Hello, and thank you for standing by. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the H.B. Fuller Third Quarter 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. I would now like to turn the conference over to Steven Brazones. Please go ahead.

Thank you, operator. Welcome to H.B. Fuller's third quarter 2023 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. 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. In the third quarter, we delivered a double-digit increase in adjusted EBITDA year-on-year and successfully drove adjusted EBITDA margin meaningfully higher. We achieved this despite weaker-than-expected volumes, driven by a more adverse customer destocking impact in Hygiene, Health, and Consumable Adhesives, and lower market demand in construction-related markets. Customer destocking actions have been temporarily detrimental to organic growth leading to volume declines in excess of underlying economic demand. While challenging in the short-term we are successfully managing through this highly unusual phenomenon taking actions that reduce our cost structure, while sustainably executing our price-to-value discipline, and leveraging our raw material scale. I am quite pleased that we were able to achieve double-digit growth in adjusted EBITDA in the current environment and without question the actions we are taking will continue to benefit our ability to grow adjusted EBITDA in 2024, and well into the future. Overall organic revenue declined 7.4% year-on-year in the third quarter with all GBUs experiencing lower volume versus the prior year. Overall, the sequential trend in volume largely followed the path we expected with the exception being the magnitude of volume impact in HHC. Customer destocking actions in EA and CA are largely complete, and we believe they have peaked for HHC in the third quarter. Incremental volume development has been improving since the second quarter trough and we expect this to continue and meaningfully improve in the fourth quarter. From a profitability perspective, we overcame short-term volume challenges to achieve a 13% increase in adjusted EBITDA year-on-year and increased adjusted EBITDA margin 270 basis points year-over-year and 140 basis points sequentially from Q2 to 17.3%. The benefits from sustainable pricing discipline, proactive raw material cost management, and restructuring savings realization more than offset the detrimental impact from lower volume and drove the improvement in profitability in the third quarter. We also delivered another outstanding quarter from a cash flow perspective with cash flow from operations increasing $50 million year-on-year to $108 million, driven by strong profit growth and improved working capital performance. Now let me move on to review the performance in each of our segments in the third quarter. In HHC, organic revenue was down 10.5% year-on-year driven by HHC's customer destocking activity, which we estimate accounted for most of the decline in organic growth. Since the pandemic, most of HHC's customers held significantly higher inventories of raw materials to mitigate the risk of supply chain availability. This has created a very unique situation for channel inventory destocking in 2023 that is unprecedented historically and has led to volume declines for HHC that have never been experienced before. With that said, we know this to be temporary as underlying demand is stronger than our volume reflects, and we have also recently seen distributor buying patterns improve. Although underlying demand is down slightly given the current economic environment, we are encouraged by the trends in HHC. The team has been successful in gaining new business. This will become much more evident once the HHC customer destocking actions conclude. Adjusted EBITDA for HHC increased 12% year-on-year to $69 million, and adjusted EBITDA margin increased 270 basis points to 17.2%. This is quite impressive given the significant short-term volume challenges we have endured. Favorable price and raw material cost management and restructuring benefits drove the improvement year-on-year. In Engineering Adhesives, organic revenue declined 3.3% in the third quarter, much improved versus the 9% decline in the previous quarter led by strength in China. Organic revenue declined due primarily to lower volume in construction-related end markets, which more than offset organic growth in the automotive, electronics, and solar market segments. Adjusted EBITDA in EA increased 26% year-on-year and adjusted EBITDA margin increased 450 basis points year-on-year to 19.3%. The improvement in profitability for EA was driven by favorable price and raw material actions and aggressive cost management. In Construction Adhesives, organic revenue declined 9.4% year-on-year, a marked improvement versus organic revenue declines of 26% in Q1 and 14% in Q2. Customer destocking impacts in CA continued to taper in the third quarter as expected and are largely complete now. However, end-market demand has weakened in construction-related end markets, and we would ascribe most of the organic revenue declines in the third quarter to end-market conditions. Adjusted EBITDA for CA was down modestly year-on-year and adjusted EBITDA margin of 14% was effectively flat as favorable price and raw material cost actions as well as restructuring benefits offset the impact of lower volume. The restructuring actions the CA team has executed position this business to deliver sustainably strong adjusted EBITDA margins consistently throughout the cycle. Geographically, Americas organic revenue was down 13% year-on-year. Customer destocking impacts in HHC which were notably outsized in North America relative to the rest of the world, adversely impacted the region's organic revenue development in the third quarter. In EIMEA, organic revenue declined 6% year-on-year, driven mostly by weaker demand in the construction and packaging-related market segments. In Asia-Pacific, organic revenue increased 7% year-on-year, driven by a rebound in demand in China in both EA and HHC. The organic sales trend for the region continued to improve as expected due to particular strength in the automotive, electronics, and hygiene market segments. From a global economic standpoint, conditions remain relatively weak. Accordingly, we have executed supplemental restructuring initiatives, which will increase our expected annualized pre-tax savings by approximately $10 million once fully implemented. On the M&A front, we recently acquired Sanglier Limited one of Europe's largest independently owned manufacturers and fillers of sprayable industrial adhesives. This complementary acquisition expands our innovation capabilities and product portfolio across the U.K. and Europe, particularly in the Construction Adhesives and Engineering Adhesives businesses. In addition, during the third quarter, we announced the restructuring of the recently acquired Beardow Adams business; once completed this restructuring is expected to result in an ongoing annualized cost savings of approximately $20 million on a pre-tax basis. This is an addition to the restructuring initiative we announced in the first quarter. The majority of the restructuring charges and run rate cost savings associated with this restructuring are expected to be recognized in fiscal year 2024. The Beardow Adams restructuring benefit represents a significant portion of the fiscal 2025 EBITDA contribution from the 2023 collection of acquisitions, which we now expect to contribute approximately $60 million of incremental EBITDA by 2025. Lastly, I would like to inform you that the recent acquisition of Adhezion Biomedical is progressing exceptionally well and is on track for a record sales year. We have a well-defined plan for synergy realization and we are very excited about the future growth prospects of our medical adhesives business. Now let me turn the call over to John Corkrean to review our third quarter results in more detail and our outlook for 2023.

