Good morning, and welcome to H.B. Fuller's Fiscal 2020 Second Quarter Earnings Conference Call. All participants will be in listen-only mode. Please note this event is being recorded. I would now like to turn the conference over to Barbara Doyle. Please go ahead.

Good morning, and welcome to H.B. Fuller's fiscal 2020 second quarter earnings call for the fiscal quarter ended May 20, 2020. Our speakers are Jim Owens, H.B. Fuller President and Chief Executive Officer, and John Corkrean, Executive Vice President and Chief Financial Officer. After our prepared remarks, we will take questions. Please let me cover a few items before I turn the call over to Jim. First, a reminder that our comments today will include references to non-GAAP financial measures and references to organic revenue, which excludes the impact of foreign currency fluctuation and the impact of acquisitions and divestitures. On this call, unless otherwise specified, discussions of sales and revenue refer to organic revenues, and discussions of EPS, margins or EBITDA refer to adjusted non-GAAP measures. These measures are in addition to the GAAP results in our earnings release and in our Forms 10-Q and 10-K. We believe that discussion of these measures is useful to investors to assist in the understanding of our operating performance and the comparability of results with other companies. Reconciliation of non-GAAP measures to the nearest GAAP measure is included in our earnings release. Also, we will be making forward-looking statements during this call. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Many of these risks and uncertainties are, and will be exacerbated by the COVID-19 pandemic and any worsening of the global business and economic environment as a result. Actual results could differ materially from these expectations due to factors discussed in our earnings release, comments made during this call or risk factors in our Form 10-K filed with the SEC and available on our website at investors.hbfuller.com. Now, I will turn the call over to Jim Owens.

