Thank you for standing by. And welcome to the H.B. Fuller Second Quarter 2024 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. I'd now like to turn the call over to Steven Brazones, Vice President of Investor Relations. You may begin.

Thank you, operator. Welcome to H.B. Fuller's second 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. I will now turn the call over to Celeste Mastin. Celeste?

Thank you, Steven, and welcome, everyone. I'm very pleased with our strong second-quarter financial performance, which reflects the team's steadfast commitment to execution, while driving our long-term strategy to focus on more profitable, higher-growth segments of the market. We continue to innovate and deliver customized, value-enhancing solutions to our customers, while acquiring highly profitable, fast-growing businesses to expand our market presence in the most differentiated segments. As we execute our restructuring program focused on streamlining our global footprint, we are driving sustainable enhancements to our cost structure and improving our ROIC. In a large total addressable market, where we win one application at a time, we continue to meaningfully move the needle and remain on track to deliver adjusted EBITDA margin greater than 20% in the next three to five years. Looking at our consolidated results in the second quarter, our organic sales trend continued to improve, driven by organic volume growth of more than 3% during the quarter with volume up in all three global business units. Overall, organic revenue was flat year-on-year as volume growth was offset by reformulation activity and index-based pricing adjustments. From a profitability perspective, we executed well and delivered very strong results on slightly stronger than anticipated volume growth, consistent with our second-half expectations. We grew adjusted EBITDA 10% year-on-year to $157 million, and expanded adjusted EBITDA margin by 120 basis points year-on-year to 17.1%. Now, let me move on to review the performance in each of our segments in the second quarter. In Engineering Adhesives, organic revenue increased 2.5% in the second quarter, marking a return to positive organic growth. Strength in the electronics, automotive, aerospace, and recreational vehicle market segments was partially constrained by slower demand in the woodworking and clean energy market segments. EA delivered a strong quarter representative of our expectations given the many growth segments in this GBU. Adjusted EBITDA increased 13% in EA and adjusted EBITDA margin increased 160 basis points year-on-year to 18.4%. Favorable net pricing and raw material cost actions and restructuring benefits drove the increase in adjusted EBITDA margin year-on-year. In HHC, the organic revenue development improved sequentially on a return to positive volume growth. Reformulation activity and index-based pricing adjustments resulted in a decline in organic sales during the second quarter for HHC. Strengthened bottle labeling, packaging, and medical partially offset continued, although lessening organic sales declines in the hygiene market. Adjusted EBITDA was flat year-on-year for HHC in the second quarter despite lower organic revenue, and adjusted EBITDA margin expanded 50 basis points year-on-year to 16.6%. Favorable net pricing and raw material cost actions, restructuring benefits, and acquisitions drove the increase in adjusted EBITDA margin year-on-year. In Construction Adhesives, organic sales increased 7% year-on-year on strong demand in roofing, which achieved a 20% increase in organic sales. Construction market conditions have improved and are more consistent with a normal construction season thus far. Adjusted EBITDA for Construction Adhesives increased 24% versus the second quarter of last year to $23 million, and adjusted EBITDA margin expanded 90 basis points to 15%. Net price and raw material cost management, improved volumes and restructuring savings drove the improvement in adjusted EBITDA margin year-on-year. Geographically, Americas organic revenue was flat year-on-year in the second quarter. EA and CA both achieved positive organic growth during the quarter and on a combined basis achieved organic revenue growth of more than 6% year-on-year in the Americas region, driven by strong growth in electronics, aerospace, and roofing. HHC organic revenue declined 7% versus the prior year, the hygiene market, while slightly improved in the Americas, continued to negatively impact organic sales development for HHC in the region. In EIMEA, year-over-year organic revenue development, while still down, improved significantly relative to the first quarter as expected. The organic sales development for all GBUs improved sequentially, although still declined modestly year-on-year. This bounce back was expected as much of the demand weakness experienced in the first quarter was temporary. We expect the trend to continue to improve as we progress through the remainder of the year. In Asia Pacific, organic revenues increased 7% year-on-year, driven by strength in electronics, automotive, beverage labeling, and flexible packaging. Strength in China, which nearly achieved a double-digit increase in organic sales, drove the region's organic sales growth. We have a winning strategy, a focused team, and a strong track record of execution. Our path to 20% adjusted EBITDA margin is multifaceted and includes restructuring opportunities, volume growth, improved organic mix between growth and leveraged market segments, and acquisitions of higher growth, higher margin businesses in the most differentiated adhesive applications. During the second quarter, we completed the acquisition of ND Industries. This highly strategic and financially compelling acquisition expands our market presence into a new and exciting growth market segment, fastener locking solutions, which is a combined system of adhesives and mechanical fasteners. The acquisition accelerates one of our top growth priorities and is consistent with our focus on proactively driving capital allocation to the highest margin, highest growth market segments within the functional coatings, adhesives, sealants, and elastomer or CASE industry. As part of the acquisition, products under ND Industries' Vibra-Tite brand will be added to H.B. Fuller's existing epoxy, cyanoacrylate, UV curable and anaerobic product ranges. This acquisition represents a very financially compelling transaction for H.B. Fuller. ND's full-year 2024 sales are expected to be approximately $80 million at greater than 30% EBITDA margin. Total purchase price was approximately $250 million, equating to a pre-synergy enterprise value to EBITDA multiple of less than 10 times and a post-synergy EBITDA multiple of approximately six times. Our M&A pipeline is robust, and we continue to evaluate a number of potential transactions. We have proven the ability to acquire multiple companies while simultaneously reducing our leverage ratio. Given this capability, we have reinitiated our share repurchase program, allowing us to both invest for growth and return additional capital to shareholders. Now, let me turn the call over to John Corkrean to review our second quarter results in more detail and our updated outlook for 2024.

