H.B. Fuller Company (FUL) Q2 2012 Earnings Report, Transcript and Summary

Good morning, and welcome to the H.B. Fuller Second Quarter 2012 Investor Conference Call. This event has been scheduled for one hour. [Operator Instructions] Management in attendance on today's call include Mr. Jim Owens, President and Chief Executive Officer; Mr. Jim Giertz, Senior Vice President and Chief Financial Officer; and Mr. Maximillian Marcy, Investor Relations Manager. At this time, I would like to turn the meeting over to Mr. Maximillian Marcy. Sir, you may begin.

Thank you, Lisa, and welcome, everyone. Today's conference call is being webcast live and will also be archived on our website for future listening. Before beginning, I would like to inform everyone that certain matters discussed during this call will include forward-looking statements as that term is defined under the Private Securities Litigation Reform Act of 1995. Since such statements reflect our current expectations, actual results may differ. In addition, during today's conference call, we will be discussing certain non-GAAP financial measures, specifically: adjusted earnings per diluted share; regional operating income; and earnings before interest expense, taxes, depreciation expense and amortization expense or EBITDA. Regional operating income is defined as gross profit less SG&A expense, and EBITDA is defined as gross profit less SG&A expense plus depreciation and amortization expense. All of the non-GAAP measures discussed today should not be construed as an alternative to the reported results determined in accordance with GAAP. Management believes the discussion of these measures is useful to investors because it assists in understanding the operating performance of the company and its operating regions, as well as comparability of results. The non-GAAP information discussed today may not be consistent with the methodologies used by other companies. All non-GAAP information is reconciled with reported GAAP results on the last pages of our presentation. For more information, please refer to our recent press release, quarterly report on Form 10-Q dated March 26, 2012, and annual report for the year ended December 3, 2011 on Form 10-K filed with the Securities and Exchange Commission. These documents are available on our website at www.hbfuller.com in the Investor Relations section. I will now turn the call over to our President and CEO, Jim Owens.

