Q4 2021 HB Fuller Co Earnings Call
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Good day, and thank you for standing by and welcome to the H B Fuller quarter for 2021 earnings conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star one.
On the telephone keypad and please be advised that this conference is being recorded.
And further assistance. Please press star Zero I would now like to hand, the conference over to your speaker today, Ms. Barbara Doyle, Vice President of Investor Relations Ma'am. Please go ahead.
Thank you operator, welcome to H, B, Fuller's fourth quarter and fiscal year 2021 earnings call for the fiscal quarter ended November 27th 2021.
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 organic revenue, which excludes the impact of foreign currency translation on our revenues. We will also refer to adjusted non-GAAP financial measures. During this call. These measures are in addition to the GAAP results reported in our earnings release and in our forms 10-Q, and 10-K, we believe that discuss.
One of these measures is useful to investors to assist the understanding of our operating performance and how our results compare with other companies reconciliation of non-GAAP measures to the nearest GAAP measure is included in our earnings release.
Unless otherwise specified discussion of sales and revenue refers to 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 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 the call or risk factors in our forms 10-K, and 10-Q filed with the SEC and available on our website at investors Doc H B Fuller Dot Com now I will turn the call.
Over to Mr. Jim Owens.
Thank you Barbara and welcome to everyone joining the call. This morning.
Last evening, HB Fuller reported strong fourth quarter results, including 15% year over year revenue growth.
$34 million of EBITDA at the high end of our guidance.
Nine of adjusted EPS.
Organic revenue was up 15% versus 2020 and increased 20% compared with the pre COVID-19 fourth quarter of 2019.
We had double digit organic revenue growth in all three segments as a result of our renovation efforts pricing strategies and service levels.
We also saw significant margin recovery with gross margin up 340 basis points versus the third quarter.
As a result of decisive pricing actions taken during the year.
And we continue to pay down debt in the quarter to substantially reduce our debt to EBITDA ratio to three three times from four one times a year ago.
We delivered on our commitments in the quarter as we have all year. Despite a rise in virtually every cost associated with serving our customers and unprecedented supply chain challenges.
Our global team of 6500 employees again demonstrated outstanding operational execution in this environment.
At the beginning of 2021, we set three operating priorities volume growth pricing to value and improved productivity and operational capacity we.
We delivered on all three of these priorities throughout the year.
Volumes are up productivity has improved and in the fourth quarter, we saw significant benefits from our strategic pricing actions, we took swift actions early and throughout the year as persistent inflation impacted our raw materials and in the fourth quarter, our pricing actions enabled us to catch up with material inflation and <unk>.
Store our margins.
In 2021, we implemented over $450 million of annualized price adjustments overcoming the annualized value of raw material cost inflation.
While inflation and supply chain management have been important drivers of the results this year.
Overall strategy, the culture and the organizational capability that we built that is enabling the companys success.
Our strategy is to deliver innovative adhesive solutions to customers faster than our competition to.
To collaborate effectively within our technical teams and with our global suppliers to solve challenges and serve customers first and fastest.
And to do that while consistently demonstrating H b fuller's values and principles as a great place to work.
It is this culture and strategy that is enabling our success.
Our ability to execute today as a result of the organization, we've built and designed over the last several years.
2019, we reorganized into three global business units centered on 30 end markets each focused on the needs of customers within that segment.
We invested in our supply chain and manufacturing systems to promote flexibility.
And we streamlined the organization better aligning all employees with our strategic objectives.
Because of these actions our agility speed to market and operational efficiency of increased enabled us to successfully navigate widespread inflationary pressures shipping disruptions raw material shortages and numerous COVID-19 related impacts.
Storage is still persist for many specialty chemical raw materials for plastic and metal packaging and shipping containers.
We continue to effectively leverage our global footprint and our sourcing capabilities to deliver for our customers.
Most importantly, we continue to capture new opportunities and gain share across end markets by delivering innovative adhesive solutions to meet new consumer needs and greater demand for sustainable goods.
And construction high demand for H B Fuller roofing adhesives led the way with 29% increase in this segment sales over the fourth quarter last year as we help customers deal with labor shortages.
Our innovative sprayer ball bonding roofing solutions increases installation speed with more efficiency and is approved for use in all <unk> regulated markets, our new level setting products ready to use grouts mortars, and pressure sensitive adhesive products enable new flooring to be installed more quickly and more reliably.
In 2021, we won significant new business in engineering adhesives, with our solutions and support a sustainable markets, including electric vehicles energy efficient insulated glass automotive electronics and solar panels.
And in hygiene health and consumable adhesives, we are delivering innovation to meet increasing demand for more efficient and environmentally friendly packaging.
In 2021, we launched annuity eases that decomposed with no residue or micro plastics, while at the same time, managing demand spikes supply chain delays and raw material shortages to deliver record levels of adhesives for our customers.
Now, let me move on to slide four to discuss fourth quarter segment performance in a little more detail.
Strong performance continues and our hygiene health and consumable segment, where organic revenues increased by 13% year over year with double digit growth in most of our end markets and very strong results in packaging applications tapes and labels tissue and towel and health and beauty.
