Q4 2023 HB Fuller Co Earnings Call
Thank you for standing by and welcome to the H B Fuller Q4, 2023 earnings conference call.
I would now like to welcome Stephen Brazilians Vice President of Investor Relations to begin the call Stephen over to you.
Steven E. Brazones: Thank you operator, welcome to H B Fuller's fourth quarter 2023, Investor Conference call.
Speaker Change: Presenting today are Celeste, Mastin, President and Chief Executive Officer, and John Corcoran, Executive Vice President and Chief Financial Officer.
Speaker Change: After our prepared remarks, we will have a question and answer session.
Speaker Change: Before we begin let me remind everyone that our comments today will include references to certain non-GAAP financial measures.
Speaker Change: These measures are supplemental to the results determined in accordance with GAAP.
Speaker Change: We believe that these measures are useful to investors in understanding our operating performance and comparing our performance with other companies.
Speaker Change: Reconciliation of non-GAAP measures to the nearest GAAP measure are included in our earnings release.
Speaker Change: Unless otherwise noted comments about revenue refer to organic revenue and comments about EPS EBITDA and profit margins refer to adjusted non-GAAP measures.
Speaker Change: 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.
Speaker Change: Actual results could differ materially from these expectations due to factors covered in our earnings release 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 that H B Fuller dotcom.
Speaker Change: I will now turn the call over to Celeste.
Celeste: Thank you Steven and welcome everyone in the fourth quarter and throughout fiscal 2023, our team members executed exceptionally well to achieve strong profit growth. Despite a low volume environment record margins and outstanding cash flow I'm very proud of the team's response.
Celeste: The significant volume weakness precipitated by unprecedented customer destocking activity over the course of the year, we proactively managed rapidly changing price and raw material dynamics and supplemented those with meaningful restructuring initiatives to deliver these strong results.
Celeste: Overall organic revenue improved substantially in the fourth quarter with consolidated organic revenue declining only slightly year on year versus the high single digit declines we experienced in preceding quarters due to volume weakness pricing was marginally lower year on year as expected following.
Celeste: Lower raw material costs, and also reflecting the impact of product re formulations and was primarily driven by raw material index based supply agreements.
As a highly specialized value added adhesives, sealants and functional coatings expert with inherent price to value power evidenced by the fact that over half of our Skus are specifically formulated for individual customers, we are strategically well positioned to maintain pricing discipline.
Overall volume development improves significantly and was flat year over year in the fourth quarter. This is a market improvement over the previous four quarters when volume declined approximately 10% on average.
Celeste: From a profitability perspective, we continued to execute well and achieved both record fourth quarter and fiscal year. Adjusted EBITDA margins. This is a testament to the strong leadership in each of our market segments and the power of collaboration exemplified by all our team members.
Celeste: Through systematic execution across all functions, our team appropriately balanced pricing and raw material movements proactively took restructuring actions to lower our cost profile and acquired highly synergistic businesses to deliver these record margins.
Celeste: In the fourth quarter, we achieved a 22% increase in adjusted EBITDA year on year up 32% on a comparable 13 week basis, increasing adjusted EBITDA margin 440 basis points year on year to 19, 1% and for the fiscal year, we achieved a <unk>.
Celeste: We'll digit increase in adjusted EBITDA, increasing adjusted EBITDA margin 240 basis points year on year to 16, 5%.
Celeste: This demonstrates how successfully executing our strategy to transform our portfolio and purposefully targeting capital allocation to the highest growth highest margin opportunities can increase the value, we provide our customers and generate higher returns for shareholders and the great news.
Celeste: News is we are not done the growth and margin expansion opportunities that we have in front of us are readily actionable and we are well underway in our plans to realize these improvements.
Celeste: Now let me move on to review the performance in each of our segments in the fourth quarter.
Celeste: N H H C organic revenue was down seven 5% year on year, driven primarily by margin preserving index based pricing adjustments with large volume customers and some lingering yet lessening fourth quarter customer destocking activity H H D has the highest <unk>.
Celeste: Johnson tracing of index based supply agreements given the nature of its customer base. These.
Celeste: These agreements are designed to maintain margins throughout the cycle and follow raw material cost movements over time.
Celeste: Adjusted EBITDA for H H C increased 42% year on year to $82 million and adjusted EBITDA margin increased 690 basis points to 19, 9%, reflecting exceptional execution.
Celeste: The team overcame continued customer destocking headwinds leveraging favorable price and raw material cost management, synergistic acquisitions and restructuring benefits to achieve record margin performance.
Celeste: In engineering adhesives organic revenue declined 1.4% in the fourth quarter, which represents continued improvement on a sequential basis organic revenue declined primarily due to lower volume in solar and construction related end markets, which offset strong organic growth in the electronics and air.
Celeste: Aerospace market segments.
Celeste: Adjusted EBITDA in a a increased 5% year on year up 13% on a comparable 13 week basis, and adjusted EBITDA margin increased 240 basis points year on year to 20.2% the improvement in profitability for E. <unk> was driven by favorable price and raw.
Celeste: A real cost actions and continued strong cost management.
Celeste: In construction adhesives, the organic revenue trend reversed increasing 5% year on year in the fourth quarter customer Destocking actions began in the fourth quarter of last year and continued through the third quarter of this year as a result, the organic growth achieved in the fourth quarter now more appropriately reflect.
Celeste: <unk> current underlying demand for CA, and our strong share position, but it is still lower than historical levels.
Celeste: Adjusted EBITDA for C. A increased 9% year on year up nearly 18% on a comparable 13 week basis, and adjusted EBITDA margin increased 12, 6% the margin improvement and see a during the fourth quarter was a positive development and followed a consistent seasonal pattern sequentially versus.
Celeste: The third quarter, while restructuring actions in the roofing and infrastructure business units are already positively impacting the P&L restructuring actions underway in the flooring business will contribute to profitability improvement in that market segment in 2024.
