Good morning, and welcome to H.B. Fuller's Fourth Quarter and Fiscal Year 2024 Results Conference Call. All participants are in a listen-only mode. After the speakers' remarks, we will have a question-and-answer session. This conference call is being recorded. I would now like to turn the call over to Scott Jensen with Investor Relations. Thank you. Please go ahead.

Thank you, operator. Welcome to H.B. Fuller's Fourth 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. Reconciliations 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 SEC, 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, Scott, and welcome, everyone. Overall, I'm proud of the progress we made in fiscal year 2024. We executed on actions to streamline our cost structure and manage the challenging pricing and raw material dynamics as evidenced by the continued expansion of our full year adjusted EBITDA margin. We also made significant progress in reducing our net working capital requirements, maintaining a stable leverage ratio and enhancing the profile of our portfolio through several strategic acquisitions and the divestiture of our Flooring business, resulting in a significant margin uplift. We remain on track to achieve the strategic objectives we've laid out for the company. At the same time, I'm disappointed that we were unable to finish the year as strong as we had expected. In the fourth quarter, we encountered an unexpected deceleration in volume across the majority of our end markets. Furthermore, slowing customer order patterns, particularly in consumer product goods related market segments and our durable goods distribution channel, shifted price increase realization into fiscal 2025, delaying the offset to higher raw material costs and resulting in margin pressure. We are intensely focused on what we can control and have already begun executing additional pricing actions and cost controls to prudently prepare for a challenging growth environment in 2025. Looking at our consolidated results in the fourth quarter, our organic sales were down slightly, reflecting a weakening economic backdrop. Volume increased 1.3% year-on-year, while pricing declined 1.5%. Although volumes were still positive year-on-year, the growth was less than anticipated as the portfolio was impacted by a weaker demand environment. The unfavorable impact of pricing continued to be moderate, but overall, incremental price realization was below our expectations, particularly in HHC. Adjusted EBITDA in the fourth quarter was down 14% year-on-year to $148 million and adjusted EBITDA margin declined year-on-year to 16.1%. The deterioration in margin versus the prior year was driven by unfavorable price and raw material dynamics and higher variable compensation. Although we did not finish the year as strong as expected, we expanded margins and achieved a new record adjusted EBITDA margin for the fiscal year of 16.6%, keeping us on track to achieve our goal of greater than 20% adjusted EBITDA margin. Now let me move on to review the performance in each of our segments in the fourth quarter. In HHC, organic revenue was down 2.2% year-on-year, driven by lower pricing and lower volume. Packaging related end markets exhibited a marked slowdown in volume growth during the fourth quarter as customers delayed orders and overall HHC pricing remained negative year-on-year. Adjusted EBITDA was down year-on-year for HHC in the fourth quarter and adjusted EBITDA margin decreased year-on-year to 13.9%. Negative volume leverage, the adverse impact from higher raw material cost and delayed pricing drove the margin decrease versus the prior year. In Engineering Adhesives, organic revenue decreased 1.9% in the fourth quarter, driven by both slightly lower pricing and volumes. The Automotive Market segment showed continued strength, but was more than offset by decelerating durable goods related end markets and slowing distribution channel demand. As expected, Solar remained weak during the fourth quarter. Excluding Solar, EA delivered positive organic growth in the fourth quarter. Adjusted EBITDA for EA increased year-on-year in the fourth quarter. The favorable impact from the acquisition of ND Industries was partially offset by lower volume. Adjusted EBITDA margin contracted slightly year-on-year to 19.7%. In Construction Adhesives, organic sales increased 10.5% year-on-year on continued strength in Roofing, which grew over 30% year-on-year. Our performance in construction remains strong as we continue to innovate and expand market share, capitalizing on positive long-term market trends such as ongoing data center expansion. Adjusted EBITDA for CA increased 12% versus the fourth quarter of last year, driven by strong volume growth. Adjusted EBITDA margin decreased 30 basis points to 12.3%, reflecting higher variable compensation expense and onetime inventory adjustments. Geographically, Americas organic revenue was down slightly year-on-year in the fourth quarter. This represents a deterioration versus the third quarter and was driven by significant deceleration in North America volume, which declined from a year-on-year growth rate of approximately 5% in the third quarter to only slightly up in the fourth quarter. Both HHC and EA organic revenue were down modestly versus the prior year, partially offset by continued strong organic growth in CA. In EIMEA, organic revenue was down 0.8% year-on-year, driven by slightly lower pricing. HHC organic sales were up low single-digits year-on-year. CA was flat and EA was down modestly. In Asia Pacific, organic revenue was flat year-on-year and continued to be heavily influenced by the Solar market segment, which declined approximately 30% year-on-year in the fourth quarter as expected. Excluding the impact of Solar, organic sales for the Asia Pacific region increased approximately 6% year-on-year, driven by strength in transportation and packaging solutions. Now I'd like to spend a few minutes discussing a couple of focus areas that support our strategic plan to achieve greater than 20% EBITDA margin. We recently completed a thoughtful and deliberate review of our manufacturing and logistics network and are finalizing a plan to significantly reduce our global manufacturing footprint, streamline our North American logistics and delivery operations and strategically improve inventory management. This multiyear plan will reduce the number of manufacturing facilities from 82 at the end of fiscal 2024 to a target of 55 by 2030. We have also completed a redesign