Ladies and gentlemen, thank you for standing by, and welcome to the H.B. Fuller Third Quarter 2016 Investor Conference Call. This event has been scheduled for one hour. Today’s conference call is being webcast live and will also be archived on the company’s website for future listening. At this time, I will turn the meeting over to our host Senior Manager, Treasury and Investor Relations, Mr. Maximillian Marcy. Sir, you may begin.

Good morning, everyone, and welcome to our fiscal year 2016 third quarter earnings call. We have two speakers today, Jim Owens, our President and Chief Executive Officer; and John Corkrean, our Executive Vice President and Chief Financial Officer. As always after our prepared remarks, we will have plenty of time to take your questions. Let me also remind you that comments made by me or others representing H.B. Fuller may contain forward-looking statements which are subject to risks and uncertainties. Our SEC filings contain additional information about factors that could cause actual results to differ from management’s expectations. These filings can be found in the Investor Relations section of our corporate website at hbfuller.com. Also, please note that our reported results include non-GAAP financial measures. These results should not be confused with the GAAP numbers in yesterday’s earnings release or with the GAAP numbers we will report in our Form 10-Q. We believe that the discussions of these measures is useful to investors because it assists in understanding our operating performance and our operating segments as well as the comparability of results. A reconciliation of these non-GAAP measures to the nearest GAAP measure is provided in the earnings release our company issued last night. With that, I will turn the call over to Jim Owens.

Thanks, Max, and thank you everyone for joining us today. We are pleased with the improving financial results we delivered in the third quarter and we remain on track to deliver double-digit growth in the 2016 fiscal year. Overall, business performance remain positive and aligned with our expectations despite the more challenging macroeconomic environment and the increased impact from raw material price deflation. We are confident that we will continue on a positive path and deliver our 2016 commitments as well as our long-term targets. Some of the key highlights from the quarter are as follows: We delivered on our commitment in the Americas, driving sequential volume improvements. Year-over-year volume was essentially flat in the third quarter in line with our commitments. We maintained our solid EBITDA margin, delivering 13.4% in the third quarter with our European business delivering a 240 basis point year-over-year improvement in EBITDA margin. The Asia-Pacific and engineering adhesive segments continued on their growth path. Each business showed strong double-digit volume growth helped by strategic acquisitions that we closed this year. All of this together resulted in over $60 million of operating cash flow in the quarter, a key deliverable of our long-term plan. The cash flow we generated during the third quarter funded the Cyberbond acquisition while maintaining our leverage ratios. As we enter the final quarter of the year, we feel good about our performance. We are on track to meet our operational goals this year and we are on track to deliver the 2020 strategic plan we reviewed with you in February. With that overview, I will now discuss the performance of each operating segment in more detail. As I mentioned, the volume trends continue to improve in the Americas segment. The measure we have traditionally called volume a measure of volume and…

Thanks, Jim. Jim provided a few highlights of the third quarter results, so I will just provide some additional financial details. Volume grew about 1% versus last year's third quarter. Volume grew in the EIMEA, Asia-Pacific in engineering adhesives with year-over-year volume and the Americas flat based on traditional measures and up year-on-year when looking at kilos sold with both measures improving sequentially from the first half of the year. As Jim mentioned, the measure we've traditionally called volume is a measure of both volume and mix. We can look at volume and mix separately by measuring the kilos sold by sub-segment in each region, which shows that volumes or kilos sold in the Americas was up 2% year-on-year in the third quarter reflecting market share performance. Mix had a negative 2% impact reflecting product substitutions with customers when we move a customer to a new SKU with a lower price point, but a similar margin. We’ve included this info for the Americas on the slide. The impact of product pricing and product substitution continues to be a significant factor in our results. It’s normal to see some price erosion during periods of prolonged raw material cost deflation, that said, we believe that we are effectively handling this normal process of managing pricing with our customers. Going forward, we expect raw material cost environment to stabilize and further incremental benefits from lower input costs should be minimal with pricing stabilizing as well. Constant currency revenue growth was slightly lower than expected and so 1.2% compared to last year. Exchange also had an unfavorable impact on sales versus last year as well as midyear expectations. The weaker Chinese Renminbi was the biggest driver of the unfavorable exchange impact on sales year-on-year, while the slightly weaker euro, weaker Chinese Renminbi and weaker…

