Good day. My name is Ellie, and I will be your conference operator today. At this time, I would like to welcome everyone to H.B. Fuller's First Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. Thank you. Steven Brazones, you may now begin the conference.

Thank you, operator. Welcome to H.B. Fuller's first quarter 2024 investor conference call. Presenting today are Celeste Mastin, President and Chief Executive Officer; and John Corkrean, Executive Vice President and Chief Financial Officer. After our prepared remarks, we will have a question-and-answer session. Before we begin, let me remind everyone that our comments today will include references to certain non-GAAP financial measures. These measures are supplemental to the results determined in accordance with GAAP. We believe that these measures are useful to investors in understanding our operating performance and to compare our performance with other companies. Reconciliation of non-GAAP measures to the nearest GAAP measure are included in our earnings release. Unless otherwise noted, comments about revenue refer to organic revenue and comments about EPS, EBITDA, and profit margins refer to adjusted non-GAAP measures. We will also be making forward-looking statements during this call. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially from these expectations due to factors covered in our earnings release, comments made during this call, and the risk factors detailed in our filings with the Securities and Exchange Commission, all of which are available on our website at investors.hbfuller.com. I will now turn the call over to Celeste Mastin. Celeste?

Thank you, Steven, and welcome everyone. We're off to a good start to the year with first quarter financial results largely consistent with our expectations. Our team is maintaining commercial discipline, proactively innovating to create win-win opportunities for our customers and pricing to that value, while also driving restructuring savings and synergy realization on the 2023 collection of acquisitions. We continue to proactively respond to changing business dynamics to drive strong adjusted EBITDA growth, margin expansion, and robust cash flow. Looking at our consolidated results in the first quarter, organic revenue declined 4% year-on-year due to anticipated pricing adjustments and slightly lower volume. The impact from pricing was in line with our expectations and primarily represents index-based pricing adjustments. In the first quarter, the year-over-year impact from pricing was similar to Q4 while volume declined slightly year-over-year driven principally by HHC's hygiene market segment. From a profitability perspective, taking into consideration that our first quarter is always our lowest margin quarter of the year due to the seasonality of our business, we performed very well. We grew adjusted EBITDA 12% year-on-year to $123 million, expanded adjusted EBITDA margin by 160 basis points year-on-year to 15.2%, and grew adjusted EPS by 22% year-on-year. On balance, global economic conditions remained similar to last quarter. Manufacturing activity continues to be subdued, evidenced by PMI readings below 50% for more than a year in both the United States and Europe. Our outlook assumes manufacturing activity will be weak through the end of the year. However, from a year-on-year comparison standpoint, constrained manufacturing activity will be more than offset by the absence of the destocking impact that weighed so heavily on 2023 volume. In this slow growth economic environment, it is essential that we continue to innovate and price to value, leveraging the vast set of tools and capabilities we've created to continue to expand our margins. Our customers have increased their focus on developing lower-cost versions of their products to better suit the market environment. And we play an important role in bringing robust bonding solutions that enable their success. We also leverage our reformulation capabilities to develop solutions that help lower our customers' costs, while maintaining or improving our margins. Now let me move on to review the performance in each of our segments in the first quarter. In HHC, organic revenue was down 9% year-on-year due to lower volume and anticipated index-based pricing adjustments. Pricing was down mid-single digits as expected. Excluding hygiene, HHC volume was flat year-over-year and has continued to strengthen sequentially over the past three quarters. The decline in hygiene volume reflects our customers adjusting their inventory levels to take into account lower than forecasted demand, our exit of lower-margin business, and disruption in certain emerging markets due to currency controls and restrictions. HHC's responsible pricing actions focus on reliability and innovation, and selective pursuit of profitable growth opportunities in its leveraged market segments enabled it to increase adjusted EBITDA 4% and increase adjusted EBITDA margin by 130 basis points year-over-year despite lower organic revenue. In engineering adhesives, organic revenue declined 2% in the first quarter. Strengthened the electronics and automotive market segments was offset by slower demand in the woodworking market segment. Overall, the diversification of EA's portfolio has resulted in relatively strong and consistent volume performance despite the challenging global manufacturing environment. Adjusted EBITDA increased 5% in EA and adjusted EBITDA margin increased 90 basis points year-on-year to 15.9%. Favorable net pricing and raw material cost actions and restructuring benefits drove the increase in adjusted EBITDA margin year-on-year. In construction adhesives, organic sales increased 10% year-on-year. The absence of customer destocking and the expectation for a return to a more normal construction season in North America benefited CA during the quarter. Roofing was particularly strong with organic sales increasing more than 20% year-on-year. Adjusted EBITDA for construction adhesives increased nearly $7 million versus the first quarter of last year and adjusted EBITDA margin expanded 530 basis points to 8.4%. Net price and raw material cost management, improved volumes, and restructuring savings drove the improvement in adjusted EBITDA margin year-on-year. Recall, the first quarter is CA's seasonally lowest volume and thus seasonally lowest EBITDA margin quarter. Geographically, America's organic revenue declined 2% year-on-year driven by HHC which declined 8% versus the prior year in the America's region. HHC organic revenue was adversely impacted by some lingering destocking activity as well as volume declines in hygiene. EA and CA combined achieved organic revenue growth of more than 4% year-on-year in the first quarter in the America's region. In EIMEA, organic revenue decreased 13% versus the first quarter of last year with all GBUs experiencing similar magnitude declines. Economic conditions have deteriorated in Europe reflecting overall cost of living challenges on consumers' purchasing power. In addition, volume in EIMEA was adversely impacted by developments in Egypt and the broader Middle East region due to currency restrictions and continued political uncertainty. In Asia Pacific, organic revenues increased 2% year-on-year, strength in China which achieved a mid-single-digit increase in organic sales more than offset weaker demand throughout the rest of the region. We continue to remain optimistic about our business in China with no direct exposure to the Chinese construction market and strong representation in the electronics and automotive market segments. We're encouraged by what we're seeing, and while we expect some uneven market activity over the near term, we will continue to grow through innovation share gains in our select markets of choice. Now, let me turn the call over to John Corkrean to review our first quarter results in more detail and our outlook for 2024.

