H.B. Fuller Company (FUL) Q3 2013 Earnings Report, Transcript and Summary

Good morning, everyone, and welcome to the H.B. Fuller Third Quarter 2013 Investor Conference Call. This event has been scheduled for 1 hour. [Operator Instructions] Management in attendance on today's call includes Mr. Jim Owens, President and Chief Executive Officer; Mr. Jim Giertz, Executive Vice President and Chief Financial Officer; and Mr. Maximillian Marcy, Senior Manager, Treasury and Investor Relations. At this time, I would like to turn the meeting over to Mr. Maximillian Marcy. Sir, you may begin.

Thank you, Christy, 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 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. Also, please note that we have changed the organization of the regional results that we share with you. There has been no change to the Europe, India, Middle East and Africa or Asia-Pacific segments. We are now separately reporting our Construction Products segment in line with our segment reporting in our quarterly and annual filings. Also, we now combine the Adhesive businesses in North and Latin America into 1 region, Americas Adhesives. We have provided tables in the back of the press release, which was issued last night, which compare the new regional format to the prior format. The new reporting format will mirror our revised segment reporting alignment, reflecting recent changes in our management structure. The revised segment reporting structure is effective in the fourth quarter of this year. 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 that 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 the comparability of results. The non-GAAP information discussed today may not be consistent with 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 June 28 and March 29, 2013, and annual report for the year ended December 1, 2012, on Form 10-K, all 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. I'm pleased to share with you today the details of our third quarter results and the great work our team is doing to drive our future growth and margin improvement. When we gathered at the end of our second quarter, we talked about the need to adjust our game plan for the second half of the year, in light of the lower revenue growth being generated. The new game plan for the second half of the year involved 3 key actions: refocusing our commercial teams to win in the marketplace; reducing discretionary activity and the related costs; and continuing to drive the business integration project, which is critical to our long term success. We expressed confidence in our ability to deliver a positive second half and back this up by reconfirming the earnings guidance that we provided at the beginning of the year. Today, I'm pleased to say that we delivered on these key actions in the third quarter and the results of our efforts are clearly evident in the financial results. We got a revenue growth moving in the right direction. We managed our margins and discretionary spending to deliver a 28% increase in operating earnings and a 40% increase in earnings per share when compared to the third quarter of 2012. At the same time, we successfully completed major milestones in our European business integration project, keeping us on track to fully deliver the promised financial and strategic benefits from the investment and our committed target of 15% EBITDA margin by 2015. We have momentum for a strong final quarter and to complete another successful transformational year as part of our current 5-year plan. And we're backing this up by, again, confirming our earnings guidance for the year, this time committing to land in the upper half of the original EPS range provided at the beginning of the year. Here's our short agenda for the call today. I want to spend a few minutes providing more details on our performance in the quarter. And also, give you a complete update on our critical business integration project in Europe. Jim Giertz will provide a bit more color on our earnings guidance for the balance of this year and also, provide a broad outline for what you might expect in 2014 and '15. And of course, we take your questions. Starting with this quarter's financial results at the top, organic revenue increased by 1.5%. Pricing was slightly positive and volume improved over 1% versus last year's third quarter. To better understand the revenue picture we need to look at the geographical regions separately. So let's start with Europe. This is the region where volume declined year-over-year. The general weakness in our volume delivery in the EIMEA region reflects several significant factors that we have been dealing with for several quarters. I think everyone recognizes that economic conditions in the broader European region remain stagnant and indicators show end-market conditions flat to down in many countries. It's not impossible to grow the business under these conditions as we showed in 2011 and 2012, but it's certainly more difficult. And as we have mentioned in previous conference calls, we have several specific factors this year that are hindering our growth as we execute our business integration project in the region. Some of the volume decline is planned attrition that supports our strategic goal of reducing complexity in our business. Some of the volume weakness is due to the distraction within our commercial teams as we manage product substitutions and product transfers. The one final factor that I would note is the third quarter is normally a relatively weak quarter in the region, due to traditional summer holiday period, which this year seems to be a bit more pronounced than in other years. With all that being said, I think our team in Europe produced a very good result in the third quarter, absorbing a slight volume decline while at the same time effectively managing a host of other strategic initiatives and generating a significant profit improvement. Also, we know that the refocused commercial teams are producing tangible results in our growth pipeline that will provide better volume momentum in the fourth quarter. Finally, we're pleased that several of our key strategic areas continue to show strong results, including the hygiene market, the automotive space and the emerging geographies. The European team is looking forward to being finished with the business integration and having the opportunity to leverage their new state-of-the-art business platform for long-term growth. If the economy improves in the meantime, that would help as well. In Americas Adhesives, we reported volume growth of over 2%, which was a solid improvement from the 1% decline experienced in the second quarter. The volume improvement was the result of incremental improvements in both North America and Latin America. Market conditions did not materially improve in either region, but the results we delivered reflect improved focus on closing new business and regaining some business loss during the business integration activities. Our Construction Products business delivered strong volume gains, again, in the third quarter boosted by a generally improving end market for new home construction and remodeling, and market share gains in key distribution channels. We continue investing to sustain our growth in this important segment. In Asia, we continued our volume growth this quarter. The recent trends remain intact. Our Australia business is flat, South East Asia showed modest growth and our China business continues to show solid organic growth. Going forward, we expect our revenue performance to improve as our teams continue to shift their focus from the business integration work toward winning new business, especially in Europe. Our commercial teams are well organized, well positioned and now fully focused on winning in the marketplace. And we are confident that better revenue growth will continue. Now turning to the results of the company overall, our gross profit margin was up approximately 150 basis points compared to the prior year. The bulk of the benefit is being driven from the business integration project, including lower raw material costs. Selling, general and administrative declined 3% or 50 basis points as a percentage of net revenue versus the prior quarter. As