<unk> organic revenues also increased 18% versus the pre COVID-19 fourth quarter of 2019.
Construction strong underlying consumer demand and share gains.
Hh C segment EBITDA margin of 13, 6% reflected the absorption of significantly higher raw material costs as well as increased variable compensation compared with last year offset by strong pricing.
EBITDA margin was up 160 basis points sequentially versus the third quarter as strong pricing gains are driving higher margins as we exit the year.
Construction adhesives had an extremely strong quarter with organic revenues up over 29% versus the prior year and up 31% compared with Q4 of 2019.
Year over year performance improvements in all three construction end markets were driven by volume growth associated with improving market conditions and share gains as well as outstanding pricing execution.
Construction adhesives EBITDA margin of 16, 3% increased significantly year over year up by 390 basis points.
<unk> EBITDA margin also improved by 390 basis points over the third quarter of this year, driven by volume leverage and pricing gains.
The construction adhesives team drove extensive operational improvements in 2021 they.
They have met strong demand in an extremely challenging environment and the business is positioned with strong momentum as we enter 2022.
Engineering adhesives delivered another strong quarter of results organic revenue increased 13% year on year led by strong double digit growth in new energy recreational vehicles insulated glass woodworking technical textiles in footwear.
Engineering adhesives, EBITDA margin remained strong at over 15% and up slightly versus Q3 on strong pricing execution offset by higher raw material costs and higher variable compensation expense looking ahead to 2022, we will pursue continued growth opportunities and share gains in a business environment.
Where we believe that underlying demand remained strong and that cost inflation will persist.
We anticipate that continued solid demand for hygiene and health products packaging paper tissues, and towels will continue into 2022 and.
We anticipate construction adhesives and markets will show strong improvements through the first half of 2022 with commercial activity improving throughout the year and residential activity remaining solid.
And we believe that engineering adhesives end market demand will also remains strong given our backlog of consumer demand for electronics vehicles and durable goods.
In total our base case planning assumptions are for organic growth in the low teens, driven by pricing and modest volume growth.
Our current outlook is for raw material cost to continue to increase in 2022 versus the fourth quarter 2021 exit rate.
The inflation, we are seeing in Q1 is sizable the less in the fourth quarter of 2021, we expect the raw material increases to be broad based across the businesses and relatively consistent by region with Asia, showing less inflation to start the year, the EMEA and the Americas, we will continue to price to value.
And we will remain vigilant regarding raw material inflation.
We have over $100 million and pricing actions, taking effect in Q1, and we will take whatever pricing actions are necessary in 2022 to fully offset raw material cost increases and enable us to restore margins.
Against a challenging economic backdrop, our performance in 2020 and in 2021 demonstrated that our business is diverse and resilient. Our operations are nimble and we are executing our strategy well.
And we expect to continue to outperform our end markets again in 2022 as we face the challenges ahead.
Now, let me turn the call over to John Cortland to review, our fourth quarter results and our expectations for 2022 and more detail based on our planning assumptions.
Thanks, Jim I'll begin on slide five with some additional financial details on the fourth quarter.
For the quarter revenue was up 15, 4% versus the same period last year currency had a positive impact of 0.5%.
Adjusting for currency organic revenue was up 14, 9% with volume up one, 4% and pricing, having a favorable impact of 13, 5% year on year in the quarter.
Adjusted gross profit margin was 27, 1% down 40 basis points versus last year as pricing more than offset raw material increases from a dollar standpoint in the quarter, but not from a margin standpoint. However, gross profit margin was up 340 basis points versus the third quarter of this year driven by pricing execute.
Jim.
Adjusted selling general and administrative expense was up year on year, reflecting higher travel and other investments to support growth as well as higher variable compensation related to the Companys strong fiscal 2021 performance for.
For the full year adjusted SG&A as a percentage of revenue was 72% down by 130 basis points versus 2020.
Adjusted EBITDA for the quarter of $134 million was up 9% versus last year and at the high end of our planning assumptions for the quarter.
Reflecting strong top line performance driven by good pricing execution and construction adhesives market share gains.
Adjusted earnings per share were $1 nine.
Up versus the fourth quarter of 2020, despite a higher tax rate in Q4, 2021, which drove a negative year on year impact of about <unk> 10 per share.
Our results for the full fiscal year were also very strong.
Full year organic revenues grew 15% versus fiscal 2020, adjusted EBITDA increased by 15% year on year and adjusted EPS was up 22%.
For the year cash flow from operations continued to be strong while absorbing higher working capital requirements to support the significant sales growth and higher raw material costs throughout 2021.
And we continue to reduce debt in the quarter paying off about $40 million of debt driving our net debt to EBITDA to three three times as of the end of the year.
With that let me now turn to our guidance for the 2022 fiscal year <unk>.
Based on what we know today, we anticipate full year double digit organic revenue growth in the range of 10% to 15% and we estimate that currency will have a negative impact on revenue of about 2% to 3%.
We expect adjusted EBITDA to be between 515 and $535 million.
Presenting a 10% to 15% year on year increase as pricing leverage and operational efficiencies more than offset higher raw material costs. We expect our 2022 core tax rate to be between 27% and 29% compared to our 2021 core tax rate of about 27%.