Thanks, Max, and good morning to everyone. Last year, we committed to a strategic plan that would deliver 15% EBITDA margin and 5% to 8% organic growth. And earlier this year, we committed to move quickly to deliver value from the Forbo acquisition. In the second quarter of this year, we made a great stride in delivering on both of those commitments. We developed and announced a fully detailed integration plan within 90 days of the deal closing to all of our employees and our shareholders, and we began execution of that plan. We made a strategic move to sell a long-term non-core asset, and we did this while delivering an underlying operating performance that increased adjusted earnings per share by 27% in the quarter. By all measures, in the quarter and long-term strategically, we delivered an outstanding quarter and I'd like to thank our shareholders for your support and our employees for their tireless efforts to make this happen. The quarter started with the closing of the acquisition of the industrial adhesives business from the Forbo Group, on time and without a hitch. In all of our regions, work began immediately with customers to secure our business and pursue offensive synergy opportunities and with suppliers to harmonize and leverage the best pricing of the combined company. Within 45 days a detailed plan was announced in North America, outlining a specific plan for each employee who remained, and reorganization began that day with a focus on taking proper care of our employees and seamlessly managing transitions for our customers. Shortly after this, we announced that we've reached an agreement to sell our Latin America Paints business to the Pintuco division of Grupo Mundial, an important strategic move for H.B. Fuller, which was initiated in a process that began late in 2011. Before the quarter ended, we announced a detailed reorganization plan to employees in Europe and Asia, a plan that meets the strategic needs and the local conditions which exist in each of these regions. All significant changes were identified and announced within 90 days of closing the deal. The state of anxiety and ambiguity which often infiltrates a merged organization was lifted, and employees across the world are now focused and energized to deliver on the plan which is ahead of them. In the midst of all these exciting actions we delivered solid business performance, ahead of the pace that we previously indicated in our upgraded earnings guidance. We are very proud of our ability to execute at this high level in a very busy quarter. The business integration is just beginning, but our second quarter results indicate that we are off to a solid start. Today, we will cover 3 main topics. I will recap our second quarter results, review our business integration progress and plans and then we will finish with an update to our guidance for the remainder of the year. We plan to leave a good amount of time for your questions as well. For my discussion of the second quarter results, I will reference the adjusted results excluding the Paints business, but including the newly acquired Forbo industrial adhesive business. I will also reference some metrics for our legacy H.B. Fuller business to provide some context around key trends in the business. So starting at the top, we delivered 6% organic growth this quarter, our 10th consecutive quarter of solid organic growth. Pricing was 7% above last year's second quarter levels, reflecting the cumulative carryover from all the actions we took over the past year to offset raw material inflation. Volume was down approximately 1% in the quarter versus last year. However, year-to-date volume is positive by about 0.5%. In North America, there's a distinct split between Adhesives and Construction Products. Although construction markets overall remain muted, we have managed to grow volumes 7% year-to-date in our Construction Products segment. The growth has come from new share gains with existing customers, as we introduce new products and new technology. On the Adhesives side, we have maintained market share with existing customers, but unit production volumes of those customers has been flat to down in most segments. Overall, the North America Adhesives business segment is down a couple of percentage points year-to-date in volume, but the trend improved in the second quarter and we expect that to continue through the remainder of the year. In Latin America, when excluding the Paints business, organic revenue was up 8%, with volume slightly up year-to-date. Asia Pacific showed organic revenue growth of 3%, while volumes declined less than 0.5% year-to-date and remained a mixed story. China continues to produce double-digit volume growth of approximately 15%. However, our South Asia region, in particular Australia, remains weak, primarily reflecting difficult end market conditions. As we have discussed before, the manufacturing and consumer sectors remain depressed, and production has slowed dramatically. In Southeast Asia, our teams have been working to shift the mix of business in the region to drive a higher profit profile with higher-value adhesive products and in the process of making this strategic shift, we have lost some volume. Lastly, EIMEA delivered organic growth of 10% year-to-date and volume growth during the second quarter. This speaks -- this volume growth speaks to our ability to gain share and is especially good news, considering all of the negative headlines and economic uncertainty in the region. We have been helped by solid growth in emerging economies, however, the core businesses in Western Europe is running well, and we are seeing good market share gains in our key markets of hygiene, packaging and durable assembly. Our reported gross margin percentage dropped to 25.9% in the second quarter, but there are a lot of moving parts in this metric so some explanation is required. First of all, the H.B. Fuller business most comparable to the reported results in last year's second quarter posted a gross margin of 30.1%, which is a strong result and slightly above our own forecast for the quarter. The acquired Forbo business currently generates lower gross margins than the H.B. Fuller business, and the addition of the Forbo business diluted our gross margin by about 290 basis points in the second quarter. This margin difference is a significant piece of the synergy opportunity available to us. The one impact of the fair value step-up of the acquired Forbo finished goods inventory diluted gross margin by another 60 basis points in the quarter. Finally, moving our Paints business to discontinued operations on the income statement further diluted our gross margin by about 70 basis points in the quarter. Taking all factors together, we had very solid margin performance in the quarter and we expect significant improvements in our margins over the next quarters as the synergy benefits of our business integration projects gain traction. Reported selling, general and administrative expense thinned as a percentage of net revenue from 19.0% to 17.6%. On the base business, this was approximately a 140 basis point reduction. The other factors driving the incremental reduction are as follows: the acquired Forbo business carries a lower expense profile than the legacy H.B. Fuller business; and adding the Forbo business lowered our SG&A as a percentage of revenue by about 70 basis points in the quarter. The exclusion of the Paints business also helped reduce the overall operating expense level by 70 basis points as it carried a much higher level of operating expense. The amortization of intangible assets for the acquired Forbo business was approximately $2.9 million; that's $2.9 million in the quarter, or about 50 basis points on net revenue. The removal of the Paints business stranded about $1.2 million of corporate expenses for the quarter, or about 20 basis points of net revenue. Again, taking all factors into account, the new business portfolio without Paints and with the added revenue base from Forbo will run at a lower SG&A rate as a percentage of revenue, with further improvements to be realized as synergy benefits occur through the business integration project. A strong fundamental shift in our SG&A percentage is happening as a result of our 2 deals. The end result of solid organic growth, strong gross margin management and thinning of SG&A led to a regional operating income improvement of more than 30% versus last year's second quarter. In addition, adjusted diluted EPS of $0.62 in the second quarter versus adjusted diluted EPS of $0.50 in last year's second quarter is a 24% increase. In the press release that went out last night, you can find tables that lay out the impacts of the adjustments to diluted earnings per share, and I'd expect that this press release provides a clear picture to each of you that the business has exited the second quarter on a very strong trajectory. I will briefly talk about our raw material cost environment. As you can see from the slide currently being displayed, or Slide 5 if you downloaded the deck, raw material costs increased slightly versus the first quarter, about 1.5%. For the remainder of the year, we expect that raw materials will remain at or near the current levels. This is a slight change from our previous forecast, which expected raw materials to continue a modest increase throughout the remainder of the year. However, we are talking about changes of less than 1% compared to the swings we saw last year of close to 20% inflation. Although the cost of some of our feed streams have fallen over the past few months, most notably ethylene, propylene and butadiene, the downstream raw materials we use in our formulations remain in balance to tight supply. As we have said previously, because of the specialty nature of our raw materials, their costs are much more dependent on supply and demand dynamics than the cost of upstream feedstocks. This is our current view. If there are prolonged decreases in feed stream costs or dramatic changes in the global economic conditions things can change, and sometimes change quickly. If that does happen, we will be ready and responsive to customer needs by utilizing our reformulation and substitution capabilities. Let's move on to a discussion of business integration. We completed the acquisition of the Forbo industrial adhesive business on March 5, 2012 and during the second quarter, announced plans to integrate the business in each of the 3 impacted geographic regions. Also, as you're all aware, prior to announcing the Forbo acquisition, we embarked on a significant transformation project of our own business in the EIMEA region. These 2 initiatives have been combined into a single global project, which we will be referring to as the Business Integration. The Business Integration is a broad-based transformation plan involving all major processes in 3 of our business segments: North America Adhesives, EIMEA and Asia Pacific. The integration strategy and execution plan is different for each region. In the North America Adhesive business segment, the integration work represents a consolidation of the acquired business into the legacy business that can be accomplished in a relatively short time period. The customer-facing portion of the 2 businesses, sales, marketing and technical, are now being combined into a single -- into a new streamlined organization that is designed to be more efficient and more responsive to customer needs. The production capacity of the 2 organizations will be optimized, mostly by transferring volume from the acquired Forbo business to existing available capacity within the legacy H.B. Fuller facilities. As a result of transferring the volume to existing facilities, 6 plants will be closed in the region. Since capacity already exists within the receiving facilities, the capital investments required to transfer this production and the time required to affect these transfers will be minimized. All of the planned restructuring activities are scheduled to be complete by the second quarter of 2013, and the first planned closure is being completed this week. In the EIMEA business segment, the business integration touches more aspects of the business and is more complex. The 2 businesses to be combined have similar inefficiencies and opportunities for improved productivity. In short, the business we acquired in Europe looks a lot like our own; a strong business with good market position, with great opportunity for improvement as complexity is reduced and processes are streamlined. Similar to the North America project, the customer-facing organizations are being optimized by combining the 2 organizations into one new, streamlined organization that is more efficient and more responsive to the customer groups that we serve. The support and administrative functions of both businesses are being reorganized and in most cases, relocated to create a shared service center of excellence for these activities in Mindelo, Portugal, maximizing our service levels and cost effectiveness. The integration of the production assets will require more resources in EIMEA because both the legacy business manufacturing network and the acquired manufacturing network are inefficient and in need of upgrades. 5 existing plants will be closed and new, enhanced production assets will be installed at the remaining existing sites to provide greater operating efficiencies and a solid foundation for future growth. This portion of the project will require more capital investment to complete or require relatively higher restructuring costs and be completed over a longer time frame when compared to the North American portion of the project, but still at a very strong pace when you consider the legal environment and the pace of change, which is typical in Europe. The EIMEA portion of the Business Integration project has already been initiated in the third quarter of this year and is expected to be fully complete by the second quarter of 2014, less than 24 months from now. In the Asia Pacific segment, the integration project is less complex because the acquired business in that region was smaller. The focus of the integration work in this region will be to build a solid foundation for growth in the commercial and technical areas and over time, create a more efficient production network in China using the best of the legacy and acquired production facilities. The benefits of the Business Integration are expected to be substantial. We have targeted an annual pre-tax profit improvement of $90 million when the various integration activities are complete. This reflects a commitment of at least $50 million of global synergy benefits from the Forbo acquisition, plus another $40 million of benefits to be derived from improvements in our legacy business in EIMEA, in line with our original estimates. By 2015, the business integration activities are expected to improve the EBITDA margin of the business from just under 11%, the profitability of the legacy H.B. Fuller business in 2011, to a target level of 15%. To achieve these significant benefits, we will invest in the form of restructuring costs and new capital. Going forward, we will track our special charges associated with the Business Integration project in 4 categories: acquisition and transformation-related costs; workforce reduction costs; facility exit costs; and all other direct costs, all associated with the Business Integration project. Our press release provided a schedule showing our estimated total cost associated with each category over the life of the project and the amounts charged in the quarter and for the year-to-date. In total, the cash cost associated with the Business Integration are expected to be about $115 million, in line with our original projections for our EIMEA business transformation project and the Forbo acquisition integration. During the second quarter of 2012, the total cash cost in these 4 categories amounted to about $31 million. And since the inception of the project, we have recorded total special charges of about $45 million, 39% of the total expected costs. Non-cash costs, specifically accelerated depreciation related to announced facility closures, are approximately $1 million since the inception of the project. In addition to the cash costs associated with the business integration, incremental capital spending will be required, especially in the EIMEA region to support the integration and upgrading of our combined production facilities. We now expect our capital expenditure to ramp up to about $65 million per year in the current year and subsequent 2 fiscal years as the Business Integration is completed. Thereafter, capital expenditures should drop back to a core annual rate of about 2% of net revenue. The Business Integration project represents a major investment in our core business to establish a healthy profit profile and a platform for future growth. Successful execution of this project will deliver significant benefits. We have a good start, and we are confident in our ability to sustain our momentum throughout the entire project. Before I turn the call over to Jim Giertz to discuss our earnings guidance, I want to talk briefly about the recent announcements to divest the Latin America Paints business to Pintuco. We have been saying for quite some time, and even more so since I took over as CEO, that Paints was not a core asset to us. Our goal is to be the best adhesive company in the world, and Paints does not fit that strategy. After significantly strengthening our core adhesive portfolio with the Forbo acquisition, it was a perfect time to explore the sale of the business. The business has shown strong performance over the last 2 years, and the external geopolitical environment in the Central America region has been solid. The partner we chose in Pintuco is focused on growing the paint market, especially in Central and South America. This deal is good for Pintuco, good for H.B. Fuller and good for the employees in the business. We agreed on a solid price for the largest paint company in Central America and are currently working to close the deal. We expect that it will be closed in the third quarter. Once we receive the proceeds from the sale, we intend to pay down debt drawn under a term loan and reduce our leverage ratios. Because we have a signed agreement, the result of this business will now be included in the income statement under discontinued operations, and our future guidance will reflect that action. At this point, I'd like to turn the call over to Jim Giertz to discuss our outlook and our guidance. Jim?

