Q4 2020 HB Fuller Co Earnings Call
Your question during the session you will need to press star one on your telephone.
Be advised that today's conference is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to your Speaker today, Barbara Doyle Vice President of Investor Relations. Thank you. Please go ahead.
Good morning, and welcome to H B Fuller's fourth quarter fiscal 2020 earnings call for the fiscal quarter ended November 28 2020.
Our speakers are Jim Owens, H, B, Fuller, President and Chief Executive Officer, and John Corcoran, 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 and references to organic revenue, which excludes the impact of foreign currency fluctuation 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 EPS margins or EBITDA refer to adjusted non-GAAP measures.
These measures are in addition to the GAAP results in our earnings release and on our forms 10-Q and 10-K, we believe that discussion of these measures is useful to investors to to assist 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 COVID-19, pandemic and any worsening of the global business and economic environment.
The result.
Actual results could differ materially from these expectations due to factors discussed on 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 HB Fuller Dot com.
Now, let me turn the call over to Jim Owens.
Thank you Barbara and welcome to everyone on the call.
Last evening, we reported strong fourth quarter results with organic revenue up 5% EBITDA up 9% on EPS up 21%.
These results exceeded our expectations in each of our segments delivered positive organic growth and strong margin performance in the quarter.
This performance is especially strong given its comparison against a pre COVID-19 environment.
And as a result of the work we've done to gain market share and reduce our cost structure.
During today's call and in the months ahead, we will explain and demonstrate why you should continue to expect differentiated performance from HB Fuller.
Throughout the year, our portfolio of innovative adhesive solutions and hygiene health and packaging has enabled HB fuller to continuously meet high levels of demand for our central consumer products.
We outperformed the market in meeting these needs.
During this time, we also work with customers in other markets to accelerate our product qualification processes for electronics and durable goods and as demand around the world strengthened and global industrial production improved we capitalized on share gains across our diverse markets to deliver fourth quarter results ahead of.
Of our expectations.
We also realized significant operational benefits from the business realignment completed earlier in the year, which generated $30 million of annualized SG&A savings in 2020, including $10 million realized in the fourth quarter, resulting in strong profit growth and operating leverage.
Our work in 2019 in advance of the pandemic to reorganize into three Gpus instead of five has enabled us to grow faster while reducing costs.
Our strong cash flow performance continued in the fourth quarter cash.
Cash flow from operations increased 27% year over year.
It enabled us to pay down a total of $205 million of debt for the year above our original $200 million target.
Our results in the fourth quarter and throughout the year reinforced the resiliency of HB Fuller strategy.
Our culture of collaboration are broad adhesive technology portfolio, our applications expertise and our global operational agility proved to be differentiators in this current environment.
HB Fuller seamlessly supported the dynamic needs of our customers and our world transformed by the COVID-19 pandemic.
Throughout the pandemic several priorities have remained constant for us ensuring the health and safety of our employees leveraging our technology investments to find new ways of working and utilizing our vast global capabilities to ensure business continuity for our customers.
All companies have had to learn how to work differently in 2020.
But I can say that HB Fuller team has truly excelled in this environment.
Can't emphasize strongly enough how proud I am of our employees around the globe for their unwavering focus on delivering our priorities throughout 2020.
Our teams effectively collaborated with each other and with our customers to develop new products and solve supply issues.
And they did it faster than ever.
We leveraged our digital technology and new ways.
To remotely qualify new applications and.
And troubleshoot complex issues.
The result was an increase in the speed of our decision, making shorten sales cycles and improved customer support.
Our new organizational structure enabled greater collaboration across our global teams faster decision, making and better flexibility.
H B Fuller's dedicated focus on adhesive technologies, and our global capabilities have positioned us to move first and fastest with a clear vision and mission.
No distractions from other divisions other priorities or regional issues.
These are proven to be critical competitive advantages, resulting in increased share with existing customers and business wins with new customers.
With that as perspective I'll move on to our segment results in the fourth quarter on slide three.
Strong performance continued in our hygiene health and consumables segment, where organic revenues increased by 5%, including solid organic growth in most geographic regions.
We continue to meet high levels of demand for our central goods in the quarter and our portfolio of adhesive solutions that enable more sustainable consumer products drove strong growth in packaging tissue and towel and tapes and labels.
