Good morning, and welcome to the H.B. Fuller Fourth Quarter 2018 Investor Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Barbara Doyle, Vice President of Investor Relations. Please, go ahead.

Good morning, and welcome to our fiscal 2018 fourth quarter earnings call. Our speakers today are Jim Owens, H.B. Fuller President and Chief Executive Officer; and John Corkrean, Executive Vice President and Chief Financial Officer. After our prepared remarks, we will take questions. Before I turn the call over to Jim, please let me remind you of our non-GAAP financial presentations and our and our safe harbor statement. Our comments today will include references to non-GAAP financial measures. These measures are in addition to the GAAP results in our earnings release and in our Forms 10-Q and 10-K. We believe that discussion of these measures is useful to investors to assist in the understanding of our operating performance and the comparability of our results. Reconciliation of non-GAAP measures to the nearest GAAP measure is included in our earnings release. Let me also remind you that we will be making statements during this call that are forward-looking. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially from these expectations because of factors discussed in our earnings release, comments made during this conference call and risk factors in our Form 10-K and other reports and filings with the Securities and Exchange Commission. These reports are also available on our redesigned investor website at investors.hbfuller.com. We do not undertake any duty to update any forward-looking statement. Now, let me turn the call over to Jim Owens.

Thank you, Barbara, and welcome to everyone on the call this morning. Our fourth quarter results were very encouraging. Organic revenue was up 4%, adjusted gross margins improved 150 basis points year-over-year and EPS was up 27%, all resulting in us generating $146 million of operating cash flow and paying down more than $200 million in debt, exceeding our debt paydown target. The strategic positioning of our company in key market segments combined with the strong action plans are creating positive momentum across all of our businesses. In fact, each of our segment showed year-on-year improvement in EBITDA margin in the quarter. In mid-September, due to the timing of our quarter-end, we were one of the early companies that called out the slowdown in China and a shift in currencies as a headwind in the second half. These impacts were seen in the fourth quarter, but the impact was somewhat more than we expected. Our forecasted lower rate of growth in the Asia-Pacific region was actually a 2% decline in organic revenues in the fourth quarter. In addition, the U.S. dollar continued to rise versus the euro and Chinese renminbi and against many Latin American currencies creating a greater currency impact on fourth quarter revenue than we expected. Net of these shifts in currency and macroeconomic factors in the second half of 2018, we strengthened our underlying operational performance and enhanced our earnings growth in the fourth quarter. For the full year, we achieved 4% organic growth compared with 2017 pro forma for Royal. Due to strategic pricing actions and delivery of our targeted cost synergies, we drove steady margin expansion throughout the year. For the full year, organic growth and margin improvement resulted in adjusted EBITDA of $449 million, an increase of 50% versus prior year and an increase…

Thanks Jim. I’ll provide some additional financial details on the fourth quarter as well as guidance for 2019. Revenue grew 13% in the fourth quarter versus last year’s fourth quarter. Organic revenue grew 3.8% versus last year as we realized benefits from pricing actions that we took throughout the year. Volume mix was up modestly and foreign currency had a negative impact of about 5% year-on-year reflecting the strengthening of the dollar throughout the year. On a pro forma basis for Royal, adjusted gross profit margin was up 150 basis points versus last year, driven by strong pricing actions taken during the year and raw material synergies. On a pro forma basis for Royal, adjusted selling, general and administrative expense was down about 2%, reflecting the impact of foreign currency as well as thoughtful control of discretionary expenses. This performance resulted in an adjusted diluted earnings per share of $0.90 for the fourth quarter, up about 27% versus last year. Cash flow from operations was very strong during the fourth quarter, as anticipated. Cash flow from operations was approximately $146 million in the fourth quarter and about $253 million for the year. Excluding cash cost for the Royal acquisition in the fourth quarter of 2017, cash generated from operation increased by 17% in the fourth quarter and increased by 29% for the full year, reflecting the strong profit trends in the business as well as improved working capital management. Strong cash flow allowed us to repay $204 million of debt during the year, beating our target of paying down $170 million of debt in fiscal 2018. That reduced our net debt-to-EBITDA ratio of 4.7x from 5.4x at the end of 2017 based on pro forma combined for the H.B. Fuller and Royal businesses in 2017. With that, I’ll now review…