Thanks, John. We're continuing to drive better business performance in 2016. This year is about capitalizing on our strong foundation and delivering results based on the investments we’ve already made. Our third quarter results are in line with our strategic direction and momentum is building throughout our business. Global market conditions continue to be volatile and raw material declines are both an opportunity and a challenge, but our teams are reacting quickly to deliver for customers and our shareholders in a cost efficient manner. Our EBITDA margin of 13.4% is evidence of our effective price and raw material management strategy. We are now three quarters into a 20-quarter plan, a plan that has us driving sizable improvement in margins, modest growth and significant free cash flow. The plan revolves around two key elements, driving continued growth in our engineering adhesive business in emerging economies while optimizing margin performance in our other segments, particularly EIMEA. We delivered solid performance in both of these elements this quarter. Our 2020 plan is a solid continuation of what has gone well in our business with a clear vision of what will improve going forward. We remain confident in our plan and our ability to deliver and we are pleased with the progress that we've made thus far in 2016. This is the end of our prepared remarks. So now we look forward to answering your questions.

Thank you. [Operator Instructions] We will move first to David Begleiter with Deutsche Bank.

Thank you. Good morning.

Good morning, David.

Hi, David.

Jim, just on the increased pricing pressure decline, are you seeing any competitive pressures – abnormal competitive pressures or does more normal given the deflation you are seeing in the overall commodity basket?

Yeah, I don't think we see anything unusual in terms of competitive activity. I think when you are in these deflationary times, we do everything we can to drive raw material costs in our favor and we also introduce new raw materials and new products in the market so that we can maintain on margins as we gain new business and compete in the market. So I would say this is a normal period in this kind of deflationary environment. I am pretty pleased with how we're managing.

Very good. And just on Americas adhesives, volume growth – volumes in Q4 and even towards next year, should we see solid positive volume growth next year or in Q4 1% to 2% or more modest than that do you think?

I think we’ve said our strategic plan is 1% to 2% in the Americas while maintaining these margins. So I think – while we're not doing any projections on next year, I think the thing you should expect out of this business is continued modest growth in the years ahead with very strong margin performance. And that's our strategic – that’s the strategic pillar in the Americas and the growth comes from what we're delivering in some of the other segments like engineering adhesives in Asia.

Thank you very much.

Thanks, David.

We will now take our next question from Mike Harrison with Seaport Global Securities.

Hi, good morning.

Good morning, Mike.

Hi, Mike.

Jim, I was wondering if you could provide a little bit of color on what you saw in terms of overall volume trends as you look at June, July and August. Is it a case where we saw some July and August weakness or timing issues that may be resolving here in September that give you a little more confidence going forward?

I wouldn’t say we had a particularly big variation throughout the quarter. I think we saw very strong performance in engineering in Asia throughout the quarter. I think what we saw in construction products was very much in line with what we expected and the Americas business, as I said, right in the beginning of the year, we saw it progressing as the year came through and we saw it throughout this quarter. So we are pleased with the progress in the Americas, which was one of the big question marks that people had coming into the year and I think we answered that well. And likewise in Europe, it was a good quarter. Certainly, if you look at businesses in places like Turkey, they took a hit after the turmoil there. But overall, we didn't see big trends throughout the quarter.

And as I'm looking at the engineering adhesives business, it seemed to show a pretty significant slowing in the volume growth rate from the 15% you showed in Q2. If I could strip out the Cyberbond contribution, is that just some timing of sales or a tough comp? Can you just talk a little bit about what you're seeing in terms of the volume trends in engineering adhesives?

Yeah, we had a really solid quarter from an electronics and automotive standpoint and most of the core Tonsan business, the solar business within Tonsan had a weaker quarter. That has to do with some timing on some subsidies that were going on in China. So, yeah, you are absolutely right. Overall, it was a little slower than last quarter, but fundamentally the business is unchanged in terms of our expectations going forward.

All right. And last question for me is, just in terms of the lower raw materials, you mentioned that it’s both an opportunity and a challenge. Can you talk about what you are seeing in terms of customer inventory levels? Are you seeing the lower raw lead customers to some strategic delays in purchases right now that might be weighing on volumes?