Thank you, Barbara, and welcome to everyone on the call. Last evening, we reported strong results for our second quarter. Solid revenue performance, lower raw material costs, restructuring savings and operational efficiencies across our business drove EBITDA of $101 million in the quarter, which exceeded our expectations. Cash flow also continued to be strong in the quarter, with year-to-date cash flow from operations up 40% versus last year. Our robust cash flow performance keeps us on track for our full-year debt paydown plan of $200 million. Our results reflect H.B. Fuller's leadership in the adhesive industry, the vital nature of adhesives in essential products, and the culture of collaboration we've created with employees, suppliers, and customers around the globe. The H.B. Fuller team proactively addressed challenges presented by the COVID-19 pandemic and gained market share while reducing costs and keeping employees safe as we successfully applied what we learned from the outbreak in China to our operations in the rest of the world. Throughout the quarter, all of H.B. Fuller factories were open and operational. By rapidly implementing health and safety protocols and business continuity plans around the world, we were able to successfully protect employees, maintain efficient operations, and deliver products to customers. We also found new ways to collaborate, internally and externally, and accelerate customer wins and internal productivity during this period. Over the past several years, we have invested in electronic and virtual collaboration tools that have proven invaluable during this period. We leveraged these investments to facilitate fast decision-making, maintain high levels of customer service, and develop new customer relationships. In several cases, we shortened the sales cycle through virtual product trials. Sales trends during the second quarter were in line with the expectations we provided in our Q1 call. Sales levels varied around the globe and by market segment, but overall were down in March, and weakened into April and then May, and have shown improving performance at the end of May and into June. We successfully met increased demand for certain markets in hygiene, health, and consumable adhesives, which were up 7% organically in the quarter, including double-digit growth in a number of end markets. HHC Adhesives sales surged in March, were strong in April, and moved back to more typical levels in May, as customers moved towards more normalized inventory levels. End markets in Engineering Adhesives experienced the biggest impacts related to the pandemic, reflecting the significant downturn in global production as countries locked down during the quarter. The biggest impacts were in transportation end markets and for construction-related goods such as insulation glass, panels, and woodworking. With positive volume growth in new energy in technical textiles, we expect improving sales performance in Engineering Adhesives in the third quarter as global production begins to ramp up. Construction Adhesives had a good start to the quarter in March, and activities slowed in April and May as contractors and distribution channels minimized inventory, given the reduced ability to access building interiors and overall uncertainty in the construction industry. As building permits have started to pick up in May, we are seeing increased project activity and order volume in June, especially in roofing. Results varied by geography, as China saw strengthening performance and an overall organic growth of 1% as performance strengthened in all segments throughout the quarter. Latin America and the Middle East felt the COVID impact later than other regions, and are not seeing a recovery in June. We expect these regions to see improved year-over-year trends later in Q3. Despite significant negative impacts from the pandemic on several end markets, our total organic sales declined by 7%, which we believe is better than the overall performance of our end markets. This performance reflects the broad diversity in our customer base and products, and our capabilities to meet technical adhesive needs of manufacturers around the world. Meeting the supply assurance and operational needs of our customers more effectively than competitors enabled us to increase share in several markets over the quarter, which will improve revenue performance going forward. In addition, benefits from raw materials, restructuring efficiencies, and rigorous cross-management supported strong EBITDA and cash flow. Raw material costs continued to move lower in the quarter, supporting Q2 margins and strong cash flow. We expect further declines in raw material purchase prices through the rest of the year. From a P&L perspective, this will deliver a more favorable benefit in the second half of the year. We reorganized into three global business units at the beginning of the year, which is helping us win with customers and execute more effectively. The organizational realignment is expected to generate $35 million of total annualized savings, of which $25 million to $30 million will be realized in 2020. We delivered $7 million of SG&A savings in the second quarter from these projects. We continue to proactively assess our business for additional efficiencies, and in the second quarter, we initiated a review of the company's manufacturing operations and supply chain, utilizing the support of an external consultant. The goal of this phase was to identify opportunities to streamline and improve efficiencies in our large facilities, to establish a roadmap towards site consolidation, and to accelerate our inventory reduction strategy to improve supply chain planning. Based on the specific projects identified, we are initially targeting $20 million to $30 million in manufacturing cost savings from these initiatives. We expect these savings to have a small impact in Q4 of this year, ramp up in 2021, and reach full-year run rate levels in 2022. We are also targeting an inventory reduction of approximately $25 million through these initiatives. We're in the process of finalizing these projects and will provide a more detailed view of savings, timing, and the cost required to achieve them during our third quarter earnings call, in September of 2020. As a result of the proactive steps we have taken to serve customers during the pandemic, to address new business opportunities, and to drive savings and efficiencies in our cost structure, we will be a stronger company, better positioned to grow as the global economy recovers. Now, I'll move on to our segment results in the second quarter, on slide four. Organic revenues in Engineering Adhesives declined by 20%, driven by the impact of COVID-19 among end market demand. Automotive and transportation-related markets were the hardest hit, while new energy and technical textiles showed good volume growth in the quarter. Adjusted EBITDA margin of 14.9% was lower than last year, driven by volumes, but up 250 basis points versus the first quarter on lower raw material costs and restructuring savings. We continue to see strong profitability improvements in Construction Adhesives despite construction activity being impacted by COVID-19. Organic Construction Adhesives revenue were down 15% in the quarter, with declines in both the roofing and flooring businesses. Retail channels remained strong for do-it-yourself activity, but contractor work decreased dramatically. Utilities and infrastructure business grew by mid-single digits. Construction Adhesives' EBITDA margin of 17.7% was up 140 basis points year-on-year, reflecting new product solutions and improved product mix related to last year's portfolio repositioning, as well as operational improvements from the restructuring. The underlying operational improvements in this business position us for strong margins in this segment as construction activity resumes. Organic sales in Hygiene, Health, and Consumable Adhesives were up 7% year-on-year in the quarter, with double-digit growth in hygiene, packaging, tape and label, and health and beauty. Some of the favorability early in the quarter was related to temporary inventory build; however, increases from changes in consumer behavior associated with more eat-at-home and work-at-home trends are expected to be longer lasting. We'd also note that some of the growth in Q2 is related to market share gains associated with being in a superior position to meet customer needs during the crisis, and that effect will also be longer lasting. HHC segment EBITDA margin of 14% improved 70 basis points year-over-year, driven by strong volume, favorable mix, lower raw material costs, and savings from the restructuring of the business. Our planning assumptions for the third quarter have been developed in an environment that continues to evolve and is difficult to predict. COVID cases are escalating in Latin America and India, and there is uncertainty of new case trends as other countries open up, and the recessionary impact of COVID is still unclear. Our core planning assumption is the COVID-related shutdown impacts will continue to abate, but recessionary forces will result in economic contraction in the third quarter, which will likely extend into the fourth quarter this year. We expect the second quarter will have the most acute impacts from COVID-19, with sequential improvements in the third and fourth quarters. Elevated demand for hygiene and health products, packaging, paper tissues, and towels will likely continue through the year as consumers continue to spend more time in their homes. HHC growth will moderate in the second half of the year from second-quarter levels as surge buying dissipates and manufacturers work down inventory levels. Strong revenue performance in construction adhesives during the first quarter continued into the early part of Q2 but slowed dramatically in April and the first part of May. Our forward orders for construction adhesives improved over the last month resulting in increased demand in June, and we expect this level to continue through the third quarter. In total, we forecast construction adhesive revenues in the third quarter will be down versus prior year, but down less than in Q2. Likewise, engineering adhesive demand has picked up throughout the last month. While we expect continued soft demand versus 2019, we are seeing improved top line and profit performance relative to Q2. Transportation-related industries will be weaker than other segments such as electronics, new energy, filtration, and textiles. We anticipate the demand for the transportation, durable goods, and construction-related markets will start to improve in the third quarter supporting sequential improvement in engineering adhesive volumes as we exit the year. Raw materials benefited margins in the second quarter, and we continue to plan for lower raw material costs over the rest of the year. This will be driven by supply-demand dynamics. Improving volume trends, lower raw material costs, and reduced working capital requirements will enable us to drive strong cash flow. This supports our plan to pay down debt $200 million this year and to pay a dividend of approximately $34 million which H.B. Fuller raised in April for the 51st consecutive year. While the economic backdrop continues to evolve, our new organization has enhanced our line of sight into our three businesses. This improves our visibility and fosters our bias for action. As we demonstrated in our first half results, we are executing our strategy well, our operations are nimble, and we have multiple levers to deliver strong results in a fast-changing environment. Now, let me turn the call over to John Corkrean to review our second quarter results and our outlook for fiscal 2020 based on these planning assumptions.

