the Australian economy, it's a tale of 2 cities. You've got this very strong, robust mining environment that's happening, while the manufacturing sector where we sell is really struggling. And with that being an important driver of our business, that's a good a drag on the overall Asian business, the performance in Australia.

And just the last question, just want to make sure I understand that correctly. Forbo contribution is now expected to be $0.05 to $0.15 to EPS versus prior expectations of neutral impact. Is it all driven by assumption of lower interest expense? Did I understand that correctly?

Yes, let me let Jim explain that a little bit to you. Jim?

Right. So the original guidance that we gave for accretion in 2012 for the Forbo acquisition was 0, you're correct. And now we're seeing $0.05 to $0.15 of accretion. And your question is, what is driving that? Primarily, it's not a different assumption on interest expense because their interest expense is coming in almost exactly as we had forecasted it to be. What it is, is a more optimistic about the timing of the synergy capture. So the bulk of that is coming from a more optimistic forecast of when the initial synergy benefits of the transaction will occur. There's a couple of other factors there, but that's the primary factor.

And we'll continue on with Rosemarie Morbelli with Gabelli & Company.

So moving up on the strong quarter results, which areas did you see perform much better than what you were previously anticipating? And were there any other areas which actually did not do as well?

So we could see, I think in a portfolio like ours, you always have some ups and downs. Generally, everything did well, Rosemarie. We had a really good quarter across the patch. I think we got a good leadership team around the world that's really focused on delivering their commitments. The European results were really encouraging. I'd say the China results were very encouraging and positive although we did anticipate some of those. Australia and Southeast Asia is probably a little weaker than we expected. And Construction Products, North America, well again, we expected a good quarter, came in a little stronger than we expected. So I'd say overall, we expected strong results and we saw a couple of areas did better than the strong performance we expected. And Australia withstand -- Southeast Asia, in particular Australia, turned out as the area that was weaker than we expected.

And following up on the construction side. Is that mostly new products and new accounts as you mentioned earlier? Or do you also see some pickup in construction overall? Or are you picking up share within a not-moving-anywhere type of marketplace?

Yes, it's always tough to separate those through too completely, Rosemarie. But generally, this is about product gains and market share gains and not some pickup in the construction business from what we can see.

Okay. And then lastly if I may, regarding Europe, you mentioned that the margins are now about 3x higher than they were. Would you mind reminding us where they were, where you are today, and whether they could get above the 14% by 2014?

I love your question, Rosemarie. I'll share it with Steve Kenny, the guy who's heading that business. Yes, so I think we were 1.9% first quarter of last year, and we were 6.3% this quarter. So significant improvement this quarter, but still ways to go to the 14%. And I think it's very solid progress, but there's a lot of work to be done both in terms of managing the manufacturing footprint, doing some of the work we're doing on the procurement, as well as this whole complexity piece. The Forbo integration gives us a lot more levers to enable that to happen, but it adds to the size of this project. So it's a big project that should deliver quarter-after-quarter. And going into the 2014, I think you'll see some good results. Let me let Jim give you a little more details on the numbers though maybe, Rosemarie.

I just want to clarify, Rosemarie, on the Europe in EIMEA in the first quarter, our EBITDA margin was 8.5%, okay? And our target is 14%, so you can see the gap. And then just recall that the first quarter of our year, our EBITDA margins are always low because we have all of our expenses, but we don't have all of our revenue because of the seasonal nature of our business. So 8.5% adjusted for the slow quarter is probably would be a little bit better than that. But you can see the gap between where we are and where our goal of 14% is.

[Operator Instructions] And we'll go to David Begleiter with Deutsche Bank.

This is actually Ram Sivalingam, I'm sitting in for David. Not to belabor the raw material point, but just trying to get the sense for the price to raw material gap in the quarter. Just remind us how much raws were actually up in Q1?

Raws were actually down in Q1 by about 1.5%.

That's on a year-over-year basis or sequentially?

Sequentially.

Sequentially.

Okay. And year-over-year?

Year-over-year they were up almost 10%.

And Christopher Butler with Sidoti & Company.

I was hoping you might be able to give us some insight on volume as they progressed through the quarter. And we touched on this a little bit, but expectations for the spring seasonal build, is that about normal at this point in time?

Yes, so maybe I'll give you high-level color, and if Jim wants to share some specific numbers, I'll throw that to him. But generally, volume progressed nicely through the quarter. So I hate looking at month-to-month numbers. Chinese New Year fell in a different month this year than it did last year, so it's tough enough managing quarter-to-quarter than month-to-month. But generally, we saw a good positive trend during the quarter. And the second question?

