Q4 2022 H.B. Fuller Company Earnings Call
Yeah.
Speaker 1: We that.
Speaker 2: I.
Speaker 3: Good morning, my name is Chris and I'll be your conference operator today. At this time, I'd like to welcome everyone to the HPE Fuller Q4 2022 Earnings Conference call.
Speaker 4: All lines have been placed on mute to prevent any background noise.
Speaker 5: After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star, then the number 1 on your telephone keypad. To withdraw your question, please press star 1 again.
Speaker 6: Thank you. Stephen Brisones, Vice President Investor Relations. You may begin.
Speaker 7: Thank you, operator. Welcome to H.B. Fuller's fourth quarter 2022 investor conference call.
Speaker 8: Presenting today are Celeste Mastin, President and Chief Executive Officer, and John Corcoran, Executive Vice President and Chief Financial Officer.
Speaker 9: After our prepared remarks, we will have a question and answer session.
Speaker 10: Before we begin, let me remind everyone that our comments today will include references to certain non-GAAP financial measures.
Speaker 11: These measures are supplemental to the results determined in accordance with GAAP.
Speaker 12: We believe that these measures are useful to investors in understanding our operating performance and to compare our performance with other companies. Reconciliation of non-GAAP measures to the nearest GAAP measure are included in our earnings release. Unless otherwise noted, comments about revenue refer to organic revenue and comments about EPS, EBITDA, and profit margins refer to a general
Speaker 13: comments made during this call, and the risk factors detailed in our filings with the Securities and Exchange Commission, all of which are available on our website at investors.hbfuller.com. I will now turn the call over to Celeste Mastin. Celeste? Celeste Mastin, Chief Financial Officer, Accenture Thank you, Stephen, and welcome, everyone.
Speaker 14: Before we begin to discuss our results for the fourth quarter and fiscal year, I would first like to thank the many team members I have engaged with throughout my travels over the last several months. You have been so hospitable and have smoothed my transition here into my role as CEO .
Speaker 15: Your enthusiasm and passion for our business is energizing, and I appreciate your drive and devotion in serving our valued customers each and every day. Thank you.
Speaker 16: In fiscal year 2022, we delivered exceptional financial results driven by market share gains, responsible pricing actions, and diligent execution of our strategy.
Speaker 17: We delivered strong double-digit growth in organic revenue, adjusted EBITDA, and adjusted EPS.
Speaker 18: This is particularly impressive given the significant headwinds we endured from continued raw material cost inflation, supply chain disruptions, a strengthening U.S. dollar, and substantially higher interest rates.
Speaker 19: For the year, we grew organic revenue by 17%, with strong organic revenue growth in all three GBUs, EBITDA by 14%, and adjusted EPS by 15%. We also delivered another strong cash flow performance.
Speaker 20: with operating cash flow up 20% year on year. I am very proud of the team's resilience and determination in executing our winning strategy to deliver these impressive results in spite of a very difficult operating backdrop. At the same time, we recognize that we did not finish the year as strong.
Speaker 21: and had a very difficult comparison versus the fourth quarter of last year, de-stocking actions were more pronounced and faster than we were anticipating. In addition, more aggressive COVID-related shutdowns in China, rather than an easing in such measures, were more pronounced and faster than we were anticipating.
Speaker 22: negatively impacted growth in our Asia-Pacific region.
Speaker 23: This was unexpected and contrary to the strengthening demand trend we saw in the first three quarters of the year.
Speaker 24: And lastly, the US dollar, which had already strengthened quite considerably throughout the first three quarters of the year, strengthened even further during our fourth quarter. These challenges adversely impacted our revenue and EBITDA growth and our financial results fell below our expectations for the fourth quarter.
Speaker 25: While disappointing, our underlying business remains very healthy and we believe that conditions negatively impacting demand in construction adhesives will abate over time.
Speaker 26: Overall, given the diversity of our geographic and end-market exposure, our pricing execution in 2022, and the expectation of lower raw material costs, we are well positioned for continued strong profit growth and margin expansion in 2023 and beyond.
Speaker 27: Looking at our consolidated results in the fourth quarter, organic revenues increased six percent year on year. This was driven by strong organic growth in both hygiene health and consumable adhesives and engineering adhesives.