<unk> segment EBITDA margins were strong at 15, 3% up 270 basis points year over year, reflecting volume leverage favorable mix savings from our business restructuring and good overall cost control.
Construction adhesives organic revenue increased 1% versus the prior year with improvements in year on year performance for all markets when compared with the second and third quarters of the year.
Both the commercial flooring and roofing end markets improved in the quarter, albeit at a slower pace than residential construction markets.
Construction adhesives EBITDA margin was solid at 12, 4% down 80 basis points versus last year, reflecting unfavorable mix and an increase in variable compensation accruals as a result of the stronger top line results in the fourth quarter.
For the full year EBITDA margin was roughly flat to 2019, new product introductions and improved product mix related to last year's portfolio repositioning as well as operational improvements from the <unk> restructuring offset the impact of lower volume.
These operational improvements position this business for strong margins as construction activity increases in 2021.
Engineering Adhesives continued to show strong improvement with organic revenue up five 6% year on year in the quarter led by double digit growth in electronics recreational vehicles, woodworking and panels and solid results and insulating glass and automotive.
Engineering adhesives EBITDA margin remained strong at nearly 17% down 80 basis points versus last year, reflecting an increase in variable compensation as a result of the stronger topline results in the fourth quarter.
Looking ahead to 2021, we will pursue growth opportunities and share gains in a business environment that is expected to continue to improve.
But remain below normal levels.
Our planning assumptions at this time are the COVID-19 related shutdown impacts will continue to lessen as vaccines are rolled out around the world. Although recessionary forces will continue to weigh on global economies throughout the year, we anticipate continued improvement in underlying demand, especially for electronics durable goods and consumer.
<unk> driving volume growth in 2021 versus 2020.
Growth in some end markets such as commercial construction and aerospace will improve at a slower pace. It may not yet returned to 2019 levels of activity.
Elevated demand for hygiene and health products packaging paper tissues, and towels will likely continue into 2021 as consumers continue to spend more time in their homes.
The spikes in demand that we saw on the second quarter, however are unlikely to repeat.
We anticipate construction adhesives end markets to continue to show steady improvement throughout 2021 with commercial.
Shall activity improving throughout the year and residential activity remaining solid.
Engineering adhesive end market demand will likely remain at elevated levels in early 2021.
Reflecting increased production activity to meet some pent up demand.
Turning to more typical activity levels in the second half of the year.
In total our base planning assumptions are for low to mid single digit organic revenue growth in 2021 with stronger growth from engineering and construction adhesives versus 2020.
We expect volume leverage and savings from our restructuring and our operational improvement programs to drive solid year on year EBITDA margin improvement in 2021.
Sales growth improving margins and continued working capital efficiency will enable us to continue to drive strong cash flow and deliver another year of strong debt pay down with a target of paying down another $200 million of debt in 2021.
Against a challenging economic backdrop, our performance in 2020 demonstrates that our business is diverse and resilient our.
Our operations are nimble and we are executing our strategy well and we expect to continue to outperform our markets again in 2021.
Now, let me turn the call over to John Cortland to review, our financial results on our expectations for 2021 and more detail based on these planning assumptions.
Thanks, Jim I'll begin on slide four with some additional financial details on the fourth quarter for.
For the quarter revenue was up five 2% versus the same period last year current.
<unk> had a positive impact on the <unk>, 5%.
Adjusting for currency organic revenue was up four 7% with volume up 5% and pricing, having a negative 0.3% impact year on year on the quarter.
Year on year adjusted gross profit margin was 27, 5%.
Down 10 basis points versus last year as higher volume was offset by higher variable compensation and unfavorable absorption due to a reduction in inventory and.
On adjusted selling general and administrative expense as a percentage of revenue was down a full percentage point versus last year, reflecting savings associated with the business realignment and lower travel, which was partially offset primarily by higher variable compensation associated with strong fourth quarter results.
Adjusted EBITDA for the quarter of $123 million.
It was up nine 4% versus last year and above the high end of our planning assumptions, reflecting strong topline performance, particularly in engineering adhesives.
Adjusted earnings per share were $1 <unk>.
Up 21% versus the same period last year.
<unk> volume growth lower SG&A and lower interest expenses associated with our debt reduction actions drove higher earnings per share than last year.
For the quarter cash flow from operations of $139 million is up by 27% versus the same period last year, reflecting continued improvement in working capital performance.
