Q2 2021 HB Fuller Co Earnings Call
To raise prices in the quarter.
We achieved an all time record quarter in revenue as we met increasing customer demand and gain market share.
Throughout the quarter, HB Fuller experienced raw material and container shortages.
Because of strong support and global collaboration with key suppliers and the ingenuity of our technical and supply chain teams, we made certain to keep our customers supplied.
H B fuller's ability to assure supply of critical adhesives and provide innovative solutions that customers need remains a competitive differentiator for our company, which is evident in our topline growth.
H B Fuller as revenue growth was broad based across segments and geographies.
<unk> revenues increased in each segment versus the second quarter of 2020, including strong double digit growth in both engineering and construction adhesives segments and very solid growth in hygiene health and consumable adhesives against a very strong second quarter of 2020.
Revenues also grew in each geography, including organic growth of 19% in the Americas, 27% in the EMEA and 9% in the Asia Pacific region.
Importantly, our revenues are also up from pre Covid levels total organic revenues increased by 9.5% versus the second quarter of 2019, which had no COVID-19 related impacts with double digit growth in HFC in engineering adhesives, and mid single digit growth in construction adhesives.
Strong volume leverage in the quarter, coupled with pricing benefits and operational efficiencies were driving in the business offset significantly higher raw material costs and drove a 21% increase in EBITDA dollars year over year.
Raw material input costs increased in the second quarter by about 10% from the end of 2020 with some raw materials, increasing more rapidly than we forecasted.
We have implemented $150 million of annualized price adjustments to date and will.
Implement an additional $75 million in the third quarter.
We're prepared to do more of as necessary. These price adjustments will offset the impact of raw material increases in this fiscal year.
Suppliers of made good progress in restoring capacity for the commodity and specialty chemicals, we purchase.
However, the rate of recovery going forward will likely be uneven until inventory levels are rebuilt to fully meet demand.
Our planning assumptions anticipate that the current supply volatility will lessen and pricing will begin to stabilize in the fourth quarter.
We now expect the year on year raw material inflation to be over 10% and expect that our pricing will fully offset from raw material increases by the end of the third quarter.
We expect gross margin headwinds in the third quarter, which is seasonally slower for volumes and we will see additional pricing of margin benefit in the fourth quarter, which is typically our strongest volume quarter.
Our global sourcing expertise, our innovative chemistries and our operational agility, we're more critical than ever this quarter.
And continue to provide competitive differentiation.
And the actions, we have taken on price and to drive efficiencies across our business enabled us to seamlessly serve our customers and achieve our profit targets in the quarter, while at the same time, increasing our debt paydown over last year's level in line with our target for $200 million of debt reduction in 2021.
Now, let me move on to discuss performance in each of our segments in the second quarter on slide 4.
Hygiene health and consumable adhesives second quarter organic sales increased 3.3% year over year.
Which is an outstanding result, considering the comparison to a very strong quarter last year when the business grew 7% organically.
Sales increased versus last year across the majority of our HFC markets with strong growth across our packaging applications beverage labeling multiwall bags and tape and label.
HFC segment EBITDA increased by 11% significantly more than the top line growth and EBITDA margin was strong at 14, 7% up 70 basis points versus last year.
Margin improved driven by strong volume leverage restructuring benefits and good expense management.
Construction adhesives organic revenue was up 23% versus last year with strong growth in both flooring and commercial roofing of share gains and improving demand drove significantly improved top line performance versus 2020.
EBIT compared to a strong non COVID-19 impacted second quarter of 2019 organic revenue was up 4%.
Contributions from the pricing adjustments, we have implemented in this segment, we're underrepresented in the second quarter as we fulfilled prior construction adhesives orders and backlog following the temporary disruption from the effects of storm the already.
We have already begun to see increased pricing roll through in the first few weeks of the third quarter and expect additional pricing realization in the P&L over the rest of the year.
Construction adhesives, EBITDA increased 4% versus last year of strong volumes were offset by higher raw material costs unfavorable mix and some temporary manufacturing costs that were required to return to normal service levels. After the extreme weather event in the first quarter.
Engineering adhesives. The results were extremely strong with organic revenue up nearly 40% versus last year, reflecting share gains and improving end market demand.
Sales increased versus last year of all 14 of our engineering adhesives and markets with exceptional growth in adhesives for automotive recreational vehicles, woodworking electronics and insulating glass.
