Ladies and gentlemen, thank you for standing by. My name is Krista, and I will be your conference operator today. At this time, I would like to welcome everyone to the H.B. Fuller Second Quarter 2025 Investor Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Thank you. And I would now like to turn the conference over to Steven Brazones, Vice President of Investor Relations. You may begin.

Thank you, operator. Welcome to H.B. Fuller's Second Quarter 2025 Investor Conference Call. Presenting today are Celeste Mastin, President and Chief Executive Officer, and John Corkrean, Executive Vice President and Chief Financial Officer. After our prepared remarks, we will have a question and answer session. Before we begin, let me remind everyone that our comments today will include references to certain non-GAAP financial measures. These measures are supplemental to the results determined in accordance with GAAP. We believe that these measures are useful to investors in understanding our operating performance and to compare our performance with other companies. Reconciliation of non-GAAP measures to the nearest GAAP measure are included in our earnings release. Unless otherwise noted, comments about revenue refer to organic revenue, and comments about EPS, EBITDA, and profit margins refer to adjusted non-GAAP. We will also be making forward-looking statements during this call. These statements are based on current expectations and assumptions that are subject to risk and uncertainties. Actual results could differ materially from these expectations due to factors covered in our earnings release, comments made during this call, and the risk factors detailed in our filings with the Securities and Exchange Commission, all of which are available on our website at investors.hbfuller.com. I would now like to turn the call over to Celeste Mastin. Celeste?

Thank you, Steven. And welcome, everyone. Our strong financial performance in the quarter is a testament to our team's disciplined execution in a highly dynamic environment, and we are performing better than the underlying markets. We remain nimble and focused on delivering positive organic revenue growth while managing costs in a deliberate manner and leveraging our global sourcing infrastructure to adeptly respond to geopolitical and market uncertainties. Our EBITDA margin expansion highlights the success of the actions we are taking, which include an increased focus on pricing, cost savings efforts, and our active portfolio shift towards higher growth, higher margin markets. Global economic activity remains subdued, but we continue to perform well and are raising our full-year outlook to reflect our strong execution. Looking at our consolidated results in the second quarter, our organic sales trend remained positive, driven by organic pricing growth of 0.7% during the quarter, partially offset by slightly negative volume. From a profitability perspective, we executed well and delivered strong results driven in part by cost savings and targeted price actions. Our ongoing portfolio transformation, including the strategic addition of higher margin businesses and divestiture of the lower margin flooring business, drove most of the year-on-year margin increase in the quarter. We grew EBITDA 5% year on year to $166 million and expanded EBITDA margin by 130 basis points year on year to 18.4%. Now let me move on to review the performance in each of our segments in the second quarter. In HHC, organic revenue increased 1.8% year on year, driven by both positive volume and price. Strength in medical and flexible packaging was partially offset by weakness in end-of-line packaging and beverage labeling. EBITDA margin of 15.6% was up nearly 300 basis points versus the first quarter, reflecting seasonally higher volume and increasing pricing…