Thank you, John. New business wins in Engineering Adhesives, effective pricing strategies and synergies from our acquisition of Royal drove strong business results in 2018. This is evident in our solid organic growth rate, underlying double-digit EBITDA growth, 27% EPS improvement and excellent cash flow performance and debt repayment in the fourth quarter. Looking ahead to 2019, we have set guidance that captures our current view that economics uncertainty in China will continue until trade and tariff disputes are resolved. We also anticipate the currency will remain a headwind going into 2019. In terms of sensitivity surrounding our guidance range, our guidance assumes relatively neutral raw material cost, a continued strong dollar and ongoing challenging conditions in China. Lower raw material cost provide the biggest potential positive impact that could enable us to deliver above the midpoint of our guidance range. Improvements in China or a weakening U.S. dollar could also positively impact results. At this point, we do not see a broader economic slowdown outside of China, but if it were to happen, it could negatively impact top line results. However, for H.B. Fuller, a broader slowdown will be offset with lower raw material cost that would positively impact the bottom line. We’d expect raw materials, combined with other actions, will make certainty remain in line with our earnings guidance in the case of a broader slowdown. We estimate that strengthening of the dollar and the change in economic conditions in China negatively impacted 2018 EBITDA by approximately $20 million versus our original expectations, and we forecast an incremental impact of $20 million for these factors in 2019. Our EBITDA growth rate, adjusting for these factors, is between 10% and 12% in 2018 and 2019. This underlying performance is in line with our strategic plan outlined a year ago,…

We’ll now begin the question-and-answer session. [Operator Instructions] The first question is from Ghansham Panjabi of Baird. Please go ahead.

Hey guys, good morning, and happy New Year to you.

Hi Ghansham, happy New Year.

Happy New Year, Ghansham.

Thank you, guys. First off, I guess on the Americas adhesive segment, did the margins for that segment on an EBITDA margin basis come in where you thought it would for the fourth quarter of fiscal year 2018? And you also mentioned, Jim, that expected improving volumes for that segment in 2019. Can you expand on that?

Yes. Yes, I think we said coming into the second of the year that we would be about 17%. Last quarter, we were 18% and this quarter we were 17%. I think 17% to 18% is what we’d expect. So I think it’s just a pattern of how some cost flow through the P&L. But we were pleased with the underlying performance of the Americas. And the pricing work we did early in the year really brought that business into that range that we expect now and going forward. Yes, in terms of volume, as I mentioned a little bit last quarter, we have this Wisdom volume that we exited last year that had an impact. And if you take that out of the quarter – I think, if you take mix and volume together, we were down about 1.6% this quarter. If you take that out, we probably would’ve been slightly positive this quarter, if you took the Wisdom piece out. And that’s a combination of really good strong volume performance in areas like hygiene, packaging and durable assembly offsetting some of our more price-sensitive areas like paper and polymer and a little bit in Latin America, were we had some volume pullback. So I think underlying in the biggest piece of our core business, we see good volume performance that we expect will start showing up in that PVM mix the we present in next year. You’ll also have some price impact that will be positive. So do you want to add anything to that, John?

No, that’s good.

Yes, okay.

That’s helpful. And then, I guess, second, referring to the macroeconomic, sort of, slowdown, you keep referring to China, you mentioned some softness in core Europe, the macro data out of Europe has been weak, construction in the U.S. has been, kind of, choppy. Is the slowdown that you’re seeing from a volume standpoint specific to China at this point? And then what did you – what have you seen in December and thus far in January that gives you confidence on that sort of 3% to 5% core sale growth in 2019? Thanks so much.

