Q3 2021 HB Fuller Co Earnings Call
So otherwise specified discussion of sales and revenue were first organic revenues and discussion of EPS margins or EBITDA refers to adjusted non-GAAP measures.
We will also 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 COVID-19, and the resulting deterioration of the global business and economic environment.
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, let me turn the call over to Jim Owens.
Thank you Barbara and welcome to everyone joining us on the call. This morning.
In a world, where there are unprecedented supply chain shortages and significant inflationary pressures impacting every portion of our business.
H B Fuller delivered double digit growth and met our bottom line commitments.
Last evening, we announced strong third quarter results led by 20% year over year revenue growth.
Organic revenue was up 16% versus 2020 and was up 13% versus the pre COVID-19 environment in the third quarter of 2019.
This top line performance reflects broad based double digit organic revenue growth in all three global business units and includes significant contributions from both volume and pricing.
We also reported adjusted EBITDA of $111 million and adjusted EPS of <unk> 79.
These results were slightly ahead of our implied guidance.
Our margins in the quarter were reduced as expected and we expect to see significant margin recovery in Q4, and 2022 as our price increases begin to outpace raw material increases and other inflation.
In the third quarter, we continued to gain share in key market segments with our innovative solutions.
We are leveraging our technical capabilities and global footprint as well as our operational speed and agility. So that our customers can continue to innovate and build new products.
Our adhesives wins this quarter or in products, ranging from new consumer electronics and globally produced solar panels to sustainable food packaging in electric vehicles.
These wins are driving our growth.
At the same time, our team is managing the raw material supply chain exceptionally well.
<unk> us to meet high customer demand without impacting our sales volumes.
We are also demonstrating our ability to price based on the value our critical adhesive solutions provide our customers.
Through the third quarter, we have implemented $225 million of price adjustments and.
And we took the decisive step of announcing a September 1st increase and surcharge in order to offset further raw material cost increases.
These actions are expected to result in more than $400 million of pricing revenue on an annualized basis we.
We anticipate a significant improvement in margins in Q4 and into 2022 as a result of these actions. We are also prepared to take additional pricing actions as needed at the end of the year. These pricing actions coupled with our strong organic volume growth, which is up 13% year to date is the basis for our confidence that H b.
<unk> innovative solutions and global network will continue to drive share gains and significant margin improvement in the quarters ahead.
We are demonstrating an outstanding ability to perform in a highly dynamic macro environment shortages persist for many specialty chemical raw materials for plastic and metal packaging and for international shipping containers, we continue to see inflationary cost pressures in terms of materials freight and labor.
Extraordinary weather conditions during the year of course shipping disruptions.
Unplanned safety and governmental actions have caused factory closures.
And we continue to navigate the uneven impact of the COVID-19 pandemic around the world.
Through all of this we are serving customers we are winning through innovation and we are protecting our margins.
We anticipated gross margin headwinds in the third quarter, and we manage them well by controlling SG&A expenses. We are now positioned to reestablish our margins through higher pricing over a larger base of business.
We have grown our base of business through exceptional support for existing customers, helping other customers in need and when we can and by adding new customer business by winning through innovation.
While we overcome these near term challenges our actions are aligned with our long term strategy to grow our business through innovation and continue to build our position as the world's leading dedicated adhesive provider.
We're gaining share in our markets by focusing on providing new and innovative adhesives that enable hygiene and packaging products to be more environmentally friendly buildings more energy efficient and durable goods stronger and more lightweight.
Our largest customer wins in this quarter or in the areas of electric vehicles and solar panel production.
We are also actively investing to further differentiate our products and expand capacity.
We recently announced a strategic partnership in Europe with <unk>, one of the world's largest polymer suppliers to deliver an adhesive with a reduced climate impacts of the woodwork in composites textiles and automotive industries.
This partnership is one of our initiatives to advance our sustainability efforts and better enabled customers to achieve their own sustainability objectives. We also recently announced a strategic investment to build a new facility in Cairo to support customers increased demand in the fast growing markets of Egypt, Turkey, the middle East and Africa.
