Q1 2020 Earnings Call

[music].

Good morning, and welcome to the H.B. Fuller Q1, 2020 quarterly earnings Conference call.

All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the Starkey followed by zero. After today's presentation, there will be an opportunity to ask question.

Please note. This event is being recorded I would now like to turn the conference over to Barbara Doyle Vice President Investor Relations. Please go ahead.

Good morning, and welcome to H.B. Fuller first quarter 2020 earnings call for the fiscal quarter ended February 29 2020.

Our speakers I, Jim Collins, H.B., Fuller, President and Chief Executive Officer, and John Corporate Executive Vice President and Chief Financial Officer.

After our prepared remarks, we will take question.

Please let me cover a few items before I turn the call over to Jeff.

First a reminder, that our comments today will include references to non-GAAP financial measures and references to organic revenue, which excludes the impact of foreign currency fluctuations and the impact of acquisitions and divestitures.

On today's call unless otherwise specified discussions sales and revenue referred to organic revenues and discussions of es margins or EBITDA refer to adjusted non-GAAP measures.

These measures are in addition to the GAAP results in our earnings release, and then our forms 10-Q and 10-K.

We believe that discussion of these measures is useful to investors to assist in the understanding of our operating performance and the comparability of 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.

Many of these risks and uncertainties are and will be exacerbated by the coven 19 pandemic and any worsening of the global business and economic environment as result.

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 filed with the FCC and available on our website at H.B. Fuller Dot com.

Now let me please turn the call over to Jim Olin.

Thank you Barbara.

I'd like the first express my thanks, and concerned everyone on the call and especially those of you from New York that are in the epicenter of the U.S. Cobot 19 crisis I know you're dealing with the challenges in your personal lives in inside your own companies and I. Appreciate you being here to understand what's happening with an H.B. Fuller.

HB Fuller, we've been dealing with this crisis since January 20, Threerd, when who Bay province went on Lockdown.

18% of our employees and 12% of our revenue from China.

And we quickly learned how to manage social distancing supply chains, quarantines and delivery of a central products.

We've used that experience and the experiences we have seen as China has begun to return to normal to guide our business plans at our expectations going forward in other parts of the world.

A significant portion of our business in China and around the World supports hygiene health food and other consumer products.

Which have seen a significant increase in demand as consumer buying habits have shifted to using products at home.

Our position as the largest dedicated manufacturer of adhesives in the world at our culture of global collaboration have positioned us to manage the supply chain and resource needs of the business more effectively than our competitors, both big and small.

Our company is holding the world together in a time of prices, whether a personal hygiene products for your baby a complex medical filter electronic communication device.

Our packaging for the foods, we were all eating at home.

H.B. Fuller is there as an essential product in our lives.

It is this capability to meet the diverse technical adhesive needs of manufacturers across the world that is the long term value our company provides to the world and to our shareholders.

We are squarely focused on protecting that long term value for you the shareholders will own this company along with the employees you run it and the billions of people in the world who rely on our products in their daily lives.

As a result of our actions through this crisis, we will be a stronger company better positioned for growth after the economy recovers from the crisis.

Last evening, we announced our financial results for our first quarter fiscal 2020.

Adjusted EBITDA of 78 million and adjusted EPS of 34 cents. We're both in line with our guidance for the first quarter, which did not reflect any estimated impact from the cobot 19 outbreak.

Given the extensive disruption that this disease caused in China in the first quarter. This was an outstanding result, and reflects the broad end market diversification of our business. The resiliency of our business model and terrific work on the part of the H.B. Fuller team.

Additionally, we continue to drive outstanding cash flow improvement with cash flow from operations up significantly year on year in the quarter at our debt Paydown plan for the year intact.

Let me start by talking about what we're seeing on the ground. How cobot 19 is impacting our business and how our experience in China is guiding our plans and actions as the pandemic slows in China, while ramps up in the rest of the world.

Based on our success and lessons learned in China, we've already taken steps for business continuity and to operate effectively during this period of uncertainty.

Making sure that we're keeping our employees safe and healthy through social distancing and hygiene actions, while meeting all of our customers' needs.

We estimate that the disruption caused by coded 19, and the shutdown in China to address it had a negative impact of approximately $15 million on revenue in the quarter.

China was the only affected geography in the quarter with 75% to 80% of the impact in engineering adhesives, and the remainder in health hygiene and consumables.

We estimated that the sales decrease in China translated to a negative impact on EBITDA of about 4.5 million and EPS of about six cents in the quarter.

The outbreak began to affect our operations in China in late January we have approximately 1000 employees in China, all of whom are safe with no reported infections.

During the first quarter the disruption to our raw material supply was very limited given our robust global supply chain and well established business continuity plans as part of those plans. We have been actively securing alternate raw material sources quickly locking down supply materials, where we anticipated shortage could occur.

We have six factories in China, none in the who bay problems, all but one of our six factories have been fully operational since the extended lunar new year holiday ended on February 10, and all of our factories have now reopened and returned to normal production levels.

And our China Engineering adhesive business, we see March results at about 80% of expected levels and based on market feedback expect able to be at about 90% of expected levels.

Our hygiene health and consumable demand is above budgeted levels in March as supply change for these consumable goods are refilled and we expect that to continue into April and move back to normal levels in may.

The total three month impact on H.C. in China is resulting in a shift to volume across the months, but not an overall decline in the total demand.

Our engineering adhesive business is seeing about a 30% totaled declines from expected levels.