Thanks, Jim. I will begin on Slide 5 with some additional financial details on the second quarter. Net revenue was down 11% versus the same period last year. Currency and the divestiture of the surfactants and thickeners business had a combined negative impact of 4%. Adjusting for currency and the divestiture, organic revenue was down 7% with almost all of the decline related to volume. We started strong volume growth in HHC with organic sales up 7% year-on-year offset by the impact of COVID-19 on engineering and construction adhesives. Year-on-year adjusted gross profit margin was 27.7%, down versus last year on lower volume associated with COVID-19, but up 120 basis points versus Q1 on raw material savings and efficiency gains. Adjusted selling, general, and administrative expense was down 10% versus last year, reflecting actions related to the business reorganization announced last year, lower travel expense, lower variable compensation, as well as general cost controls. Adjusted EBITDA for the quarter of $101 million was above the high end of our planning assumptions reflecting slightly lower than expected raw material cost and higher expense reductions, including savings from our restructuring actions. Adjusted earnings per share were $0.68, also slightly higher than expectations reflecting lower than expected raw material cost, high expense reductions, and lower interest expense associated with our debt reduction actions and lower interest rates. Year-to-date cash flow from operations of $108 million increased by 40% compared with the first half of last year based on continued improvement in working capital performance. This allowed us to continue to reduce debt, paying off $45 million of debt in the quarter, slightly more than last year keeping us on track for our full-year debt pay down plan. Regarding our outlook based on what we know today and the planning assumptions that Jim laid out earlier, we anticipate revenue to be down 5 to 10% year-on-year and EBITDA to be between $95 million and $105 million in the third quarter as disruption and recessionary forces are offset by a continued decline in raw material costs, low SG&A, and restructuring-related savings. We expect cash flow to continue to be strong for the remainder of the year, given the lower expected working capital requirements associated with reduced demand, as well as higher anticipated raw material cost savings. This is allowing us to maintain our target to pay down approximately $200 million of debt during 2020, keeping us well ahead of our original deleveraging plan laid out in late 2017 with $40 million to $50 million of debt pay down expected in Q3. Additionally, we continue to have more than adequate liquidity to meet any foreseeable needs. This includes a $400 million revolving credit facility with a built-in accordion feature that allows us to upsize the facility by $300 million if needed. We also have ample room under our debt covenant, even using the most conservative scenarios. With that, I'll turn the call back over to Jim Owens for some closing comments.

