Fuller H B Co Q4 FY2022 Earnings Call

Good morning. My name is Chris, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the H.B. Fuller Q4 2022 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. Thank you. Steven Brazones, Vice President of Investor Relations, you may begin.

Thank you, operator. Welcome to H.B. Fuller's fourth quarter 2022 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?

Thank you, Steven, and welcome, everyone. Before we begin to discuss our results for the fourth quarter and fiscal year, I would first like to thank the many team members I have engaged with throughout my travels over the last several months. You have been so hospitable and have smoothed my transition here into my role as CEO. Your enthusiasm and passion for our business is energizing, and I appreciate your drive and devotion in serving our valued customers each and every day. Thank you. In fiscal year 2022, we delivered exceptional financial results, driven by market share gains, responsible pricing actions, and diligent execution of our strategy. We delivered strong double-digit growth in organic revenue, adjusted EBITDA, and adjusted EPS. This is particularly impressive given the significant headwinds we endured from continued raw material cost inflation, supply chain disruptions, a strengthening US dollar, and substantially higher interest rates. For the year, we grew organic revenue by 17%, with strong organic revenue growth in all three GBUs, EBITDA by 14%, and adjusted EPS by 15%. We also delivered another strong cash flow performance with operating cash flow up 20% year-on-year. I am very proud of the team's resilience and determination in executing our winning strategy to deliver these impressive results in spite of a very difficult operating backdrop. At the same time, we recognize that we did not finish the year as strong as we had expected. During the fourth quarter, we experienced an accelerated slowdown in demand in Construction Adhesives, driven by inventory destocking actions by our customers. While we were expecting demand to decline sequentially in Construction Adhesives and had a very difficult comparison versus the fourth quarter of last year, destocking actions were more pronounced and faster than we were anticipating. In addition, more aggressive COVID-related shutdowns in China rather than an easing in such measures negatively impacted growth in our Asia-Pacific region. This was unexpected and contrary to the strengthening demand trend we saw in the first three quarters of the year. And lastly, the US dollar, which had already strengthened quite considerably throughout the first three quarters of the year, strengthened even further during our fourth quarter. These challenges adversely impacted our revenue and EBITDA growth, and our financial results fell below our expectations for the fourth quarter. While disappointing, our underlying business remains very healthy, and we believe the conditions negatively impacting demand in Construction Adhesives will abate over time. Overall, given the diversity of our geographic and end market exposure, our pricing execution in 2022, and the expectation of lower raw material costs, we are well-positioned for continued strong profit growth and margin expansion in 2023 and beyond. Looking at our consolidated results in the fourth quarter, organic revenues increased 6% year-on-year. This was driven by strong organic growth in both Hygiene, Health and Consumable Adhesives and Engineering Adhesives. The strength of these two business units more than offset the weakness in Construction Adhesives. Responsibly strong pricing actions taken throughout the year drove the organic growth in the fourth quarter. From a profitability perspective, despite the challenging financial results in Construction Adhesives, we again achieved sequential EBITDA margin expansion in the fourth quarter, marking the third consecutive increase in adjusted EBITDA margin this year. On a year-over-year basis, adjusted EBITDA was up 5% in the fourth quarter to $141 million, and adjusted EBITDA margin remained stable year-on-year at 14.7% despite significantly higher raw material costs. Now, let me move on to review the performance in