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 one hour. Today’s conference is being web cast live and will also be archived on the Company’s web site 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 two 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 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 the actual results to differ from management's expectations. These filings can be found on the Investor Relations section of our corporate web site 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 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 also want to remind you, that in March of this year, we 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 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 will 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 are 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 remains 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 three 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 that goal. The pricing actions that we took in the second quarter, has ensured that we deliver this target and it 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 will continue to implement the appropriate pricing actions needed to offset any cost increases, as the year…

Thanks Jim. As Jim mentioned, we had a very strong second quarter. I will 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 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 approximately a 4% impact versus prior year. Pricing was a strong contributor, at over 3%, as we realized the impact of 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 a 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 in 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 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 and…

Thanks John. 2018 is progressing very well and in line with expectations. We are 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 are seeing positive volume growth in both the legacy H.B. Fuller, Royal businesses, and we are 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 gross [ph]. We are 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 New York. We plan to discuss in detail how each segment will perform and contribute to our commitment of $600 million in EBITDA, that will 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 Adhesive 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, and now we look forward to answering your questions.

[Operator Instructions]. And our first question will come from David Begleiter of Deutsche Bank.

Thank you. This is actually Katherine Griffin on for David. So I guess first, if we 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 few quarters? Kind of like what are the puts and takes there? Thank you.

Great. Thanks for the question Katherine. As I said in my comments, really three factors; one is Brazil, so the trucker strike that you may 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 of volume. 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, wouldn't see any of that going forward. About 2% of it is repositioning of our Wisdom business. So some of the business we bought from Wisdom in Q1 of 2017 was lower margin business that we strategically realigned and exited. So you will 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 at our 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 got the $50 million in increases that we 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 that we lost some volume in some of our lower end businesses. So we are 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 are back on offense, so I think you will see the volume numbers in terms of attrition go away, where we have had less price increases going forward, although we have some, and we also see more competitive activities. I think you will see volumes improve, and you 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 are not unhappy about. Does that help, Katherine?

Yeah, absolutely. Thank you for the color there. And then I guess on Engineering Adhesives, their organic growth was very strong. I am just curious, which products or regions are you seeing contribute to that strong volume growth?

Yeah. So we are seeing a broad base in our business. We have got a very strong electronics team, and they continue to gain shares, they have moved into some microelectronics opportunities, so that has been -- some of their newer wins are in that area, in addition to our strength in assembly. Our automotive business continues to improve, combination of some nice early synergy wins from Royal, as well as some of the specification work we have 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 have also seen growth in the new energy space, both solar energy, as well as some of the work we are doing in wind and car battery is 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 will be a highlight for people as to learn more about that business at the Investor Day as well. So thanks for that question as well Katherine.

Yeah. Thank you so much.

Thank you. [Operator Instructions]. And our next question comes from Dmitry Silversteyn with Longbow Research.

Good morning. Let me follow-up that line of questioning on the volume declines in EMEA. It looks like it was down about 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, which you saw year-over-year in Europe or EMEA region?

Yeah. So the auto business shows up in Engineering Adhesives Dmitry. So I would say the -- but then the same question applies, 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 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, some 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 will see most of the pullback is on that lower end water [indiscernible] business.

So to follow-up on that, as well as your North American, or your Americas losses on volume and pricing, 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, where there is a chance that you can get it back, if the performance is not there or service is not there or whatever, and you will have a chance at that business later on?

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

And then, on your raw material outlook, it sounds like you are still experiencing a little bit of inflation. Is the price that you have 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 as this continues, you are going to have to go out with another price increase in the back end of the year?

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

Okay. Okay. Thank you.

Okay. Thank you.

Thank you. Our next question will come from Eric Petrie with Citi.

Hey, good morning Jim.

Good morning Eric.

Could you -- I was looking at the charges that you had backed out for your organizational realignment for year-to-date totals? You have done quite a bit in both the construction adhesives and EMEA. What actions are you taking and how long should we expect these charges to extend throughout this year and maybe into next year?

I could take that one, Eric, it's John. The organizational realignments for this year, primarily carryover some of the restructuring actions we announced in January of 2017. So within EMEA, I would say the majority of that is headcount related within construction products, its related to some of the facility rationalizations we have done, and that will tail off this year and basically [indiscernible].

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

That will actually be reflected in the Royal restructuring integration, and in that, we have yet to record anything specifically on that, so we are still in the planning stages, but very close to completing that, and that 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 the acquisitions and the new technologies acquired?

I don't have a great number for you, I don't think you do either John. So I think we are in -- our strategy in Engineering Adhesives is two things, one is to pick the most attractive segments, and then the second is to be faster in solving problems, so targeting those opportunities with that win. So there is a combination in there. But I would say, these businesses grow in aggregate, probably in the mid single digits, maybe mid to high single digits that we are 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 in Engineering Adhesives in a specific quarter, versus a full year?