This allowed us to continue to reduce debt paying off $205 million for the full year ahead of our $200 million debt Paydown plan.
With that let me now turn to our guidance for the 2021 fiscal year <unk>.
Just on what we know today and the planning assumptions that Jim laid out earlier, we anticipate full year organic revenue growth be in the low to mid single digits and EBITDA to increase by approximately 10% as volume leverage pricing manufacturing and supply chain savings and carryover of the restructuring related savings in SG&A.
Offset higher raw material costs variable compensation rebuild and higher travel expense.
We expect our 2021 core tax rate to be between 26% and 28% compared to our 2020 core tax rate of about 25% the higher tax rate as a result of forecasted income by region and the tax impact related to the global cash management cash.
On expenditures are expected to be approximately $95 million in the 2021 fiscal year, and we expect to devote approximately $200 million of.
Of our cash flow after capex investments and dividends to the repayment of debt.
Now, let me turn the call back over to Jim to wrap us up.
Thanks, John.
In 2020, we proved our ability to consistently and effectively execute our strategy in the toughest of times when we reinforced the business resiliency that comes from our broad portfolio of adhesive applications and diverse end market exposure.
Most importantly, we have created momentum as we head into 2021.
Revenues increased and margins improved sequentially throughout the year and in the fourth quarter, we delivered 5% organic revenue growth.
With positive organic growth in each of our segments.
The momentum we have created is enabling us to outperform our markets and as a direct result of actions we've taken over the past few years to realign our organizational structure and strengthen our ability to grow.
Our business realignment accelerated our market focused innovation and enhanced our collaborative capabilities, enabling us to consistently meet customers' needs and capture growth opportunities.
And the business realignment also enabled us to do this through a simpler lower cost structure.
Looking ahead, we are only just beginning to see the benefits from these actions our customer wins continue to grow and we are still on the process of implementing changes and optimizing the business with a focus now on driving 20% to $30 million of efficiencies across our manufacturing network by the end of 2022.
We are encouraged by share gains in new customer business. We have won in 2020 that helped drive revenue growth as we exited the year.
Our focus on innovation to drive new business continues in 2021, and our new product pipeline is stronger than it has ever been.
We continue to expand our portfolio of adhesive applications that enable more economical and environmentally sustainable buildings and products.
Some examples include our single ply membrane spreadable roofing adhesives are fast to K pole and post setting material advanced adhesives for solar panels, and insulating glass formaldehyde free low monomer emission adhesives to support low VLC structural wood products on panels.
And a growing portfolio of adhesives for electronics, including applications used in smartphones and Wearables touch panels in keyboards.
And interiors and exteriors in both traditional and electronic vehicles.
In December we announced our advance hot melt adhesive technology for extreme cold storage of vaccines and medical packaging, which provides a secure bond at minus 70 degrees Celsius day.
<unk> also remains strong for sustainable packaging solutions, such as HB Fuller has closed sesame tapes that support easily returnable packaging systems, <unk> adhesives for paper and hygiene products and our micro sphere adhesive technology for removable signs and labels. This.
This high level of demand reinforces the importance of our <unk> solution in today's world.
These are just a few examples of the innovation, we are bringing to market with our strong product pipeline and the continued optimization of our operations. We are confident in our ability to build on our success driving further share gains and continued margin improvement.
We exited an unprecedented year in 2020 as a much stronger company and as the world's largest dedicated provider of adhesives, we are uniquely positioned to capture future growth opportunities and deliver for our shareholders strong sustainable results in the months and years ahead.
This concludes our prepared remarks today operator, please open up the call. So we can take some questions.
As a reminder to ask a question you will need to press star one on your telephone to ensure your question press the pound or hash key please standby, while we compile the Q&A roster.
Our first question comes from Jeff Zekauskas with Jpmorgan. Your line is open.
Thanks very much.
Hi.
In your remarks, you said that.
Raw materials go up you should be able to offset it with price increases.
How much price do you need to offset your raw material inflation.
Yeah, So Jeff as you know raw materials are starting to move here early in the year.
Right now it's.
Commodity materials things like.
Propylene and ethylene and only about 13% on what we buy is those materials.
