H.B. Fuller Company (FUL) Q2 2013 Earnings Report, Transcript and Summary

Good morning, and welcome to the H.B. Fuller Second Quarter 2013 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, Senior Manager, Treasury and Investor Relations. At this time, I'd like to turn the meeting over to Mr. Maximillian Marcy. Sir, you may begin.

Thank you, Catherine, 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. Adjusted diluted earnings per share are defined in the quarter reported, typically excluding the impact of special charges related to the ongoing business integration project. 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 these non-GAAP measures discussed today should not be construed as an alternative to the reported results determined in accordance with GAAP. Management believes that the discussion of these measures is useful to investors because it assists in understanding the operating performance of the company and its operating segments, as well as the 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 29, 2013, and annual report for the year ended December 1, 2012, 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 thank you, everyone, for joining us today. My objective today is to highlight the positive aspects of our second quarter financial results while explaining what we are doing to address the revenue shortfall we saw in the second quarter. In addition, we will review our full year 2013 and 2015 targets, which we are reconfirming today. One of the things we're most proud of at H.B. Fuller is the culture of agility and accountability that we've developed and enhanced over the past several years. This new attitude served us well in the second quarter as we shifted priorities in response to our revised growth outlook and will also help us manage through the second half of the year. Clearly, our revenue performance was a disappointment this quarter. There are some valid explanations for this, which I will discuss later in the call. We have initiated a global action plan to return to growth in the second half of this year and you will see better revenue numbers from us in the coming quarters. We saw many positives to point to in our second quarter results as well. We managed our margins well in the quarter. Gross margin improved sequentially by 40 basis points despite the lower-than-expected volume in our production facilities. The synergy from the Forbo acquisition is being delivered in lower raw material costs and lower production costs. Our operating expenses declined relative to the prior quarter as we took early action to reduce discretionary spending. Our business integration project moved forward and remains on track for all significant milestones. The EBITDA margin in our EIMEA business segment exceeded 10% in the quarter, demonstrating that the integration project in Europe is gaining traction, again, despite the relatively weak volume environment. And we announced the acquisition of Plexbond, which is an important step in our strategic plan to strengthen our competitive position in Brazil and the South American region. In summary, the organization was successful in executing our strategic plans while at the same time, shifting our short-term tactics to deliver our fiscal year commitments. Our ability to adjust to changing dynamics gives us the confidence to reconfirm our earnings per guidance -- our earnings per share guidance for the year. Also, our strategic direction is unchanged and our commitment and plans to deliver consistent organic growth and 15% EBITDA margin in 2015 are unchanged. Let me dig a bit deeper on some of the key results and trends from the second quarter in each of our operating segments. Starting at the top. Organic revenue declined by a little over 1%. Although pricing was slightly positive, it was not enough to overcome the volume losses. To more fully understand the revenue picture, we need to look at the geographic regions separately. Let's start with Europe. This is the only region where volume actually declined year-over-year. The reasons for this decline are several. The end market conditions in Europe are not strong, especially in the southern tier. Several of our key durable assembly markets, for example, woodworking, are weak as consumer discretionary spending is constrained. Second, we have experienced some planned attrition of the acquired Forbo revenue. The cause of the attrition is a combination of factors stemming from product line rationalization, repositioning and other factors relating to the change in organization structure and personnel in the region. This attrition was expected and planned for in the business integration project and now is recognized in our results. Additionally, the growth initiatives in several key market segments have slowed a bit in recent months, in part because our teams are focused on delivering the integration project. And finally, while we continue to show solid growth in emerging parts of the region in India, Middle East and Africa, the growth is not as strong as in prior quarters. We are, however, seeing strong growth in our core hygiene markets and we continue to grow and gain share in this segment across the region. We expect all the factors noted here to improve in the second half of this year. In the Americas, we see a continuation of recent trends. Our Construction Products business in North America posted solid organic revenue gains again in the second quarter, boosted by a generally improving end market for new home construction and remodeling and market share gains in key distribution channels. We are investing to accelerate our growth in this important segment. Our industrial adhesives business in North America and Latin America remain subdued with organic revenue development slightly negative