Thank you, Celeste. I'll begin with some additional financial details on the first quarter. For the quarter, revenue was up 0.2% versus the same period last year. Currency had a negative impact of 0.6% and acquisitions increased revenue growth by 5%. Adjusting for those items, organic revenue was down 4.2%, with volume down 0.9% and pricing down 3.3% year-on-year in the quarter. Adjusted gross profit margin was 30.1%, up 320 basis points versus last year, as the net effect of pricing and raw material actions and restructuring savings more than offset the impact of slightly lower volume. Adjusted selling, general, and administrative expense was up year-over-year as expected with acquisitions driving half of the increase, and the rest of the increase resulting from higher wage inflation and higher variable compensation, partially offset by restructuring savings. Adjusted EBITDA for the quarter of $123 million was up 12% year-on-year, reflecting the net positive impact of pricing and raw material cost actions, restructuring savings, and the favorable contribution of acquisitions. Adjusted earnings per share of $0.67 was up 22% versus the first quarter of 2023, driven by strong operating income growth. Operating cash flow in the quarter improved significantly year-on-year as higher margins, lower working capital requirements, and favorable accrued compensation more than offset the lower organic revenue. Strong growth in EBITDA and cash flow resulted in a net debt to EBITDA of 2.8 times at the end of the first quarter, down from 3.3 times at the end of the first quarter of last year and 2.9 times at the end of 2023. With that, let me now turn to our guidance for the 2024 fiscal year. As a result of our good start to the year, which was largely consistent with our expectations, we are reiterating our previously communicated financial guidance for fiscal 2024. Net revenue growth is expected to be in the range of up 2% to 6%, with organic revenue flat to up 3% year-on-year. Adjusted EBITDA is expected to be in the range of $610 million to $640 million, equating to growth of approximately 5% to 10% year-on-year. Combined, these assumptions result in full-year adjusted EPS in the range of $4.15 to $4.45, equating to year-on-year growth of between 7% and 15%. We continue to expect full-year operating cash flow to be between $300 million and $350 million, weighted toward the second half of the year. Finally, based on the seasonality of our business, we would expect second quarter EBITDA in the range of $145 million to $155 million. Now let me turn the call back over to Celeste to wrap this up.