And looking back to the non Covid impacted second quarter of 2019 organic revenues were up 11%.
We expect continued strength and double digit full year growth in this segment.
Engineering adhesives second quarter, EBITDA grew 42% year on year, driven by exceptional volume performance.
We expect EBITDA margin to improve in the coming quarters as pricing actions are fully implemented and offset the impact of raw material cost increases.
Looking ahead of our full year results. Our planning assumptions are the economies will continue to open up as vaccines of rolled out around the world.
Raw materials will be tight through most of the year and pricing will remain elevated of supply chain begins to normalize and demand continues to be strong.
We anticipate continued strong demand and share gains in each of our business units to drive strong volume growth in 2021 versus 2020.
Revenue in most of our end markets will exceed 2019 levels.
Overall, when considering our strategic pricing actions, coupled with the solid volume growth of HFC continued improving performance in construction adhesives and strong demand in engineering adhesives, we now expect full year double digit revenue growth versus 2020.
Now, let me turn the call over to John Cortland to review, our second quarter results and our updated outlook for the full year.
Based on these planning assumptions.
Thanks, Jim I'll begin on slide 5 with some additional financial details on the second quarter.
Net revenue was up 22, 7% versus the same period last year.
Currency had a positive impact of 3.9% adjusted.
Adjusting for currency organic revenue was up 18, 8% with volume up 17, 4% and pricing up 1.4% with most of that pricing realized in the second half of the quarter.
All 3 Gpus had strong growth versus 2020, as well as compared to the non COVID-19 impacted second quarter of 2019, which we believe validates the strength of our topline performance.
When compared to Q2.2019 organic revenue increased 9.5% for the total company with strong organic growth for all 3 Gpus.
Adjusted gross profit was up 17, 4% year on year and gross profit margin was down 120 basis points as volume growth and pricing gains were offset by higher raw material costs.
Adjusted selling general and administrative expense was down 130 basis points as a percentage of revenue, reflecting volume leverage savings associated with our business reorganization and general cost controls offset by higher variable compensation than last year.
In total adjusted operating income margin improved by 20 basis points year over year.
Net interest expense declined by $1.3 million, reflecting lower debt balances.
The adjusted effective income tax rate in the quarter was 26, 8% compared to 27, 6% in the same period last year.
Adjusted EBITDA for the quarter of $122 million was up 21% versus the same period last year, driven by strong volume growth pricing gains and restructuring savings, partially offset by higher raw material costs and higher variable compensation.
Adjusted earnings per share were <unk> 94.
Up 38% versus the second quarter of last year, reflecting strong income growth and lower interest expense associated with our debt reduction.
Cash flow from operations in the first half of the year of $80 million compares to $108 million in the same period last year, reflecting working capital requirements to support strong top line performance as well as higher raw material costs.
We continue to reduce debt paying down $62 million in the first half of 2021 compared to $51 million. During the same period last year and keeping us on track for our full year debt Paydown plan of $200 million.
Regarding our outlook based on what we know today, we now expect full year revenue growth to be in the low double digits.
As you will recall, we increased our adjusted EBIT guidance range last quarter to $455 million to $475 million and this guidance remains unchanged given our expectations for the continued strong volume growth and accelerating pricing offsetting raw material cost increases that we now expect to exceed 10% for the fiscal year.
Sure.
Based on the seasonality of our business and the timing of raw material and price increases we expect revenues in the third quarter to be up about 15% versus the third quarter of 2020, as we continue to deliver strong top line growth.
EBITDA margin in the third quarter is expected to be about 100 basis points lower than the second quarter on a sequential basis as.
As pricing actions are fully implemented margins will improve in the fourth quarter, which was also our strongest quarter from a volume standpoint.
We expect cash flow to be strong for the rest of the year, allowing us to maintain our target to pay down approximately $200 million of debt during 2021.
With that I will turn the call back to Jim Owens for some closing comments.
Thank you John.
During our last conference call I outlined the 3 critical priorities, we set for 2021 and the current supply constrained inflationary COVID-19 recovery environment.
These 3 priorities are volume growth price and greater productivity.
And we executed well against each of these key imperatives in the second quarter.
Our first priority is to drive volume growth by supporting our customers in the current high demand than supply constrained environment.
Volume growth and share gains are our foundation for creating durable shareholder value.
Our 19% second quarter organic revenue growth is even more significant than it appears considering our <unk> business had a very strong quarter of 7% organic growth in the second quarter last year.