of our North American logistics and warehousing structure that will reduce the number of warehouses from 55 today to approximately 10 by 2027. These actions will not only reduce costs through improved capacity utilization, they will also enable us to reduce future capital expenditure requirements and better serve our customers. As a result of these actions, we expect to generate approximately $75 million in annualized cost savings once the plan is complete. These actions will be implemented over the next five years and we expect to invest approximately $150 million of incremental capital over this time. We expect the savings to be minimal in 2025, but to ramp significantly in 2026 through 2030. These actions are incremental to the previously announced re-structuring already underway, which is on track and still expected to generate approximately $45 million in annualized cost savings by the end of fiscal 2025 versus fiscal 2022 with $37 million already achieved through the end of Fiscal 2024. On the M&A front, we recently announced the acquisitions of two leading medical adhesive companies, GEM S.r.l. and Medifill Ltd. GEM S.r.l. based in Italy is a market leading provider of medical adhesives and innovative application devices approved and certified for over 80 internal indications. Medifill Limited based in Ireland specializes in formulating and producing medical grade cyanoacrylate adhesives specifically tailored for the wound closure market. These highly complementary acquisitions will enhance our market leading position in cyanoacrylates and expand our market presence in the highly advanced and rapidly growing Tissue Adhesives market. The transactions represent two significant milestones in the expansion of our Medical Adhesives portfolio, a key strategic priority for the company and build on our previous acquisitions of Cyberbond, Tissue Seal and Adhezion Biomedical. The two companies generated 2024 net revenue of approximately $24 million and adjusted EBITDA of $12 million. On a combined basis, these acquisitions will be completed at a pre-synergy EBITDA multiple of 15.5 times and a projected three-year post synergy EBITDA multiple of 9.5 times based on a combined purchase price of EUR180 million. Consistent with our next level portfolio management strategy, we also recently divested our Flooring business. The decision to pursue strategic alternatives for this business came as a result of a robust strategic review and both historical and forward-looking financial assessments. As a result of the strategic review, we determined it was unlikely we would achieve our minimum EBITDA margin threshold of 15% for this market segment on a timeline and at a level of investment that was acceptable to us. This move is consistent with our strategy to drive our portfolio focus and capital allocation to the highest margin, fastest growing market segments in this $80 billion global adhesive industry. Concurrent with the Flooring divestiture, we also announced the reorganization of our Building and Construction segments into a newly named Global Business Unit, Building Adhesive Solutions or BAS, replacing H.B. Fuller's existing Construction Adhesives GBU starting in fiscal year 2025. The reorganization combines the company's Insulated Glass, Woodworking and Composite segments previously included in Engineering Adhesives with the remaining Roofing and Building Envelope and Infrastructure market segments historically included in construction adhesives. The reorganization into BAS creates a faster growing solutions business with a more complementary customer base across the architectural and infrastructure markets. These organizational improvements allow for more effective spec setting in the architectural space and streamline our execution playbook. In addition, it consolidates the more cyclical and seasonal construction-related markets into one GBU, allowing for greater external transparency. On a pro-forma basis, BAS generated approximately $850 million in sales and $120 million in adjusted EBITDA in fiscal year 2024. Our proactive portfolio management strategy is a key part of delivering long-term financial targets and tuck-in acquisitions are an important part of that. Our 2023 and 2024 collections of acquisitions are performing exceptionally well and we have executed successfully to our synergy targets, even exceeding our business case commitments. This success provides us with the confidence to continue pursuing strategic acquisitions to further expand our growth market segment mix and improve our overall business profile. We wanted to share some of the financial results from our 2023 collection of acquisitions. We now have a full year of results for these six deals, which closed throughout 2023. Collectively, these deals delivered approximately $37 million of adjusted EBITDA in 2024, exceeding the collective acquisition case by approximately 10%. We grew 2024 adjusted EBITDA nearly 90% year-on-year versus full year 2023 by successfully executing our synergy plan. These six deals represent approximately $15 million of acquired EBITDA at a purchase price of $216 million and a collective pre-synergy multiple of 15 times. At the time of purchase, EBITDA margin was collectively 8%. Through the first full year of ownership, the post-synergy multiple has been reduced to less than 6 times and the EBITDA margin expanded to 21%. Per the collective business case, we expect to achieve a combined EBITDA margin of 24% and a post-synergy EBITDA multiple of 4 times by fiscal 2026 for this 2023 collection. In 2024, we closed two acquisitions, ND Industries and HS Butyl. Both are performing very well and on track with the business case in the 2024 partial year. As a reminder, we acquired $27 million of EBITDA at a purchase price of $275 million and a pre-synergy multiple of 10 times. We expect to convert this into $47 million of EBITDA by 2027, equating to a post-synergy multiple of less than 6 times. We plan to provide a more detailed update on these two deals this time next year, consistent with what we discussed on the 2023 collection. The net impact from the annualization of the two deals we closed in fiscal 2024, the two medical adhesive acquisitions that were announced in early December and the divestiture of the Flooring business is expected to deliver an approximately 70 basis point adjusted EBITDA margin uplift in 2025. Now let me turn the call over to John Corkrean to review our fourth quarter results in more detail and our outlook for 2025.