Generally speaking, we don't see a lot of that in our business. People reducing their inventories of adhesives isn't a big driver of their strategic thinking in terms of how they manage things. So there's an argument that there is a little bit of that in our numbers, but we don't see it in any big major way in any of the regions.

All right. Thanks very much.

Okay, thank you.

We will now move to Curt Siegmeyer with KeyBanc Capital Markets.

Hey, good morning, guys.

Hi, Curt.

Good morning.

Just on gross margins, obviously, they moderated a little bit sequentially this quarter, kind of not too surprisingly, but how should we think about gross margins and just sort of price cost going forward? Should we expected to be kind of neutral heading into 2017 and maybe even like further into 2017, would you expect it to kind of stay at that level or how should we kind of think about that?

I think generally if you look at our strategic plan, it involves gross margins getting above 30%, right? If you look at our 70% EBITDA target, I think we’ve done a really nice job of managing the price raw material cost component of the margins and the opportunity we have in our business is to drive better savings in manufacturing costs. So, I think as we go forward, we will probably see less benefits from the price margin combination and more benefits from manufacturing. But net-net and particularly when you look at the mix of our businesses, our engineering adhesive business grows will be overall long-term positive improvement from where we are today in gross margins.

I think it’s also you have to factor in – and Europe, it is the lowest volume quarter, so there is some absorption, unfavorable absorption that we see at gross margin. But overall manufacturing cost in Europe are headed in the right direction, but we've got some fixed cost absorption issue that you deal within the third quarter. So, it’s a little lower data point, but we’d like as Jim said targeted to move it up over 30%.

Got it. And then just a follow-up on the outlook. You mentioned in the press release $0.05 related to the currency moves that were unexpected in the quarter. It looks like you trimmed your volume outlook just a little bit from 3% to 2% to 3% on a constant currency basis for a topline outlook, I should say. Could you maybe sparse that out and talk about what you saw in your end markets in the current quarter or anything noticeably stronger or weaker, kind of what that compensation looks like and then just going forward what was responsible for the small reduction there?

Yeah, maybe I will comment on the volume and I will let John comment on the currency. I think overall we see the underlying volumes in line with our expectations overall. The level of deflation as we manage price of raw materials is what pulls back that 0.5% you see in the overall constant currency growth rates. So that’s the way I would look at that, but overall we are pretty pleased with the growth rates in engineering adhesives, Asia-Pacific, stabilization in Americas in a positive ground and our continued positive positioning in Europe. So we feel pretty good about the underlying volume. Deflation, we are managing by managing our raw materials. So that’s how we are managing that. Do you want to give a little more detail on currency?

Sure, yeah. So the currency obviously, it’s a handful, but there is a slight weakening in the euro and Renminbi, a bit little more pronounced weaker pound and we have some exposure to the Turkish lira. So that’s having an impact both in terms of the topline as well as operating income and EPS. To build on what Jim said related to the slightly lower constant currency, it is really the price deflation impact we are seeing, but we're holding contribution margin very well. So that’s really not a driver per se. We do have a little bit of headwind for manufacturing costs as we talked about that are primarily temporary items, it will dissipate as we get through the year. If you look at the way we’ve thought about guidance, it’s really more on the currency and the headwind from manufacturing than a price deflation impact falling through. We are managing that pretty well.

Got it. Thanks a lot.

Thank you, Curt.

We will now move to Rosemarie Morbelli with Gabelli & Company.

Good morning, everyone.

Good morning, Rose.

Following up on the manufacturing expenses, could you give us a better feel as to how much more the start up is costing you this year and how much of the recovery do you expect in 2017?

I will let John answer the details here. So, I’d say there’s three buckets, Rosemarie. The biggest one is the CPPs, which is related to the start up of our Aurora plant and then what we’ve had to do in terms of supporting our business from a service standpoint by leveraging the overall network. The second piece is this Indonesia plant start up, which is really going well, but we are making certain that we take the necessary steps. So to make certain that that is a big driver for our business and it is showing up with growth in that region. And then the third is some delay in some of the savings initiatives we have in the Americas. So those would be the three broad buckets. I guess John can maybe quantify at a high level.