Thank you, Celeste. I'll begin on slide seven with some additional financial details on the third quarter. For the quarter, revenue was down 4.3% versus the same period last year. Currency had a negative impact of 1.7%, and acquisitions positively impacted net revenue by 4.8%. Adjusting for those items organic revenue was down 7.4% with pricing having a favorable impact of 0.6% year-on-year in the quarter, and volume had a detrimental impact of 8% reflecting customer destocking impacts, particularly in HHC and a general slowdown in industrial demand. Adjusted gross profit margin was 30%, up 350 basis points versus last year as a net effect of pricing and raw material cost actions together with restructuring benefits, and general cost controls more than offset the impact of lower volume. Adjusted selling, general and administrative expense was up slightly year-over-year. Good cost management, growing restructuring benefits, lower variable compensation and favorable foreign currency impacts largely offset the incremental SG&A from acquisitions and inflation in wages and other costs. Adjusted EBITDA for the quarter of $156 million was up 13% year-on-year, and adjusted EBITDA margin increased to 17.3%, up 270 basis points compared to the third quarter of last year. This reflects proactive actions taken to optimize the price and raw material dynamics, as well as restructuring benefits and other cost savings measures. These actions combined with the contribution from accretive acquisitions more than offset lower volume, unfavorable foreign exchange, and wage and other inflation during the quarter. Adjusted earnings per share of $1.06 was flat versus the third quarter of 2022, as strong operating income growth was offset by significantly higher interest expense and unfavorable foreign currency. Higher interest expense and unfavorable foreign exchange negatively impacted adjusted EPS in the third quarter by approximately $0.17 and $0.05 respectively. Operating cash flow in the quarter improved significantly year-over-year as improving margins and lower net working capital requirements more than offset the impacts of lower volume, higher interest expense and unfavorable foreign currency translation. Third quarter and year-to-date cash flow from operations increased year-over-year by $50 million and $168 million respectively. With that, let me now turn to our guidance for the 2023 fiscal year. We now expect full-year net revenue for fiscal 2023 to be in the range of $3.5 billion to $3.55 billion, and taking into consideration the extra week in 2022, we now expect organic revenue to be down 4.5% to 5.5% versus fiscal 2022. This reflects lower than previously expected volume, due to a more significant destocking impact in HHC in Q3, and slightly weaker overall industrial demand conditions. Additionally, we now expect adjusted EBITDA to be $580 million to $590 million representing a 9% to 11% year-on-year increase. This reflects lower organic revenue expectations, offset by a more favorable pricing and raw material dynamic, additional cost reductions as well as the benefit of value-creating acquisitions completed this year. Furthermore, we now expect net interest expense to be approximately $135 million for the fiscal year, and the full-year adjusted effective tax rate to be between 27% and 28%. Combined these assumptions result in full year adjusted earnings per share in the range of $3.80 to $3.90. Also, we now expect full year capital expenditures to be approximately $125 million. Regarding savings from restructuring plans, we now expect actions from the previously announced and subsequently expanded strategic restructuring to generate between $40 million and $45 million in annual pre-tax run-rate cost savings, up from our original estimate of $30 million to $35 million. This is an addition to approximately $20 million of pre-tax run rate savings associated with the Beardow Adams integration which was announced during the third quarter. Now let me turn the call back over to Celeste to wrap us up.