Celeste: Geographically Americas organic revenue improved significantly on a sequential basis, reducing the year on year decline from 13% in the third quarter to a decline of 6% in the fourth quarter volumes were flat year on year in North America, and improved substantially versus the third quarter.
Celeste: However volumes remained weak in Latin America.
Celeste: In EMEA organic revenue was flat year on year as modest organic growth in EAA driven by strength in automotive and electronics was offset by modest declines in both H H C. N C. A.
Celeste: In Asia Pacific organic revenue decreased 2% year on year influenced by the relatively volatile recovery in China, while organic sales for H H C. In Asia were flat year on year in the fourth quarter organic sales declined slightly for <unk>, given its greater exposure to China. The fits and starts we are.
Celeste: <unk> seen in the Chinese market are not unexpected and we continue to believe that the overall trend there is positive and improving.
Celeste: From an overall global economic standpoint conditions remained subdued while real GDP measures have been slightly positive sentiment, particularly within the manufacturing sector remains weak and cautious as a result, we continue to plan for a mild manufacturing recession in fiscal <unk>.
Celeste: Thousand 24, and our expectations for the year ahead reflect this scenario.
Celeste: We expect interest rates to remain high for the first half of the year and declined modestly in the second half restricting industrial production and construction activity to lower than normal levels for most of the year.
Celeste: From a year over year comparison standpoint, constrained manufacturing activity will be more than offset by the absence of the destocking impact that weighed so heavily on 2023 volume.
Celeste: We will also benefit from the restructuring and cost saving actions that we initiated and the acquisitions that we closed in 2023, all of which will be additive to profit growth in 2024.
Speaker Change: Now, let me turn the call over to John Corcoran to review, our fourth quarter results in more detail and our outlook for 2024.
John Corcoran: Thank you Celeste I'll begin with some additional financial details on the fourth quarter for the quarter revenue was down five 8% versus the same period last year.
John Corcoran: On a comparable 13 week basis revenue was up one 2%.
John Corcoran: Currency and acquisitions collectively had a positive impact of four 7%.
John Corcoran: Adjusting for those items organic revenue was down three 5% primarily driven by pricing.
John Corcoran: Volume was flat, reflecting slower, but improving end market demand in H H C offset by solid growth in construction adhesives.
John Corcoran: Adjusted gross profit margin was 31, 3% up 510 basis points versus last year as pricing and raw material cost actions restructuring benefits and general cost reductions drove the margin increase year on year.
John Corcoran: Adjusted selling general and administrative expense was effectively flat year on year, reflecting continued cost management and restructuring savings as well as the impact of last year's extra week offset by wage inflation and the impact of acquisitions.
John Corcoran: Adjusted EBITDA for the quarter of $173 million was up 22% versus last year up over 30% year on year adjusting for the extra week, reflecting pricing and raw material cost actions, the favorable impact of acquisitions and restructuring savings and other cost reduction actions.
John Corcoran: Adjusted earnings per share of $1 32 was up 27% versus the fourth quarter of 2022, driven by operating income growth, which more than offset higher year on year interest expense depreciation and amortization expense and a higher tax rate.
John Corcoran: Cash flow was very strong for both the quarter and the full year.
John Corcoran: Full year cash flow from operations of $378 million was up $122 million year on year, reflecting higher operating profit and improved working capital driving our end of the year net debt to EBITDA ratio down to two nine times.
Speaker Change: With that let me now turn to our guidance for the 2020 for fiscal year.
Speaker Change: Based on the market assumptions outlined by Celeste earlier, we anticipate full year net revenue to be up 2% to 6% versus 2023 and organic revenue is expected to be flat to up 3% with volume up low to mid single digits and pricing to be down low single digits.
Speaker Change: We expect foreign currency translation to negatively impact revenue by about 1% versus fiscal 2023.
Speaker Change: We expect adjusted EBITDA to be between 610, and $640 million, representing a 5% to 10% year on year increase as volume growth restructuring savings and the impact of acquisitions more than offset wage and other inflation and bonus and variable compensation rebuild.
Speaker Change: We expect our 2024 core tax rate to be between 27 and 28%.
Speaker Change: Impaired to our 2023 core tax rate of about 27%.
Speaker Change: We expect full year interest expense to be $115 million to $125 million, reflecting continued strong cash flow and moderating interest rates.
Speaker Change: We expect depreciation and amortization to be roughly $170 million and the average diluted share count to be about 57 million shares.
Speaker Change: These assumptions result in full year adjusted earnings per share in the range of $4 15.
Speaker Change: The $4 45 reps.
Speaker Change: Representing year on year growth of 7% to 15% versus fiscal 2023.
Speaker Change: Finally, we expect full year operating cash flow to be between 300 and $350 million before approximately $140 million of capital expenditures.
Speaker Change: Based on the seasonality of our business and the timing of working capital needs. We expect operating cash flow to be weighted to the second half of the year.
Speaker Change: Taking into account last year's Destocking activity as well as the typical seasonality of the business. We expect first quarter revenue to be up low single digits and for adjusted EBITDA to be between $115 million and $125 million.
Speaker Change: Now, let me turn the call back over to Celeste.
Celeste: Thank you John.
Celeste: As we enter fiscal year 2024, we are confident in our outlook for positive organic growth achieving further EBITDA margin expansion and delivering strong cash flow.
As the largest pure play adhesive company in the world and the market leader in innovation focused on providing highly tailored solutions for our customers. We have successfully transformed our portfolio over the past 15 years into one that is concentrated within the highly specified portions of our market segments.
Celeste: We are executing well in that portfolio as evidenced by our strong EBITDA margin expansion and we are ready to institutionalize the disciplined choices we are making.
Celeste: As such we have begun to take portfolio management to the next level by being more proactive and explicit about how we're allocating capital and investing in the highest margin growth segments of the portfolio.
Celeste: As I've spoken about repeatedly since becoming CEO of little more than a year ago, all of our investment decisions, both organic capital expenditures and M&A are rooted in transforming H b fuller into a higher growth higher margin and higher Rois C business.