Thank you, John. As the market leader in innovation, we have the privilege of collaborating with some of the most exciting and forward-thinking companies in the marketplace. Companies that think differently, act differently, and exhibit the courage to take a risk to improve our world. Next month, we will be launching the inaugural H.B. Fuller Customer Innovation Awards. We are proud to publicly recognize the most outstanding customer innovations during the previous year that were enabled by our adhesive technology. We look forward to celebrating with these customers and continuing to innovate to support their objectives. Keep an eye on our social media platforms and our website for the official announcement to learn who will be named our winners. In conclusion, we are off to a good start to the year, and we are pleased with our results in the first quarter. Our teams are executing well in a challenging environment and continue to demonstrate discipline in balancing changing price and raw material cost dynamics, drive acquisition synergy realization, and deliver meaningful cost savings from restructuring initiatives to drive growth in adjusted EBITDA. As we look ahead, we remain on track for another year of strong profit growth, continued margin expansion, and improved volume trends in fiscal 2024. We will continue to strengthen the portfolio through targeted organic investments and new highly synergistic strategic acquisitions, and we are confident in our ability to achieve our long-term growth and profitability goals. That concludes our prepared remarks for today. Operator, please open the line for questions.

Our first question comes from Ghansham Panjabi from Baird. Your line is now open.

Good morning, everybody. Thank you, Operator.

Good morning, Ghansham.

Good morning, Celeste. Maybe you can just build on your comments on what you saw during the first quarter. I think you said Europe deteriorating a bit and China a little bit stronger. Just based on that, how are you thinking about the regional macroeconomic backdrop for the rest of the fiscal year? And then also can you update us on your view on where we are relative to the destocking across your three core operating segments?

Sure. Let's start with destocking. I believe we have mostly moved past the destocking issue we experienced in 2023. There were some residual impacts in HHC during the first quarter, and there may be a bit more in the second quarter. However, overall, I think that situation is largely resolved. Regarding the quarter, as you mentioned, China performed better than expected while Europe was weaker. Notably, all three of our GBUs in Europe faced volume declines of 10% or more, which marks a significant shift from what we observed in 2023. Nevertheless, the strong performance in China helped us offset that decline. If we analyze the segments further, we see that overall volume remained relatively flat, except for HHC, where only the hygiene segment experienced volume declines. On the other hand, CA improved due to easier comparisons, and EA saw a substantial double-digit percentage increase driven by developments in China. That encapsulates the quarter.

Ghansham. Maybe I'll add just a little color on Europe, because, although it was weak and I think we continue to assume that it will be weak for the year, it did improve sequentially over the quarter. So just to give you some perspective on kind of the cadence in Q1, revenue in Europe was down in the high teens in P1 down in the mid-teens in P2, down high single digits in P3 and then P4 year-to-date it's down mid-single digits. So we're seeing sequential improvement. We think that's a positive sign but we're still remaining cautious on Europe.

Yeah. And just to elaborate on Europe a little bit. So we saw this really pronounced destocking phenomenon in North America in 2023. I don't believe this is the same thing. In fact, based on anecdotes from a few of our large customers and again, customers across GBUs, the statement that kept being repeated was that they had overproduced demand. So I think there has been a little overproduction happening in Europe. And what we're seeing now is a correction of that, a temporary correction. And as John pointed out, the volume numbers that we experienced month-over-month, ending this month to date really indicate it is a correction and not a major destocking activity.

Okay. Super helpful. And then just for my second question on commodity costs. And obviously you've seen significant margin expansion at H.B. Fuller through just price cost. And also your restructuring and cost optimization initiatives, et cetera. We're seeing oil tick up a bit. Some of the other inputs have started to pick up as well in terms of propylene and also some of the TiO2, et cetera in China starting to pick up. How are you sort of thinking about that dynamic for H.B. Fuller going forward as it relates to the upstream inflation pulse, if you will?