Thank you, John. Strategically, we are driving this business where we said we would, as evidenced by our gross profit and EBITDA margin performance demonstrating our confidence, and becoming a higher EBITDA margin company. We strive to be recognized as the imperative ingredient to our customers' success. We are committed to driving innovative solutions for our customers to create valuable and sustainable solutions using drops, not trucks of adhesives. I would like to thank all of our H.B. Fuller team members around the world for delivering exceptional results in a challenging environment, and for leading the way as we transform our company into a higher growth, higher margin, higher ROIC business. That concludes our prepared remarks for today. Operator, please open the line for questions.

Our first question will come from the line of Jeffrey Zekauskas with JPMorgan. Please go ahead. Jeffrey, you may be on mute. Our next question will come from the line of Patrick Cunningham with Citi. Please go ahead.

Hi, good morning.

Good morning, Patrick. How are you?

Good. How are you?

Good.

On the strategic M&A update, you know, you cited this $60 million figure up from the previous $50 million. Can you quantify how much of that is coming from the latest acquisition versus maybe there is better than expected in adhesion or other incremental synergies?

Yes, it is a blend of both the impact of Sanglier, as well as better performance across the collection. We prefer not to quantify how much each particular acquisition brings to the blend, but it is composed of both.

Yeah. That makes sense. And then just you had the comment that you're encouraged by trends in HHC, and just underlying demand as well as share gains there. So, what end markets have the best underlying demand? And where are you gaining share? And where do you think any particular end markets, you'll see a restock in 2024?

And when you say end markets, just for clarity are you talking about the segments within HHC, or are you talking more so about the different GBUs?

You know either of both, but typically, particularly within HHC.

We are not involved in any of these businesses and do not anticipate significant restocking impacts. We expect to navigate through the destocking in HHC over the next two to three quarters and then return to more typical demand, which may be slightly lower than usual, about a couple of percent. We are achieving notable successes with major consumer product companies in this sector, particularly in Hygiene, where we have recently secured several wins. We anticipate strong performance in this area and are increasing our market share in various packaging applications within HHC. I have a positive outlook for this part of the business, although we still need to address the destocking challenges. Additionally, we are seeing significant successes in our other business units. For instance, in EA, we recently made a major breakthrough with fuselage airline sealants in the aerospace sector, while also advancing our position in the rapidly growing EV automotive market, which is expanding at around 22% annually. We are also realizing noteworthy achievements in Technical Textiles, Harting Cables, and PVC Edge Banding. We operate in a fragmented market with 30 different global segments, and we are achieving victories across all of them, especially in EA, and are also seeing substantial gains in HHC.

Very helpful. Thank you. I'll pass it on.

Your next question comes from the line of Ghansham Panjabi with Baird. Please go ahead.

Hey guys. Good morning. Hopefully, you can hear me okay?

Good morning, Ghansham.

Good morning, Celeste. You know, I guess in context of the 8% volume decline in 3Q. Can you sort of take us through the cadence throughout the quarter and what you're seeing thus far in September? And also EBITDA margins were up, I think 270 basis points year-over-year during the third quarter. Are you forecasting additional year-over-year margin expansion in 4Q? We are just trying to reconcile your guidance for the quarter.