We expect full year interest expense to be between $65 and $70 million and the average diluted share count to be about 55 million shares.
These assumptions would result in full year adjusted earnings per share in the range of $4 to $4 25.
All of this guidance reflects the fact that H B Fuller will have one additional reporting week in fiscal 2022 compared to 2021.
We estimate that the extra week will have a favorable impact on full year revenues of approximately 2% compared with full year 2021.
And a favorable impact on full year EBITDA of approximately $8 million to $10 million versus 2021, all occurring in the fourth quarter.
The extra week into consideration as well as the typical seasonality of the business, we expect to realize $20 to 21% of full year EBITDA dollars in the first quarter.
Now, let me turn the call back over to Jim to wrap us up.
Thank you John .
After we reported strong fiscal 2020 results a year ago, I said that investors should continue to expect differentiated performance from HB Fuller.
I can say confidently today.
We have demonstrated this in 2021 <unk>.
Significant volume growth rigorous execution of our price to value strategy, and greater productivity and operational capacity enabled us to deliver a record level of revenue volume and profit performance in 2021.
In 2022, we are positioned to again deliver double digit organic revenue growth and nearly 20% EPS growth as we build upon the momentum we created in the last couple of years 2020 demonstrated the resiliency of our diversified portfolio of market, leading solutions and difficult end market condition.
While 2021 showcased our ability to grow faster than our competitors and seize growth opportunities through our agile customer centered collaborative business model.
Full year 2021 organic revenue increased by 15% led by 10% volume growth and strong contributions from pricing.
Full year EBITDA dollars also increased 15% as we mitigated bottom line impacts from the extreme raw material inflation.
Our momentum accelerated in the fourth quarter as margins expanded which positions us well for another strong year in 2022 and 2021. We also continued to increase the share of high value adhesives and our portfolio.
We did this by pursuing and winning high growth opportunities, including new wins in electric vehicles sustainable buildings can postal packaging e-commerce packaging solar panel sealants and new medical adhesives.
These wins exemplify the innovation that has driven the strategic repositioning of our portfolio over the last decade towards specialized higher margin adhesive solutions.
In 2010, we were a $1 $3 billion company with a sizable portion of our sales and non specified applications.
In 2021 were $3 $3 billion company with less than 10% of our sales and non specified applications.
Growth in specialized adhesive products in our portfolio has driven compounded double digit growth in EBITDA dollars and a significant EBITDA margin improvement over that time period.
In 2022, we will continue to invest in innovation and to organically expand our portfolio of specialized adhesive applications.
And where appropriate we'll also make inorganic investments we have a strong track record of acquisitions and are viewed as a sought after buyer within the industry, given our scale and proven integration strategy.
While we have an improved balance sheet and an exciting pipeline of opportunities. We will remain disciplined buyers and committed to our strategic balance sheet target of debt to EBITDA below three times.
Let me close by thanking our shareholders for their continued confidence in our company.
2021 was a remarkable year with enormously complex global supply issues and volatile inflationary headwinds.
And H B Fuller lived up to the challenge we served our customers supported our employees and delivered consistently for our shareholders under exceptional business environment.
We've made tremendous strides in our business over the last decade, and we accelerated our performance in 2021 with double digit top and bottom line growth.
2022 is positioned to be another record year for H B Fuller with both the top and Bottomline projected to grow double digits again.
Our company strategy.
And our execution capability is leading to year over year growth and margin expansion, which has us well positioned to continue this performance beyond 'twenty two into the years ahead.
This concludes our prepared remarks today operator, please open the call. So we can take some questions.
Thank you as a reminder to ask a question you will need to press star one on your telephone keypad again that will be tier one and your telephone keypad to ask a question and to withdraw your question press the pound key.
Please standby will be compile the Q&A roster.
We have the first question comes from the line of Vincent Anderson of Stifel. Your line is now open you may ask your question.
Thanks, and good morning.
Good morning Vincent.
So I wanted to start off on construction you gave a lot of.
Detailed but I wanted to dig into it maybe just a little bit more I mean, one that growth was pretty unseasonable and you led with the discussion of your new Spreadable roofing product, which you talked about last year was there anything to think about with regards to timing of sales and maybe that product specifically and then I noticed that you said the strength was also.
Very broad based and you didn't call out mix and the margin improvement. So I'm, just trying to parse out where the new product fits and all of that and if there are any timing considerations to that strength.
Yes.
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I think.
And all of our businesses, but the.
Construction it shows up in the number there is the innovation behind our growth really important part of looking at our story so.
So I would say, it's not the majority of that growth, we had growth broad based across our business.
But certainly that new products, we invested in some technology.
That we actually purchased last year, we put in some capacity early this year allowed us to meet what is a growing demand.
The strategy, we've put in place across all of our construction adhesive markets is to deal with the labor shortage, so finding products that allow.
Our customers to use less labor do the jobs faster so.
Clearly it wasn't.
Some sort of short term blip as a lot of momentum in that business and I think I've talked about the fact that just coming into the pandemic. We started seeing really good momentum both on the top and bottom line in that business.