Thank you, Celeste. I'll begin with some additional financial details on the second quarter. For the quarter, revenue was down 2.1% versus the same period last year. Adjusting for the flooring divestiture, net revenue was up 2.8% year on year. Currency had a negative impact of 1.2%, and the net impact of acquisitions and divestitures decreased revenue by 1.3%. Adjusting for those items, organic revenue was up 0.4%, with pricing up 0.7% and volume down 0.3% year on year. Adjusted gross profit margin was 32.2%, up 110 basis points versus last year, driven by cost savings, the impact of acquisitions and divestitures, and targeted pricing actions. Adjusted selling, general, and administrative expense was up 2% year on year. Adjusting for the net impact of acquisitions and divestitures, adjusted SG&A was flat year on year, reflecting strong expense management. Adjusted EBITDA for the quarter of $166 million was up 5% year on year, driven principally by targeted pricing actions, cost savings efforts, and the net benefit from acquisitions and divestitures. Adjusted earnings per share of $1.18 was up 5% versus the second quarter of 2024 due to higher net income and lower shares outstanding. Second quarter operating cash flow of $111 million increased $29 million or 36% year on year. Cash flow from operations was also up versus the first quarter, reflecting higher net income and a slight improvement in working capital. Net debt to adjusted EBITDA decreased sequentially from 3.5 times to 3.4x at the end of the second quarter, reflecting growth in EBITDA as well as lower debt balances as a result of improved cash flow. We expect to continue to further reduce our leverage ratio in the second half. During the second quarter, we repurchased 300,000 shares, bringing the year-to-date total to approximately 1 million shares. With that, let me now turn to our updated guidance for the 2025 fiscal year. As a result of our strong financial performance and the assumptions that Celeste laid out earlier, we are updating our previously communicated guidance for fiscal 2025 as follows. Net revenue is now expected to be down 2% to 3% year on year. We still expect organic revenue to be flat to up 2% year on year, and we now expect foreign exchange to adversely impact revenue by between 1-1.5% year on year. Adjusted EBITDA is now expected to be in the range of $615 million to $630 million, equating to growth of 4% to 6% year on year. We now expect fully diluted shares outstanding for fiscal 2025 to be in the range of 55 million to 56 million shares. Combined, these assumptions now result in full-year adjusted EPS in the range of $4.10 to $4.30, equating to year-on-year growth of between 7-12%. We continue to expect full-year operating cash flow to be between $300 million and $325 million. Finally, we would expect third-quarter EBITDA in the range of $165 million to $175 million. Let me turn the call back over to Celeste.

Thank you, John. At H.B. Fuller, innovation isn't just about new products. It's about solving real-world challenges alongside our customers. We are privileged to work with a diverse and innovative group of customers, and today I am excited to highlight the winners of our second annual H.B. Fuller Customer Innovation Awards, which honor groundbreaking innovations that leverage adhesive technologies to improve the world around us. CMC Packaging Automation was recognized for its revolutionary automated packaging technology, which creates right-sized packages on demand, significantly reducing waste and inefficiencies driven by the rise of e-commerce. Chengdu Xinyu was recognized for advancements in automotive lighting that improved visibility and road safety through better heat management, ensuring long-lasting and efficient lighting systems. MITRE Brands received an award for creating a triple-paned glass insulating unit in collaboration with Corning Incorporated, which enhances thermal efficiency and reduces energy consumption while using the same frame dimensions as dual-pane systems. Georgia Pacific was honored for its innovative use of water-based barrier coatings for protein-based packaging, which offer a sustainable alternative to traditional wax-based coatings. Congratulations again to these innovative companies. We are proud to celebrate your achievements and look forward to continuing our journey of innovation together. At H.B. Fuller, sustainability is more than a commitment; it's a catalyst for innovation, operational excellence, and positive impact. We're proud to share the progress we're making toward a more sustainable future and encourage you to learn more by checking out our newly released sustainability report, which launched on our website earlier this week. We're also thrilled to announce that Newsweek recently named H.B. Fuller as one of the world's greenest companies in 2025. We appreciate this honor, which recognizes superior environmental sustainability performance. Finally, I would like to announce that Steven Brazones, our Vice President of Investor Relations, has announced…

Thank you. We will now begin the question and answer session. Your first question comes from the line of Ghansham Panjabi with Baird. Please go ahead.

Yes, good morning. Thank you, operator. Good morning, everybody.

Good morning, Ghansham.

I guess, first off, you know, big congrats to Steven on his retirement. Obviously, he'll be missed by our team. And congrats to Scott as well. Look forward to working with you. I guess, Celeste, going back to the second quarter and the margin performance in EA, which seemed to be the outlier on the plus side, very strong margin performance. Can you just give us a bit more color on that in context of some of the end markets being mixed and also solar being down as you noted in your prepared comments?