Thank you, Celeste. I'll begin with some additional financial details on the second quarter. For the quarter, revenue was up 2.1% versus the same period last year. Currency had a negative impact of 1.7%, and acquisitions increased revenue by 3.9%. Adjusting for those items, organic revenue was down 0.1% with volume up 3.3%, and pricing down 3.4% year-on-year in the quarter. Adjusted gross profit margin was 31.1%, up 210 basis points versus last year, driven by the net effect of pricing and raw material actions, restructuring savings, and higher volume. Adjusted selling, general and administrative expense was up 9% year-on-year as expected, with acquisitions driving approximately 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 $157 million was up 10% year-on-year, reflecting the net positive impact of pricing and raw material cost actions, volume leverage, restructuring savings, and the favorable contribution of acquisitions, which more than offset higher variable compensation and wage inflation versus the prior year. Adjusted earnings per share of $1.12 was up 20% versus the second quarter of 2023, driven by strong operating income growth. Year-to-date operating cash flow increased $21 million year-on-year on improved profitability and lower net working capital as a percentage of revenue. This strong growth in EBITDA and cash flow resulted in net debt to adjusted EBITDA of 3.1 times at the end of the second quarter, down from 3.3 times at the end of the second quarter of last year. On a sequential basis, the ratio increased from 2.8 times to 3.1 times, reflecting the acquisition of ND Industries. On a pro forma basis, including the acquired EBITDA from ND Industries, net debt to adjusted EBITDA was 3.0 times at the end of the quarter. During the second quarter, we reinitiated our share repurchase program and acquired 182,000 shares. Now that our net debt to adjusted EBITDA ratio has returned to more historical levels and given our expectations for continued strong free cash flow, we anticipate regularly repurchasing shares with the goal of offsetting annual share creep from equity-based compensation programs. With that, let me now turn to our guidance for the 2024 fiscal year. As a result of our strong first-half performance and recent acquisition activity, offset somewhat by the impact of the strengthening US dollar, we are updating our previously communicated financial guidance for fiscal 2024 as follows: net revenue growth is now expected to be in the range of up 2% to 4%, with organic revenue flat to up 2% year-on-year. Adjusted EBITDA is now expected to be in the range of $620 million to $640 million, equating to growth of approximately 7% to 10% year-on-year. Net interest expense is now expected to be approximately $130 million. Our adjusted effective tax rate is now expected to be between 26.5% and 27.5%. Full-year depreciation and amortization expense is expected to be approximately $170 million and our fully diluted share count is now expected to be approximately 56.5 million shares. Combined, these assumptions result in full-year adjusted diluted earnings per share in the range of $4.20 and $4.45, equating to year-on-year growth of between 9% and 15%. We still expect full-year operating cash flow to be between $300 million and $350 million. Finally, based on the seasonality of our business, we would expect third-quarter EBITDA to be in the range of $165 million to $175 million. Now, let me turn the call back over to Celeste.