Thank you, Celeste. I'll begin with some additional financial details on the fourth quarter. For the quarter, revenue was up 2.3% versus the same period last year, currency and acquisitions collectively had a positive impact of 2.5%. Adjusting for those items, organic revenue was down 0.2%, driven by lower pricing. Volume was up 1.3%, reflecting slightly negative volumes in HHC and EA, partially offset by a continuation of the strong growth in construction adhesives. Adjusted gross profit margin was 29.6%, down 170 basis points versus last year, driven by delayed price realization and unfavorable raw material cost developments. Adjusted selling general and administrative expense was up 12% year-on-year, driven primarily by wage inflation, higher variable compensation expense and the impact of acquisitions, partially offset by our continued cost reduction efforts. Adjusted EBITDA for the quarter of $148 million was down 14% versus last year, reflecting the negative impact of pricing and raw material cost actions, primarily in HHC, as well as higher variable compensation expense. The decline was partially offset by the positive impact of acquisitions, continued restructuring savings, and other cost reduction actions. Adjusted earnings per share of $0.92 was down versus the fourth quarter of 2023 and primarily driven by a decline in operating income. Cash flow was strong for the full year, although lower than we expected, driven by lower operating income. Full year cash flow from operations of $301 million was down year-on-year, reflecting lower operating profit, partially offset by improved working capital efficiency. Net working capital as a percentage of annualized net revenue declined 160 basis points year-on-year to 14.5%. As a result, our net debt to EBITDA ratio of 3.1 times was flat versus the end of Q3. With that, let me now turn to our guidance for the 2025 fiscal year. We anticipate full year net revenue to be down 2% to 4% versus 2024 and when adjusting for the divestiture of the Flooring business, to be up between 1% and 2%. Organic revenue is expected to be flat to up 2%. We expect foreign currency translation to negatively impact revenue by about 2% and acquisitions and divestitures to also unfavorably impact revenue by about 2% versus fiscal 2024. We expect adjusted EBITDA to be between $600 million and $625 million, representing a 1% to 5% year-on-year increase, as pricing actions, restructuring savings and the impact of acquisitions more than offset variable compensation rebuild and unfavorable exchange. On a constant currency basis, this guidance range represents year-on-year adjusted EBITDA growth of 3% to 7%. We expect our 2025 core tax rate to be between 26% and 27% compared to our 2024 core tax rate of 26.7%. We expect full year interest expense to be between $120 million and $125 million, depreciation and amortization to be between $170 million and $180 million, and the average diluted share count to be between 57 million and 57.5 million shares. These assumptions result in full year adjusted earnings per share in the range of $3.90 to $4.20, representing year-on-year growth of 2% to 9% versus fiscal 2024. Finally, we expect full year operating cash flow to be between $300 million and $325 million before approximately $160 million of capital expenditures, which includes approximately $40 million of capital related to the company's global footprint improvement initiative. Based on the seasonality of our business and the timing of working capital needs, we expect operating cash flow to be weighted to the second half of the year. Taking into account the current global operating environment as well as the typical seasonality of our business, we expect first quarter revenue to be down low-to-mid single-digits, reflecting a slower operating environment and the divestiture of the Flooring business and for adjusted EBITDA to be between $105 million and $115 million. Now let me turn the call back over to Celeste.

Thank you, John. I would like to take this time to acknowledge and thank all our employees for their dedication and hard work during the year. Despite significant obstacles in the second half of the year, your efforts enabled us to make meaningful progress on many of our strategic initiatives. As we look ahead to 2025, we remain committed to our portfolio improvement strategy and remain dedicated to the long-term strategic plan we have outlined. While we are currently facing some near-term market weakness, we are taking all necessary actions to manage costs appropriately, implement our planned pricing initiatives and navigate this period efficiently and effectively. We are confident in our ability to permanently transform this business into a sustainably faster growing higher margin enterprise, and we remain on track to achieve an EBITDA margin of greater than 20% on the timeline we originally communicated. That concludes our prepared remarks for today. Operator, please open the line for questions.

