Q4 2019 Earnings Call
The presentation, there will be an opportunity to ask questions.
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Withdrawal question. Please press Star then too.
Please note the events being recorded.
I'd now like to turn the conference over them as Barbara Doyle, Vice President Investor Relations. Please go ahead.
Good morning, and welcome to H.B. Fuller is 2019 fourth quarter earnings call for the fiscal period ended November Thirtyth 2019.
Our speakers, our Jim Owens, H.B., Fuller, President and Chief Executive Officer, and John Corkran Executive Vice President and Chief Financial Officer. After our prepared remarks, we will take questions. Please let me cover a few items before I turn the call over to Jim.
First a reminder, that 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 then our Form 10-K and 10-Q.
We believe that discussion of these measures is useful to investors to assist the understanding of our operating performance and the comparability of our results with other companies.
Reconciliation of non-GAAP measures to the nearest GAAP measure is included in our earnings release.
Also we will be making forward looking statements. During this call. These statements are based on current expectations and assumptions that are subject to risks and uncertainties actual results could differ materially from these expectations due to factors discussed in our earnings release comments made during this call or risk factors in our Form 10-K .
With the FCC and available on our website at investors got H.B. Fuller Dot com, we do not undertake any duty to update any forward looking statements now please turn to slide three in the investor deck, and I will turn the call over to Jim Owens.
Thank you Barbara and welcome to everyone comical.
Last evening, we announced our year end results for 29 team and our guidance for 2020.
In a challenging manufacturing environment, where overall end markets were showing negative growth.
Full year of 29 team.
We delivered organic constant currency EPS growth of 6% margin improvement solid cost control and very strong cash flow, which allowed us to reduce debt by $268 million well ahead of our target.
We achieved these results while at the same time building momentum for 2020.
We announced the realignment of our business from five operating segments into three global businesses, which are enabling better organic growth and a more simplified business structure, which will operate with approximately $30 million and lower cost.
Momentum and are prepared this going into 2020 is strong and will result in an approximate 10% improvement in EPS. Despite our expectation of a continued weak macro environment in the manufacturing sector globally.
Ill talk more about our 2020 plans and our business realignment later in the call, but first let's review the fourth quarter and 2019 results.
In the fourth quarter, we saw good organic growth in the Americas adhesives in Asia Pacific Adhesives, and engineering adhesive segments. These were driven by higher volumes and hygiene packaging, new energy and general industries.
But were offset by weak automotive and construction volumes.
Overall organic revenues were down less than 1% compared with the fourth quarter of 2018. This was an improvement from negative 3.3% in Q3.
For the full year, EBITDA and EPS, excluding the divestiture, we're up at constant currency.
This profit growth was achieved despite the fact that we had negative annual organic growth for the first time in 10 years.
In the fourth quarter EBITDA was weaker than anticipated because we had some temporary increases in manufacturing and inventory write off costs at three of our acquired factories, which totaled about $7 million the higher costs are not expected to recur.
Strong free cash flow conversion of working capital improvements continued in the fourth quarter and enabled us to pay down 100, and may $18 million of debt in the quarter for a total of 268 million for the full year.
This exceeded the $260 million commitment we made on our September investor call and far exceeds the $200 billion commitment we made at the beginning of the year.
These results demonstrate the strength and the resiliency of our cash flow.
And in the fourth quarter, we completed significant steps in our business realignment by finalizing our new Glip global business unit organizations, establishing clear operational plans for 2020 and executing on cost reduction commitments in our functions.
Our realigned organization includes a focus of resources on standardizing and simplifying key business processes across the company.
This will drive further savings and focus on customers as we streamline and strengthened support for our commercial teams improved consistency and visibility across the businesses and drive down our cost to serve customers.
Our GB realignment has also allowed us to streamline our organizational structure and drive immediate savings of approximately $20 million in 2020.
Now I'll review segment performance in the fourth quarter on slide four.
Weakness in the industrial sector continued to impact volumes in the quarter.
In the US average PMI of 48 for the quarter worsened versus 51 in the third quarter and 59 in the fourth quarter of last year.
Eurozone PMI also continued to trend lower averaging 46 in the fourth quarter.
Compared with 47 in Q3 at 52 in the fourth quarter of 2018.
With that backdrop, H.B. Fuller organic revenues in the Americas increased by 3%.
Driven by volume growth in hygiene so.
Adjusted EBITDA margin of 14.1% was lower than last year as volume growth and favorable raw material costs were offset by impact of the surfactants divestiture and higher manufacturing costs.
The idea revenues were down 3.5% year over year on an organic basis, reflecting the widespread market slowdown in core Europe year on year volume trends improved in Q4 compared to Q3. However.
The idea segment EBITDA margin of 11% improved year over year, driven by favorable raw material cost and good expense controls.
Asia Pacific organic sales increased by 2% year over year as strong growth in Korea, and solid results in southeast Asia, and China offset slower sales in Australia, New Zealand.
Asia Pacific EBITDA performance was strong increasing 100 basis points year over year, driven by volume growth favorable mix lower raw material cost and solid expense controls.
Construction adhesives face continued external headwinds in the fourth quarter.
Lower private construction spending in the U.S. impacted flooring in roofing sales and weak industrial spending outside the U.S. impacted utility and infrastructure volumes.
We confronted a series of factors in construction adhesives this year.
Lower construction spending in the us in Europe overall were magnified by a repositioning of our construction adhesive portfolio toward business areas that provide higher margin and growth potential.
These portfolio adjustments, which we began in the fourth quarter of 2018 unfavorably impacted segment revenues by approximately 6% of full year basis for about half of the full year decrease versus last year.