Because of the resilience of our cash flows we were able to make these investments while continuing to pay down debt in line with our $200 million target for 2021 now.
Now, let me move on to discuss our GPU performance in the third quarter.
Hygiene health and consumable adhesives third quarter organic sales increased 13% year over year with strong growth across the portfolio, including very strong results in packaging applications beverage labeling and tapes and labels as.
As expected <unk> segment EBITDA margin of 12% was down versus last year's strong volume leverage and pricing gains were offset by higher raw material costs, we expect Hh see organic volume growth to continue to be solid in the fourth quarter with pricing gains driving significantly higher margins as we exit the year.
Construction adhesives organic revenue was up 20% versus last year with strong growth in both flooring and commercial roofing is improving demand share gains and pricing drove significantly improved topline performance versus 2020.
We saw a significant improvement in pricing contribution in the quarter with pricing contributing 8% of the organic growth in Q3.
We expect these pricing gains and the impact of the surcharge to drive 10% to 15% year on year growth in EBITDA in the fourth quarter.
Engineering adhesives topline results continued to be extremely strong in Q3 with organic revenue up over 19% versus last year, reflecting share gains and strong pricing execution sale.
Sales increased versus last year in almost every market with exceptional growth in adhesives for woodworking insulating glass and new energy.
And looking back to the non Covid impacted third quarter of 2019 organic revenues were up more than 15% we.
We expect continued strength in double digit full year growth in this segment.
Engineering adhesives third quarter, EBITDA increased 11% year over year, driven by exceptional volume performance and pricing gains, we expect double digit sequential EBITDA growth in the fourth quarter as pricing actions in the surcharge are fully implemented and further offset the impact of raw material cost.
Cruises.
Our planning assumptions are that demand will remain strong across our business units.
Raw materials will continue to be tight through the end of the year and pricing will remain elevated against a strong demand backdrop.
We anticipate that higher customer demand and share gains in each of our business units will drive strong year over year organic growth.
As a result revenue in most of our end markets will exceed 2019 levels by double digits.
Overall, when considering our strategic pricing actions, coupled with the solid volume growth in H H C. <unk>.
Continued improving performance in construction adhesives and strong demand in engineering adhesives, we now expect full year revenue growth of 17% to 18% versus 2020.
Now, let me turn the call over to John Corcoran to review, our third quarter results and our updated outlook in more detail based on these planning assumptions.
Thanks, Jim I'll begin on slide five with some additional financial details on the third quarter net.
Net revenue was up 19, 6% versus the same period last year.
Currency had a positive impact of three 2%.
Adjusting for currency organic revenue was up 16, 4% with volume up 10, 1% and pricing up six 3%.
All three Gpus had double digit organic growth versus 2020, with engineering adhesives, and construction adhesives up over 19% year on year and HFC up 13%.
Top line results were also strong when compared to the non COVID-19 impacted third quarter of 2019, which we believe validates the strength of our topline performance.
When compared to Q3 2019 organic revenue increased 13, 1% for the total company with strong organic growth for all three Gpus.
Adjusted gross profit was up three 8% year on year, but gross profit margin was down as volume growth and pricing gains were more than offset by higher raw material costs.
Adjusted selling general and administrative expense was down 220 basis points as a percentage of revenue, resulting from strong volume leverage and general expense controls.
Adjusted EBITDA for the quarter of $111 million was up 5% versus the same period last year and adjusted earnings per share were <unk> 79 up 4% versus the third quarter of last year, driven by strong volume growth pricing gains and good cost controls offset by higher raw material costs.
Cash flow continued to be strong with cash flow from operations in the quarter of $81 million similar to the Saint <unk> and higher raw material costs.
And we continue to reduce debt paying down $110 million.
And the first three quarters of 2021, keeping us on track for our full year debt Paydown plan of $200 million.
Regarding our outlook.
Look based on what we know today, we now expect fourth quarter revenue growth percent.
We are narrowing our adjusted EBITDA guidance range to $460 million to $470 million given our expectations for continued strong volume growth.
And accelerated pricing offsetting raw material cost increases that we now expect to exceed.
15% for the full year.
This would represent full year EBITDA growth in the range of 13% to 16%, 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.