in both North America and Latin America year-over-year. Again, there are some valid explanations for the sluggish revenue performance in recent quarters, including generally flat end market conditions in some key market segments, such as end-of-line packaging and some revenue attrition from the integration of Forbo. That said, we are not meeting our own expectations for growth in these regions for the second quarter. However, we are seeing a change in the trend for the second half of the year. In Asia, we're getting back on track with volume growth again this quarter. The recent trends in volume remain intact. Our Australian business is flat, Southeast Asia showed modest growth and our China business continues to show solid organic growth. Our business in Japan also showed solid organic growth in the quarter, though this does not impact our revenue line since it is a nonconsolidated joint venture. Going forward, we expect our revenue performance to improve as our teams shift their focus from the business integration work toward winning new business. Our commercial teams are well organized, well positioned and now fully focused on winning in the marketplace, and we're confident that better results are just ahead. Now turning to the results of the company overall, our gross profit margin from continuing operations was up approximately 170 basis points compared to the prior year. The bulk of the benefit is being driven from the business integration project, including lower raw material cost. Selling, general and administrative expense from continuing operations declined 4% or 230 basis points as a percentage of net revenue versus last quarter. We were proactive in reducing discretionary spending as it became evident that organic growth was coming in lower than we initially expected. To sum it up, although we did not grow our revenue in the second quarter, we managed our margins, controlled our costs and took another step toward completion of the business integration project. We delivered a 13% increase in operating income and EBITDA margin improvement of over 100 basis points versus the comparable period last year. Our year-over-year EPS growth was 8%, lower than our operating income growth, mainly due to various below-the-line items. The most notable were FX translation losses on our core business, as well as the reduction in the reported earnings from our Japanese joint venture due to the weaker yen. Now a quick update on the business integration project. In summary, the project remains on track and our progress is evident in our operating results. Here is a brief update on our status in each region. In North America, the integration is essentially complete. We have one final production facility to close, but much of the volume from this plant has already been shifted to the receiving plant. The remaining facility will be fully retired at the end of the third quarter. Now that all the dust has settled, we can look back and review the outcome. Our North American business, running at 17% EBITDA margin prior to the acquisition, acquired a 6% EBITDA margin business and restored the EBITDA margin of the combined businesses to 17% in just 5 quarters. It took a great deal of work and significant change was implemented in a short period of time. In the process, the team created a new and stronger sales organization, unified the supporting administration and infrastructure, consolidated product lines and created a new manufacturing network with 35% fewer production facilities. It is mission accomplished in North America. In the EIMEA business segment, the integration overall is progressing as planned. Here are some highlights. First, the shared service center in Mindelo was completed ahead of schedule and on budget. This creates a significant benefit for us as we consolidate functions into a single location and leverage learning across business segments and countries. You'll recall that we and Forbo had separate shared service facilities across all countries in Europe. Second, 50% of the product line consolidation has been completed and nearly 20% of the product volume transfer has been transitioned to new sites with essentially no disruption to our customers. Lastly, our significant capital investment plan remains on track. Major investments in state-of-the-art production capacity in Germany, France and Portugal are taking shape and will be ready to begin scale-up production in the fourth quarter of this year as we close 5 sites across the region. The first 2 sites will close during the third quarter. The results of these efforts are beginning to show in our financial results with the EBITDA margin in the region above 10% for the first time since 2009. The bulk of the synergy savings are still ahead and will bring – will be bringing margin improvements in the later part of this year and through next year as the production network rationalization is finalized. And finally, in China, we remain on track regarding synergy targets. The Asia Pacific sourcing team has been integrated into the global sourcing organization and products are becoming more localized to better suit the region's needs. Our plan is to consolidate from 4 production sites to 2, and this investment project is on track with the focus now on consolidating our 2 plants in Guangzhou into 1 state-of-the-art facility. To summarize, the business integration is right on track to realize and retain the synergy benefits that we committed to at the time of the acquisition. The successful completion of the North America piece of this project gives us even more confidence that the important EIMEA integration will deliver the benefits as planned. At this point, I'd like to turn the call over to Jim Giertz to discuss our guidance for the remainder of the year. Jim?