Thank you, John. At H.B. Fuller, we are committed to working alongside our customers to test new ideas, optimize bonding performance, and develop highly tailored adhesive solutions. It is through this unique collaborative approach that we are able to innovate with speed and enable our customers' success. We have the privilege of collaborating with and creating solutions for an extensive group of customers. In April, we recognized the most innovative product introductions that resulted from these partnerships in 2023 by naming Anhui Huasun, GAF, and Niine as the Inaugural Winners of the H.B. Fuller Customer Innovation Awards. We are proud to recognize these customers for their exceptional achievements that leverage our unique technology to improve our world. Let me share a little more about this year's winners. Anhui Huasun Energy is a market leader in solar panel construction and their heterojunction technology solar modules were recognized for their ability to offer power that is more efficient and reliable than previous generations of solar modules. This improved solution has helped to facilitate the broader adoption of clean energy. GAF, a standard industries company, and North America's largest roofing and waterproofing manufacturer, was recognized for its EnergyGuard Non-Halogenated Polyiso Insulation, which gives architects and contractors an energy-efficient solution designed to help meet their sustainability goals. This product line offers excellent thermal value and is free of potentially hazardous flame retardant chemicals. The product offering holds numerous sustainability certifications. Niine, a leading feminine hygiene company in India and producer of sanitary napkins, was recognized for introducing India's first biodegradable solution, which helps to mitigate adverse impacts on the environment. This is particularly crucial in India, where high population density combined with a still-developing disposal system for feminine products has led to a push for more sustainable solutions. Incredibly, Niine's new product reduces the estimated decomposition time from 800 years to less than 18 months for a sanitary napkin in a landfill. Congratulations to these customers for innovating to improve our world and for being our Inaugural Innovation Award winners. H.B. Fuller was also recognized for innovation in the second quarter winning our second consecutive Annual Innovation Award from the Adhesive and Sealant Council following our win in 2023 for our EV Protect Product. This year we were honored for our new thermoplastic encapsulant platform for photovoltaic modules used in the construction of solar panels. Our products have application in newer thin-film modules and are advantaged by lower levelized costs of electricity, enabling the creation of solar panels that generate power at a lower cost per watt than traditional technology. We are very proud of our Clean Energy team and we thank our peers at the ASC for the 2024 Innovation Award. To wrap up, we are very pleased with our first half financial results and the continued incremental improvement we are driving throughout the business consistent with our strategic plan. The team is executing well and there is complete alignment across the organization. We have one focus: creating customized value-added adhesive solutions for our customers. We're set to deliver another year of improved profitability and ROIC, strong cash flow, and we are on pace to achieve our long-term financial targets and drive attractive shareholder returns. That concludes our prepared remarks for today. Operator, please open the line for questions.

Thank you. We will now begin the question-and-answer session. Your first question today comes from the line of Ghansham Panjabi from Baird. Your line is open.

Hi. Good morning, everyone. This is actually Matt Krueger sitting in for Ghansham. I just wanted to focus my first question in on volumes for the quarter and for the rest of the year. So you highlighted that all three segments demonstrated volume growth. I think this is the first time since early 2022 that this can be said, but can you provide some added detail on segment volumes during the quarter, specific to each segment? And then, how the third quarter has kicked off, and maybe what your budgeted volume expectations by segment are for the year, just trying to get a sense of what should we be thinking about for the second half.