Thanks, John. Our strong performance through the first half of this year is a testament to the importance and diversity of adhesives in our world, the agility of our team and the resilience of our margins and cash flows in recessionary environments. Our nimbleness and robust global operations have been crucial differentiators for H.B. Fuller during this crisis, and they will continue to be sources of competitive advantage going forward. We anticipated challenges and we responded to events quickly, activating alternate work arrangements, implementing health and safety protocols to ensure the protection of our employees and communities and reinforcing our supply chains. By doing so, we have been able to assure customer service and product deliveries, including considerable demand in the HHC segment. Customers know that H.B. Fuller delivers when they need us most, and we're a stronger company today than we were six months ago with a better focus, global coordination and lower cost to serve customers. Our new organizational alignment has improved our ability to respond rapidly to end market conditions, and efficiencies from the new structure will deliver $35 million in SG&A expense savings. We're driving additional productivity gains from the next phase of projects; this time to streamline operations and better leverage our global factory and distribution network and supply chain. We estimated an additional $20 million to $30 million in cost savings from these projects along with approximately $25 million of inventory reduction. This crisis has required us to work smarter and more creatively than ever before. We have leveraged our technology investment to deliver extraordinary levels of collaboration with customers during this period, and we continue to invest in our future, including innovative, sustainable adhesive solutions in each of our segments that help reduce packaging and waste, reduce energy requirements, and improve daily life. Significant social health and economic challenges remain ahead of us. H.B. Fuller is up to the task. We have proven our ability in these extraordinary times to serve our customers, outperform our competitors and deliver strong business results. We remain committed to ensuring delivery of adhesive for goods that are central to our world while taking actions that protect the health of our employees and extending support to build our communities as we solve the world's adhesion challenges. This period of change provides continued opportunities to differentiate H.B. Fuller as the world's largest dedicated provider of adhesives. We are well-positioned to continue creating significant value for our customers, our shareholders and other stakeholders by solving the world's adhesion challenges better and faster than our competitors. That concludes our prepared remarks today. Operator, please open up the call so we can take some questions.

We will now begin the question-and-answer session. Please remember to limit yourself to one question and one follow-up. Our first question will come from Ghansham Panjabi with Baird. Please go ahead.

Thank you. Good morning, everybody. I hope that each of you is doing well.

Good morning, Ghansham.

Hey, Ghansham.

I hope you're doing well too. Thanks.

Thank you, thank you. So I guess first off, maybe you could just quantify for us organic sales as the quarter unfolded in 2Q, and just give us a sense of what the run rate is thus far in June on a year-over-year basis? Would you be able to do that?

Yes, we're not providing that level of detail by month, but I want to be clear that we began seeing the impact of the shutdown in March, excluding China. Overall, things weakened in March, worsened in April, and May turned out to be the weakest month. However, we've established weekly metrics to analyze our performance on a week-to-week basis across all our businesses. As we concluded May and entered June, we noticed a shift in demand for the company. As I noted in my earlier comments, this trend is occurring globally. China is ahead of the U.S. by about two months and has shown consistent strength throughout the quarter. My previous comments mainly referred to North America and Europe, while regions like Latin America and the Middle East experienced a different trend, lagging behind the rest of the world by approximately a month to a month-and-a-half. We have provided a range of 5% to 10% growth for next quarter, based on significant visibility into this month, which we are already four weeks into. While we typically do not share weekly or monthly sales figures, I hope this gives you enough insight.

Yes, that's very helpful, thanks so much, and then just based on that, I guess I'm curious as to why wouldn't EBITDA for 3Q be better than in 2Q on an absolute basis? I mean I know HHC is moderating a little bit, but there should be some net mixed benefit just given the recovery in EA, restructuring savings, you talked about raw material costs being lower. I know there's a little bit of seasonality 3Q versus 2Q, but are there any other negative offsets we should consider?

Yes, I believe the main concern is seasonality, as you noted. We are focusing more on year-over-year comparisons, and the results are improving each week, which we expect to continue through this quarter. The mix is definitely becoming more favorable for us, although we are experiencing some moderation in HHC, as I mentioned. Therefore, HHC likely won't see a 7% increase as we approach Q3. I think it's the mix that will play out in that range, and John, perhaps you would like to add something regarding the EBITDA?

Yes, I think you hit all the key items, other than SG&A was probably a little bit lower than it will be in Q2 than it will be in Q3, just travel is down dramatically. So we do have some variable comp true-up that happens in Q2. So I think SG&A will be slightly higher in Q3 than Q2.

So, John, just to clarify, would decremental margin 3Q year-over-year be better or worse than what you delivered in 2Q?

Margins should be better in Q3 than in Q2. Gross profit margins and EBITDA margins should be similar.

Thanks so much. I'll turn it over.

Okay, thanks, Ghansham.

Our next question will come from Vincent Anderson with Stifel. Please go ahead.

Yes, good morning, and nice job on the quarter.

Thanks, Vincent.

I know you mentioned that you'll provide more details next quarter, but could you clarify your comments regarding site optimization and the increased cost saving target? Is this primarily about relocating production to enhance logistics, or is there a possibility of divesting some assets and possibly some lower margin product lines?