Okay, thanks, Jim. As we've already mentioned a couple of times, there are a lot of moving parts in our business, so I'll try to simplify where we are and what we expect for the remaining quarters -- 2 quarters of the year. So prior guidance was provided in 2 parts and excluded all special charges associated with the acquisition integration of the Forbo industrial adhesives business. At the beginning of the year, the earnings guidance was set as a range of $2.05 to $2.15 per diluted share, with the acquired Forbo business expected to be neutral to a diluted EPS. Then after the Forbo acquisition was completed, we provided further guidance indicating that the acquired business was expected to generate incremental earnings in the current fiscal year of between $0.05 and $0.15 per diluted share. So the 2 parts of the guidance taken together indicated an expected earnings range for this year of between $2.10 and $2.30 per diluted share, representing our baseline earnings guidance. Then subsequent to issuing this guidance, we announced our intentions to divest the Latin American Paints business and as of the second quarter of 2012, the Paints business is accounted for as a discontinued operation. Therefore, the earnings associated with this business which were included in the original baseline guidance, can be removed to create adjusted continuing operations earnings guidance. The amount of the 2012 fiscal year earnings attributed to the Paints business and included in the company's original guidance is $0.16 per diluted share. Therefore, the adjusted baseline earnings guidance for the company's continuing operations, excluding the Paints business, is a range of $1.94 to $2.14 per diluted share. Now our new revised earnings guidance for the current fiscal year is a range of $2.10 to $2.15 per diluted share. This guidance excludes all special charges associated with the business integration. This guidance also excludes the one-time negative impact of the inventory step-up portion of the acquisition purchase accounting which was recorded in the second quarter, and totaled $0.05 per diluted share. However, the guidance does include all other impacts of the acquisition such as the interest expense on the incremental debt and the amortization of acquired intangible assets. Finally, this guidance excludes all income statement impacts of the Central American Paints business in the 2012 fiscal year, including the impact of the contemplated sale transaction. So on a comparable basis, the mid-point of our current earnings guidance has been increased to $2.13 per diluted share from $2.04 per diluted share under the original adjusted guidance. The current guidance reflects current market rates of foreign exchange, in particular our second half plan is based on an assumed U.S. dollar to euro exchange rate of $1 -- $1.24 per euro. In regards to net revenue, we expect second half net revenue to be between $1,000,050,000 [ph] or $1.1 billion. This is in line with our previous guidance of 69% organic revenue growth on the base business, less currency translation at current foreign exchange rates. Next regarding capital expenditures, we're increasing our expectations for the full year from $40 million to $65 million. Capital expenditures related to the Business Integration project will be, in large part, funded as part of our annual capital spending program, which would normally run at about $40 million per year for the legacy business, an additional $10 million per year for the acquired Forbo business. Going forward, we expect a normal annual capital spending program of about $50 million per year to increase to about $65 million per year for the years 2012, '13 and '14. And then finally the core tax rate, which excludes the impact due to special charges and discreet items, is expected to decrease to 30% for the 2012 fiscal year. This reflects the core tax rate, excluding discrete tax items. And you can find a table in our press release, which reviews results reported in the first half of the year and compares to current guidance of the second half of the year. And with that, I'll now turn the call back to Jim Owens to wrap this up.