Sure, Matt, and welcome. Good morning. So when you look at our volume performance over Q2 by segment, highest volume performance was logged in by our Construction Adhesives business, which you would expect their mid-season right now. Last year was definitely a weak construction season. So they're up, volume growth is up double-digit percent. EA also had a strong quarter from a volume perspective and showed mid-single digit volume growth. And HHC, low single-digit volume growth, but volume growth all the same. So we've seen the destocking that was occurring in HHC, now solidly in the rearview mirror, and we're feeling good about all three of these businesses from a volume outlook perspective. When we look at P7, we're seeing continued strong performance on volume, and actually what we've seen is, we were already projecting volume growth for the second half of the year, around mid-single-digit. We actually have now seen that earlier than planned, which really explains our second quarter.

Can you provide some additional information on the benefits from the cost optimization and restructuring efforts that have been implemented so far? What have you achieved to date, and what opportunities remain under the current program? Additionally, how do you expect this to progress throughout the year, particularly regarding the contribution from the first half compared to the second half? This will help us understand the scale of the benefits we can anticipate.

Sure. When we announced the restructuring last year, we announced a $45 million restructuring program over three years. In the first year 2023, we delivered about $10 million toward that end. This year, we're on track for what will be about $20 million of restructuring savings, and the remainder will then occur in 2025.

Yes, Matt, in terms of kind of impact by quarter, first half versus second half, I would say we're probably seeing 35%, 40% of that $20 million in the first half, and we'll see the rest in the second half. So it'll ramp up a little bit as we go through the year.

Got it. Got it. That's helpful.

And that $20 million was incremental, Matt, right, on top of the 10.

Yes, yes. Makes sense. Okay. That's it for me. I'll hop back in. Thank you very much.

Great. Thanks. And our regards to Ghansham.

Your next question comes from the line of Kevin McCarthy from Vertical Research Partners. Your line is open.

Yes. Thank you, and good morning. Celeste, congrats on the acquisition of ND Industries. I was wondering if you could maybe address a few questions related to that deal. In listening to your comments on sales and margins, would it be fair to say that you're baking in, say, $5 million to $7 million of EBITDA per quarter in the back half of the year? And then just qualitatively, maybe comment on your early experience now that you've owned it for five weeks, and maybe what the integration roadmap looks like over the near-term and medium-term strategic thoughts. Those sorts of comments would be welcome.

Sure, we're projecting a benefit of about $13 million from ND in the second half of the year, which breaks down to roughly $6 million each quarter. Our experience with the team so far has been fantastic. We've gained some excellent technology and some remarkable people. A part of their business included adhesives under the Vibra-Tite brand, which we strongly believe in and appreciate. In addition to our previous offerings of cyanoacrylates, UV curables, and epoxy systems, they possessed a very advanced anaerobic product line that stands out to us. This anaerobic offering is impressive; it involves a two-part epoxy that gets encapsulated and included in a liquid carrier system, which is then applied to mechanical fasteners, remaining inactive until the threads are engaged. Once the threads connect, the product mixes and cures into a strong structural bond. We're eager to introduce this to more of our significant OEM clients in the aerospace and automotive sectors, particularly in heavy equipment, as it delivers a robust structural bond. The acquisition also included the coating of customers' fasteners, which enhances our relationship with our customer base and allows us to excel in adhesive applications. The operation is an excellent fit because it leverages our strengths in formulating adhesives that satisfy customer requirements and understanding their practical applications, especially since we are now applying these adhesives at ND. From an integration standpoint, we're following our standard playbook, which includes a scheduled series of activities over the next two years. Currently, our legacy H.B. Fuller leader and the acquired business leader, who is now a market segment leader at H.B. Fuller, are in Europe exploring opportunities for geographic expansion. We also noted a positive development, as one major competitor to ND Industries exited the market due to supply chain challenges, creating a chance for us to increase volume and expand quickly. We have ambitious plans for ND Industries and are thrilled to welcome their team.