Yes, there's really three elements to the plan. The first is productivity improvements, especially in some key plants. So I think there's some learning and fundamentals around OEE downtime and productivity enhancements that's not only going to save us money but improve capacity, which helps us from a capital standpoint. The second piece is on asset consolidation. So some of that might be plant closures, and some of it might be consolidating production or product lines to certain facilities. So that's a second part of it, and then the third is our S&LP planning. Certainly, the move toward more of our facilities on SAP, and just some of the tools around the S&LP are things that we think we can leverage that are going to create a level of savings, but also help unleash some of that working capital that we see as an opportunity for us. So it's all three bucket, and obviously the first one will come sooner than the second one in terms of timing, but we're definitely looking at all three.

That's helpful, thank you. And then just if we could maybe get a little bit more detail on the improvement in construction margins. Just if you're willing to parse out some of the more sustainable savings from cost-outs and the new product mix after the lines that you exited in 2019 versus the raw material benefits and maybe some of the natural SG&A declines related to the lockdown, just in terms of what you think is very easily sustainable in a recovery versus what was a bit more countercyclical?

Yes, I'll provide a high-level overview, and John can share some specifics. The most significant change we've seen is a shift in our portfolio. In our construction business, we identified substantial opportunities for innovation and growth, which we pursued through strategic moves last year. Although this impacted our top line slightly, it ultimately strengthened our business. In Q1, we experienced organic growth and improved margins, and we are seeing similar trends this quarter, despite not achieving organic growth. Our company offers excellent innovations that allow contractors and individuals in the construction sector to complete specialized jobs more efficiently. This focus on growth opportunities has altered our growth profile. Boz and the team are actively identifying areas where we can deliver value in the market. Despite negative organic growth, we've implemented effective strategies in that business that contributed to our results, thanks to the innovations being introduced. Additionally, we achieved some savings in SG&A related to restructuring and minor activity changes, but the primary factor was a shift in our portfolio. Regarding raw materials, our business is less affected by petrochemical factors, so while there was some impact from raw materials, it was comparable to or even slightly less than what other businesses faced. John, would you like to add anything?

No, I believe your points are spot on. I think there is likely a more noticeable favorable mix effect in the second quarter. Flooring, which tends to have a lower margin, wasn't as robust as roofing. Additionally, there are some timing effects related to SG&A that I previously mentioned. Therefore, the margins we are currently observing are in line with what we expect to achieve over the long term. While we may not meet these margins every quarter, this range and slightly above it are what we anticipate for this business moving forward.

And that's very helpful. Thanks again.

Our next question will come from Jeff Zekauskas with J.P. Morgan. Please go ahead.

Thanks very much.

Good morning, Jeff.

Hi, good morning. Do you think your revenues will grow sequentially on an organic basis?

Sequentially on an organic basis? Yes, I think so. Yes, so I think we said the range is 5 to 10 this quarter, and there is some currency negativity in there, Jeff, so yes.

Yes, I would say the range we provided will be similar, though it may be slightly lower. However, considering currency fluctuations, it should ultimately be a bit better from an organic perspective.

Right. You talked about knocking out $25 million in inventory costs, but I was wondering from what base in that your inventories were $388 million, which were up year-over-year even though your organic sales were down 7. So like on a more normal basis here your inventories have been, I don't know, $355 million, and so your goal is to get to $320 million?

Yes, I'd say it's off a more normalized basis. The way we set the targets, Jeff, was we built an understanding of what we thought the year was going to progress, and then how we were going to improve off of what would have been improved in normalized levels of performance. So I think you're right, our inventories this quarter weren't at our normalized levels as we slowed down plants, and especially in EA tried to pull back to normalize levels, but yes, it's off normalized levels, not off of a Q2 level. That would be the way to think of it.

Okay. Do you think that it will be hard to grow in the hygiene business in the next fiscal year because of, you know, I guess, the unusual purchasing patterns this year, or do you think next year you can grow your hygiene business of whatever level you pretend to fiscal 2020?

I believe we will continue to see strong performance. The underlying performance of that business has consistently been good. It has gained more exposure in the HHC world since it was previously divided among three regions. We have a robust team in hygiene, and much of the growth in that business continues to come from emerging and developing markets. This presents a significant opportunity for us. Currently, there is reduced demand in regions like Latin America, India, and the Middle East, with noticeable demand destruction occurring. In some of these countries, there are slight increases, but in other areas, people struggle to afford basic necessities. Nevertheless, our team remains very strong, we have a compelling value proposition, and I anticipate that you will see good organic growth in that business, although not double-digit performance, thanks to the strength of our team.

Which raw materials have moved down for you that have been important?