Yes. Great. Thanks, Ghansham. Yes, it’s – when you look at Q4, it was predominantly China. We had estimated weakness in China, it was actually worse than we expected. And I commented on our Engineering Adhesives, how strong it was. We actually would’ve done better if we didn’t have a little pullback in China in Engineering Adhesives. And then outside of that, we do see a little weakness in core Europe. As far as the last month or two, I think, we have seen less negative in China, so we think, there’s a little bit of destocking in Q4 that gives us a little positive, right, that there is probably some destocking in the Q4 numbers, but I think, there’s weakness overall in China. For us in Q1, we have both the Christmas Holiday, all the winter months and Chinese New Year all hitting us between December and February. So it’s a weak quarter for us overall. So I think, we expect, because of certain seasonality factors, Chinese New Year where we’re anticipating a little weaker, that you may see a little weaker organic growth down to that lower end of our range, 2% to 3% at the start of the year with maybe as much as 5% currency impact, if you remember last year, because currency was very strong quarter one of last year. So the net revenue will look a little weaker in Q1, but underlying in North America, we see positivity, we’re getting – we continue to get strong wins in Engineering Adhesives, very impressive with what that team is doing in terms of winning in the market. And around the rest of the world, we don’t see any weaknesses so far anyhow in December, January outside of really China and a little bit in Europe.

Perfect. Thank you so much and good luck this year.

Thanks a lot.

The next question is from Mike Harrison of Seaport Global Securities. Please go ahead.

Hi, good morning.

Good morning, Mike.

Wanted to ask about the raw material impact. You mentioned offsetting most of that during the 2018 or fiscal 2018. But in your guidance, it sounds like you’re assuming more of a neutral impact, whereas if you look at some of – where some of the raws have moved up to this point. Is it fair to say that your neutral assumption is a conservative assumption at this point? And I guess, you shared some details on what you’re seeing in terms of profit there.

I’d say our assumption is middle of the road right now. If you recall a quarter ago, there was no talk of raw material declines and lots of talk of raw material increases. So oils come down, you’re right, certain commodity materials have come down, and in China, with the slowdown, we see some things coming on. But 87% of what we buy is not commodity material, it’s specialty materials, they’re supply-demand driven. And I think the – our view today is the net of all that is neutral. Now there continues to be slowdown around the world, there’s some supply-demand moves, oil stays below $50, I think we could see some benefits in this second half of the year, but I would say that our view today is increases have stopped so I think in all those specialty materials, we’re seeing increases stop, certain commodity materials are coming down a little bit. And the world changes a lot in the quarter, as you’d see if you listen to our transcripts and I would say, it’s still a little too early to say we’re going to have a big raw material decline in 2019.

And then wanted to ask about the Engineering Adhesives business. That business, as you pointed out, did hold up very well and it sounds like would have been even better if not for some of the slowing in China. Can you talk about what you did in China, specifically in areas like electronics and automotive that may be showing signs of slowing?

I’d say that most of what we saw in China, the hardest tipped businesses with customers who are exporters. We have customers that buy our product and then export them around the world. Those are the ones that had pretty dramatic downturns. But we did see – we sell products in the areas like hygiene and packaging and especially for higher-end consumers, we did see a slowdown generally. And I would say that my perception, our perception of China is across both the business community and the population, there is a little bit of hesitancy until the trade and tariff dispute gets resolved for people to spend money. So I think people are pulling back generally in the economy, but the hardest piece is that we’re hit at things that were export-driven. For us, in areas like electronics and automotive, these are mostly commercial wins for us. So I think there might have been bigger wins had there been more autos produced, there are more electronic materials, but these are big growth wins where we’ve identified opportunities and won them. So that’s why we’re not seeing as much impact there.

All right, thanks very much.

Thank you, Mike.

The next question is from David Begleiter of Deutsche Bank. Please go ahead.

Thank you and good morning. Jim, in terms of Royal synergies, what are the incremental synergies in 2019?

Yes, so I’ll give a high level, John will give you a little more detail, but I think we still have some raw material synergies coming through. We’re doing a lot more work on indirect savings. John can comment on some of those. And then a couple of plant closures we announced last year will start hitting this year. So those are, I would say, the big – three biggest chunks.

Yes, those are – that’s a very good description. On the indirect side, this is things like MRO as well as service providers that we have got nice wins in the fourth quarter of this year that will show up next year. Jim alluded to manufacturing, we really didn’t have manufacturing cost synergies this year and they will start to kick in. And then on the non-cost side, obviously, the revenue synergies step up pretty dramatically starting next year.