That's super helpful. As a second question, Celeste, I was wondering if you could comment on your price experience in each of the segments in the second quarter and taking into account that your comparisons look very different on pricing, moving forward, how would you characterize pricing prospects for the fiscal third quarter? Would you expect the negative numbers there to flatten out or perhaps even turn back to positive territory at some point?

Yes. There are several factors impacting pricing that affected it in the second quarter, and I can address this for the second half as well. HHC has numerous index-based pricing agreements, which I have mentioned before. When examining our pricing performance in both the first and second quarters this year, much of the negative performance was influenced by the adjustments occurring with these index-based pricing agreements. Currently, we are observing a steady increase in raw materials, as we monitor around 4,000 different ones. Looking ahead, about 80% of these are either stable or rising. Thus, we expect the index-based pricing agreements with major customers to stabilize in the third quarter and eventually rise along with raw material costs over time. Additionally, we will see an increase in reformulating products. In this cost-sensitive environment, customers may seek assistance with their product pricing. Typically, we collaborate with them to substitute certain raw materials in their formulas with lower-cost alternatives or from different suppliers, which allows us to reduce the overall price we can offer them. This reduces our costs without impacting our margins, though you will notice a change in pricing. Regarding our full-year guidance, while we initially projected pricing to decrease by 2% to 3%, we now anticipate it to be in the range of 1% to 2%.

Perfect. Thank you so much.

Maybe I can just add a little color, just if you're thinking about this sequentially, Kevin, for purposes of modeling. So, first half of the year, our prices were down roughly 3.3%, 3.4%, and this, as Celeste said, that will narrow as we go through the back half of the year, based on the fact that indexes have now leveled and we'll actually start to see a little bit of benefit from those, will also annualize against some of the price adjustments we had in the second half last year. So if you're thinking about the 3-ish-%, 3.5% in the first half, I would say, in Q3, it'll probably be closer to negative 2%, and Q4, maybe kind of negative 1% to negative 2%, something in that range.

I see. Thank you, John.

Your next question comes from the line of Patrick Cunningham from Citi. Your line is open.

Hi. Good morning…

Good morning. I wanted to focus on the volume outlook for HHC for the year. You've mentioned some ongoing softness in the hygiene sector. First, is destocking mostly finished in that area? How should we expect it to change throughout the year? Additionally, it seems there are still signs of consumer weakness in the US and Europe. What is your confidence level regarding strong positive volumes in the second half for HHC?

Yes.

I believe we can expect the volume trends to persist. We observed this transition from Q1 to Q2, and when looking across the portfolio, nearly every market segment is experiencing a return to volume growth. In fact, eight out of the twelve market segments reported volume growth in Q2. While hygiene remains a challenging area, it has improved significantly from Q1 to Q2. We anticipate further improvements over the next two quarters. Although we still predict that hygiene volume, or organic growth for the year, will be down in the low single digits, you can expect to see an upward trend in the upcoming quarters.

Yes. Looking at the year, organic growth for HHC will be slightly negative, mainly driven by pricing, which will be somewhat offset by volume.

Got it. That's helpful. And then just in terms of expectations for capital expenditures and free cash flow for the year, where do we stand? Given the sizable acquisition that you did, should we expect more of a focus on share repurchases for the rest of the year? Or might you still have an interest in pursuing another deal over $100 million?

Our capital forecast remains at $140 million for the year. Now, let's discuss the M&A pipeline. It is very strong, as we continue to identify and collaborate with business owners in targeted areas where we can acquire companies at reasonable prices. These businesses have significantly higher EBITDA margins than our own, as illustrated by ND Industries, and are in rapidly growing sectors. Therefore, for modeling purposes, you should consider expenditures of up to $350 million in M&A this year.

Got it. Thank you.