each of our segments in the fourth quarter. In HHC, organic revenue was up 12% year-on-year, with most end markets achieving strong double-digit organic growth. Beverage labeling, hygiene, packaging, tissue and towel, and health and beauty markets were particularly strong. HHC's pricing actions offset lower volume and drove organic revenue growth in the quarter. Adjusted EBITDA for HHC increased 5% year-on-year. Adjusted EBITDA margin decreased year-on-year due to higher raw material costs and lower volume. In Engineering Adhesives, organic revenue increased by 9%, led by exceptionally strong growth in automotive and insulated glass. Strong pricing actions and higher volume drove EA's organic growth. Adjusted EBITDA increased 23% in EA and adjusted EBITDA margin increased 240 basis points year-on-year to nearly 18%. Pricing actions and expense management drove the improvement year-on-year and offset the impact of significantly higher raw material costs. In Construction Adhesives, organic sales declined 20% year-on-year due to customer destocking activities and more challenging economic conditions. The prior year's fourth quarter benefited from the post-COVID demand surge in construction markets, which has since reverted given the current economic backdrop. The decline in organic sales was driven principally by a slowdown in the roofing market. Adjusted EBITDA for Construction Adhesives declined in the fourth quarter, driven by lower volume and higher raw material costs. Geographically, Americas organic growth was up 3% year-on-year, significantly impacted by the decline in Construction Adhesives. Organic growth, absent Construction Adhesives, was up double-digits in the Americas in the fourth quarter. In EMEA, organic revenues increased 13% versus the fourth quarter of last year. Weak economic conditions in the region persisted but did not worsen sequentially versus the third quarter. In Asia Pacific, organic revenues increased 3% year-on-year. More severe COVID-related lockdown restrictions in China negatively impacted sales development for the region, and this was contrary to the strengthening trend we experienced during the second and third quarters of 2022. Overall, global economic conditions have slowed throughout the year, largely as we expected, but for Construction Adhesives, reflecting customer inventory reductions and slowing end market demand. Europe remains weak, and an expected rebound in China has been delayed. Macro conditions in the Americas are also slowing as the impacts of higher interest rates begin to temper demand. Construction Adhesives is being disproportionately impacted in the short-term, given the economic sensitivity of this sector and heavy customer destocking activities. Both HHC and EA are weathering the challenging economic situations well, aided by their diverse geographic and end market exposures. While the economic outlook poses challenges, we are prepared and well-positioned to control expenses, expand margins, and grow cash flow in such an environment. We are beginning to see the rate of aggregate raw material cost inflation slow, and we expect this to continue as we progress throughout the year. Generally, it takes about a quarter for changes in raw material costs to cycle through inventory and impact the P&L. While aggregate raw material cost inflation is beginning to taper, it's not universal. The preponderance of our raw material purchases in November were at the same or higher prices than in the month of October. Accordingly, we continued to increase prices in the fourth quarter, and additional price increases are planned in 2023. The value we generate for our customers as a solutions provider, as reflected in our pricing performance, together with the diversity and scale of our raw material purchases will enable us to expand margins in an environment of declining raw material cost inflation. Following two years of unprecedented supply chain disruption and significantly higher raw material costs, this provides us with a meaningful opportunity to further expand EBITDA margin in the year ahead. Now let me turn the call over to John Corkrean to review our fourth quarter results in more detail and our outlook for 2023.