So you assume, we have $15 million to $20 million of incremental synergies for Royal in 2019. I think you’re forecasting the low-end EBITDA growth of roughly $20 million. So my question really is ex Royal, there isn’t going to be much growth, if any, in the base business. Is that an accurate assessment?

Yes, I think, as we alluded to in the script, there is a big impact of the currency that’s flowing through our P&L that hit us for the second half of this year and will hit us even harder during the year – next year. So I think you have to build that into any model that you have, and I think you’ll see a more robust number.

Yes. I think that’s right. I think the impact of currency and obviously, China, we believe if you look at what that impact is in 2019, our underlying growth rate is right in line with what we had expected, kind of, going back a year ago, and the synergies are certainly right in line with expectations as well.

And just lastly, on your long-term EBITDA target, you have pushed that up by a year. What is your level of confidence in actually achieving that number in the 2021 time frame?

I think, the way we look at this is this a – this double-digit EBITDA growth when you build in what’s happening with our cost synergies and the underlying performance of our business is what we expect to see. So if you run the math, it comes out somewhere around that 12-month range. Currencies go crazy, if economies go off, then things will delay that. But I think, strategically, a couple of things you should expect to see from us, this 3% to 5% organic growth rate, this double-digit EBITDA growth, the $600 million debt paydown by 2020 and all that should lead to us in that $600 million range at 2021 depending, of course, what happens in the world, as I said, it change a lot quarter-to-quarter, year-to-year could be a lot. So, but I assure you, we’re driving toward those numbers as quickly as possible.

Thank you.

Thank you, David.

The next question is from Mike Sison of KeyBanc. Please go ahead.

Hey, guys. Happy New Year. Jim, I was wondering if you think about the outlook you have for 2019, midpoint EBITDA $475 million and getting to the $600 million, $125 million, can you maybe walk us through how much of that is going to – will come from organic growth, how much of that will come from the cost savings? And maybe other variables that get to that $125 million over the next couple of years?

Yes, I think the way we see – the plan is no different than what we laid out in our Investor Day, Mike, right? So you have very strong performance in Engineering Adhesives, both top line and margin improvement. So you saw a very nice margin number this quarter, and I think, we’re committed to get up north of 21% by 2020. I think we’re on track to meet or exceed all the numbers we laid out for Engineering Adhesives when we started. The synergy number is another $20 million in cost savings and $15 million in commercial synergies. Both of those are very solidly on track along with the projects that – about 93 different projects that we’re executing on this year and next that will bring those to fruition. And then I think the thing you see underlying in all our businesses is our real focus on EBITDA margin improvement. I mentioned all five of our businesses showed EBITDA margin improvement. And that’s just good blocking and tackling, looking at efficiencies in our manufacturing plants, managing our product portfolios and pricing. So that’s the third bucket of what we see. So Engineering Adhesives, Royal synergies and then this operational improvements, and if you go back to our Investor Day, the numbers are right there. And I think, you take out some of this currency and China effect, and you’ll see that it’s fundamentally exactly what we talked about at Investor Day, and that’s what happened in 2018 and that’s what we’re seeing in 2019.

Right. Okay. And then just one quick follow-up on Engineering Adhesives again, it’s – I mean, the growth rate has been pretty impressive for the last couple of years and the outlook, again, pretty impressive given the confidence. So can you maybe walk through maybe in terms of as we hear, where you win your share, what technologies are really driving that growth? How much of the growth this year in 2019 is going to be driven by what you’ve won already so you got pretty good visibility? Just maybe breaking down that double-digit growth again would be helpful?