promised, we proactively managed our discretionary activity and the resulting costs as part of our focused second-half game plan. To sum it up, we got a revenue line moving in the right direction, we managed our margins and controlled our costs. In the end, we delivered a 28% increase in operating income and EBITDA margin improved by 200 basis points versus the comparable period last year. Our year-over-year EPS growth was 40%, well above our targeted growth rate of 15%. We set ourselves up for a strong finish to the current fiscal year, on track to deliver on the strong earnings guidance we provided at the beginning of this year. Now a quick update on the business integration project, today, focusing on Europe where most of the action is for the time being. As we noted last quarter, the integration in North America is essentially complete with only a few investments in our production facilities complete over the next several months. In the EIMEA business segment, the integration overall is progressing as planned. Here are some highlights. First, we successfully completed 2 of the 5 scheduled facility closures. These were located in Chatteris, U.K. and Vigo, Spain. Approximately 30% of the total volume that will be transferred from the legacy site to a new facility is now completed. 2 more facilities will be closed in the first quarter of 2014. And the final production facility closure will occur into the second quarter of 2014. Second, the SKU reduction project is on track. The initial plan was to eliminate 45% of total combined SKUs in the region. To date, we have eliminated 30% of the combined SKUs. Third, 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 in the fourth quarter of this year. Lastly, our shared service center in Portugal has taken on customer service and finance functions from 8 legacy locations. The remaining consolidation of local staff units will be completed by the end of the fiscal year. The results of these efforts continue to show up in our financial results, with the EBITDA margin in the region at 10.6% in the third quarter. Our internal forecasts indicate we should generate an EBITDA margin of 12% in the fourth quarter, in line with the commitment we made at our Investor Conference in February of this year. And the bulk of the synergy savings are still ahead and we'll be bringing margin improvements through next year as the production network rationalization is finalized. 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. We continue to apply lessons learned from the successful completion of the North American piece of this project. We remain confident that the EIMEA integration will deliver the benefits as planned. Before I turn the call over to Jim Giertz to discuss our guidance for the final quarter of the year, I would like to provide a midterm report on our margin improvement commitment, which is a key component of our 5-year strategic plan. The Slide before you or Slide 6, if you downloaded the deck, illustrates our progress towards our 2015 EBITDA margin goals. For each of the businesses, on the chart the left bar is the margin performance in 2010, the base year of a 5-year plan. The right bar is the 2015 target and the center bar is the actual margin posted in the third quarter. As you can see at the halfway point of our current strategic plan, we are more than halfway to our EBITDA margin targets. From a regional perspective, Americas Adhesives has already overachieving its target level of performance for 2015. Our Construction Products segment is also ahead of plan and will more than likely deliver a higher level of performance than we originally anticipated. EIMEA is right on track and we expect significant margin expansion in 2014 as the production network rationalization is completed. The only region that is slightly behind target is Asia-Pacific. The primary driver of the underperformance is slower revenue progression than we had originally anticipated when we created the plan back in 2010. So long story short, we are on track to achieve our targeted EBITDA margin of 15% by the 2015 fiscal year, despite the generally lower volume environment that we're experiencing relative to our original plans. The progress to date is evident in the results of this year. The expected future improvements are supported with specific plans and active initiatives which will produce the targeted outcome. 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. Our outlook for the fourth quarter essentially confirms our original earnings projections provided at the beginning of this year. Starting at the top, we expect net revenue in the fourth quarter of between $520 million and $530 million. This is in line with the current trends and within the guidance range we set at the end of the second quarter. We anticipate achieving an EBITDA margin for the full year of about 12.5%, in line with our expectations when we initially set guidance at the beginning of the fiscal year. That said, the absolute EBITDA dollars earned will be a bit less than our original guidance, as revenue is lower than we initially planned. Our EBITDA guidance for the year is now $255 million to $260 million, or $68 million to $73 million in the fourth quarter. We are narrowing our earnings per share guidance range by increasing the bottom end by $0.05 per share. The new full year guidance is $2.60 to $2.65 per diluted share or $0.70 to $0.75 per diluted share in the fourth quarter. The core tax rate, excluding discrete items, was 30% in the third quarter and we expect this core tax rate to again be 30% in the fourth quarter and for the 2013 fiscal year overall. In the third quarter, we had positive discrete tax items totaling about $1 million, which boosted our EPS by about $0.02. Capital spending guidance this year remains $110 million to support the ongoing business integration activities, primarily the EIMEA region. Our capital expenditures totaled $35 million in the third quarter and $83 million for the year-to-date. Now, before I turn the call back to Jim O, a few comments about next year and our 2015 financial targets. As I think everyone is aware, at our Investor Day conference in July of 2011, we announced aggressive targets for the 2015 fiscal year. And then following the acquisition of Forbo's Adhesives business in 2012, we ratcheted these targets up. The key target metrics for 2015 are: organic revenue growth of 5% to 8% per annum and a 15% EBITDA margin. So now, as we complete the third year of our 5-year plan and set specific guidance for the fourth year, the question is, are the 2015 targets still valid? And to this question, my short answer is, yes. Jim Owens showed our EBITDA margin progression earlier so I think that our plan and prospects to achieve the 15% EBITDA margin target are well understood. The larger unknown is the expected revenue trend for the next 2 years. Based on our 2013 revenue performance and the current global economic backdrop, we are updating our growth numbers to reflect our current situation and have established a revenue target range of $2.2 billion to $2.4 billion for 2015. In other words, from our current position, we are continuing our commitment to achieve revenue growth of 5% to 8% per annum. The plans for 2014 and 2015 will reflect our focus on generating higher and consistent organic revenue growth, especially from our key target markets of hygiene, packaging and durable assembly. Also, we will maximize our opportunity to grow our Construction Products business in North America, leveraging our improved competitive position and improving end markets. We will provide specific guidance for 2014 during our fourth quarter conference call in January of 2014, but for now, we can say that the 2014 plan will include an improvement in our organic revenue growth, relative to 2013, and a significant further step in our EBITDA margin improvement plan, primarily driven by the completion of our business integration in Europe and improving market conditions in our Construction Products segment. In addition, our 2014 plan will include other strategic initiatives to provide a foundation for future sustainable growth and completion of our aggressive 5-year plan. And now I'll turn the call back to Jim Owens to wrap this up.