We've observed similar trends, Ghansham, but our business has faced them in a different way. It's important to note that 87% of our raw material expenditures are on specialty chemicals. We keep track of 4,000 different material bases, which are significantly influenced by the volume of their application, unlike traditional commodities. I'm predicting that we will likely see more deflationary or stable raw materials, especially if volume remains limited. If our volume continues to be weak, we should expect more deflation in our raw materials, as they don’t fluctuate like propylene and crude oil do. I believe this will put pressure on those suppliers.

Okay. Perfect. Thanks so much.

Our next question comes from Kevin McCarthy from Vertical Research. Your line is now open.

Yes, thank you and good morning. Celeste, it's nice to see your Construction Adhesives business, post the results that it did. Can you talk a little bit about what you're baking into the annual guide for that segment in terms of seasonality sales and margin opportunity?

Yes. Welcome, Kevin.

Thank you.

So as it relates to CA, what we saw this quarter was really, what I would call customers buying and their sentiment and anecdotes equivalent to the start of a normal construction season. So we're starting to see the build and we're anticipating that will be the case. If you look at our guide for the year, what we anticipated there was high single-digit organic growth for the CA business. Do you want to elaborate any further, John?

Yes. I just would say just to echo Celeste's comments about our assumptions, we're assuming we're going to have a normal North American construction season. We think the destocking is complete in that market. So you will see CA have a strong first half. Q1 will be our strongest quarter, I would predict because it is our easiest comparison. Q2 should be strong too from a comparison standpoint. And then we'll see moderating growth in the second half, as we get to comparisons against the improvements we saw in last year's trend. So – but we still feel good about that high single-digit type of growth range.

Yes, Kevin in particular, our roofing business was very strong in Q1. And actually we're instituting some price increases in that business unit as well.

Okay. Good to know. And then secondly, Celeste, I think you referenced some softness in the hygiene space within HHC. How is that business evolving relative to your expectations? And is the European dialogue part of the equation there? Or is that separate and distinct? Maybe you can just kind of update your thoughts on likely trajectory for that business as the year progresses?

Yes, the hygiene market within HHC was entirely responsible for the volume decline we experienced. While it has become a smaller segment for us compared to the past, we managed to offset much of that decline with growth in our packaging and medical adhesive areas. Regarding hygiene specifically, we noticed that some of our major customers in Europe overproduced, leading to a correction in that market. Additionally, our hygiene market often leads in many developing regions, but we faced currency restrictions in places like Argentina and Egypt, which halted our sales there. The index pricing adjustments have been significant in the hygiene space, and I want to point out that these adjustments are leveling out this quarter and moving forward, unlike the previous two quarters when they were down. Furthermore, we encountered price competition in Asia and chose to exit some of that business. For the future, I believe many of these issues will correct themselves. We saw a production correction in Europe, and while core Europe will remain weak, it won't be as weak as in the first quarter. The currency restrictions are easing in certain areas, providing some improvement. As I mentioned, index price adjustments are stabilizing. Therefore, apart from the business we are stepping back from due to pricing, the hygiene market is expected to perform better in the upcoming quarters.

Understood. Thank you.

Our next question comes from Jeff Zekauskas from JPMorgan. Your line is now open.

Thanks very much. I think your SG&A expense adjusted was about $165 million. And I know that there's a lot of discretion in the way you allocate SG&A in a seasonally weak quarter. Do you expect that number in absolute terms to rise through the course of the year or to be lower or stay the same? Can you give us some assistance on that?