That first quarter of 2020.
There is a lot of things up and down certainly theres better underlying demand, but we're at a trade show. This week. Our team there is hearing from customer after customer what a great job, we're doing on the supply chain issues supplying them what they need so I think.
It's a combination of the supply chain and the innovations and I'd say that in.
China front, a couple of quarters that you're going to be pleased with what we see in construction and I think that's going to prove to be true.
And 'twenty two as well.
Alright, thank you.
And then just tenants quickly at a high level can you talk about what Youre seeing in Asia demand right now, particularly against some of the higher margin businesses with outside exposure to outsized exposure in China are performing.
Yes, China is still growing but a lot slower rate you would have just about every quarter asked me the question, which region as your highest growth I would have said, China, China, China now, it's probably our lowest growth spread so so so still growth, but if you look at the last let's say a while even January December January November slower.
Slower growth than we're seeing in some other parts.
And a couple of factors there right. There is the export phenomena certainly co.
Covid related slowdowns.
And some of the energy policies that we put in place in China.
And I think everyone does expect and given what we hear from customers. We expected uptick here later in the year.
But right now, it's a little slower in China.
Okay, and just a quick point of clarification.
Broad based China's slowdown, it's nothing specific to the products, we have a focus there.
I'm, sorry, it's broad based and sheets in China, So I would say across our we've got a pretty diverse business across.
Auto.
Solar or other markets that just broad basically like the rest of our business and we.
We don't see a position and then our HFC business in China again, growing just not growing at as higher rates as the other businesses.
Okay Alright. Thank you and then just a really quick one.
The smaller but I see on your website you have some products and electric electronic Lee conductive adhesives I'm just curious how that how important that business is today to your overall strategy in electronics and is that also an area where you're focused on an additional growth.
Great specific question most of our business is not electronic conductive adhesives, but we do have some and we see it as a good opportunity for us we've built a very substantial electronic adhesives business by solving customers' problems faster than competitors there given us. These challenges our teams are tackling them well.
But most of our products are non conductive and.
It's a small area of our business today, I would say the thermally conductive area, especially with electronic vehicles is a growing part of our portfolio and growth strategy.
Less on electrical induction.
Okay excellent I appreciate it good luck on the year. Thanks.
Thanks Vince.
Yes.
Thank you we have the next question comes from the line of Jeff Zekauskas from Jpmorgan. Your line is now open you may ask your question.
Thanks Brendan.
I think your original target was to lower debt by I don't know.
$200 million this year and maybe you got to 120, maybe maybe because working capital demands were so high.
Can you talk about that and do you have.
Leverage targets for next year.
Yes, I think we actually did a 157% or 156 jets this year so and.
And I think if you dig into the balance sheet, you'll see the real difference this year versus last year was inventory build so I think as we've made some strategic decisions late in the year.
Both the need to deal with the fact that raw materials were more expensive.
But also make certain that we supply customers resulted in a inventory buildup. So.
So we adjusted our planning as we exited the year.
And I think.
I think so so that's the reason why you see a difference between between the numbers.
Overall, given the higher EBITDA, we met some of our EBITDA debt.
Debt to EBITDA targets, because we over delivered what we expected from a bottom line standpoint and in the three three was.
It was really the kind of range, where we're targeting to exit this year and so we're pretty pleased with the debt debt to EBITDA ratio as of the year as far as next year is concerned I think if you look at <unk>.
Organically our plan, we'd be below three point out as I mentioned in the script, we are willing to do smaller acquisitions. There is a number of opportunities in there. So.
If none of that has come to fruition youll see us.
Below three.
I think.
You should expect us if we do some deals to be between three and three five exiting this year, but we're committed long term certainly to bring that into that two five to three range is where we'd like to be in the long run and operate within that consistently.
It looks like your demand.
Really softened in the fourth quarter, maybe health and hygiene in engineering adhesives demand was down.
What happened was that you didn't have enough raw material mix or the order pattern was different and in your guide for next year you talk about sales growth. What do you think your volume growth and if you can talk about the individual segments, what's going on yes, yes, I think well first off overall volume, which was very strong as your point.
Driven by construction, so the volume growth in EAA and HFC was not as strong as it has been all year.
You have to look at what we're comparing to Jeff right Q4 of last year was very strong. So if you take our volume in Q4 this year compared to Q4 of 2019 in those two businesses still upsize of Lee So as a company I think we were up 9% for the full year and 7% in volume in Q4, if you look at the.
These two businesses you'd see some sort of similar ratio.
Compassionate. So so there was this big uptick in Q4 of last year.
That method demand, but there is a supply chain that's a challenge right now.
Our received in full on time, so the materials, we get from suppliers is below 50% our suppliers are.
Are either short or late within materials. So.
So we could have sold more and I would say you can see in some of our end markets, whether it's chip shortages or other issues with customers.
There are some issues customers are dealing with so for all those reasons, even though theres a lot of pent up demand we've projected low volume growth in 2022. So I think I think I said in the script low single digits. That's what we have built into our plans.
I think there is a potential for that to be a lot larger next year, but but that's what we build our plan on John is there anything you would add to and I think Jeff asked about.