Thanks, Jim. This is a solid quarter which brings us one step closer to our long-term goals. Not only did we returned to growth this quarter, we also continued our margin management by delivering 13.5% EBITDA margin and EPS growth of 40%. 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 and that we have a team at H.B. Fuller who will deliver. We're on track to deliver 2013 EPS performance at the high end of our guidance range which will deliver full year EPS growth of 18% to 20%. We have also taken the necessary steps to deliver our 2015 EBITDA margin growth goals as we move back toward our strategic growth rates. Thank you for your interest in H.B. Fuller and for joining us on the call today. Now, I'd like to open your call up for your questions.

[Operator Instructions] We'll go first to Mike Ritzenthaler from Piper Jaffray.

For our understanding, Jim G, you had added some color in your prepared remarks, but taking up the midpoint of EPS guidance but lowering the midpoint of EBITDA, is it fair to assume that the delta between the 2 is on the top line as opposed to some new change in the outlook for the end markets? Or is it somehow an artifact of the business integration costs or I think, or some other factor.

This is Jim G. You want me to answer that?

Yes. Nothing...

Jim G. I think if I understood your question right, the answer is yes. We just -- the EBITDA dollar guidance that we've given originally, we just ratcheted that down just a little bit just because our revenue was lower. But the EBITDA margin expectation for the full year is still according to our original guidance and our original plans that we set out at the beginning of the year. I hope that answered your question.

Yes. No, that's the clarification that I was looking for. I guess secondly then, on the integration update, in the prepared comments you got 2 of the 5 facilities closed. Basically, on the closure side of 2013, milestones have been completed, the SKU reduction is at 30%. Looking at the table in the release, it seems like the workforce reduction and facility exit costs are the 2 categories that are sort of though, have the farthest to go to obtain the expected costs. I guess to what degree does further progress depend on Surbourg and Mindelo and some of the other significant CapEx projects? And I guess, what I'm trying to -- the spirit of the question is the additional 100 basis points in EIMEA sequentially, what kind of has to happen there in terms of, I don't know, headcount or is it really more on the operational side on products and SKUs?