We typically the 87% on what we buy is specialty materials and those typically lag those commodity materials. So we don't anticipate we're seeing and anticipating a ramping up of increases that will probably hit us more on the second half than the first half. We have started some price increases here in February and March.
So.
So I'd say its a fluid plan, Jeff, but but I think for the full year increases of <unk>.
One maybe 2% for the full year, but that ramps that starts at a pretty low number in the second half of the year will be closer to three or 4%.
Right. So shouldn't your organic growth towards 2021 be higher than low to mid single picture, if youre going to GAAP.
A couple of percent from price alone.
A few grew at a low single digit rate that would imply no volume growth or not much volume growth, but surely you should do much better than that now.
Yes, let me let me, let John give you a little more color on it but I think I think Jeff. It's a it's a fluid environment out there. So I think there's a lot of reasons to be optimistic certainly given how the year end and the comps were up against and certainly there will be some some price impact of.
102%, but.
But I think I'd say, it's a fluid world. So we're not going to anticipate.
Exactly where it's going ahead.
Until things play out here a little bit.
Go on into the start of the year, but but yes, I think there is a case that that organic growth could be a little higher depending on where the world goes John you want to add to that.
Yes, just on the point on pricing so Jeff we would probably expect that if we saw 152%.
Raw material inflation, we might get closer to 1% pricing, which would fully offset the dollar impact.
Obviously, a 1% increase in pricing, what offset approximately a 2% increase on raw materials. Eventually we want to get back to where we're getting that full 2% to get our margins back.
Back to where they were but that sometimes takes a little longer. So I think as we think about a 1% to 2% raw material inflation world We're probably.
Around 1%, maybe a little bit lower than that from a pricing standpoint.
Okay.
Lastly.
The margins in engineering.
Construction on the fourth quarter were down year over year.
And even though the revenue growth.
Gearing was really pretty strong.
And you talked about taking out $10 million in costs.
It didn't look like the $10 million in costs really came out of those two segments.
Did it come out of Hh C and where are you satisfied with your margins in engineering.
Yes, I think I think broadly speaking, John and I'll, let John again, Jeff I'll, let John give a little more color as it's really about this.
Yeah.
Accrual of variable compensation that was because we over performed in the fourth quarter, we need to build up some accruals that really impacted the last few quarters. So.
So that was fundamentally what I think would have shifted margins to be more more positive than they were so we were happy to see 21% EPS and double digit growth, but I think to your point with that organic growth you would normally see even better numbers.
And that was just about.
Building up some some some variable comp John do you want to add to that yes.
Yes, no thats exactly right.
And really the variable comp impact, which was probably $6 million to $8 million in the quarter versus kind of a typical run rate because there was a catch up impact was all in engineering adhesives.
Construction adhesives, which have been harder hit by the Covid impact on performed much better in Q4, so that was a little bit of a catch up impact in Q4.
Okay, great. Thank you so much thank you Jeff.
Your next question comes from Mike Harrison with Seaport Global Securities. Your line is now open.
Hi, good morning, congratulations on the most of the year here good morning, Mike and thank you.
Wanted to start out with.
So I have a question on the guidance.
Maybe talk a little bit about your expected cadence of.
Of EBITDA growth in that 10% number.
And talk a little bit about your macro assumptions or I guess, maybe COVID-19 or vaccine assumption because we refer to this guidance as your base case and I am wondering if that means it's maybe a little bit conservative or can you talk about maybe how you would think about the difference between base case, and maybe best case or are we.
Worse case relative to that 10% number okay.
Okay.
A lot of questions built on there, Mike, but I'll try and give a high level I think.
Sorry about.
That's okay.
In terms of cadence, we're expecting double digit EBITDA growth here in Q1.
We were also.
<unk>.
If you think about that 10% to be above 10% to in Q3 on maybe a little below it in Q4. So so that's kind of the shape of the EBITDA growth.
And.
Admittedly, Mike, we're not trying to crystal ball here.
A big rebuild of demand globally, certainly there is a lot of good signs out there and our results are very positive plus we've got some good share gains. So theres a lot of reasons why you could get.
More optimistic, but I think we've all seen that the world goes in fits and starts as things go forward. So just as we did last year, we build our planning assumptions I think on a.
Practical view that recessionary impacts would affect our business and.
And while I couldn't tell you what they are aware theyre going to hit and when that's sort of our planning assumptions as is not some.