Our planning assumptions assume similar short term impacts in Europe, North America, and other parts of the world combined with recessionary impacts related to reduced employment and reduced consumption in other sectors the economy.

We're already seeing this scenario play out in Europe, and North America.

Our March demand numbers are up significantly in H.C. and down slightly in engineering adhesives.

Our April projections show continued strong demand in H.C. and sizable reductions in engineering adhesive market segments, beginning to hit our numbers in April.

We believe that our global supply strategy robust business continuity plans and outstanding leadership on the ground provided us a meaningful competitive advantage in China. During this challenging first quarter.

As we prepare for disruptions to ramp up in other geographies in the coming weeks. The protocols. We are implementing our similar as we leverage the lessons learned in China.

From implementing disinfectants and social distancing procedures utilizing internal chat tools to connect to each person in the company, ensuring effective remote work capabilities as practical and appropriate, allowing a central travel while utilizing technology to connect with customers, including our state of the arc wearable glass.

To provide remote support to our customers.

The core of our continuity plans is working closely with customers to determine and plan for customer delivery needs utilizing our robust global supply chains to backfill raw materials as needed and shifting production between sites where needed.

Manufacturing factories have generally been exempt from business shutdowns around the world.

But whenever there have been manufacturing shutdown mandates such as the recent mandates from the governors in New York, California, and other states in the us.

H.B. Fuller facilities have received a government exemption as they meet the criteria for an essential manufacturer under federal guidelines supplying the hygiene food packaging or medical industry. We operate these facilities under strict protocol to avoid disease transmission today, nearly 100% of our 72 factories around.

Around the globe, our operating fully.

Now I will move onto the financial results in the first quarter.

Organic revenues were down 1% year over year, driven by the impact on our China sales of the disruption caused by the cobot 19 outbreak.

Side of this impact our business was on track for very strong performance in the quarter.

Excluding impacts on our sales in China from the delayed holiday in the outbreak we estimate that organic revenue was up approximately 1% year over year with volume growth in all three segments.

Adjusted EBITDA was 78 million in the quarter, which is consistent with our guidance. Despite an estimated 4.5 million impact from cobot 19.

Impacts from the virus were offset by lower raw material costs.

Restructuring savings, resulting from the move to global business units and solid organic growth, particularly in construction adhesives as well as strong growth in H.C. adhesives due to elevated demand within the paper packaging and hygiene end markets.

Adjusted EPS of 34 cents was flat year over year and would have increased by more than 15% without the Cove is 19 impact of approximately six cents in the quarter.

And cash flow continued to be very strong in the quarter with cash flow from operations up significantly versus last year, keeping us on track for a full year debt Paydown plan.

Importantly, our business reorganization remains on track and delivered savings in Q1 at the high end of expectations.

The new global business unit organizations have been fully operational since December onest strengthening the collaboration across our global teams and the support of our customers.

In addition, we're driving down our cost to serve customers.

In the first quarter, we realize $6 million of savings from our reorganization. We are also accelerating several projects and now plan to see total annualized savings at the high end of our $25 million to $35 million range.

Now I'll move to segment performance in the first quarter on slide four.

Revenues in engineering adhesives declined by 4% on an organic basis, driven by lower volume compared with last year.

As we said earlier the impact of co bid 19 dealt in China was most evident in our engineering adhesive segment.

We estimate that the virus impacted Iot revenues by about $12 million in the quarter and organic revenue would have been close to expectations and about even the last year. Excluding this impact with volume up in the low single digits year on year.

We continue to see very strong results and electronics, which was up double digits again in the quarter based on market share gains.

This was offset by slower results in automotive insulated glass and new energy. These end markets will likely decline further through the fiscal year as economic impacts of that pandemic or Phil.

Adjusted EBITDA margin of 12.4% was lower than last year, reflecting unfavorable mix associated with lower sales volumes.

Hygiene health and consumable segment or Hh see organic sales were up about 1% year on year on the quarter.

As we said we saw about 3 million of sales impact from the shutdown in China in the quarter for Cobot 19.

We estimate that organic revenue would have been up about 2%, excluding this impact, reflecting strong growth and packaging and health and beauty.

HHG segment EBITDA margin of 11.5% improved 100 basis points year over year, driven by favorable mix slightly lower raw material costs and savings from the restructuring of the business.

Construction adhesives had a very solid quarter as the business returned to topline growth and double digit EBITDA on track with our forecasted improvements.

The improvement in the quarter was led by double digit revenue growth in roofing and improving results in Florida.

Construction adhesives, EBITDA margin returned to double digits and increased year over year, driven by volume growth and improved mix related to the portfolio repositioning and new product solutions as well as the operational improvements from the restructuring.

Our visibility and pipeline for construction adhesives look solid in the first two months of the second quarter. Looking further we would expect a negative impact of this business if theres a pandemic related shutdown of new construction.

For a significant precession or environment.

Regarding our outlook for the second quarter and the rest of this year. This obviously continues to be a very fluid and difficult environment to predict.

We are using China as a baseline on which to rigorously plan, our operations and adjustments we need to make.

Our current assumption is that we will see economic contraction in second and third quarter. This year.

More acute in the second quarter than third quarter with some rebound in the fourth quarter.

We expect the high demand, we are seeing for paper tissues, and Taos hygiene and health products will continue through the year, particularly in packaging as consumers continue to delay eating out.

Construction will continue at close to the current pace in March and April and likely slow into may and the third quarter.