Okay, so this is Jim G. I'll take the first -- I think I'll take one part of that question which you ask about our workforce reduction cost that have been recorded in the income statement so far relative to our total estimate I believe. The reason that that's lagging is, essentially, all of the discussions and the negotiations to establish what the severance payments and other arrangements will be when these facilities are closed, those discussions are essentially completed. But from an accounting point of view, we amortized in the cost from today into the estimated date of the closure of the facility. So that's -- and those costs will come in basically in line with our estimate, but they will come in to our income statement as special charges, up until the time that the facility is closed. So I think that -- hopefully that answers that part of your question.

Yes.

And then in terms of the broader question, in terms of margin improvement, Mike, the Q4 margin improvement is built on a stronger top line in Q4 versus Q3. There is -- that's a natural phenomena along with some of the things that are going on in the business. Combined with more importantly the actions we've taken this quarter, so the 2 slight closures will come through, the customer service consolidation, some of the other work we're doing on raw materials and margins. So those are embedded in by actions that, that have happened or are in the process of happening in terms of Q4 margin improvement. And then the big step up next year is the result of the fact that the largest capital investments come online, Q1 of next year, and the largest 2 closures happen in Q1 and Q2 of next year. So the big changes from a production footprint happen are those ones that happen in Q1 and Q2 of next year and that's when you see that other step up in that margin as a result of those changes.

And we'll take our next question from Rosemarie Morbelli with Gabelli & Company. Rosemarie J. Morbelli - Gabelli & Company, Inc.: I was wondering if you could give us a better feel for whether you get to your EBITDA margin more from the SG&A decline than the gross margin decline. And linked to that, 18.3% of sales in SG&A is the lowest level going back to 2005. And on the gross margin side, can you get back to 30.1%, which you had in 2009? If you could help understand where you are benefiting the most. And still linked to this, is that $91 -- $91 million, let's call it, the SG&A on a quarterly basis, something sustainable or you cut really too much of your discretionary items in order to continue in that path? It is always the same question.

Rosemarie, this is Jim G. So I'll start to answer that. Yes, so to get to 15% EBITDA margin in 2015, we have -- we've communicated kind of a generic model of our P&L and that is 30% gross margin, 18% at the SG&A level and 3 points of depreciation and amortization. So 30 minus 18 is 12, plus 3 is 15, right? So that's generally the model that we're moving to. The gross margin improvement from 28% where we are today to 30% is -- there's many factors there, but the primary driver of that is, next year in Europe, when the plant rationalization will really take effect and we'll work to improve our gross margin as our manufacturing expenses are reduced. So that's -- I think answers the first part. Then you asked about our SG&A level this year, this quarter, and then is it sustainable. I would say, well first of all, we were pleasantly surprised that our operating expenses came in a little bit lower than even we thought they would in the third quarter. I would say that in the fourth quarter of the year, our operating expenses will again be well-controlled but I would -- if I had to guess, I would say that they'd be just a tick higher than they are -- than they were in Q3.

And generally, how sustainable is this, Rosemarie? I mean, we've made a commitment to grow our SG&A in a lower rate than our revenue growth, and as a company, we made decisions about things that we're going -- how we were going to spend differently in the second half of this year and you see that in the numbers. So we're going to continue to invest in the business and as we generate growth, we'll spend more on SG&A and if growth is lower, we've shown our ability that we'll be able to manage discretionary spending in a controlled fashion while still investing for the long term of the business. Rosemarie J. Morbelli - Gabelli & Company, Inc.: Just a couple of clarifications, if I may. What are you basing your -- you are maintaining your top line growth organically at 5% to 8% and the economy certainly is not conducive to that. I understand you have new problems. I understand that people are going to be focused and they are not going to be concentrating on the integration as much, but it is still a high number considering the global economy out there.

Yes. So, you're right, the economy isn't going to help us a lot here, Rosemarie, and we're not counting on that when we look forward. I think if you look back to our performance in 2010, '11 and '12, it was certainly up at, or above these kind of ranges. And also I think today, more importantly if you look at certain segments of our business, where we are performing well and whether isolated from the integration, there's really strong growth. Our hygiene business is showing double-digit growth because of the great work we're doing to win share with customers. Our Construction Products business, nice work by the team there to gain key wins in channels. Some of the durable assembly work we're doing, electronics is gaining some momentum in terms of meaningful growth. So there are pieces of our business where we're seeing solid growth today, and I think to your point, as we get through the integration, those parts of our business that are distracted by integration will also be on that offensive track. So this is about innovation and winning in the market and the investments we've made there. So that's the reason for the confidence.