Speaker 28: The strength of these two business units more than offset the weakness in construction adhesives. Responsibly strong pricing actions taken throughout the year drove the organic growth in the fourth quarter.
Speaker 29: From a profitability perspective, despite the challenging financial results and construction adhesives, we again achieved sequential EBITDA margin expansion in the fourth quarter, marking the third consecutive increase in adjusted EBITDA margin this year.
Speaker 30: On a year-over-year basis, adjusted EVA-DAH was up 5% in the fourth quarter to $141 million, and adjusted EVA-DAH margin remained stable year-on-year at 14.7% despite significantly higher raw material costs.
Speaker 31: Now, let me move on to review the performance in each of our segments in the fourth quarter. In HHC, organic revenue was up 12% year-on-year, with most end markets achieving strong double-digit organic growth. Beverage labeling, hygiene, packaging, tissue and towel.
Speaker 32: and health and beauty markets were particularly strong. HHC's priked scene actions offset lower volume and drove organic revenue growth in the quarter.
Adjusted EBITDA for HHC increased 5% year on year. Adjusted EBITDA margin decreased year on year due to higher raw material costs and lower volume.
In engineering adhesives, organic revenue increased by 9%, led by exceptionally strong growth in automotive and insulated glass. Strong pricing actions and higher volume drove EAs organic growth.
Adjusted EBITDA increased 23% in EA and adjusted EBITDA margin increased 240 basis points year-on-year to nearly 18%. Pricing actions and expense management drove the improvement year-on-year and offset the impact of significantly higher raw material costs.
construction markets, which has since reverted given the current economic backdrop. The decline in organic sales was driven principally by a slowdown in the roofing market. Adjusted EBITDA for construction adhesives declined in the fourth quarter, driven by lower volume and higher raw material costs.
Geographically, America's organic growth was up 3% year-on-year, significantly impacted by the decline in construction adhesives. Organic growth, absent construction adhesives, was up double digits in the Americas in the fourth quarter.
In EIMIA, organic revenues increased 13% versus the fourth quarter of last year. Weak economic conditions in the region persisted, but did not worsen sequentially versus the third quarter. In Asia Pacific, organic revenues increased 3% year on year.
More severe COVID-related lockdown restrictions in China negatively impacted sales development for the region, and this was contrary to the strengthening trend we experienced during the second and third quarters of 2022. Overall, global economic conditions have slowed throughout the year.
in the Americas are also slowing as the impacts of higher interest rates begin to temper demand. Construction adhesives is being disproportionately impacted in the short term given the economic sensitivity of the sector and heavy customer de-stocking activities. Both HHC and EA are weathering the challenging economic situation.
such an environment. We are beginning to see the rate of aggregate raw material cost inflation slow, and we expect this to continue as we progress throughout the year. Generally, it takes about a quarter for changes in raw material costs to cycle through inventory and impact the P&L.
While aggregate raw material cost inflation is beginning to taper, it's not universal. The preponderance of our raw material purchases in November were at the same or higher prices than in the month of October . Accordingly, we continued to increase prices in the fourth quarter.
and additional price increases are planned in 2023. The value we generate for our customers as a solutions provider, as reflected in our pricing performance, together with the diversity and scale of our raw material purchases, will enable us to expand margins in an environment of declining raw material cost.
Now let me turn the call over to John Corcoran to review our fourth quarter results in more detail and our outlook for 2023.
Thank you, Celeste. I'll begin on slide 5 with some additional financial details on the fourth quarter.
For the quarter, revenue was up 7% versus the same period last year.
Currency had a negative impact of 8.7%, acquisitions increased revenue growth by 1.6%, and the extra week compared to last year positively impacted revenue growth by 7.5%. Adjusting for those items, organic revenue was up 6.4%, and the extra week compared to last year positively impacted revenue growth by 7.5%.
with pricing having a favorable impact of 11.4% year-on-year in the quarter and volume down 5%, reflecting a slowdown in in-market demand, particularly in construction adhesives and softness in China due to COVID-related lockdowns. Adjusted gross profit margin was 26.2%, down 90 basis points versus last year.
gains, lower variable compensation, and overall good expense management.
Adjusted EBITDA for the quarter of $141 million was up 5% versus last year, reflecting strong pricing actions, lower SG&A, and the impact of the extra week, which more than offset significantly higher raw material costs and unfavorable foreign currency translation.