Absolutely. If you look at EA's performance in the second quarter, the really outstanding contribution there was twofold. One was the ND Industries acquisition performed better than we anticipated. So we like to see that outperformance to the deal model. And secondly, that team, in addition to others across H.B. Fuller, but in particular EA, really showed very strong cost control. That led to the increased expansion in margins. Now, of course, we're seeing strength across that business in a number of their end markets. If you look at the automotive business, actually anything transportation, particularly in Asia Pacific, our team there has just done a fantastic job expanding our business from what has historically been more focused on interior trim to exterior trim applications, to the powertrain, to various other sealant applications and thermal management in not just batteries, but braking systems. And they've done an excellent job growing share.

And then for my follow-up, as you think about volume velocity across your different business units, how did fiscal 2Q compare to the previous couple of quarters? And then just related to that in terms of solar, what is the reasonable timeline for Chinese solar to inflect positively year over year? In context of easier comps coming up?

Yes. So we'll start to see less of an impact from the solar space toward the end of this year. And when I say that, I'm referring to the top line. The team has already taken steps to reposition that business and to mitigate the EBITDA margin impact of that particular business on their results. So if you look at the impact of the solar space Q2 of last year on margins in EA, it was about 120 basis points. This quarter they reduced that to a negative 80 basis point improvement or a negative 80 basis points. So they've improved margins and they continue to work on doing that by shifting the business into more differentiated applications and spaces. As far as volume velocity, across the business, are you asking about across EA in particular? Ghansham, or across all the end uses? End applications? Yeah. Sorry to clarify, across the portfolio is the last the whole company. Across the portfolio? Yeah. So John, do you want to jump in on this one?

Sure. So if you look at total company level, the volume trends are pretty similar. We were up about 2% on organic volume in Q1. It was flat in Q2. I would say we saw some positive momentum in places like automotive, which actually was very strong in Q1, but had a slightly stronger Q2. Flexible packaging actually probably saw a little bit of acceleration and medical. I would say those are the places seeing a little bit of slowing as we highlighted in some of the construction-related markets, particularly those that have a bigger exposure to residential. But overall, one of the things we do is we measure how many of our end markets are showing acceleration, how many are showing deceleration. About half were showing acceleration, half showing some level of deceleration. So it's a little bit softer volume in Q2. I think it's predominantly related to some of the residential construction softness. Most of the rest of the portfolio was pretty similar in terms of volume from Q1 to Q2.

Yes. The one other area I would add there, Ghansham, is that in China, we also saw a temporary, I'll call it a temporary, what I think is a temporary pause in export markets in China in Q2. Our electronics business, for example, is one that has done well and has continued to take share. We really saw that cool off given the underlying market for electronics exports in China in Q2. But we feel very strongly about that business and its ability to overcome that in the second half of the year. Because they have taken share and they have become parts of new products being developed and introduced in the second half that we'll see volume from. Upcoming.

Fantastic. Thank you both.

Your next question comes from the line of Patrick Cunningham with Citi. Please go ahead.

Good morning, Patrick.

Hi, good morning. I'd like to echo congratulations to Steven. It's been a pleasure working with him and looking forward to continuing the partnership with Scott. But I guess, first of all, I mean, maybe just digging into that weakness in electronics a bit more, it seems to be a deviation from prior quarters, and I think you hinted at some export weakness and trade uncertainty. But I mean, are you seeing in terms of just underlying market? What gives you confidence that this is sort of normalizes back to your sort of consistent growth rate there because it just looks surprising just in terms of that's been one of the strongest categories. But you obviously still had quite a strong quarter within Engineering Adhesives. So just any additional commentary would be helpful.

Yes. We had a very good quarter in Electronics in The U.S. Took some exciting new business there. We had wins in aerospace and defense in particular in radar assembly, in pressure sensors, in tires, in fighter jet fiber optic communications, all really good growth in our U.S. Electronics market. And we've taken good positions in growing end markets like electronics for medical devices, for example, glucose monitoring systems, as well as automotive electronics, because there's a lot more electronics in an automobile today. So those are good examples of ways that we've expanded our electronics business into faster-growing electronics applications and also taking share in those new applications. And as I highlighted, yes, we saw a pause in electronics in Asia Pacific this quarter, which is unusual. However, what we see is that that underlying export market for electronics was weaker in Q2 coming out of China. But again, we've taken some new business with some of the new designs being introduced in the second half with multinationals, there in particular that we'll see the benefit from upcoming in the remainder of the year. So I feel that we're in a good position in the electronics business. It was just notable that it was slower this quarter than it has been in previous quarters. And we're very pleased that our EA business was able to deliver on so many other segments and overcome that challenge.