Thank you. Our first question comes from Kevin McCarthy from Vertical Research Partners. Please go ahead. Your line is open.

Yes. Thank you, and good morning. Celeste, you've unveiled a fairly ambitious restructuring plan here. I did have a few questions around that. Can you speak to the cash cost to implement the plan that would hit your financials in 2025? And then elaborate also on the flow-through of the expected savings. I think you indicated it may be modest this year and then ramping into 2026, but I appreciate any thoughts on the millions of dollars that would be in the plan. Thank you.

Sure, Kevin. Yes, it's an ambitious plan, but I believe it's also very attainable. As outlined in the press release, we discussed the cost savings that will come from executing this plan. Looking at the bigger picture, we have a significant global presence, and within that, there is redundancy in some technology production in certain areas, while other regions present opportunities for us to expand capacity in technologies where we may not have enough to meet market demand. Upon reviewing our footprint, I realized it was the right moment to pursue this project. We now have the necessary tools and diagnostics to assess our operations, and I have great confidence in our operational leadership. They have a capable team with effective plans in place, and they understand our goals and are progressing towards them. To test our readiness for such a bold objective, we piloted a few location closures. For instance, with the Beardow Adams acquisition, we successfully closed two facilities in Europe and one in the US within 12 months, which was a challenging target achieved by the team. We are announcing a plan to reduce our facilities by 27, with 16 of those reductions expected to be completed by the end of 2025. This includes six from the Flooring business we sold, as well as the three Beardow Adams facilities that are already factored into our synergy calculations. Some plants were included in our previously announced restructuring as well. The $75 million of savings is additional, and we will see benefits in the early stages of this program as we reduce from 82 facilities to 66 by the end of 2025. John, would you like to discuss how this will be scheduled over time?

It's still a work in progress, but for 2025, the savings should be about $5 million, in addition to another $8 million from the restructuring we announced in 2023. This incremental savings of $5 million is expected in 2025, with the figure likely rising to around $20 million in 2026. The total savings will increase over the next three years to reach a $75 million run rate. Regarding implementation costs, we mentioned capital costs in the press release, but we haven't detailed the other cash costs yet, which are still being developed. I expect there to be some costs in 2025, but they won't be significant. Throughout the program, I estimate the non-capital cash costs will range between $25 million and $50 million. We will also gain proceeds from the sale of the facilities we are exiting, which may not entirely cover the cash costs but should cover a substantial portion. For capital, we mentioned in the press release an estimate of $150 million over the next five years, which is still being refined. Specifically for 2025, we anticipate about $40 million in capital expenditure related to the footprint reset. I hope this addresses your questions.

Yes, that's very helpful. And then secondly, if I may, I wanted to talk about pricing, maybe a two-part question. In the fourth quarter, I think you indicated that some pricing was delayed, particularly in the HHC segment. So I was wondering if you could elaborate on what's going on there. And then the second part would be, what is the level of price that you're prospectively baking into your organic sales growth forecast of 0% to 2% for fiscal 2025?

Yes. Let's discuss HHC. In HHC, we observed notable increases in raw material costs impacting the P&L in Q4, starting in Q3. The team identified price increases to address this. However, due to lower-than-expected volume in the fourth quarter, we weren't able to realize the full price adjustment. Significant price increases are planned for Q1. Regarding your question about anticipated pricing for 2025, we're looking at an increase of around 0% to 2%, with volume declining across the entire business in 2025. Does that make sense, Kevin?

Our next question will come from Ghansham Panjabi from Baird. Please go ahead. Your line is open.

Good morning, Celeste. Good morning, everybody. Good morning, Celeste. I just want to go back to Kevin's question on the manufacturing footprint optimization and if you kind of zoom out, is the core of the strategy to kind of build bigger, more productive plants, particularly across the leverage portion of the portfolio? I know Celeste, you talked about 16 plants or so coming out of the system in fiscal year 2025, but also just your view in terms of how you're managing execution risk and customer service throughout this process because it is obviously a very significant initiative.

Yes, there is a clear opportunity for us to expand our capacity to take advantage of growing markets. However, we can also reduce redundancy in several cases. For the HHC business, we are actively exploring ways to lower their overall production costs. They have more leverage market segments in their portfolio compared to other businesses. Therefore, we aim to ensure that we optimize our cost profile in these areas. In some instances, the production costs in HHC are excessively high, making them the main beneficiaries of our efforts to reduce our global footprint. While there are some new projects underway, our primary focus is on consolidating within our current operations.