Some everybody gets vaccinated in the world takes off kind of scenario so.
John you want to add to that Sam.
I think thats exactly right.
So and in terms of best case, I think if the world got a lot better Mike you'd see clearly higher demand would come forward in our on our business. We do have very good leverage, especially in EBITDA in CA from a margin standpoint.
We're anticipating some buildup of costs.
Things like.
We talked about bonus accruals and obviously all of our bonuses are below target last year, We got merit and we've got travel that will go up but we will have very good leverage if we see more volume growth, but we will also see more raw material inflation and I think the.
If the world gets very active youll see that so.
We've got a plan to manage through all of that if it goes through but generally at the world a better place we are well positioned to take advantage of it.
Alright, I appreciate the color there and then.
Hearing that a lot of manufacturers in industrial and automotive and maybe some other markets are running at pretty low inventory levels can you talk a little bit about the potential restocking opportunity.
You'll see across some of your key businesses.
Yes.
I Couldnt give you full color on everything we're very diverse in our end markets.
I think we're feeling a little of that in Europe, I think Europe really Destocking you saw a lot of in activity from a manufacturing standpoint over the summer so markets like auto and insulating glass in Europe are definitely intermodal restocking.
I mentioned rvs rvs the demand.
Is very high but they've depleted all of our inventories I think I think youre going to see.
A pull to fill pipelines there for a long time just to catch up. So so there are definitely some market segments that need especially of more <unk>.
Industrial goods.
On a durable goods I think youll see some inventories.
Depleted in certain markets.
Alright, thanks very much.
Okay, Mike Thanks.
Your next question comes from Eric Petrie with Citi. Your line is open.
Hey, good morning, Jim and Don.
Good morning, Eric.
A question on the noted semiconductor chip shortage going on globally on.
The impact on the electronics business and organic posting double digit gains this quarter last quarter. So.
So how do you see that growth momentum for both those end markets into 2021.
Yes, so in terms of our own products most of what we produce around the world we produce with local raw materials. So we don't have a.
A huge supply chain dependence on raw materials shipping around the world and we have local alternatives. So we're doing a great job on managing our supply chain to get product to customers.
Your question is more about our end customers are wins in electronics are mostly share gains so.
Thats tough for us sometimes to sift through what the market's doing versus us.
Winning there so clearly the shipping lane problems or an issue for a lot of industries and <unk>.
Some of our customers are managing through them, but.
We don't see a material impact on our business overall.
From what we hear from customers, but.
But there are definitely signs of people having supply issues.
Globally through shipping lanes and.
But our customers seem to me to be mostly managing through it with exceptions, John anything color you want to add there.
No I think thats right.
Exactly right.
Okay helpful.
For my follow up question that how do you see working capital in 2021 versus a source of cash this year.
In 2020, and then what is your target leverage by year end 'twenty, one compared to four times currently and the target that you gave when acquiring royal of Western three by 2020, how does that stack up now.
So so.
So on the well I'll give some high level and then maybe John can.
Working capital I think we've since over the last few years with reduced at 300 400 points shall I give you the exact number but we put a really big focus on that and I think the team has done an outstanding job of managing working capital and we see ourselves improving that another 50 to 100 basis points again this year. So.
Now we're going to have more capital demand is as we grow off of 2020, but but I think as a percentage you'll see that go down another 50 to 100 basis points, where we continue to build that as a strength in.
In the company and then as I've said, many times to our investors. Our objective is to get below three now we set out a three year target to reduce.
On to reduce debt by $600 million, we've delivered over $670 million on debt reduction.
Beaten our target every single year.
I'm going to be shooting to beat the target again this year and.
As you pointed out will be will be close to three by the end of this year and certainly below three in 2022.
John do you want to comment more on special on the working capital on it.
Sure, Yes exactly right.
We've taken our working capital as a percentage of sales from about 18% in 2017 to below 17% at the end of 2020, so about 100 basis points a year on that.
In the range of improvement, we would expect to see in 2021.
So based on that math that would be a source of cash.
Maybe not quite as big a source of cash as this year. When we also had the impact on lower sales but.
Sure.
But yes, and then from a leverage standpoint.
Based on.
Those numbers, we would expect to be.
At around three five times debt to EBITDA or slightly below.
By the end of 2021.
Great. Thank you.