Yes, so it's pretty broad base, Jeff. I think as you know, 87% of our materials are specialty materials. So, 13% are commodity materials; think of that as solvents, MBI, vinyl acetate monomer, and these things move, they're pretty volatile, right? So, those moved as oil prices moved down. The other 87% is really demand-driven, supply/demand-driven, and in this kind of environment, there's a lot of pressure on those materials through alternate materials. So it's pretty broad-based across the whole field of petrochemicals with some of the commodity materials going down faster and bouncing up to a more normalized level. John, do you want to add any color to that?

I think you've covered, and I think it is very broad-based.

Yes. And then lastly, what are your largest capital projects this year?

So we had, we're building capabilities in China around certain specialty materials, both in electronics and other materials. So, some of them we had told in the past, some of them we see as big growth areas. So we've got an expansion of our Yantai facility, and then the second large is in the Middle East, our demand a lot of it comes out of our facility in Egypt, which we had bought back in 2009, I think. So, it's an aging facility. So we're relocating and expanding our footprint in Egypt. So those are the two largest, but as you know, our business, Jeff, there's a lot of small projects that add up to our spend. So it's a million here. It's 200,000 here, it's 500, but those would be the two largest investments.

Okay, great. Thanks so much, Jim for all those answers.

Thanks, Jeff. Thanks for the interest.

Our next question will come from Mike Harrison with Seaport Global Securities. Please go ahead.

Hi, good morning.

Good morning, Mike.

Jim, can you talk a little bit about what you're seeing in terms of pricing? Typically in a deflationary environment, you would be passing some of these lower raw material costs back to customers, but I think you've also seen some expansion in areas where you're serving more specified applications, have more specified or specialized adhesives, and I'm guessing that the pricing there can be a little bit stickier. So what are you seeing in this current environment?

No, I think you understand our business pretty well, Mike. So we have about 15% to 20% of our business that's on some sort of an index, and that moves up and down as raw materials move up and down and then the other 80% is negotiated pricing and especially in those highly specified areas, we don't see a lot of price movement in those areas, and I would say generally, in this environment, supply assurance is what customers are looking for and we're providing a lot of that in the market. I mentioned in the comments, our team has done an outstanding job of making certain that every need, whether it was a surge need or specialty need or a new opportunity in some markets, products that used to be made in China got insourced for things like gowns or surgical masks and our team was able to respond quickly to those. So, I think around the business that supply assurance is really what people are looking for, but yes, generally not a lot of price pressure at this point.

All right. And then within the HHC business, I think I was a little bit surprised that given the strength of volume, that margin wasn't up a little bit more there given that volume strength, given some raw material tailwind, as well as the restructuring savings. So was mix a drag in there or what other factors should we keep in mind when we look at the margin performance in HHC?

Yes, it was a good margin performance, and while I agree that more would have been better, I will share your comments with the team. Perhaps John can provide some specific insights, as we do have a few details regarding what is contributing to it.

Yes, it's primarily mix, Mike just within the quarter, the mix of sales was towards slightly lower margin products, and some timing on costs too. So I think you're going to see that margin improve over the rest of the year.

Right, and then last question for me is you mentioned that mix in general for the company dragged a little bit on gross margin, was this primarily the engineering adhesives weakness and more of a segment level mix impact? You mentioned obviously, what's going on in HHC but what are some of the other mix factors that we need to keep in mind that played out in the quarter?

Yes, certainly the biggest one was engineering adhesives versus HHC. So I think we also have some pretty high margin businesses in construction that were off as well. So I think we did have, when you look at our margin, it was very strong for the quarter. That's with that negative mix playing into the factors and I think that's the biggest piece of it. John, anything you want to add on that?

That's exactly right. I mean there's a little bit of intra-segment mix impact, but the biggest one is lower revenue in CA and EA as a percentage of total.

All right, thanks very much.

Thank you, Mike.

Our next question will come from Eric Petrie with Citi. Please go ahead.

Hey, good morning, Jim and John.

Good morning. How are you there, Eric?

Good, good. So you have six manufacturing sites in China. I was just curious, can you talk a little bit about the split between consumption domestically and product that's for exports and how those two categories are faring?

Yes, absolutely there's a difference right. So, as you know, our business is made around the world in country for country and most of our China business is produced and consumed in China. So that part of the business that was domestically driven, whether it's hygiene, packaging, products that are used in the durable or engineering area by Chinese consumers was strong. We saw a bounce back in some of those areas and real solid demand, the business environment in many ways, the life environment in China is back to a new normal. That's very robust, and where we did see weakness was in some areas that are export-related. So a great example where we saw strong performance especially the second half of the quarter was Chinese Autos for China, where we're relatively strong, hygiene business relatively strong, but if we had a customer who made products in China that they shipped around the world, those were a little slower. So that would be just a high level. The other thing I'd say again, across the company, the performance that we're seeing, I think was really exceptional. So I'm not sure China's manufacturing environment if you took the last quarter was performed as well as we did, but our team has done a great job of being first and fastest. I think this whole strategy we employed to keep employees safe, educate them on what needed to happen, give them a sense of comfort, but also focus on customers and how we were going to do things differently played out in China as well, and that team's doing an outstanding job of finding opportunities and seizing them in this environment and that entrepreneurial spirit, I think helped the numbers as well.