And our business overall grew 9.5% compared to pre COVID-19 levels in the second quarter of 2019.
Our second imperative is to strategically manage pricing aligned to the value we deliver in this inflationary environment.
We implemented $150 million in price increases effect from March 1 through July 15th and we're planning.
An additional $75 million in price increases later in Q3.
We're also delivering on our third priority the release greater productivity and capacity through our operational excellence programs.
In the second quarter, we out delivered competitors in supporting customers and our factory labor and overhead as a percentage of revenue in the second quarter decreased versus the second quarter last year.
COVID-19 has changed how businesses operate and supply constraints and pricing volatility or challenges that are impacting our industry today.
In this environment HB Fuller strategic clarity the benefits of our robust global operations and supply chain, our culture of collaboration and market based innovation and the speed and agility. We have developed across our company is delivering results for our customers.
And for our shareholders.
We will continue to navigate the challenges of the constrained supply environment grow our business and build on all of rising leadership position in the global adhesive industry.
We will continue to deliver strong results for our customers and for our shareholders.
This concludes our prepared remarks today operator, please open up the call. So we can take some questions.
Thank you as a reminder, if you would like to ask a question. Please press Star then the number 1 on your telephone keypad. If your question has been answered and you wish to remove yourself from the queue press the pound key.
First question comes from the line of Vincent Anderson of Stifel.
Yes, Thank you and good morning, everyone.
Good morning Vincent.
So.
Thank you for some of the extra detail on the outlook, but I'm a little flow. This morning, and trying to fill unpack a couple of things so.
If depending on what we call low double digit topline growth you recorded it looks like about 14, 5% organic in the first half of the year and then it sounds like the price actions will flow through more of in the second half at least.
The weighted towards the second half.
When that kind of just carve all that up it sounds like to get to just low double digit organic growth. It doesn't seem like there's a lot of room for volume gains in the back half of the year am I missing something.
Perhaps the I think I think the.
It gets low low double digits.
Broad term think of that is 13%, 14% overall Vincent so.
Low double that so we're not selling.
Something like in that range and I think as you pointed out there is very significant.
Price increases that are flowing through in those numbers along with I think we have more modest projections for volume growth, but certainly volume growth.
The second half of the quarter, but the volume growth continues pricing ramps up and that gets you to the the.
The numbers that are similar.
We probably should have said.
$13.14.15, something like that go John moving okay.
I think the other factor Vincent and the SEC.
Half of the year, we'll have leftover ability from FX, So I think.
Based on a number that Jim gave you I think we still expect to see.
Low double digit growth of low.
The low teen growth in the back half of the year and 13 of working for the full year.
Okay, yes that debt.
That helps a lot I appreciate it and then 1 thing that hasn't really been discussed and all of this is just how we should think about the mix impact on margin as we get some of more normalized demand environment.
Yes, so the overall the mix in the mix improvement is very positive for us. It was positive in the quarter of can we get more positive as we go throughout the year as we as we drive EBITDA and CA.
And.
And I think recognizing that the the pricing actions that we've taken hit the second half of.
Of this quarter really ramp up in Q3, and Q4 and EBITDA in CA are typically a little slower.
A little more customer notification in them than our HVAC business. So youll see of ramping up of their margins and that positive mix combined with the fact that our HVAC business is doing a great job right. They have.
The or improve their margins here versus where they were last year. So I think youll see a very positive mix effect as we head into Q4 and certainly into 2022.
Great.
I just have 1 last quick 1 on the price side, so well communicated on the price my.
My question is are they fairly standard pricing terms and so youll hold on to this for a bit.
Or are there some share of these where it's somewhat exceptional because of how tight the raw material environment is and so some of those price prices will just naturally unwind rather quickly with the the easing of raw material constraints.
Yes, we don't believe in temporary price increases or surcharges. So you don't have very little of that we have.
And that's why we were raw material prices go up quickly what we do is we notify customers, we explain our value and the the price increases in our business or our permanent day stay in place. So yeah. There is a there is no no very little if any.
<unk> increases here.
Embedded in here.
All right excellent. Thank you best of luck on the rest of the year.
Thanks, Jim.
Your next question comes from the line of Johnson Punjabi of Baird.
Hey, guys. Good morning, good morning Ghansham.
Yes, so if we focus on the EA segment.
You called out your sales were basically 11% above fiscal year 19 comparable levels.