Thank you, Celeste. I'll begin on Slide 5 with some additional financial details on the fourth quarter. For the quarter, revenue was up 7% versus the same period last year. Currency had a negative impact of 8.7%. Acquisitions increased revenue growth by 1.6%, and the extra week compared to last year positively impacted revenue growth by 7.5%. Adjusting for those items, organic revenue was up 6.4%, with pricing having a favorable impact of 11.4% year-on-year in the quarter and volume down 5%, reflecting a slowdown in end market demand, particularly in Construction Adhesives and softness in China due to COVID-related lockdowns. Adjusted gross profit margin was 26.2%, down 90 basis points versus last year, as raw material inflation and lower volumes more than offset significantly higher pricing. Adjusted selling, general, and administrative expense was down slightly year-on-year and adjusted SG&A as a percentage of revenue declined 130 basis points, reflecting strong pricing gains, lower variable compensation, and overall good expense management. Adjusted EBITDA for the quarter of $141 million was up 5% versus last year, reflecting strong pricing actions, lower SG&A, and the impact of the extra week, which more than offset significantly higher raw material costs and unfavorable foreign currency translation. Adjusted earnings per share of $1.04 was down slightly versus the fourth quarter of 2021 and driven by the unfavorable impact of foreign currency and significantly higher interest rates. Adjusting for unfavorable foreign exchange, which negatively impacted EPS by approximately $0.22 in the quarter, adjusted EPS was up 15% year-on-year. Cash flow in the quarter was strong. Cash flow from operations of $208 million was up $156 million year-on-year, reflecting higher profit, reduced working capital requirements, a one-time gain on the maturity of a cross-currency swap, and the impact of the extra week. Our results for the full fiscal year were also very strong. Full year organic revenues grew 17% versus fiscal 2021, reflecting outstanding pricing execution. Adjusted EBITDA increased by 14% year-on-year and adjusted EPS was up 15%. With that, let me now turn to our guidance for the 2023 fiscal year. Our geographic and end market diversification is an asset in recessionary time periods and provides us with a meaningful buffer to the volatility in demand in any one particular market. As we assess the economic sensitivity of our portfolio with the conditions present in the marketplace today, more than half of our portfolio has little sensitivity and is well insulated from significant swings in demand. Only about 20% of our portfolio would be more highly influenced by economic conditions, but the drivers impacting recessionary sensitivity will generate different outcomes amongst the end markets. Our diversification will serve us well as we manage through what we expect to be challenging economic conditions in 2023. Based on what we know today, we anticipate full year net revenue to be flat to down 3% versus 2022 and organic revenue to be up 2% to 4%. We expect foreign currency translation to negatively impact revenue by 3% to 4% versus 2022. Fiscal year 2023 will be a 52-week year compared to a 53-week year in 2022, which will unfavorably impact year-on-year revenue growth by approximately two percentage points. We expect adjusted EBITDA to be between $580 million and $610 million, representing a 9% to 15% year-on-year increase, up 11% to 17%, adjusting for the extra week in 2022 as the benefits from net changes in prices and raw material costs and strong expense management more than offset unfavorable foreign exchange. We expect our 2023 core tax rate to be between 27% and 29% compared to our 2022 core tax rate of about 27%. We expect full year interest expense to be $115 million to $125 million, reflecting higher interest rates, and we expect average diluted share count to be about 55.5 million shares. These assumptions result in full year adjusted earnings per share in a range of $4.15 to $4.55. Finally, we expect full year operating cash flow to be between $300 million and $350 million before approximately $120 million of capital expenditures. Based on the seasonality of the business, and the timing of working capital needs, we expect operating cash flow to be weighted to the second half of the year. All of this guidance reflects the fact that H.B. Fuller will have one less reporting week in fiscal 2023 compared to 2022. We estimate that extra week will have an unfavorable impact on full year revenues of approximately 2% compared with full year 2022 and an unfavorable impact on full year EBITDA of approximately $10 million versus 2022, all occurring in the fourth quarter. Taking into consideration low construction demand in the first half of the year and continued disruptions in China as well as the typical seasonality of the business, we expect first quarter revenue to be down low to mid-single digits and to realize approximately 17% to 18% of full year EBITDA in the first quarter. Now, let me turn the call back over to Celeste to wrap us up.