Thanks, Jim. I'm really excited about the results we delivered so far in the first half of our fiscal year. We continue to deliver on our plans and are making progress each quarter to achieve our long-term goals on organic growth, EBITDA margin improvement, return on invested capital and EPS. We have a lot of work to do to successfully integrate the newly acquired business. But we're focused, we have positive momentum, an outstanding team and a clear plan to deliver. Many good things are happening inside the business. We grew sizably in each of our 3 areas of strategic focus: hygiene, packaging and durable assembly, and have specific plans on how to continue gaining share over the next 4 years. The strategic markets we have chosen for special focus are sound, and H.B. Fuller is poised as a leader in each. We are capitalizing on new opportunities with our expert sales and technical teams, delivering and leveraging H.B. Fuller's depth of innovation experience and capability. H.B. Fuller's European business is moving in the right direction, and the Business Integration is off to a good start to build on the positive momentum. We delivered these strong adjusted results, which were above our initial expectations while completing the Forbo acquisition, planning the business integration and working on the sale of the Paints business. I am very proud of our ability to consistently deliver results regardless of external conditions or potential internal distractions. This is definitely a new H.B. Fuller, a company which has a clear path forward, a proven ability to deliver in challenging market conditions. Thank you for joining us today, and now I'd like to open the call up for your questions.

[Operator Instructions] And we'll now take our first question from Rosemarie Morbelli with Gabelli & Company.

Jim, you said that you experienced growth in all of your segments; hygiene, packaging and durable goods. Could you give us about a feel for the kind of growth you experienced in each of one -- each one of them by region possibly and what the trends are going forward?