By business segment, I would say, it's probably pretty similar by business segment, we've got a little stronger volume opportunity in construction given the momentum they've built.
Yes.
Youre going to go up against strong comparisons in the first half of next year. So your volumes going to shrink and engineering health and hygiene and the first couple of quarters.
No no its certainly not based on what we see today, Jeff we see we see volume growth throughout the year, we see volume growth in each one of the businesses.
And we are one month into the year, we see of a good start certainly.
There is a COVID-19 effect that happened over Christmas and the first week of January with customers.
We already see that starting to abate certainly here in this in this country. So.
So.
So now we don't see a volume decline in 'twenty two at least not at this point.
And Mitch.
It's early in 2020 , one showed us that.
And our crystal balls are great.
We will tell you, Jeff we're very focused on delivering significant bottom line performance this year and.
Given your organic growth on the pricing Youll see a lot of top line growth.
And all kinds of different situations as we go through the year.
Maybe lastly for Sean.
In the funds flow statement, there's an other cash inflow for the year.
$108 million.
What is that.
And in your income statement.
You've got an other income of I don't know $33 million versus 15 at least on a GAAP basis, Brian that was year over year, what are those two numbers and what are the next year.
So that impact you're seeing on that other line and the cash flow statement is is really offset in the other assets line that completely but youll see a big negative so.
It's really the way that some of our our swaps are revalued and so you really kind of have offsetting impacts in two different parts of the cash flow statement.
The other income that you see and we've mentioned this before on our calls was the fact, we had higher pension income and.
In 2021 versus 2020 based on strong asset returns, so and it will be the number youll see in 'twenty two will be very similar to 2021 may be slightly lower.
Okay, great. Thank you so much sure. Thank you Jeff.
Thank you. The next question comes from the line of Ghansham Panjabi of Baird. Your line is now open you may ask your question.
Hey, guys good morning.
Got you very very strong year, good morning, Jim and Jeff. Thank you Barbara.
On the EA segment.
Maybe you could just touch on the impact from any incremental supply chain bottlenecks I mean, clearly there's been all sorts of issues propagate. It also by auto kind of more recently.
What are you seeing on a realtime basis specific to the segment and then your customers and Hh C are also executing quite significant price increases.
You are raising prices and others.
How should we think about any impact.
Typically rolling that to you.
Yes.
So yes.
I think there are two questions in the quarter definitely we saw some impact from things like chip production right.
You have certain products that can't be produced.
At a little bit of a slowdown in China that that affected their their growth in the quarter. So they would have had more growth if their customers could have met some of the demand that's out there and you see that supply chain across all of the durable goods markets that we have.
And then as far as the Omicron as I mentioned earlier, what we've really seen as a bit of an impact that.
That feels like its even coming back already it's a one to two week phenomenon around Christmas but.
We sell.
With very strong December .
A couple of weeks, where we're looking at things a little slower and then things are picking up here as we exit the month so.
We will see where the world turns but that's our impact so far along with the the slowdown I mentioned in China. So.
But not a fundamental shift here in Q1 versus Q2, we see continued strong overall revenue progression as far as price elasticity I think.
Consumer goods people have needed a price increase for a while and they're getting hit from a lot of different directions, I think as you point out.
What theyre doing in the market is sticking so I think.
I think overall, we've been a very reliable supplier in tough times. Both in 2020. If you remember there are some crazy spikes that happened.
In 2021 is the supply chain issues. So all of that served us well and as I mentioned for us being the innovator on the next project that next opportunity is really important and we're winning those so.
<unk>.
So yes, so so.
Ongoing inflation and as I mentioned, we're raising prices again here in Q1.
Is it with some pockets and some exceptions is not there.
It is not impacting our volume and our position with consumer goods companies.
Got it and then for my second question I also have a follow up is the timeline. What do you think is a realistic timeline 14, EBITDA margins to inflect higher I think it's been down for obvious reasons on the raw material side since the second quarter of fiscal year 'twenty. One and then also on the on the inventories I mean, I understand what youre, saying, but it's still up 40% year over year. So.
What do you think is realistic in terms of timeline timeline to see normalization of inventories or are we just in a paradigm, where you are going to carry higher inventories than you have historically.
Yes so.
So all of that.
On the first question, we have seen some inflection here this last quarter right I mean, I think I've made it clear that our our goal is to improve our margins up to the levels we had in.
We committed to do that in Q3, and we saw some some good progression here in Q4 and Thats. Our goal as we go forward, it's always going to be a struggle right as I mentioned, we got sizeable inflation here, so I'm raising prices over $100 million.
This quarter, but as you're as you're as you're pushing maybe at or a little more than what roles are you don't get good.
Inflation, it's when the rolls flattened or start to come down that youll see really good.
Expansion of our margins and if you can tell me when that's happened and I'll tell you what my margins have gone up but right now were.
We're responding to this inflation I think very effectively we're anticipating it.
And making the moves not after things happened, but before or as things happen. So so yes. So.
Margin progression throughout this year and then when raw start to flatten out or come down very sizable margin expansion and then to your question around.
Working capital.
No.