And our next question comes from David Begleiter from Deutsche Bank.

This is actually Ram Sivalingam, sitting in for David. Jim, just a quick question, very clear on the cost side of things, both at SG&A line and the gross profit line. But regionally, what I found was interesting, EIMEA volumes were down 3.8% yet, that was the only region to post pricing gains. So could you talk a little bit about what drove that pricing gain in the quarter, whether it'd be mix shift or some supply demand changes at the product level.

Yes. So the pricing gains are a product of some of the integration work. So as we manage integration, reduce SKUs, but also make certain that pricing is in line with the value we deliver. So there are certain products that are -- that were underpriced relative to the value we delivered. So that's a part of generating the value and the margins that we expect in our European business. That's probably the biggest driver of that price gain in Europe. And I just comment that we do that generally across the business, across the world, getting good at pricing is a fundamental part of something that's changed in this company over the last couple of years. Understanding where value is delivered and making certain that we price appropriately is a skill set that the company has acquired and we actively manage that much better than we did a few years ago.

And our next question comes from Peter Cozzone with KeyBanc Capital Markets.

Can you provide some more color on the organic sales growth initiatives? How have those been progressing? Are they better than expected thus far and any specific wins or markets that you can point to us to in terms of visible progress? Should these benefits accelerate as we head into 2014?

Yes. So I think the one that we've highlighted most clearly is the hygiene business, which is a nice, attractive space but our team is clearly winning and that comes as we talked a little bit in the Investor Day about having the right relationships on the right projects with the right customers. So as people innovate, decide they want to make a thinner diaper or a stretchier diaper or a new product that has higher productivity in their lines, we win those opportunities by being the technology expert in that field. That's the same approach we apply to other segments, whether they're in packaging or durable assembly. We've identified those 3 areas as the targeted areas. Second area where we've made investments is our Electronics business and it's another good example of a place where we've taken dedicated resources, put them in a market segment and we're seeing real tangible gains in the business as a result of those investments. So it is a business where there's not one huge customer that you can point to, but as you look at the details around these various customer initiatives and innovation initiatives, you can see the traction on a number of them. The final one I'd point out, Peter, is our Construction Products team. If you look at the organic growth rate, the last couple of years there, you'll see that, that's driven by market share gains relative to what's happened with others in that market and again, that's this innovation philosophy of what new products, what new problems can we solve and win in the market. And that's generating some nice wins and the team had another nice one they announced this quarter that will kick in the first half of 2014. So good progress there would be something else I'd say that's a good example.

Great. And then expanding on earlier questions, am I clear in assuming that the margin expansion in Europe during fourth quarter is a function of milestones already completed and that the next big milestone or step up should come in the first half of '14?

I think that's a fair way to look at it. I mean, the team's done a great job this year. I think you'll see that, we saw that result in Q3 and you'll see more of it in Q4. And then those big milestones of the new investments coming online and the closure of 2 large facilities both happen in 2014, Q1 and Q2.

So in relation to the 12 plants targeted for closure noted in the Investor Day slides from earlier this year, can you just give us an update of where we are? I know you got the 2 closed in 3Q here and 2 more in the first half of '14 here. Can you just give us an update of where we are there?

Yes. So 5 in North America, 5 of the 6 in North America are fully closed. There's 1 that's finalizing in this quarter. In Europe, 2 of the 5 are closed. And in China, there's 2 to be closed in 2014. None of those are closed at this point. Those are smaller impact in terms of the overall transformation but those both happen in 2014.

And our next question comes from Christopher Butler with Sidoti & Company. Christopher W. Butler - Sidoti & Company, LLC: Looking at the North American Adhesives business, on similar revenue, your profitability increased and I noticed that this occurred last year. Is there a seasonality to the mix as you move into the third quarter that -- or anything else that accounts for that change on a second quarter or third quarter sequential basis?

That's -- I think it is true, the last 2 years, I have to look back to see if it was true. I think it's just a matter of milestones being ahead. I mean, the North American team, as we talked about, did some great work. The integration started right away last year, so they saw some benefits in Q3 of 2012, did a lot work throughout the year last year and some of their final steps happened in Q2 of 2013, which resulted in the step up they saw here. So I'm not sure it's a seasonality issue Chris, as much as it’s a good, solid performance by the team in North America to continue to deliver on their commitments. Christopher W. Butler - Sidoti & Company, LLC: Okay. And that was -- the reason I asked is that last year, I knew that there were a lot of improvements being made but I wasn't aware that there was a big chunk that was going to be taking place in the second quarter.