Construction adhesives organic sales, excluding the portfolio repositioning were down about 6%.
This is in line with overall private residential use construction spending which declined by 6.4% for the full year versus 2018.
Lower volume capacity constraints on certain roofing products and higher levels of manufacturing cost and inventory write offs in the quarter negatively impacted EBITDA margin versus last year on a quarterly and full year basis.
While the refocus of our construction business has negatively impacted our results in 2019.
I am extremely confident that the actions we have taken will result in a significant change in the growth profile and profit performance of this business in 2020 and beyond.
Let me share some of the steps we have taken this year to position ourselves to capture construction related growth opportunities around the world and improve performance in this segment in 2020.
In 2019, as you know, we exited less profitable products and product lines and reduce our cost structure.
We have also focused resources on new product solution regional growth opportunities and customers that will drive above market growth rates.
This includes adding resources and new leadership in Europe to accelerate our growth of differentiated products in that region.
Commercializing new H.B. Fuller applications in North America.
Such as Sprayable adhesives for roofing membrane, which is an exciting innovation for this industry.
And is showing strong market acceptance.
And investments to build awareness and promote and grow our fast to K technology, which is generating a lot of excitement as a concrete replacement.
We also upgraded staff equipment and improved operations planning processes to address capacity constraints and improve deficiencies in one of our acquired factories as we completed our integration activities.
Additionally.
Im pleased to announce that on December 2nd Baas, Malec joint H.B. Fuller to take on leadership of the new construction adhesives GPU.
Boss has deep experience in construction end markets with more than 20 years of experience in global industrial and construction roles.
He joins us from Masonite International where he led their $900 million North American residential business.
We are happy to welcome boss to H.B. Fuller and we're confident in his ability to drive profitable growth.
As a result of all of these actions, we anticipate a return to revenue growth and construction adhesives. In 2020, we also forecast increased EBITDA margin driven by volume growth mix. The efficiency actions that are underway and the cost reductions we've taken.
Relative to the GPU alignment.
Lastly, organic revenues in engineering adhesives increased by low single digits compared with a very strong fourth quarter last year. When this business grew sales by 17%.
Strong performance in new energy General industries, and other parts of the business were offset by weak results in automotive and other vehicles, reflecting a slowdown in global auto production.
Engineering adhesives organic volume grew by mid single digits in the fourth quarter and the full year.
Driven by share gains in our end markets.
Engineering adhesives, EBITDA performance remains very robust and a 21% margin driven by volume growth mix, lower raw material costs and good expense and pricing discipline.
Now I will provide an update on our business realignment and its impact on our business going forward.
On our last quarterly call in September we announced a strategic realignment of our business into three new global business units or Gpus.
Engineering, adhesives, hygiene health and consumable adhesives and construction disease.
As of December Onest, our realignment has been completed and is fully operational.
This realignment as a natural and important next steps in our Companys evolution.
This structure enables us to accelerate growth.
By identifying market trends and solving our customers problems better faster and at lower cost than our competitors.
Given the importance of this business change, we engaged expert consultants to help design and organizational structure that enables us to do just that.
Our primary objective for this realignment is simple to drive higher long term profitable growth.
As a global company, we have global market strategies, and all of the market segments, where we operate.
By organizing into global business units rather than regional businesses.
We can execute our growth strategy faster, while eliminating the cost complexities and inefficiencies associated with a regional structure.
By shifting the majority of our resources into the Threeg views and assigning more direct accountability to our sales technical and manufacturing teams.
We will more rapidly identify market trends streamline decision, making and accelerate innovation.
Our threeg views are similar in that they are focused on identifying market trends designing advanced adhesive an application systems and bringing solutions to market quickly.
However, each has a distinct strategic and financial profile.
Engineering adhesives, which already operates as a global business unit is adding our durable assembly business, which was previously operated regionally.
These businesses focus on highly specified high performance in pieces.
This combined business generated 1.2 billion of revenue in fiscal 2019 at EBITDA margin of about 18%.
In the near term, we expect mid single digit growth, reflecting the inclusion of the durable Assembly business.
However, as we introduced the engineering adhesive business model leverage synergies across the business and operate and a more stable business environment, we expect double digit growth longer term.
We expect an EBITDA margin range in the high teens in the near term, which will exceed 20% over the next several years.
Given the overlap between our historical engineering adhesives, and durable assembly businesses in terms of plants products and technology, the combination creates significant growth and cost centers.
Our hygiene health and consumable adhesive business generated $1.3 billion of revenue in fiscal 2019 at EBITDA margin of about 12%.
With a global rather than regional focus we will be better able to strategically identify converging trends and new applications and hygiene sustainable packaging beauty and medical care.
This business is expected to deliver long term growth at above market rates for low to mid single digits with an EBITDA margin in the mid tier.
The construction adhesive business remains largely unchanged by enabling architects builders and construction workers to complete projects in less time at lower cost with higher levels of door ability and sustainability, we expect long term growth at above market rates in construction adhesives with EBITDA.
Margin in the high teens.
As I mentioned earlier another critical outcome of this realignment is that allows us to simplify management of our business and reduce the cost required to deliver high quality service to our customers.
As part of the realignment, we now anticipate annualized cost savings in the range of 25 to 35 million by the end of 2021.
With approximately two thirds of those savings being realized in 2020. This narrows, our previously estimated savings range of $20 million to $40 million.
We will begin reporting our financials under the three new segments in the first quarter of 2020 and in February we will share with you more detailed recasted 2019 quarterly historical results under this new segment reported.