Celeste: Over the course of my tenure with H B Fuller I've conducted annual market segment reviews with each of our 31 market segment leaders to identify the top 25 growth and profit improvement opportunities for the company. This process has become the basis for generating and evaluating all of our grew.
Celeste: <unk> and investment opportunities and it has evolved to the point, where we have created a growth pipeline full of compelling opportunities that can unlock additional market expansion opportunity and augment our margin profile.
Celeste: As a result of the success, we have demonstrated in transforming our portfolio a more robust pipeline of step change opportunities and our track record of executing with speed. We are increasing our long term adjusted EBITDA margin target for the enterprise from the high teens to greater than 20.
Celeste: Percent within the next three to five years.
Celeste: To better enable our investors to follow our progress we've divided our market segments into two categories growth and leverage.
Celeste: This replaces our previous categories of high medium and low specification because we've successfully migrated to a strongly specified portfolio in each of the markets we serve.
Celeste: About half of our market segments are in the growth category spanning all three GB use, including but not limited to medical and Hh see electronics, new energy and the newly created E power in EAA and infrastructure and roofing N C. A.
Celeste: Both segments share a few key common characteristics first they're large and fast growing markets, which benefit from global Megatrends and technological disruption such as clean energy sustainable packaging and labor shortage as well as rapidly evolving product designs and the need to innovate.
Celeste: Eight as a result, there is ample room for H B Fuller to capture share and unlock additional growth by bringing differentiated technologies to market capitalizing on underlying market trends and supplementing with M&A.
Second in these growth markets, we are broad and relevant technology innovation speed and the ability to create solutions for demanding applications reliably rapidly and accurately.
Celeste: From a financial perspective growth segments are expected to realize outsized revenue growth delivered double digit adjusted EBITDA growth and generate greater than 25% adjusted EBITDA margins.
Celeste: The leverage category consists of 16 market segments, where we are focused on maximizing operating efficiency and cash flow.
Celeste: Leverage segments share a few key common characteristics first they require a highly selective go to market approach one in which we are rigorous and disciplined about where we choose to play in terms of regions product applications and customer selection focusing on applications, where we <unk>.
Celeste: Meaningful price to value performance for our customer.
Celeste: Second in leveraged segments, H B Fuller as a disproportionate buyer of raw materials at scale, which helps create a margin uplift in these markets.
Celeste: Financially leveraged segments are expected to generate greater than 15% EBITDA margin through benefits of production efficiency raw material scale and selective pursuit of applications, where we improve our customers' productivity.
Celeste: It's important to mention that this new structure captures the intuitive decisions, we've been making over the past year.
Celeste: With this next level approach to portfolio management, we are sharpening our focus on ensuring investment activities are directed to our highest value opportunities to profitably grow the business over the near and long term.
Celeste: As mentioned previously we maintain an up to date list of the top 25 opportunities to grow our business and leverage our operating structure, either organically or through value added M&A.
Celeste: Our primary focus for M&A has been and will continue to be in growth segments. This new structure does not preclude opportunistic investments in leverage segments. In fact, we recently executed several deals and leverage segments, where we're benefiting from superior buying power and efficiencies in our <unk>.
Celeste: <unk> plant network as a result of market consolidation.
Acquisitions and leverage segments generally have high synergies and strong return on investment given our speed to integrate resulting in a very meaningful difference between pre and post synergy acquisition multiples.
Celeste: I have complete confidence in our team our strategy and our ability to execute to make this happen as we continue to focus our high touch highly customized portfolio on accelerating innovation and executing efficiently we're confident in our ability to achieve our new EBITDA.
Celeste: Margin target.
Celeste: We look forward to keeping you updated on our progress using this do portfolio segmentation.
Celeste: To wrap up I am extremely pleased with our strong performance in 2023 and very excited about the opportunities. We have in 2024 to continue to drive value creation.
Celeste: We are successfully executing our strategy to deploy capital to the highest returning opportunities innovating with speed to deliver solutions for our customers driving efficiencies throughout our manufacturing footprint and achieving meaningful synergies from our collections of acquisitions.
Celeste: We are performing very well and we're entering 2024 with confidence optimism and strong momentum.
Celeste: That concludes our prepared remarks for today operator, please open the line for questions.
Celeste: The floor is now open for your questions to ask a question at this time simply press the star followed by the number one on your telephone keypad.
Celeste: Again to ask a question simply press the star followed by the number one on your telephone keypad will now take a moment to compile a roster.
Celeste: Our first question comes from the line of.
Celeste: Hmm.
Celeste: Robbie with Baird. Please go ahead.
Robbie: Thank you operator, and good morning, everyone.
Speaker Change: Good morning, Ghansham how are you.
Ghansham: Good morning, so less happy new year to you.
Ghansham: I guess first of all.
Ghansham: On the base assumptions for the first quarter that gets you to your EBITDA guidance I think $1 15 to 125, but what what are you anticipating in terms of volumes and price are you still being impacted by destocking across any of the operating segments.
Ghansham: And then also for fiscal year 'twenty four.
Ghansham: Is the EBITDA guidance sort of weighted more so towards the second half versus historical seasonality.
Speaker Change: Yeah. So so let's start with let's start with volume.
Speaker Change: So for 2024.
Speaker Change: We're anticipating.
Speaker Change: Volume growth of call it kind of mid single digits.
Speaker Change: On the pricing side, we're experiencing the opposite.
Speaker Change: So as we go into as we go into 2024, there is a few things happening. So when you look at it from a pricing perspective, we've got a number of index based pricing arrangements with large customers that are rolling into 2024, we will see the impact of that on the top line.
Speaker Change: Also we are.
Speaker Change: We formulating our products for many of our customers. So that we can offer them a product at a lower cost.
Speaker Change: To them and also a lower cost to us so you'll see that on the pricing side on the volume side were projecting volume growth, that's really more consistent with what consumer buying is expected to be in fact, we've we've taken a look and analyzed our shipped volume over the past several years and.