Engineering adhesives will face declining demand and durable goods for transportation solar and doors and windows with some offsets infiltration electronics and MRO adhesives.

We also expect that raw material costs will decline significantly based on softer global demand and lower underline petroleum prices with these cost declines accelerating over the next several months.

Fundamentally a decline in petrochemical prices supports H.B. fuller as margins and our cash flow.

Importantly, under various scenarios, we continue to forecast sufficient cash flow generation to pay dividends of approximately $34 million and $200 million of debt repayment. This year.

We're also developing additional levers to improve our operating efficiencies and underlying costs are 2019 restructuring project impacted SGN any costs and prior to covert 19, we initiated a review with external consulting support to evaluate our 72 factories with three goals.

Yeah.

To improve efficiencies in our large factories to establish a roadmap towards site consolidation.

And to build a plan to accelerate our inventory reduction strategies to improve supply chain planning.

We expect to share more details on our plan savings and timing during our Q2 conference call in June.

While the economic backdrop continues to evolve and our underlying assumptions could change dramatically. We think that it is important to share with you what we're seeing today and how it is guiding our expectations and operating plans for the rest of the year.

And share with you other levers that we have at our disposal.

Now, let me turn the call over to John Corporate to review, our first quarter results and our revised outlook for fiscal 2020 based on the economic assumptions that I just described.

Thanks, Jim I'll begin on slide five with some additional financial details on the first quarter.

Net revenue was down 3.9% versus the same period last year.

Currency and the divestiture of the surfactants and Thickeners business had a combined negative impact of 2.6%.

Adjusting for currency and the Divesture organic revenue was down 1.3%.

As Jim mentioned, we estimate that cobot 19 impacted revenues by about $15 million in the quarter, primarily an engineering adhesives and H.C.

Adjusting for the impacts of code at night team organic revenue was up about 1% year on year with volume growth in all three segments.

Year on year adjusted gross profit margin was 26.5%.

50 basis points versus last year as lower volume associated with cobot, 19, and products mix offset the impact of lower raw material cost and manufacturing efficiency gains.

Adjusted selling general and administrative expense was down 3.2% versus last year, reflecting actions related to the business reorganization restructuring announced last year as well as some fourq impact foreign currency.

Adjusted EBITDA for the quarter of $78 million was in line with our expectations and guidance. Despite the impact of Kobin 19, our revenue in the quarter.

Reflecting a slightly lower than expected raw material costs and higher savings from restructuring.

Adjusted earnings per share were 34 cents the same as last year as underlying organic revenue growth savings from our restructuring actions and lower interest expense associated with our debt reduction actions and lower interest rates offset the impact of cobot 19, and currency headwinds versus last year.

Cash flow from operations increased by $34 million compared with the first sort of last year based on continued improvement in working capital performance. This allowed us to continue to reduce debt during our lowest cash flow quarter of the year.

And it keeps us on track for our full year debt Paydown.

Regarding our outlook based on what we know today and the assumptions that Jim laid out earlier, we anticipate revenue to be down 5% to 15% year on year and EBITDA to be approximately $90 million to $100 million in the second quarter as business in China continues to recover all we anticipate disruptions and other parts of the world will.

Increased raw material costs will start to decline.

Using our cash flow performance during the recessionary period of 2008 in 2009 as a reference point given the lower expected working capital requirements associated with reduced demand as well as higher anticipated raw material cost savings. We continue to expect to see strong cash flow performance over the rest of the year.

This is allowing us to maintain our target to pay down approximately $200 million of debt during 2020, keeping us well ahead of our original de leveraging plan laid out in late 2017.

Additionally, we have more than adequate liquidity to meet any foreseeable me. This includes a $400 million revolving credit facility with a built in according feature that allows us to upsize the facility by $300 million just needed. We also have ample room under our debt covenants using even the most conservative scenarios.

With that I'll turn the call back over to Jim Owens for some closing comments.

Thank you John.

We don't know for certain what the impact of Cobot 19 will be on our business, but we do have good experience from China.

And a number of other facts that are working on a favor.

These facts are as follows.

Our first quarter with strong despite the impact of coven 19 in China for five weeks.

Our first month of Q2 remains on track due to increased demand in our consumer goods and hygiene businesses offsetting slowdown in our engineering adhesive business.

Our actions taken last year to decrease SGN, a deliberate savings in Q1 and will deliver further savings throughout this year.

Our actions for reducing manufacturing costs are moving forward as planned this quarter and will result in additional savings.

The decrease in oil prices and reduced demand for chemicals globally will result in reduced raw material costs. During the second half of this year for H.B. Fuller.

H.B. Fuller is an essential supplier and remains open for business around the globe.

While there are still many unknowns the facts surrounding H.B. Fuller business as an essential supplier will enable us to weather the storm successfully delivering strong cash flow and reducing our debt.

Most importantly, the fundamentals of our business end of your business investment in an industry, leading company that create significant value remains firmly intact.

The execution of our strategy to be the best adhesive company in the world and to grow by solving the world's adhesion challenges better and faster than our competitors has proven itself. Thus far through this crisis and we'll continue to be a source of strength for H.B. Fuller going forward.

We're better positioned as a business today than we were six months ago, having completed the global business unit realignment in our business, we are more agile and able to more quickly assess and respond to end market conditions and customer needs under this new structure.

Our robust global supply chain business continuity planning and nimble this give us a significant competitive advantage as reflected in our first quarter results.

