Ladies and gentlemen, thank you for standing by. And welcome to the H.B. Fuller First Quarter 2018 Investor Conference Call. This event has been scheduled for one hour. Today’s conference 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 your host, Director of Investor Relations and International Finance, Mr. Maximillian Marcy. Please go ahead sir.

Good morning and welcome to our fiscal year 2018 first 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 on the Investor Relations section of our corporate website at hbfuller.com. Also, please note that our comments may include references to non-GAAP financial measures. These results should not be confused with the GAAP numbers in yesterday's earnings release or the GAAP numbers we will report in our Form 10-Q. We believe that the discussion 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'll turn the call over to Jim.

Thanks, Max, and thank you, everyone, for joining us today. Our Royal integration is off to great start and underlying business performance remains strong. Net revenue grew 42% year-over-year. And consolidated EBITDA was $84 million at the high end of our expectations. In addition to our earnings release, which was distributed last night, we also filed an 8K earlier this week that included pro forma 2017 results illustrating what our consolidated and segment level financial performance would have looked like last year heavily on Royal. We chose to file this 8K to provide you a baseline when comparing year-over-year performance as we deliver growth and margin expansion on a combined basis this year. It also underscores the solid financial results of this combination. During our call today we will make some references to our growth in 2018 versus the pro forma results included in that filing. So in line with that statement performa for Royal net revenue growth grew 11%, led by Engineering Adhesives, which again delivered double digit growth and both Americas and EMEA growing above their long-term targets. Pricing continues to improve contributing to our solid revenue performance and is expected to get stronger throughout the year. As we move through the remainder of the year we expect to deliver performance consistent with our 2018 guidance and the goals in our 2020 plan as we expand margins, integrate Royal and meet our free cash flow targets. We have three areas of focus as we enter the second quarter: first will be to realize over $50 million in annualized pricing to offset last year's raw material inflation. Next, we continue our Royal integration which will deliver $15 million of cost synergies this year and set the stage for revenue synergies of $50 million by 2020. Lastly, we will generate…

Thanks Jim. Jim provided a few highlights of the first quarter results, but I'll provide some additional financial details. Net revenue grew by over 40% versus the first quarter of 2017 the vast majority of the growth came from the addition of the Royal business. On a pro forma basis for Royal, revenue growth was 11% which included approximately a 4% positive impact on foreign currency translation primarily related to the stronger Euro. Pricing continues to be a more positive revenue contributor as we realize the impact of pricing actions to offset loss last year’s raw material inflation. Adjusted gross profit margin declined versus last year reflecting a cumulative impact to raw material inflation during the 2017 fiscal year offset somewhat by pricing actions. Adjusted selling and general administrative expenses increased 36% in the first quarter versus the prior year, primarily reflecting the addition of Royal. On a pro forma 2017 basis SG&A grew of about 5% that declined as a percentage of revenue versus the prior year by about 100 basis points due to the restructuring actions we implemented at the beginning of 2017 fiscal year, volume leverage and overall cost controls. The net of this resulted in adjusted EBITDA of $84 million, up 43% versus the first quarter of 2017 and in line with our guidance. On a pro forma basis for Royal EBITDA was essentially flat year-over-year reflecting volume and pricing offset by the cumulative impact of raw material inflation during 2017 fiscal year. Adjusted earnings per share for the quarter was slightly above our expectations at $0.35, down year-over-year as a result of higher interest expense and additional amortization related to the Royal acquisition which impacted our lowest volume quarter of the year. With that let me now turn to our guidance for the 2018 fiscal…

Thanks John. 2018 is off to a great start. The key priority this year is to successfully integrate the Royal business and this integration is already having a positive impact. We have already secured a significant percentage of the raw materials synergy savings that we outlined. We also recently announced the actions that will rationalize some of our manufacturing footprint and drive efficiencies and cost savings. And in the first quarter of this year we received our first orders related to our commitment to deliver $50 million in revenue synergy by 2020. In addition to the Royal integration we are seeing positive volume growth in both the legacy and Royal businesses and we're delivering positive pricing across all of our businesses. The pricing actions will ramp up significantly in the second quarter. The results of these actions will generate the EBITDA of approximately $465 million this year and free cash flow of approximately $200 million this year. The cash flow will be used to pay down debt. With each passing quarter we gain confidence in our 2020 targets of $600 million in EBITDA and $600 million in cumulative debt pay down by 2020. We are gaining momentum in the business as we continue to grow our top line and improve our operational performance. This is the end of our prepared remarks, so now we look forward to answering your questions.