Speaker Change: When you look at 2023, our shipped volume our ship tonnage was down five or 6% versus 2019. So we're anticipating a year that we would consider.
Speaker Change: Normal.
Speaker Change: In 2024.
Speaker Change: Yeah, Ghansham I'll give you a little color on kind of Q1 versus the rest of the year guidance. So.
If you look at the assumptions for revenue that kind of underlying so less laid them out for the full year for the first quarter, we would expect organic revenue to be flat to down-low single digits offset by positive impact of 4% to 5% from acquisitions.
Speaker Change: As it relates to the EBITDA guidance.
Speaker Change: If you look at the midpoint of our EBITDA guidance for Q1 that would represent about 9% growth year on year, and then that would based on the midpoint of our full year guidance that would represent about 6% growth year on year for Q2 through Q4 of course.
Speaker Change: There is seasonality in the business as you know so.
Speaker Change: The numbers in the second half of the year for EBITDA will be higher than the first half of the year, but I would say.
Speaker Change: As it relates to year on year performance I don't think it's more weighted to the second half of the year.
Speaker Change: Got you helpful. And then on the reformulation dynamic can you just sort of expand on that is that sort of typical at this point in the raw materials cycle, which segments are you seeing that at current and then also going back to your 20% EBITDA margin threshold over the next three to five years.
Speaker Change: Why outline that now I mean, the world is complex there is a lot going on and so on and so forth.
Speaker Change: With inflation and growth et cetera, what should we take away in terms of your confidence and outlining that as part of your.
Speaker Change: Yesterday's release.
Speaker Change: Yeah. So let's start with your question about the re formulation dynamic. So yes that is typical at this point in the cycle.
And maybe if I, just kind of speak to our to our product portfolio and our pricing are the realities of our pricing strategy and it'll help explain this so so when you look at and I mentioned in the script. So.
Speaker Change: Over half of our customers.
Speaker Change: Our over half of our SKU base is unique to a customer. So if you look at our SKU count.
Speaker Change: Half of those Skus are sold to a single customer. So so we're working closely with these customers day in and day out and we identify.
Speaker Change: Understand their needs as you point out in this part of the cycle.
Speaker Change: Cost matters to our customers.
Speaker Change: Our ability to reformulate, our products not only impacts their cost, but more importantly, our ability to reformulate our products enables them to often use lower cost substrates. So that reformulation work is ever occurring.
Speaker Change: As a consequence theres not only innovation that we're bringing to this customer base, but as you really as you look at it.
Speaker Change: You know it it's an amazing dynamic because the amount of adhesive that is used in our end products is just so slow small relative to the total that whatever we can do to reduce the overall system cost for the customer matters a lot more.
Speaker Change: Then the cost of our adhesives so.
Speaker Change: In fact, if you look at if you look at our our.
Speaker Change: Customer base, 97% of our customers spend less than $500000 on adhesive. So on any given adhesive, they're spending about $25000 per SKU or less so.
Speaker Change: One of the things that is woven into this business model is that we have a lot of pricing resilience as it as a consequence.
Speaker Change: Yeah.
Speaker Change: Okay.
Speaker Change: And then the second question sorry, Yes, yes, I'll stop there just to make sure there is.
Speaker Change: Got any follow on question to the pricing piece before I talk about the margin.
Speaker Change: Perfect. Thank you.
Speaker Change: Yeah, great. So and you really see that in our in our gross margins.
Speaker Change: <unk> recently.
Speaker Change: Moving onto your second question about EBITDA margin.
Speaker Change: Why why now I mean, why not now gone.
Speaker Change: I'm very confident about where we can take this portfolio.
Speaker Change: Really dissected this and thought about it long and hard and when you look at these two segments. What we've done is really create a structure that directs our investment.
Speaker Change: Identified these high EBITDA margin high growth spaces, you saw the bubble chart, representing our top 2025, I mean that chart was boiled down from 220 opportunities that were brought to us by our team.
So there's a lot of ways and a lot of places to grow in this 70 billion dollar adhesive industry and we feel confident that with our organization structure really highlighting these 31 different market segments that we're able to pinpoint those.
Speaker Change: <unk>, where we can really grow the business.
Speaker Change: So the growth segment is full it's a compelling list of opportunities within that pipeline. Then you look at the leveraged segment and I feel like our teams are really winning in these leverage markets.
Speaker Change: And they're really.
Speaker Change: Focused on driving those things that matter to our customers and that create margin uplift in our business and again you saw that in our results.
Speaker Change: Over the last year as well as in the last quarter and H H C was a really good example of that last quarter.
Speaker Change: That's largely.
Speaker Change: More leveraged segments are in Hh see then growth segments are the most leveraged segments in the company are N H H C and you see how they manage successfully to drive.
Speaker Change: Really drive those businesses forward.
Thank you.
Speaker Change: Our next question comes from the line of Patrick Cunningham.
Patrick Cunningham: With Citi. Please go ahead.
Patrick Cunningham: Hi, Good morning, Thanks for taking my question Hi.
Speaker Change: Hi, Patrick.
Speaker Change: Maybe just on the portfolio construct and how you've laid it out here how should we think about the balance of inorganic investment in the growth category versus the leverage category I would think that there.
Speaker Change: The recent deals you've done there is maybe more of an outsized opportunity to go after the low risk consolidation plays with significant synergies versus the growth markets, which maybe have more execution risk and less tangible commercial synergies. So how are you thinking about the pipeline from an inorganic perspective relative to that cost structure.
Speaker Change: Sure.
Speaker Change: Yeah. So so I'll start with the leverage category. So you nailed it there there's a lot of opportunities for industry consolidation in that leverage space, our M&A strategy in the leverage segment tends to be more opportunistic.
Speaker Change: And we do underwrite those deals very heavily on cost savings synergies.
Speaker Change: And you can see the success we've had in those Berto Adams is a good example of a of a.