We will address your question about share repurchase. We will keep buying back shares to counterbalance equity-based compensation programs. You saw us start this in Q2, and we will maintain this throughout the year.

Your next question comes from the line of Jeffrey Zekauskas from JP Morgan. Your line is open.

Good morning, Jeff.

Thanks for it. Hi. Good morning. Thanks very much. In terms of the financial leverage that Fuller is willing to bear to execute its acquisition program, is it fair to say that you want to stay within, say, 3 times to 4 times unless something really unusually good came up? Is that where we're evolving to for 2024 and 2025?

No, Jeff. So I would put that range in the 2.5 times to 3 times, and that's where we've been operating over the course of this year. Now we're at 3.1 times with ND industries. But as you look back, what you see is that as we acquire these businesses, we have simultaneously been able to continue to reduce that leverage given the strong synergies that come with the businesses we're buying, their EBITDA, and our ability to further grow their EBITDA. So I'd consider 2.5 times to 3 times as more so the reasonable range of operation.

Okay. And then maybe a couple of questions for John. The benefit from ND in the second half is more than $10 million, and you increased your lower end of your guide by $10 million. So is it the case that the base business, for whatever reason, is a little bit weaker than you expected, because the increase is smaller than the acquisition benefit?

Yes. It's probably

I'm sorry.

Go ahead, Jeff.

I'm sorry. Your adjusted EBITDA increased by about 10% this quarter, and the benefit from acquisitions was approximately 4%. Based on my calculations, it appears that the acquisition contributions to EBITDA were around $6 million. Therefore, it looks like the organic EBITDA growth was about 5.5%. Is my calculation approximately correct?

Well, I think you'd have. So let me go to your first question around the guidance. So the $10 million, yes, that's roughly right, a little bit more than that. One of the things we saw in the second quarter was a continued strengthening of the US dollar, and we factored that into our guidance as well. We saw that start to show up in Q2. It kind of increased as we went through Q2, and we would expect the full year to be about a negative 2% impact from FX. And so, that would reflect a higher impact in the second half. We had devaluation of the Egyptian pound. Turkish lira was down about 7%. And then we have the renminbi, euro also weakening against the dollar. So we factored that into the second half. That pretty much offsets the impact of the ND Industries' contribution to EBITDA. So we kind of look at it, as we're adding ND, we've got some negative FX and the guidance for the most part in the second half is unchanged. When you look at the second quarter, yes, I think the $6 million might be a bit high. We only got $1 million from ND Industries in the quarter. It's probably around $4 million, but I get your point. The other impact you have to factor in, though, is FX, right? Because it wasn't nearly a negative 2% impact. So, yes, I think on netting out FX in ND, it's maybe a little less than 10%, but it's high single-digits.

Just if I could squeeze in one last one.

Sure.

What kind of growth rate do you expect for ND in sales over a three to five year period? And what's been its historical growth rate?

Yes. For the next three to five years, we expect revenue growth for that business to exceed 10% annually. While it has not reached that level historically, this has mainly been due to limited capital availability. Private owners have invested heavily in these businesses, but a few million more in capital expenditure would be beneficial. They have grown in stages, and we are now at the point where they are ready for the next phase of expansion.

Yes. And just to add to that, Jeff. Celesta commented major competitor leaving the US market creates a big opportunity in the near term. The big opportunity is geographic expansion, right? This is a business that's almost entirely US-based. As Celeste alluded, we've already got the team looking at opportunities in Europe, there's opportunities in Asia. So this will be a deal that brings a lot of commercial synergies with us.

And that's something that we are much better suited to do than a private owner, given that we already have a well-entrenched footprint around the world.

Great. Thank you so much.

Sure.

Your next question comes from the line of Mike Harrison from Seaport. Your line is open.

Hey, Mike.

Hi. Good morning. Congrats on a nice quarter. I was wondering if we could talk a little bit about the Engineering Adhesives business. I guess, first of all, I'm curious if you can walk through the volume growth that you're seeing in some of the key end markets within that business. I assume that electronics was still kind of leading the pack, but what are you seeing in areas like transportation, clean energy, and some of the stuff that's exposed to construction markets?