Thank you. [Operator Instructions] We'll move to the first caller in the queue. We will hear from Dmitry Silversteyn from Longbow Research.

Good morning thanks for taking my call. Just wanted to clarify…

Good morning Dmitry.

I actually since I get one call let me clarify one thing. The $50 million in annual price realization that you're hoping to get and I'm assuming this for 2018, that represents about maybe a 0.5 or so in your revenue, that’s a little bit lower than, I think certainly I expected. So can you clarify sort of the total price realization and what that implies for the run rate of pricing for 2019 in the words should we expect something more than $50 million even if you don't increase prices again just on the basis of which were already done.

Yes that’s additional increase in Q2. So would add about 1.5% to 2% of pricing starting in Q2 of this year. That's about two quarters of benefit.

So this is actually incremental to the price which you've already, got not…

That’s correct. That’s additional increase that are going into place right now and this doesn't include anything we need to do in Q4 or Q4. If we see further inflation, this is increases announced that are in the market and either implemented March 1, or effective April 1 and agreed with customers.

Got you. And if can ask a quick follow-up. When you started the year, when you provided guidance for the year, you made it very clear that you're going to pursuing pricing to restore your margins, and you sort of cautioned that it may impact on volumes. In your pricing initiatives that you've seen so far, was the volume attrition better than you expected, in other words less, or was it greater than you expected, or pretty much in line with expectations and how does that change your thinking about additional price increases in the back end of the year?

Yes so far it’s a little better than expected Dmitry, I mean we will see what happens in Q2, but we are seeing better competitive activity as well which is what we really needed to help mitigate some of that. So I would say, we plan for the worst and I mean things are a little better at this point.

Okay, so thank you very much.

Thanks Dmitry.

We’ll hear next from Mike Harrison from Seaport Global Securities.

Good morning this is Jacob on for Mike.

Good morning Jake.

Good morning. In your comments, you expect to end the year in your 20% EBITDA margin in Engineering Adhesives. And then it appears the Royal Engineering Adhesives portfolio was running closer to mid-20s. So given your 2020 targets, do you feel that with the added scale, you can get up into the mid-20s by 2020?

Yes. I think, so the short answer is, yes, we'll be higher than 20% in 2020. One of the things we'll do in our Investor Day in July is layout more specific by segment what we expect these segments to be in 2020. But I think given the accretive effect of Royal plus the underlying plans we have in the business, the legacy business to improve Engineering Adhesives, we expect margins to be north of 20% by 2020, in Engineering Adhesives.

Got it. And then one follow-up. Is effective the Royal business in EMEA through 19% year-over-year, based on the 8-K information. So may a little more color on what the drivers are there? I assume a good portion of that was FX, but it still seems to be pretty strong.

Yes I'm not sure that we show Royal growth quarter-over-quarter. We showed Royal pro forma 2017. And then this year we showed the combined segments. I don't think there's a separate. You may looking at one of the model numbers, but we have been separated out for 2018 Royal and Fuller numbers. Those are combined.

Yes the growth rates are similar to the H.B. Fuller growth rates, which is low double digits, and it’s – some of that’s exchange and then there’s some good volume growth.

Okay, that’s good. Thanks for answering my questions.

Thank you.

Well move on to Ghanshyam Punjabi from Baird. Please go ahead.

Hi, good morning. This is actually Matt Krueger sitting in for Ghanshayam. How are you doing today?

Hi Matt good. How are you?

Good, good. With a particular emphasis on your interest rate sensitive end markets, have you seen any shift in momentum on a macro basis across any of these various businesses? Like I said, particularly in the context of the interest rate momentum that we had seen recently?

Yes I don’t think we get – first of all, we have interest rate sensitive markets. If there was one, it would be tied to our construction adhesives. But the amount of momentum we have there is more. So we really don't have what I would call interest sensitive. But overall construction looks positive, I think, construction markets are positive. We are anticipating a pretty good year in our construction adhesives business.

That’s helpful thanks.