Adjusted earnings per share of $1.04 was down slightly versus the fourth quarter of 2021, driven by the unfavorable impact of foreign currency and significantly higher interest rates.
Adjusting for unfavorable foreign exchange, which negatively impacted EPS by approximately 22 cents in the quarter, adjusted EPS was up 15% year-on-year.
Cash flow in the quarter was strong. Cash flow from operations of $208 million was up $156 million year on year, reflecting higher profit, reduced working capital requirements, a one-time gain on the maturity of a cross-currency swap, and the impact of the extra week.
Our results for the full fiscal year were also very strong.
Full year organic revenues grew 17% versus fiscal 2021, reflecting outstanding pricing execution. Adjusted EBITDA increased by 14% year on year and adjusted EPS was up 15%.
With that, let me now turn to our guidance for the 2023 fiscal year.
Our geographic and in-market diversification is an asset in recessionary time periods and provides us with a meaningful buffer to the volatility and demand in any one particular market.
As we assess the economic sensitivity of our portfolio with the conditions present in the marketplace today, more than half of our portfolio has little sensitivity and is well insulated from significant swings in demand. Only about 20% of our portfolio would be more highly influenced by economic conditions.
but the drivers impacting recessionary sensitivity will generate different outcomes amongst the end markets.
Our diversification will serve us well as we manage through what we expect to be challenging economic conditions in 2023.
Based on what we know today, we anticipate full year net revenue to be flat to down 3% versus 2022 and organic revenue to be up 2-4%.
We expect foreign currency translation to negatively impact revenue by 3-4% vs. 2022.
Fiscal year 2023 will be a 52 week year compared to a 53 week year in 2022.
which will unfavorably impact year-on-year revenue growth by approximately 2 percentage points.
We expect adjusted EBITDA to be between $580 and $610 million dollars, representing a 9 to 15 percent year-on-year increase.
up 11 to 17 percent, adjusting for the extra week in 2022, as the benefits from net changes in prices and raw material costs and strong expense management more than offset unfavorable foreign exchange.
We expect our 2023 core tax rate to be between 27 and 29 percent compared to our 2022 core tax rate of about 27 percent.
We expect full year interest expense to be $115 to $125 million, reflecting higher interest rates, and we expect average diluted share count to be about 55.5 million shares.
These assumptions result in full year adjusted earnings per share in the range of $4.15 to $4.55.
Finally, we expect full year operating cash flow to be between $300 and $350 million before approximately $120 million of capital expenditure.
Based on the seasonality of the business and the timing of working capital needs, we expect operating cash flow to be weighted to the second half of the year.
All of this guidance reflects the fact that HB Fuller will have one less reporting week in fiscal 2023 compared to 2022.
We estimate that extra week will have an unfavorable impact on full year revenues of approximately 2% compared with full year 2022 and an unfavorable impact on full year EBITDA of approximately 10 million dollars versus 2022 all occurring in the fourth quarter. Taking into consideration low construction demand in the first half of the year, and the impact on full year EBITDA, we estimate that
and continued disruptions in China, as well as the typical seasonality of the business, we expect first quarter revenue to be down low to mid-single digits, and to realize approximately 17 to 18% of full year EBITDA in the first quarter. Now let me turn the call back over to Celeste to wrap us up.
Thank you, John . Since becoming CEO at the beginning of December , I have grown even more optimistic about our future.
We have tremendous potential for continued organic growth and margin expansion, and I have confidence in our strategy and ability to achieve our long-term financial goals. As we begin 2023, we do so having successfully expanded EVA.margin sequentially over the last three consecutive quarters.
and we are entering an environment that will be more conducive to further margin enhancement.
We have many competitive advantages to leverage, particularly in the current economic environment. In addition to our ability to innovate with customers to serve their needs, we have pricing discipline, robust product substitution capabilities.
and a demonstrated ability to execute. Each of the last three years has brought unique and extraordinary challenges, including a pandemic.
a conflict between Russia and the Ukraine.
unprecedented supply chain disruptions with raw material cost inflation, and a significant strengthening of the US dollar.
And in each of the last three years, HB Fuller has stepped up to those challenges and delivered for our customers, our employees, and our shareholders while consistently outperforming the competition.