Very helpful. And then how should we think about the progression of price cost and margin profile specifically for HH given what appears to be you're getting strong price there, you've got some high margin acquisitions starting to have an impact. I guess, if the underlying volume environment stays relatively stable, should we start to see more significant year on year margin expansion within that segment?

Yes. In fact, Patrick, the you know, what I highlighted during the last call and we included in the script is just recall this reference to $55 million call it, spread benefit in 2025 that you will see. So that's benefits from raw material cost reductions and from pricing. So today through Q2, raw material cost was higher than it was the previous year. But the benefits that we've highlighted you're going to see really back end loaded here in the remainder of this year. A lot of that will happen in the HHC business. And the HHC business is performing very well. We've seen this medical adhesive business growing successfully there. That's contributing to a stronger margin profile. Also in flexible packaging, we've taken a significant amount of share basically with our ability to develop and enable our customers a solution that solves global regulatory compliance challenges and that really simplifies their product profile given the supply chain challenges that are happening at this point in time. But even more interesting to me is the HHC's team's ability to really address some of these what you would think would be slower growing legacy markets. Tissue towel is a great example. We'll call it the premiumization of toilet paper and paper towels is happening as multiple plies are being used that increases the amount of adhesive required and actually oftentimes even requires a higher performing more differentiated adhesive to meet the challenge. So there's a lot going on in that space and the team is executing well. Growing margins and bringing new product ranges and new product lines out to solve new problems in the space.

Very helpful. Thank you.

Your next question comes from the line of Kevin W. McCarthy with Vertical Research Partners. Please go ahead.

Good morning, Kevin. Thank you very much. Good morning, Celeste. And Steven. I'll add my congratulations on your retirement. You will definitely be missed. And Scott, look forward to talking with you even more frequently. I wanted to ask Celeste about your view of the quarterly cadence of EPS that's embedded in your new range of $4.10 to $4.30. If I look back at history, it seems that it's often the case your November quarter is stronger than the fiscal third quarter, but that was not the case last year. So maybe you can kind of talk through how you're thinking about the flow through given the comparisons that you had last year?

Yes, Kevin, it's John. I'll try to field this one. So I think this year will look more like kind of a normal H.B. Fuller year in terms of the cadence of the quarter. So you're correct. Last year, I would say was an anomaly. We had a number of headwinds in the fourth quarter, which resulted in lower EBITDA, lower EPS. I think we view this year as being more similar to maybe if you went back two years to 2023. Where you'll see a modest step up in EBITDA and EPS in Q3. We gave the guidance on where we think that range should be and then likely a further step up. So that's mostly a reflection of volume, being a little bit higher in Q4 than Q3. But we also expect this pricing and raw material momentum to show up a little bit bigger in Q4 than Q3.

I see. Very helpful. And then John, I was wondering if you could comment or elaborate on your view of the capital expenditure trajectory. Kind enough to give us pretty full cash flow statement with the release. So I look at the first half, I guess you spent maybe $65 million versus $90 million in the first half of last. So that's running down quite a bit. What are your thoughts on the back half and the full year? And then I guess related to that my recollection is if we look ahead to '26 and beyond, at some point, maybe you have a step down related to your SAP project. So perhaps an update on that aspect of it would be helpful.

Yeah. So, yeah, I would say we're a little bit behind in terms of capital spending year to date versus our budget. I would expect we'll close that gap in the back half of the year. We guided to $150 million of CapEx for the full year. I think we'll get there. I think there's a little bit of risk. There are some large chunky projects that will happen in the back half of the year. Looking forward, we talked about the fact that with this footprint consolidation, we're going to have about $50 million, $40 million I guess is the number of incremental CapEx this year, probably a similar number next year. But you are right, we will start to come to the end of our SAP deployment at the end of next year. We probably have about $20 million of capital associated with that project on an annual basis. So doesn't mean there won't be any capital, but that will step down significantly. And we also expect as we go from roughly 80 manufacturing facilities down to 55 that will reduce maintenance capital. So we don't really have a new updated assumption for let's say beyond 2026. But I would say that we would hope to see that step down a little bit as we go forward.