Yes, absolutely. This quarter, we've seen significant strength in automotive, aerospace, electronics, RV, and glass. Starting with automotive, we are actively increasing our market share and anticipate this momentum will carry into the second half. We've experienced double-digit growth, with increases ranging from 20% to 60% in interior and exterior trim applications, including materials like plastic lift gates and spoilers. We're also innovating in the EV powertrain sector with a new thermally conductive gap filler that is being utilized in lighting applications, such as sealants and controls for headlights. Our team has formed strong partnerships with major companies globally in the automotive sector, integrating into their innovation processes. I expect robust performance from both internal combustion engine units and electric vehicles, particularly in China, where we are collaborating with numerous EV manufacturers. In the glass sector, we have built a strong momentum, driven by our 4SG innovation—a product that supports significant architectural advancements. Notably, the most automated glass customer in Europe has committed 100% of their business to us. In the US, we've expanded our profile wrapping position from 25% to 100% share with a domestic OEM due to our product quality and customer service. This market is set to grow further, irrespective of the construction climate, as we see clients investing in 4SG lines. Aerospace has also been very promising. We've recently launched a non-chrome, corrosion-inhibitive sealant aimed at improving fuselage sealing and aerodynamic smoothing, which has helped us gain market share. Our flame smoke toxicity-approved products for interior trim have also contributed to increased penetration in the aerospace market, including new business wins in India for sealing emergency door hatches and helicopter components. Lastly, the electronics sector is experiencing rapid growth. Our presence in China has been pivotal to this expansion, and we've actively engaged with customers throughout their development processes. We recently transitioned our consumer electronics lead from China to the US to further scale our electronics business globally. Overall, we are optimistic about the growth potential in our Engineering Adhesives business, with approximately two-thirds of our growth segments located within this area. We've also welcomed a new opportunity in fastener locking systems, and our partnership in the E-Power space with a customer developing new battery technology for non-passenger EVs marks another thrilling growth avenue for us. This segment is excelling and evolving quickly.

Mike, you inquired about the influence of construction-related markets. We identified this as a weak area for Engineering Adhesives in Q1, which might seem at odds with our positive comments regarding our Construction Adhesives business unit. It's important to note that our construction operations are primarily based in the US, which are performing strongly. In contrast, the engineering adhesive businesses connected to construction, such as glass, woodworking, and panels, operate globally, and Europe experienced a slowdown in Q1, although there was improvement in Q2. Thus, we are witnessing better performance in the construction-related sectors. Celeste mentioned that glass is one of the standout areas, which is a positive development, and we anticipate this trend will carry into the second half of the year.

All right. That's definitely a helpful color. And then the EBITDA margin in your Engineering Adhesives business, pretty strong, you said, 160 basis points of year-over-year improvement. I know that long term, you see EA as a segment that can consistently deliver 20% EBITDA margin or higher. Is that 20% margin level something that we should expect you guys to achieve in the second half based on what you're seeing today?

So, Mike, I would say we were at 18% in Q2. We would expect that to step up as we see continued volume improvement and ND. So, yeah, I think the second-half average should be closer to 20% than the 18%.

In the second half, as we consider the direction of our portfolio over the next three years, our goal is for H.B. Fuller to achieve a total EBITDA margin of 20%. To reach this goal, our growth segments need to generate an EBITDA margin of at least 25%, while our leverage segments should exceed 15%. Our leverage segments are already nearing that 15% mark. Therefore, our focus is on continuing to acquire and grow in the faster-growing, higher-margin areas that are well differentiated. As you mentioned, you will be keeping an eye on EA as part of this strategy.

All right. Thanks very much for the additional color.

Thanks, Mike.

Your next question comes from the line of David Begleiter from Deutsche Bank. Your line is open.