Okay, and just as a follow-up, do you think the mix is like 70:30 or less than that, just trying to get a peg for how that correlates to the 1% growth rate?

Yes, I mean I'd be guessing, but I'd say it's more than 70% China for China, so whether it's 80% or 90% or higher but it's not 100%, it's not 70%. So pick 85% or 90%, I guess if you wanted to model it.

Okay, helpful. And then within construction adhesives, how much is tied to the retail channel, Lowe's Menards and were those volumes up?

Yes, so most of it is a contractor business for us. So we don't specifically say how much we do with each of those customers, but I think you want to think of our business as predominantly a contractor business with let me try and put a ballpark number on it. I'd say less than 10% going to the overall business going through those retail channels. John, does that sound right to you?

Yes, I think that sounds exactly right.

Okay. And then lastly a question maybe for John, how much were raw materials down on a percentage basis in 2Q and what are you expecting for a second half?

Eric, if they're down in sort of the 3% range kind of year-on-year, and I would say that we would expect that to be slightly higher in this back-half of the year; maybe 4%.

Helpful, thank you.

Thanks, Eric.

Our next question will come from David Begleiter with Deutsche Bank. Please go ahead.

Thank you. Good morning. You mentioned some share gains in the quarter, could you talk about where they were, maybe quantify the size and what drove those share gains?

Yes, I would say they were substantial. Thank you for the question, David. Yes, they are very widespread. This is fundamentally driven by our energy and collaborative culture. In a crisis environment, our team’s ability to collaborate and adapt has been impressive. We successfully identified opportunities due to a reliable supply chain, ensuring we didn’t let any customer down globally. While some competitors faced challenges, we managed to step up. These gains are likely to stick with us. Recently, we held five sales conferences where we shared various success stories about how our team worldwide has been using remote tools to win business, which was remarkable to witness. This reflects the usual ebb and flow of business, and it’s evident that our capability to connect with corporate accounts and decision makers for remote trials led to a series of notable successes during this quarter compared to previous ones. Additionally, we saw new wins stemming from new technology. Some regional competitors, who sell products globally, struggled with sourcing their products, either due to logistics or customer concerns regarding international shipments. We also identified new opportunities, such as surgical gowns produced in the U.S., which our team was quick to pursue, highlighting an ongoing need for such products that were traditionally made overseas. Moreover, we’ve had success with a disinfectant previously used in our infrastructure business, which is now recognized as a CDC EPA approved product. This product, effective against coronavirus, has created new demand for us. Lastly, the first and fastest approach we discovered in China is applicable elsewhere as well. Those are the five primary categories. I could detail numerous wins, but the essence is that across our 28 segments, I found successes in all but automotive, which essentially shut down. Even there, I’m confident our team could find some wins. It's a broad-based achievement.

Very impressive. Hi, Jim, just on the cost side, everything about this latest cost action. I feel if you take a step back and look at the Royal cost synergies that the business realignments savings and now these are global operations savings. Is this the last piece of the puzzle for Fuller, and if it is how should think about incremental margins as things normalize given the costs you've removed from the entire portfolio.

Yes. I'll let John quantify that number, but there is never a final piece. There are always more opportunities to pursue. I believe this operations segment is likely to be larger than the projected $20 million to $30 million in the long term, but we've identified about six projects that we will focus on and deliver here in 2021. It will commence in Q4, but there will always be additional opportunities. The key point from your question is that we are positioning ourselves to enhance our incremental margins. As growth occurs, regardless of when it happens, we are in a strong position to capitalize on it and improve our bottom line due to all the efforts we have made on the cost side. These incremental margins stem from the business we've developed following the Royal acquisition and the restructuring efforts in construction, along with an HHC business that is undergoing a shift in focus. Our healthcare business is contributing significantly to improving incremental margins when growth occurs. Do you have a number that you would like to share with David, John?

Well, I think I would just, David, you remember when we announced the Royal deal and we talked about synergies, we didn't have a very big number associated with manufacturing, right? I think our focus was delivering procurement synergies, SG&A synergies, and then making sure we integrated the business and kept it running well, and I think that served us very well particularly in this period, but I think we always knew that there was an opportunity to come back and find more manufacturing savings, and so I don't know if it's the last, but I think this is sort of the next logical step in terms of the process with the Royal integration.