The margin is down 360 basis points over the 2 year period, and obviously theres a lot going on with raws and then youre working on price increases et cetera.
But was there a mix impact.
Relative to 2 years ago, and then what is the reasonable on the timeline from the coverage that level. If in fact that is the right level.
You should expect a convergence towards.
Yes. So so yes, I think I think you hit all of that right. The biggest the biggest challenge is raw materials. So so what happened in second quarter in terms of raw materials as well.
1 of the most significant spikes in raw materials that we've seen in and of the business like EBITDA Thats, a real opportunity for us and we're taking advantage of it and getting a lot of the pricing, but it doesn't happen automatically so thats why youll see the margin slipped a little here in Q2 and into Q3 as we fully implement the EA price increases but.
This is a real opportunity for us to reposition some customers. There. So it's mostly a raw material and price situation is probably a little bit of mix just on where some of the markets have grown.
Aerospace is now positive again, but that's a real nice high margin business.
That's not doing as well as some of other businesses that are more durable goods kind of businesses, but it's.
It's mostly raw materials more than more than mix and yes, I think it's 1 of the real positive upsides of what's going to happen the margins here in the EAA and CA in the coming quarters and into 2022.
Okay got it and then for the second half of this year I mean is there a way can you give us just give us the volume outlook by segment.
Relative to the comparable 2019 period I mean, there's just so much complexity with.
Maybe mobility, increasing and some impact on HFC.
<unk> impact on EBITDA and so on so just curious as to what you have specifically embedded from the back half relative to 2019, and then second in terms of raw material velocity, you've already raised prices.
The outlook for cost inflation twice, so far this fiscal year.
Can you give us a real time indication as to how things are progressing at this point so far of <unk> and then also I assume you were impacted by out of pattern movement in the second quarter relative to winter storm. Yuri So was there any specific callouts on cost side that may not recur in the <unk>. Thanks, so much.
Okay.
A lot of good questions I'll, let John try and unpack exactly what happened with 2019 volumes as you know we don't go into that much detail by segment I would say that each 1 of them has very positive volume trends for this full year.
<unk> 2019 so.
Rightly pointing out towards 2019 significant expansion in.
Our volumes and I think that's really a product of how well we manage the business throughout the Covid, we got into a lot of new qualifications, we were out in front of customers and won new business last year, and especially what we've done here in the second quarter. We have we haven't talked much on this call yet about it but but the volume that we generated in this quarter.
It was directly related to the agility of our company to respond in a supply constrained environment. So we met the needs of our customers better than others in the market.
We also had all of those gains that we were pulling together as we qualify new products and we are able to meet those needs. So so really great work by our supply chain teams to get the raw materials in the.
The <unk>.
<unk> guys and the supply chain teams to meet what was a significant uptick in demand in a constrained environment.
As far as of.
The the 3 questions I'll go to the third 1 and I'll come back to the second 1 the <unk>.
Third 1 was about exceptional costs that are definitely exceptional cost in this quarter that we didn't call them out.
We mentioned just a second ago, what we did.
We are afraid of raw materials from China to the U S at exceptional prices in order to meet the needs of customers. We had 1 supplier who had a ship stuck in the Suez Canal 1 of those famous ships, we work with them to to air freight materials from the U S to Europe in that case and that was a.
The significant costs that we share with that supplier to keep our customers running we had.
Yes.
The steel steel short out there with shortage of steel drums, we bought raw material off of 1 of our customers who had extra steel and had our supplier converted in the steel. So we did exceptional things with exceptional cost in some cases, we had customers pay for it a lot of cases this was about enabling us to get the long term price increases and the margins that we.
The out of our business. So the metal out of investments this quarter that are going to pay off both in share gains and also I think pricing realization as we go forward and before I turn it over to John on the 2019 question what was the second question Ghansham.
It was on the raw material.
Conviction that 10% plus is the right sort of baseline.
Yeah in terms of where we got too. So so what we see right now is the raw material increases are lower in Q3 than they were in Q2. So they are still increasing in Q3, we see of flattening potentially of decrease but a flattening of the.
In Q4.
We do see some downtick in some materials in China right now Thats, usually the early sign it's going to be tougher to realize those globally because of the supply chains, but but maybe a little slower than normal to see those the flow around the world, but yes definitely I think we have a pretty good picture of where things are headed here at least in the <unk>.
2 quarters, and that's a little different than when we entered last quarter, where there was a big question of we know what's going up it's just a matter of how much I think today, we have a.