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 silicone. So there is a sizable increase in the cost of silicone materials that's driving pricing and some share dynamics. But overall, I think the build rates -- first of all, we are much bigger in solar than wind. We have some nice early wins in wind, but we will be much bigger in solar, and I would say overall, there is 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.

Okay. Thanks guys.

Okay. Thanks.

Thank you. Our next question comes from Rosemarie Morbelli with Gabelli and Company.

Thank you and good morning everyone.

Good morning Rosemarie.

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 wars that we seem to be having with China, given your strong business there?

Yeah. I think we are in a very good position relative to tariffs. Most of what we do around the world, Rosemarie, is make in local countries for local countries. So as you know, we have seven facilities in China, and we produce products there for China. We have done a pretty deep -- so I would say, overall, pretty benign for us, really not a big impact. We hadn't 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 have 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 are not exporting from country-to-country, and most of our raw materials that we purchase are bought in-country or in-region.

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

No. we have seen none of that.

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

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

Okay. And then if I may, on the volume mix decline, I mean, you have mentioned on several occasions and 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?

Yeah. I think you got to be -- I guess, well the way we 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 this volume numbers, we sell products in five 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 would say, it's very much on those lower margin businesses in segments that are less of our growth initiatives? But did I get at your question, maybe I missed the point there?

I mean, I was wondering what real volume decline was, which will eliminate the mix which has been positive?

Yeah. I think you got to be very careful about looking at real volume, right? So a product that we sell for $15 or even 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's double in price per pound, is a very -- 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. No, I understand. Thank you.

[indiscernible].

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

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

Okay, great. Thank you.

Thank you.

Thank you. [Operator Instructions]. And our next question will come from Ghansham Panjabi with Baird.

Hi, good morning. This is actually Matt Krueger here sitting in for Ghansham. How are you doing today?

Good. How are you?

Good, good. 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?

So I will cover the raw material side and then I will let John talk about 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 that, as I said to Dmitry earlier, was more front-end loaded than back-end loaded and going forward we [indiscernible] 2% to 3% inflationary pressures. As far as the exchange rates, John can give you specifics there?

Sure. Matt, so we have generally just assumed that the spot rate is going to be the rate for the remainder of the year, so that has been a little bit of a moving target recently. But with the euro at 1.16, 1.17, and the renminbi in the 6.55 range, those are just our assumptions and that's -- those are the two 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 would be helpful as well? Just from your perspective?

Right, so just a perspective on the market. Yeah I would say, our volume and organic performance was by segment, pretty much in line. So we have strategically defined where we want to grow, and we are growing there, and where we have different expectations, we are not, as we have raised prices and done other things, as we have talked about already. As far as a perspective on what's happening overall, [ph], generally speaking, we see positive growth around the world. China continues to be robust. India and the Middle East, underlying performance of the markets continues to be positive. The U.S., we see good activity in the manufacturing sector. Little less in Europe, but 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 at what we see, as a supplier to lots of manufacturers around the world.

Okay. That's helpful. Thank you.

Thank you.

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

Good morning. This is Jacob on for Mike.

Hey Jacob.

Could you talk a little bit more on that key customer weakness you are 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 few quarters?

Yeah. I think overall, our flooring volumes are weaker than our roofing volumes. We are aligned with two of the big box manufacturers and the third one is the one who is having the biggest growth in the flooring space. So that all depends on the market dynamics there, so we are tied to our customers in that regard. But I'd say overall, we expect our Construction Adhesives business to be positive growth going forward. We are 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 $465 million EBITDA guide in Q1, and if I was being picky, I would say that, the increase to $5 million versus the $6 million calculation benefit, it nets out to sort of a $1 million reduction, just being picky. So given the --

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 precise, that was John's point. This is an approximation, so $471 million sounded a little too precise for us, which is why we have rounded to $470 million. But maybe you can comment on it, since you made the decision.

If that number is -- that additional impact is $6 million, then our target will be $471 million. And if it's $7 million, it will be $472 million. We are trying to not to be -- give the impression where that resides.

It is a range on that number. But we haven't changed our guidance at all on EBITDA, and we are still very confident in delivering the number.

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

It's unchanged.

All right. Thank you guys.

Thanks Jacob.

[Operator Instructions]. And our next question comes from Curt Siegmeyer who is an analyst.

Good morning guys. Thanks for taking my question.

Good morning Curt.

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 a walk to get there, the assumption was volumes sort of in the mid-single digit range. so if 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 to maybe less volume, potentially, and that mix just changes, or is there a certain recovery in volumes, 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?

Well I would say, at a high level, the target is unchanged, right, and the expectation is unchanged. 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. All of that is 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 hugely 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 will pull the pricing lever harder or softer, depending on what we need to do to deliver that. So I would say long term, we are 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 margins 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 that direction, and I think that's you will see at Investor Day. Do you want to add to that John?

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

Thanks for the question, Curt.

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

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

Got it. Thank you.

[Operator Instructions].

Yeah 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.