HB Fuller (FUL -8%) is experiencing a decline after reducing its FY24 adjusted EPS and EBITDA guidance. This follows a Q3 earnings miss and lower guidance. As the world's largest pureplay adhesives company, FUL is affected by a sluggish manufacturing environment, impacting its products used in various consumer and industrial goods.
- FY24 revenue guidance remains generally in-line, but adjusted EPS guidance has been significantly reduced to $3.84 from $4.10-$4.20. Adjusted EBITDA is now expected at $594 million, down from $610-$620 million, indicating a weaker-than-expected Q4.
- Q4 revenues and earnings were affected by weaker conditions and delayed orders, especially in consumer goods, packaging, and durable goods distribution. Delayed customer orders shifted price increase realization to FY25, while higher raw material costs, mainly in Hygiene, Health, and Consumable (HHC) Adhesives, impacted EBITDA.
- Late in Q4, there was a negative volume inflection point, with topline deceleration in several market segments compared to Q3. This mirrors the Q3 call, where volume growth was at the low end of expectations due to slowing demand in durable goods-related markets.
- Volume growth was stable in Q3, with expectations of incremental strengthening throughout the year. However, the current guidance suggests a volume recovery may be delayed until FY25. The HHC segment's weak performance was also disappointing, despite previous improvements driven by bottle labeling, packaging, and medical strength.
Overall, this guidance was disappointing for HB Fuller, though not entirely unexpected given the stock's decline in December. Rising interest rates in December may have led customers to reduce orders, causing shares to drop about 12% last month.
Raw material costs constitute about 75% of FUL's cost of sales. A 1% change in raw material costs impacts EPS by $0.24, explaining the EPS guidance drop. Many raw materials are petroleum and natural gas derivatives, and rising prices in December could affect FY25. FUL needs lower rates and increased industrial/manufacturing activity to boost volume and improve margins by spreading costs over a larger revenue base.
