H.B. Fuller Company (NYSE:FUL) Q1 2024 Earnings Call Transcript March 28, 2024
H.B. Fuller Company isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day. My name is Ellie, and I will be your conference operator today. At this time, I would like to welcome everyone to H.B. Fuller First Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Steven Brazones, you may now begin the conference.
Steven Brazones: Thank you, operator. Welcome to H.B. Fuller’s first 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. We’re off to a good start to the year with first quarter financial results largely consistent with our expectations. Our team is maintaining commercial discipline, proactively innovating to create win-win opportunities for our customers and pricing to that value, while also driving restructuring savings and synergy realization on the 2023 collection of acquisitions. We continue to proactively respond to changing business dynamics to drive strong adjusted EBITDA growth, margin expansion and robust cash flow. Looking at our consolidated results in the first quarter, organic revenue declined 4% year-on-year due to anticipated pricing adjustments and slightly lower volume.
The impact from pricing was in line with our expectations and primarily represents index-based pricing adjustments. In the first quarter, the year-over-year impact from pricing was similar to Q4 while volume declined slightly year-over-year driven principally by HHC’s hygiene market segment. From a profitability perspective taking into consideration that our first quarter is always our lowest margin quarter of the year due to the seasonality of our business, we performed very well. We grew adjusted EBITDA 12% year-on-year to $123 million, expanded adjusted EBITDA margin by 160 basis points year-on-year to 15.2% and grew adjusted EPS by 22% year-on-year. On balance, global economic conditions remained similar to last quarter. Manufacturing activity continues to be subdued, evidenced by PMI readings below 50% for more than a year in both the United States and Europe.
Our outlook assumes manufacturing activity will be weak through the end of the year. However, from a year-on-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. In this slow growth economic environment it is essential that we continue to innovate and price to value, leveraging the vast set of tools and capabilities we’ve created to continue to expand our margins. Our customers have increased their focus on developing lower-cost versions of their products to better suit the market environment. And we play an important role in bringing robust bonding solutions that enable their success. We also leverage our reformulation capabilities to develop solutions that help lower our customers’ costs, while maintaining or improving our margins.
Now let me move on to review the performance in each of our segments in the first quarter. In HHC, organic revenue was down 9% year-on-year due to lower volume and anticipated index-based pricing adjustments. Pricing was down mid single-digits as expected. Excluding hygiene, HHC volume was flat year-over-year and has continued to strengthen sequentially over the past three quarters. The decline in hygiene volume reflects our customers adjusting their inventory levels to take into consideration lower than forecasted demand, our exit of lower-margin business, and disruption in certain emerging markets due to currency controls and restrictions. HHC’s responsible pricing actions focus on reliability and innovation, and selective pursuit of profitable growth opportunities in its leveraged market segments enabled it to increase adjusted EBITDA 4% and increase adjusted EBITDA margin by 130 basis points year-over-year despite lower organic revenue.
In engineering adhesives, organic revenue declined 2% in the first quarter. Strengthened the electronics and automotive market segments was offset by slower demand in the woodworking market segment. Overall, the diversification of EA’s portfolio has resulted in relatively strong and consistent volume performance despite the challenging global manufacturing environment. Adjusted EBITDA increased 5% in EA and adjusted EBITDA margin increased 90 basis points year on year to 15.9%. Favorable net pricing and raw material cost actions and restructuring benefits drove the increase in adjusted EBITDA margin year-on-year. In construction adhesives, organic sales increased 10% year-on-year. The absence of customer destocking and the expectation for a return to a more normal construction season in North America benefited CA during the quarter.
Roofing was particularly strong with organic sales increasing more than 20% year-on-year. Adjusted EBITDA for construction adhesives increased nearly $7 million versus the first quarter of last year and adjusted EBITDA margin expanded 530 basis points to 8.4%. Net price and raw material cost management, improved volumes and restructuring savings drove the improvement in adjusted EBITDA margin year on year. Recall, the first quarter is CA’s seasonally lowest volume and thus seasonally lowest EBITDA margin quarter. Geographically, America’s organic revenue declined 2% year-on-year driven by HHC which declined 8% versus the prior year in the America’s region. HHC organic revenue was adversely impacted by some lingering destocking activity as well as volume declines in hygiene.