Thank you.

[Operator Instructions] We’ll hear next from David Begleiter from Deutsche Bank.

Thank you. Jim just in Engineering Adhesives volume growth did slow versus the prior two quarters. Can you address that? Is that 6% growth what you think you will see for the rest of the year in Engineering Adhesives?

There’s a couple of things going on there. So I would say, organically it was about 12%. I think you're right the volume was a little less than that. But now it's a combined business, so I would same what we expect going forward is the legacy businesses had a very nice and continue to have a very nice profile of 15-ish percent organic growth and the Royal pieces of that are more in the 5% to 7% growth. So we'll nudge down to the mid-digits, but closer to 12% to 15%. We also have an interesting effect that happened this quarter and it was predominant in engineering and Asia Pacific in the way Chinese New Year fell, right. For most people Chinese New Year is always in the middle of their first quarter. For us, it can fluctuate a little bit. It was right at the end of our first quarter. So the pickup that happens after Chinese New Year didn't happen in our business until the first month. So there's a couple of percent of volume related to that that will come back in the numbers actually in Q2.

I understand. And just on Royal versus pricing, will you be fully caught up by the end of Q2 with these $60 million annualized price increases?

Pretty much by the end of Q2 from last year. I think we feel really good about – we feel very good about what's happened with these increases here going into the quarter. And I think, we see further inflation. So there is very much a potential for further price increases. But this is a nice catch-up quarter, if you will, on the margin.

Thank you very much.

Thanks David.

We'll move next to Rosemarie Morbelli from Gabelli & Company. Please go ahead.

Thank you. Good morning everyone.

Good morning.

Jim, I was wondering if you could give us a better feel for what is happening in the construction side. You said you are seeing it from flowing it from flowing last week. Can you give us a little more detail on what we should expect?

So in terms of Q1 it’s a very tricky quarter both on a roofing on the flooring side, because you’ve got Christmas and you’ve got normal seasonality of less construction in the U.S. which most of this businesses is U.S. And you’ve got weather always in construction-related businesses. But overall for the rest of the year, we feel pretty positive about what's happening in construction. Certainly, we think in the roofing business, we are going to have a hurricane rebuild affect. That should be positive for that business. And they have more seasonality in their business than flooring, obviously because a lot of that work goes on outside. So there is a big seasonality effect in that business that you'll see flowing through as well as positive growth. And then the flooring business will be definitely positive and grow this year. We started the year looking for five-ish percent, and we are still targeting that as our growth. But I think the big story in construction will be the continued expansion of margins. So underlying in our flooring business, we have good margin expansion some of the actions that we have taken in the roofing business are going to improve margins, and we have a nice synergy program there. So that's a very nice margin expansion story on Construction Products.

Where they affected more than other businesses currently added cost for raw materials, and on the subject, do you see – have you seen additional increases in the raw materials in the first quarter? And are there signs that you will get additional cost in the second as well?

Yes. Actually broadly speaking, petrochemicals are going up. A couple of areas are hit a little harder. Certainly, anything related to MDI. So if you think about that construction context, there is more European Roofing business than there was in our legacy businesses. So it’s probably more of an effect of raw materials than there have been in the past, in our new construction versus what we been construction adhesives in the past. So I think silicones and MDI-related materials are going up more than others, but there is a broad modest inflation here going on in 2018 that we need to recover as well.

Alright thank you.

Does that help?

Thanks Rosemarie.

Jeff Zekauskas from JP Morgan. Your line is open. Please go ahead.

Thank you. Your interest expense expectation, I think, is $100 million, but if you annualize the first quarter, you get to 110. Can you explain how that works?

So as part of the financing we swapped some of our debt into fixed rates. So what you're seeing on the interest expense line is gross of swaps, so there is actually part of the offset is sitting in the other income line Jeff. So it will be around 100 but you have to kind of net those two lines.

Okay. Why is that Engineering Adhesives would reach 20% EBITDA margin by the end of the year? That is, there is a very, very large lift from where we have now?

Yes so that’s one of those segments that has a pretty significant seasonality impact, especially with the combined businesses.

Okay.

Because of Chinese New Year. So you’ll see margins pickup a lot because of that. And then some of the seasonality from a growth standpoint are actually in some of our higher-margin businesses. So there are wide range of businesses in there.