Got it. And then going back to the fourth quarter, I think this was the first. Just looking at my model, the first year-over-year decline in EBITDA margin since 4Q of fiscal year 2022. And I'm still trying to reconcile that because your volumes were up, your pricing was down, but it wasn't worse than in Q3. So why were margins down so much at over 300 basis points? And also maybe a quarterly question as it relates to volumes for the first quarter fiscal year 2025, how that's tracking relative to what you saw in 4Q?

So margins were down primarily in Q4 because of the raw material cost flow through that we experienced. And I don't know if you remember, like over the last several quarters, we've pointed out that in the first half of the year, we would have tailwinds on raw material and price, the combination of that bucket, and again, price was negative because we were overcoming a lot of index pricing issues. But in the second half, raw materials became a headwind. And as we pointed out last quarter, we anticipated a $20 million increase in raw material cost in Q4. We did experience that, and we experienced all of that in HHC. So that was the primary driver of down margins in the quarter.

Yes, if your question is about what we are seeing so far in Q1, we have only one month, so it's a small sample size. I would say things are modestly better. However, it's important to note that Q1 is usually our lowest margin quarter. Volumes in Q1 tend to average around $100 million less in revenue compared to any other quarter because of the Christmas, New Year's, and Chinese New Year holidays. Some pricing actions we are taking may show some impact in Q1, but more likely in Q2. Underlying raw material costs have remained stable from Q4 to Q1. I believe our sourcing team has done well in finding alternative sources of supply, and they have implemented measures that lessen the impact we observed in Q4. Still, due to the timing of material purchases and how they flow into our cost of goods, the effects will probably be more pronounced in Q2. Overall, things are holding steady, if not slightly improving, and we can see the foundational actions that will aid in sequential improvement in Q2.

Okay, perfect. Thank you.

Our next question comes from Mike Harrison from Seaport Research Partners. Please go ahead. Your line is open.

Good morning, Mike.

Hi, good morning and appreciate the details on the acquisition progress that you've made that's great to hear. I wanted to dig in a little bit more on the HHC business. You called out packaging and consumer. We tend to think of those areas as being a little bit more defensive in nature and I think packaging had been kind of a bright spot for you earlier in the year. So can you talk a little bit about what's changed and what drove some of the weakness in those markets, to what extent are we maybe seeing some customer inventory rationalization going on? And I guess, how have those trends progressed as we went from kind of November into December and now into January?

Yes. In Q4, we experienced a significant slowdown in the HHC business, particularly in consumer packaged goods. We observed a deceleration in 10 out of our 13 HHC market segments during this period. This could be partially attributed to inventory adjustments by customers. Additionally, in the distribution sector of packaging, our distributors are exercising caution due to a noticeable slowdown. There is a considerable shift in market share among consumer packaged goods customers, resulting in a weak market overall. However, the segments that are growing are benefiting from gains in market share. For instance, our flexible packaging business, which is a key growth priority, has successfully taken business from competitors that have been established for two decades. This growth is largely driven by innovation, addressing customer needs such as compliance with European regulatory standards, which required reformulation on our part. Without our innovations and market share gains in flexible packaging, the situation would likely be even worse. Overall, the market in consumer packaged goods is experiencing broad-based deceleration.

And Mike, regarding your question on our current observations, we are only in the first phase. I would note that the packaging sector remains weak. As Celeste mentioned, last year during the first three quarters, we were outpacing the market, so comparisons are now more challenging. However, Hygiene has actually experienced some growth in the first phase, which is encouraging. This area benefits from easier comparisons. We noted that the slowdown is primarily in HHC, with some declines in Engineering Adhesives within the durable goods distribution sector, which has rebounded well in the first phase. Overall, of the three areas that experienced weakness, packaging still displays softness, while Hygiene and other consumer packaged goods, along with durable goods distribution, are showing slight improvements.

As we look at HHC, significant actions are underway to ensure effective performance in 2025, regardless of market volume. The team has aggressive price increase plans and is enhancing their cost reduction strategies. Additionally, our global footprint rationalization will benefit HHC more than other business units in the long term. We've redirected resources and focus within HHC towards higher returning market segments, such as flexible packaging, while also achieving success in the Medical Adhesives market. These initiatives aim to restore HHC to the margins and growth rate that the business should achieve. In Q4 of 2023, we compared to a 19.9% EBITDA margin, which we noted was not likely sustainable. This was 600 basis points lower, and we don't expect that to be the future rate either. This business should operate around a 16% EBITDA margin, and the team is taking steps to ensure that target is met.

All right. And just to follow-up on that, you mentioned that the share shift that may be going on among consumer packaged goods customers. Is that leading you guys to potentially lose some market share? Or can you talk about those dynamics a little bit?

We work with a variety of customers. In cases where the consumer is switching down to lower quality, lower cost products, there can be share shifts as a consequence that influence us negatively. We tend to work with customers that are very interested in innovation and that value the solutions we provide. So, it's a tougher market for that at this point.