Right. Okay. So let's talk about the quarter and your question on volume declined month-over-month. So RP7 which was the first month of our quarter was much worse than the other two. So in P7, we saw really extreme destocking in our HHC business, but also our EA and CA businesses were down double-digit on volume in that month as well. We saw real inflection point for the EA business in particular come P8, and really experienced more flat volumes in EA, P8 and P9 and a lot of that was due to this rebound in China. So, we are seeing strong performance in China. In fact, when you look at China from Q1 to Q3, our volume has swung from a negative 15% roughly to a positive. So, I give the team in China a lot of credit to be nimble enough to handle operationally that shift in volume. And also we saw in the CA business also sort of some leveling off in the back end of the quarter. Your question around P10 really much, much more of the same. So we are really seeing HHC starting to settle out a little bit, but there's still destocking there. That's going to go on for a couple of quarters, however in EA and CA, I think this destocking is completed, and we are seeing much, much better volumes in P10 for both of those businesses.

Maybe I can comment on your question on margins, Ghansham. So, we are forecasting additional margin expansion in Q4. If you look at our guidance range, both for revenue and EBITDA that's what is reflected and we are seeing that so far in P10. We are seeing margins continue to expand. We would expect a bigger contribution from restructuring in Q4 than we've had the previous quarter. So something on the order of 100 basis points of margin expansion in the fourth quarter is more or less in line with our forecast.

Got it. Thank you, John. And just obviously there has been more sequences of events, right, over the past couple of months increase in crude oil prices and we have auto strikes and that's not an insignificant market for your EA segment. How are you sort of think about these dynamics as we, especially on the cost side, cycling into fiscal year ‘24 in context of pricing starting to moderate reported plus 0.6% in the most recent quarter? And can you just give us any more variances to think about for fiscal year '24 that sort of underlying your confidence on EBITDA being up on a year-over-year basis?

Yes. So first, regarding the UAW, about 1% of H.B. Fuller's total sales go to the big three automakers or their primary suppliers. While this is an important market for us, we are more active in the rapidly growing EV vehicle sector. We're closely monitoring the big three and any developments, but I don’t expect a significant impact on us in 2024. Now, concerning raw material costs and related pricing, it's important to note that our raw materials do not fluctuate with crude prices. We manage and purchase around 4,000 different raw materials, each influenced by its own supply and demand dynamics. A decline in our volumes typically indicates a downturn in global industrial volume, impacting these materials more than crude prices. Our scale in the industry provides us with the opportunity to leverage our volume and optimize purchasing from suppliers. In a low-volume market, we can negotiate better terms, giving us an advantage with raw material costs, which we balance with pricing. As we look ahead to the next quarter and into next year, we anticipate a decrease in our pricing comparisons. This is partly due to the carryover from substantial price increases in the previous year and because some of our customers have prices tied to indexes based on the raw materials we purchase. While our pricing may seem lower, it's part of a strategy to preserve margins. You'll notice incremental price reductions in the upcoming year; however, this is aligned with our cost-saving efforts. We are reformulating many products to reduce raw material costs and are passing those savings to our customers. So, while there may be apparent price decreases, our margins will remain intact. Earlier in the year, I mentioned a value of $130 million to $160 million derived from balancing price and raw material movements. The first half of the year was heavily influenced by pricing, whereas the second half will benefit more from favorable raw material conditions. This balance is why we present it this way.

Let me provide some additional insight into our considerations for 2024 without going into too much detail since we are still in the planning stages. As Celeste mentioned, the price-raw balance has been quite stable this year, yielding a benefit of approximately $40 million to $45 million each quarter. This benefit has fluctuated between stemming from pricing advantages and raw materials, but we expect to carry this trend into next year. If raw material costs remain where they are, the overall benefit next year won’t be as significant as it has been this year, though we anticipate some benefit that will likely match or slightly exceed any price decreases. Another key factor is the restructuring impact, which we expect to be much more pronounced in 2024 compared to 2023. We're estimating a run rate of $40 million to $45 million, but we'll likely see about $10 million to $12 million captured this year. You can use this midpoint to gauge what we might see in 2024. Additionally, with regards to acquisitions, we're looking at a contribution projected to be $60 million by 2025, of which we’re likely to realize around $12 million this year. On the downside, we do anticipate a significant variable compensation benefit this year, roughly $30 million lower than last year, which will be rebuilt. We are also projecting a continued challenging volume environment as we build our plans. While we don’t expect nearly the same impact from destocking in 2024 as we experienced in 2023, these factors give us confidence that we can achieve another year of profit growth despite likely facing another difficult environment.

