Yahoo Finance H.B. Fuller Company (NYSE:FUL) Q2 2024 Earnings Call Transcript
H.B. Fuller Company (NYSE:FUL) Q2 2024 Earnings Call Transcript June 27, 2024
Operator: Thank you for standing by. And welcome to the H.B. Fuller Second Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I'd now like to turn the call over to Steven Brazones, Vice President of Investor Relations. You may begin.
Steven Brazones: Thank you, operator. Welcome to H.B. Fuller's second quarter 2024 investor conference call. Presenting today are Celeste Mastin, President and Chief Executive Officer; and John Corkrean, Executive Vice President and Chief Financial Officer. After our prepared remarks, we will have a question-and-answer session. Before we begin, let me remind everyone that our comments today will include references to certain non-GAAP financial measures. These measures are supplemental to the results determined in accordance with GAAP. 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 adjusted non-GAAP measures. We will also be making forward-looking statements during this call. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. 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.hbfuller.com. I will now turn the call over to Celeste Mastin. Celeste?
Celeste Mastin: Thank you, Steven, and welcome, everyone. I'm very pleased with our strong second-quarter financial performance, which reflects the team's steadfast commitment to execution, while driving our long-term strategy to focus on more profitable, higher-growth segments of the market. We continue to innovate and deliver customized, value-enhancing solutions to our customers, while acquiring highly profitable, fast-growing businesses to expand our market presence in the most differentiated segments. As we execute our restructuring program focused on streamlining our global footprint, we are driving sustainable enhancements to our cost structure and improving our ROIC. In a large total addressable market, where we win one application at a time, we continue to meaningfully move the needle and remain on track to deliver adjusted EBITDA margin greater than 20% in the next three years to five years.
Looking at our consolidated results in the second quarter, our organic sales trend continued to improve, driven by organic volume growth of more than 3% during the quarter with volume up in all three global business units. Overall, organic revenue was flat year-on-year as volume growth was offset by reformulation activity and index-based pricing adjustments. From a profitability perspective, we executed well and delivered very strong results on slightly stronger than anticipated volume growth, consistent with our second-half expectations. We grew adjusted EBITDA 10% year-on-year to $157 million, and expanded adjusted EBITDA margin by 120 basis points year-on-year to 17.1%. Now, let me move on to review the performance in each of our segments in the second quarter.
In Engineering Adhesives, organic revenue increased 2.5% in the second quarter, marking a return to positive organic growth. Strength in the electronics, automotive, aerospace, and recreational vehicle market segments was partially constrained by slower demand in the woodworking and clean energy market segments. EA delivered a strong quarter representative of our expectations given the many growth segments in this GBU. Adjusted EBITDA increased 13% in EA and adjusted EBITDA margin increased 160 basis points year-on-year to 18.4%. Favorable net pricing and raw material cost actions and restructuring benefits drove the increase in adjusted EBITDA margin year-on-year. In HHC, the organic revenue development improved sequentially on a return to positive volume growth.
Reformulation activity and index based pricing adjustments resulted in a decline in organic sales during the second quarter for HHC. Strengthened bottle labeling, packaging, and medical partially offset continued, although lessening organic sales declines in the hygiene market. Adjusted EBITDA was flat year-on-year for HHC in the second quarter despite lower organic revenue, and adjusted EBITDA margin expanded 50 basis points year-on-year to 16.6%. Favorable net pricing and raw material cost actions, restructuring benefits, and acquisitions drove the increase in adjusted EBITDA margin year-on-year. In Construction Adhesives, organic sales increased 7% year-on-year on strong demand in roofing, which achieved a 20% increase in organic sales. Construction market conditions have improved and are more consistent with a normal construction season thus far.
Adjusted EBITDA for Construction Adhesives increased 24% versus the second quarter of last year to $23 million, and adjusted EBITDA margin expanded 90 basis points to 15%. Net price and raw material cost management, improved volumes and restructuring savings drove the improvement in adjusted EBITDA margin year-on-year. Geographically, Americas organic revenue was flat year-on-year in the second quarter. EA and CA both achieved positive organic growth during the quarter and on a combined basis achieved organic revenue growth of more than 6% year-on-year in the Americas region, driven by strong growth in electronics, aerospace, and roofing. HHC organic revenue declined 7% versus the prior year, the hygiene market, while slightly improved in the Americas, continued to negatively impact organic sales development for HHC in the region.