So what was your normalized margin going into the year in Engineering Adhesives on the pro forma basis? And how much do you expect that to change in 2018?

Yes John has got that number.

Yes. So the information will be provided on a pro forma combined basis shows in Engineering Adhesives was approximately 16%, EBITDA margin last year where you have the two business combined. And we are expecting I think we said in the script roughly 100 basis point left in that EBITDA margin year-over-year.

Okay, great. Thank you.

So the full year improvement is about 100 basis points, driven by growth of high-margin businesses.

Okay, great. Thank you so much.

Thanks, Jeff.

We’ll move next to Eric Petrie from Citi.

Hi, good morning, Jim.

Good morning. How are you today Eric?

I’m well, thanks. What gives you more confidence that you would be able to continue to implement pricing action compared to 2017?

Well, I would say, the level of activity that we have going on. So I guess, there’s a few things that are happening. One, deeper and better analytics. One is a broader price increase leveraging our software tools, and very importantly, is more competitive activities. So I think Henkel has been, especially in North America and Asia, active both publicly, but also with customers. And we’ve seen a lot more activity in North America from all of the competitors. So I think those things they are very different approach to the price increase internally and a different dynamic externally.

Okay. And as a follow-up, you seem pretty bullish on the sequential margin expansion in most of our your segment, so why not raise guidance for the full year or what are the risks that you are still going into second half?

Yes. I think that’s built into our guidance. I think there is a seasonality that always existed in our business that is bigger now with Royal because of – mostly because of the construction adhesives piece, but couple of other factors that are in the business. So there is going to be a natural not only revenue, but lower margin in our Q1, and the pricing in the synergies add up to it. So we feel very good about that $465 million, but I’d like to deliver more than $465 million, we’re certainly not stopping there, but I think it’s a very firm, very deliverable commitment at $465 million EBITDA. And we’re a really working toward our long-term goal of $600 million EBITDA. So we’ve committed by combining these companies to build a company that’s going to get that. This year is going to be a very nice step in that. But we do more of the $465 million possibly, but I can assure you $465 million is going to happen, and our commitment to 600 is very high in 2020. Does that help? I mean…

Thank you.

Yes, yes, [indiscernible].

Thank you.

[Operator Instructions] We’ll move next to Curt Siegmeyer from KeyBanc Capital Markets.

Hey guys, nice start to the year.

Thanks, Curt.

I was wondering if you are able to quantify the transportation and logistics cost that you had mentioned? And is the $50 million in pricing action that you expect to take is that – does that include what you would implement to offset some of those costs?

I wonder why John looks up the numbers and make sure he gives you his specific numbers again. I think logistics cost, especially in the U.S. are up significantly I think every business is seeing that right now. So I was probably little more than anticipated when we started the year, and it’s definitely built into our pricing expectations going forward. But it is a – it’s a small percentage of our costs, but with sizable increases, it becomes something that we definitely factored into our price increases during Q2. John, you want to give a little more?

Yes. So kind of to quantify it, less than 5% of sales, it’s around 3% to 4% of sales, but it’s up pretty significantly. And it would be kind of mid-teens, actually driven in part by sales, but also driven by underlying cost increases.

Okay. That’s helpful. And then with the – on the revenue synergy opportunity across the construction business, could you provide a little more detail what may be you would expect with the combined Royal business, what that brings to the table? Would you anticipate the long-term growth opportunity to improve at all in that business with the Royal Roofing business now part of the portfolio?

Yes. I would say the biggest revenue synergy opportunities are in Engineering Adhesives, and then some in our Americas and EIMEA. We do have some in Royal, but that’s mostly around flooring. So in flooring, H.B. Fuller had technologies that Royal didn’t have and vice versa. So they had a very nice position for instance, with some product technologies in wood flooring. We have a whole bunch of distributors that we sold adhesives to for tile and resilient flooring. So we’re going to market their products into our distribution channels and vice versa we had some product technologies like wrappers that they didn’t have in their product portfolio. So I would say the – again we’ll share more of this in July with a more detailed rundown of the growth synergies by segment. But I would say, it’s a – of the $50 million in revenue, it’s a single-digit millions of opportunity in Construction Products in added growth. And as far as a cross roofing and adhesives, we haven’t built any of that in. I think those opportunities are more long-term as we build a constructed adhesive’s franchise. The channels that we have from a retail standpoint, things that we can leverage, but those aren’t built into at this point into 2020 growth synergies.