We've reduced working capital as a percentage of sales by 110 basis points. So we're looking at all elements of our working capital to make certain that we manage our cash effectively I'm pretty proud of how we manage working capital overall.
And that's been something we've been doing every year. So we're now down to 17, 2% of revenue.
Specifically on inventory.
I think if you look theres about a $120 million to $120 million increase in inventory at the end of the year $110 million.
Half of that is simply inflation does see the inflated cost of our goods that we purchase and our products and then the other half is us building inventory for various reasons across our businesses. So.
We're not going to pull off of that we think it's an important part of enabling us to serve our customers.
And I think its supply chain stabilized we could go back to normal levels of inventory, but we're planning to have an elevated number.
This year and.
And of course, the inflation impact so so image of a use of cash and not as much probably this year as it was last year, but it will be a use of cash in 2022.
Okay just final clarification.
Low single digit growth guidance that you gave for volumes does that exclude the extra week or is that inclusive of the extra week.
Excludes the extra week.
Okay awesome. Thanks, so much.
Yeah.
Thank you we have the next question comes from the line of Mike Harrison of Seaport Research. Your line is now open you may ask your question.
Hi, good morning.
Good morning, Mike.
About the engineering adhesives business you'd noted the double digit growth in a number of different markets. There wasn't really a mention of electronics in there can you just talk in a little more detail about what youre seeing in electronics applications.
That really just the China weakness.
Showing up in terms of your electronics exposure.
Yes, so over overall.
Electronics had a great year overall, both on the top and the bottom line and we had some very sizeable wins.
Yes, I think it was a little bit.
Softer here in Q4 than it had been and part of that is related to some supply chain issues with some customers, but but overall great year for our electronics, some very nice wins.
Not quite as strong in Q4 as it had been earlier in the year.
And do you expect that to recover or is that kind of a post Olympics type thing or maybe.
Yes.
Your thoughts on trends there, yes, we see very significant recovery, there and as you know Mike a lot of our electronics business is driven by our wins and we have a number of them that happened here in the second half of the year. So.
Yes, we expect very strong performance out of that business here in 2022.
Alright, and then on the <unk>.
Construction business definitely impressive performance here in the fourth quarter.
If you could give a little more color on margin drivers. There obviously there was some some good pricing.
Recovery against those higher costs and it sounds like some volume leverage as well.
Any thoughts on operational improvements mix and any kind of unusual dynamics that may not repeat.
I think we're all just trying to kind of get a sense of where that 16% EBITDA margin number.
Can go over the next few quarters, yes, yes.
Yes, I would say that you picked up the two big drivers right more volume in a really good job of managing price and getting ahead of what are some sizeable increases in that space are the two biggest drivers of the margin improvement.
I'd say, though the teams done a lot of good work to Debottleneck, some assets and make certain we can supply customers in.
Our ability to.
To serve the market certainly outperformed a number of our competitors in all three spaces and that was that was driven by some some good debottlenecking of our facilities along with some strategic purchasing of raw materials early in the.
Early in the year that allowed us to sort of get ahead of the game. So.
In terms of expectations I think I've always been clear our expectations for this business are high teens EBITDA.
And.
That's why we're driving it to but.
Again, one quarter is not a trend so youll have to see it might but.
That's what this team is driving for an IDE.
Don't see any reason why they shouldn't be able to to use 2022 as of year to consistently have.
Speaker 1: much better margins than we've seen in the past.
Much better margins than we've seen in the past.
Alright, thanks very much.
Thank you.
Speaker 2: Thank you. We have the next question comes in the line of Eric Petry of Citi. Your line is now open. You may ask a question. Hey, good morning.
Thank you. The next question comes from the line of Eric Petrie of Citi. Your line is now open you may ask your question.
Hey, good morning, Jim and Don.
Eric.
Speaker 3: So just taking a look at overall your incremental EBITDA margins and engineering at thesis for the full year was I think a little less than 14% below segment average. So you talked about new wins, you know, higher growth, higher margin applications. So why is that? Is it just mix the business? Is it higher comp expense? And then how do we model that going forward?
So just taking a look at overall your incremental EBITDA margins in engineering adhesives for the full year was I think a little less than 14% below segment average. So you talked about new wins higher growth higher margin applications. So why is that is it just mix of business is a higher cost.
Expense.
And then how do we model that going forward.
Speaker 1: Well, I'll try and have John give you a more detailed answer, but there is a little bit of a mixed effect that's going on with the business in terms of where the wins and where the growth is that's a negative impact. There's timing on pricing. I mentioned how the construction of these was ahead of the game. They're probably not, given the nature of the customers and the markets.
Okay, well I'll try.
Try and have John give you a more detailed answer but yes.
Yes, there is a little bit of a mix effect, that's going on with the business in terms of where the wins and where the growth is.
That's a negative impact there is timing on on pricing I mentioned, how the construction adhesives was ahead of the game that probably not given the nature of the customers in the markets. These are very sticky and very strong increases when we put them forth and our business is based on based on specified product.
Speaker 1: these are very sticky and very strong increases when we put them forth and our business is based on specified products. So the speed is not as important as the long term impact of pricing. So there's a timing of pricing effect that's...