In EIMEA, year-over-year organic revenue development, while still down, improved significantly relative to the first quarter as expected. The organic sales development for all GBUs improved sequentially, although still declined modestly year-on-year. This bounce back was expected as much of the demand weakness experienced in the first quarter was temporary. We would expect the trend to continue to improve as we progress through the remainder of the year. In Asia Pacific, organic revenues increased 7% year-on-year, driven by strength in electronics, automotive, beverage labeling, and flexible packaging. Strength in China, which nearly achieved a double-digit increase in organic sales, drove the region's organic sales growth. We have a winning strategy, a focused team, and a strong track record of execution.
Our path to 20% adjusted EBITDA margin is multifaceted and includes restructuring opportunities, volume growth, improved organic mix between growth and leveraged market segments, and acquisitions of higher growth, higher margin businesses in the most differentiated adhesive applications. During the second quarter, we completed the acquisition of ND Industries. This highly strategic and financially compelling acquisition expands our market presence into a new and exciting growth market segment fastener locking solutions, which is a combined system of adhesives and mechanical fasteners. The acquisition accelerates one of our top growth priorities and is consistent with our focus on proactively driving capital allocation to the highest margin, highest growth market segments within the functional coatings, adhesives, sealants and elastomer or CASE industry.
As part of the acquisition, products under ND Industries' Vibra-Tite brand will be added to H.B. Fuller's existing epoxy, cyanoacrylate, UV curable and anaerobic product ranges. This acquisition represents a very financially compelling transaction for H.B. Fuller. ND's full-year 2024 sales are expected to be approximately $80 million at greater than 30% EBITDA margin. Total purchase price was approximately $250 million, equating to a pre-synergy enterprise value to EBITDA multiple of less than 10 times and a post-synergy EBITDA multiple of approximately six times. Our M&A pipeline is robust, and we continue to evaluate a number of potential transactions. We have proven the ability to acquire multiple companies, while simultaneously reducing our leverage ratio.
Given this capability, we have reinitiated our share repurchase program, allowing us to both invest for growth and return additional capital to shareholders. Now, let me turn the call over to John Corkrean to review our second quarter results in more detail and our updated outlook for 2024.
John Corkrean: Thank you, Celeste. I'll begin with some additional financial details on the second quarter. For the quarter, revenue was up 2.1% versus the same period last year. Currency had a negative impact of 1.7%, and acquisitions increased revenue by 3.9%. Adjusting for those items, organic revenue was down 0.1% with volume up 3.3%, and pricing down 3.4% year-on-year in the quarter. Adjusted gross profit margin was 31.1%, up 210 basis points versus last year, driven by the net effect of pricing and raw material actions, restructuring savings, and higher volume. Adjusted selling, general and administrative expense was up 9% year-on-year as expected, with acquisitions driving approximately half of the increase and the rest of the increase resulting from higher wage inflation and higher variable compensation, partially offset by restructuring savings.
Adjusted EBITDA for the quarter of $157 million was up 10% year-on-year, reflecting the net positive impact of pricing and raw material cost actions, volume leverage, restructuring savings, and the favorable contribution of acquisitions, which more than offset higher variable compensation and wage inflation versus the prior year. Adjusted earnings per share of $1.12 was up 20% versus the second quarter of 2023, driven by strong operating income growth. Year-to-date operating cash flow increased $21 million year-on-year on improved profitability and lower net working capital as a percentage of revenue. This strong growth in EBITDA and cash flow resulted in net debt to adjusted EBITDA of 3.1 times at the end of the second quarter, down from 3.3 times at the end of the second quarter of last year.