Early in the year, we set three critical priorities for 2021 volume growth pricing to value and releasing of greater productivity and operational capacity.
As you've heard this morning, we executed exceptionally well against each of these priorities again this quarter.
Our double digit volume growth versus both 2020 and pre Covid 2019 reflects enduring demand for our critical adhesive solution.
Market share gains and the success of our global sourcing initiatives.
On pricing, we move quickly to implement $225 million and pricing actions, which are aligned with the value customers derived from our adhesives and we have implemented further increases, which we will reestablish our margin profile in the fourth quarter.
And we continue to enable productive efficient capacity to deliver at a high level for our customers with lower factory and overhead cost as a percentage of revenue than last year.
Our execution of these three priorities reinforces that despite varying economic conditions, our clear strategic vision enables us to take rapid decisive actions to create value for our shareholders.
Our performance through the pandemic in 2020 and now through the unique supply an inflationary challenges in 2021 demonstrates our resilience and flexibility as we outperform our competitors.
Our performance consistency through these challenging periods reflects the power of our global team and our business model.
It demonstrates the strength of our cash flow generation and resiliency of our diverse customer set <unk>.
Including a strong and durable ADHD business, coupled with our substantial growth in engineering adhesives and construction adhesives.
Looking ahead innovation will continue to fuel multiyear growth opportunities.
<unk>, an outsized percentage of our new product pipeline focused on electronics electric vehicles building in energy efficiency and more sustainable packaging and hygiene products.
A strong debt Paydown track record increases our optionality to deploy capital to acquisitions that add to our portfolio of specialized adhesive solutions.
The actions we have taken in the first three quarters of the year have delivered sizeable double digit top and bottom line growth.
But more importantly, they position us to exit 2021 with significant momentum.
Our business is well positioned for further market share and volume growth additional pricing gains and sizable margin improvement as we enter 2022.
The last couple of years of demonstrated to investors that the adhesive industry is a great investment.
High customer demand for our solutions high cash flow generation pricing resiliency, and recently announced valuation multiples for adhesive businesses.
Reinforce the premium value adhesive solution providers deliver to customers across a wide range of markets.
As the only global pure play adhesive provider of scale. We believe we are uniquely equipped to innovate with the speed and agility necessary to help our customers address their most pressing adhesive challenges and to deliver significant long term value to our investors.
<unk> is a stronger company today than ever before to enhance our capabilities our productivity our speed our agility.
<unk> and our financial profile.
I want to thank our shareholders for their continued confidence as we navigate some of the most demanding operating conditions any of us have seen.
We remain laser focused on executing our priorities and creating value for shareholders and all stakeholders in the fourth quarter and 2022 and throughout the years ahead.
That concludes our prepared remarks today, operator, let's open up the call to take some questions.
Absolutely, ladies and gentlemen, again that will be far agenda number one are you touched on the telephone.
Your first question comes from the line of Ghansham Panjabi from Baird. Your line is open.
Yes. Thanks, good morning, everybody. Good morning, I guess my first question as it relates to raw materials and some of the scarcity issues that peers across the chemical coverage subsided, including in recent pre announcements maybe touch on what's different with HB Fuller I mean, I understand the cost baskets might be different.
But on some of the inventory buffers, along the supply chain and.
Is there a potential disruption.
Over the next couple of quarters, just given I assume your inventories are pretty lean.
At this point thanks.
Great. Thanks, guys.
Yes, I would say early in the year.
We started a mantra inside Asia.
H B Fuller that said that the.
The team with the most raw materials is going to win and we had we had meetings and each one of our Gpus at seven a M.
Tuesday Wednesday Thursday of those meetings have continued and it's been really a diligence on material by material managing what's are there. Other event there were fires of big events. Those couple of shutdowns now happening in China.
But its understanding and working with our suppliers working with our plans and working with our customers and.
It's probably relative to other people ours is more diverse which helps us but it is more complicated.
And.
I think it's a it's really an execution.
Story of understanding the problem getting ahead of it and then really working as a team.
The sourcing initiative, but these these meetings have frontline commercial people are sourcing people operations and supply chain. So.