I'd like to thank our entire team for their work in executing this realignment. It is truly a testament to the dedication and talent of our people that we were able to execute this initiatives so quickly.
Because of these efforts in unity across the company. We are entering 2020 poised to realize the benefits of our new operating model.
Now, let me turn the call over to John corporate or review, our fourth quarter results at our outlook for fiscal 2020.
Thanks, Jim I'll provide some additional financial details on the fourth quarter as well as guidance for 2020.
Revenue was down 3.8% in the fourth quarter versus last year's fourth quarter.
Currency and the Divesture of a surfactants in Thickeners business had a combined negative impact of 2.9%.
Organic revenue was down 0.9% and while volumes were still down 0.4% volume trends improved versus Q3 with growth in the Americas Asia Pacific and engineering adhesives offset by slower results in construction in Europe .
The pricing was down 0.5% year on year, reflecting some give back of lower raw material costs.
Adjusted gross profit margin was down 20 basis points year on year as the impact of favorable raw material costs was more than offset by lower volumes and higher manufacturing costs and inventory write offs as Jim discussed these costs were temporarily temporarily higher in the quarter, especially in construction. He serves and are projected to return to lower more.
Typical rates in 2020.
Adjusted selling general and administrative expense was roughly flat year on year.
Interest expense and taxes were both down year on year net interest expense declined by 15% driven by debt pay down.
The adjusted effective tax rate of 18.8% in the quarter reflects a cumulative catch up.
Favorable mix of income by geography, the annual average adjusted effective tax rate of 24.5% for full year 2019 was down from fiscal 2018 rate of 25.1%.
This performance resulted in adjusted diluted earnings per share for the year of $2, a 96 cents down 1.3% versus last year and up about 6% versus last year adjusting for exchange and the divesture of a surfactants and Thickeners business.
Cash flow from operations was $109 million in the fourth quarter and $269 million for the full year, resulting in full year cash flow conversion ratio of 135% of adjusted net income.
Strong operating cash flow as well as the proceeds from the sale of this practice business allowed us to pay down $268 million of debt for the year more than $60 million higher than our original target for the year and also exceeding the $260 million estimate that we set out at the end of the third quarter.
Over the last two years, we have repaid over $470 million of debt exceeding the paydown target that we laid out at the end of 2017 by 34%.
With that now let me turn to our guidance for the 2020 fiscal year.
Our projected organic revenue growth of 1% to 2% in 2020 reflects improving volume growth and pricing that is flat to down 1% year on year.
Net revenue is projected to be flat to up 1% in 2020 versus 2019 with foreign currency is expected to have an unfavorable impact on revenue of about a half a percent at current rates.
And the divestiture of the surfactants and Thickeners business also expected to have a negative half a percent impact on year on year sales.
From a segment standpoint, we expect mid single digit organic growth and engineering adhesives, and low single digit organic growth in A.J.C. and construction pieces.
We expect to consolidated gross profit margin to be up by 10 to 30 basis points versus 2019, as lower raw material costs than volume leverage is offset by modestly unfavorable pricing and slightly higher manufacturing costs.
Operating expense is projected to be down about 2% year on year, reflecting savings from the business reorganization and efficiency projects and Jim referenced earlier offset by variable compensation rebuilt some investments in the faster growing parts of our business.
We expect that volume growth raw material savings net of some pricing give back and savings from the business reorganization and efficiency projects will contribute to adjusted EBITDA of between 440 million and $460 million.
We expect full year, depreciation and amortization to be about $140 million and we expect full year net interest expense of about 80 million dollar.
Depreciation amortization and interest expense are expected to be incurred ratably over the year.
We expect our 2020 core tax rate to be between 26, and 28% compared to our 29 core tax rate of about 25%.
The higher tax rate as a result of forecasted income by region and impacts from ongoing tax reform and tax law changes in the us and foreign countries, where we do business.
Capital expenditures are expected to be approximately $85 million into 2020 fiscal year.
We expect to devote approximately $200 million of our cash flow after capex investments and dividends to the repayment of debt, allowing us to significantly exceed our original plan to pay down $600 million of debt from 2018 through 2020.
Given these factors were introducing and adjusted full year EPS guidance range of between $3 in 15 cents and $3.35. The midpoint of this range represents growth of 10% versus the 2019 fiscal year.
As a reminder, based on the seasonality of our business as well as the fact that we have both the Christmas holidays, and Chinese new year in our first quarter, we would expect to achieve about 23% of our full year revenue and 17% to 18% of our full year EBITDA in the first quarter.
Now, let me turn the call back over to Jim to wrap up.
Thank you John .
Clearly 2019, presenting more challenging macroeconomic environment than we anticipated.
By remaining focused on matters under our control we strengthened our underlying business during the year in several ways by gaining share in our target markets better aligning our business with our strategic growth markets accelerating our debt Paydown and driving continued improvement in EBITDA margin.
Establishing our new hygiene health and consumables engineering, and construction adhesions global business units and getting them fully operational as we started 2020 positions us to quickly realize benefits of this new operating model.
In addition, our focus on standardizing and simplifying core business functions across the company is designed to improve our consistency and visibility and drive our cost to serve customers lower.
The current external outlook is that 2020 will look pretty similar to 2019.
Brexit the U.S. election cycle. The continued strong us dollar and other macroeconomic and geopolitical forces will likely continue to create uncertainty and potential headwinds on global manufacturing growth.
We do not expect a significant change in the macro forces outside of our control.
The actions, we have taken within our control will drive our results.
In 2020, we are focused on executing on the growth drivers and the cost savings that are enabled by RGB you realignment.
And the further growth synergies provided by the Royal Adhesives acquisition.