Thank you, John. Since becoming CEO at the beginning of December, I have grown even more optimistic about our future. We have tremendous potential for continued organic growth and margin expansion, and I have confidence in our strategy and ability to achieve our long-term financial goals. As we begin 2023, we do so having successfully expanded EBITDA margin sequentially over the last three consecutive quarters, and we are entering an environment that will be more conducive to further margin enhancement. We have many competitive advantages to leverage, particularly in the current economic environment in addition to our ability to innovate with customers to serve their needs. We have pricing discipline, robust product substitution capabilities, and a demonstrated ability to execute. Each of the last three years has brought unique and extraordinary challenges, including a pandemic, a conflict between Russia and Ukraine, unprecedented supply chain disruptions with raw material cost inflation, and a significant strengthening of the US dollar. And in each of the last three years, H.B. Fuller has stepped up to those challenges and delivered for our customers, our employees, and our shareholders, while consistently outperforming the competition. We expect 2023 to be no less challenging, but we are confident in our team's abilities and resolve – and we believe, based on the improvements that we've made in our business over the last several years and our ability to bring innovation to the diverse set of end markets we serve, that we are well-positioned to continue to drive growth and expand margins while delivering outstanding cash flow. That concludes our prepared remarks for today. Operator, please open the line for questions.

Thank you. Our first question is from Ghansham Panjabi with Baird. Your line is open.

Yes. Thanks. Hello, everybody. And, Celeste, congrats again on your new role.

Thanks, Ghansham. How are you?

Yes. Good. Thank you, thank you. So, I guess, destocking seems to be a pretty common theme so far this earnings season. You called out Construction Adhesives, which I guess fits with intuition. But what about the other segments, HHC and even EA? And the reason I ask is, many of the CPG companies that are starting to report, they're reporting pretty significant declines in volumes as well. So I'm just curious as to the risk associated with destocking becoming more pronounced for the other segments as well?

Yes, that's a great question, Ghansham. It absolutely is. In HHC during the fourth quarter, we noticed significant destocking. It's somewhat unusual for the consumer product business, but yes, that is definitely the case.

Got it. And what about EA?

Not so much there. Interestingly enough, we did see our volumes impacted in EA because of this slowdown in China. Over Q2 and Q3, we saw mid-single-digit increases in growth in China. That was not the case in the fourth quarter. Fourth quarter was flat. Our EA business, certainly, that took some wind out of their sales as it relates to volume, but we did not see big destocking actions in EA.

Got you. And then, maybe a question for John on the EBITDA bridge between fiscal year 2022 and 2023. I know you gave some parameters about the loss of the week and FX, but what about the other components in terms of volumes and price cost, et cetera?

Yes, what we mentioned earlier is that due to our pricing actions in 2022, we have a significant pricing carryover into 2023. We are beginning to see a decline in raw material costs. It's important to consider these two factors together, as they are the primary drivers of our profit growth. We estimate that the combination of pricing carryover and easing raw material costs will contribute between $130 million and $160 million to our profit growth in 2023. This growth will counterbalance the challenges we face, such as slightly lower volume, unfavorable foreign exchange impacts, an extra week, and typical inflation affecting wages and other expenses, which together amount to about $80 million. This is how we arrive at that projection.

Awesome. Thanks so much.

Thanks, Ghansham.

The next question is from Mike Harrison with Seaport Research Partners. Your line is open.

Hi. Good morning.

Hey, Mike. How are you?

Hi, Mike.

Doing well. Thank you. Happy New Year. I wanted to ask a different question regarding the earnings progression. If my calculations are correct, it seems you are suggesting an EBITDA of $100 million to $110 million for the first quarter. I'm trying to understand what gives you the confidence that the rest of the year must demonstrate significant growth. Are you currently seeing declines in raw material costs? Could you discuss your confidence in achieving better earnings as we move through the year? Is this primarily driven by favorable raw material trends?

Thank you for the question, Mike. You're right in your estimation of what EBITDA looks like in the first quarter. We do expect it to be around 17% to 18% of our full year EBITDA, which would be similar to last year. This percentage is slightly lower than our usual first quarter, where we typically see around 20% of the full year EBITDA. We are experiencing some lingering effects from the fourth quarter. In December, which was part of our P1, we noticed that the month resembled Q4. However, with the new year starting, we're beginning to see some improvements. Regarding raw materials, they are currently stable. We experienced flat prices in Q3 compared to Q4. Looking at Q4 this year against the previous year, we are still seeing increases. We anticipate reaching a turning point for raw materials this year, but we haven't experienced it yet. John, would you like to add to that?

Yes, that's correct. The main influence will come from raw dynamics. Another factor to consider is the exchange rate. The dollar strengthened throughout 2022, and in my earlier comments, I mentioned that there was about a $0.20 unfavorable impact in the fourth quarter. As we move through 2023, this will become less of a challenge, and if exchange rates remain stable, it could even turn into a slight advantage. So, those are the primary factors I would highlight: the raw material dynamics and foreign exchange.

Perfect. And then in terms of the Engineering Adhesives business, obviously, very nice performance there. Was there anything unusual or maybe more onetime in nature that drove that margin strength that we might worry about reversing at some point in 2023. I guess maybe my way of asking what you expect margins to look like in that business as we get into next year.

