Q3 2020 HB Fuller Co Earnings Call
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Good day, and welcome to the H.B. Fuller third quarter Investor call.
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I would now like to turn the conference over to Barbara Doyle, Vice President of Investor Relations. Please go ahead good.
Good morning, and welcome to H.B. Fuller third quarter 2020 earnings call for the fiscal quarter ended August 29th 2020.
Our speakers are 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.
Please let me cover a few items before I turn the call over to Jim first.
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 this call unless otherwise specified discussion of sales and revenue refer to organic revenues and discussion of B P. S margins or EBITDA refer to adjusted non-GAAP measures. These.
These measures are in addition to the GAAP results in our earnings release and in our forms 10-Q and 10-K.
We believe that discussion of these measures is useful to investors to assist the understanding of our operating performance and the comparability of results with other companies right.
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.
Many of these risks and uncertainties are and will be exacerbated by cobot 19, and any worsening of the global business and economic environment as a result acts.
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 forms 10-K, and 10-Q filed with the SEC and available on our website at investors Dot H.B. Fuller Dot com now.
Now I'll turn the call over to Jim Allen.
Thank you Barbara and welcome to everyone on the call in June we reported second quarter results that were ahead of expectations and ahead of our competitors performance last.
Last evening, we reported strong third quarter results with $691 million in sales 76 cents of adjusted EPS and $106 million of adjusted EBITDA.
Our third quarter results were also ahead of our expectations and ahead of the prior quarter.
The fourth quarter, we expect to deliver EBITDA results in line with the fourth quarter of 2019.
The performance over the last two quarters and our expected performance are a direct result of the actions, we took to reorganize our business and invest in growth segments and opportunities.
This performance is also a result of the strength of H.B. Fuller his leadership team and our position as a leader in the disease of industry.
Our operational performance in the third quarter resulted in a solid sequential improvement in sales EPS and EBITDA.
In the quarter, we leverage new business wins and market share gains into revenue performance that exceeded our expectations. We.
We also continued to capture raw material savings and realize operational cost efficiencies from our business restructuring supporting EBITDA results that were better than we had forecasted.
Cash flow performance continued to be strong and year to date cash flow from operations increased 20% versus the same period last year and enabled us to exceed our pay down target for the quarter and keep us on track for full year debt paydown of $200 million.
Throughout 2020, and especially in the last six months, we have leveraged our 72 factories in globally connected operations and supply chain teams to ensure consistent delivery of adhesives for essential goods around the globe. During this crisis, we have not let our customers down.
We've also leveraged our broad adhesive technology portfolio and the applications expertise of our people to support customers, who needed to solve supply problems or develop new products.
While other companies may have taken similar actions H.B. Fuller is dedicated focus on adhesive technologies and our global capabilities have positioned us to move first and fastest to deliver results for customers.
We have leveraged our investment in digital tools to improve our service to customers deliver innovation faster collaborate internally more effectively and increase the speed of decision making.
Our global operations are agile and have been crucial differentiators for H.B. Fuller as our customers faced significant upward shifts in demand of some products and downward shifts and other products.
Our ability to meet increased demand and ensure customer supply and our capabilities to remotely qualify new applications and troubleshoot complex problems.
Have proven to be competitive advantages.
As a result, we have been able to shorten sales cycles increased share with existing customers and win business with new customers.
These results were evident in the second quarter as we outperformed the market and competition.
Our sequential top line improvement this quarter directly reflects the proactive collaborative approach, including our ability to deliver new applications and provide world class remote customer support.
Our performance in the third quarter also reinforces the value of H.B. Fuller is strong product customer and end market mix hygiene health and consumable results remain positive in the quarter, but moderated from the very strong performance in the second quarter as surge buying dissipated and economic slowdowns in India.
In Brazil impacted results at the site.
At the same time engineering and construction adhesives performance improved meaningfully on a sequential basis, particularly in engineering adhesives, we were well positioned to meet increasing demands as markets opened up.