In addition negative impacts from the portfolio adjustments in our construction adhesive business are behind us and the positive impact from our investment in this business are ahead of us.
Our plan delivers organic growth and a continued challenging global manufacturing environment.
And the cost reductions, resulting from our GPU restructuring support additional earnings growth, which we targeted 10% at the middle of our guidance range.
And as a result of improved profit margins working capital reductions high cash flow conversion rates and our focus capital management programs, we remain on track to significantly exceed our committed $600 million in debt pay down by the end of 2020.
The outcome in 2020 will be low single digit organic growth above expected industry rates achieved through customer innovation and share gains. This will be combined with efficiency benefits from our reorganizations that will drive EPS growth of approximately 10% and strong results in EBITDA and cash flow growth.
The actions, we have taken have positioned us to capture growth opportunities in the global adhesive markets, where we operate.
And they provide sustainable cost and efficiency improvements that will enhance our profitability in 2020 and in the years ahead.
That concludes our prepared remarks today operator, please open up the call. So we can take some questions.
Well I'll begin the question answer session.
Question can we press Star then one on your Touchtone phone.
Using the speakerphone, please pick up your hands, so before crossing the key.
Oh Your question. Please press Star then too.
This time, we'll pause momentarily to assemble Ross.
First question.
Comes from Mike Harrison.
Global Securities. Please go ahead.
Hi, good morning.
Good morning, Mike.
Hi, Jim in the fourth quarter 2017.
You were issuing guidance for fiscal 18 and expected to hit the 465 billion dollar level.
We're now two years later.
It's still kind of guiding to a number that's below that 465 billion dollar levels. So.
A question is aside from FX in the macro headwind.
I think we could all acknowledge are there.
Can you help us understand what maybe have stood in the way of H.B. Fuller leveraging the Royal acquisition and delivering on the potential that you saw when when you first did the acquisition and maybe give us an update on where we stand on the longer term plan.
Good to $600 million.
Yes. Thanks for the question, Mike, Yes, I think in fourth quarter and the fundamental issue between now and fourth quarter 2017 is FX rate since that day. The change in exchange rates has impacted our revenue by about $150 million.
Hundred $60 million and EBITDA by $40 million to $50 million. So thats the biggest driver and of course the environment. We've operated in globally from manufacturing standpoint is completely different. So so do it at that due to try and pull those two items out you'd see significant growth overall overall in the busy.
Mrs and I think the fundamentals of market share gains cost reductions are coming through in the Royal integration.
In each one of the elements of our business. So so when I step back and look at the horizon over the last 18 months, that's the biggest driver of the numbers and.
I think as you saw last year and you saw the year before on a constant currency basis. Our EBITDA has grown each of those years, our EPS has grown each of those years and.
And I think.
I think for a couple of like ours is very global you have to take that current still trying to look over a long horizon you take that tendency to these into perspective.
Yeah. The I'd say is even despite that.
Our cash flow management has been outstanding.
To to and that kind of environment deliver well above the targets that we've had from from cash standpoint is pretty significant so so.
Yes, certainly there are things I'd like to see better in the business, there's things that we've over over delivered but what that cash flow stands out I think especially in that macro environment.
And and the 600 million dollar longer term target is that still well.
I think we said about six quarters ago that our goal is to deliver 10% EBITDA right I think constant currency on a constant currency basis right. So so that's that's our objective we laid that out in the middle of last year I think the math at a constant currency basis would say that thats we targeted.
Yes, we delivered in 2018, 2019 and environment, we were and we Didnt, let's certainly thats our expectation going forward is is those are the kind of returns that we expect out of the business.
On a constant currency basis in normal manufacturing environments.
And I think Thats the metric you should you should measures debt.
Okay.
And then in terms of B, the facility costs than and inventory cost that impacted your margin this quarter.
I understand you quantified those at about 7 million and it sounds like most of that.
Construction.
Business, but can you help us understand exactly.
What it is that was going on.
Got it sounds like free facilities.
Yeah, Yeah, I think one of the Royal integration issues that we've been managing is moving their business model, which is which is very different plan to plant to a sort of best practice model. So so thats, putting in best practices in sales and operations planning and in cycle accounts in standardize work processes.
And safety.
And in 15 of the 18 plant that has gone extremely well so.
I think building those kind of systems allows us to have.
Better safety lower cost better service to customers in a few of the plans I would say the integration Didnt go as well as it shows that led us to getting behind on some orders for for customers, having some changeover costs and we injected extra labor to make certain that we serve customers and and work to reduce.
Backlog, but the bigger aspect was showed up in the inventory. So when we finally did our when we did our.
Our physical inventory count at the end of year, the physical inventories were off so so when I said, one off it's mostly a physical inventory adjustment issue combined with some extra labor we had to do it wasn't really 18 plants.
I think the really good news about that Mike is those plants now are running on better standard processes. So we're in a better position to manage cost to serve customers. As we go forward. So in terms of where they impacted us they were all us based plants.
About 2 million of that was in the Americas about $3 million, but was in construction adhesives and about 2 million was in engineering adhesive. So so those plants serve all three of those businesses.
Got it and then last question is just on the.
Capacity constraints that you had in <unk> I believe you said roofing products within construction.
Can you help us understand what's going on there and what I would've thought was a slower seasonal period.
Yes.
Yes, again, it's tied to that same issue I talked about so one of the plants, we talked about serves the roofing business.
And we've been a little behind all year I think we didn't build inventories as quickly as we needed to in the first quarter.
And then.
And we've been playing catch up all year and I think we ended the year with about 2 million in backlog. So like you I expect us to too.