Speaker Change: Of a consolidation acquisition and our labor leverage segment, that's performing well for us in fact, performing well ahead of the deal model by about 40%. So when you migrate to the to the growth category and I wouldn't say so much that there's execution risk in these in these.
Speaker Change: Inorganic opportunities in the growth.
Category in fact, a lot of those.
Speaker Change: A lot of the opportunities there that we're focused on are very selective.
Speaker Change: This tends to be a place where we have the opportunity to buy smaller companies that have been very focused on a certain technology or a certain region.
Speaker Change: And Tim.
Speaker Change: Particularly.
Speaker Change: As we look at those technologies, they tend to fit well within our broader portfolio of technologies and fit really well with our market experience. So so the the growth opportunities.
Speaker Change: It is M&A is a really good tool in the growth category because so many of those products have are qualified or.
Speaker Change: Require them.
Speaker Change: Really a long time to build from an organic perspective by buying into those markets you get an automatic qualified product to run with and I'll use adhesion as and a good example for a 480 acquisition that we did in a growth category.
Speaker Change: We were basic in cyanoacrylate, we really.
Speaker Change: Have great cyanoacrylate technology, but we needed.
Speaker Change: On October <unk> Cyanoacrylate technology, So we acquired adhesion and.
Speaker Change: The integration there has been very well run and in fact, we have already.
Speaker Change: In that market.
Speaker Change: We've already leveraged our secure port IV product that came through adhesion into 514 countries.
Sorry hospitals in the United States and on top of that we've already.
Speaker Change: Also signed a GPO contract with them for our tissue bonding adhesive that came through adhesion that is a contract that represents 40% of the hospitals in the U S. So you know.
Speaker Change: I I don't see so much execution risk there I, just really see the opportunity for us to get into these.
Speaker Change: Michie selective high margin spaces that we can then grow.
Speaker Change: Better than the companies that own them previously.
Speaker Change: Okay.
Speaker Change: Got it no I appreciate it that's very helpful. And then I just wanted to dig in a little bit on price maybe can you help quantify the portion of the portfolio that index mechanism.
Speaker Change: I can quantify how much the subjects. Some of these re formulation pressures that youre seeing and then how should we think about more normalized more normalized structural pricing when we can get back to.
Speaker Change: Flatter raw material.
Speaker Change: Beer demand environment.
Speaker Change: Yeah. So so let.
Speaker Change: Let me start by saying that if you look at our pricing performance in 2023 that.
Speaker Change: Less than 25% of our customers received a price decrease so so that's.
Speaker Change: Included in that number would be customers on indexes as well as those that are not so.
Speaker Change: I'd say when you look at kind of price decrease impact about half of that comes from index customers.
Speaker Change: And what we do see is that for our non indexed based customers. They get price decreases that decrease is less than what you see with the index based customers. So so that's kind of you know.
Speaker Change: A snapshot of 2023 to use to think about pricing in what was an incredibly challenging market our volume was down 8%.
Speaker Change: And that's sort of how I describe pricing resilience when you think about more normalized conditions.
Speaker Change: The impact of indexes.
Speaker Change: It's just a margin preservation tool right. So you shouldn't youll see.
Speaker Change: Those indexes move with our raw material market there'll be a lag.
Speaker Change: And then as far as a normalized pricing environment I mean, you know.
Speaker Change: Typically what is <unk>.
Speaker Change: Occurring throughout the year low volume year or not is we're constantly innovating with our customers, sometimes we're innovating to bring them.
Speaker Change: Fancy new technology that enables them to introduce a new design.
Speaker Change: And.
Speaker Change: That product is priced to that value, sometimes where reformulate aimed to help them address.
Speaker Change: Cotton costs needs or are maybe just reformulating or tweaking to accommodate a change that happened because they shifted their line speeds or they wanted to use the new substrate. So so there's a lot of new pricing that happens in any given year.
Speaker Change: Cause of that innovation.
Speaker Change: As well as just you know.
Speaker Change: Ongoing status quo.
Speaker Change: Pricing resilience.
Speaker Change: Thank you so much I'll pass it on.
Speaker Change: Thanks, Patrick.
Speaker Change: Our next question comes from the line of Mike Harrison with Seaport Research Partners. Please go ahead.
Michael Joseph Harrison: Hi, Mike.
Michael Joseph Harrison: Hi, good morning.
Happy new year to you.
Michael Joseph Harrison: Was hoping that maybe we can dig in a little bit on the.
Michael Joseph Harrison: The H H C segment.
Michael Joseph Harrison: I'm really trying to get a sense of what the margin cadence there could look like versus this <unk> very strong.
Michael Joseph Harrison: 28% ish level you achieved in Q4 can you maybe give us a sense of whether there were some one time positives in there in terms of reduced incentive comp lower discretionary spend or maybe some of this price cost.
Michael Joseph Harrison: There was positive in Q4, but it's starting to roll over into next year, and then I guess as we as we see maybe some better volume performance in that segment going forward.
Michael Joseph Harrison: What kind of incremental margin contribution could we expect from that.
Michael Joseph Harrison: Segment.
Michael Joseph Harrison: Okay.
Michael Joseph Harrison: Yeah.
So Mike I'll try to provide a little color on that I would say there were no real unusual onetime favorable items in the fourth quarter.
Michael Joseph Harrison: Variable comp was lower across the company so that benefited.
Michael Joseph Harrison: Hh C.
Michael Joseph Harrison: Looking forward.
Michael Joseph Harrison: They delivered these margins.
Michael Joseph Harrison: And in a year, where volume was a real challenge.
Michael Joseph Harrison: We are really confident that they can maintain margins.
Michael Joseph Harrison: In this ZIP code, maybe not 19% every quarter, but I think we've I think we have shifted our focus from maybe three or four years ago. When we viewed H H C as sort of a.
Michael Joseph Harrison: Mid teens type of EBITDA margin.
Upper teens.