That's very helpful, John. And just lastly, John, just on working capital can you remind us of your targets this year for working capital, I guess source of cash?

Yes. We have approached this by looking at it as a percentage of revenue. Our target is to reduce working capital by a hundred basis points as a percentage of revenue for the full year. This should lead to a larger cash source, especially with the expected decrease in revenue. Our focus has always been on this percentage rather than a specific dollar amount, as we adjust based on the company's revenue.

Thank you very much.

Thank you, David.

Our next question will come from Rosemarie Morbelli with G Research. Please go ahead.

Thank you. Good morning, everyone.

Good morning, Rosemarie.

Good morning, Rosemarie.

I was wondering if you could give us a little more details as to how you are benefiting from all of your technology investments, which give you new ways to cooperate with customers. Can you share some more details on that?

Yes. They fall into a number of different buckets, Rosemarie. We set up quite a while ago remote customer service centers so that people could work remotely and serve our customers in case of any kind of emergencies. Of course, this was a huge dynamic that happened. So having that competency immediately allowed us from a supply chain standpoint to get the work done. With respect to customers, we invested in a technology called Google Glass that enabled us to visually have our technology experts see what the customer is seeing on their lines. So, a lot of times in our business the nuance of where the adhesive is right at that point of contact is really important. So we lets fly somebody halfway around the world to see that. So we invested in this technology, so that we'd be able to get the eyes of the experts right on the line. We certainly leveraged that technology during this. I think one of the things that was really helpful for us, Rosemarie, is our ability to use WebEx and other video conferencing tools. This has been a normal part of life at Fuller because we're such a global coordinated business. So that technology is one that we didn't just use. We had perfected how to use it and how to collaborate on it. So it was very natural for our team to not only do it, but also then start sharing it with customers. We train numbers of customers on ways to collaborate with us during this process that drove different levels, and then finally, I think the collaboration information sharing tools that we have are ones that we embedded in our systems and leverage. So those are the four categories. There is more specifics in there, but video is very powerful. Google Glass is very powerful for customers, and then importantly, this culture that we have of collaboration enabled I think those tools.

Okay, thanks. And then I was wondering, so you have been gaining share, right, because you are able to supply your customers better than some of your smaller competitors. So when the economy returns to normal, whatever the new normal is going to be, do you think that you could lose those new customers as the small competitors decide to lower price in order to gain it back?

Yes, Rosemarie. I think this is a fundamental shift in how people are working and we are really well-positioned to take advantage of it, and we're proud of the results of this quarter, but what I'm most proud of is how we've positioned ourselves from a growth and leveraging these wins into the future. So this new way of working is changing at our customers; it's changing in the market, and we are very focused not just on delivering great results in Q3 or during this pandemic, but how do we transform how we are better out there in the market using remote technical service, using remote tools combined with face-to-face tools. So the short answer is, no Rosemarie, I don't really feel this is a threat. I think this is just the beginning of leveraging what we've done and what we've learned. I'm really excited about that how we're managing through this, but also how it's changed in our company to be more capable and more aggressive.

All right, that is very helpful. Thanks. And then one last question if I may. You had given 2020 targets for HHC margin of 18%, construction 20%, and engineering and adhesives 22%. So I realize that this has been pushed out. Do you think that you can achieve those by year-end 2021, or do you need a next to a year in order to get to those targets or maybe more?

Yes. I think we have laid those out as long-term targets, Rosemarie, without a specific date on them, but I think when it comes to 2021, we are doing the planning right now for 2021. We've laid out four scenarios in terms of what could happen out there in all of those scenarios. We see ourselves being stronger than we were in 2019, and we have a lot of leverage to get there if the world picks up; we've got some good growth opportunities, and if for whatever reason things are in a negative kind of world next year as well, I think we have to leverage the pull to help us deliver the results we are. So we're mapping out multiple scenarios. We're monitoring the world just as we did this quarter. We're now looking out at 2021 and making certain that we deliver what our shareholders expect, which is growth on the bottom line.

All right, thanks very much.

Thanks, Rosemarie.

Thank you, and that will conclude our question-and-answer session. I would like to turn the conference back over to Jim Owens for any closing remarks.

Thanks everyone for your time and attention today. We appreciate your support. Certainly very proud of the results of our team, but most importantly, what we are building for the future. Please keep yourselves and your families safe as we are doing as the top priorities are our employees, and again, thanks for your interest in H.B. Fuller.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.