All right. Understood. Now for my last question, regarding guidance. Looking back over the past couple of years, you fell towards the lower end of your guidance range in fiscal 2023 and missed quite a bit in fiscal 2024 for the reasons we've discussed. Can you address whether some conservatism has been incorporated into your initial outlook for 2025? Additionally, aside from end market demand, what are the key factors that will influence your ability to meet the guidance range?

Yes, we're committed to delivering within the guidance range, Mike. As we look ahead to 2025, we expect a slightly negative volume growth environment. We want to ensure that we are prepared and taking the necessary actions now in case the market continues to show weak and sluggish volume. That's our expectation for 2025, and we are planning accordingly. However, there are opportunities for growth beyond what we have indicated. Any volume will be beneficial in 2025 since we are not factoring in anything substantial. We also have not included any interest rate cuts in our outlook, but if they do occur, they could positively impact volume while also affecting our interest expenses. In a very slow volume environment, we will focus on achieving greater raw material savings. We have noted that the raw material costs could favorably change by about $55 million, and there is potential for better outcomes if the volume declines further. We've also expanded our cost reduction initiatives and can increase those efforts if the year does not unfold as we expect.

All right. Very helpful. Thanks.

Sure.

Our next question comes from Jeff Zekauskas from J.P. Morgan. Please go ahead. Your line is open.

Good morning, Jeff.

Hi, good morning. Thanks very much. I think you spent about $275 million for acquisitions in 2024. How much do you think you might spend in 2025?

Well, Jeff, we have spent year-to-date already EUR180 million on our two Medical Adhesives businesses as you know, now if you take into account that we also divested the Flooring business in 2025, we're sitting at about $100 million. Our pipeline continues to be robust; there are some wonderful opportunities we see there. The good news about a proprietary deal pipeline, the kind that we participate in that we're growing is that we have a little more flexibility around timing with a pipeline like that. So as we've said from the start, our allocation for M&A tends to be in the $250 million to $300 million range so you can count on additional M&A happening in 2025 beyond what we've done and announced so far.

Okay. All right. Thanks. You talked about some raw material inflation. I think VAM and Acetic acid are down, propylene is down, polyethylene is down. What went up?

Yes. So, in our HHC business in particular, which is where most of the raw material increase was centered. We saw some increases in waxes, oils, but most notably in hydrogenated hydrocarbon resins, more as a function of a consumption tax that was not necessarily put in place in China, but that was now being reinforced in China, that's where the impact was.

I see. Okay.

I mean, it's not only the resin impact. Obviously, we monitor 4,000 raw materials; about a quarter of those actually, Jeff, were inflationary. If you look at on an account basis. But I'm pointing to a couple that were the more significant on a dollar basis, inflationary.

Sure. And a unique situation. Yes. You talked about weakness in packaging at the very end of the quarter. Is that food packaging or what's the packaging end market that seems to have softened in a more pronounced way?

We are involved in a variety of packaging applications, particularly in case and carton sealing at the end of the production line when customers are packaging their products for shipment. However, we also see participation in other areas such as tapes and corrugated materials across the industry. Overall, it’s accurate to say that those applications experienced a notable decline.

Yes. And then just so that John doesn't feel neglected, a $36 million outflow in deferred taxes. Is that ongoing and sort of what's that about?

Yes, it was mostly related to a China dividend, a large China dividend we took in 2024. And so that was accrued for in 2023, but we pulled the cash back in 2024, something on the order of $100 million came back and there's withholding tax associated with that. So that's more of a one-time item.

Okay. So that number should go down in 2025?

Yes. If you look at our tax impacts, including the withholding tax, we experienced some timing issues with other payments in 2025, some audit settlements, and some timing related to our European taxes. This resulted in that number being around $20 million to $30 million higher than the usual rate, which we did expect. However, it should be less unfavorable next year.

I guess lastly, you're bringing down your warehouses to 10 in the US over time. How many warehouses do you have in Europe? A lot, know?

That's a topic we can discuss in more detail on a future call, Jeff. First, let me address the reduction from 55 to 10 warehouses in the US. This transition in our logistics structure involves enhancing our tools and capabilities to manage inventory and transportation more efficiently. Reducing the number of warehouses is a significant challenge, primarily due to a shift in our operational model. We are moving towards a distribution center model in the US and are currently testing these new systems and tools. If these trials prove successful, we intend to implement them in other regions as well. I think it's reasonable to assume that we have a considerable number of warehouses in Europe as well.

Okay. All right. Thank you very much.

Our next question comes from David Begleiter from Deutsche Bank. Please go ahead. Your line is open.

Good morning, David.

Thank you. Good morning. Celeste, on Engineering Adhesives, can you talk to what's driving the forecast of lower volumes? And how much low volumes are you forecasting in that segment in 2025?

Do you want to discuss the forecast for 2025, John?