To work through that this quarter.
Happy to report that the backlog is dramatically reduced here in PD. One so the work we were doing in Q4 has paid off but it didn't pay off by the end of year, but.
But it's it's.
The roofing business is really well poised and.
A slowdown here in December allowed us to catch up build some inventories and we're ready well positioned for great year moving in 2020.
Alright, thanks very much.
Thank you.
Next question comes from Ghansham Punjabi Baird. Please go ahead.
Hey, guys good morning.
I got to help them.
Good morning, Jim John and Barbara Hey, Jim just picking up on your prepared comments on share gains on can you just sort of expand on that which segments. In particular do you see the gains what does it actually based on.
And then second in terms of the guidance for fiscal year, 20, with pricing down zero to 1%.
And just your base assumption up a tepid macroeconomic backdrop I'm just curious what sort of visibility do you have on your volumes as we head into fiscal year 20.
Okay, Yes, I'd say the what we what we've done Ghansham is in this is one of the beauties of the new GPU alignment is we're executing strategically along the lines that we look at our business. So so each one of RGB use has between three and 10 market segments, where they operate so we look at the this share within those markets and as I mentioned.
In the prepared comments real good gains in new energy solid gains in electronics continued to be a go positive for us this quarter were very pleased to see hygiene.
Share gains, which which is really important for our H.C. businesses. It's an important part of that and our packaging business had some share gains. So we we analyzed what's happened in those markets and we saw good share gains. So so we look at each market and look for where the share gains are and.
I would say.
We see.
Really you can see in the PMI numbers right across the manufacturing sector that that theres, a slowdown in lots of areas, but we try to analyze each one of those market segments, and then pull that together to identify our share.
In terms of.
The second part of your question was around pricing volume has the ability of volume visibility yes.
Say it, especially here at the end of year, we had better visibility because we have we report a month later, so we've seen the PD one results.
I think that that the.
What we see here in Q1 is encouraging I would say, it's not an encouraging external markets, but but our ability to gain share in markets has improved so as I mentioned Q4 was a refer environments in Q3, but organic growth improve we see it. It's again, it's only one period and its December we see more positive improvement here.
Yes, I know certainly I'm concerned I'm sure investors concerned about CA, we see CA moving back to that that positive territory.
HHG also goodstart EA I think this first quarter will be affected by.
Both in Europe now he is now the combined da da So we had extended shutdowns and a lot of facilities in Europe here in Christmas and we're seeing extended shutdowns in China. So so I do see EA, new EA, which includes durable assembly being more flattish here in Q1.
With pop with popping back as we go through the year, but thats more seasonality mills, but in any case visibility here in Q1 is pretty good and I'd say, we feel good about what's happening organically at least after one month.
Okay, and then just going to go back to Fourq you.
You mentioned, an improving trend landfill volume standpoint.
Is that skew to any particular month I'm just curious as to how the portrayed it played out and yeah theres been some chatter about how the timing of the Chinese new year, but have impacted.
Certain pockets of manufacturing, including auto OEM in the region.
Do you sense that.
That played out for you as well.
A reminder for US our our Q4 ends November Thirtyth. So that's funny from China Q1 area that that we would have not seen.
A big difference certainly here in in Q1, Chinese new year affects our Q1, but its December January and February and it's in the middle So I understand the big impacts the John you want to comment more on but no I think from a month to month standpoint, I would say have played out pretty consistently through the month, maybe with a little bit of momentum as we exited.
For Q on anyone yet.
Okay, and then just one final one on Americas adhesives was there anything unusual that weighed on segment EBITDA margins year over year was down about 180 basis points.
Yes, I mentioned those manufacturing plus a 2 million of those were there. So I think if you put those 2 million back that we get into the low fifteens and then the rest is mix ghansham. So nothing exceptional there except that $2 million manufacturing cost as a boom facility.
Yes. Thanks, so much you didnt have Dalton, who adults in the divestiture, which was a high margin business, but a little bit of emergency.
Probably cost us 30 basis points.
Since the mix.
Perfect. Thank you so much.
Thanks, guys.
Next question comes from David Begleiter from Deutsche Bank. Please go ahead.
Hi, Thank you Jim.
Yes.
Jay that you sounded Sam Rob.
Thanks for being.
If you look at your 2020.
Guidance Jim.
That's a good point up about $20 million per year, which is basically all that well from the.
GPU realignment.
If you could real synergies implies a base businesses the out year over year.
Why is that the case.
Yeah. So I'll have John take you through some of the specifics there I think.
The.
The fundamentals of where we're at is we're building on our business plan off of that 20 million in savings with a bit of inflation and other costs and.
And solid performance on a price raw material standpoint, and and that gets you the 10% ABS with with limited growth right. If we can deliver more growth will deliver.
Little bit more organic growth, we're going to allow deliver a lot more EBITDA growth, but but that's how we build our our plan and expectations. We want to lay out there to the street with John you want to comment more yes, I mean, I think if you think about where you mentioned royal synergies Weve really captured the vast majority of those in 2018 and 2019, so there's a little bit of a tail, but it's pretty soon.
While in 2020.
The impact of.
Our variable compensation rebuild and merit.
Is the biggest offset so you're right the savings represent the biggest positive we'll get some benefit related to organic growth.
In some raws, but that's really come off some of the bonus rebuild.
And how much is how does that $10 million or $515 million range.
Got it.
Cash flow for up to 2020.
Expectations on working capital and other items that impact cash flow.
Yes, so we expect strong cash flow performance again in 2020, we as we said in our prepared remarks, we believe we can pay off $4 million with for the debt, which would put US well ahead of our three year target.