Michael Joseph Harrison: And I think that we should be able to maintain that particularly when volume starts to return.
Speaker Change: Yeah, and I mean, they're the Hh C team is just doing an excellent job executing.
Speaker Change:
Speaker Change: You know they have continued to win business throughout the over the 2023 and the wins just keep piling up coming into 2024.
Speaker Change: They've got done really a nice job in their growth segments, bringing innovation like in the beverage labeling space they've introduced a beverage labeling adhesive that allows our labels to come off bottles more quickly in the washing process.
Speaker Change: More quickly and at lower and lower temperature.
Speaker Change: So they've got some growth segments that are really bringing solid innovation to customers and then they also have just really managed how they run their leverage segments.
Speaker Change: A good example is taping label I mean, we never used to sit here and talk about tape so tape and label, we have a new market segment leader there and he's just very successfully choosing what parts of tape and label, we really want to play in and that's part of us succeeding in these <unk>.
Speaker Change: Average segments picking where we truly add value and we can generate margin better margins and better profitability for our products.
Speaker Change: As well as continuing to leverage effectively our plant network and in our raw material network. So.
Speaker Change: They did a nice job demonstrating the power of leverage youre going to continue to see that without H H the team.
Speaker Change: Alright. Thank you for that and then maybe a broader question just on what you guys are seeing in terms of Destocking activity.
Speaker Change: Well aware that you guys have a December.
Speaker Change: That is going to be contributing probably to some weakness at least starting your fiscal first quarter, but just curious what you're seeing across some of your key market areas like.
Speaker Change: Packaging and maybe some other consumer related.
Speaker Change: <unk> areas, where you had been seeing destocking as well as what youre seeing in construction.
Speaker Change: Or are you encouraged that as we start the calendar year.
Speaker Change: We're getting order pattern.
Speaker Change: Back to normal or is that going to take a few more months still.
Speaker Change: Yeah. So so let me talk a little bit about kind of how we're seeing all three of these businesses pulling out of of this deal.
Speaker Change: I'm going to call it past Destocking phenomenon. So in Q4, what was really interesting to me as I looked at the development in Q4 month over month, and providing a lot of transparency here.
Speaker Change: The CA businesses, each and every month of Q4 were positive volume.
Speaker Change: Our EA business was positive in two of those three months in progression and our H H C business was positive in the last month of our fourth quarter and so and so you just you can kind of just watched that.
Speaker Change: Destocking Rolling back I'm confident it's complete in CA, we never really saw a big impact of it in our E business.
Speaker Change: Really not the nature of most of that business.
Speaker Change: But we certainly did.
Speaker Change: Not dramatically and Hh see and feel comfortable we're coming to a conclusion there.
Speaker Change: Does that answer your question Mike.
Michael Joseph Harrison: Yes, I appreciate the additional color there thanks very much.
Speaker Change: Our next question comes from the line of Jeff.
The cost gas with J P. Morgan. Please go ahead.
Speaker Change: Good morning, Jeff.
Jeff: Good morning, Thanks very much.
Speaker Change: Just I guess first a question about the guide.
Speaker Change: B B.
Speaker Change: The adjusted EPS is $4 15 to $4 $54 45.
Speaker Change: What's the guide for GAAP EPS.
Speaker Change: And secondly, the interest.
Speaker Change:
Speaker Change: Interest expense for next year is 115 to $1 25.
Speaker Change: And the.
Speaker Change: Fourth quarter you were at.
Speaker Change: $33 million.
Speaker Change: Which would push you higher than that why should I get and maybe youre doing net interest, but even net interest for this year is in the $1 <unk>.
So why should interest expense come down the $1 15 to $1 25.
Speaker Change: And then you talked about this indexed pricing.
Speaker Change: So is the meaning of that that your raw materials continue to decline and then what you do is you give some of that back or in a sense did you over earn a little bit in 2023, and now you have to give a little bit of that back.
Speaker Change: Maybe we can try those to begin with.
Speaker Change: Sure. Thanks, Jeff I'll try to handle the first one and I'll, let <unk> comment on the pricing question. So adjusted EPS, Yes. So we don't really guide on GAAP EPS, but I would say if youre looking at kind of.
Speaker Change: non-GAAP items are items that are adjusted.
Speaker Change: Think we expect it to be in the $35 million to $45 million range next year pre tax so I didn't do the calculation and what that means from an EPS standpoint, so lower than this year, but we do still have some of the integration related costs and some of the restructuring that.
Speaker Change: That will happen in 2024, so interest expense, we are projecting it to be lower two dynamics. There. One is the strong cash flow that we had in the year, particularly in the second half has reduced our debt balances going into 2023 or 'twenty 'twenty four excuse me.
Speaker Change: We are projecting interest rates to decline in 2024, not in the first half, but we baked in a 25 basis point.
Speaker Change: Decline in borrowing rates in Q3, and $25 25 basis points in Q4, so thats what drives the difference right. This doesn't reflect any potential acquisitions in 2024, and we don't reflect those in our guidance but.
Speaker Change: Assuming that we continue to show strong cash flow and continue to pay down debt.
Speaker Change: It kind of results in this type of interest expense profile.
Speaker Change: Unless you want to talk about index pricing.
Speaker Change: Absolutely so.
Speaker Change: So yes as I mentioned when you look at our our outlook for 2024, we anticipated a mid single digit price in 2024 and that was.
Speaker Change: Directly related to what we anticipate will happen with our index pricing as well as some product re formulations for sure. So so you saw that you see that in our guidance.
Those are largely a margin preservation tools, but they do Jeff have a little bit of a lag effect and so.
Speaker Change: They don't they're not really lumpy, but what youre seeing is the impact of those raws coming down in prior year, starting to get reflected in price.
Speaker Change: In the upcoming year as far as what's happening in raw materials, we actually right now as you know, we monitor 4000 different raw materials, so I'm talking about raw material count here.
Speaker Change: About.
Speaker Change: Ooh almost half of those materials are still in the declining phase and decline.