Perfect. Thank you so much.

Thanks, Kevin.

Your next question comes from the line of Jeff Zekauskas with JPMorgan. Please go ahead.

Good morning, Jeff. Hi, good morning. Maybe first some housekeeping question. Your acquisition project costs were $3.6 million in the quarter, but I don't think that you bought anything. So why the $3.6 million in spending? And does that drop off in the second half? And what was your pension income in the quarter?

So, yes, so the acquisition costs in the second quarter primarily related to some lingering costs associated with the flooring divestiture. So I would anticipate that those will tail off in the second half of the year. We do have some ongoing deal evaluation-related costs that will continue through the year. But I think we should see a little bit of step down. Pension income in the quarter was about $5.7 million, and that compares to about $4 million last year in Q2.

And then is it the case that your raw materials are sequentially declining? And as far as demand goes, it's you cited some slowness in domestic home construction. Is it fair to say that outside of that, business is pretty steady across the geographies?

Yes. If you're referencing The U.S. in particular, Jeff, true, we are seeing a decline in some volumes as a consequence of lower residential activity. Now only less than 6% of H.B. Fuller's revenue comes from residential construction. So we're not going to see that that's not going to cause a very big swing. In The U.S. in particular, our construction business overall remained good with roofing in particular strong this quarter. And yes, I mean, you look at pricing in all of our GBUs in The U.S, we performed better in the second quarter. EA and HHC both showed better volume growth. In The U.S. in the second quarter, albeit not great volume growth. So it was pretty stable and demand is pretty consistent there. You asked about raw materials. Raw materials do continue to decline. As I mentioned, they're still up year on year. But we've taken some actions to reallocate raw materials to different suppliers in Q1 that will have an impact on our overall raw material cost throughout the course of the second half.

Okay, great. Thank you so much.

You bet.

And as a reminder, if you would like to ask a question, your next question comes from the line of Mike Harrison with Seaport Research Partners. Please go ahead.

Good morning, Mike. Hi. Good morning, Thanks for taking my question. I want to say my congrats to Scott and best wishes to Steven on your retirement. It has been really nice working with you over the years. Wanted Celeste, I wanted to see if you could talk at all about overall volume trends as you looked from kind of March, April, May and then into June so far, and I'm kind of curious when exactly did the pause in China exports happen? Like, was there a specific month when you saw that and have you seen recovery here in June?

Yes. So if you look throughout month by month throughout the second quarter, overall what we experienced was really just slightly negative to flat volume throughout. There was not a big differentiation between from one month to the next. Now the only caveat I would make there is that in our BAS business, we did see more weakening in volume performance in P6. So in May, than in the previous two months. And again, as we look out to the second half, our guidance includes an impact of a slower construction market as a consequence. As it relates to China in particular, I can't point to a particular month. I don't have that level of precision to really do that. But what I would say is that later in the quarter, we experienced more of this pause in the electronics market. I think you'll see that extend for a couple more months before the actual improvement in volumes in electronics in Asia picks up because of the new designs that we have that we've become a part of. So again, temporary kind of call it later second quarter and probably will continue a month or two more.

All right. That's very helpful. And then I wanted to dig in a little bit on some of your comments on packaging within the HHC business. I was on a plane yesterday, and sitting near me was eating crackers out of what would be a flexible package that would think would have traditionally been a cardboard box. And so I'm curious if some of the end-of-line weakness that you're seeing in the strength in FlexPack is maybe some shift away from traditional cardboard packaging and growth in a flex pack that might have, like, a resealable opening on it. Is that happening? And how is that benefiting your business?