The speed is not as important as the long term impact of pricing so.
So is it timing or pricing effect.
That's it's.
Speaker 1: not as aggressive as it is in some of the other businesses. So I just want to get the key points. There's a little bit of variable comp impact in 2021, but it's the same, you know, ros and pricing offsetting, you know, from a dollar standpoint.
Not as aggressive as it is in some of the other businesses. So I think that's the key point there is a little bit of variable comp impact in 2021.
But it's the same.
Raws and pricing offsetting from a dollar standpoint.
Speaker 1: And that puts a little pressure on margins, but you know, still above 15% the last two quarters, and we would expect that to continue.
And that puts a little pressure on margins, but still above 15% in the last two quarters and we would expect that to continue.
Speaker 3: Okay, great. And then just in terms of M&A, we've seen higher multiples paid for more specialty versus commodity business assets. So I think a handful of deals have been done and it is both strategic and multiples paid are kind of in the 11 times EBITDA, 15 times EBITDA for a higher margin business.
Okay, Great and then just in terms of M&A, we've seen higher multiples paid for more specialty versus commodity.
Business assets so.
Thank a handful of deals have been done.
By both strategic and.
Multiples paid are kind of in the 11 times EBITDA at 15 times EBITDA for a higher margin business what are your.
Speaker 3: You know, what are your pipeline opportunities, especially the private family owned businesses saying to you and you know, kind of is that a fair range of free synergies or or do you think that's out of the money?
Pipeline opportunities, especially the private family owned businesses. Thank you.
Kind of is that a fair range pre synergies are or do you think that out of the money at this point, yes, well I think if you're a privately owned company you can read the same stories that you've read right. Eric. So I think I think expectations are definitely in the double digit range for for most deals it depends on the nature of the business it depends on.
Speaker 1: Yeah, well, I think if you're a privately owned company, you can read the same stories that you've read, right, Eric? So, you know, I think I think expectations are definitely in the double digit range for for most deals. Depends on the nature of the business. It depends on a lot of factors.
A lot of factors.
Speaker 1: For us, we've got a very good position to drive synergies out of deals. So generally the return that we can get on these deals is pretty significant and usually better than just about anybody in the market. So it's about us strategically finding the right assets that are a good fit for us. And I think the returns may be a little more delayed, not as strong as they would have been in some other environments. But yeah.
For us we have.
Got a very good position to drive synergies out of deals. So generally the return that we can get on these deals pretty.
Pretty significant and usually better than just about anybody in the market. So it's about a strategically.
Finding the right assets that are a good fit for us and.
I think.
I think the returns maybe a little more delayed not as strong as they would have been in some some other environments, but.
Speaker 1: uh... but yet those are the prices that are out there and i don't think we're gonna get some huge discount for those prices you know people want to settle on some with me consistently see that here that from both private and bigger companies uh... and uh... and we also have a very good position for the center
But yes those are the prices that are out there and I don't think were going to get some huge discount to those prices people want a satellite and we consistently see that and hear that from both private and bigger companies.
And we also have a very good position from a synergy standpoint.
Speaker 3: OK, and then just a quick follow up, do those assets have similar kind of composition as yours, where it's less than 10% commoditized adhesive, or is it more commoditized, less specialized?
Okay, and then just quick follow up to those assets have similar kind of composition as yours, where it's less than 10% commoditize adhesive or is it more.
More commoditized west specialized.
Speaker 1: Generally speaking, the things that we'll target would be very specialized in the use of businesses.
Yes, generally speaking the things that will target would be very specialized adhesive businesses.
Thanks, Tim.
Thank you Eric.
Speaker 4: Thank you. We have the next question comes from the line of David the glider of Deutsche Bank. Your line is now open. You may ask a question. Thank you. Jim on pricing of the 13 and a half percent. You realize in the quarter how much of that was in the surcharge.
Okay.
Thank you. The next question comes from the line of David Begleiter of Deutsche Bank. Your line is now open you may ask your question.
Thank you Jim on pricing of the 13, 5% realized in the quarter how much of that was from a surcharge you know.
Last year.
Speaker 1: Yeah, so, uh, I can't give you a specific number on that, David. But as I mentioned in the last call, a lot of that surcharge was actually switched over to pricing before it was even put in place. And, uh, and just about all of it has been turned into permanent pricing. So, um, so I couldn't give you an exact number, but it was a.
Yes so.
I can't give you a specific number on that David but as I mentioned in our last call a lot of that surcharge was actually switched over to pricing before it was even put in place.
And just about all of it has been turned into permanent pricing. So.
So I Couldnt give you an exact number but it was a.
Speaker 1: you know, certainly the smallest part of that and and it's it's not completely gone. We have some customers where it's there, but it's a very small part of the pricing going forward. So we moved out of surcharge to just permanent price.
Certainly the smallest part of that.
And it's not completely gone we have some customers, where it's there, but it's a very small part of the pricing going forward. So we moved out a surcharge to just part of the price.
Speaker 4: got it and we can't be any relief in the rise how much was pregnant you think is uh... it permanent in my door for it to get back a little bit given it public
Got it and if we do see any relief in raw is how much of this pricing do you think is.