We expect 2023 to be no less challenging, but we are confident in our team's abilities and resolve. And we believe, based on the improvements that we've made in our business over the last several years, and our ability to bring innovation to the diverse set of end markets we serve, that we are well positioned to be the best in the industry.
to continue to drive growth and expand margins while delivering outstanding cash flow.
That concludes our prepared remarks for today. Operator, please open the line for questions.
Thank you. And as a reminder, if you would like to ask a question, please press star, then one on your telephone keypad.
Our first question is from Ganjam Anjabi with Baird. Your line is open.
Yeah, thanks. Hello, everybody. And Celeste, congrats again on your new role.
Thanks, Gansham. How are you? Yeah, good. Thank you. Thank you. So I guess, you know, de-stocking seems to be a pretty common theme so far this earnings season. You call that construction adhesives, which I guess fits with intuition, but what about the other segments? HACN, even EA.
And the reason I ask is, many of the CPG companies that are starting to report, they're reporting pretty significant declines in volumes as well. So I'm just curious as to the risk associated with you know, D-stock becoming more pronounced for the other segments as well.
Yeah, that's a great question, Gansham. It absolutely is. Certainly in HHC in the fourth quarter, we saw some significant de-stocking. It's a little unusual in the consumer product business, but...
Yeah, that absolutely is the case. Got it. And what about EA?
You know, not so much there, interestingly enough. Now we did see our volumes impacted in EA because of this slowdown in China. You know, over Q2 and Q3 we saw mid-single-digit increases.
in growth in China. That was not the case in the fourth quarter. Fourth quarter was flat and our EA business certainly that took some wind out of their sales as it relates to volume but we did not see big de-stocking actions in EA.
Gotcha. And there may be a question for John on the EBITDA bridge between fiscal year 22 and 23. I know you gave some parameters about the loss of the week and FX, but what about the other components in terms of volumes and price cost, etc.?
Yeah, so I think what we had said earlier, Gacam, is we have got, given our pricing actions in 2022, we've got very nice pricing carryover into.
2023, we are seeing raw materials start to ease. You have to kind of look at those two things together. And that's really what's...
driving the majority, if really all of the profit growth. We estimate that the pricing carryover and raw materials easing, that's 130 to $160 million of profit growth for us in 2023. And that offsets the headwinds we have related to probably a little softer volume.
Obviously, unfavorable foreign exchange, the extra week, and kind of normal inflation on wages and other things. And that's probably about $80 million. Kind of how do we get to that bridge?
foreign exchange, the extra week, and kind of normal inflation on wages and other things. And that's probably about $80 million. That's kind of how we get to that bridge. Awesome. Thanks so much.
Thanks, Gancho.
The next question is from Mike Harrison with Seaport Research Partners. Your line is open.
Hi, good morning.
Hey Mike, how are you?
Doing well, thank you. Happy New Year. Wanted to maybe ask a little bit of a different question on the earnings cadence. If I do the math correctly, it looks like you're kind of pointing to 100 to 110 million of EBITDA for the first quarter.
material declines happening as we speak. Just maybe talk about the confidence level of better earnings as we get through the rest of the year. Is that mostly driven by raw material tailwinds?
Yeah, thanks for the question, Mike. So, let me, you're correct to start with in your estimation of what EBITDA looks like in the first quarter. We did guide to 17 to 18% of our full year EBITDA, which would be pretty flat with last year.
That 17 to 18 percent is a little lower than what we would normally see in a first quarter. Usually we're around 20 percent of full year EBITDA. And it is, you know, this sort of, let's call it kind of fourth quarter hangover. We are still seeing in our P1, which was December ,
You know, we saw a December that still looked a lot like Q4. However, you know, with the beginning of the new year, we're starting to see things pick up a little bit. As to your question about raw materials, yeah, we're still... Raw materials are really just plateauing.
We were pretty flattish Q3 versus Q4 on ROZ. And if you look at Q4 this year versus prior year, we're still up. So, you know, we're moving towards that inflection point. We expect that will hit us during the current year.
But it's definitely not been here yet. Do you want to elaborate on that, John ? Yeah, that's exactly right. I mean, yeah, the raw dynamics will be the big impact. The other impact I'd point out is exchange. All right, exchange, the dollar strengthened throughout 2022.
I think in my prepared remarks we indicated it had something like a 20 cent impact, unfavorable on the fourth quarter. So we will annualize as we get through 2023. It will become less of a headwind. If exchange rates stay where they are, it will actually be a little bit of a tailwind. So those are the big dynamics, I would say, Mike, the raw material.
raw material dynamic and foreign exchange.