Okay. Got it. Thanks so much.

Your next question comes from the line of Mike Harrison with Seaport Research Partners. Please go ahead.

Hi. Good morning.

Good morning, Mike.

I was hoping that you could maybe give a little bit more detail on the increase in the restructuring expectations. I believe you are in the midst of an operational review that has maybe helped to increase that target. Just curious what stage is that operational review in? And do you have any sense of how much more savings could potentially be identified in the future?

So, we are very early on Mike in the operational review that we are doing. Just to take a step back on that recall, we are in the process of identifying capacity utilization by product, by plant, by line, by region. We should have a complete assessment of that outlook, as well as how it relates to our future growth plans by the end of this year and following that we will be announcing steps we are going to be taking to optimize that footprint. So this is very early in and what you see in the updated restructuring is that we have identified there are additional plants that we can take out of the network. But again we are not completely through that analysis.

And, I guess, I'll just comment, Mike, on the increase. We increased the range by $10 million. I think when we came out with our initial estimates of $30 million to $35 million, we said about two-thirds of that impact was related to manufacturing costs and about a third related to SG&A. We did increase the number of anticipated plant closures, we had talked about two plant closures after Q1. We now have eight that are planned. They are small, but they do have an impact. But I would say the recently announced changes to restructuring savings estimates, actually a little more weighted to SG&A. So this sort of second round we went through, we focused in more on SG&A where we had potential redundancies opportunities to reduce costs given lower volume. And so the balance now might be 60% manufacturing cost, 40% SG&A. But I think what Celeste alluded to is, I think there's more opportunity in the manufacturing footprint and supply we will be focused on here in the near term.

All right. Perfect. And then my other question is on the M&A front that you've done several acquisitions now, with the exception of Beardow. I think most of them are relatively small, but just curious at what point do you start to worry about reaching capacity? I'm trying to integrate too many things at once. Obviously, you've got 30 different market segments and three GBUs that you work on and not all of them were in the same markets. But, how do you think about integration and your capacity to integrate as a bigger company?

I feel good about it, Mike. So we have focused our M&A and capital allocation activities around our top 25 growth opportunities and we continue to update that list every year. Within that list there's a lot of opportunities to expand and grow the business and we end up getting a lot of different market segments involved in doing so. So when we do an acquisition from the very beginning we assign an integration leader during due diligence. That integration leader participates in diligence and that embedded knowledge is very instructive as we work through the integration process. Now as we integrate we primarily use people from within the business that did the acquisition. And so when you think about it, we have integrations going on in different regions managed by different people or being performed by different people in different businesses concurrently. We are very careful as we look at our pipeline. We would not double up on a region and a business for an acquisition if we felt like we would not have the people, the resources to place against that. And the good news is we have lots of other targets, lots of other places where we can acquire and drive high EBITDA margin and high growth rates. So I think it will be a long time, Mike before we get to the point where we are really ever saturated with integration activity, particularly because we are integrating these businesses fully within two or three years.

All right. Sounds good. Thank you very much.

Thank you.

Your next question comes from the line of Vincent Anderson with Stifel. Please go ahead.

Yes, thanks. So Celeste, I just wanted to spend maybe a bit more time on the cost saving side, if that's okay. It sounds like the savings are more around footprint consolidation versus site-specific cost out. If that's, so, just can you help me get comfortable handicapping your expectations on the manufacturing cost savings prior to completing your review. And then just the part B to that. Are these initiatives being paired with the inventory management changes that we can expect incremental cash return on those savings?

What we described in the restructuring actions is primarily related to our footprint. However, we currently have initiatives in place within the businesses to optimize our shift load, which will enhance productivity in the plants. We are already implementing various cost-saving measures that will impact conversion costs. Although we are not discussing these actions as part of a restructuring, they are ongoing. Additionally, we are working on improving our supply chain by adding capabilities that will enable us to manage our inventory levels more analytically. We have taken steps towards this by acquiring software for that purpose and are currently piloting it at six of our facilities. These efforts are progressing in parallel and are not solely focused on the footprint.