Yes, I think, the biggest driver of – well, one of our very nice businesses is the electronics business. We built that business organically by understanding some opportunities in the market leveraging technology. That business has now become a sizable business that’s growing very nicely. And we have had a couple of touches of acquisitions that have helped to grow. But it’s a very sizable double-digit growth, both by penetrating the globe. So we started with a couple of big customers on the West Coast and a great job with Chinese customers, we’ve now penetrated a customer in Korea. So all of that’s really going very well in our electronics business. And we’re also moving to different applications. Your cellphone that you’re carrying in your hand, Mike, has 100 different adhesive applications. So as there’s a problem we’re solving it, we’re getting the opportunity. The U.S. assembly market is a really nice one for us. If you recall, we bought Tonsan with a lot of technology, bought Royal with a lot of packaging capability and with the Cyberbond, we got some great talent. All of that is coming together to some very nice growth rates in North America, as we’re leveraging technology, people, plants to really go nicely in our North America, what I’ll call our general industry’s part of the business. We’ve got the world-leading position in solar. As solar moves outside of China, Tonsan wouldn’t have been able to deliver that. We’re getting solar wins around the world as new demands are coming on in the solar area. And then aerospace, I think, is another great one. Royal had done some great work to get themselves specified on some very important specifications. With H.B. Fuller’s infrastructure around the world, we’ve been able to accelerate the growth in some of those spaces. So that would four or five good examples. I have a long list of others, Mike, but it’s really an energizing team, I love spending time with that team. And when we’re together, we’re talking about all kinds of opportunities that exist around the world and just leveraging the capabilities of H.B. Fuller. Does that help to give some color?

Yes. That’s correct. Thank you, Jim.

Thank you.

The next question is from Eric Petrie from Citi. Please go ahead.

Hi, Good morning Jim.

Good morning, Eric.

When does your guidance assume trade uncertainty with China revolves? I’m just curious that if you could split out that $40 million EBITDA impact in 2019 between China weakness and FX fluctuation?

Yes, we don’t have that crystal ball. So I think we’ve assumed that it’s an extended period of time for 2019. I think, that’s the right.

Eric, was your question how much of the impact in 2019 is currency and how much is China? Was that one of your question?

Yes.

Yes. That’s s roughly half and half. The impact of currency is roughly half of the $40 million and China is the other.

Okay. And secondly, are you seeing any impact on durable assembly from slowing manufacturing or housing markets? And you noted destocking in China, is there is a possibility for inventory destocking in other regions?

Yes, the only durable assembly slowdown we’ve seen so far, Eric, is in the recreational vehicle market. So – and I think there was an overstocking there and you see some slowdown there. But I would say, as far as North America and Europe are concerned, we haven’t seen a real fundamental slowdown in the durable assembly space outside of China.

Great. Thank you.

Thank you.

The next question is from Vincent Anderson of Stifel. Please go ahead.

Hi, good morning. Thanks for taking my question. I just want to get back to specific markets that you’re excited about next year. When you look at 2019, are there any areas where there are outsized numbers – an outsized number of new product development cycle is coming out? Or you believe you’ll have a good opportunity to go and win additional business? And that’s outside of Engineering Adhesives as well. And then on the other side of the coin, are there any other areas where you expect you’ll be able to bell out of lower margin businesses? And I know, across the broad portfolio there’s probably many but anything specifically lumpy to 2019 would be helpful.

Yes. I think, across our businesses, we’ve got some good momentum in our durable assembly business. Part of that is driven – I’ve talked in the past about how durable assembly is a sister market to Engineering Adhesives. So specifically in the insulating glass, we have some new technology that’s driving growth, but across a bit of our durable assembly, we have the same kind of dynamic that we talked about in Engineering Adhesives, just not quite as dramatic. That’s very nice work that’s going on. We are also, I think, doing a very nice job in our hygiene business with core customers and local customers around the world. I think, we’ll see good growth in those two areas. In terms of slowness, I mentioned RV, I think we’re going to see a little bit of slowdown there. And these old core businesses, these pay-per-conversion type businesses, they continue to be a bit of a drag. And the only other area where there is a shift, that is some of this portfolio work we’re doing in our Construction Adhesives businesses. So that’s a really strategic move to reshape the portfolio and that will cause a bit of a top line slowdown there, but it’s pretty strategic in terms of us improving profits by pulling out some cost.

That’s helpful, thanks. And if I could drill back into solar, you mentioned the opportunity outside of China, but in 2018 photovoltaics in China certainly had some pretty big issues with the cancellation of tax credits. Can you update us today where you’re exposed within the supply chain geographically? And what that business will look like – looks like going into 2019, assuming 2018 gives us some easy comps, at least in China?