New customers were gained and China began moving toward more normal demand patterns.
Our reorganization into three global business units at the beginning of this year is helping us win with customers and execute more effectively in each of our market segments.
The organizational realignment is also enabling us to generate $35 million of annualized savings of which 30 million will be realized in 2020, including $7 million of SGN a savings realized in the third quarter.
As.
Just on our last earnings call earlier. This year, we initiated a review of the company's manufacturing operations and supply chain utilizing the support of an external consulting.
As an outcome of this review we identified opportunities in three areas.
One lower cost operations at individual sites by leveraging best practices into a number of our higher cost facilities to a roadmap toward manufacturing footprint consolidation and.
And three acceleration of our inventory reduction plan through improved supply chain processes.
Based on specific projects identified we have validated $20 million to $30 million in manufacturing cost savings from these initiatives with approximately half of these savings to be realized in 2021.
We are also targeting and inventory reduction of approximately 25 million in 2021 through these initiatives.
Now I will move on to our segment results in the third quarter on slide three.
Hygiene health and consumable adhesives third quarter organic sales increased 1% year on year.
Cross the second and third quarters, we have seen strong growth throughout this segment, including packaging tissue and towel hygiene and health and beauty.
Third quarter global growth and hygiene health and consumables was muted by significant volume declines in Brazil and India.
H.C. segment EBITDA margins were strong at 13.6% margin.
Margin was down slightly versus last year, primarily reflecting mix and the timing of some expenses offset by lower raw material costs and savings from the restructuring of the business.
Construction adhesives revenue was down 12% versus prior year, but improved from the second quarter with higher sequential revenues in both flooring and roofing.
This profit of progress was delivered despite continued covert 19 related disruptions in commercial construction, which is a significant part of our construction adhesive business.
Retail channels remains strong for do it yourself activity, while contractor flooring work and commercial roofing activity improved at a slower pace.
Construction adhesives, EBITDA margin was solid at 15%, reflecting new product introductions and improved product mix related to last year's portfolio repositioning as well as operational improvements from the GPU restructuring. These.
These operational improvements position this business for strong margins when commercial construction activity increases.
Engineering adhesives results improved significantly in the third quarter double digit growth in electronics recreational vehicles, and technical textiles, and solid results and insulating glass in woodworking offset slower, but improving results and transportation related markets total organic engineering in here.
As of revenues declined less than 3% versus last year and.
Engineering adhesives, EBITDA margin remains strong at 17%.
And Walmart margins were down versus last year, we sold very good sequential margin improvement of 210 basis points versus the second quarter due to better volume and mix lower raw material costs and restructuring savings.
Our planning assumptions for the fourth quarter have been developed in an environment that continues to evolve and will be impacted by covert of related restrictions and the corresponding recessionary impacts.
We have taken a granular approach by segment and geography, and analyzing our future results.
Our core planning assumption is the cobot related shutdowns will not worsen, but recessionary forces will result in a year on year economic contraction for the rest of this year and into next year.
As discussed last quarter, we believe that the second quarter had the most acute impacts with sequential improvement in the third and the fourth quarters.
Elevated demand for hygiene and health products packaging paper tissues, and towels will likely continue through the year as consumers continue to spend more time in their homes HHG volume should improve from Q3 to Q4 as manufacturers work down inventory levels and start restocking construction at.
Construction adhesives performance in Q4 is expected to improve versus Q3 with commercial markets, improving but at a slower rate than residential activity.
Engineering adhesive demand picked up throughout the third quarter and we expect those trends to continue into the fourth quarter we.
We anticipate the demand for the transportation and durable goods markets will continue to improve in the fourth quarter supporting sequential improvement in engineering adhesives volumes as we exit the year.
Raw material costs have started to flatten and we expect raw material costs in the fourth quarter to be similar to cost in the third quarter, but still down year on year.