While there are significant global health risks that we all are managing.

An economic challenges to face over the next quarter's adhesives, we'll continue to be a high value part of the supply chain for vital products needed to address the pandemic today and the long term challenges we will see afterwards.

As customers need to accelerate manufacturing efficiencies and product innovations.

Adhesives will be front and center in driving those outcomes.

I am confident that H.B. Fuller will continue to strengthen our position in this industry because of our extraordinary collaboration with customers our ability to quickly reformulate and re purpose our broad portfolio of adhesive applications.

Robust global operations and supply chain.

And our unmatched expertise in adhesives.

I will again credit our entire team around the world for working to keep all of our employees safe and to meet our customer needs safely creatively with unwavering focus.

That concludes our prepared remarks today operator, please open up the call. So we can take some questions.

Thank you we will now begin the question and answer session to ask a question you weigh press Star then one on your Touchtone phone, if you're using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then too.

Our first question comes from Vincent Anderson from Stifel. Please go ahead with your question.

Thanks, Good morning.

Morning, Thats <unk> point.

I was interesting how your sales processes mitigating any limitations on the personnel working directly with customers, bringing visitors can yield 30 typing operations and and second do you have any impression on whether customer product development cycles are being delayed in this environment.

Yes to the extent that there's risk maybe missing out on new win.

Central customers are forced me for this product refreshes, but just whatever materials are available at the time.

Yes.

Well I would say Vincent again with China as our guide of our sales teams continued to work throughout the crisis staying closely connected with customers and.

As our labs opened up our R&D books were back in the labs, and and and today as an essential business.

We have we have people operating in our labs and working on projects importantly for staying connected with customers.

We've we've put in place a lot of remote communication tools are there we had piloted about a year ago.

This Google glass technology, where where we can give a customer set of.

Remote glasses that they can where in their factory as we're trialing products and and we've accelerated that program here in the U.S. and it's been a very successful program or views that so so is there some change in the cycle, yes, but our customers as well have people working from home and those people that are work in.

Our next continue to work with our team so.

So I would say there's network continues and based on our experience in China. It continued there as well.

That's great. Thank you.

And then if I think about.

The effects of the slowed down in cross border shipments.

Are there any key exporting plants for instance, but that could suffer in your network or on the other hand any business lines that are really focused on domestic customers that could benefit from from a slowdown in import volumes.

Yes, I would say thus far that's that's been a an advantage for us in a sizable advantage.

Good example was we have some cash competitors that exports from China into southeast Asia, our facilities in southeast Asia, We're able to meet those needs for customers that couldn't get the product there otherwise in India before the recent shut down there. So we were able to fill in for some major customers that had supply issues, making some.

Hygiene products that that weren't able to get materials and even recently here in the states or there's somebody who exports into the United States from Europe, and able to supply here. So most of our business is very much.

As most of you know, it's we make around the world for those local markets.

We certainly have some exports but.

But for most part we make in country for the country and I think thats turned out to be an advantage for us in this.

In this environment.

Thanks, if I could sneak in a quick modeling question. Just if you think about the second have slowed down but that you're potentially expecting.

How do we think about the flexibility in your R&D spending to kind of cushion cash flows.

Yeah, the way the way we look at our modeling Vincent is.

Is really around.

Three things that we haven't flight.

We expect Ross the come down as a result of significant decline in petrochemical prices as well as a slowdown in demand and we've seen that through any other slowed down it's ever happened. The DNA work that we did.

Is is going to have a benefit and there's some things we can do there to accelerate some of that work and then as manufacturing project I talked about with kick that off before all this covitz. So we'll see some of those savings as well we have a number of other levers but.

But those are the three main ones that we see that are going to offset a slowdown so but our intention is not to cut R&D, we're investing for the long term than in our company.

Okay, Thanks, very much and good luck.

Okay. Thanks.

Our next question comes from Mike Harrison of Seaport Global Securities. Please go ahead.

Hi, good morning.

Good morning.

I think you guides or are in a pretty good position.

Gone through a what you saw in China, and as you said the applying some of those Lester.

I wanted though to understand as you're seeing the effect of Htwo bid.

Starting in China, and now obviously parts of Europe.

Baby.

Couple of weeks behind that in a in the U.S. can you talk about some of the trends that you're seeing in I guess.

You know, maybe those EA markets, where you're seeing the most pronounced impact.

It seems like China had more of a V shaped impact with things fell off very quickly and now have recovered.

More quickly than people would have assumed are you seeing a the pattern be pretty similar in Europe in the U.S. or do you feel like at this point the fall off it's been a little bit more gradual those two geographies.

Yeah, So I would say.

Certainly it's two months difference between where the U.S. is in China is pretty close to that and Europe's only a week or two ahead. So so the recovery curve could be different in those different areas.

I think the of the big difference and we've looked at what the differences are China had the extended lunar holiday for most of the country. So just sort of an abrupt process. There that was a little different than what happened in other parts of the world.

Were sort of take a wave across Europe and away the cross the U.S., but but you know our fundamental assessment is very similar we.

The the steps that the government took they're very similar to what's been taken by other governments and the things that we learned we've been able to to I think do a better job as a company, we're doing a better job in Europe, and North America, and I'm guessing that governments are learning from China. So you know, there's a chance that governments and other parts of the world will will will have a faster recover.

Within China of course, there's a chance will be slower but.