Sure. Yes. So I think just to kind of frame it, David. So our outlook on revenue, as we talked about is organic revenue to be flat to up 2%. We've reflected slightly positive pricing, up maybe 1% to 2% and slightly negative volume, down low single-digits. If we think about how that looks by GBU, we are projecting that Engineering Adhesives will be flattish next year and that HHC will be down low single-digits and BAS up kind of low-to-mid single-digits. So from a volume standpoint and pricing in all three will be up kind of 1% to 2%, probably up 1%-ish in EA and 1%-ish in BAS, up a little more in HHC. So volume, as I said, kind of down low single-digits in HHC, flattish in EA and up low single-digits in BAS. Is that what you were looking for?

No, very helpful. In EA, given the macro forecast do call for growth this year, you had a pretty severe volume decline in 2023, which you only partially got back to. So why aren't volumes up in EA in 2025?

Let's discuss some of the positive trends. One significant factor is that we expect solar prices and volumes, which started to decline in the second quarter, to improve in the latter half of this year. Additionally, we've successfully gained traction in many of the EA markets, with our Electronics business experiencing double-digit growth, reaching rates of 20% to 30% depending on the quarter. There is a lot of positivity there. Despite widespread macro concerns in the automotive industry, we are rapidly expanding in that space. This growth stems from our innovation and our ability to move beyond being just the interior trim leader to also cover exterior trim applications and even powertrain components. Recently, we secured some business by launching a highly thermally conductive silicone product for electric vehicle powertrains. We've also developed acrylic-based structural adhesives that bond spoilers to the backs of cars, which need to cure quickly and withstand high-stress conditions while being humidity resistant. Surprisingly, we are also gaining business in the headlamp sector within automotive. There are markets that may not seem like they would experience high growth, yet we are managing to thrive despite the underlying market conditions.

And David, I would say, we may be being a bit conservative around EA. I think as we said, we're projecting negative volume growth, primarily from HHC and then EA flat. It started off stronger than that. I think some of the things we're baking into our assumptions is that although our auto team has done a terrific job, winning new business, the macro trends aren't good there. So we're expecting that to be slower. Clean energy, as Celeste said, we'll start to annualize against some of that negative performance we saw in the second half, but it will still be a headwind in the first half of the year. But the other markets, Electronics, durable assembly, as I said, has bounced back nicely. So hopefully, we're conservative. I think the team is setting higher targets than what we outlined. But there are a few macro headwinds that we're trying to reflect in our outlook.

Understood. And just a good segue to HHC, the guidance of down I guess, 2% to 3% of volumes in 2025. Given the rapid deceleration in Q4, I would have thought we would see volume growth in 2025. What else is underpinning that forecast of down 2%, 3%, 4% volumes in 2025 in HHC?

The packaging business continues to be weak, and we are still observing that trend today, which has significantly impacted our results. Much of our HHC business operates in Europe, a region that is generally not experiencing growth. Overall, the consumer packaged goods sector remains difficult to predict as we look ahead to the upcoming year.

The thing I'd say, David, is we're going to be more aggressive on pricing. As we discussed, HHC I think to get back to the margins we need them to get back, or it's really where most of the pricing activity is going to have to happen and we may get some volume attrition from that, and that's okay. So we've kind of reflected that in our assumptions as well.

No, very helpful. Appreciate that. Thank you, guys.

In that situation, David, if volumes in any specific region or globally are quite low, which we experienced in 2023 with a 10% decrease across this portfolio, we have the chance to push harder with our suppliers and reduce some of the impact on EBITDA, should we find ourselves in that position.

Our next question comes from Patrick Cunningham from Citigroup. Please go ahead, your line is open.

Good Morning, Patrick.

I want to revisit the question about price and costs. First, I'm interested in understanding how significant the impact of raw material inflation was in Q4 and what impacts are anticipated in Q1. Additionally, I believe that much of the price decline throughout the year was related to index-based contracts or reformulation pressures, which typically preserve margin dollars. So, why have you struggled to pass that through, and how confident can we be that you'll be able to increase prices in HHC for 2025 in this challenging volume environment?

Yes. Well, the index price, remember, Patrick, the index pricing does lag three months to six months. So we've seen now this increase in raw material cost and the indexes will reflect that next year. So that's one component of this. Yes, reformulation is ongoing for customers, particularly in a low volume environment. And also in Q4, our teams were very successful renegotiating multiyear contracts with very large customers that will be volume enhancing. So now that depending on the year, you'll see that maybe two years, three years out, depending on what the overall market environment is for volume. But from a share perspective, the team did a very good job on those contracts some of that did have an impact on price in Q4. So yes, and yes, large impact of raws in Q4. When we look at the price raw material bucket for 2025, we're anticipating about a $55 million benefit to EBITDA next in this upcoming 2025 year. You want to add to that, John?