Most of that will come from.
The EBITDA growth that we just talked about as well as we plan to see an additional working capital improvements.
On the order of 1% to 2% up revenue.
Hopefully be pretty broad base, we've got activities going on.
Round of receivables.
Around inventory and around.
Increasing payable terms and we're seeing side as we exit the benefit objective. This year, we expect them to contribute mr., what you'll see in the detailed David as we've done a nice job on payables here in 2019, there's more of that the Tom with what we've put in place for 2020, and then we've got some really good programs around inventory management.
That are going to also of working capital is one point.
Thank you.
Okay.
Thanks, David.
Our next question comes from Vincent Anderson from Stifel. Please go ahead.
Yes. Thank you I just wanted to follow on.
Oh gosh.
On the fiscal 2000 guidance I guess, what I'm missing and all of that as you know after backing out the Gpus saving.
And then kind of a slower organic growth.
Permit.
Why are we seeing maybe a bit more margin expansion action.
The growth you are higher margin.
Relative to the rest of the portfolio.
Yeah, I mean, I think I think we are seeing some of that.
Vince and where we grew in terms of kind of what we expect to flow through from a sales growth standpoint, but as we've talked about in terms of our targets for this year.
There is.
No there isn't a significant difference in the growth businesses.
Yes.
Generates a little bit more of a mix favorability around here.
Okay.
And then just you had a competitor.
They took market share this quarter in North America, assuming at least some of that had to reach people or maybe.
How much would you chalk that up to your constraints during the year and delivering those products versus maybe.
Selling or or just spot sales.
Yes, I saw that I think you're talking about rpms saw the results.
With which we are good we don't compete with them. So so that does not at our expense.
I think when we look at our roofing share this year it was positive.
But it was.
And the roofing business had a positive year overall, so if you ticket you take a look at our construction Hasan business. It was the flooring business, where we had.
More challenges, but but that backlog like I mentioned was all roofing and that was a couple million. So so if we look at our numbers. We would have had a couple million more in sales here in Q4 had we not exited the or the backlog but.
But no we didn't lose share to RPM.
That's very helpful. Thank you.
Given that.
You mentioned, if I could sneak one more in mentioned share gains in hygiene packaging, maybe I missed it but you were pretty happy with how your progress at Darden electronics.
Sure.
How has that gone in the fourth quarter and through the first part of 2020, and then you talked about last quarter about some bigger wins coming through in Fourq you in one H those panning out.
Hi, Yes, yes electronics is still our star performing business had an outstanding year this year.
Again, we don't hold the numbers on specific sub segments, but it's been extremely strong all year and I just saw the Q1 numbers and they're off to the bridge start here in Q1, so so and those are share gains I think what we what we've been able to do there is identify new applications in allocate resources to those so.
I think the benefit we have is given our share in that business, we've really focused or are our business on where the new trends what are the new products that are being introduced and one of the problems out there, whether that's better waterproof better productivity.
In enabling someone to provide center lines of that he is getting bigger screen whatever that problem as we work on those.
With our customers and then the other thing were doing is we're taking our technology further into the devices. So we've got more penetration into microelectronics, rather than just assembly. So so the we show electronics business as a is very important growth drivers of engineering, So and it's still continues so thanks for the question.
Thank you good luck.
Thanks, Thanks, a lot.
Next question comes from Eric Petrie from Citi. Please go ahead.
Eric you might be on mute, we don't hear you.
[noise] cap rate Yeah, let's go to the next question over the next call will put back into queue or you think you want moment.
Next question.
Yep.
Caucus JP Morgan. Please go ahead.
But what was price down in all geographies and why is where pricing trends better and are they deteriorating.
Yes, so we didnt hear the first part of your question, Jeff but.
We're priced sorry, we're prices down in all geographies.
They work there there were up in construction adhesives.
Or down modestly in the other business.
I think the answer on your question about.
Fred we really did all of our pricing work in the first half of last year, which.
Significantly drove margins.
Second over the last year and all of this year.
We have annualized against that when you look at kind of Q3 to Q4. It was very similar from a pricing standpoint, yes, Joe to three to Q4 were very similar Jeff and I would say that roles are coming down. So there's some slight give backs whether those.
Contractual or which is a small percentage of our business or not but I'd say.
That negative half a percent of price is similar to what we had in Q3.
Do you think do you think volumes in Europe will grow and.
Thousand 20, or you can tell.
Yeah I'd say.
Probably going to be very tough, especially core Europe , I think you're going to see.
A really tough environment from a from a volume standpoint, as you know our EMEA business includes.
India Middle East Africa, India business still continues nicely, we've got some good wins in Africa.
If you're talking about core Europe , it's a it's a tough environment from a manufacturing environment, we don't expect growth here.
Do you think your markets are decelerating in your first quarter.
And either either because of the Chinese new year or extended shutdowns and then what you expect this for a reacceleration later in the or is that your general plans and how do you see business conditions in China.
Yes, so yeah I think what we saw in Q4, you look at the external data whether its PMI auto builds that were worse than Q3 little early for us to project, what's going to happen here and in Q1, I would say our businesses improved so we improved from an organic standpoint Q4 versus Q3.
And.
One month of Q of Q1, we're seeing further improvement on organics.
Basis I'm not sure that's an indication what our markets are doing though Jeff. So I think that was your question. So.
So so I couldn't give you a really solid read as to whether the world's getting better here in Q1 as I mentioned there are were extended shutdowns in a lot of factories in Germany versus earn your overall, but Germany in particular and and we do have some somewhere that some factories in China are gonna have extended shutdowns here.
So so we're hearing a little of that.