Okay, thanks, Jim. As we have noted previously, we are confirming our key guidance ranges for earnings per share, EBITDA and our capital spending. At the end of the first quarter, we indicated that we expected organic revenue growth for the full year to be between 3% and 5%. Given that the second quarter results fell below this range, we now believe the best estimate for revenue for the year is 1% to 3% rather than the previous target of 3% to 5%, and both ranges excluding the Forbo acquisition impact. Depending on market conditions, we may hit the bottom end of our original range, but it is clear that we will not hit the top end. The revenue growth will be driven primarily by volume gains with little incremental pricing. This assumes end market conditions remain at or near current levels. We are still targeting an EBITDA margin in 2013 above 12.5%, which indicates that EBITDA margins will continue to improve in the final half of this year. Our EBITDA target remains between $260 million and $265 million. On the bottom line, we confirm our previous guidance of earnings per diluted share between $2.55 and $2.65, which represents growth of 16% to 20% over prior year. We expect the ongoing core tax rate, which excludes discrete items, to be 30% for the 2013 fiscal year. And capital spending guidance remains $110 million to support the ongoing business integration activities, primarily in the EIMEA region. Our capital expenditures totaled $28 million in the second quarter and $48 million for the year-to-date. And with that, I'll turn the call back to Jim Owens to wrap this up.

Thanks, Jim. We're delivering the strategic improvements and acquisition synergies, which we committed to in our strategic plan and during our Investor Day. Volume was not as strong as we had expected this quarter, but in spite of that, we delivered on the bottom line. We reacted quickly and reduce costs when necessary. We are a nimble organization with employees at every level, mindful of our long-term goals for the company and capable of responding to short-term challenges. We are seeing solid growth in parts of our Asia business, global hygiene, North America Construction Products, India and the Middle East. And we have initiatives in the pipeline for the rest of our business, which will help us improve overall revenue as the year progresses, even if the macro conditions do not improve. At the onset of the business integration project, we were clear in our long-term commitments and equally clear that not every quarter would happen exactly as planned. We showed this quarter that when conditions change, we remain committed to reaching our profitability goals. We are on track to deliver our targeted EPS and EBITDA performance for 2013 and have taken the necessary steps to deliver our 2015 EBITDA and growth goals. We have averaged year-over-year organic growth of 7.1% over the last 14 quarters. And we have plans in place to move back towards our strategic growth rates in the near future. Thank you for your interest in H.B. Fuller and for joining us on the call today. Now I'd like to open up the call for your questions.

[Operator Instructions] We'll take our first question from Mike Ritzenthaler with Piper Jaffray.

It sounds like the gross margin upside in the quarter came from raw materials and the EBITDA margin upside came from cost savings. Is that a fair characterization? And in terms of raw materials, are the savings in procurement or something else that has some good degree of permanence going forward?

Okay. So yes, I think, again, that's a generalization overall, but I think you're right. We've done good work on the raw materials side. And on EBITDA margins, we did good work on the cost side this quarter, and we saw the revenue numbers. There is permanency to the raw material savings. Some of that is -- a lot of that is related to the synergy work we did in pulling the 2 organizations together, so we were able to leverage suppliers and get the best of both in terms of our pricing positions in the market. There's still further synergy savings as we move to more levels of bulk deliveries. Certainly, some of that has gone through the pipe in North America, but there's more of that to come in Europe. So, Jim, anything you want to add to that?

No.

Okay. And then was there any effect of product mix that was hidden in the pricing line item or is it mainly ASPs?

It's -- well, yes, pricing is separate from mix. Mix shows up for us in the volume line.

Okay. I guess it was perhaps a little disconcerting that pricing wasn't a little better, given some of the lofty margin targets at your largest competitors. It doesn't seem like there should be a lot of pressure on price. So I guess, are we seeing some tactical moves by the other adhesive companies reflected in current pricing that could abate over time? Or is there -- has there been pressure from customers accepting price increases or is it something else entirely?

Yes. Well, pricing was up in Europe. It was flat in North America and it was negative in Latin America and Asia. And I think that's a -- that's product line by product line responds to changes in the markets, probably not from major competitors, but with more availability response to actions by smaller competitors. So but I would say, in line, and probably favorable, as you can see in the margins, to what's happening in the market.