So it's a really good execution story I don't think the market that different for anybody, but these times of Covid and the supply chain problems. We have are really an opportunity for to differentiate companies and I think I think our team has done just an outstanding job of managing through this.
And I just want to thank Dan it's really the great work.
Now in terms of buffers in inventory as you know it's interesting what's happening out there I was in Europe. The last two weeks.
As we ship outside of the region.
And they have built up inventory because they're waiting for the international shipping containers, but at the same time I had aligned in that plant.
That was idled because they couldnt get a raw material from a supplier in Germany. So managing that complexity is really what this is this is all about and thinking ahead to shipping containers arent going to come in and how do we manage the customers and the supply chain.
By change because people can't ship material in other cases, there are shortages and again managing those details, but broadly speaking I think the point, you're making is that.
Supply chains are tight and any little issue that pops up creates a disruption that we have to manage and other specialty chemical manufacturers have to manage.
Got it.
Thanks for that and then.
For my second question is just sort of two parts I mean, your margins, obviously reflective of price cost just like everybody else.
Is quite a bit below 2019 levels, so whats a reasonable timeline to get back towards that baseline first of all and then from a.
Wondering if the HB Fuller in terms of capital allocation evolution.
Sort of cycle, yes, certainly.
Margin protection is really important for us I think.
We've looked very carefully at it I think we talked about it last quarter that we're going to have some decline.
We're going to see a big uptick both in gross margin and EBITDA here in Q4, and we'd expect that to improve in 2022, I can't tell you exactly when and where they will get to but I can tell you that our fundamental objective is to grow our <unk>.
So when we started this year, saying we were going to grow.
Double digit 9% to 10%, we're going to end the year growing 14%, 15%, 16% and.
Target whatever market conditions, we get doing that same thing again next year, but I think the long term projection for our margins and whether that's 22 or beyond that high teens is what we see this adhesive business moving to so we've move full or up to this 15% margin company.
And we see our future being closer to 17% to 18%.
As far as capital allocation, yes, we've done a great job with that.
The debt pay down over the last few years.
We're looking at what the right opportunities are out there and I'd say in 2022, not big deals, but we will allocate more of our money towards.
Towards acquisitions, if we can get the right.
The right opportunity at the right price, so I think thats a shift you'll see in 2022.
Thanks, so much Jim thank.
Thank you.
Thank you. Your next question comes from the line of Vincent Anderson from Stifel. Your line is open Sir.
Yes. Good morning, Thanks for taking my question.
Morning.
So I appreciate the detail on the price versus raws, but I actually wanted to dig into the mix a little bit.
Yes.
Is there anything meaningful coming from that right now and what kind of potential there is for us this year and margins going forward just assuming this price versus raws volatility comes down.
Yes, maybe I'll, let John see if he wants to dig into that a lot deeper I'd say broadly speaking, we have ups and downs on mix across product lines.
That are working their way out.
So in a certain market segments are growing faster than others. Some of them are higher margin couple of them are lower margin, but I don't think when we dig through the details there's a big mix effect in this the big drivers are our volume growth through wins raw material cost increases and price increases.
Jim talked about in the longer term, we expect engineering adhesives, and construction adhesives to grow at a faster rate than HFC, certainly engineering adhesives, EMEA up higher margins. So we should get.
A beneficial mix impact overtime.
Okay, all right understood thanks and.
I guess are you seeing any impact on your new product pipeline from these shortages you feel comfortable about being able to source or just even the bandwidth to evaluate new products right now.
Yes, I'd say bandwidth is good it's a new way of qualifying new products. So I think with.
Think about our business, we worked with a lot of engineers.
It's around the world.
And development candidates and those people some of them are working from home and remotely and our team has to connect in a different way. So is it a different way of selling and qualifying products that we've gotten very good at I think so.
But in terms of.
Adoption I think customers are continuing to try to find ways to innovate.
Sustainability agenda drives a lot of that whether that's more energy efficient buildings lightweight cars evs.
And then certainly in the packaging space Theres a lot of that so so I would say.