Yes, we are very excited about our EA business. We have continued to refine the portfolio, focusing particularly on highly specified applications that have higher EBITDA margins. To address your question, there was nothing one-time or temporary; this was intentional, and it's beginning to show results, which is encouraging. Looking ahead to 2023, EA is significantly impacted by the situation in China. We anticipate sluggish growth in China for the first half of the year, but we expect this business to pick up momentum as the year progresses.

All right. And if I can sneak one more in. On pricing, it looks like if I do the math, that the two-year stack, if I look at Q3 and Q4, were both up around 25%. And so my question is, did you get any sequential pricing, or was pricing pretty flat in Q4 versus Q3?

Yes, we achieved $50 million in pricing in the fourth quarter. As we look ahead to 2023, particularly in the early part of the year, it's crucial to consider pricing and raw materials as a single category. We estimate that there's between $130 million to $160 million of value in this combined area. There will be many fluctuations. Our top 25 raw materials represent less than 20% of our total raw material costs. We are still implementing price increases in cases where raw materials continue to rise. Additionally, new product launches may complicate this picture. Overall, we believe that both raw material costs and pricing will contribute to incremental EBITDA. If raw material prices do not decrease, we will need to keep raising prices, which we have reliably done in the past. Conversely, if raw material prices decline, it suggests a mildly recessionary climate, which can actually benefit our business since that's when our customers need our support the most. We can assist them in changing substrates in their products to save more money compared to altering their adhesive choices. Therefore, we are optimistic about the year ahead and encourage you to consider pricing and raw materials as one unified category as we proceed.

Excellent. Makes sense. Thank you very much for answering my questions.

The next question is from Vincent Anderson with Stifel. Your line is open.

Yes. Thanks and good morning. I wanted to maybe dig in on that last comment that you made, Celeste, because it really feels like you have sort of a dual strategy where ideally, you're an important technical partner to your customers and trying to increase the value add of your portfolio. But in an environment like this, you're also trying to maintain a portfolio that offers customers that maybe you're prioritizing costs an opportunity to trade down. But hopefully, without you suffering a margin hit. So I'm just trying to get a sense for, first, how have conversations with customers drifted between those two types of commercial interactions recently? And do you have a sense for how much of your portfolio you feel like today you could protect with a lower-cost product before suffering either a margin mix hit or just having to decide whether or not to participate at all?

Yes. I think I chose to highlight there kind of our role in enabling customers to be able to reduce the total cost of their product. We enable that through our technical expertise, most certainly. If someone really wants to buy a lower-cost adhesive, we have the raw material substitution capabilities and a number of alternative technologies to be able to provide them as well a lower-cost adhesive, something they can save money on and something that's lower cost to ourselves as well and helps us preserve our margins. So there's a lot of ways that we interact with the customer to help them achieve their goals. I also don't want to minimize the fact that most of our conversations with customers revolve around innovation. We are very focused on bringing new technology, new products to the market. We've got 30 different market segments and thousands and thousands of different customers. And so it's hard for me to generalize directionally if everyone's going in one matter or another. That's really not the case. Every customer we treat very differently. And our ongoing focus is on innovation first.

Okay. Fair enough. That's helpful. And then if I'm remembering correctly, you've had some pretty important wins in HHC, thinking specifically around like consumer beverage and maybe some e-commerce packaging automation technology that you're participating in. Could you maybe give an update on the cadence of those contributions to HHC growth and maybe just in general terms, assuming those sales take a little longer to ramp up?

Yes. Let me discuss some of the recent successes in the HHC business, which has excelled in the steady CPG market by introducing new products. Our sustainable packaging adhesives have been very popular among packaging customers, offering a unique solution that enhances recyclability. We also launched a new beverage labeling technology that replaces traditional casing, allowing recyclable bottles to be returned and cleaned more efficiently. As a result, we've gained significant market share in beverage labeling. Those are just a couple of examples. When considering others, John…

Hygiene is filling fast.