We'll go on to Mike Sison with Keybanc.

In terms of your outlook for 2013, you reduced the outlook for organic sales growth a little bit. Can you just help us maybe understand where you're making that up?

Where we're making it up on the bottom line or where we're making up the sales growth?

On the EPS line. Meaning, you reduced organic sales growth. I think the last quarter was 3% to 5%, down to 2% to 3%, would imply earnings should have come down, but you've had some positives to offset that, it sounds like.

Right. Yes, and significant work on -- well, I'll let Jim cover some of the details. Couple things that are happening in the business, Mike. Certainly, we're doing a really good job on the integration project and you can see in the North America numbers, very solid performance there. Additionally, we have a mantra within the organization that we're going to flex our spending in line with what happens to our revenue growth. So as we saw lower revenue growth, we flexed down discretionary spending. There are lots of ideas on areas that we can invest and improve in the business. Staging those in line with revenue growth is an important part of what we've done in the last few years and it's what we'll do going forward. So I think that's a high-level summary of what we're doing. Jim, you want to add a little more color?

Yes, sure. Well, just on the subject of operating expense, which Jim was referring to. I think, in the last call, we indicated that our outlook was generally that our first quarter -- the operating expense level that we saw in the first quarter would carry on flat through the end of the year. Well now, I think it would be better to think about our Q2 operating expense level continuing on through the rest of the year. So that's a step down in our operating expense levels, which should persist in the second half of the year. And again, that's coming from both benefits from the integration project and our decisions to cut back on some of our discretionary spending. So that's part of the answer, Mike, is we're stepping down our operating expenses. I think our margin outlook has probably gotten a little bit better since the first quarter because of the raw material environment. I also think, in general, that we've always thought that our margin improvement was more back loaded in this year than maybe some of other people have looked at our year or tried to forecast our year because the synergy benefits come later in the year for us. So I think those are the -- those are some of the main factors that are driving the improved -- our ability to hold our guidance even though we slipped our revenue in the second quarter.

Right. Okay, great. And then in terms of Europe, or EIMEA, you talked about various factors that caused the 5% decline in the second quarter. The outlook for the year for the full company would suggest that would maybe improve or other areas of the business would improve on an organic basis. So if you think about the EIMEA business, can you sort of walk through what gets a little bit better in the second half, maybe the product rationalization efforts subside a little bit or emerging markets pick up a little bit and it doesn't sound like Europe, generally, is getting any better, right? I mean, I wouldn't say.

Yes. Well, as you know, Mike, we've done very well in Europe over the last couple years in a pretty bad environment. And it's because we have a really strong team focused on where we can win and deliver value across core Europe, as well as in the emerging parts of the region in the India, Middle East and Africa. So up through this quarter, clearly, they've over-delivered relative to the economy. I think there's 2 main factors that happened in Europe, 1 planned -- beyond the economy, there's 2 main factors: 1 planned, 1 unplanned. We expected, as we made significant changes in the business that there'd be a certain level of attrition. It was in the plans when we built the plan. We've consolidated 2,500 products. We've taken 2 sales forces, put them together. We've moved shared services. We've moved some customers through new channels. All of those had a certain level of planned attrition. That attrition has come through just about as planned in terms of the numbers. I think what's happened that was a little less planned was, we had a number of growth initiatives that we expected to kick in. And with our teams very focused on driving the business integration, those growth initiatives didn't come in at the rate or the speed that was expected. They're still in the pipeline. Our team now is a lot more focused on those initiatives. That focus has shifted in the last 30 to 60 days and we're already seeing some progress. So I think the big thing that you'll see differently in Europe, the second half of the year versus what we saw this quarter, is closure of these wins and initiatives. I'd also say that's true in North America. And North America, they're even in a better position. Again, lots of change happened in North America. The sales force has changed in the second half of last year. We're now in a position where those sales teams are turning their full attention toward driving some of the innovative growth initiatives that we have and we're seeing some traction there. So that's fundamentally, I think, what's going to change in the second half of this year versus what we saw in Q2. Does that give you [indiscernible] answer?