Yes. So Rosemarie, the commitment we made -- so we reported results, as you know, on the operating segments, and the commitment we made was to, on an annual basis, share the details of that growth. We did that last quarter for 2011, and we'll continue to do that periodically. So we don't have numbers to share specifically on each one of those, but I would say that those strategic segments are growing at a higher rate than the rates you've seen overall. So the focus is paying off. But I don't have numbers with more detail to share on that. Jim, do you want to add something to that? So -- but we will, on a periodic basis, give details by segment, as we did last quarter.

Okay. Do you want to add, Jim? The other Jim?

No, he gave my answer.

So when you are talking about the higher growth rates than overall, are we talking volume? Or -- I was mostly interested in the volume if you exclude pricing.

Yes. So we're talking about both volume and overall organic growth.

So we are looking at that 6% organic revenue growth, if that's what we are comparing it with?

Yes, I would say you could compare it to the volume growth year-to-date and see a higher number in those 3 segments. And you could also compare it to the organic growth year-to-date and see that it's higher in those 3 segments. And I think if you look at last quarter's numbers -- I don't have them right at hand here, Rosemarie, but it was between 17% and 22% in packaging and hygiene and a little less in the durable assembly area.

And if I could ask one last question, regarding Europe and the economy out there, do you see things deteriorating? And I understand that you are doing enough to offset some of the turmoil. But is there a point where you actually are going to get into trouble as well?

Yes. So I think it's a real high point of the business, Rosemarie, that our volumes are up in Europe with the kind of conditions that exist there. It speaks to the strength of our team and the strength of the business and the ability to gain share. But Europe, as we said the end of last year and the beginning of this year, we're getting no help from the economy. It's a sluggish environment, and it's particularly sluggish in Southern Europe. So France, Italy, Spain are slower economically. So when we're showing almost 10% organic growth and positive volumes for the first half of this year, very strong indication that we're gaining market share in the EIMEA region.

How much of your business is in Germany, of the European business?

We don't share that number, but it's well spread across Europe. It's not a German-centric business, Rosemarie. But Germany is obviously a powerhouse within Europe, an important part of the business.

And we'll now go to Christopher Butler with Sidoti & Company.

Staying on Europe, could you talk to the volume growth or decline from the Forbo business specifically? And could you give us an idea as the year rolls out, what kind of shedding of volumes we could expect from Forbo as you try to improve the product mix there?

Yes. So we haven't given specific details on how much volume we plan to shed in any part of the world. I think what we've said is overall, net of price adjustments, offensive synergies and volume losses, that the acquired business would remain relatively flat. So we're not expecting a lot of growth because the growth that we're going to generate will be offset by trying to reposition some of the business that we have. And that applies in North America and Europe. But the work we do is going to be targeted, systematic. We're developing a detailed plan country by country, product line by product line, as we roll out the changes in the business. So I think from an overall standpoint, Chris, you can look at our acquired business and say that the net revenue is going to be flat, and that would include some price repositioning and some volume losses.

And for the volume for Forbo in the second quarter?

The volume numbers for Forbo in the second quarter overall -- is that your question? What were the volume numbers for Forbo overall?

Right. Whether -- was it up? Was it similar to your organic volume? Or different?

Yes. So let me give you a high-level answer and then I'll ask Jim to dig around and get the numbers. We got a lot of numbers, so I want to -- make sure that we're accurate. The Forbo business overall performed relatively well. The revenue for the business was flat to prior year, and that includes some negative currency translations. And operating income was up about 23% versus their prior year. So -- with gross margins improving. So Jim, do you have more data to add on the Forbo situation?

No, that's all we have. We don't have the accurate volume data that we can share with you, so I don't know -- I assume that the volume was relatively flat, given the revenue performance. But as -- yes, the Forbo business performed extremely well in the second quarter, slightly better than our expectations.

That was basically what I was looking for. As far as SG&A, it sounds like there was nothing unusual in this quarter upwards or downwards. So should we think -- be thinking in this range for the back half of the year?

Yes, I think this is the right range. I think we're working to drive some synergies, Chris, and those are coming through. But you also can't pull out the old costs immediately. So when you're doing the work to reformulate products, close plants, move things around, you need a lot of resources to get that done. But relatively in this range, I think, would be what we'd expect for the rest of this year.

And we'll now go to David Begleiter with Deutsche Bank.

Jim, just on the -- both Jims, both on the second half guidance, given -- with the Forbo asset in hand, what's the new expected split between Q3 and Q4 on EPS do you think, just a rough, rough breakdown.

Okay. So I'm going to let Jim pull out his cheat sheets while we go forward and just comment a little bit about what we're doing Q3 and Q4. So a lot of the activity that we have -- well, activity is rolling across all the businesses, but the North American activity is really ramped up at a high rate, and we see a lot of that happening right now. I think I mentioned already our first plant was closed this last quarter. Our next plant will be closed by the end of July. So good, solid progress. And the reorganization of the sales and technical teams, that's happened. These teams are meeting and moving forward with customers and driving the kind of performance we expect out of offensive synergies and the value that we want to generate. So Jim, do you want to comment on Q3, Q4?