Your next question comes from Ghansham Panjabi with Baird. Your line is open.
Hey, guys good morning.
Good morning Ghansham.
Yes, so going back to the EBITDA margins specific to <unk> and Hh C.
The margins there come in in line with the original plan was it better.
Higher than our model just curious as to what drove the upside if there was any relative to your initial plan and Jim.
Also more broadly.
Lockdown started too.
Expand and during the quarter during calendar <unk>, how does that impact some of the exit run rates. If you will from volumes for each of the segments, especially EBITDA.
Okay. So.
As far as <unk> is concerned in the margin.
Q3 was a little slower than we expected Q4 was about what we expected probably a little better.
Andy and his team have done a great job all year and I think they've met a lot of demand they generate the growth and then they have improved the margins in that business. So we're very pleased with it I wouldn't say it's.
Dramatically less than we thought in the quarter, probably a little better as they have done all year, so really good.
Quarter end the year for our HVAC business and part of that is growth right the share.
Share gains that Theyre getting in addition to meeting all of the demands out there in this environment has been has been really really positive.
And.
The second question was.
Exit rate for volumes.
Yeah. So John did you want to comment on that.
It can for share. So I don't really think we saw a significant impact for many lockdowns in the fourth quarter, either positive or negative I think that the.
The trends in <unk> and EMEA.
Both moved on a positive direction as we ended the year. So I would say, it's hard to it's hard to say for sure Ghansham, but I don't really feel like we saw an impact.
Got it and then in terms of back to the raw material question also I mean, there is a big concern about margin pressure for a lot of other companies.
Our coverage, including yours.
Have risen as the economies bounce back et cetera globally.
You mentioned re formulation and some select pricing, but how would you kind of give us comfort that we're not going to go through a sequential margin compression phase as your volumes come back and then also some other commodity just the tightness on the commodity markets.
Start to start to roll through your cost structure.
Yes, so I think one of the difference between the us and a lot of other companies Ghansham as we're not a purchaser of commodity materials. So we definitely see that lag as raws come in so with only 13% of our raws being things like them in acrylate in ethylene and so we're not seeing that big uptick that a lot of people see here early in the <unk>.
First half of the year.
And also I would say, it's a little more muted I mean, if you look at what's happening to propylene and ethylene.
It's really taken off them, which is our number one raw material is only 4% of our purchases. So so that's one thing that's different about us than others.
But I think we've shown over the years Gotcha and you can look back at other inflationary environments.
Environments that we've gotten very good at anticipating where the world's going and then taking those bold steps on increases I mentioned briefly in Jeff's question. We've got we've got price increases that are going into effect in February and March in certain market segments. We've got a whole plan built around Q2 increase.
<unk> and right now we're shifting through exactly how big and the exact timing of those but.
But certainly price increases will be a big part of the strategy as we look into the second half of the year, but we don't get that big.
Big shock to our system. The other companies have so we have a little time to plan for it and it's pretty clear it's coming so we're taking the steps.
John anything else to other.
Summary.
With the current.
And Jim if I could just your exposure to freight how big is that for you and.
<unk>.
The question I asked about wrong, because it wasn't just specific to your pure raw material basket, but also some other logistics costs, including freight yes, again, if you think about adhesives, and especially as our portfolio has changed over the years.
Our business is not as bulk as a lot of companies. So overall freight is.
As about 2% to 3% of revenue. So if you think about a 10 or 20% increase in freight.
<unk> three or <unk>, 6%, so it's something for us to manage this.
Just as labor is and I think we're going to see a little bit of labor pressure here, but it's not the big driver raw materials or the big driver for us.
Okay very clear thanks, so much okay. Thank you guys.
Sure.
Your next question comes from Vincent Anderson with Stifel. Your line is open.
Yeah, Thanks, and just wanted to echo the congratulations on an impressive year.
Thanks.
Yes, so just to nitpick 'twenty 'twenty, one guidance a little bit longer.
How much of the 10% EBITDA increase.
Accounting for the cost savings that you've achieved net of whatever kind of cost inflation normalizing out of Covid.
Yes, so I think if I were to think about it at a very high level.
The.
The growth in currency impacts about $40 million of of increased ghansham.
Our.
Our our project grow our restructuring savings that we talked about generate about $15 million to $20 million benefit.
And then we have a lot of cost up.