Hi, this is David Huang here for Dave. I guess, just going back to the guidance, it sounded like volume is tracking ahead of expectations and pricing will become less negative in the second half. Why did you reduce the top end of your organic sales guidance from 3% to 2%?

Hey, David. We adjusted our guidance for organic growth from a range of 0% to 3% down to 0% to 2%. The two main changes we made include revising the price impact for the full year from a negative 1% to 2% to a negative 2% to 3%. Regarding volume, we initially projected a full-year impact of 2% to 4%, which we have now updated to 3% to 4%. This means we have increased the lower end of our volume assumption while slightly increasing the negative impact from price.

Okay. Got it. And then on working capital, do you still expect that to be a source of cash for the full year?

I think it might not be a source of cash. It was a source of cash in the first quarter and a use of cash in the second quarter as we return to volume growth. For the full year, it will likely be relatively neutral. We still expect our full-year working capital to decrease to around 16% or between 15% and 16%. We believe there will be continued sequential improvement, but year-over-year, it will probably increase due to volume growth.

Okay. Got it. Thank you.

In response to your comment about price volume, David, our adjusted EBITDA projection midpoint is increasing by approximately $5 million, as reflected in Q2, and this increase is being balanced out by the impact of foreign exchange despite the benefits from ND Industries. There aren't many other significant changes to report.

Okay. Got it. Thank you.

Your next question comes from the line of Rosemarie Morbelli from Gabelli Funds. Your line is open.

Thank you. Good morning, everyone, and congratulations on the strong quarter.

Thanks, Rosemarie.

Celeste, the company's focus and the ND acquisition indicate that you are adhering to the previously mentioned strategy regarding the leverage categories with a margin of 15%. Are there any divestiture opportunities we might anticipate to help you achieve a 20% plus EBITDA margin over the next three to five years?

When considering our leverage category, we are nearing 15%. Most of our businesses provide some benefit. We are now assessing all of them with a fresh perspective compared to the past. We have specific criteria for a leveraged business, which include factors like raw materials scale and selective market participation. Our priority is to identify and maintain as many segments as possible, weighing the trade-offs between choosing higher-margin but potentially smaller businesses. If we identify any business that does not align with our leverage criteria, we will contemplate divesting it. It is important to note that while our facilities are organized by a global business unit for management, nearly all of our plants are technology-driven and serve multiple units. Separating and exiting a market segment could lead to complications due to these shared resources. Hence, this assessment is complex, but we are actively engaged in critically evaluating all our businesses on an ongoing basis.

Thanks, Celeste. So you just said that all of the plants are servicing, so if I can use that term, all of your operations, all of your businesses. So how do we go from that comment to restructuring and eliminating, lowering your overall infrastructure?

Most of the plants are shared and primarily technology-based. However, there is still potential for redundancy and the possibility of shutting down some facilities. Since initiating our optimization process, we have announced the closure of nine out of the 80 plants we initially had. There are further opportunities to streamline our operations, and we are currently evaluating three to six more plants for potential exit. We are also reassessing our warehouse infrastructure in the US through a network optimization program aimed at making it more efficient. This presents various opportunities to reduce fixed costs in our business. While it is a challenging process, we are proceeding cautiously and remain focused on identifying numerous opportunities.

Thank you. I’d like to ask one last question. With the ND 30% EBITDA margin, that was achieved when they were independent rather than part of a public company. Are you factoring in some of the added costs associated with being public? Consequently, should we expect that margin to decline from the 30% level?

You should expect that margin to keep increasing over time. Yes, it will certainly help cover some corporate costs, but there are also synergies and opportunities within the business to reduce costs. We will utilize those. Additionally, as we continue to grow the business and increase volume, we will achieve more operating leverage. I would say 30% is the minimum threshold, Rosemarie.

Okay. Thank you very much.

Thank you.

That concludes our question-and-answer session. I will now turn the call back over to Celeste Mastin for closing remarks.

Thanks everyone for joining us. We look forward to speaking with you again next quarter.

This concludes today's conference call. Thank you for your participation. You may now disconnect.