A number of things finished through and found their way through the P&L in the second quarter that impacted us in the third quarter. And I also pointed out that, as I said, we took a conscious effort to manage discretionary spending for the second half of the year, so that's also impacting the Q3 results. Christopher W. Butler - Sidoti & Company, LLC: And touching on that, the forecast out of the last conference call was for $94 million of SG&A. Could you give us an idea of what the delta was, from what your expectation was to where the reality is?

So I'll give Jim -- this one to Jim Giertz and he can give you a flavor of -- I think we give broad guidance on SG&A, not specific on a quarterly basis but Jim can give you a sense of where some of the savings came from.

Yes. So that's my fault because I was the one that said it was your number that you said, what I said in the last conference call. So yes, we overestimated what our operating expenses were going to be. I don't think there were -- as -- it's true in the every quarter, there were some good things that happened and some bad things that happened in the quarter. So I don't think it really relates to in any material way to unusual items that happened in the quarter. What I think is the fact is that we were actively cutting back on our hiring. We were leaving positions open. We were cutting back on outside services, cutting back on travel and we came in a little bit better than we thought. So I think that is the core explanation. And as I said earlier, I think if I had to give a forecast for next quarter I'd say, we're probably a little bit higher than we were in the third quarter.

And our next question comes from Jeff Zekauskas with JPMorgan. Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division: Do you expect your European volume to grow year-over-year in the fourth quarter? And some people believe that the European economy is really beginning to gather a little bit of speed. Is that your experience or you do you have a different point of view?

Yes. So as you know Jeff, we don't give specific volume numbers on regions by, specifically by quarter. Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division: I was just wondering if you're up or down.

Yes. But I think that we will improve in Q4 versus Q3, whether there will be a positive volume number, I think that will be large step for the group. So somewhere between where it is and 0 would be the right progress from where we're at today. But it will be better Q4 than it was in Q3. We don't see, from our standpoint, we try to dig into on a quarterly basis, what's happening in the region from an underlying versus what we've done. As you know, the last couple of years, Europe was down when we were generating volume growth. So we -- our results are more driven by what we do than the economy but what we see in our customer base is not as strengthening in Europe from our perspective and in fact, as I mentioned in the script, we saw this summer shutdown in some areas actually being a little longer and more pronounced than we would have seen last year. So -- but generally, I think the general statement is, we see Europe like it's been, very stagnant. Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division: Okay. So over the past couple of months, oil prices have moved up. Has that changed your raw material outlook either in the United States or in Europe? Or are your raw materials, I guess, still pretty flat? And what's your view of the year ahead in terms of overall pricing and overall raw materials? Are we -- was the base case that both raw materials and pricing will be flat over the next 12 months or do you see them differently?

As you know, for most of our raw materials, Jeff, it's a supply demand phenomena but the long term trends of the feed streams have an impact. We -- so I would say, most of the benefit we're getting right now is a result of the integration and the work we're doing there, but in terms of market trends, they've been flat to slightly down this year in terms of market trends. I think you're right if oil stays over $100 a barrel, $105, $110, we'll see some pressure sometime in 2014 on raw materials but the supply-demand issue is that bigger driver, so if the economies remain the way they are now, I think that will be a very muted effect because this is the huge driver of raw materials. So our current view is slight pressure, second half of 2014 but relatively flat between now and then. Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division: In your margin target, the one area where there's a good distance to hit your target is Asia and you mentioned that you would close a couple of small facilities. So is really hitting your target in Asia dependent on volume growth? Is that the core dynamic there?

Yes. So I think, as I said in the script, we're going to hit the overall target as a company, we're probably going to overdeliver in construction products, maybe a little bit in North America and I think the Asian business is a little stretched at this point, of the 2015 target because that was built on volume growth. We do have the volume growth coming around there, which is good progress. I think there's also some things we can do on the cost side including the work we'll have by consolidating. And I'll now just point out, in Asia, this is a consolidation and an investment because we have growth, both the plants in China that were 4 smaller plants, Forbo had 2 and we had 2, we're making investments to have 2 sizable built-for-growth facilities in our China business. So these are really growth investments more than cost investments or cost-cutting investments. Although there's some cost savings. So the short answer to your question is, yes, we're going to move toward those targets. Volume is a part of it but there's also a part of not spending at the same kind of rates we anticipated in the original '15 plan. Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division: And then lastly for Jim Giertz, are there tax items that you expect in the fourth quarter, either positive or negative?

In terms of discrete items? Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division: Yes.

Well, those are a little bit hard for us to predict but I would say, our best guess would be that they have some small positive discrete items perhaps.

And our next question comes from Dmitry Silversteyn with Longbow Research.