Yes. I think it’s a great point. Again, because we’re still fragmented, we don’t go too deep into any one of these areas because they’re not that large in the scheme of H.B. Fuller, but they’re sizable businesses on their own. But, yes, it was a tough year in China for solar, but we did pretty well. And – but for us, I think, we see the opportunity. Yes, there’s probably some upside in solar in 2019 versus 2018, because of some of the regulation changes or the government incentive changes there. But especially for us, leveraging this around the world is the opportunity. There are a number of manufacturers and different applications that we see as opportunities for us as manufacturers now start transplanting their facilities around the world. So it’s a – solar should be a net positive for us in 2019, both in China and especially outside of China.

All right. Thank you.

Thank you.

The next question is from Dmitry Silverstein of Buckingham Research. Please go ahead.

Hi, good morning. This is Wahid Amin on for Dmitry. Just a quick question on your Engineering Adhesives. Pricing was about 2.1% above year-over-year. Would you mind breaking that out a little bit and talking on how sustainable that is going forward? And is that mostly because of contracts from the beginning of the year flowing in towards the end of the year? Or is it something else that I’m missing there?

Yes, I would say, well, Engineering Adhesives, as we’ve talked about at the Investor Day, is one of the areas where we have the highest degree of pricing power, typically though with the way we manage our margins and our pricing areas based on new specifications and new wins. So we were a little slower in getting pricing up in that business as we were focused on growth, but towards the second half of the year, we got a good price and momentum and that’s very sustainable in that business.

Thank you. And just one more here, we’ve seen a lot of shutdown in the China’s environmental players. Would you mind speaking on how that will affect pricing moving forward? And if there is a new opportunity for increasing market share there?

I’m sorry, you said a shutdown in environmental players, what did you mention?

Yes, for environmental pollution within China, there’s been shutdowns in some chemical producers.

Yes. So, we haven’t seen a big impact of that yet in this year, although, it’s been a recurring theme in the next couple of years. What we are seeing is an oversupply of raw materials, so that’s helping us from a raw material cost standpoint in China. I think it’ll be interesting to see what happens this winter, how much of a pullback there is. But, right now, most materials are long in China because of the slowdown. And today, we haven’t been impacted by any shortages because of environmental like shutdowns in China.

Thank you very much.

Thank you.

The next question is from Christopher Perrella of Bloomberg Intelligence. Please go ahead.

Good morning, thank you. A question on the raw material outlook. I know for the full year, your expectations are very neutral environment. How long before you hit the inflection point on the raw materials in terms of tipping to balance? I expect 1Q is probably going to still be a headwind. And does your pricing initiative run slower as that raw materials become neutral to positive in the back half of the year?

Yes, I think, it’s a great point year-on-year, I would say, you’re probably right, our Q1 raw materials are going to be a little bit higher but pretty neutral, I think, is where we are seeing, especially when you consider the impact of China. And I would say that our pricing now will become more opportunistic. I think there are specialty products, lower volume opportunity opportunities where you will see pricing leverage. But the very aggressive pricing strategy that we started early last year and really paid off for us. I think one of the key drivers of our success was our ability to do that upfront and get after pricing was very helpful for us in terms of positioning ourselves for the second half of the year and into 2019. But those more aggressive approaches will turn off here in Q1.

All right. And then a bit of a housekeeping. I would have missed this, Wisdom deselection. Is that – that’s pretty much completed at this point or is that dragged a bit in 1Q? And also with the Construction Products, I guess that’s going to be a negative mix effect for the balance of the year? Or did you start that already in the back half of 2018?

Yes so – so, yes, the Wisdom has two out of three months in Q1 so it’ll be two-third of the size this quarter. And then the construction products portfolio shift was really a Q4 – started impacting the numbers in Q4, a little bit in Q3. So we mostly have three quarters to work that through.

Alright, thank you very much, appreciate your time guys.

[Operator Instructions] There are no other questions at this time. This concludes our question-and-answer session. I would like to turn the conference over to Jim Owens for closing remarks.

Thanks, everyone, for joining us today and thanks for all your support for H.B. Fuller.

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.