The seasonal build, there's -- we look towards spring, any sense there on strong versus normal?

Yes, I would say generally we don't have seasonal builds in our business except in Construction Products. So could there've been a seasonal build in Construction Products, that's one of the questions I had, Chris, but I wouldn't say that we have a big evidence that, that is part of it.

And looking at the Forbo deal, a lot of the benefits come down the road, but the negative synergies from sales would probably happen pretty quickly. With the European volume growth that you saw here in the quarter, do you think there was any impact from that?

Yes, we projected as we went into the acquisition that there'd be limited overlap of customers, and there were. We, early on, tackled that issue with our sales teams, getting our sales team together where there was overlap. We've had detailed meetings with customers, and we feel really good about managing any negative synergies. So limited overlap, where there is, we're working very closely with customers to make certain that there's no negative impact. So, no, I don't see a big negative impact on the overlapped customers, Chris.

And just finally, just to be clear on the gross margin story, you'd indicated that somewhere around 30% is what you're targeting. But as we look to the second quarter, we're now, including Forbo, which is at least on the operating margin line, I assume on the gross margin line as well, lower margins than your existing business, so you have to imagine from a modeling standpoint that gross margin takes a bit of a hit here for the rest of the year?

Yes, Forbo will dilute the margin on a gross margin. So any commentary -- first off, what I tried to stay with the base businesses is that it would stay about the same level, maybe decrease slightly as we go forward. But Forbo will certainly dilute that number as we go forward because it's a lower gross margin business.

We'll take our next question from Tom Claugus [ph] with Graham partners.

I have 4 questions, but I'll try and keep it to 2. The volume growth in Europe, why -- since you're more established here, and I call people in the glue business, so I think I'm pretty well dialed-in, seems like business in the U.S. is good. And so what I'm surprised by is why is your volume growth stronger in Europe than it would be in the U.S.?

Yes. So I would say couple of things. One, we have an EIMEA business, so we have a Middle East, Africa and India business that helps to pull up some of the growth, so we have a broader geography there. And there's certain geographies in Europe where in certain market segments where we're underrepresented relative to what we should be given the value propositions we have, so there are good win opportunities that the team is executing over in Europe.

Okay. And then my next question is I've heard in the field that there are some raw increases this year. So far, wax is starting to be a problem. And my understanding was the Henkel took 6% to 8% pricing this quarter, and I think somebody else did too. I was wondering if you guys took -- you guys did not take any additional pricing in this year? And are you planning on taking additional pricing in this quarter?

So we're managing our margins to what we see in the marketplace. And I think we've done a better job than most in the market of anticipating raw material changes in 2011, and we managed our pricing to that all throughout 2011. As we go into 2012, as we see raw material increases, we're going to manage in an anticipatory way toward those on price increases. So that's the strategy we're taking along with working closely with customers on reformulation.

Okay. But you did not take any pricing this quarter -- I know not in the quarter, but I mean after this year, after December 31?

So we don't go into the details of what we do with price increases specifically. But generally, yes, we need to change prices all the time. And we've -- as I said, repositioning of products in Europe is something that's ongoing process. Where raw materials are affecting certain product classes, we're definitely raising prices to compensate for those. So it's tough to make a general statement. There's certainly places where price increases of 6% to 8% are happening because of what's happening with raw materials are repositioning in our market. For this call, we layout the general view of what's happening for raw materials and pricing.

Okay. And then I guess I'll throw in one more. There is a decent bump in inventory this quarter. Is that to preempt the Forbo integration? Or was that prebuy to try and offset some of the oncoming increases in Ross?

I'm going to let Jim comment.

Yes, it's Jim G. That's a normal seasonal development in our business. Our inventory tends to be at the lowest point at the end of the fourth quarter, and then it builds up to the first quarter as our volumes improve or in expectation of higher volumes in the second quarter.

Okay, just it looked bigger than normal even on that basis, but okay.

Just one last comment on pricing, Tom. Some of our competitors are having to catch up on some of the things that maybe they didn't execute on Q4 as well.

[Operator Instructions]

Okay. I think that's all the questions. Thanks, everyone for your time and your interest in H.B. Fuller. We look forward talking next quarter.

Thank you, Mr. Marcy. Ladies and gentlemen, that does concludes today's conference. We thank you for your participation. Have a great afternoon.