Fairly good picture at least out over the next 3 or 4 months or so good job on 2019 zone, yes, So and I don't have exact math, there ghansham, but I think directionally. If you look at the second half of the year based on the guidance we've given.
Youre, probably looking at volume growth versus 2019 in the first half of the year was 9% to 10%.
And second half of the year, we're probably in the mid to high single digits in terms of volume growth.
Overall company level, so reflecting.
Maybe a little bit of pent up demand in the first half of this year that lessons of little bit modest of maybe attrition related to some of the pricing gains we get.
And by <unk>, I think we're able to expect to see.
EBITDA in the high single digits low double digits and.
Construction of adhesives, and HFC has sort of been on.
The mid single digits, the high single digit does that help.
Absolutely. Thanks, Okay, great. Thank you guys.
Your next question comes from the line of Mike Harrison of Seaport Research partners.
Hi, good morning, good morning.
Mike.
Was wondering if you can talk a little bit about I don't know if you have a great sense for this but how much the supply chain disruption impacted your volumes.
You just mentioned that maybe in the first half year, you're benefiting from some pent up demand.
The sense of again, there's not a lot of restocking going on at this point.
But if you had all the all of the supply all of the raw materials supply that you could have wanted how much higher would your volume growth have been and maybe what what segment had the greatest impact from from the disruption from a volume standpoint.
Yes, it really really hard to quantify Mike So I can say that there's definitely the.
Some strain that we realized during the quarter so.
And I would say certainly early in the quarter, we had some supply constraints in the HVAC business related to the vinyl acetate, which got very tight.
And have we fully filled all of those buckets probably not.
Somebody already mentioned the auto business.
We're going hand to mouth there.
We are picking up some business from winning some business because we've got a great supply chain, but but there is definitely more backlogs today than there was a quarter ago and probably the biggest place we have backlog right now is in our CA business outside of pick an area, where we have a bigger backlog. It's in it's in construction adhesives, but overall, we're doing a good job meeting demand, but there's definitely more of the.
Ask my sales team.
Tell you a very big number right because it just feels like everywhere we go.
Of customers are looking for more and part of that is because we're doing a really good job.
Alright, and then.
On the capital priorities front, you continue to be on track with your debt pay down plans.
That the leverage situation is going to kind of resolve itself between free cash flow and EBITDA growth can you give us a better sense of when you expect to be more comfortable and shifting your capital allocation strategy toward M&A.
Particularly if an attractive target were to become available.
Yes, so as you pointed out of our goal is to get our debt to EBITDA ratio of below 3 I think will the.
Current projections, you'll be around 3 to the end of this year. So that should happen early next year, So and we see ourselves state of that range long term so.
So we look at every target every opportunity that's out there I.
I think we've made a lot of great decisions for shareholders. Both in the deals we have made and at the times that we've we've passed in the last couple of years, bringing down our debt has been a.
Priority. So so we'll make the right decisions for shareholders at the right time, but our long term commitment is to be in that 2 to 3 debt to EBITDA ratio.
Alright, and if I can sneak 1 more in kind of a housekeeping question the diluted share count.
If my model of correct went up by about 1 million shares sequentially.
What drove that and I guess, how should we think about the share count progressing in the remainder of the year.
Yes, that's definitely a question for John So.
Asked the same question. So he can give you the.
Uh huh.
So it's all a function of of the calculate the dilutive share count calculation, meaning our higher share price results in less ability to sort of.
Buy back shares in the calculation. So it's not related to shares issued its not related to anything we're doing around share buyback of share issuance and simply the math and I would say Mike It will depend on 1 of the share price goes but I would have projected is probably going to be around the same number for the rest of the year.
Alright, thanks very much.
Thank you Mike.
Your next question comes from the line of Jeff Zekauskas of Jpmorgan.
Thanks very much.
The margin progression in the health and hygiene business from the first from.
For the second quarter was pretty good and it was good year over year.
But not so much in engineering.
Whats the difference by the margin profile of improving and Hh C, but not an engineer.
Yes, I think the the biggest difference was the speed at which they introduced pricing, Jeff So our HFC.
Business did a better job of getting ahead of this they also had been.
Maybe more shortages of raw materials earlier, so they had a burning platform that they were able to point to with the with customers and and I think in these very high value businesses, we want to of careful more thoughtful dialogues with customers as we raise prices. So that's fundamentally the difference bit of.