Sure. I'll take this one, Jeff. So it was in line with expectations. It's higher certainly as a percentage of revenue in the first quarter, because revenue is our lowest revenue quarter seasonally. And if you look at the increase, it's up about 10%. Half of that is acquisitions that we didn't have in the first quarter last year. So that's driving about half of that increase. And then the remainder is really driven by higher variable compensation. So, we're accruing at a higher rate than we were last year at this time and the impact of wage inflation. So if you look forward, we would expect it to increase sequentially in terms of total dollars but decrease as a percentage of revenue. So, when we look at how we accrue things like variable compensation we do adjust the percentage, we accrue to match the seasonality of the business. So we accrue a little less in Q1 than in Q2. So you'll see that step up, but you should see that come down both in terms of the year-on-year increase, because we'll start to annualize against those acquisitions and it should also come down as a percentage of revenue.

Great. And then for my follow-up, do you guys think that volumes will grow year-over-year in the second quarter or no or stay flat?

I would say that they should sequentially improve, but I think we're kind of still projecting they may be down, certainly, less than a couple of percent, but they may be down, maybe flat to down a percent, maybe flat to up a percent. So, I don't think we're going to see a significant deviation from Q1.

Thanks, Jeff.

Our next question comes from Patrick Cunningham from Citi. Your line is now open.

Hi. Good morning. This is Eric Zhang on for Patrick. Can you walk us through how the 2023 vintage acquisitions have performed? And are there any positive or negative surprises?

Sure, Eric. I reviewed the integration results from the adhesion acquisition this morning and I'm pleased to report that we've doubled our performance compared to the deal model. In general, looking at the overall results, we are exceeding our deal model plan, and I believe the synergy projection for this year is $25 million, up from $12 million last year.

Yes. And I can add just a little color on that Eric. As Celeste said, the total impact that we should see year-on-year from acquisitions is about $25 million. That's what we discussed in Q1. That's the incremental impact versus 2023, and we’re right in line. And they're all performing very well in line with expectations.

Got it. Thank you.

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

Thank you. Celeste your Q2 guidance is a little bit below Street expectations. Is that due to hygiene or other factors?

Hey David, I'll add to that. When we consider this, we focus more on trends and year-on-year comparisons rather than consensus. So, the midpoint will reflect a slightly lower growth rate than Q1. The main factor here is that we are experiencing our biggest net pricing and raw material benefit in Q1, which will decrease in Q2 and continue to narrow as the year progresses. However, we are also seeing synergies and restructuring benefits increase. Overall, the assumptions indicate that the situation for Q2 appears quite similar to Q1, but we will have slightly less net pricing and raw material benefit.

Got it. Based on your Q2 guidance, the EBITDA for the second half is projected to be 29% higher compared to your first half EBITDA guidance and results. Can you explain the reasons behind this almost 30% increase from the first half to the second half EBITDA?

Yes, it's primarily influenced by seasonality and the fact that the first quarter has low volume. I mentioned the benefits from restructuring and synergies, which will increase as we progress from the first half to the second half. Ultimately, it's mainly a result of seasonal effects.

Yes. And David when you look at the trends in the business, we have some favorable trends on our side, right? So, we've got our index prices flattening out. Our construction season is really ramping up, particularly in our roofing space, which drives a high EBITDA margin for us. I'm anticipating continued strength in China, and I want to elaborate on that because that is in part the market in China, but also some really tremendous market share gains in China as well. So, I'll come back to that. We've got destocking that's complete in all of the GBUs. And as John just identified, we've got synergies and restructuring. But just to talk a little bit about some of these market share gains, our electronics business was up 50% versus prior year Q1. And we're really seeing some excellent work come to fruition there. In fact, 30% of our new volume in electronics is actually coming from new models. So, what that tells me is that our team is now fully integrated into these customers so much so that they become part of their development cycle. So, we're winning a lot. We're well entrenched in that space and it also indicates that our customers have gone back to innovating. So, they're back on their product upgrade cycle post-pandemic. And that's really important because that's the opportunity that we've to get in and drive share take and to really bring solutions to the customer base. So, that's just one example.

And David, I might just add something regarding the sequential impact. Our perspective on the business can differ, and that's an insight I've previously recognized. I looked at last year, and our second half EBITDA increased by just over 30% compared to the first half. I believe that kind of trajectory is quite typical.