Most of my questions have been answered but just to follow-up on the question that Rosemarie asked earlier. When you look at your top line growth expectations of 5% to 8% for 2014 and 2015, Jim, I think you referenced that in 2011 and 2012, you've done better than that, largely on higher pricing. I mean, your volume was up, I think, 2% in 2011 and just a little bit over 1% in 2012 and maybe flattish this year. So how do you get from 1% to 2% volume growth to 5% to 6% volume growth and a little bit of pricing to get you to the 5% to 8% top line that you're looking for over the next couple of years?

Yes. So again, Dmitry, I think the key issue is building on the strengths we have. So we have good solid growth in Construction Products. We think we can do better than that. We have some wins that are already logged that will drive very significant growth plus the fact that our Construction Products business is on the later end of the housing recovery. We haven't even seen all the benefits to come there. So we see some good positives there. Our hygiene business continues to generate wins. So that's a piece of our business that we see positive growth. I indicated we're seeing good progress on this Electronics business. We have a number of parts of our business that are generating nice growth and the difference between where we are now and where we're going to be is the other chunks of our business delivering what we'd expect. So our Packaging business, some of the innovations that we have there come into market. Some of the other segments of our Durable Assembly business delivering what we'd expect. So I think what we have in the organization is -- parts of the organization that aren't distracted by Forbo delivering very nice growth, parts of the organization that are distracted by the business integration that are getting rolling in terms of growth agenda.

Got it. Got it. Okay. On the Construction and Americas business, and I'm not sure where the acquisition fits and so I'm asking about both. But is the Plexbond acquisition in the numbers there somewhere, and if it is, in the quarter, what would the organic growth have been if you excluded Plexbond?

So the number -- the Plexbond business is in the integration numbers. I'm sorry, it's in the Americas number, I'm sorry, I misspoke there. And it's about 1% overall, I think for the growth.

1% was contributed from Plexbond. Okay. And then final question, the pricing -- that the weakness that you're seeing outside of EIMEA, is that raw material pass thru driven? Is that sort of end market environment driven? Are you going after volume? Can you explain to me the dynamic of lower prices in regions where you’re not out mixing customers through the Forbo acquisition integration?

Yes. So I think the pricing overall is relatively flat overall, so I think that's -- there's a mixed phenomena of us managing our pricing across our market segments there. As I mentioned, raw materials are generally favorable, so that generally, results in pricing flat to down but relatively flat in the other regions. With the exception as you pointed out, is the EIMEA where we're actively managing prices as we restructure the business, so there's big segments of our business where, where we're making changes to better reflect the value proposition that we have in the business.

So the 2% -- or whatever the 1% of price declines that we've seen in Americas and Asia-Pacific, that's primarily mixed, what you're saying?

It's primarily driven by us managing to what the cost structure is in the market. So as we -- as we win business at -- as raw materials drop and we win business at lower prices, or in other segments where raw materials are up, we gain business at higher prices. Mix is out to a net of about 1%. Jim will follow-up on that one.

Yes, and Dmitry, the other thing. And just to remind you that these -- the way we are measuring price here is, it's year-over-year. So it's picking up all the different price changes that have happened over the last years. So it's not always a very good indicator, what's happening right now in terms of price. Like for example, Asia, price is down but if you ask where our price is going in Asia going forward, I would say, they probably are going to go up and that has to do with just the swings and valleys of the raw material cost environment that we see in that region, for example.

And our next question comes from Steve Schwartz with First Analysis.

Just one question for you. Jim O, you recognized last quarter that you'd taken your eye off the ball on some growth initiatives. In this call, you noted that you're getting back on track with furthering those initiatives. Can you give us an idea of kind of how big was the gap last quarter from maybe what your original targets were on those initiatives? How much have you closed it and kind of at what point do you get back to the growth pace that you originally set?

Yes. So as I said last quarter, Steve, we had 2 factors that are -- that were in our business second quarter, they're still in our business this quarter. One is we had -- through all the business that we had integrated, changes in our business by eliminating SKUs, transferring products, eliminating products that was going to result in volume decreases. Those are finding their way through the numbers and they're part of the net number that you had last quarter, and they're part of the net number you have this quarter. And the second thing that we have was, we have sales organization that had to be combined, right? So the -- end of last year, we had 2 sales teams came together to form 1. They're calling on new customers, they're getting comfortable with new product lines and they're the team that's managing all of these products and price transformations. So rather than being on the offense in selling, they're managing all those kinds of activities with customers. And it was that activity that we strongly addressed this quarter. We put in place a program we called Project Win, What's Important Now?, identified clearly the targets that needed to get closed this year that would drive growth for the second half of this year and into 2014 and we dedicated a lot more resources of our sales leadership, as well as the commercial leadership and the sales management, all the way up to the organization, to focus on this growth effort, and it made an impact this quarter, it will make an impact next quarter and you'll see it as we go into 2014. So my expectation, Steve, is you'll see positive movements in that organic growth rate quarter after quarter. So to get us up into the range that we're talking about is, as what we think is sustainable. So moving last quarter, this quarter, next quarter, we should see another positive jump and the same thing in the first couple of quarters of next year. And I don't have a specific number to put on that today but I think this quarter was a good positive step and I'd expect a similar good positive step next quarter.