Yes, we did just win a big application in the hygiene business as well for fairly unique characteristics that we can bring to an application there. So, yes, that is just a constant ongoing focus for us, Vincent, and we're seeing those wins really support not just our HHC business, but our other businesses as well.

Got it. Sure. No, that's helpful. I guess the way I'm trying to frame all of that then is over the next year or two, is HHC still a kind of slow steady business given the number of wins that you piled up there?

Yes. So the objective with that business is to get to mid-teens EBITDA margin. That's a good level of profitability for that business. And it’s continued to grow kind of mid single-digit, high single-digit over time. So we’re going to continue to take market share in that space and we’re going to continue to grow through innovation. I think if you’re anticipating kind of mid single-digit, high single-digit growth in the HHC business, you're probably spot on.

Okay. Excellent. And then I just wanted to sneak in a quick one, just checking in on a couple of markets in the EA that we haven't talked about. It looks like Chinese solar cell numbers have been really strong this year, but you mentioned glass and auto and not solar. So, I just wanted to see how that was going. And then same question, but on electronics.

Yeah. The solar story is really exciting. What we are – our solar business is doing well, and that is a business that we're starting to see migrate around the world. So we are working with big customers to take – leverage our expertise that we have in Asia in solar and bring it to other parts of the world. And I think that's a great example of a way that we are very strong, being able to take technology and work with big customers and bring it to new regions successfully, and evolve it for the unique circumstances in those regions is something we're very good at. Do you want to add something there, John?

Yeah. I think just to amplify that a little bit, we called out auto and insulated glass. Auto has been a huge growth story for our EA business, particularly electronic vehicles. And we see that, as a continued area that we should be able to drive outsized growth, and insulated glass, it's really an innovation play, and even despite some softening in parts of construction, and their products go into construction, they continue to perform very well. Electronics has always been a strong performer. It's been a little more – it's been a little lower growth still growing, but because of chip shortages and some of the other challenges. And then in the new energy space, that continues to perform well, and we're seeing the opportunity there from geographic expansion. It's historically been a business that's been sort of China-centric. We have a strong presence there, but we are really in a competitive advantage as that industry starts to globalize because we can reach customers more effectively in other geographies than a lot of our competitors. And we have already started to see the benefit of that.

All right. Excellent. Thank you very much and good luck on the year.

Thank you.

Our next question is from David Begleiter with Deutsche Bank. Your line is open.

Thank you. Good morning. Celeste, on the Q1 guidance and the range itself, what could drive the upper and lower ends of that guidance range being achieved? And by segment, how do you expect the segments to perform within that range in Q1?

Yeah, I think that the range we've expressed there is definitely going to be subject to what happens with volume. Destocking – we were anticipating, we'll be seeing destocking in HHC complete in Q1 with Construction Adhesives. It's going to be interesting to watch that one. I think we're going to start seeing the restocking kind of February, March time frame. What will be interesting is what level are we restocking to that remains the question in the construction business. So, I don't know, John, do you want to add more color?

Yes, I'll just kind of maybe help David with how that may look in terms of our different businesses. So, Celeste's comments on China, if China recovers more quickly, that could be an upside. If we start to see other economies maybe start to show a little bit more bounce back from what was a very slow Q4 that could be opportunities. As you think about the core – that guidance for the quarter and how that looks by our GBUs, we think HHC will continue to be very steady, right? EA, which has more of a China exposure, will probably be a little more impacted than HHC in terms of slower results. And then construction, as Celeste indicated, we think it will take a little longer than the first quarter to see the recovery there. So that's kind of the direction we would see those three GBUs going in the first quarter.

No, very helpful. Appreciate that. And guys, just on the cost issue, if you go back to beginning of 2021, how much have your raw material costs increased by? And how much do you expect them to fall by in 2023, just raw material costs?