The mix, but the HFC team did a great job of of jumping on prices. The rest of the businesses have done the same thing just with more customer notice.
So my memory is that in the last conference call. I think you thought that prices would be up about 3% from the quarter and they were up whatever it is 1.4.
And so.
Is it the case that your assessment of your ability to raise price.
It turns out of was tougher, but volume conditions were better and why did prices go up faster.
So I don't know if we.
On the back of the scripts, so I would say Jeff.
Certainly the last month of the quarter they were up more than 3%. So I think in the quarter, we said.
It was the end of March and we said that we're going to raise.
Prices in April and May right. So so that 1 of the other challenges right. We're a month into the quarter now than we were a month ended the quarter. Most of our price increases went into effect April 15th in May of <unk>. So so you saw the impact in our numbers in the period 6 last period of the quarter and.
And that's 1 of a very confident in what's happened and I would see it in our numbers here in the <unk> 6 and flowing into <unk>. So so now I would say pricing happened a lot of exactly like we expected. In fact, we ended up announcing more I think during the last call I said $100 million would be announcement. We're now at 150, that's implemented and agreed.
When I say its in place. This is implemented agreed and change in our system to happen between.
Margin July 15th and then we are right now planning. This additional 75 million. So it's been a pricing happened like we planned what didn't happen like the plant as raws were a little stronger than we planned a little stronger and faster and as you point out volume was stronger so I would say pricing was pretty much what we expected maybe a little stronger than we expected.
AUM was stronger and raw material increases with stronger so all.
<unk> were up higher.
1 of the engineering business is doing so much better than it did in 2019.
In your assessment.
Yes. These are share gains, Jeff I mean, we rebuilt the team there that understands market trends and.
This whole move to these Gpus has allowed us to really put a lot of power in the hands of those 14 segment leaders. So if you talk of our electronics teams. They know where the new products are coming out and they know where they are going to talk to our solar team. They see the trends that are happening the new panels that are being developed where the investments are going if you talk to the RV team.
They see who the winners and losers are in the market and what applications are going to create value. So so that move which saved us money I know we talk on these calls about how much money that said this is really enabling us to grow faster in that model and our team is the 1 we're applying in the other businesses to generate organic growth, but it's particularly valuable there when you're part of new and evolving products collect.
The vehicles, we're doing a great job of electric vehicles water business has benefited from that shift. So so it's really the way we've designed the organization to get ahead of opportunities and I would just add too Jeff.
<unk>.
In 2020, 'twenty joined Covid, our team was very aggressive and qualify new applications. So some of that come in come in here as of then.
And maybe lastly.
Ashland is interested in monetizing its business.
Is that acquisition too big for you is that something that you were aware.
The thing.
Yeah of course, we wouldn't comment on any specific acquisitions Jeff.
I think they've said, they're doing a strategic review I guess, we'll see what happens with that but it's a good business I would say that it's a good adhesives business.
And.
As I said earlier, we're going to do what's best for our shareholders with a clear view toward having the right debt to EBITDA ratio in the long run. So so we won't ignore anything that happens in the market. If it happens right you'll see the comes out of the strategic review, but.
Sure.
Because our goal is to be the best disease of the company in the world and we've done that by growing our business organically and when the right inorganic opportunities come up that are good for our shareholders.
We look at those seriously.
Okay, great. Thank you.
Thank you Jay.
Your next question comes from the line of Eric Petrie of Citi.
Hi, Good morning, Jim from John.
Good morning, Eric.
Jim question on strategy, you talked about 19 in the patients.
Engineering adhesives is that the right number for you and you just want to get larger in those businesses or do you want to actually expand into other end markets.
Yes, I would say today, it's the right number some of those are the groupings of other markets, but I think it's a good manageable number of end markets and we have expertise there so.
Sometimes these businesses involved there's a whole subsegment of electric vehicles that.
Coming out of business unit within automotive right. So so but.
But yes, what is the right number.
And then secondly, just the follow up the pre.
Other question, you mentioned share gains because of your better supply in your own customers.
EPS was doing real strong what other end market is that recognize the bar.
Point of view.
Yeah, I'd say, it's a combination of 2 things that are driving the share gains I mean.
And our business being the innovator, who solve the customer's problem is the biggest way we win business.
I can point to examples in almost all of our 30 segments, where we have an innovation, that's making a difference.