Perfect, and then in terms of the engineering adhesives business, obviously very nice performance there. Was there anything unusual or maybe more one time in nature that drove that margin strength that we might worry about reversing at some point in 23?
that business we have continued to work the portfolio. We continue to drive the portfolio in that business particularly to those highly specified applications which do carry higher EBITDA margins.
So to answer your question, no, there was nothing one time, there was nothing temporary that occurred there. It's by design and it's starting to work. So that's the good news. I think as we proceed through the course of 2023, again, EA is a business that is
over the course of the year.
Alright, if I can sneak one more in, on pricing, it looks like if I do the math, that the two year stack, if I look at Q3 and Q4, we're both up around 25%.
So my question is did you get any sequential pricing or was pricing pretty flat in Q4 versus Q3?
Yeah, we got $50 million of price in Q4, Mike. And I think as we move forward, I think it's important for 2023, especially early in the year like this, that we really start talking about.
price and raw materials as one big bucket as John described, where we believe there's $130 to $160 million of value in that bucket. There's going to be lots and lots of puts and calls. Our top 25 raw materials make up less than 20% of our raw material cost.
and we've got pricing actions. We're still increasing price in some cases where we have raw materials still increasing. We've got new product introductions that also kind of makes that a little murky. So collectively, regardless of what happens with raws or price.
We think the two of those will generate the incremental EBITDA as we've described. You know, if RAs don't come down, then we're going to have to continue to raise price. We're a company that's demonstrated the ability to do that, and we'll do that.
If raws do come down, it indicates that we're in a mildly, at least, recessionary environment. And that's a great place for this business because that's where our customers need us more than ever. We really can enable them at times like that to change substrates in their end products.
which is going to save them a lot more money than changing their glue. So, you know, we feel optimistic about the year ahead, and I just want to have you start to think about price and raw material in one big category as we move forward.
Excellent, makes sense. Thank you very much for answering my questions.
The next question is from Vincent Anderson with Stifel. Your line is open.
Thanks and good morning. I wanted to maybe dig in on that last comment that you made, Celeste, because it really feels like you have a dual strategy where ideally you are an important technical partner to your customers and trying to increase the value out of your portfolio.
But in an environment like this, you're also trying to maintain a portfolio that offers customers that maybe are prioritizing cost and opportunity to trade down. But hopefully without you suffering a margin hit. So, I'm just trying to get a sense for first, how have conversations with customers drifted between those two types of commercial interactions recently.
And do you have a sense for how much of your portfolio you feel like today you could protect with a lower cost product before suffering either a margin mix hit or just having to decide whether or not to participate at all.
Yeah, I think, you know, I chose to highlight there kind of our role in enabling customers to to
be able to reduce the total cost of their product. We enable that through our technical expertise, most certainly. You know, if someone really wants to buy a lower cost adhesive, we have the raw material substitution capabilities and a number of alternative technologies.
to be able to provide them as well a lower cost adhesive, something they can save money on and something that lower cost to ourselves as well and helps us preserve our margins. So there's a lot of ways that we interact with the customer to help them achieve their goals.
You know, I also don't want to minimize the fact that most of our conversations with customers revolve around innovation. We are very focused on bringing new technology, new products to the market. We've got 30 different market segments, thousands and thousands of different customers.
And so it's hard for me to generalize directionally if everyone's going in one matter or another. It's really not the case. Every customer we treat very differently and our ongoing focus is on innovation first.
Okay, fair enough. That's helpful.
And then, you know, if I'm remembering correctly, you've had some pretty important wins in in HHC. Thinking specifically around, like, consumer beverage and and maybe some ecommerce packaging automation technology that you're participating in. Could you maybe give an update on the cadence of those contributions to HHC growth and maybe just in general terms?
CPG space to bring new products to market. We've got our sustainable packaging adhesives, which have been really a very big, it's been a big hit with our packaging customers. Something very unique that enables them to be able to make their products more recyclable.
We have had a big, big hit with our new beverage labeling technology to replace casing that enables recyclable bottles to be returned and cleaned more effectively. So we've seen a lot of share take in beverage label as a consequence.
Those are just two. When you think of others, John , that you want to...