For us overall, though I.
I think a share gains are overcoming what we see at least early on in the core.
I will say through the question around the shape of the year.
Yes, I think given gems points on some of the impacts of the extended shutdowns for Christmas and Chinese New year. Just the fact, we have easier comparisons I would say in the second half a year. We would expect you know the revenue trends to ramp up.
One point.
So if I could just a final question.
Your your changing your segment reporting essentially from a geographic.
The reporting structures to an end market reporting structure.
And that's different than many companies that is you know if you look at for example, the industrial gas is air products moved over from an end market.
Segmentation twitchy graphic segmentation following what the old praxair debt.
I don't think you guys export a lot from your individual regions.
There's no strong growth by now back right now.
Aren't you afraid that you might lose.
Granularity of data that you had in having more segments by having fewer segments.
Because you are now going to have you know a more global no revenue mix because 10 markets. You know are you going to just to kind of granular data you need to manage the costs in your business or why should it be better.
So so let's.
It's going to be a lot better Jeff So and first off the strategically we got a manager business by the 28 segments.
So if its roofing roofing has a profile that we need to manage electronics hygiene packaging, we've been building those strategies globally, but working to execute them for two thirds of the business regionally. So what happens is the execution model is not fully aligned with this strategic models.
Plus five segments has a lot more cost involved with it then three segments. So our ability to see the visibility in the market and then drive the results where we need to is much better in this model than the old operating model in terms of your question of visibility will have better visibility here.
And again, we'll need to share with you. So you see it but for US down the organization, we're going to get good visible regional visibility for each one of those businesses or piano tiles are built along this 28 segments and there's a regional one for each one of those 20 segments. We've got good accountability on each of those so so our visibility will be.
The much higher in terms of our ability to see exactly what's happening in each segment, although down the piano.
So I I don't see the issue you're talking about at all for US. We as you know that we ran two globals and three regionals. So yeah. It was up there was sort of this mix now, it's very clear and I would say within each one of our businesses to your point about the.
The world being different you know Andy's rod and HHG. He's got to lead I'm, just looking out at the Americas as well as down those global businesses GE way.
He's running electronics, and durable assembly and and insulating last all separately, but he's got a leader in Asia Who's looking a detail at that so so I think we've got a very well covered.
No I'd, just say, we had our business reviews yesterday and I felt like we had great visibility. So I think it was sort of proof of a proof of that.
So does that mean that you'll you'll you'll.
Do you see your head count by reducing regional managers. So that you only have a.
And end market focus or will you keep all the different regional and end market management layers.
Yeah, I know, we've definitely reduced and we we reduced it ended in December . So you know if you think about it I had I had five finance partners for five segments I now have three five HR partners I'd five sourcing partners at five manufacturing leaders now we do have some things we share across those businesses, but but those leaders are global.
Five already leaders to them. So yeah, okay. All right. Thank you very much yeah.
Next question comes from Eric Petrie from Citi. Please go ahead.
Hi, good morning, Thanks for taking my question.
And your gross margin guidance about 10 to 30 basis points I wanted to get a little more color as to why you think there would be pricing give back.
As well as manufacturing costs are expected to be higher but I believe you know drink plenty 18, Investor day, you were talking about lowering manufacturing cost.
Yeah, So maybe I'll take the high level jobs get into the the math of it.
I think the.
First off some of our customers maybe about 50% of our business are built on a on a contractual basis is raw materials move up and down so do you see a little of that that.
To address some of what happens with pricing and I think everything that happens in certain markets, you'll find that that competitive pressures especial enrolls are coming down put in a position where you lower prices. So so it's not a big impact more numbers, but I would say overall, we expect slightly down rather than slightly up in this environment.
Sales are going down.
Oh, we very much better manufacturing costs to go down in 2020 or so so that's a that's definitely what we have in Atlanta, Chicago Thomas President So as a person as if you look at kind of what's driving the gross margin improvement is that really.
Contribution margin line, so our ability to capture raw material costs.
And manufacturing costs as a percentage of sales are flat.
Despite the fact that volume is growing some of those.
Bonus rebuild that I've talked about show up in manufacturing, so we're offsetting that with productivity.
Okay helpful and secondly on your raw material basket can you talk about what raw materials are moving out first us down it seems that your gross margins aren't improving as much as parents. So just looking for any differences between baskets.
Yeah, I think in our Investor day, as a really good she our Eric Yeah that shows the diversity of our raw materials. So what's different for us versus say the pains guys is they have it this big margin. This big monomer component, whether its acrylic or vinyl acetate or ethylene you know we buy materials that are further down the change the number.
So on raw material, we buy is about 4% of our purchases 87% of what we buy our our our second or third tier materials, so 13% of what we buy or monomers and solvents and other materials that are more commodity driven the others are our downstream from those so so we don't see as much volatility.
On the positive or negative side as you would see.
Paints business from the raw materials standpoint.
Great. Thank you.
Thank you.
Next question comes from Rosemarie Rally.
Research. Please go ahead.
Thank you good morning, everyone.
Good morning Rosemarie.
Jim when Matt and John when we look at should try and get a reducing debt by another 200 million by the end of season here you mentioned that we get back to 1.6 billion outside net debt [laughter] anyway, he or she will be that guidance at the midpoint of front ended in 50 million.
Now we have the net leverage of 3.7 times I was wondering if you could give us a feel as to what do you see aptima named wage well H.B. Fuller, particularly in [laughter] Plano, if we go into a recession I don't know whether we are not that takes several you haven't had any for about 10, yet so we are.
So as to whether it would be the optimum language.
She would be comfortable to eating and.