Yes, that's great. Last question, you talked about assuming some confidence in hitting your 2015 outlook. Is that more clearly -- and part of that outlook was a much stronger organic sales growth outlook for '14 and '15. Do you feel better about that or is it just the ability to control your cost and generate the synergy that gives you confidence to get there?

Yes. No, we now have 2 clear elements to the strategy for '14 and '15. One is the EBITDA margin and one is the growth aspect and we got plans well in place for both of those. I think the level of change and distraction that happens when you go through, as quickly as we did, the transformation we've been going through slowed down some of that growth this quarter, but our optimism for '14 and '15 on our ability to grow is unwaned. And Mike, just on that point, I think if you look at our track record over the last couple years, our organic growth relative to peers and our organic growth relative to those targets has been in those areas, so I think you can see the track record on that. So, thanks, Mike.

And we'll now hear from David Begleiter with Deutsche Bank.

Jim, going back to North America volumes, still not totally clear what happened in Q2, which actually was a pretty good comp year-over-year. You actually have shown some decent growth in Q4 and Q1, which I assume there's also an integration going on then. So was there destocking or was this core to the impact to the Forbo lost business? What changed between Q1 and Q2 in North America volumes?

Yes, so there's some specifics under there. I think at the high level, it's very much the same story I just talked about in Europe. We had a sales team -- if you think about some of the changes we made, we had to take 2 customer service teams and consolidate them. Many of the customer service people didn't actually come up to our facility. We had to train up a customer service team that interfaces with the customers. Nearly 60% of the customers had a new sales pro, so the teams had to reorganize their focus in terms of their customers. So new relationships had to be built with customers. We shifted production sites. We consolidated some products. We had to -- all the sales team had to learn 2 new product lines. When you take all those factors into place, especially at the back end of last year, our sales teams were very focused on making the integration work. Now when you look at a business with a 6- to 9-month sales cycle between initiation of closes and closes, you can see that, that activity in the second half of last year starts showing up in Q2 numbers. So attrition was no different but the level of growth and gains was different, if you dig into the details of the products. So that would be the summary of what happened in North America this quarter.

And Jim, given that, and I don't want to get too granular, but June trends in North America, July order books, would they be consistent with an improvement in volume growth year-over-year.?

Yes, they're better. And we're obviously, David, we're doing a lot of work to dig into lots of granularity business by business, area by area and we understand very fully exactly what we expected. We had a lot of metrics around it and we have an early view on the quarter, right, I mean it's just halfway through the first month, but it's better than what we saw at the second half of last quarter.

And just for Jim Giertz. Jim, on SG&A, this $94 million number in Q2, is that a good number for Q3 as well or did you cut back spending temporarily that will come back into Q3?

I think that's a good number for both the quarters, Q3 and Q4.

And then lastly, should growth margins, you think, be up in Q3 versus Q2 or flattish?

Yes, I don't think you're going to see a lot of change in gross margin. So I'd say it's flat. Let's call it flattish or within forecasting errors, yes.

And we'll take our next question from Rosemarie Morbelli with Gabelli & Company. Rosemarie J. Morbelli - Gabelli & Company, Inc.: Jim, you said that the new focus now is going to be on sales and gaining some new business, which I can see happening in North America since you are done with the restructuring. But you are not done with the restructuring in the EIMEA region. So what are you doing? Do you have a different team, one focusing now on new business and then you have added some focusing on the rest of the restructuring? Could you give us a better feel as to why there is sort of only so much time to focus on new business while you are still in the middle of restructuring?

Right. Yes, so a couple points, and I think it's a good point. We've had a lot of discussion on it internally, Rosemarie. North America is ahead certainly on the planned consolidations, but Europe has done a lot of customer changes already. So the sales force consolidation happened within a few months of the North American consolidation. So that change happened last year. Product line consolidations, a large part of the product line consolidation has already happened ahead of the transfers. In North America, they happened during and after the product transfers. So that's a big customer-facing activity that the sales team was working on. Additionally, the transfer of very small customers, and Forbo had a lot of very small customers, to our distribution channel, that's happened already in Europe. So big chunks of the disruptive activity have moved forward in Europe. The other thing we're doing is exactly what you said. I think learning from the North American experience, bringing a higher level of focus on the gains and making certain that the retention piece and the disruption piece is not being managed by our sales team so that our sales team can be focused on the wins is a difference in how we're trying to drive the organization going forward. So yes, there's still more changes to come in Europe, but I think we have a different focus in our sales organization that will very much have them focused on growth. But we do expect to see more growth in North America than in Europe the second half the year. Rosemarie J. Morbelli - Gabelli & Company, Inc.: And the growth in North America, is that mostly for product lines related to the construction? Or is there some progress on other areas as well? Do you see some better trends in the other markets you serve?