For us supplying raw materials supplying logistics really important getting the social distancing right, making certain that we quarantined employees and put ourselves in a position were other employees weren't going to get get sick.

All were steps that we took in China that we were able to do very early in advance of.

Issues and you look it up a plant like our plant in Italy in Dennis It's still operating today, they supply and materials for essential goods.

None of our employees have have caught the virus weve quarantine any that have been in but that is that a family members that have the virus and we've been able to keep our employees safe and keep our business running and I would say our reaction and the attitude and energy of our China of our Italy team is a great example of how we've learned from.

From China so.

The answer your question or or or did you have more to it mikes.

No I think that they've got to the but the question, but I was so I was trying to ask there.

The second question I have is.

I think you did a good job mentioning that in hygiene packaging filtration.

You are seeing some benefits some elevated demand.

Can you help us quantified.

How much improvement so you're seeing in some of those markets is some of that pull forward.

And on museum, maybe maybe the effect of according or unusual spikes that that would be not sustainable and other areas maybe sustainable.

Maybe just a little bit more color on what you're seeing in some of those markets that are benefiting.

Yeah. So again, we're using a China's our guide in terms of what's happened.

And what we expect to happen.

Yeah, our our demand this month is way up in hygiene health and consumables around the world, including China.

But in Europe, and North America, as well and one of our priorities right now is filling that demand. We do think there's increased usage I think it in a world where people are worried about thrown a virus.

You know anything that's related to the cleaning products hygiene personal hygiene products division increased use of those products.

Food packaging I think has a potentially a long term shift as people are are certainly eating out less and at some point in this process they'll start eating out again, but there may be some resistance by some people to to eat out. So I think I think we're anticipating.

This.

Well some of it's definitely a spike in demand some of its refilling pipelines.

And some of it as a as we think it a little bit of a shift in demand that's going to happen over time based on our customers.

We don't see any hoarding, we see we see customers ramping up their facilities and meeting demand whether that's our food customers are a hygiene customer. So so they're not building inventory of adhesives theyre using these eat adhesives as they.

As they get them.

Alright, and then last question I had is on the 5% there's just a few percent decline.

But you're guiding to for second quarter revenue.

Just trying to frame up.

What what you're seeing thus far in March two informed.

That range, maybe what assumptions, you're using to get to that range and is the 15% decline and a $19 million EBITDA number.

Is that a worst case scenario is that just a pretty bad case scenario, how did you get to that.

Yeah, we did a detailed assessment through each one of our segments because we know it would be an important question and people would have to model. It I.

I can let John comment more more on our process.

I would call a guidance right I'd call. It our planning assumptions, we have to build our plans and our business plans on what's going to happen.

As I mentioned in the comments earlier, if you looked at our March revenue numbers overall, you'd see a company that through Q1 and through through this month is right on plan.

But we do see auto plant shutting down we do see what happened in China in terms of certain market segments, where where there was a clear short term.

Dip in demand on on especially more durable goods. So so we modeled it what happened in China in aggregate into our views on our engineering adhesive business.

And we looked at what what's happening with H.C. and the feedback we had for our customers and our HFC business and applied very similar numbers to Europe, and North America, Europe, and North America to get through this quicker and the numbers would be on the high side of that maybe better.

There could be a much longer term problem in Europe, and North America, but we see this all on the EA side or construction adhesives, thus far construction demand and some a lot of the things we did to advance and new products continue to see good demand here in in March and and at this.

Point looking into April we still see solid demand in most of those segments. We are thinking that construction will slow down and maybe a bit.

Especially related to recessionary forces and uncertainty.

So that's what we modeled Mike but it was it was really educated based on what we saw but all that is temporary right. We see all that is temporary and then the only thing that we all need to figure out if is there a lasting recessionary impact of the last into Q3 in Q4, but that the downtime we talked about there was the list.

Temporary so I don't know John if you have anything else you want to add to that.

Yes, maybe just a little color around the approach then Mike we did that we went to the people who are running the business and image GPU in the region to get their view.

So, it's really sort of a bottoms up and not surprisingly, there's pretty wide range of outcomes that they.

Our.

Thank you can could be anticipated given how early we are in this the other thing we tried to assess is how quickly raw material cost savings could comment I think our position at least for this view as or that they won't.

Very much will show up in a second quarter and I think a big focus will be to try to accelerate those savings.

Alright, thanks, very much great color.

Okay. Thanks, Mike Thanks for the question.

Our next question comes from Ghansham Punjabi with Baird. Please go ahead.

Hey, guys good morning.

Great. Thanks, Thanks for taking my question.

I guess first thanks, Josh I, maybe following up on the last final question.

You know just from our check I mean, it seems like Theres, a fair amount of concern about employee absenteeism, along the supply chain and related disruption but.

Jim you mentioned that customers seem to be just sort of ordering like normal to service demand.

But you see a buildup on safety stock in some of the other businesses I mean your business is very very specified.

You know and done I assume that there's a longer production cycle.

Among the supply chain just curious as to your thoughts in terms of what you see this week, maybe versus last week and if you're seeing customers start to worry about Ron what he couldn't get.

What you.

Yeah, I would say that it well first off on the on the issue of Absenteeism I think thats a priority for us and I think most manufacturers understand how important that is and.

I'm part of the business community here, which has a lot of global companies in in the twin cities and clearly everyone's doing a lot of work to keep their manufacturing employee safe and healthy and and isolated from from other employees. So so what I see around the world is manufacturing sector employees, not having a major absentee.