Oh yeah, we did just win a big application in the hygiene business as well for a fairly unique
characteristics that we can bring to an application there. So yes, you know, it's just a constant ongoing focus for us, Vincent, and we're seeing those wins really support not just our HAC business, but our other businesses as well.
Sure, no, that's helpful. I guess the way I'm trying to frame all of that then is
Over the next year or two, is HHC still a kind of slow, steady business given the number of wins that you've piled up there?
Yeah, so, you know, I think the objective with that business is to get to mid-teens EBITDA margins. That's a good level of profitability for that business. And it's continued to grow kind of mid-single digit, high-single digit.
over time. So, you know, we're going to continue to take market share in that space and we're going to continue to grow through innovation. I think if you're anticipating kind of mid-single digit, high single digit growth in the HHC business, you're probably spot on.
Okay, excellent. And then I just wanted to sneak in a quick one, just checking in on a couple of markets in the E.A. that we haven't talked about. It looks like Chinese solar cell numbers have been really strong this year, but you mentioned glass and auto and not solar, so I just wanted to see how that was going. And then same question, but on electronics.
Yeah, the solar story is really exciting. Our solar business is doing well and that is the business that we're starting to see migrate around the world. So we are working with big customers to leverage our expertise that we have.
in Asia in solar and bring it to other parts of the world. And I think that's a great example of a way that we are very strong, you know, being able to take technology and work with big customers and bring it to new regions successfully and evolve it. Hello and welcome to the WHO Hosts Change startup webinar.
for the unique circumstances in those regions is something we're very good at.
Do you want to add something there John ? Yeah, I think just amplify that a little bit. We called out auto and and and Insulated glass auto has been a huge growth story for EA business particularly Electronic vehicles and and we see that as a as a continued
area that we should be able to drive outside is growth and insulated glass. It's really an innovation play, you know, and even despite some softening in parts of construction and their products go into construction, they continue to perform very well. Electronics has always been a strong performer. It's been a little more...
It's been a little lower growth, still growing, but because of chip shortages and some of the other challenges. And then in the new energy space, that continues to perform well, and we're seeing the opportunity there from geographic expansion. It's historically been a business that's been sort of China-centric.
And we have a strong presence there, but we are really in a competitive advantage as that industry starts to globalize because we can reach customers more effectively in other geographies than a lot of our competitors. And we have already started to see the benefit of that.
All right, excellent. Thank you very much and good luck on the year.
Thank you.
Our next question is from David Beglider with Deutsche Bank. Your line is open.
Thank you, good morning. Celeste, on the Q1 guidance and the range itself, what could drive the upper and lower ends of that guidance range being achieved and by segment, how do you expect the segments to perform within that range in Q1?
complete in Q1 with construction adhesive. It's going to be interesting to watch that one. You know, I think we're going to start seeing the restocking kind of February , March timeframe. What will be interesting is what level are we restocking to.
that remains the question in the construction business.
So I was saying, I don't know, John , do you want to add more color? I was trying to maybe help.
with how that may look in terms of our different businesses. So, you know,
You know, if China recovers more quickly, that could be an upside. You know, if we start to see other economies maybe start to show a little bit more bounce back from what was a very slow Q4, that could be opportunities. If you think about the core of that...
guidance for the corridor and how that looks by our GBUs. We think HAC will continue to be very steady. EA, which has more of a China exposure, will probably be a little more impacted in HAC in terms of slower results. And then construction is less indicated.
it will take a little longer than the first quarter to see the recovery there. So that's kind of the direction we would see those three GBUs going in the first quarter.
No, very helpful, appreciate that. And guys, just on the cost issue, if you go back to the beginning of 2021, how much have your raw material costs increased by and how much are you expecting them to fall by in 2023, just raw material costs?
Yes, so they've increased by $800 million. When you ask how much we expect them to fall, it's a great question, right? And that's why I continue to go back to wanting to bucket price and raw material cost into one big category for the upcoming year.
It's very hard to assume how much those materials are going to come down, particularly because there's so many. We're monitoring 4,000 of them at any one point in time and watching for movement. None of them is significant.
So that's a great question and that's why what we've decided is regardless of what happens, whether RAS come down significantly and we benefit by...
of course lower raw material costs but also being able to support our customers in a recessionary time or if raw materials don't come down or they move up a little will pass through price increases so I hate to speculate on what kind of reduction we'll see and I think the important thing is that the company is preparing itself
no matter what happens. Thank you very much.