Right. Thank you very much. Thank you.

Thanks David.

The next question comes from Rosemarie Morbelli from Gabelli Funds. Your line is now open.

Thank you very much. Good morning everyone. Celeste, I was wondering about two things. First, following up on your customers innovating and your market share growth in the electronic sector, which includes a lot of areas. Could you provide more insight into which specific areas you are performing well in? And then my second question, I'll ask later.

Thank you, Rosemarie. I'm happy to provide more details on that. For instance, in consumer electronics, we've replaced a competitor's PFAS-containing product with our own PFAS-free two-part epoxy for trackpads, allowing us to capitalize on the shift away from PFAS. In mobile phones, we secured a 100% share of touchpad bonding and edge gap bonding with a reactive hot-melt polyurethane for a phone that will be shipped to Africa. This supplier is focusing on the African mobile phone market from China. Additionally, in automotive electronics, we won a vehicle display bonding application with an OEM in Europe last year, which has grown tenfold since then. These are a few examples from the electronics sector. We also had notable success in aerospace, particularly in Europe, where we provided adhesives for airplane interior trim and brought in a syntactic epoxy that offers great compressive strength for bonding honeycomb materials to carbon skins in aircraft. These examples showcase the range of products and markets in our growth category, where we are competing successfully and achieving wins.

That is very helpful. I hope – you have something for the aerospace that will prevent doors....

Me, too.

And then my second question would be, on the hygiene side. You mentioned that it was smaller than in the past. So, are you walking away from a lot of businesses? Or has the industry changed to the degree that it is not as interesting?

We have stepped back from certain business opportunities because we struggled to effectively price our offerings, particularly in challenging emerging markets like China. The product performance there doesn't match that of other regions. While we are withdrawing from some areas, the larger impact is that we are experiencing growth in other parts of our business. For instance, we are focusing on expanding our Engineered Adhesives segment. Hygiene also remains an important area for us, where we aim to enhance productivity and improve EBITDA margins. However, we recognize that achieving these goals may require us to be selective about the markets in which we engage. That's the overall direction we're taking with hygiene.

Thank you very much. Good luck for the rest of the year.

Thank you very much, Rosemarie.

We have a follow-up question from Jeff Zekauskas from JPMorgan. Your line is now open.

Thanks very much. Can you talk about demand trends in the U.S.? What the U.S. was like during the quarter? And how it seems to you in the second quarter? Are we strengthening, weakening? Or how are we doing?

Certainly, Jeff. Let me start by discussing the U.S. in Q1. A significant factor was the end of destocking in our HHC GBU, alongside our California customers preparing for a typical construction season. Consequently, volume in that area saw a low-single-digit increase. Our packaging and solar businesses performed particularly well. I’m very pleased with our packaging team in the U.S. They have excelled in creating solutions for our customers, which has led to business growth. In Q1 2024, we achieved high-single-digit volume growth in packaging compared to 2023, and we expanded our EBITDA margin by 300 basis points. The team has not only developed effective solutions but has also creatively explored new distribution channels aimed at specific industries, rather than general adhesive distribution. On the other hand, the hygiene and woodworking businesses were weaker in the U.S. during Q1, largely due to factors related to products used in building materials, which are influenced by construction trends. John, would you like to add anything?

Well, Jeff, just to your comment about or question about trends we're seeing. It was pretty consistent across the quarter in Q1, as Celeste, hit on some of the key points for Q1. Q4 started out a little bit stronger. Construction continues to be strong and will show good growth probably not the level of growth that we did in Q1. And Engineering Adhesives is showing improving growth. And HHC is showing improvement too, but they tend to be still a little bit weaker for some of the items that Celeste highlighted. So small sample size, but so far Q2 has started out a little stronger than Q1.

Thank you.

As of right now, we don't have any hands raised. I'd now like to hand the call back over to Celeste Mastin for closing remarks.

Great. Well. Thank you, all for joining the call and your continued interest. We look forward to speaking with you again next quarter.

Thank you for attending today's conference call. You may now all disconnect. Have a wonderful day.