Okay. All right, that's helpful. And you touched on both of my next questions. So I'm trying to pick which one to start with. But, all right, so you mostly answered this one which was along the lines of, do you feel like H.B. Fuller is already leveraging best-in-class analytical system available for procurement, inventory management? But maybe taking that a step further, I mean the pricing and the procurement systems were really kind of formalized after the 2019 restructuring. So same question, is there more that could be investigated there?

So we have an excellent pricing system, pricing team and pricing methodology. And I think I've mentioned before that, that I'm on a call with our pricing group every two weeks. So it's definitely an area of focus. And what I'll say is that every two weeks something new comes out of that right. We expand our capabilities. We focus on some other reporting that we could do. We identify strategies for price increases in parts of the portfolio and is not just myself. I get to see the outcome of the work that's going on with that pricing team and in concert with the GBUs. And so we are never going to be satisfied that we are perfect pricers. We continue to work on what I think is already an excellent capability and continue to make it better. And one of the things that is a very important part of that is the technology leverage right not just in pricing systems, but ensuring that we are pricing to the value that our customers are experiencing. So, you know pricing sort of the last thing to happen. The first thing that happens is understanding our customers' needs, knowing how they use our product, understanding their goals, really driving innovation around bringing a solution that matters to them and that we can be paid for. So pricing, we are never going to be done and we are going to continue to capture value there. And similarly, our procurement system, you're right that we have a great team that's been in place for quite some time now, and we continue to leverage our scale successfully in these multiple raw material segments that we participate in. And each one of them is different. It's very interesting.

Sure. All right. That's helpful. All right. So, last one. You talked a bit about this. It sounds like a lot of it's still kind of to be determined through the end of the year. But a lot of your non-U.S. sites, at least appear to be running fewer technologies on a per-site basis than what we see with your, kind of legacy U.S. assets. So as I think to your growth strategy you've been globalizing a lot of U.S.-developed products to buy rather than build. Are there opportunities to get more leverage out of the non-US sites where the footprint and staffing might be underutilized? And is any of that in your current savings target, or is that more related to again kind of your growth strategy?

We will address this as we examine our global presence. More than half of our plants support multiple Global Business Units, and most of them focus on various technologies, likely two or three types. Our aim is not to establish large mega sites; instead, we want to produce close to our customers, which has its advantages. We just need to ensure that as we assess business capacity utilization by technology, we eliminate any unnecessary redundancies.

Okay.

Did I answer your question, Vincent?

Yes, yes. I might try again in six months. But, yeah.

Okay, okay.

That's it from me. Thank you.

Your next question comes from the line of David Begleiter with Deutsche Bank. Please go ahead.

Thank you. Good morning.

Good morning, David.

Good morning. Celeste and John, your Q4 guidance implies a pretty steep ramp from Q3. Can you give us some color on the various drivers and buckets how much from price cost? How much from cost savings? How much from volume and normalized operations to drive that ramp?

Yes, I believe the primary factor is the momentum we are experiencing from savings on raw materials, and we have been effective in managing our pricing. As I mentioned, we've consistently seen savings of about $40 million to $45 million per quarter from these areas, and we anticipate similar results in Q4 due to improved volume performance. These are the key factors, and the effects of restructuring and acquisitions are expected to be more significant in Q4 compared to previous quarters, potentially doubling due to the timing of acquisitions and the ramp-up of restructuring efforts. Additionally, I would note that we have an easier comparison for Q1 through Q3 regarding the macroenvironment we faced in Q4 last year versus the previous quarter. Therefore, the growth rates are partly due to easier comparisons, but they are primarily influenced by the aforementioned factors: the timing of raw material savings, pricing management, volume improvement, and the impact of restructuring and acquisitions.

And John, how that $40 million to $45 million price cost tailwind, how much of that is locked in? I presume pricing is locked in and I presume most of raw material costs are locked in as well. Is that fair?

Yes, I think that's reasonable. Everything, particularly regarding raw materials, tends to lag because the products we purchased in the second quarter really affected our profit and loss in the third quarter. So, when considering the impact for the fourth quarter, it's mainly related to materials we've already bought and pricing. We do have quarterly resets on our formula-based pricing, which are based on the raw material costs from the previous quarter. Therefore, we have good visibility on that as well.