We got to rebalance, our bonuses, which were below targets merit travel and that's about a $20 million drag and and then you have this net raw material pricing and positive mix, which ultimately that nets out to zero. So so those are the main elements of this and Thats, how you get to the numbers.
Okay.
And then.
Sure.
Not to get ahead of ourselves, but maybe this is a year where the dollar isn't just.
Constant headwind.
If we see the dollar weakened further is it all translation for HB Fuller or can we actually see some kind of impact to margins from a weaker dollar.
Yes, so it's always interesting in theory, we it's mostly translation, but but there have been in the past benefits when we when we see a weakening dollar and we've had the pain is it feels like most of my term as CEO. We've had the other effects. So so it should be a positive for us.
We factored some of that into this year, but but a weakening dollar is generally good for us.
Thanks, and if I could sneak on one more.
Are there any particular listed quite a few new product developments maybe.
Maybe more broadly are there any specific families that you're excited to see progress on commercialization as we get back to a more normal customer environment and then maybe specifically you had some recent success in aerospace earlier in 2020.
That going to translate to much in the way of sales in 'twenty one.
While I am excited about all of our innovation. So it's tough for me to pick a couple I would say and we haven't talked a lot about it on this.
This restructuring into three Gpus, and then really the 28 segments below that is really driving a lot of our growth on our win so.
Think about a business like ours, and those are roughly $100 million businesses them getting to in five and $10 million wins is what this is about so so I can't point to 120 $30 million when that's really driving the number it's a lot of things, but what I really love is each one of our segments has one or two <unk>.
Sizable wins, where they are gaining some share so I'll work on solar I am very pleased with what we're doing there and some of the innovations there.
Because that's such an emerging trend our work on electric vehicles and the electronics around vehicles. So we've targeted in the auto space anything to do with electronics. There is some really exciting wins, there and we're positioning ourselves as a leader there and then just electronics in general that team continues to get stronger and stronger.
And then finally <unk>.
Under Andy's leadership and part of why we set up HFC was to get a better handle on what some of the sustainability benefits were and we got a couple of nice wins. There. So those are some other ones I'm most excited about.
In terms of we're ahead of the trends.
And they have momentum that's going to build on itself as the world evolves.
Alright, thank you.
Yes.
Your next question comes from David Begleiter with Deutsche Bank. Your line is open.
Thank you good morning.
Good morning, David how is organic growth tracking in Q1.
Yes, I would say December was positive so I think more of what we saw in Q4.
So its December though I am always cautious not to overreact to December but I would say more positive than that is what we saw on the first month of the quarter.
And do you have a read on January weekly sales that gives you an insight into we do again.
I'm really hesitant to talk about our average daily sales, but I don't think we see any.
Big trend changes, we think it's going be a positive quarter.
And if you see higher volume than you're currently forecasting our planning assumptions.
Types of increment incremental margin should we see on those higher volumes.
Yes, we can.
We typically say that our incremental margins are around 30% when we consider all of the costs associated with it so it's somewhere in that range David.
Helpful. Thank you.
Your next question comes from Rosemary Marbella with G. Research. Your line is open. Thank you good morning, everyone and good morning, Roz mentioned thank you.
If we look at.
Growth slate Hh C N E and engineered adhesives, how much do you feel was from pent up demand or inventory build versus normal type of.
Demand level.
Yes, So Asia.
She was we don't think it was really a resulting of inventory rebuild but we see good positive growth there and some good positive wins and not a big inventory shift or pent up demand and there was strong all year right.
No we don't we don't see that.
In engineering adhesives, Rosemary is it's a mix right. So I think.
Something like electronics, we had a lot of good wins that came through.
Rvs, they're still not picking up on the demand they had earlier in the year auto in Europe, certainly has some pent up demand that's coming through so and then there's other areas as I mentioned things like aerospace that really aren't picking up as an industry. So so it's a broad mix market by market, but I think thats the beauty of our.
Organizationally structure, we have in aerospace team on electronics team and RV team and auto electronics team. Each one of those teams is identifying the needs and making certain we capitalize on them as they come so but it's a mix.
Okay. Thank you and following up on your laundry list, if I can use that term.
Innovations new projections.
While you cannot <unk>.
Give us a dollar number.
Because it is a combination of a lot to offer on.
Multiple small wins.