EA and CA combined achieved organic revenue growth of more than 4% year-on-year in the first quarter in the America’s region. In EIMEA, organic revenue decreased 13% versus the first quarter of last year with all GBUs experiencing similar magnitude declines. Economic conditions have deteriorated in Europe reflecting overall cost of living challenges on consumers purchasing power. In addition, volume in EIMEA was adversely impacted by developments in Egypt and the broader Middle East region due to currency restrictions and continued political uncertainty. In Asia Pacific, organic revenues increased 2% year-on-year, strength in China which achieved a mid single-digit increase in organic sales more than offset weaker demand throughout the rest of the region.
We continue to remain optimistic about our business in China with no direct exposure to the Chinese construction market and strong representation in the electronics and automotive market segments. We’re encouraged by what we’re seeing and while we expect some uneven market activity over the near term, we will continue to grow through innovation share gains in our select markets of choice. Now, let me turn the call over to John Corkrean, to review our first quarter results in more detail and our outlook for 2024.
John Corkrean: Thank you, Celeste. I’ll begin with some additional financial details on the first quarter. For the quarter, revenue was up 0.2% versus the same period last year. Currency had a negative impact of 0.6% and acquisitions increased revenue growth by 5%. Adjusting for those items, organic revenue was down 4.2% with volume down 0.9% and pricing down 3.3% year-on-year in the quarter. Adjusted gross profit margin was 30.1%, up 320 basis points versus last year, as the net effect of pricing and raw material actions and restructuring savings more than offset the impact of slightly lower volume. Adjusted selling, general and administrative expense was up year-over-year as expected with acquisitions driving 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 $123 million was up 12% year-on-year, reflecting the net positive impact of pricing and raw material cost actions, restructuring savings and the favorable contribution of acquisitions. Adjusted earnings per share of $0.67, was up 22% versus the first quarter of 2023, driven by strong operating income growth. Operating cash flow in the quarter improved significantly year-on-year as higher margins, lower working capital requirements and favorable accrued compensation more than offset the lower organic revenue. Strong growth in EBITDA and cash flow resulted in a net debt to EBITDA of 2.8 times at the end of the first quarter, down from 3.3 times at the end of the first quarter of last year and 2.9 times at the end of 2023.
With that, let me now turn to our guidance for the 2024 fiscal year. As a result of our good start to the year, which was largely consistent with our expectations, we are reiterating our previously communicated financial guidance for fiscal 2024. Net revenue growth is expected to be in the range of up 2% to 6%, with organic revenue flat to up 3% year-on-year. Adjusted EBITDA is expected to be in the range of $610 million to $640 million, equating to growth of approximately 5% to 10% year-on-year. Combined, these assumptions result in full year adjusted EPS in the range of $4.15 to $4.45, equating to year-on-year growth of between 7% and 15%. We continue to expect full year operating cash flow to be between $300 million and $350 million weighted toward the second half of the year.
Finally, based on the seasonality of our business, we would expect second quarter EBITDA in the range of $145 million to $155 million. Now, let me turn the call back over to Celeste to wrap this up.
Celeste Mastin: Thank you, John. As the market leader in innovation, we have the privilege of collaborating with some of the most exciting and forward thinking companies in the marketplace. Companies that think differently, act differently, and exhibit the courage to take a risk to improve our world. Next month, we will be launching the inaugural H.B. Fuller Customer Innovation Awards. We are proud to publicly recognize the most outstanding customer innovations during the previous year that were enabled by our adhesive technology. We look forward to celebrating with these customers and continuing to innovate to support their objectives. Keep an eye on our social media platforms and our website for the official announcement to learn who will be named our winners.
In conclusion, we are off to a good start to the year and we are pleased with our results in the first quarter. Our teams are executing well in a challenging environment and continue to demonstrate discipline in balancing changing price and raw material cost dynamics, drive acquisition synergy realization and deliver meaningful cost savings from restructuring initiatives to drive growth in adjusted EBITDA. As we look ahead, we remain on track for another year of strong profit growth, continued margin expansion and improved volume trends in fiscal 2024. We will continue to strengthen the portfolio through targeted organic investments and new highly synergistic strategic acquisitions, and we are confident in our ability to achieve our long-term growth and profitability goals.
That concludes our prepared remarks for today. Operator, please open the line for questions.
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