Great. And just last thing in ‘24 on a non-formula-based products which I know it will be down. Do you expect pricing to be down on the other portion of the business, the negotiated portion of the business?

Well, again we will, because there will be plenty of reformulated products that we introduced to customers that are at a lower price to the customer while still being margin-preserving for us. So there's a lot of activity, David, right now underway to reformulate and provide savings to customers given the weak volume demand that's out there. Now, some customers will take advantage of that and some won't. Again, we are a very small part of our customers' end product and very enabling. There may be cases certainly where we are introducing higher priced products that bring overall total savings to them by allowing them to use a different substrate or run their line faster. So it's a bit of a mixed bag, but I think that the overall movement in price will be flat to incrementally lower for all of those reasons.

Understood. Thank you very much.

Your next question will come from the line of Jeffrey Zekauskas with JPMorgan. Please go ahead.

Thanks very much.

Good morning, Jeff.

Hi, good morning. Did you reiterate your cash flow guidance for the year of 350 or no?

We didn't reiterate it, but it remains intact.

So you just reiterated it. Is that what you just said?

I guess, I think we can say we just reiterated it.

Okay.

We feel good about cash flow. We had another strong quarter as expected, and everything is aligning with the guidance we provided in Q2.

Okay, great. So you've spent $195 million on acquisitions so far. Exclusive of the costs that you might take out or the synergies that you might achieve what's the annual EBITDA of that $195 million in spending? And what are the annual revenues, roughly?

This year we expect to recognize about $100 million in revenue from these acquisitions and around $12 million in EBITDA, which reflects roughly half a year's worth of contribution since we acquired them throughout this year. If you double those figures, you can estimate the value of what we've acquired relative to our spending. There is some synergy included this year, so the number might actually be between 18% to 20%, with our synergies contributing an additional 4% to 6%. Does that answer your question, Jeff?

Yeah, it does. Your non-recurring charges this quarter were about $0.36. I was listening to your answers to some previous questions. Did you effectively say that your non-recurring charges in the fourth quarter would be double that, or about $0.72?

No, I think that on a pre-tax basis, as of the end of the third quarter, the non-recurring charges were approximately $40 million. Some of these costs will not recur. We had an earn-out linked to an acquisition made last year, which is a payment we made due to the business performing better than our original deal model indicated, which is positive. However, we are experiencing the effects of the restructuring-related charges and the integration costs for these acquisitions. I would expect that for the fourth quarter, the total non-recurring charges for the year will be around $55 million to $60 million on a pre-tax basis. Additionally, in Q3, there was a significant discrete tax item related to resolving some old tax audits, which slightly increased that figure. We do not expect this to occur again in Q4.

In the Engineering segment, your EBITDA went up about $10 million sequentially even though your revenues were flat. Is that raw material benefits or something else?

Several factors are at play here. First, raw material benefits are increasing across all three Global Business Units, which is also affecting EA. Additionally, the product mix in the third quarter was quite favorable compared to the first two quarters, due to the strong performance in the automotive sector and a significant improvement in electronics. Part of this can be attributed to the impact from China. I would say that about half of the improvements are due to raw material trends, while the other half is linked to growth in the higher-margin segments of the business.

And then lastly, Celeste do you plan to buy anything in the fourth quarter of any size?

We are constantly rebuilding our pipeline, Jeff it's a real focus area for us. So I never want to say, I'm going to do a deal until it's done.

But you are working?

We are always working. We are always working on the pipeline and there's a lot of opportunities that we find to invest in those top 25 growth opportunities for the business. We have 30 market segment leaders that are desirous of growing their business. They're encouraged and incentivized to grow their business and they've recognized that one of the ways that they can fill some of these most critical needs is through M&A. So, yes, so we have a strong pipeline and we will continue to work that, those deals to close many quarters to come.

Okay. Thank you so much.

I think we have no further questions at this time. I'll hand the call back to Celeste Mastin for any closing remarks.

Thanks, everyone for joining us this morning. We appreciate your time. Have a great day.

Everyone, that will conclude today's meeting. We thank you all for joining and you may now disconnect.