On a sequential basis, the ratio increased from 2.8 times to 3.1 times, reflecting the acquisition of ND Industries on a pro forma basis, including the acquired EBITDA from ND Industries, net debt to adjusted EBITDA was 3.0 times at the end of the quarter. During the second quarter, we reinitiated our share repurchase program and acquired 182,000 shares. Now that our net debt to adjusted EBITDA ratio has returned to more historical levels. And given our expectations for continued strong free cash flow, we anticipate regularly repurchasing shares with the goal of offsetting annual share creep from equity-based compensation programs. With that, let me now turn to our guidance for the 2024 fiscal year. As a result of our strong first-half performance and recent acquisition activity offset somewhat by the impact of the strengthening US dollar, we are updating our previously communicated financial guidance for fiscal 2024 as follows.
Net revenue growth is now expected to be in the range of up 2% to 4%, with organic revenue flat to up 2% year-on-year. Adjusted EBITDA is now expected to be in the range of $620 million to $640 million, equating to growth of approximately 7% to 10% year-on-year. Net interest expense is now expected to be approximately $130 million. Our adjusted effective tax rate is now expected to be between 26.5% and 27.5%. Full-year depreciation and amortization expense is expected to be approximately $170 million and our fully diluted share count is now expected to be approximately 56.5 million shares. Combined, these assumptions result in full-year adjusted diluted earnings per share in the range of $4.20 and $4.45, equating to year-on-year growth of between 9% and 15%.
We still expect full-year operating cash flow to be between $300 million and $350 million. Finally, based on the seasonality of our business, we would expect third-quarter EBITDA to be in the range of $165 million to $175 million. Now, let me turn the call back over to Celeste.
Celeste Mastin: Thank you, John. At H.B. Fuller, we are committed to working alongside our customers to test new ideas, optimize bonding performance, and develop highly tailored adhesive solutions. It is through this unique collaborative approach that we are able to innovate with speed and enable our customers' success. We have the privilege of collaborating with and creating solutions for an extensive group of customers. In April, we recognized the most innovative product introductions that resulted from these partnerships in 2023 by naming Anhui Huasun, GAF, and Niine as the Inaugural Winners of the H.B. Fuller Customer Innovation Awards. We are proud to recognize these customers for their exceptional achievements that leverage our unique technology to improve our world.
Let me share a little more about this year's winners. Anhui Huasun Energy is a market leader in solar panel construction and their heterojunction technology solar modules were recognized for their ability to offer power that is more efficient and reliable than previous generations of solar modules. This improved solution has helped to facilitate the broader adoption of clean energy. GAF, a standard industries company, and North America's largest roofing and waterproofing manufacturer, was recognized for its EnergyGuard Non-Halogenated Polyiso Insulation, which gives architects and contractors an energy-efficient solution designed to help meet their sustainability goals. This product line offers excellent thermal value and is free of potentially hazardous flame retardant chemicals.
The product offering holds numerous sustainability certifications. Niine, a leading feminine hygiene company in India and producer of sanitary napkins, was recognized for introducing India's first biodegradable solution, which helps to mitigate adverse impacts on the environment. This is particularly crucial in India, where high population density combined with a still-developing disposal system for feminine products, has led to a push for more sustainable solutions. Incredibly, Niine's new product reduces the estimated decomposition time from 800 years to less than 18 months for a sanitary napkin in a landfill. Congratulations to these customers for innovating to improve our world and for being our Inaugural Innovation Award winners. H.B. Fuller was also recognized for innovation in the second quarter winning our second consecutive Annual Innovation Award from the Adhesive and Sealant Council following our win in 2023 for our EV Protect Product.
This year we were honored for our new thermoplastic encapsulant platform for photovoltaic modules used in the construction of solar panels. Our products have application in newer thin-film modules and are advantaged by lower levelized costs of electricity, enabling the creation of solar panels that generate power at a lower cost per watt than traditional technology. We are very proud of our Clean Energy team and we thank our peers at the ASC for the 2024 Innovation Award. To wrap up, we are very pleased with our first half financial results and the continued incremental improvement we are driving throughout the business consistent with our strategic plan. The team is executing well and there is complete alignment across the organization. We have one focus; creating customized value-added adhesive solutions for our customers.
We're set to deliver another year of improved profitability and ROIC, strong cash flow, and we are on pace to achieve our long-term financial targets and drive attractive shareholder returns. That concludes our prepared remarks for today. Operator, please open the line for questions.
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