Release Date: June 27, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- H.B. Fuller Co (FUL, Financial) reported a 10% year-on-year increase in adjusted EBITDA to $157 million, with a 120 basis point expansion in adjusted EBITDA margin to 17.1%.
- The company achieved organic volume growth of more than 3% during the quarter, with volume up in all three global business units.
- H.B. Fuller Co (FUL) completed the acquisition of ND Industries, which is expected to contribute $80 million in sales at a greater than 30% EBITDA margin.
- The company reinitiated its share repurchase program, acquiring 182,000 shares in the second quarter.
- H.B. Fuller Co (FUL) has a robust M&A pipeline and continues to evaluate potential transactions to drive growth and shareholder returns.
Negative Points
- Organic revenue was flat year-on-year as volume growth was offset by reformulation activity and index-based pricing adjustments.
- Currency had a negative impact of 1.7% on revenue, and the strengthening US dollar is expected to have a continued negative impact.
- The hygiene market continued to negatively impact organic sales development for HHC in the Americas region.
- Adjusted selling, general, and administrative expenses were up 9% year-on-year, driven by acquisitions, higher wage inflation, and higher variable compensation.
- The company's net debt to adjusted EBITDA ratio increased from 2.8 times to 3.1 times sequentially, reflecting the acquisition of ND Industries.
Q & A Highlights
Q: Can you provide some added detail on segment volumes during the quarter, specifically each segment? And then, how the third quarter has kicked off, and maybe, what your budgeted volume expectations by segment are for the year?
A: Highest volume performance was logged by our construction adhesives business, with double-digit percent growth. EA showed mid-single-digit volume growth, and HHC had low-single-digit volume growth. We were already projecting mid-single-digit volume growth for the second half of the year, and we have now seen that earlier than planned.
Q: Can you provide some added detail on the benefit from the cost optimization and restructuring of the business that's gone on so far? How much have you achieved to date?
A: We announced a $45 million restructuring program over three years. In 2023, we delivered about $10 million. This year, we're on track for about $20 million of restructuring savings, with 35%-40% of that in the first half and the rest in the second half.
Q: Can you address a few questions related to the ND Industries acquisition? What are your early experiences, and what does the integration roadmap look like?
A: We're baking in about $13 million of benefit from ND in the second half. The team has been amazing, and we acquired some terrific technology and people. The integration is based on our standard playbook, and we are already looking at opportunities to expand the business geographically.
Q: Can you comment on your price experience in each of the segments in the second quarter and pricing prospects for the fiscal third quarter?
A: HHC has a lot of index-based pricing agreements, which are leveling out and expected to increase over time. We are also reformulating products to lower costs without impacting margins. For the full year, we are projecting a price impact in the range of negative 1% to 2%.
Q: What is the volume outlook for HHC for the year, considering ongoing softness in the hygiene space?
A: Hygiene continues to be a soft spot but has improved from Q1 to Q2. We expect improvement each of the next two quarters. Overall, HHC organic growth for the year will be slightly negative, driven by pricing, with volume growth offsetting some of that.
Q: What are your expectations for capital expenditures and free cash flow for the year?
A: Our capital forecast remains at $140 million for the year. Our M&A pipeline is robust, and we are considering expenditures of up to $350 million in M&A this year. We will continue to repurchase shares to offset equity-based compensation programs.
Q: What kind of growth rate do you expect for ND Industries in sales over a three- to five-year period, and what has been its historical growth rate?
A: We are looking for revenue growth of greater than 10% per year for ND Industries. Historically, it has not performed to that level due to being capital constrained, but we are ready for the next stage of expansion.
Q: Can you walk through the volume growth in key end markets within the engineering adhesives business?
A: Strongest growth was in automotive, aerospace, electronics, RV, and glass. Automotive showed double-digit increases in various applications. Aerospace and electronics have been growing rapidly, with significant contributions from our operations in China.
Q: Is the 20% EBITDA margin level something that we should expect you to achieve in the second half for the engineering adhesives business?
A: We were at 18% in Q2 and expect that to step up in the second half, closer to 20%, driven by continued volume improvement and contributions from ND Industries.
Q: Why did you reduce the top end of your organic sales guidance from 3% to 2%?
A: We adjusted our guidance due to a more negative impact from price, changing our full-year price impact from negative 1%-2% to negative 2%-3%. However, we increased our volume assumption from 2%-4% to 3%-4%.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