Speaker Change: Declining I'm talking about Q4 versus Q3 here so so.
Speaker Change: Continue to have raw material benefit carryover into 2024, because it does take a while for these for these raw materials to make their way through production onto our P&L.
And then go to <unk>.
Speaker Change: <unk> raw material environment sure.
Speaker Change: And then for my second question.
Speaker Change: If you look at your three major segments this year.
Speaker Change: <unk> had a very strong year engineering adhesives was pretty good.
Speaker Change: Construction was pretty tough.
Speaker Change: In 2024.
Speaker Change: Yes.
Speaker Change: Which segment do you think will do the best which the worst.
Speaker Change: Whats the one in between.
Speaker Change: And when you look at your acquisition environment, you spent a couple of hundred million dollars this year on acquisitions.
Speaker Change: What do you think youre going to spend next year, what's the.
Speaker Change: What's the outlook for opportunities as best as you can tell.
Speaker Change: Yes, so when I look at these three segments H H C EEA and CA.
Speaker Change: Think both ebay and CA, we'll do we'll do well in 2024 I'd call. It kind of mid single digit organic growth in both of them see a being a little higher than ebay.
Speaker Change: H H C.
Speaker Change: We'll probably still see them down low single digits as we kind of work through a lot of this index pricing and as you know they solidly get their feet underneath them coming out of the Destocking phase.
Speaker Change: Relative to M&A.
Speaker Change: You'll see a very similar M&A performance and focus from us and spending in 2024 as you did in 2023.
Speaker Change: Okay, great. Thank you so much.
Speaker Change: Our next question comes from the line of David Begleiter with Deutsche Bank. Please go ahead.
Speaker Change: David.
David Begleiter: Good morning, Thank you.
David Begleiter: Can you talk to the Q1 guidance sequentially implies.
David Begleiter: Pretty dramatic severe.
David Begleiter: Severe decline and decremental margins.
Speaker Change: Why is that.
Speaker Change: So David maybe I'll take that and <unk> can add to it it's really the reflection of the seasonality of the business. So when you look at Q1, it's at the beginning of December through the beginning or the end of February So you've got the.
Speaker Change: Christmas and new year's holidays, you have Chinese new year, So it's always our lowest.
Speaker Change: Lowest revenue quarter in that and correspondingly lowest margin quarter. So it's really it's really nothing changing in the dynamics of the P&L, It's really just the lower volume quarter for us.
Speaker Change: Yeah, Andrew if you're in China This year Chinese new year's.
Speaker Change: About three weeks closer to the end of our quarter.
Speaker Change: And so.
Speaker Change: China's recovery has been very inconsistent.
Speaker Change: It's bouncing around a lot and we're anticipating we might see some impact from that.
Speaker Change: Understood and to be clear just on raw materials, what do you expect them to be down on a percentage basis and 24 versus <unk> 23.
Speaker Change: So my reference to raw material cost reduction in 2024, what is largely related to carryover. So so.
Speaker Change: So that's that's one impact when I was speaking to our 4000 different raw materials that we track I was speaking about Q4 versus Q3, that's where we saw.
Speaker Change: The biggest.
Speaker Change: Look of our raw materials, not quite half was still declining now interestingly enough right a third of them are increasing as well. So it's really a mixed bag as it relates to raw materials.
Speaker Change: But hopefully that clarifies my comments and David I can give you just a little more color.
David Begleiter: If you look.
David Begleiter: What we are what is reflected in our guidance and what we're seeing is that the impact of raw materials through the P&L year on year and the impact of pricing ought to be relatively neutral right. So and as Les said the raw material impact is predominantly carryover and it won't be as big of a benefit this year, we've talked about this year.
David Begleiter: The combination of raws and pricing.
David Begleiter: Beginning of the year, we expected them to contribute.
101 hundred $30 million to $150 million of benefit ended up being more than that.
David Begleiter: But next year as I said, the raws and pricing should more or less offset and as we said.
David Begleiter: Pricing will be down kind of low single digits. So you can kind of do the math on what that would look like from a P&L standpoint.
David Begleiter: Yeah.
Speaker Change: Very helpful. Thank you.
Speaker Change: Our next question comes from the line of Vincent Anderson with Stifel. Please go ahead.
Vincent Alwardt Anderson: Yes, thanks, good morning.
Vincent Alwardt Anderson: I was hoping maybe you could just highlight a few areas where you have very high degree of confidence in your organic volume.
Outlook, just given your otherwise conservative macro view.
Vincent Alwardt Anderson: And maybe just separating between products that have been growing consistently over the years and just were overshadowed in 'twenty three versus products, where your customer feedback is what gives you a high degree of confidence.
Speaker Change: Got it good morning, Vincent sure. Let me, let me just talk a little bit about some of the wins that we've had because I think that helps convey where my confidence is coming from and you can really get a feel for how the how the portfolio is growing so so our electronics space.
Speaker Change: As you know has really ramped up and our team is winning repeatedly there you know for example that those new foldable phones as it happens those are really hard to bond to because your bonding are pretty flexible screen and really small bond line out of him.
Speaker Change: So we have successfully secured new applications in that fold foldable phone space, that's a growing category, so and that's a really demanding application. So you know that that's a good example.
Speaker Change: In automotive the automotive business has been really interesting. This year. So throughout 2023, we saw as did many others are double digit growth in automotive on a global level and actually.
Speaker Change: Actually when I look at Q4, what I found particularly notable was that growth continued in automotive in Europe at that double digit rate.
Speaker Change: And part of that is because we brought some new products to market there by the way during Q4 in the U S. We finally saw a cooling, but I really think that that is just related to the strike and an anomaly, but back to the wins in automotive when you think about how the technology is <unk>.
Speaker Change: <unk> in a car.
Speaker Change: We call the development conversion because we're seeing a lot of these big kind of glass dashboards in automotive that have been recently introduced.
Speaker Change: We are winning.