Then I'll comment on a couple of those what's unique about what's happened here in the last year between Covid and especially the second quarter is our service levels have been a differentiator right usually service levels arent, a differentiator, but in this supply constrained environment. Our teams did exceptional things to support our customers and support customers of need and thats driving share gain.
That's exceptional and normally we don't have that but in terms of of where we're winning we continue to grow in electronics by finding new and different opportunities.
Our insulating glass business, we developed and patented the technology that includes some some new equipment, that's driving a lot of growth for us as people look to innovations to make more energy efficient buildings and solar we're the leader in China and as companies make investments out China side of the China, we're getting those opportunities because of how global we are now.
You mentioned the electric vehicles, and then I think importantly in Hh see what that team's done since we went to the GPU structure, which led very carefully about sustainability trends and how thats changing adhesive needs and that's opening up opportunity. So.
And then finally I guess in CAE of probably the biggest growth area from an innovation standpoint is what our roofing team is doing to make easier to use environmentally friendly roofing adhesives that that allow you to use less construction workers because there's just such a problem getting construction workers, so putting those roofs on faster.
With some of our new technology is a big winner there so.
A lot of little examples literal meaning millions of multi millions of dollars that are that are adding up to the significant impact.
And then just 1 follow up on your outlook on supply chain, how much do you produce captive way of your of your own like tack of buyers of residence or polymers, you look to expand that to avoid the sharp.
Shop, and raw material prices.
No I would say our goal is not to be backward integrated I think 1 of the things that helps us.
If you dig into the details of what's happened with raw materials commodities went up a lot.
Only 13% of our raw materials of commodities.
The materials have less inflationary volatility that's good for us it's good for our shareholders. So we don't have the kind of volatility that somebody who's backward integrated makes and then we've got the whole model of building partnerships with suppliers. So we think that works to our favor. So so a small percentage of our business is polymers, we make for ourselves captive.
<unk>.
But we're mostly formulated and where it makes sense, we'll build the polymers where its proprietary technology.
Great. Thank you.
Yes.
Your next question comes from the line of David Begleiter of Deutsche Bank.
Thank you good morning.
Hey, Jim just come back to you. Thank you going back to your comments on retaining these price increases I hear heard of reset, but historically have you seen prior periods of rapid inflation.
<unk> been able to retain the entirety of the amount of these price increases or is there historically, where the some portion of the did go back of the customer, especially maybe in the automotive or maybe more of assembly side of the business.
Yes, I would say of the.
The historically, what youll see over time is a very slow leakage and really we don't lower our prices anywhere they become competitive pressures that that put us in positions, where we need to introduce new products or are we meet of competitive situations. So.
So I would say multi quarters afterwards, but in auto no. We don't have any kind of price up price down kind of commitments, we do of about 15% of our business that's indexed with the lag so not really automotive. So so that part of the business will follow a pattern of the market.
But for the most part.
So youre right its not 100%, but for the most of our price increases go in place in there there are more permanent in our business.
Got it and Jim just volume is looking into next year I know, it's early but.
We have a more normalized year next year, how are you thinking about the volume growth of the 3 <unk> Gpus.
Yes, it's <unk>.
Really early to predict volume growth I think we're going to get a lot of pricing benefit next year because were a half a step behind the raw materials here in raising prices will drive a lot of margin benefit next year I mean, I think we're so certainly a higher revenue, we're going to be higher higher margins and the growth wins, we have to put volume on top of that.
Amazing, but I think we've really set ourselves up well not just to have a strong finish to this year right I think youll see it here as we head into Q4, but I think we've positioned ourselves for a very strong 2022 with or without a lot of volume growth and if we get a lot of volume growth of it could be.
The exceptional.
And kind of lessen any labor constraints in your business that you are seeing right now.
Everywhere right.
The big it's a big challenge for our factories now I mentioned with the talk a lot about it in this call, but our 3 priorities are delivering on the volume growth getting the pricing and then productivity and we see this as of productivity opportunity at all of our facilities either the automate.
Or just drive other efficiencies.
But yeah, there is labor constraints I think.
130 year old company, great employer. So we probably don't have the same kind of things you see from other companies, but but.
Its causing a little wage inflation in some parts of the country and pressure on employees. So far our teams have done a good job, but every 1 of my plant managers is looking for for good workers.
Got it thank you very much.
Okay. Thank you.
Your next question comes from the line of paradox of Mr. Aaron Berg.
Thank you good morning, Jim John and Barbara.