Yes. Just in terms of the impact in Q4, Patrick, I'd say it was probably $10 million unfavorable to Q3. Which was largely unanticipated going into the quarter, we expected the raw materials to be pretty flat sequentially. And so that was really what drove that margin compression, particularly in HHC. And then Q1, we would expect them to be flat sequentially to Q4 and that's what we're seeing so far. There is some expectation that we might see some improvement in Q2 based on some actions we are taking around changing sources of supply and other things. And we should also see the pricing actions we're taking in Q1 really show up much more in Q2.

Very helpful. And then Construction stood out as being particularly strong in 2025. How would you characterize the strong top line and margin performance? Was it data centers, share gains or is it simply just lapping destocking? And then market growth in 2025 doesn't seem to be a given at this point. Why should volumes be up across the building segment?

So in our Roofing business in particular, which was the primary driver of CA as it has been reported, there's a few positive things happening there. One is first of all, introduction of innovative products. For example, our PG-1 EF ECO sprayable adhesive product took share. The other thing that happened in this current year is we added business with a large customer. So we've shifted share from a large customer across the board there. So that had a big influence. And finally, we are playing in the right segments of the Construction market, that data center build, for example, we don't see that abating anytime soon. So we're playing in the right spaces in Construction. I do think the Construction market should continue to be strong for us because of those things, that occurred in 2024, they'll reoccur in 2025. But yes, we are now annualizing against tougher comps from 2024.

It’s important to note that this portfolio is different from what it was in 2024, as we now include wood, glass, and composites. These materials did not experience the same positive macro trends as the broader construction market or specifically in roofing. This is another reason we anticipate a slower performance in 2025.

Understood. Thank you so much.

Our last question will come from Rosemarie Morbelli from Gabelli Funds. Please go ahead. Your line is open.

Thank you. Good morning, everyone.

Celeste, I was wondering how soon you knew that fourth quarter was going to be below expectation? What was the surprise from? And is there anything that you are doing currently in order to better manage expectations, for example, can you help us in all of the different steps and actions you are taking if anything is addressing that?

Yes, we anticipated that Q4 would be challenging, especially in HHC. We attempted to implement price increases, but the timing was not optimal, and it took longer than expected for those changes to take effect due to the lower volume we encountered during that quarter. In response, we are actively reassessing our ongoing cost reduction initiatives in that area, along with contributions from the GBU leader. We have enhanced our pricing strategies that were already in motion, so you should see improved pricing performance from that business due to rising raw material costs. Our sourcing team has also shifted some key HHC raw material business to different suppliers in light of cost increases related to the Chinese consumption tax from Asia. We are dedicating significant resources to this, including not just long-term strategies like global footprint reduction, which will benefit the business, but also immediate actions to address current challenges. The CA business is similarly engaged in immediate efforts, as the CA margin was approximately 300 basis points lower than expected this quarter due to some one-time challenges that the team is working to resolve. They are also focused on pricing actions and cost reductions to enhance the portfolio.

In terms of our awareness and management of potential challenges, the impact in the fourth quarter was primarily felt in the latter half of the period. The results showed strong performance in our P10, keeping us aligned with our expectations. However, we observed a downturn starting in late October and continuing into November. Some markets, such as clean energy, did experience a notable decline in the fourth quarter, but it was anticipated. Conversely, the unexpected weakness in the packaging and consumer products sector arose in the middle to later part of the quarter, which we did not foresee.

Okay. That is very helpful. Thank you. And I was just wondering, looking at HHC, are there additional divestitures of either product lines or any specific categories that you think you should exit in order to get to your 20% EBITDA margin?

Divesting anything out of this portfolio is very challenging and again, because our plants, while they're assigned to a GBU, they really are technology-based and we have such raw material scale that we get benefits from that across the portfolio. Flooring was very unique in that not being the case, that was part of the reason why we divested. So rather than looking for divestitures in the HHC space, we are very focused on how do we grow that portfolio in higher margin, faster growing market segments. I talked about flexible packaging. That's an area where we're certainly focused and where the team has done a fantastic job growing the business and doing so profitably. But also in the medical space, that's an area where our HHC resources are being directed toward growth. And we had really an exciting win just recently, Rosemarie, where our SecurePortIV product was actually not only approved for use in Phoenix Children's Hospital by the way, it's in use now in 10 of the top 10 children's hospitals in America, but also at Phoenix Children's Hospital, they approved SecurePortIV for not just but applications in the central IV catheter space, which is about 10% of that business, but they approved it for every catheter, IV catheter application there in the facility. So we're really seeing growth in higher margin, much more profitable, faster growing spaces even in this HHC business where the medical business resides.

We have no further questions. I would like to turn the call back over to Celeste Mastin for closing remarks.

Thank you very much for joining us today. We look forward to updating you on the business during the next quarter. Have a good day.

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