Yes, so we certainly see good trends in Construction Products and we expect to accelerate that. We've got some big wins there, one with a major retailer that'll come through. But in the core business, some of the good things we've had in our hygiene business around the world, we have a major win there that'll be rolling through in North America. In our packaging business, where we haven't seen the strength that we saw in hygiene, we've got a redirected focus toward some of the issues that are defined there and we see that improving. And then we have a couple innovation programs that are kicking in. So there are a number of things that are specifically in the pipeline there in North America. Rosemarie J. Morbelli - Gabelli & Company, Inc.: And then if I may, could you give us a little more details on your recent Brazilian acquisition, what you expect from it over the short term and the longer term, obviously?

So yes, I'll cut – I mean short term, it's not a huge acquisition, so I wouldn't say it's going to move the dial dramatically in the short term, Rosemarie, although it's positive and accretive. The business strengthens our position in flexible packaging. We haven't had any production assets in Latin America in flexible packaging, which has limited our ability to grow. They also have a process capability that we don't have in other parts of the world. So that's a process capability that we can leverage. So it gives us a strong position in flex pack in Brazil that we can leverage across the rest of the region, it also gives us a production facility in Brazil. So up to this point, we've been supplying our Brazil market from production facilities in Argentina and Colombia. We'll now have a manufacturing footprint in Brazil, which is important for us strategically. So strategically, it strengthens us a lot in Latin America fundamentally as an organization and it strengthens us in an important market of flexible packaging.

And we'll continue on to Steve Schwartz with First Analysis.

I think when you talked about Asia Pacific, you mentioned that you're seeing growth in China. And I know, Jim, you don't normally quantify that for us quarter-to-quarter, but can you give us an idea of how the growth rate is trending over the past couple quarters?

Yes, so without getting too specific, as you know, we don't report those, but I would say, when I say solid growth, not double-digit growth. So something in the high single digits would be the way to look at what we have going in China. It's as good as it's been in a few years past but still solid.

So high single digits year-over-year and that is lower or higher than the level you had in the first quarter and the fourth quarter?

Yes, so I would say generally, this is -- and again, without getting specific quarter-by-quarter, generally, this is the kind of number we've been seeing over the last few quarters. And I would say a year or 2 ago, we were seeing double-digit, mid-double -- mid-teens kind of growth. So we've gone from that kind of growth rate to high single digits over the last few quarters.

I see. Okay. And then you had mentioned weakness in packaging and we've heard similar comments from PolyOne and Eastman. Can you give us a little bit of color on exactly where you're seeing that weakness or is it pretty broadly dispersed across your packaging business?

Yes, I wouldn't say there's a specific region where we'd say it's worse than any other. I think it's broadly dispersed.

Okay. And then just lastly, on the 5 or 6 facilities in North America, you've had that number for quite some time. I think even what I noticed in the K, you were still listing some facilities in North America that were already noted as being closed. Are you still carrying costs with some of those 5 facilities?

I'll let Jim comment on the cost because I assume some of those -- if there are any cost of carrying there it's special charges. But Jim, you can comment...

Yes, Jim always answers the question and then he tells me to answer the question, see? So I don't know what [indiscernible]. But he serves me well on these things.

Well, I think this situation in the case, if we own the facility, even if isn't operating, it's listed. I believe that's the case. They're nodding to me. So I think that's the situation. And then as Jim indicates, to the extent that the -- if the plant has closed and we're still maintaining it, those costs of maintaining that plant are in our special charges, okay, and not in our operating results.

And we'll now hear from Dmitry Silversteyn with Longbow Research.