Exactly right. I think the biggest is the construction products, the integration we're doing there with the plant in the Chicagoland area and that’s probably ramped up as we’ve gone through the year and it’s probably providing $1 million to $2 million headwind per quarter. That piece will – and that’s one has been delayed. So that’s providing a little bit more of the unanticipated piece. That is work that should be completed by the year and then we will have that behind us. Indonesia will probably also be a little lingering in the 2017, but not much. That project is on pace.

So if we look at $1 million to $2 million cost a quarter in terms of the ramp up in the U.S., can you eliminate the entire amount next year and see that kind of a margin – I mean of a growth profit improvement everything being equal?

I think that’s unfavorability we probably face in the back half of the year and a little less than that in the front half year’s figure, $1.5 million per quarter in Q3 and Q4 and less than $1 million in Q1 and Q2 as far as the favorable impact we should see next year.

Okay, thanks. And I wonder if you could touch also on the price decline. Is it more than you previously anticipated or is it more or less in line and at this stage if raw materials stabilize, do you expect to have pricing? I think you said it would stabilize, but oil seems to be fluctuating, raw material cost seem to be fluctuating, so could you actually see some price increases if this is the case?

I would say that if you look at our business, Rosemarie, as you know, it’s delayed a long time off of the oil decline, so oil has come down a long way almost two years ago now and then it finds its way through our business 18 months later. And that’s what we’ve been managing this last year. We are managing it really well. It affects our business in two ways. One is where we give price discounts to customers as part of a sharing aspect whether that’s through an index or a negotiated deal. The other way is we introduce new raw materials. So if we have a customer that has a whole set of needs, we will introduce a new product with a new set of raw materials to that customer and that product will have same or maybe sometimes better margin for us, but a lower price for our customer. The uptake on that has probably been a little stronger than we had anticipated at the midyear. That's a good thing I think. I think it keeps us competitive, it allows us to introduce new raw material suppliers into the market. So we are pleased with what’s happened there, but it does put a little drag on the revenue. Will that continue? Yeah, I think we will see a little bit of that continue certainly the rest of this year and early into next year. Our management here is to manage that well and we’ve shown up really good capacity. Over the last five years, we’ve managed up and down these raw material situations and drive our margins forward on the bottom line and that’s what I expect we will continue to do with whatever happens. If things tick up and raw material prices go up, we will certainly be in a position to raise prices. So I would say from a H.B. Fuller standpoint, it is about being flexible and taking the issues and managing them well. So hopefully that gives you a perspective and the detailed answer you are looking for.

Yes, it is helpful, thank you. And if I may ask one last question, when we look at the volume growth in Asia-Pacific and in engineering adhesives, could you touch on what legacy Fuller did versus the full result, which include acquisitions?

I think I would look at the acquisitions as between $3 million and $4 million per quarter for each of those businesses.

Okay, thank you.

[Operator Instructions] We will move next to Jeff Zekauskas from JPMorgan.

Hi, thanks very much. Your SG&A costs move down about $7 million sequentially, why was that and why is SG&A so volatile?

So, yeah, SG&A, it’s a number of things, I think we’ve touched on them when we were making our general comments. But you got the impact of, I would say, just overall managing discretionary spending better, which we did in the quarter. And I think you have to remember Q2 is historically our highest quarter in terms of SG&A, we tend to have the most discretionary spending. So part of it is sort of the natural move of SG&A from Q2 to Q3. And Q3 always tend to be lower because of the Europe effect, I think you’ve got half the continent on vacation. Exchange had somewhat of a downward impact on SG&A and then we adjusted variable comp in the quarter to reflect sales and profit performance.

And I would say, Jeff, importantly, as we’ve looked at this deflationary impact, we’ve also put a specific emphasis on making certain that we control our SG&A to manage our business effectively.

Okay. You made some comments about price and mix, if you exclude mix, did prices decrease sequentially in a meaningful way?

I think, if you look at the business overall, I would say, there is a slight decline Q2 to Q3 from a price only standpoint, Jeff.

So when you look – I mean the price of ethylene is now – spot price in the United States is $0.42 and it used to be in the mid-20s a couple months ago. Propylene is up and VAM is up. It look – it’s not touching your business at this second, but it looks like there is a meaningful raw material movement upward, what are you going to do about that or do you see raw materials differently?