The next question is from Jeff Zakoskas with JP Morgan Chase. Your line is open.
Thanks very much.
Thank you. Thank you.
if your prices didn't move.
from the end of fiscal 22.
How much would your average prices be higher in fiscal 23?
Is it 3% or is it more or less?
there.
It's about 4 to 6 percent.
Again, it's murky water because there are so many, there's indices, we have new product introductions, we have...
I mean, it's a challenging question. And so, again, I want to remind you to let's go back to looking at that overall price and raw material cost bucket as one.
Okay.
Your non-recurring charges this year were about 40 million.
Is that a good number for next year?
Why don't you take that?
Why don't you take that one, John ? Sure. It's a little bit on the higher side, Jeff. I would say we had a couple of items that were kind of unusual and non-cash, actually. They probably represented about $10 million between them.
a pension curtailment and a non-cash charge on illegal entity consolidation. So I think the number will probably be lower than that, probably between $20 and $30 million representing kind of those same areas as far as the talk.
M&A related activity, our SAP implementation, and probably some finalization related to some restructurings we've done.
Thanks. In the fourth quarter, you're in your
working capital
statement.
your other assets were
cash inflow of forty six and a half million. In the third quarter they were for the nine months they were a cash outflow of forty million so there was an eighty six or eighty seven million dollar positive cash flow change from other assets in the fourth quarter.
What was that?
Yeah, I think you got to look at the fourth quarter, but you're exactly right, Jeff. And I mentioned it in our prepared remarks. We did have a one-time gain on maturity of a cross-currency swap. And the impact that you're seeing on other cash flow is almost entirely related to that. So that's non-repeating. Even if you...
you know, take that away, it was a very strong cash flow corridor driven by improving working capital and good profit growth.
How big was the cross current?
cross currency swap game.
It was about 50 million dollars.
Was the engineering volume growth in the quarter above 3%?
It was right about that. It was very near that.
I think I'm good. Thank you very much.
You're welcome Jeff.
Again, that's star one if you'd like to ask a question. Our next question is from Eric Petry with Citi. Your line is open.
Hey, good morning, Celeste and John .
Good morning, Eric. How much of your construction exposure is new construction versus repair and remodel? I'm sure there is probably differences between flooring, roofing, and inflated glass.
Yeah, so if you look at our portfolio, about 9% of our businesses in
a new
Sorry, 14 percent, sorry, less than 15 percent of our business, I've got to remember your question, less than 15 percent of our business is in new construction and then, you know, we've got some additional business in the repair and remodel.
Sorry, less than 15 percent of our business, I've got to remember your question, less than 15 percent of our business is in new construction. We've got some additional business in the repair and remodel.
I think that's what you're asking. Yeah, and just and just and when Celeste quotes those numbers that would include our construction adhesives business as well as our other businesses and EA that are construction oriented like insulated glass windows, so it's it's as Celeste said
kind of all in across the whole portfolio. It's a little less than 15 percent. And then repair and remodel would be similarly sized, but actually a little less than that. Yes, and a little counter cyclical.
That's helpful. And then just as you turn leverage kind of to the three times and below, you know, HPE Fuller has been a consolidator in the industry. How do you see it blessed that, you know, returning cash back to shareholders versus M&A?
Yeah, so we have a target to hit three times net debt to EBITDA leverage. We're very serious about that target and we're progressing nicely along the path to get there. Yeah, so we should be, you know,
going below three times that the EBITDA in 2023 and would like to stay in that kind of two and a half to three times range. You know Eric I think there's I think if you look at our strategy around M&A there's a lot of consolidation opportunity we've got a you know a robust pipeline for M&A it's mainly very small bolt-on deals which have worked.
we would look at share or purchase, depending on where the stock price is. But we feel like the M&A pipeline is robust enough to really be the use of cash for us as it relates to maintaining our target capital structure.
stock price is, but we feel like the M&A pipeline is robust enough to really be the use of cash for us as it relates to maintaining our target capital structure.
Thank you. We have no further questions at this time. We'll turn it over to Celeste Mastin, Chief Executive Officer, for any closing remarks.
Thanks everyone for joining us today. We look forward to interacting with you in the future.
Take care.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.