Yes, sure. So -- well, we don't break our guidance down by quarters. So I don't want to make any specific comments about it. So there are some things that are changing. We don't -- we're just learning about the Forbo business, so we'll learn about their seasonality. I think typically, our third and fourth quarter would be relatively similar in performance. We are losing our Paints business, which was historically very strong in the fourth quarter. So that might change our seasonalities a little bit and flatten out the third and fourth quarters a little bit. And then also, David, just remember that last year we had an extra week in the fourth quarter. So if you're doing a year-over-year comparison, you need to take out that increment of -- the one-week increment in the fourth quarter prior if you're going to do a year-over-year.

Very helpful. And Jim, you mentioned also improvement in North American volumes exiting the quarter. Any more comments on that?

Yes. So if you recall, our North American Adhesives business had a weaker -- much weaker volume quarter than our construction adhesives business in first quarter. Second quarter, they moved closer together. So -- and that's really driven off of share gains. Again, a little like Europe, we're not getting a lot of help from the economic environment. If you look at the external numbers on volumes of consumer goods products, volumes of beverages that are being produced, volumes of baby diapers, this is not a good year in North America for the net volumes, and those drive some of our volumes. But what we see is some of the gains that we were looking to have happened. We see some interesting early offensive synergies, so we're pretty pleased about the momentum, particularly when you compare first quarter -- second quarter to first quarter. So expect it to go positive next quarter would be the sure answer.

And just last price versus raws, with the raws coming off, would you expect some of your pricing actions to flatten out here? And any pressure do you foresee in lowering prices as raws flatten or roll over?

Yes.

Yes. So I think raw material-related pricing actions will dissipate. But there are a lot of pricing actions related to repositioning and making certain that we get the value out of certain products that maybe weren't priced appropriately, especially some of the acquired products. So any price action we'll see will be about making certain that value for certain market segments or product lines is generated out of pricing. In terms of downward price pressure, we're really driven off the supply dynamics of our materials. Certainly in the short term, I would say if we saw the kind of depressed pricing we're seeing on ethylene, propylene and butadiene and in other feed streams continue through the third quarter, then maybe sometime late in the year or early next year that would start flowing through to the adhesives market. But we don't see that in this next quarter, given the dynamics of the materials that we buy.

And we'll now go to Peter Cozzone with KeyBanc Capital Markets.

On the integration front, it sounds like there's good momentum there in regards to the total $90 million in expected synergies there or cost savings. Is that a fairly linear ramp as far as the expected completion in 2Q '14? Or how should we think about that progression over the next few quarters, particularly in the EIMEA segment?

Yes. So I would say if you're looking at it on a year-over-year basis from '12 to '15, it's pretty linear. Over the next couple of quarters, it may not be quite as fast to ramp up as we have extra expense to allow us to get some of the synergies. But generally, fairly linear. Jim, do you want to add more color to that, maybe?

Yes, sure. I think that's actually one of the interesting things about the project overall is that it's got a lot of moving parts, and they all kind of phase in at different times. So some of the synergies we're getting right away, like raw material cost reductions. Some of the SG&A savings come a little bit earlier. And then some of the savings from consolidation of the production facilities will come later. So there's a nice mix of some short-term wins and then some wins that will occur later. So I think generally you'll see -- you should see a pretty linear progression of improving EBITDA margins. Also by region there's a little bit of difference. So as we pointed out in our release, the North American piece will move a little quicker for a number of different reasons. And then the European business will come along at a little slower pace. But I think all in all, it's a good, balanced program. It should be delivering benefits to us really every quarter as we progress.

Great. And then it sounds like the expected Forbo synergies are intact around that $50 million. But could you maybe touch a little bit on the $40 million in expected savings from the legacy restructuring actions? Is that kicking in sooner than Forbo in the Europe segment? Or maybe what are the primary components here as far as headcount reductions or facility consolidation?

Yes, Peter. It's -- the integration and the -- the EIMEA transformation project, which we used to call Project Key [ph], and the business integration of Forbo in Europe, they're really the same project now. The work streams of one are identical to the other, and so the timing of the delivery of the benefits are exactly the same. And as I mentioned, Europe has some early wins with pricing and with some headcount reduction and some raw material cost reductions. The big benefit that comes from the consolidation of production facilities comes later in Europe, back at the back end of 2013 because it just takes us longer to get these plants shut down and the receiving plants prepared for -- to take over the incremental capacity. So -- but the 2 projects are exactly the same and as they line out -- the timing of the 2 line up exactly the same.

Okay. And then just one more. I mean we've heard some concern in chemical land here about a potential destocking in June as some of the upstream raw material costs are falling. Any concern as far as what you've seen thus far, as far as potential customer destocking? And then maybe could you comment briefly on what you're seeing in the underlying North American kind of manufacturing markets as far as momentum into the back half of the year here?