Improving volume trends, our ability to capture raw material savings and reduced working capital requirements will enable us to continue to drive strong cash flow. This.
This will enable us to meet our commitment to pay down debt by $200 million in 2020 exceeding our three year target.
While the economic backdrop is not great. Our performance in the first nine months of 2020 demonstrates that our business is diverse and resilient our operations, our nimble and we are executing our strategy well.
H.B. Fuller has multiple levers to deliver strong results in this fast changing environment.
Now, let me turn the call over to John Corcoran to review, our third quarter results and our outlook for the fourth quarter based on these planning assumptions.
Thanks, Jim I'll begin on slide four with some additional financial details on the third quarter.
Net revenue was down 4.7% versus the same period last year currency and the divestiture of the surfactants and Thickeners business had a combined negative impact of 2.2%.
Adjusting for currency and the divestiture organic revenue was down 2.5% with volume down, 2.1% and pricing, having a negative 0.4% impact year on year in the quarter.
Year on year adjusted gross profit margin was 27.3% down versus last year on lower volume and unfavorable mix offset by raw material savings.
Adjusted selling general and administrative expense was down 6.4% versus last year, reflecting actions related to the business reorganization announced last year lower travel expense and general cost controls.
Adjusted EBITDA for the quarter of $106 million was above the high end of our planning assumptions, reflecting strong improvement in top line performance, particularly in engineering adhesives.
Adjusted earnings per share were 76 cents and strong volume improvements raw material savings and lower interest expense associated with our debt reduction actions drove higher earnings per share than last quarter.
Year to date cash flow from operations of $193 million is up by more than 20% versus the same period last year, reflecting continued improvement in working capital performance.
It allowed us to continue to reduce debt paying off $59 million in the quarter keeping us on track for our full year debt Paydown plan.
Regarding our outlook based on what we know today and the planning assumption for Jim laid out earlier, we anticipate revenue to be up 4% to 7% sequentially from Q3, which is flat to down 3% year on year and EBITDA to be between 110 and $115 million in the fourth quarter as improving.
James and lower SG nay related to restructuring savings offset continued disruption in recessionary forces.
We expect cash flow to continue to be strong in the fourth quarter, 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 continue to have more than adequate liquidity to meet foreseeable needs. This includes a $400 million revolving credit facility with a built to an accordion feature that allows us to upsize that facility by $300 million if needed.
We also have ample room under our debt covenants using even the most conservative scenarios.
With that I'll turn the call back to Jim Owens for some closing comments.
Thanks, John.
Last quarter, we told you that we were in a stronger position than we were six months ago to.
Today I can confidently say, we are even stronger after another quarter of great execution.
This performance is a direct result of consistent execution of our strategy and the way in which we have managed the business. We continue to benefit from our leadership position as the largest dedicated manufacturer of adhesives in the world and we are focused on creating value for our shareholders through all business cycles.
A decade ago, we began building a strong portfolio focused on high growth markets, requiring highly specified adhesive solutions when.
When we acquired Royal in 2017, we diversified our customer base and expanded our technical capabilities are too.
Our 2019 organizational realignment accelerated our ability to respond to end market trends, while generating $30 million of cost savings this year and we have.
And we have begun the next phase of our operational cost improvement plan by driving efficiencies across our manufacturing footprint and reducing costs by $20 million to $30 million by the end of 2022.
Our leadership team is strong and experienced including the additions over the last year and H.C. construction and in the Chief operating officer role.
At multiple levels across the leadership team, we have the right expertise to continue to proactively address our business opportunities and to drive results.
In the near term, we are well positioned to win during the reopening of economies around the world and as end markets continue to improve.
We are also well positioned for the future as new opportunities to differentiate H.B. Fuller evolve and electronics sustainable packaging medical new energy applications and as we help our customers reduce costs and deliver new products that improve the lives of consumers.
While coated related uncertainties persist.
Our end markets continued to show signs of improvement and we are well positioned to grow as global economic forces continue to evolve we.