If you look out two or three years, how much do you think on aggregate all of those new products could generate in terms of revenues.
If you would have to go through the list and go through them, one by one Rosemary, which I'm not going to do but I think sizable wins in our space the kind that I would mention on a call like this on.
Our 10 ish million, sometimes they're a little bigger sometimes are a little smaller but thats a good average number of how much adhesives, which is a lot of adhesives $10 million worth of adhesives. So.
Sometimes they're bigger depending on the market segment in the on the nature of the innovation.
But in aggregate they add up to a big number when you do that across 28 segments.
Biggest driver.
EBITDA growth in 2021.
Sure.
Okay, and if I may add one more.
It could be one.
What is your exposure to any potential infrastructure based <unk>.
Infrastructure Bill.
With that have a big impact on your on your businesses.
Not that much not a direct impact Rosemary we have within our construction adhesives businesses, we have three businesses.
A roofing business of flooring business, and our utilities and infrastructure. So there is some opportunities in that business.
So think about a third of our CA business is affected by that.
So not a huge.
Infrastructure, the infrastructure Bill won't drive directly adhesives purchases from HB Fuller.
Okay. Thank you.
Okay.
Your next question comes from Heritage Miserables with Baron Burke Your line is open.
Thank you Jim Good morning, Jim John and Barbara Sue in your three business units do day operating a similar fashion in terms of how price hikes are announced or implemented.
Just trying to get a sense of what percentage of free business may require you to push through these price hikes, if raw materials go up this year, yes, yes.
Yes, so well.
Thank God, even think about it.
Current level, there's 28 segments and will manage pricings differentially on each one of them now all of our businesses are similar in that they have.
Low volume products.
Or products that are specialty products that will take increases early so youll see some of that happening thats part of whats happening in February and then we have some products that some of those market segments that are tied more toward these commodity materials that are moving now theyre also moving more quickly. So so it does vary by the market.
And the buying behavior of the customers.
But so it'll be a mix.
Got it thanks for that and then.
Engineering adhesives.
What would it take the margins to get to 20%, which I believe is the high end of your long term targets is that just more volume or any specific end markets and I need to go back to where they were.
Yes, I think.
I think 20% is that is the target on that business and we.
I think what we've done is we've built a great infrastructure for growth we've seen it over before 2020 in terms of the double digit growth.
On our ability to gain share there so and given the margins in that business the incremental margin of that business are higher even than our other businesses growth will drive a lot of value to the bottom line and margin expansion. So that's the biggest driver.
Got it and then last one quick on the Capex. This year is there any major project that's worth flagging or is it just regular small project yet.
We have we always have a number of expansion projects going on so on and Middle East. We've got a project in Egypt, we had a very old plant there that's a growing area for our hygiene business.
Our electronics business has a pretty pretty sizable expansion going on.
In China and.
On the business that supports our solar business has an expansion project on on so so those are three of the bigger ones.
But most of our investment is smaller $5 $10 million to $2 million investments within facilities to drive growth and productivity.
Thanks, Jim and all the best for 'twenty 'twenty one.
Thank you very much.
I think we have one more question.
Okay.
Your final question comes from Rosemary Marbella with G Research Your line is open.
Thank you for taking my follow on.
You have a target of three times.
Net leverage should we expect should.
Should we expect that you will not have any M&A until you reach that level or do you think that the market is such that you could still add.
Bolt on new technologies.
<unk> product lines.
Think we've been pretty clear Rosemary on our goal is to get to that three point out leverage we've committed that to our investors.
We're well on our way to do that.
So there's two ways to do that.
Hey, down more debt faster or improve the EBITDA and we will work on both of those.
Okay. Thanks, and lastly, just following up on the margin target you.
You had 22% margin target co construction, we are now at about 12, 4%.
Have you changed that particular level.
I'm not sure where the 22% comes from Rosemary, but but yes, we see a lot of margin expansion for our for that business. So we did some good repositioning of our portfolio. If you look at the margins throughout the year, especially given what happened in construction. This year that were they were very solid overall.
But we expect good expansion into next year.
Alright. Thank you good luck.
Thank you.
There are no further questions at this time I will now turn the call over to Jim Owens for closing remark.
Okay. Thanks, everybody for your time today happy new year and thanks for all of your all of your support for HB Fuller.
That ends our call.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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