No it hasnt slowed down at all in terms of adoption in terms of raw raw availability may be a little bit if they don't have chips or something like that but but really that's not what's driving our customers our customers want to find a way to innovate and win in their markets.
That's a big driver.
Alright, thanks very much.
Thank you. Thank you.
Your next question comes from the line of Jeff Zekauskas from Jpmorgan. Your line is open.
Yeah.
Thanks very much.
Sequentially your margins improve engineering adhesives and the contract.
Construction.
Why was the performance better engineering.
Right there.
It looks like Europe, you're containing year inflation pretty well.
Yes, I would say, there's a little bit less inflation sensitivity in that business. So thats.
That's probably the biggest driver there is a little bit of positive mix in there with some of the wins that we've had in high value.
John you want to add to that those are the main things we did we had a.
A recovery of a receivable that was reserved for that was a one time benefit in the quarter, but.
The bigger items are the ones that Jim talked about.
Okay.
So.
Do you think maybe about three 3% more price to catch up to raw materials.
I have to think about that I've been thinking about it in percentages. We're looking at this Jeff broadly in terms of whats the the dollar impact of roles in dollars, but yes, I think to catch up.
We would probably need three or four to just catch up and I think we're going to expect it to sort of to.
Not just catch up but makeup for what we've been behind here. So so thats why youll see six or 7% of price in the numbers.
Alright, maybe a question for Sean.
I think your pension income in the first half that's up about $7 million.
And it looks like you probably had another good result, this quarter, so maybe for the year youre going to be.
Now positive 15.
What happens to that number next year, how does it happens at all work.
Do you think that you need like another good return from the market or are there some different underlying dynamic.
What do we do about why is pension income so high.
The outlook for next year.
Yes, I think the short answer Jeff is that as Youre pretty much right on your numbers.
It's it's.
Outcome.
Strong returns on pension assets last year, so that number is really no.
Depending on what happens in the market between now and the end.
Similar to this year.
But it's right on the budgeted budgeted level.
Okay.
Talked about.
The magnitude of the price increases and I was just a little bit puzzled by that.
Prices in the quarter were up 6%.
So if you annualize that on last year's revenue.
It would be about $170 million.
Our actual prices maybe were up three.
Which is.
I don't really understand where the 200 or 220.
35 to 400.
Yes, 225 is.
Annualized value. So you can look at that is what our exit rate was at the end of the year. So usually exited the quarter at about 7% right. So so it's the annualized and as I said Thats the way we look at this.
Getting the timing is one issue right, so that we deliver quarters, but the real important value for our shareholders as we need pricing that overcomes our raw material increases so year to date, we have agreed and executed.
$225 million through before September one when we took this next big step.
Daniel.
This job on getting those raw materials.
The other guys haven't been as fortunate.
It's different raw materials in different situations, but yes, I think it's a great job by our team and I'll make sure I pass that on Jeff. So thanks.
Alright. Thank.
Okay Sir.
Thank you next we have Mike Harrison from Seaport Research Partners. Your line is open Sir.
Yeah.
Hi, Good morning, and let me add my congratulations on a nice quarter in a challenging environment.
Thanks, Mike.
Wanted to ask about SG&A as a percent of revenue you called that out.
Climbing versus last year really it looks like it was the lowest in several years.
Is that.
SG&A number sustainable.
Have driven that lower.
Thanks.
Yes.
So I think one of the great leverage opportunities for US right now in this inflationary environment G&A as a percentage of revenue is going to go down.
So we don't have as much inflation and I would say the net net of all this is really positive.
Instead of for our margin.
Our margin progression in the future. So I wouldn't expect I would expect that SG&A as a percentage in general.
Sorry, I think I would say Jeff.
We knew this was going to be a challenging quarter and we manage expenses really well in the quarter.
There were I would say some more kind of one time items that probably won't repeat.
Did some variable comp adjustments that had to year to date catch up.
I think I mentioned earlier, a bad debt recovery. So I would say Q4 will probably look more like Q1, and Q2 than Q3, but I think we're we recognize that.
In this environment, we've got to manage SG&A, well, but to your point of a percentage of revenue it's down in than we expected.