Yes, I think our goal Rosemary is to be between two and three debt to EBITDA net debt and and that's what we're targeting we see that happening in 2021.
As you say, we'll be in the low threes by the end of this year. If you recall, we did well were 5.9 to dramatically reduce that number.
It will come down again dramatically this year and we see that is really positive progression. The other thing I'd say from a you know from a recessionary standpoint, yeah thinking that the two years approved proven anything to our investors is the resiliency of our cash flows. So we had negative organic growth and exceeded our debt pay down side. It. So this is.
As a very cash flow generative business low low.
Capital intensity, we got a lot of levers to pull on cash. So so we feel really good about our of our position to withstand any kind of the difficult environment, but the short answer. Your question two to three you want to and then I think that's the target I think I'm going to say I think that the the fact that we're able to some of this is.
Ben work on reducing working capital, but also it's a little bit of a reflection of win.
The topline slows, we have less working capital usage and raw materials come down and those are cash flow generative reps.
No I didn't know teach yeah, my calculation, which may be wrong.
3.7 time left wage which itself.
T O substantially above.
Well you are comfortable.
Yes so.
King about that teaches suite by the end of 2021, correct correct. Yeah. So if I wasn't clear yet, but it's in the somewhere in 2021 is where we see ourselves getting below threex.
Okay I might have missed that.
Thanks, and then.
You.
That's still on the defense My kids shoes here, so, but I was wondering if you could give us a little more details aneel I stated expectations, so theres different market [laughter] and ER, particularly from here. It seems that you are growing faster than they are and organic revenue you know if 1% to 2%.
Pretty low so you must be expecting some markets could be substantially below I mean in the nicotine anywhere.
Yeah, I you know Rosemary we're leveraging off of PMI data right. When pmires below 50 that shows the manufacturing sector declining and I think what we've seen both in Europe and North America. The date is a little fuzzier in China, and Asia, our numbers below 50 and decreasing quarter.
The quarter so so.
That that shows in the manufacturing sector overall, there's other data at market specific that shows that there is an overall decline in manufacturing output around the world.
So that's what we base the expectations on and.
On the I can't go through each one of our 28 segments, but but we look in detail at each one of them in terms of what we see is the growth of that business and then our ability to grow right, our aerospace business <unk> aerospace business.
From Boeing.
As part of our business, but they are shutting down lines in slowing down clearly that's a pretty negative environment. We're gaining share. There. So we have really good positive share gains in that space, but as you know it's in a market slowdown but would be one example of the 28.
Okay, and you don't see any change in the auto where old.
Can you tell myself, we're not building that into our plan Rosemary you know I think there's an opportunity for that to happen you know.
One of the second year of a decrease in auto builds up it's rare that the auto industry has three years in a row of a decline so but we haven't built any of that into our expectation. So if autos improve our numbers will be better than the ones we outline.
[noise] intensely on in a on the auto subject to is done does an easy you small deal today than regular engine kind of caught.
Yeah, that's a a that's a good question most of the analytics out there say that it will use more there's more sound deadening that has to happen. Because these cars are so quiet and then a the batteries themselves depending on the design and there's a few different designs need to have thermal conductive materials that are he's like materials and encasing. So so.
You'll see over time, but most of the data indicates that Tvs will use.
More of these is then not easy.
[noise]. Thank you very much.
Okay. Thank you Rosemary.
Our next question comes from pair tossed Ms. Rob from Berenberg. Please go ahead.
Thank you good morning.
On slide five in engineering adhesives, <unk> it looks like you're looking at a mid single digit growth in the near term and double digit into long term can you just elaborate on what's driving that improvement is that just more volumes or pricing and mix also played a little.
Yeah. So so yeah I think the the move you know is as you know potash the the engineering adhesive business has a very strong track record of double digit growth. We've now combine that with the durable assembly business. The durable assembly business has not been growing at that rate. So so so that's why this year in particular, we see mid single digit.
It's the potential in that business just to do a lot of the things that engineering adhesives is doing by focusing on new trends and new opportunities in that space and specific technologies, we see that combine business moving back towards that 10%. So so I think the way I think about it is.
22020 should be at a mid single digit business for the combined business, but as I said Q1 being flattish and then when you look out the 2021 2022 moving towards that double digit and we have it and why is because we're leveraging that engineering adhesives business model of where to focus and how.
Focus to win market share.
Got it thank you and maybe if I could just go back to.
Comments on China, It yeah, any any contracts that you're seeing between consumer demand versus industrial demand in the country.
You know I'd say consumer demand is probably a little better than industrial demand, but I would say you know you really have to look at business by business.
Today, you know both of them are slower, but both of them are possible in China with hours from us.
Understood. Thank you.
Okay. Thank you.
Again, if you ever question. Please press Star then one.
Our next question comes from Christopher Perrella Bloomberg Intelligence. Please go ahead.
Hi, guys. Thank you quick question on the cash costs I'm, assuming these are cash costs of six to 10 for the business realignment and a 12 to 15 of ERP.
Would you be finished with those are doing any those lag into 2021.
So the the kind of the cost related to the business realignment are really.
Done in 2020 will complete that the costs related to the ERP rollout will continue.
Let's see what that's got a little bigger number we've stepped up the pace of that so we would expect us to complete a faster but certainly.
It'll be a couple of more years at least several more years [laughter] that amount and everything is going to be incurred this year that were expectation right. That's all this year.
All right.
That's it for me. Thank you very much. Thank you very much Christopher Thanks, sorry, we went a little over thanks, everyone for your Ah for your interest in your focus on on H.B. Fuller and I was sort of one great one point. Thanks.
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