Problem until this point.

The the supply chain issues, we see our are mostly people.

Filling demand that they have so so we don't see even in some of this specified orders you know the auto supply chain people trying to load up on adhesives rights I think people are trying to get a balance of the supply demand and.

We don't see at this point a lot of over over ordering it might that change in April and May and we see customers auto companies that are shutdown trying to build up that he is a supply potentially but but thats not what we say at this point.

And then in terms of the.

Specific PQ in the 5% to 15% and looking at the midpoint of EBITDA, that's sort of implies a 35% decremental how do you how do you see that shit.

During the back half of the as Bronco prices again.

On the downside and but for some of that impact and John you mentioned, you say Oh wait on nine as sort of a proxy for cash flow.

So how should we going back to that timeline, how did detrimental kind of base grew apart from the initial shock, which I assume.

Yeah, Yeah. So as you know that's it's clear from our commentary, we're not really commenting in detail on the second half of this year other than to say that we're going to get continued SDMA benefits that we're we're definitely going to get off raw material benefits that will happen and were quantifying and working to accelerate those and that this manufacture.

String project that we already started we'll start seeing benefits in the second half of the year. We also have other levers that we could pull but those are the three main levers that that were targeted on.

Yeah, I'll, let John give more color on on 2008 to 2009, but you know these are the high level numbers.

Our revenue from 2008 to 2009 was down 11% and our gross profit was up 380 basis point.

And our operating income was flat.

Working capital went from a use of capital to two to source of cap of source of cash and our cash flow was up 50% from 2008 to 2009. So that's what we saw back then.

When a different time and company is different but at the same fundamental things are what we anticipate and what we've modeled all the various scenarios John anything you want to add to that.

No I think I was a good description I think you know, obviously 2000 2000 likes it could be very different than what we're seeing right now, but I do think those fundamental things that we talked that Jim said on if we see a revenue decline.

We expect offsetting lower raw material costs, and we would see working capital free up. So those are the basic fundamental things that we think will be the case for the rest of this year and that's how we're looking at or cash flow.

Okay, and just one final one on the construction segment.

Hey, Jim you mentioned in your comments of backlog being pretty pretty healthy or.

Do you just give us some more color on that which protect what end markets you know kind of separated between roofing and flooring or whatever else is relevant thanks yeah.

Yeah. So so we've had conversations with up all of our major roofing customers right, which is the biggest segment.

And out with contractors and roofers and there's there's a pent up demand in that space. So they have current projects and and and insight into the next projects that they see continuing to go forward. So.

So yeah, they're concerned about filling supply chains in ordering and moving forward.

You know, how and when that will slow down really I think depends on people's the overall economic conditions in the country, but but what we see certainly what we've had we have the orders in hand and product shipped and sold and in March and what we see into April is still foot pretty robust there.

In the flooring business, we're seeing more activity at the big boxes them, we're seeing the distributors.

I think there's a bit of de iwai piece going on and maybe some planning around there. So so so we see a more activity there and then the other and then on or utility infrastructure business.

Pretty stable so far in terms of the projects and the things that are going forward, but again.

In a recession, we'd we'd expect that the slowdown if there is.

A recession is as we go forward.

And then we have some some anomalies in the business, we have a disinfecting products that we in our utility infrastructure business, that's used when people install new installations.

Especially after hurricanes or other issues that product of course is selling off the shelves and our team is doing everything they can to get that out in the hands of of users. It's effective against wrote a virus and as a is an uptick. So you know we have things like that that are out there as well that are better balance and things out, but but yeah. We have.

I see.

Right now we see construction strong, but we're really anticipated slowdown here in the second as of quarter.

Thanks, so much big Dave.

Okay you too.

Our next question comes from Eric Petrie of Citi. Please go ahead with your question.

Hey, good morning, Jim and John.

Good morning, or.

So question on electronics, you noted that volumes were up double digits and a lot of that was due to share gains, but if I'm looking correctly at your planning assumptions for 2020 up look like you have electronics hundred down moderately so just gives any color there whether it be impact of lower shipments to smartphones.

And remind us to how much of sales of electronics represent.

Yeah. So.

I appreciate your persistence on the second question, we don't we don't share specifically, our electronics business, but it is growing sizably and becoming a a sizable part of our business. We are gaining share both through through wins that we had that are impacting products that are being launched.

As well as you know the really great work that our team did in China helped us fill some needs that are out there in the market that others weren't able to fill needs. So business that we maybe were.

Where we're about to replace got accelerated.

Because of our ability to get our yantai facility up and running so quickly.

I would say the down moderately is only because of what we read externally our business is very strong in electronics and and you know it could be up it could be down certainly would've been up a lot more.

In Q1, if if the Corona virus had hit hit China.

Thank you and as a follow up are you seeing any near term pressures on the smaller mom <unk> pop that uses suppliers and can you gained share there is there an opportunity for for consolidation than industry.

Yeah, and I think everybody's into in a different position depends on the nature of their business certainly if somebody's a smaller company that exports around the world they've got a lot of challenges right and there's a number of those that have a sizable part of their business or at least a piece of business, where they're trying to ship around the world. That's a big challenge for small companies.

And then you know in their local market depending on the nature of the situation you know if you're a small hughes of company and who they province.

Your ability to serve all China is dramatically impacted so it doesn't who they are but I would say broadly speaking as I as I said in the script the matter comments.

Our global supply chain, our team's ability to work around the world has been a a competitive advantage.