Good morning.
On the.
Raw material inflation.
Percentage increase.
Raw material cost is that pretty much the same for the 3 segments of based on contrast, there.
Yes, I'm looking at John and we're trying to ensure that I would say, it's probably a little higher and he may be a little higher in EMEA.
But.
But pretty much the same probably a little lesson CA, a little more of an EAA.
Pretty much the same across the business.
Alright got it okay.
Okay.
Net of sales okay.
Okay, Great and then on <unk>.
That's going to see the biggest chunk of it it's more than $200 million price hikes, and then I guess just kind of related to that it sounded like in construction you said the pricing in Q2.
It didn't really fully reflect what has been announced so could you just elaborate on that at all.
Yeah, Yes, HFC, probably a little more than the EAA, but hh CMEA lead the charge with CA, having less in terms of the the dollar impact but.
All the all of the businesses have significant price increases that they're putting forward and as I said she is off to a great start on that.
Yes.
A little slower for 2 reasons 1.
2 of our factories were in in the Texas area. So they had a backlog so that they took a while to get caught up and get the pricing out of those and then because of how some of our distribution channels are set up we didn't have the.
The pricing timings of little more delayed so you see it flowing through in the numbers this quarter.
Total less of it last quarter, but.
But they are the very much on point right now and I'm pretty confident we're going to see some really good benefits from that in the coming quarters.
Thanks, Jim and then I guess the last 1.
Can you.
Talk about how your customers are getting affected by the chip shortage issues.
I'm not sure if you could quantify the volume impact, but anything anecdotal and is that mainly the automotive customers are you hearing back from solar or electronics customers of that as well.
I would say, we're seeing it mostly in the auto space.
Most of the around the fact that as we all see right you've got a.
<unk> had dearth of cars at every dealership in America and around the world. So so I think the.
The chip shortage of shows up in in a little bit lower demand.
But I would say there is still making a lot of cars in the still using a lot of adhesives and sometimes the park into the sides of put them in with these chips. So.
It's an impact, but but not 1 that I would be the best guide of quantify because we're seeing strong growth in our automotive business overall.
Combination of some share gains some opportunities some of the EV work we've been doing.
<unk> made our auto business strong despite the chip issue.
Got it got it thanks, a lot of that inside of that that's all I had thanks guys.
Okay. Thanks Paradise.
We have time for 1 more question. Your final question will come from the line of Rosemarie <unk> of Gabelli <unk> company.
Thank you good morning, everyone and thank you for taking my question.
Jim You mentioned that you gained share because you were able to supply quite a few customers that force.
The regular supply of could not scale.
So do you think of in your opinion, how did you gain those particular businesses for the long term do you think that they will eventually we tend to the previous supplier.
Of the price points.
Yes.
Clearly, it's not like we were at this point of everybody in the markets and the incremental number of customers. We were able to serve that those of all web based on long term commitments. So we are very much rosemary of priority for existing customers.
But we added.
We added business, where we saw it as a customer that.
Really appreciate it the value that we bring in we got long term some of that's out of it so no I wouldn't say of temporary.
Thanks for the question.
And then.
Looking at your comments regarding the fact that you would you are ready to raise prices.
If it's necessary.
The particular area, where you could potentially see additional inflation.
Yes, it's a great question, Rosemary and I think that's the question out there broadly in the market right in the I'll ask about just inflation in general is this the doesn't inflation super cycle or is it transitory as our friends as I said to say.
I would say the inflation, we're seeing in the third quarter is less than the second quarter and I mentioned that China is starting to see a little bit of decreases. So so I tend to think that this is on its way down but if for whatever reason there is a spike.
My point, Rosemary to you and to all of our investors as we are going to raise our prices in the market more than we get from raw material suppliers.
Got to get that balance right, there's a little timing.
We got to manage.
We will get the price increases in the market and we've shown a great ability to do that so that's the point of that comment, but right now I would say, we think we see a tapering of inflation here going into the second half of the year.
Thank you and congratulations on the great quarter. Thanks.
Thanks Rosemarie.
Thank you that was our final question for today I will now return the call to you Mr. Jim Owens for any closing comments.
Thanks, everybody on the call for your support and your questions and we are excited about.
The quarter, but also what we're building here for the future. So again, thanks for your support of heavier of day.
Thank you that does conclude the HB Fuller second quarter 2021 earnings conference call.
Connect your lines and have a wonderful day.
Okay.
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