A couple of questions, if I can, and some of them have been asked maybe a little bit differently. But you mentioned the benefits of the longer-term projects like the integration of Forbo driving your margin and you also talked about some discretionary cuts that you've made. Is there any way for you to sort of qualify or quantify what those cuts or what the split was? And then sort of as a follow-up, do you have any more that you can do about discretionary spending assuming that -- or in case the second half of revenues don't come back as strongly as you believe? And how long can you maintain the sort of lean and austere operating environment before you have to let those costs creep back in?

So let me let Jim try and answer the first question of the split between -- since he wants the tough question -- the split between what's going on in costs on discretionary versus the integration. Then I'll come back to our cost savings.

Yes, so it's very difficult to quantify. But I would say -- I mean, if you go back -- reference back to my answer earlier about operating expenses, obviously, if we were indicating that we thought we were running at a $97 million per quarter spend rate and now we're more like $94 million, our synergy outlook hasn't really changed very much. So most of the delta is coming from our decisions to cut back on we call discretionary spending. So maybe that answers the first part of your question.

And then on the second part, so let me start by saying I have a lot of confidence in our revenue projections, right? We've got good work going on. We've got an organization that's showing long-term growth and it's very clear, when we dig into the details, what's happened with respect to the Forbo impact both on planned attrition and the lack of growth that's come in some of our targeted areas. With that said, if revenue came in shorter -- so the plans we have now in terms of discretionary work are some delayed hirings, some T&E, some internal meetings. So it's a -- it's not a huge level of austerity. The opportunity to cut farther, if we had to, certainly exists. So could we sustain the level of spending that we're talking about here for a long period of time? Absolutely. Could we cut deeper? Yes, definitely, if we had to, Dmitry, because we're not in a super cost-cutting mode. And then that's the cutting mode that maybe couldn't sustain if you had to keep that for a long period of time without major changes. But we are confident on the growth trajectory going forward.

Sounds good, Jim. And then if I could follow up on sort of the pricing dynamics that you're seeing. As you mentioned, it was the secondary Latin America and Asia Pacific markets that saw some pricing pressure. You were able to hold pricing and actually increase prices in Europe. As demand there continues to "fail to recover" and North American demand is what it is, are you -- is the patience of market participants, perhaps, running out in sort of waiting for the volumes to come back? Are they starting to get a little bit more anxious about filling their facilities and maybe sacrificing pricing a little bit? Or is it just a case of everybody sort of learned their lessons from the past or the raw material costs are just too high to be able to cut price and maintain margins? Can you talk about sort of the pricing dynamic you were seeing in the developed markets?

Yes. So I mean, the decision on adhesives is not a price volume decision for a customer. These are small-volume products that drive a lot of value for them. So I think the pricing dynamics come when -- related to price and volume, when companies aren't demonstrating the value that they're delivering in their products and it's in new opportunities that pop up. So fundamentally, I would say that the strategy we have is to continue to manage our margins solidly through the cycle. And I think you saw that as raw materials went up, our margins actually moved up through that process in '10 and '11. As -- if pricing were to decline, then I think you'd see our margins maintain and show strong as we manage the dynamics of competitive pressure. So I don't see a big competitive push on volume and price. And frankly, I'm not sure that's a real effective strategy for people to try to employ in this market.

And we'll now continue on to Christopher Butler with Sidoti & Company. Christopher W. Butler - Sidoti & Company, LLC: Yes, a lot of good questions thus far. If we're looking at the North American segment in the second quarter, there was good expansion of margin. When we're looking at that, is that directly attributed to the structural changes that you've made in the U.S. and North America, seeing as there were no price increases year-over-year? So no value-based pricing boost or any synergies from that standpoint? Is that an effective read on the segment in the quarter?

I don't know if that's 100% accurate. There are some pricing dynamics that have happened over time through the year. I think the way to look at it, Chris, is we were at 17%. We bought a business that was at 6% and there were various elements that had to get layered on. Some of that definitely was pricing, which happened throughout the year, for products that were -- that needed to be repositioned. Some of it was reformulating. Some of it was the manufacturing synergy. Some of it was the SG&A benefits that we were able to create. So each of those things spaced through the year and I think we saw an element of each of those in this last quarter that helped with the margins. Maybe Jim can give little a more color on that.