Enabled us to serve customers really well and benefit the and demonstrate the benefits of our strength as a company not just versus small suppliers, but also big suppliers, who maybe are distracted with other parts of our business. You know they were everybody in this company worries about the adhesive business and where and how this.

But and I think that's a a fundamental advantage that we had.

In our our our understanding and our singular focus and making that happen versus companies that have out a lot of other needs in a lot of other different parts of the business.

Great. Thank you.

Thank you Eric.

Our next question comes from David David Begleiter of Deutsche Bank. Please go ahead.

Hi, This is Peter from here or I guess first question, just saying or restructuring savings how much do you expect you will I think use and the second huh.

Yeah, Let me, let me give that to John but I think I think we said originally it would be a two thirds this year and we're doing work to accelerate that move some of those savings of forward. So that 25 to 35 million. We originally said was going to be two thirds. We're now saying we're at the high end.

And we're also working to accelerate that some of those savings. So John I don't have specific number on Q2, you can share.

Yeah, I think Q2 will you will be at least what we realized in Q1, which was $6 million and we'd expect that to increase slightly over the year as Jim said, we originally had a range of 25 to 35 million with two thirds of that.

Realized this year, which would put US you know.

So you could you can do the math on that obviously our goal is to exceed that.

And the second one either how much pricing erodes can you expand.

Year from lower raw materials, and probably weaker demand.

Yeah. So we're not really in a position to to quantify that on that we certainly.

See that the dramatic change and petrochemical prices is something that's very easy to happen that quickly.

And we definitely a little benefit us normally it takes a couple of quarters for us to see those benefits. We think in this environment there could be an opportunity to accelerate that but we don't go up and down with petrochemical with with oil prices, except when it makes dramatic moves like this and normally there's a phasing it.

That.

Supply demand drives us more than anything and if.

Supply demand slows down that will also be contributing positive factor, but.

You know the models were running show that the what we're seeing as potential downturn in the second half of this year will be offset by raw material savings. So John you want to add anything there.

Yeah, well just only point as you know, even though raw materials have been dropping.

They are customers are more concerned with supply than price right now so that's going.

They're big focus.

Yes, and no I got spots currency is assuming the current energy prices.

Your next one level of raw material savings are we talking about and then how much pass.

Back to realize from working capital.

Yeah, again, we're not modeling or providing guidance on what that's going to be in the last half of the year, but you had I think the you know it's it's a.

It's a sizable tens of millions of dollars of a benefit on on raw materials, and and we see that flow through and working capital as well so.

John you want to add anymore.

No I think there at near your question also on working capital.

We would we have been targeting to reduce working capital by.

Hundred basis points as a percentage of sales. This year, we think that we're still on track to do that if we have lower sales will see lower working capital. So the percentage should hold.

Okay. Thank you.

As a reminder, if you would like to ask a question. It is star then one our next question comes from Jeff Zekauskas of JP Morgan. Please go ahead your question.

Hey, Jeff you might be on mute.

Hi, I'm sorry about that.

Hi, Jeff.

How are you.

Can you remind us what percentage of your sales were to the auto market.

2019.

And how you expect pillars.

Use of sales to the auto markets to bear in 2020.

Yeah. So.

That's a great question. So if you can figure that out we're looking at the external numbers in terms of.

Of car builds in trying to manage our plans around that certainly at this point we're expecting.

A decline I think the latest numbers I saw in the U.S. were up 20% decline and builds but that number moves around everyday and every week, Jeff. So so we're building that into our second half models a decline, but we don't know exactly what it is our our revenue in a in auto is between five and 10.

10%, you know well on the lower end to that.

Yeah.

So I wish you could just speak a little bit more specifically to the I think you set up 30% decline revenues and engineering adhesive. So the second quarter. So there must have pockets of.

Much better performance pockets, so much worse perform.

Yeah, I'll give us an idea of what the LIBOR sorry.

Yeah.

Yeah. So ER, so solar new energy was was down Sizably and it again. These are things were expecting around around the world from auto auto and anything transportation related was down sizably markets like.

Textiles footwear filtration down less though so you know I'd say things that are more.

Consumer oriented or construction oriented were down less and things that are more heavy durable goods bus truck rail.

And then solar for infrastructure panels were down more John you want to add something to that.

Yeah, just just for your reference Jeff we added a slide and presentation that was posted in the appendix, it's sort of shows those different markets and so on the down moderately.

One other other than construction those are the those are the engineering adhesives markets would be down moderately.

Okay.

Okay.

Hum normally when oil falls, you say well you know we don't.

Well you know difficult to know how are you know what affects our raw material cost, but you're stance is much different with oil being down very sharply.

You do you expect to see a widening of your price raw material.

GAAP.

For a period of time and a habit close up the customers really want prices to come down very quickly or where do you think there'll be more patients.

Yeah, I I, it's a it's true that normally when oil comes down and normally oils moving it up at $10 a barrel and people were asking there you can see Romero decline and I say no right because it goes up and down 10 or $15 barrel that.

Now when it moves $30 a barrel there's a substantial change in the cost structure of our suppliers that we think will eventually get passed on to US normally that's a that's a nine month cycle. We think the fact that their costs are down combined with the supply dynamic demand dynamics that.

Will likely be unfavorable across the chain and with China's chemical production ramping up.

So we see a positive dynamic for us.

And and you know, it's it's not like.

Huge but its you know sizeable right in 2008 2000 attendees, we share there so so and.