Yes, they have increased by $800 million. When you ask how much we should expect them to decrease, it's a valid question. That's why I prefer to group price and raw material costs into one category for the upcoming year. It's difficult to predict how much those materials will decrease, especially since we are monitoring 4,000 of them at any given time and observing any changes. However, none of these changes is significant. Regardless of what occurs, whether raw materials significantly decrease and we see lower costs or if they remain stable or even rise slightly, we will implement price increases. I don't want to speculate on the extent of any reductions. What's important is that the company is preparing itself for any eventuality.

Thank you very much.

The next question is from Jeff Zekauskas with JPMorgan Chase. Your line is open.

Thanks very much. If your prices didn't move from the end of fiscal 2022, how much would your average prices be higher in fiscal 2023? Is it 3%, or is it more or less than that?

It's about 4% to 6%.

4% to 6%. Okay.

It's a complex situation because there are various factors at play, including indices and new product introductions, making it a difficult question. I want to emphasize looking at the overall price and raw material cost as a unified category.

Okay. Your non-recurring charges this year were about $40 million. Is that a good number for next year?

Why don't you take that? Why don't you take that one, John?

Sure. It's a little bit on the higher side, Jeff. I would say we had a couple of items that were kind of unusual and non-cash actually, that probably represented about $10 million between a pension curtailment and a non-cash charge on a legal entity consolidation. So, I think the number will probably be lower than that, probably between $20 million and $30 million, kind of representing those same areas as far as the M&A-related activity, our SAP implementation, and probably some finalization related to some restructurings we've done.

Thanks. In the fourth quarter, your other assets resulted in a cash inflow of $46.5 million. In the third quarter, they were a cash outflow of $40 million for the nine months. Thus, there was an $86 million or $87 million positive cash flow change from other assets in the fourth quarter. What was that?

Yes, I think you got to look at the fourth quarter, but you're exactly right, Jeff. And I mentioned it in our prepared remarks, we did have a one-time gain on maturity of a cross-currency swap and the impact that you're seeing on other cash flow is almost entirely related to that. So, that's non-repeating. Even if you take that away, it was a very strong cash flow quarter, driven by improving working capital and good profit growth.

How big was the cross-currency swap gain?

It was around $50 million. It was about $50 million.

Was the engineering volume growth in the quarter above 3%?

It was right about that. It was very near that.

I think I'm good. Thank you very much.

You're welcome, Jeff.

Thanks, Jeff.

Our next question is from Eric Petrie with Citi. Your line is open.

Hey, good morning, Celeste and John.

Good morning, Eric.

How much of your construction exposure is new construction versus repair and remodel? I'm sure there's probably differences between flooring, roofing, and insulated glass.

If you examine our portfolio, approximately 9% of our business comes from new construction, or to be more precise, less than 15%. Additionally, we have some business in the repair and remodel sector. I believe that addresses your question.

Yes. When Celeste mentions those numbers, she is referring to our Construction Adhesives business and other construction-oriented segments in EA, such as insulated glass windows. Overall, as Celeste indicated, it's slightly under 15% for the entire portfolio, and the repair and remodel segment is also of a similar size, but slightly smaller.

Yes, it's a little countercyclical.

Helpful. And then just as you turn leverage kind of to the three times and below, H.B. Fuller has been a consolidator in the industry. How do you see it, Celeste, that returning cash back to shareholders versus M&A?

Yes. So, we have a target to hit three times net debt-to-EBITDA leverage. We're very serious about that target. And we're progressing nicely along the path to get there.

Yes. We expect to go below three times debt to EBITDA in 2023, and we aim to maintain a range of two and a half to three times. If you consider our strategy regarding mergers and acquisitions, there are many consolidation opportunities. We have a strong pipeline for M&A, primarily consisting of small bolt-on deals that have proven successful for us. Therefore, we anticipate using most of the excess cash to remain within our targeted capital structure range. If we drop below 2.5 times, we may consider share repurchases depending on the stock price. However, we believe our M&A pipeline is strong enough to utilize our cash effectively while maintaining our targeted capital structure.

Thank you.

We have no further questions. At this time, we'll turn it over to Celeste Mastin, Chief Executive Officer, for any closing remarks.

Thanks, everyone, for joining us today. We look forward to interacting with you in the future. Take care.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.