Yes. So that's a viable hypothesis, Mike. FlexPack in particular is growing in some of the more developing nations in the world faster like Latin America, India, parts of Asia. But still growing. Is it growing faster than typical cardboard and aligned packaging? Yes, it is. That said, the strong outperformance that we've had in the Flex Pack market has really been more a function of share gains than the market growth. There's not a lot of differential in these European or U.S. markets over the last two or three years in flexible packaging growth rates. So I believe it is more so the solutions we're bringing to customers and the shifting that's happening around regulations, the increasing demands on customers due to supply chain disruption and our ability to provide simpler solutions that have broader applicability that's really driving our growth rate there.

In terms of the adhesive that's used in a FlexPack, though, that is a more differentiated and I guess, more qualified higher-end adhesive than what you use in a cardboard package. Is that correct?

Yeah. It's definitely a more demanding application. That's absolutely correct.

All right. Thank you very much.

Thanks a lot, Mike.

Your next question comes from the line of Rosemarie Morbelli with Gabelli Funds. Please go ahead.

Hi, good morning everyone.

Hi. Good morning. Thank you, everyone, and best of luck to Steven on his next chapter. You will be thoroughly missed. And Scott, you will be very capable, but you have big shoes to fill. I look forward to talking with you going forward. Now most of my questions have been answered, but I was wondering, Celeste, even though you talked about the difficulty of estimating the impact from tariffs. If we assume, which of course is anybody's guess, that the level is going to be whatever has been announced to date, what would be the impact on your the direct and indirect impact and which categories would be more affected than others?

Yes. Recall, Rosemarie, that on average, 90-97% of what we sell in a region we make and source there. In The United States, that's 99%. And in China, that's 96%. So from a direct tariff impact, there's a limited effect that we by default will feel. Now there are actions that the team has taken. I don't want to minimize this because they're doing great work throughout April meeting twice a day to ensure that as they understand the tariff implication, at present that they're able to offset the direct impact of that through either sourcing solutions maybe reallocating product to a different supplier or renegotiating with current supplier. Or putting through targeted pricing actions to offset. So from a direct impact, we won't see an impact because of the work that's being done by dedicated people across H.B. Fuller. From an indirect perspective, we addressed in the script this concept of share shifting. I think we're going to see that. We're going to see some business shifting between customers in any given region, we're well positioned to manage that as well. As you know, we have a global footprint. So if product needs are shifting from one region to another, the likelihood is that we'll be working with a customer in a different region that picks up the business. Or if there's a shift within a region again it's highly likely given the thousands and thousands of customers that we work with that we will be able to pick up the business from another angle through another customer. The biggest question I think Rosemarie and it's what we all have as businesses is what will be the ultimate volume impact of tariffs globally once there is some certainty around a tariff program. And that's hard to know. So the way we look at that is we need to be prepared for potentially lower volumes given potentially more constrained economies. And you saw the impact in this quarter of the cost reduction efforts we've taken in advance of that to try to get ahead of it. And again, the work that we have started already to drive cost reduction efforts throughout our raw material base will also be more evident and something we'll use to mitigate lower volumes in the second half should they come to pass.

Thanks. That is very helpful. You mentioned something in your prepared remarks, Celeste, regarding your work with different categories I had not on, which would be the defense area. You mentioned adhesives for radars and so on. Could you give us a better feel for how big that business is? And obviously, we are in a world where there going to be the need for more defense. So what could we see from your end?

Well, you know, Rosemarie, that this business of ours is so diversified that there there's no single market segment region combination that represents more than 5% of sales. And so aerospace is another good example of a differentiated fast-growing high-margin space within our overall network. It is growing quickly and we anticipate that'll still continue to be the case. Will it have an outsized material impact ultimately on H.B. Fuller? Maybe in a decade. But, you know, in the near term, that growth is while fast, still on a smaller base.

Thank you very much.

And that concludes our question and answer session. And I will now turn the conference back over to Celeste Mastin for closing comments.

Thanks, everyone, for joining this morning. We look forward to speaking with you again next quarter.

And ladies and gentlemen, this does conclude today's conference call. Thank you for your participation, and you may now disconnect.