So that that that gives you some color right and we think it opened a buffer any kind of recessionary.

Decline that we see it in volumes as far as customers reaction and we about 15% of our revenue that moves on some sort of an index.

Some of those are tied to external numbers and some of those are just tied to what our costs are so we've set agreements up with customers. The other 85% most of those products are specified. We you know we won't see any change in pricing and some of them. We'll have negotiated pricing. So so yes. Some of it will be given back to the market but.

A lot of it will be retained.

Can you turned off your Capex, if you need to or are you pretty much.

You know fixed fixed on what you're going to spend this year.

Yeah, I think one of the things just you Ah you saw on the.

On the slide on our on our earnings.

Earnings release was a very strong commitment to deliver the $200 million in and in debt.

I think two fundamental principles John I haven't our leadership has is build the company for the long term and make certainly deliver that $200 million and debt pay down so we.

We definitely have some levers on on capital that yeah can be pulled back and in fact, some some projects we've been able to delay already so see I think theres an opportunity there and we also think there's a sizable opportunity on working capital Jeff. So so so yeah. We think those are two levers that we can modify depending on how the world.

Looks when we come out of this.

It's just the last question like order of magnitude Jim I know, it's early days and.

The virus issue and the downturn like do you think that you're in that H.B. Fuller his experience will be similar to what it was in the 2000.

2009 downturn, Peter maybe you guys were down 20%.

And when you look at your the kinds of near term forecast that you have.

Seems sort of similar <unk>.

Yeah, Yeah, Interestingly, Jeff we were Ah, we were flat and EBITDA from 2008 to 2009 and into 10. So you know what it was this this raw material piece and some of the savings were able to generate that offset declines in volume. So yeah, and I think a you know our base case is.

As I said in the script is this Q2 decline and mostly around E Bay and somewhat in construction and then some recessionary forces. We're not we're not expecting a great recession type of a of decline that we've got scenarios that are built like that we got scenarios that are built worse than that but.

Some recessionary impact into Q3, maybe into Q4 is what our planning assumptions are right. So I wouldn't call that a projection or guidance I'd just say, that's what we're planning for.

Okay. Good luck to cast.

Thanks, Jeff Thanks Elliot.

[music].

Our next question comes from Rosemarie Morbelli with Gabelli and company. Please go ahead with your question. Thank you good morning, everyone.

Good morning Rosemarie.

I was wondering if you could touch on the potential financial issues from some of your customers have you.

Thanks, and some bad debt into consideration that we see Liberals that you're not going to get some smaller customers Seth filing.

Uh huh.

Yes, we've you know we've looked at 2008 and we factored some of that that is I don't know John do you want to comment on that.

Yeah. So I'd just say given current state. We are we haven't seen any any customers a file world, they're doing a pretty in depth review of customer credit quality as we always do but we're stepping that up given the current situation. So I think we would.

Being a position to get out ahead of hopefully a situation where customer was under significant stress.

I would comment Rosemary that are our credit team is outstanding they've leveraged a lot of learning around the world. So if you look at our numbers relative to industry benchmarks in times in normal times, we've we've outperformed external benchmarks.

Okay, Thanks, and could you give us a little more details.

Ah Lisanti I'll comment on China durable goods.

Having spike to me.

Which areas was bad debt and Oh, whereas those particular areas down substantially and now just filling up yeah the pipeline.

Yes I.

No I didn't say the durable goods spike H.C.. So all the hygiene products the packaging products consumable products. Those have have have come up dramatically and we see a lot of demand there and we see consumers using them right. Today I was on the phone with our Guy Who's Who's leading China people are on the streets of Beijing in.

Well again, we have a a number india in the appendix, but but I would say across all of our businesses. The the the products are deemed essential in some way or another so so it's not like we're.

So in everywhere around the world the facilities, we have supply a central markets and therefore the facilities are open.

Okay. Thank you very much and you guys stay healthy.

You as well Rosemary you on your family.

Our final question comes as a follow up from Mike Harrison. Please go ahead.

Hey, just just a quick one here.

You.

Talked a lot about cash flow and your expectation that cash flow is still going to be solid for the year and your $200 million of expected debt pay down.

I was just wondering can we think of that is as maybe you'll keep that $200 billion or accrue that cash on the balance sheet, rather than pay down, but that's right away in an environment, where cash and liquidity is gonna be very important or are you definitely committed to some kind of timeline or.

Specifically paying down the debt.

Yeah. So you know our liquidity situation is extremely strong in the most ridiculous of scenarios, so and Weve run them all Mike. So so we don't have any concerns about about.

Managing cash so we haven't set a specific timeline on our debt pay down as you know it's weighted towards the third and fourth quarters because of how our demand cycles and that's probably how it'll happen this year.

So.

On on essentially our three priorities that I talked about red supplying our customers, making certain that our employees in our communities are safe and then preparing for the future and you know where we're doing a great job managing this crisis and hopefully if you felt that through this call, but importantly, I think for our investors. So this is going to make us a stronger company.

An out of this crisis and I'm really proud of the work our employees are doing so.

It's a I really appreciate the question certainly.

The the timing probably won't be affected by that so.

Okay.

Thanks, I understood. Thanks, very much. Thank you. Thanks, everybody for your time on this call again.

I ask.

Our hearts are with all of you. We appreciate your time here with H.B. Fuller in please keep yourselves your families and your community safe.

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

[music].

Hmm.

[music].