[Operator Instructions] We'll go next to Rosemarie Morbelli. Rosemarie J. Morbelli - Gabelli & Company, Inc.: I would just like to follow up on the pricing issue. If you are eliminating SKUs that are marginally profitable and are learning as an organization to raise prices for the value-added products, shouldn't price be up, just by definition even if volume is not and even if raw material costs are stable to down?

Yes. The pricing -- and I think the question was particularly targeted at Europe and pricing is up in Europe, Rosemarie. So I think that was the point is that in our European business, we have some volume declines, part of that was planned, but it is offset by some pricing changes that we see as part of a strategic effort. And as far as the rest of the businesses there's both activities that go on at the same time as well, at the bigger side of Europe. Rosemarie J. Morbelli - Gabelli & Company, Inc.: Okay. And if we look at volume being up 1.4% for the Corporation and then you eliminate 1% from the acquisition, that leaves you with volume growth of 0.4%. What would it have been if you have not consciously eliminated some of the SKUs and I am assuming marginally profitable customers?

Yes, it's tough to exactly target that number, Rosemarie. We -- because -- we don't purposely try to lose customers, right? We want them to buy this products for us but at the right price or in some cases, we want to substitute product A for product B. The net -- if you're looking for a number that the net impact that we said early on in the transformation plan was that there'd be, out of the revenue that we acquired, $50 million that through the process, we expected to lose, we certainly didn't target to lose any of it. And I would say, as we dig into our details, we see in each segment of the program the kind of numbers that we planned. So that's probably a good overall number in the business on an annualized basis. Rosemarie J. Morbelli - Gabelli & Company, Inc.: So you will have lost this year about $50 million in revenues from your conscious efforts?

I think overall, through what happened the end of last year and this year, $50 million is a good number overall for the Corporation as a result of this. Rosemarie J. Morbelli - Gabelli & Company, Inc.: Okay. And just one quick explanation -- well let me see, clarification is the word I was looking for. On Asia-Pacific, you had 2 plants, Forbo had 2 plants. Are you shutting all down all of those 4 plants and replacing them by 2 state-of-the-art manufacturing facilities? Is that what you are doing or did I miss something?

No, no. That's not what we're doing, Rosemarie. So we are -- in -- so we each had a plant in Guangzhou. Forbo's was a newer facility. We're taking our production competencies and moving that to that facility. So in Guangzhou, we're closing as a former H.B. Fuller plant and investing in that facility there in Yangzhou. And that in the northern part of China, Forbo had a plant in Shanghai and a lease site. We have a state-of-the-art facility in Nanjing. We're making a sizable investment in Nanjing. So in both cases, it's on an existing site. In one case, it was the former Forbo site, and the other was the former H.B. Fuller site. And there are group of product lines also associated with each. Rosemarie J. Morbelli - Gabelli & Company, Inc.: Okay. So you are adding capacity plus equipment to produce additional product lines?

Correct.

And our next question comes from Mike Ritzenthaler with Piper Jaffray.

Just one follow-up for me for our edification on the rationale for breaking out the construction separately. I mean, given the fact that the company is more focused on things like hygiene, durables and packaging. Is there anything else that's leading to the decision to breakout construction separately that -- other than what it seems like on the surface I guess?

So I'll let -- well, it's always been a reportable segment and an important part of our business but let me let Jim tackle that. So...

Yes, I think Mike it's -- I don't think there's any great message here. It's just that -- we have been reporting Construction Products as a reportable segment in our Qs and K, so the information was always available the day after we have our conference call. So -- and we are changing our segment reporting alignment because of changes in our organization. So we decided it was a good time to align the reporting that we do on our press release to what we actually do in Q, which comes the day after. So it was a little bit of a mismatch, we're just aligning it, that's all. Hopes that make sense.

And we have no more questions at this time. I'll turn it back to you for closing remarks.

Okay. Great. Thanks, everybody, for all of your time, attention and support of H.B. Fuller.

Thank you, ladies and gentlemen. This does conclude today's H.B. Fuller Third Quarter 2013 Investor Conference Call. You may now disconnect.