Yes. So early returns on June don't show a significant change in destocking. I think those kind of moves typically happen more upstream than they do for us downstream. Adhesives aren't big drivers of people's inventory, inventory movements, but can be at times. But we don't see anything specifically there, Peter. And as far as the manufacturing environment at -- in North America, we've read some of the same reports you've read. I would say what we see is -- we saw some of these same kind of lackadaisical numbers in terms of volume output of manufacturing the first half of the year, and they're continuing. So we don't see decreasing momentum, but we don't see a lot of positive momentum from the market itself. As I said, we are seeing good momentum with some of our share gains, but the market itself, I would say, is not robust, and it hasn't been for most of the year in North America Adhesives.

[Operator Instructions] We'll now go to Steve Schwartz with First Analysis.

Jim O., in your prepared remarks you talked a little bit about Southeast Asia, and it sounds like you basically walked away from some volume in terms of restructuring the strategy of the business. Did I hear that correctly?

Yes. So I would say the biggest driver in our Asia business was what -- what's happening in Australia. It's -- the Australian economy is being driven by raw materials in the mining industry. But when you dig into the details, what's happening in the consumer and manufacturing areas is very weak, and we have a strong position in Australia and New Zealand. And that's really what's driving our -- the downside of our numbers. So very strong performance in China, very weak performance in Australia. And then yes, in Southeast Asia, one of the things we're doing around our business -- again, we add this color, right? We're committed in each one of our regions to drive in this EBITDA performance. And in some cases, that means we need to reposition our portfolio business. And in some parts of Southeast Asia, we went through and did some work to improve the profitability of the business there, and that showed up in the volumes, Steve. So good catch. I think it's an important strategic move for our business to get that mix right.

Do you expect this to be a factor over the next couple of quarters then?

Well, the Australia issue we're concerned about over the next couple of quarters? We're not seeing a big, big uptick. And in Southeast Asia, yes. I mean overall, I'd say that the repositioning of our Asia business is about where we're not as profitable fixing that, where we have good solid growth like China, continuing to drive significant growth there. Because we want a robust growth environment in Asia, but we also want a profitable business in Asia.

Okay. And then if I could, with a follow-up for Jim G., just 2 things, actually. Interest expense, lot of puts and takes in the second half of the year. If you can give us an idea of what you kind of expect those numbers to look like? And then also, with respect to the Paints business, you're taking $0.16 off of your guidance, but that business did about $7 million in op income. And even if that $7 million weren't taxed, that works out to about $0.14 a share. So I'm wondering where you're getting the $0.16 deduct from?

Sure. Okay. Let me take the first one first. Interest expense for the full year forecast for us will be just right around $20 million. So the interest expense that you saw in the second quarter would project out in Q3 and Q4 as well. You add all that up, the total interest expense for the full year would be just right around $20 million.

Okay. So the deduct for the $120 million that you get from Pintuco is modest at best?

It's very small. So the good news is we're paying down our debt. The bad news is it's very cheap debt. So we're paying down our floating rate debt, which -- the interest rate on that is extremely low, LIBOR plus at quarters, or LIBOR plus 150 or something like that. So it's very, very cheap debt. So I think that only gives us about a $500,000 benefit for the balance of the year by the time we close the deal and get the cash in the house here. But the $20 million -- $20 million is our best estimate of full year interest expense. Now Paints, I'm glad you asked, because we made our Paints business look really bad in the quarter, and we were hoping that we could have a chance to explain it. First of all, the Paints business actually had a great quarter. The revenue was up year-over-year, and their op income was very positive, enough actually -- over 30% over prior year. So just from an operating results perspective, the Paints business had a very good quarter, absolutely in line with our budgets and our plans for the year. So there's -- the posted results are not indicative of the actual operating earnings of the Paints business. What's happening is the pre-tax income that was generated by Paints is being more than offset by taxes. And it's very complicated, but the simple way to explain it is that there are certain tax costs that got pulled forward into the second quarter that actually relate to the sale of the Paints business that hasn't occurred yet. Okay? So we're paying tax, we're paying capital gains taxes basically in the second quarter for the sale that is to occur in the third quarter. And those capital gains taxes are more than offsetting the operating income of the business. That's why we're getting the negative $0.06. Our best estimate is that if those tax implications hadn't occurred and if we hadn't -- we weren't pursuing the sale transaction, the Paints business would have contributed about $0.04 a share in the quarter. So instead of a $0.06 deduct, it would have been a $0.04 positive in the quarter, if we're running just as we were a year ago. Is that -- hopefully, that makes sense.

Yes. No -- so that pretty much explains it for me, Jim. So yes. So in other words, you're getting the $0.16 because you got a tax hit, too.

Yes. Now let me say one more thing about the $0.16, because I need to change your math just a little bit. So when we report our segments in our Qs and our K, those are fully allocated. So that's an operating income after corporate allocations of overheads. And what we actually lose when we sell our Paints business is the operating income that the business earns before the corporate allocation. So the corporate allocation basically is stranded, stays behind. So the actual operating income that we're going to lose from the Paints business this year is more like $13 million to $14 million pre-tax. It has a relatively high tax rate, 40% to 45%. So if you take that $14 million minus the taxes and divide it by our share count, I think you get right at the $0.16.

I see. Okay. And you did mention $1.2 million of stranded, right? In your prepared remarks?

In the quarter.

For the quarter. I see. Yes.