Alright, Thats helpful. And then our cost guidance pushed through a number of increases and now the surcharge.
I'm sure that there isn't getting a suite.
Super favorable response from customers, but maybe just give us a little bit of a sense of how those customer conversations are going maybe you talked about areas, where you feel like youre getting pricing, a little bit more easily and where there might be some less favorable.
Dynamics, either because of weaker demand or competitive dynamics or are there other factors, yes, yes.
Yes, no you're right Mike.
Customers.
Frustrated not just by us, but by other materials and whats happening to their to their prices overall.
So I think I said earlier in the year price increases we are going through more smoothly than they ever have well that's not happening anymore.
Part of it is the speed and part of it is the magnitude.
We were we were pretty aggressive from a timing standpoint with what we did on September one.
And also within with the amount.
But we have a good view into the future and we understand what's needed we've seen in the 30 days since we've announced that lots of follow on activity from others in the market. So so I think the.
The truth is this has to be done not real happy I think I think most customers are understanding of the dynamics. They appreciate our straightforward honest approach and up to this point there hasn't been an impact on volume of any kind of.
Appreciable appreciable size.
So did you have a second question on <unk>.
I didn't write down.
Yeah.
You got it.
And then the last question I have.
I know, it's a little bit early.
Sure kind of implies like.
11% EBITDA growth from your guidance midpoint.
For this year.
Anything you can share at this point in terms of assumptions around revenue growth or margin performance that might help us kind of sharpen our view on.
Fiscal 'twenty two could look like thank you.
Yes, well.
I couldn't have predicted what 'twenty was going to be like or 'twenty. One so predicting 'twenty two is going to getting more challenging but I think what we've proven Mike is a really strong resilience and lots of environments. So is it going to be bigger demand less demand is inflation going to continue things going to abate. Our goal is we're going to deliver double.
Digit EBITDA growth in 2022, we're scenario.
Planning various things that can be happen should expect from us that's what we're seeing.
Showing and we started this year with a.
A 10% gold people felt like that was a stretch.
And we're going to deliver closer to <unk>, 10% goal and we're going to find it.
Irrespective of the market conditions.
I think it's a it's certainly.
Fair way at this point to look at the year. It's certainly how I look at it is we're doing our planning for 2009 it sounds good thanks very much.
Thanks, Mike.
Thank you.
David Begleiter from Deutsche Bank. Your line is open.
Hi, This is Dave along here for Dave I guess in your three segments, where do you expect to see them.
Benefits from price increases and margin improvements in 2019.
Fuzzy here and there.
In Q.
Three segments wacky.
Thank you, Steve and mounts benefits around price increases and marketing improved <unk> 22.
And 'twenty two.
Yes.
Overall 'twenty one to 'twenty two we see the same kind of uplift.
Each one of each one of the businesses John you want to comment further.
If you look at.
The quarter pricing for all three were between 6% to 8%.
And the actions we took at the beginning of Q3 Q4 are pretty good.
And then just on the 10% volume growth you guys had in Q3.
Yes.
Okay.
Comment on how much of that 10% with that share again.
It sounds like you guys are less impacted by raw material volatility.
So D E.
Kick back some of that share gains he.
Cantat during Q3, when the supply chain issues with industry gets rebuilt.
Yes, I think.
I don't want to make it sound like we haven't had supply chain issues right. We have a lot of them that we are managing so so there are some areas, where we've got a little bit of a backlog and we've got some opportunities. So.
The share gain in 2020 and in 2021, so so those new wins.
Those are introducing with our adhesives and thats broadly across the market with new wins in our EMEA business.
This and CA in Hh see having similar levels, so, but yes, I think there is.
A bit of pent up demand, because we haven't been able to supply some customers our backlogs so.
There is some of that here that we see as an opportunity going forward, but but our real goal is to supply customers product when they need it as they need it so.
Hello.
Thanks for the question.
Okay.
For any closing remarks, Sir.
Just for your ongoing support and our business.
That's in our business model, thanks, everyone for their time today too.
Thank you speakers, ladies and gentlemen, this will close today's conference call will call for joining.
Yeah.
[music].
Okay.
Okay.