Yes, so all those comments that Jim made, I think, relate to North American adhesives and, of course, the numbers you're looking at in our release are the region overall, which includes CP, our Construction Products business. So I'd just add on to what Jim said that our Construction Products business had a very good quarter margin. And that's based on a lot of hard work on managing their input costs, but also a little bit of volume coming through that business is very, very helpful to margin. So you're starting to see some of the lift in North America region coming out of improved margins at our Construction Products business as well, in addition to what Jim said about adhesives. Christopher W. Butler - Sidoti & Company, LLC: So could you help me understand then why, as you get the Forbo sales up to the same speed as the Fuller sales in North America, we're not seeing price increases year-over-year? It's -- this is the first quarter that we've got a good year-over-year read on Forbo. Is it in the mix and that's in the volume as well or is there something else going on?

Yes, so let me try and cover it at a high level. I'll let Jim try. So I think you see a mix of things by segment below the North American business, so where there was overlap and where there were clear movements on pricing, those went through the P&L. In some other segments, for instance, in the polymer business, where there were raw material contractions, we saw some price decline. So there's variation of things that happened below the surface that net out to that number, but very much in that Forbo piece of the business, you see the price numbers that come through in the numbers and the details below the overall North America. Jim? Christopher W. Butler - Sidoti & Company, LLC: And shifting gears...

I don't have so much to add. So go ahead, Chris. I'm going to go with the answer. Christopher W. Butler - Sidoti & Company, LLC: Shifting gears, you generated cash flow from operations of $52 million. Working capital came down quarter-over-quarter, significantly. Have you made changes there? Anything unusual going on that allowed you to generate so much cash in the quarter?

Well, I think we had a good cash flow quarter, but I think it was pretty in line with what we expected. So I think our working capital was slightly negative in the quarter, but it was pretty close to a push. No, I think that what you're seeing in our working capital is some seasonal changes. So we tend to, because it's a -- between first quarter and second quarter our business grows, our accounts receivable balances go up. That's pretty normal. Inventory for us is -- will bounce around a little bit in quarter-by-quarter because with all these plant consolidations we're doing, sometimes there's inventory builds in front of those and then the inventory comes down afterwards. So the inventory is bouncing around a little bit, but I would say the answer to your question is, there haven't been any kind of structural changes in the way we're managing our working capital over the last number of quarters. Christopher W. Butler - Sidoti & Company, LLC: And thoughts on use of cash going forward?

Well, I'd reference back to our Investor Day. We said that we thought our operating cash flow would be about $160 million this year, excluding special charges. And based on what we've seen through the first half and our outlooks for the second half, I would say we'd stick with that number.

[Operator Instructions] We'll take a follow-up from Rosemarie Morbelli. Rosemarie J. Morbelli - Gabelli & Company, Inc.: Just quickly, Jim, you talked about price pressure in Latin America and Asia coming from small competitors as opposed to your major competitors. Any sign of consolidation within all of those small companies?

So as you know, Rosemarie, there's been some consolidation over the years. So I think as the world progresses, I think there was a deal that was announced not too long ago in North America. We did a deal in Malaysia a couple of years ago. We did a deal in Egypt. We just did one in Brazil. So yes, so some of those things have happened. Rosemarie J. Morbelli - Gabelli & Company, Inc.: But you don't see any acceleration?

I don't think there's any indication externally in the market that, that's happened. Rosemarie J. Morbelli - Gabelli & Company, Inc.: Okay. And then one last question if I may, CapEx for 2013 is $110 million. What are you looking at for next year?

I don't carry that number in my head. I think it's around $50 million. So we're moving back towards our -- about 2% of revenue. We should be moving back towards that number. I think that's about right. $50 million to $60 million would be my guess for next year.

And that's all the time we have for questions. I'd like to go ahead and turn the conference back over to Mr. Jim Owens for any additional or closing remarks.

Thanks, everyone, for your time today and for all your support and interest in H.B. Fuller.

Thank you. Ladies and gentlemen, that does conclude today's H.B. Fuller Second Quarter 2013 Investor Conference Call. You may now disconnect.