Yes. So that's like $5 million to $6 million for the full year. And if you add that to your $7 million, you're at $13 million or $14 million, roughly.

And we'll now go to Dmitry Silversteyn with Longbow Research.

A lot of my questions have been answered, particularly on the Paint loss that you posted. But just to follow-up on that, you expect to get a $0.16 positive in the Paint business it sounds like in the second half of the year, including this current quarter. So with the $0.06 loss, do we assume that the paint business would have contributed more, like $0.22 in the back end of the year?

No...

Yes. Now -- so let me -- continue, Jim.

Yes. No, let me reset. So the $0.16 is our estimate of -- it's the original estimate that we had for our Paints business for the full year of 2012. So think about it as, when we gave our original guidance at the beginning of the year before we had contemplated -- or before we announced our intentions to sell the Paints business, in our original budget and plan and in our original guidance, we had $0.16 of earnings related to the Paints business. That now is fully going to go away because it's a discontinued op. And that -- of course, it goes away for the whole year, not just the future quarters. Okay?

Okay. So -- but I'm sure that in that $0.16, you didn't have a $0.06 loss. You probably had a $0.04 gain that you talked about for this quarter?

Right. Exactly. Yes.

Okay. So basically, we're still looking at something like $0.04 a quarter for the back end of the year as the impact from Paint?

Yes. Although -- yes. I think that's right. I mean, $0.16 for the full year. It could be $0.04 a quarter. Usually, the fourth quarter is quite a bit higher than the others. The first quarter was a little weaker, so yes.

Got it, got it. Secondly, just -- you did mention that you're doing well relative to the market in the EIMEA region. And certainly, having delivered what looks like about 2.5%, 3% growth in volumes over the first half of year, it's hard to argue. On the other hand, your volumes in North America have been fairly weak with the economy that certainly seems to be better when compared to Europe. How much of that is sort of reformulation and getting better value at lower volumes? And how much of that is particular end markets not doing well, or perhaps your business in those markets not doing well? You mentioned Adhesives being a struggle. But is there anything beyond that? And where do you see the Adhesives part as opposed to the Construction part in North America perhaps turning the corner?

Yes. So yes, I think -- so as you say, good solid performance in Europe. In North America, really strong performance in our Construction Products with 7% growth year-to-date. And the issue is around our North American Adhesive business. And if you recall first quarter, it was down 4% in volume. This quarter, it's probably about 1% in volume. And that's a big improvement, and we see that trend continuing. In terms of the markets, Dmitry, we've dug into some details on a volume of what our customers are reporting. So getting external data on how many cases of beverages are being produced, how many baby diapers are being produced and sold. Interestingly, when economic times get tougher, people train their children off of diapers at a slightly earlier age, right? And months generate lots of differences in diapers. So those kinds of trends are underlying some of the volume softness that's out there. And so we don't see huge trends negatively, certainly going forward in terms of the market, but we don't see huge upticks. But what we do see is, with us moving through the Forbo acquisition, gathering these 2 strong teams together, focus with these teams, we see some good positive momentum in terms of how we're winning in the market. Some of that showed up this quarter. I expect that our performance will improve in the next 2 quarters, although that's coming from us winning, not from the market helping us.

Got it. Got it. And then final question, you mentioned the destocking or restocking really doesn't play a big role in your business. But clearly raw material pricing, at least upstream raw material pricing, kind of the more basic propylene and derivatives and ethylene and derivatives and whatnot, has softened. Your customers must see that. Has there been any sort of resistance to new price increases? Or have you started to hear back from customers, that they're losing for some price cuts next time? Do they sit at the table with your salesmen and negotiate the future deliveries? Kind of can you talk about the pricing environment and whether it's different by regions or whether it's just a sort of across the globe that people are looking at petrochemical costs and expecting you guys to do something about it.

Right. Yes. So we're pretty transparent, especially with our more sophisticated customers, on our raw materials. So while the whole world sees externally the price of propylene, ethylene and butadiene, we try and help educate our customers and share as much as we can what happens with the materials between propylene and adhesives and what happens there. And so those don't -- when the cycle goes up, they don't go up us much as the commodity materials. And when the cycle goes down, they don't go down as much or as quickly. So -- especially our sophisticated customers, they understand that, and they don't expect dramatic changes when we see the kind of things that have happened over the last 60 days. If that prolonged, we'd expect it and we'd get it, and we'd pass it through. But -- so I think the answer to the question on pricing pressure is, if this were to continue for another 4, 5, 6 months, then definitely you'd see some downtick, and we'd manage that as our raws went down. But the short answer is no, were not getting a lot of pressure. We're not raising prices based on raw materials. Where there's a value position or repositioning, we're doing that. But there's, at this point, a relatively stable environment. Subject to change, based on how the world changes over the next 3 to 6 months.

And it appears we have no further questions at this time. I'll now turn the conference back to our speakers for any additional or closing remarks.

Okay, great. Well, thanks, everyone, for your attention and the detailed look at our business. We appreciate your time on today's conference call.

Thank you, ladies and gentlemen. This does conclude today's H.B. Fuller Second Quarter 2012 Investor Conference Call. You may now disconnect.