Speaker Change: One a big application actually with an OEM on that big glass Dash and we won that because of conversion we understood. What it took to bond a touch screen touch panel because of our work in phones and electronics and we're able to get there faster.
Speaker Change: For our customer than anyone else. So really good growth in that space are plus this edition of the E power category, which we're pretty bullish about E power. When we talk about E power, we're talking about kind of sealing and bonding in thermal management.
Speaker Change: Applications in.
Speaker Change: For power storage in batteries, and we now have 17 customers signed up and buying our EV protect product are unique products, there, which facilitates thermal management. So those are some examples in EAA. When you look at the CA business, we expect roofing to bounce back in 2000.
Speaker Change: 24 also I'm seeing some great wins in our infrastructure market segment.
Speaker Change: Let me tell you about this on this because I think this really helps export.
Speaker Change: It makes our acquisition strategy come to life as it relates to infrastructure, we bought a company called GSI about a year ago that makes butyl based tape for metal bonding. So think about metal buildings for example.
Speaker Change: And we also bought a company called ex Cam in the Middle East that had some bad experience in infrastructure and so we've started to localize our very popular fosters brand product at X Chem now to support these big Middle East infrastructure projects and at the.
Speaker Change: Same time, we've taken this butyl base tape from GSI and rebranded it fosters an introduced it as a system in the middle East and we actually just recently won.
Speaker Change: Phase one application in Qatar and one of the big LNG projects.
Speaker Change: You know I'm bullish about I'm bullish about infrastructure.
Speaker Change: I'm excited that roofing is bouncing back that's the CA business and then there's a THC.
Speaker Change: These guys are just the guys and gals are delivering.
Speaker Change: <unk> Crazy in our hygiene segment, we've introduced a pad fastening adhesive that bonds to some of these hard to bond.
Speaker Change: Substrates.
Speaker Change: So that that's gone well, that's a big category for US also in packaging our team is I'm getting a contract across my desk every week.
Speaker Change: For some big CPG customer packaging contract. So we've done well there part of that is our focus on sustainability, which has really evolved in the packaging space.
Speaker Change: Created a renaissance opportunity for us in NH H C. And then of course I spoke to are now.
Speaker Change: Recent success with adhesion in the tissue bonding and sealing applications really excited that we're getting that product.
Speaker Change: For topical topical skin bonding as well as the secure port IV product now into hospitals around the country. So.
Speaker Change: We've got we've just we've got a lot of momentum Vincent and.
Speaker Change: I just every day I am seeing wins and feeling bullish about what these gpus can do.
Speaker Change: Well alright.
Excellent and my follow up was on fosters anyways. So.
Speaker Change: Go ahead.
Speaker Change: Thank you okay. Okay. Thanks, Thanks Vincent.
Speaker Change: Our final question comes from the line of Rose Marie.
Rosemarie Morbelli: Belli with Gabelli funds. Please go ahead.
Rosemarie Morbelli: Good morning Raspberry.
Raspberry: Good morning, everyone and I will add the happy new year and wish for it we went.
Raspberry: I was a lot of my questions have been answered, but I was wondering if you could give us a feel for the size of your gross.
Raspberry: Categories in each of the AC.
Raspberry: I mean, CAH a fee and so on and then if you look at your gross margin at your margin target EBITDA margin target with gross targeting 25% and leverage 20, 15% can you give us a feel as to where they are now is that something you can share.
Speaker Change: Let me, let me provide a little more information here. So so when you look at our our growth and leverage categories. Rosemary what you see is that.
Speaker Change: You know.
Speaker Change: About 50% of our sales and about 50% of our EBITDA plus or minus 5%.
Speaker Change: Is resides in each category and I didn't mean, it to turn out that way. It just it just turned out that way.
No.
Speaker Change: Well, it's a pretty balanced portfolio.
Speaker Change: And when you look at those what's what's in this space today.
Speaker Change: We say that our growth target is 25% EBITDA margins were definitely at the high teens, there already and starting to push forward and that'll be the category, where we really.
Speaker Change: Direct more of our investment so.
Speaker Change: I'm confident we can increase that toward that 25% target fairly quickly in our leverage category.
Speaker Change: They're pretty close already to that 15% collectively and and.
Speaker Change: Can easily exceed that so that's about where we are today.
Speaker Change: Thank you that is helpful and I was wondering as part of the on the.
Speaker Change: Of that margin progression are there any product lines that.
Speaker Change: Do you think that no longer belong in the portfolio and will help boost the.
Speaker Change: The mountain and helps you get is that 20% plus of the role of the next three to five years as you pointed out and.
Speaker Change: And just the general dollar amount.
Speaker Change: Understand you cannot give any specifics.
Speaker Change: Yeah, you know so as we look at those at the all of the.
Speaker Change: And digging deep into these various market segments since I arrived and as I referenced we've already been through a couple of these extensive.
Speaker Change: Market segments review market segment reviews, and as we do that you know what I'm really focused on is what's the industry structure in each of these spaces and and why do we deserve to win them.
Speaker Change: And how would we as a company executing against the needs in that space and so so we're still very.
Speaker Change: Very much evaluating every one of these market segments in great depth.
Divestment is not a decision that we would make lightly and this new portfolio management structure is just one more lens now that we're using to evaluate it with.
Speaker Change: Thank you very much I appreciate it and congratulations on the great quarter.
Speaker Change: Thanks, very much Rosemary.
Speaker Change: I would now like to turn the call over to Celeste Mastin for closing remarks.
Celeste Mastin: Thanks, everyone for joining us this quarter, we look forward to hearing from you again at the end of Q1.
Celeste Mastin: Have a great day.
Speaker Change: This concludes today's call you may now disconnect.
Speaker Change: Yeah.
Speaker Change: Yeah.
Speaker Change: Yeah.
Speaker Change: Okay.
Speaker Change: Yeah.
Speaker Change: Yeah.
Speaker Change: Yeah.
Speaker Change: Yeah.
Speaker Change: Okay.