We see – I would say there’s two perspectives here. If you look at our business at a broad basket, most of our raw materials, 87% of them are not tied to commodity raw materials. So those are materials that have a downward pressure on them over a period of years. So there is an 18-month delay. The parts of our business that are directly connected ethylene or VAM, we have seen price increases this quarter. So the numbers are net and you are right. At a point, VAM have moved positively and those specific segments tied to some all-time liquid polymer businesses that have seen upticks in the quarter.

Right. So are you preparing to do something about that or you will wait it out to see whether it’s a temporary fluctuation or what is your strategy?

What you would see in those businesses, Jeff, beneath the business in the Americas, it’s those businesses that are directly polymer related, related to ethylene and VAM, had a price increase in Q3 versus Q2. So while the overall net number is negative, you would have seen those segments having – and those were small part of our business, but they do move – when I talk about that 10% of business that’s indexed, a big chunk of that is in this water-based polymers base and that’s the piece that would move pretty closely, about a quarter lag to what happens to ethylene and VAM.

Okay. Just as a last question, a lot of the earnings growth that you’ve got this year, a lot of the EBITDA growth comes from a very weak performance in the first quarter of 2015 and a much better performance in the first quarter of 2016, but since that time your EBITDA has flattened out. Can you do anything about that or you really can't do much because you're in a pretty slow growth environment right now?

I think our strategic plan is pretty clear in terms of how we are going to get to the 17% EBITDA over the next few years. Right now we are 90 basis points ahead of last year. We will probably end up a little short of 90 basis points for the full year. And I think the way to look at our business is each one offers segments has its specific challenges. We’ve talked a lot about Europe and the challenges we had there. We’ve made some really nice progress to move that segment forward. Construction products, we have a very specific plan on how we’re going to move that forward. Engineering adhesive business, we’ve said very clearly that we are investing for growth there. With that business, it’s very high gross margins there. So each one is looked upon separately, but we think this 17% EBITDA target is very achievable. And what you should expect as an investor in the company is progression toward that 17%, mostly within our control. Right. We are not expecting a lot of growth in this plan. We are expecting good growth in Asia, we are expecting in engineering adhesives, but the margin improvement are things that we are driving within the business.

Okay, great. Thanks so much.

Thank you, Jeff.

We will now take a follow-up from Rosemarie Morbelli with Gabelli & Company.

Just quickly, thank you. I was wondering if you could touch on the trends – the demand trends you are seeing in Europe since the end of the summer vacation? I know it is still kind of early in September, but can you give us a feel for what you are seeing?

I can say I see a specific trend change after summer vacation, but maybe John has better insight.

I will be honest, it’s so early, but I don't think we're seeing a change in trend in general in Europe other than what we’ve talked about with some of the turmoil and – I’m talking broadly now, EIMEA and Turkey. Q3 is kind of looking like Q2 right now in the very, very early stages.

And for our business that means broadly muted but positive for Europe. Weaker in Turkey right now, we certainly see everything being weaker within the Turkey sphere and continued strength in India. We are very pleased with our business in India. And while our Africa business is small, we're real pleased with the progress we're making there. So that’s the net-net for [indiscernible].

And just looking at it in a different way, did plants shut down for longer period of time during the summer or more of a normalized type of…?

That's a good way to look at it, Rosemarie. And I would say it was more normalized than you see in summer years where you have these very long shutdowns.

Okay. Thank you.

[Operator Instructions] We will now take another follow-up from Mike Harrison with Seaport Global Securities.

Hi, thank you. Just one other question on the Americas. You pulled out the volume growth and I appreciate that. The volume was up, but the mix was negative. But can you break out a little bit what you are seeing in some of the different markets across the Americas, particularly Latin America, I assume, is still weak? Packaging, what were you seeing there? And can you give us an update on the hygiene business where I think you lost some business last quarter?

So, I would say – thanks for that question, Mike. In each one of those were areas that we highlighted as areas of weakness and each one of those got stronger this quarter. So, I’d say, we are pleased with the performance in our hygiene business and our packaging business and Latin America got better. We're still dealing with year-over-year impact because of the Venezuela situation, but our teams are doing a nice job, gaining share and managing through the business, but thanks for the question.

Thank you.

Okay. Thanks, everyone, for your time today and your continued support of our strategy.

Thank you, ladies and gentlemen. This concludes today's H.B. Fuller third quarter 2016 investor conference call. You may now disconnect.