Is permanently.
To get back a little bit given.
How much you've raised prices this cycle.
Yes, it's a great question right normally just about none of it goes back.
Speaker 1: Yeah, it's a great question. Right. Normally, just about none of it goes back. We do have some, you know, about 15% of 15 to 20% of our business that's on some sort of an index that that comes back with a delay. But there is some sort of index. So, but 80% of it is is negotiated pricing and and normally doesn't come back. So, you know, we'll have to see how extreme the decreases are and what the market conditions are. But
Do have some about 15% of 15% to 20% of our business that so in some sort of an index.
That that comes back with a delay, but there is some sort of index, so but 80% of it is.
Negotiated pricing and normally it doesn't come back so we'll have to see how extreme the decreases are and what the market conditions are but.
Speaker 1: Generally speaking, in adhesive space, pricing stays a long time as the laws come down.
Generally speaking in adhesive space pricing has.
Stays a long time.
Ross come down.
Thank you.
Speaker 2: Thank you. Again, if anyone would like to ask a question, you may press star 1 on the telephone keypad. Next question we have from the line of Paritash Mishra of Berenberg. Your line is now open. You may ask a question.
Thank you again, if anyone would like to ask a question you May press star one on the telephone Keypad next question, we have from the line of Pat.
Mr. Barron. Your line is now open you may ask your question.
Speaker 4: Thanks and good morning Jim, John and Barbara. I just wanted to go back to the incremental margin question. So what's the right way to think about incremental margins in 2022 for the pre-segment? Which segment do you think could see the highest incremental margin? Maybe let me ask it that way.
Thanks, and good morning, Jim John and Barbara.
Just wanted to go back to the incremental margin question. So whats the right way to think about incremental margins.
22 for the three segments.
Which segment you think could see the highest incremental margin, maybe let me ask it that way.
Speaker 1: Yeah, so let me talk broadly and then John can talk about 2022 because there's a lot of moving parts in 2022, especially given the nature of the pricing and the price that we delivered that's going to annualize into 2022. But broadly speaking, our EA and HHC businesses have to hire overall incremental margins.
Yes, So let me I'll talk broadly and then.
John could you talk about 2022, because it has a lot of moving parts in 'twenty, two, especially given the nature of the pricing and the price.
That we have delivered that's going to annualize it into 2022.
But broadly speaking our.
EAA and HVAC businesses have the higher of overall incremental margins and I think we've typically said those are between 30% to 35% and the.
Speaker 1: And I think we typically said those are between 30% to 35%. And the HHC businesses are a little lower.
<unk> businesses are a little lower.
Speaker 4: That's right. And I think I would say it will, I'd say we'll probably see similar margins and HHC and EA in 2022. And I think there's some opportunity probably for some expansion in CA. It's the smallest of the three out of
Thats right and I think I would say it will.
We'll probably see similar margins in the HFC in EMEA in 2022.
And I think theres, some opportunity probably for some expansion in CA, it's the smallest of the three of us.
Speaker 5: Got it. That's very useful. And then maybe also if you could just recap I think you've given several of these numbers but if you could just recap where we would be in terms of closing the price cost gap at the end of Q1 after this most recent round of price hikes.
Got it that's very useful and then maybe also if you could just recap.
I think you've given several of these numbers, but if you could just recap where we.
B in terms of closing the price cost gap.
At the end of Q1. After this most recent round of price hikes.
Speaker 1: Yeah, so so exiting the year, we've got more price than we had raw materials. And our expectation is at a Q1 that we'll expand that again. So so our goal each quarter is to have more price than there is raw materials. Now we do have other inflationary effects in the business that we're trying to overcome as well. But but that's what we're delivering and we're doing it ahead of the game.
Yes, so so exiting the year, we've got more price than we had raw materials.
And our expectation is at Q1 that we will expand that again, so so our goal each quarter is to have.
More price than there is raw materials that we do have other inflationary effects in the business that we're trying to overcome as well, but but that's what we're delivering and we're doing it ahead of the game.
Speaker 5: Got it. And the last one, this 27 to 29 percent tax rate, is that a good number for cash taxes as well or would those be lower?
Got it and last one this 27% to 29% tax rate is that a good number for cash taxes, as well or would those be more.
Speaker 5: uh... that's a good number for cash taxes overall perotosh
That's a good number for cash taxes overall touch.
Thanks, guys.
Speaker 2: Thank you. There are no further questions at this time. I would now like to turn the call over back to Mr. Jim Owens.
Thank you there are no further question at this time I would now like to turn the call over back to Mr. Jim Owens Sir.
Speaker 1: Thanks to all of our investors for your support in 2020 and 2021. We're very excited about what's coming ahead for all of us in 2022. Have a good day, everyone.
Thanks, Yes, thanks to all of our investors for your support in 2020 in 2021, where we're very excited about what's coming ahead for all of us in 2022.
Have a good day everyone.
Speaker 2: Thank you. This concludes today's conference call. Thank you all for participating.
Thank you. This concludes today's conference call. Thank you all for participating you may now disconnect.
Speaker 6: © BF-WATCH TV 2021
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