Great. Thanks for the color.

Thank you.

At this time, we’ll move to a follow-up from Dmitry Silversteyn from Longbow Research.

Yes. Good morning, Jim.

Dmitry, thanks for requeuing. I know you’ve got a lot of questions.

I just wanted to kind of revisit the volume declines that we’re seeing in construction in APAC businesses in the quarter. And I understand the sort of the cadence of – or the timing that the New Year’s fell in – the New Year fill-in, but you’ve had issues growing APAC volumes not just in this quarter, it is not been a particularly strong division for you when it comes to volume growth for the last couple of quarters. So what would it take to get that business to perform maybe not in line with engineered adhesives, but maybe more in line with what the Asian markets overall are growing?

Yes. I don’t know, I guess, maybe John can pull up the numbers, I think our Asia volume growth last year was good each quarter, and this year it was very exceptional. So it was mostly the Lunar New Year. And even without the Lunar New year, it would be a little lower than it’s been. But we’ve been, volume wise, I think high single digits consistently 2017 and 2016. And I think that’s our expectation for that business. So just to net out in that high single, low double-digit range in that business. As you raise prices in Asia, you get a little bit of pressure. So do manage to do that. But that’s my expectation of that business strategically and I think that’s what we have delivered. On construction adhesives, it was a disappointing year in volume growth. And I would say, our volume business being negative is not acceptable even in Q1, even with the seasonality. So that’s the area that I expect to see a turnaround. What to take in there, I think the service issues that we had, had a hangover effect with some of our distributors. We have a good technology position. We have a good distribution channel. So it’s an execution opportunity for our team in Construction Products. But that’s the place where I agree with your premise that that needs to get the right levels. And its execution on our innovation strategy and winning with customers. Maybe John can give you some color.

I just wanted to call out the Asian market. A lot of the – we have seen in print and we’ve seen in some of the company’s results sort of the impact both good and bad of the restrictive environment laws and what it’s doing to the industry capacity in China and there’s many markets where you had significant shutdowns in capacity. So I’m just wondering how this is playing out with respect to your business? Are you sort of benefiting more from getting some of these lower costs, less discipline, less environmentally responsible players out of the market? Where it’s easier for you to get share and pricing? Or reduction in your customer base for the same reasons as there will be getting their plant shutdown because of environmental contamination. Is that having a bigger impact on your ability to grow volumes? So I’m just trying to understand.

How that plays in. Yes. That’s a great question. Yes, for us it’s a little different than most chemical companies because they are selling to other chemical companies. For us, we sell to end-users. So our end markets are still equally as robust and really unchanged by a lot of these environmental impacts. So it effects us from raw material standpoint, from a availability and pricing standpoint for local raw in China, which we’re manage using our global network. And in terms of your question about, is it starting to stop out smaller competitors, not yet. But we definitely see that pressure on some of these smaller competitors who are operating in non-chemical zones, in manners that are going to create control issues. So we see this as a really positive for the competitive dynamics in China. Long term, we haven’t seen that affect yet on our competitive base. But I think it’s a very good thing for China and it’s a really good thing for our industry and a distraction for us are all about raw material availability and cost in China.

Got you. Okay, Jim. That’s very helpful. Thank you.

Thank you, Dmitry.

Yes. Dmitry, if you’re listening, just to clarify that Asia Pacific last year’s constant currency growth was double-digit in Q4 – in Q4 and for the full year in volume with double-digit. So I think Q1 was kind of the outlier.

I’m looking at kind of the November results were you got about 3.5% growth in volume mix, which you kind of hit a declining rate of growth throughout the year and then it turned into a negative growth in the February quarter. So I just want to make sure that it was nothing going on – from returning to the high single digit growth you are seeing.

Right, right.

I think you might be looking at the impact of the extra week in the fourth quarter.

Yes, we also had that extra week, but I think it’s a great offline question, make sure the numbers are clear. But yes, we did have an offline week in Q3. But no doubt the Q1 number has the balance in Q2 on volume.

Okay.

Okay, great. Thanks.

[Operator Instructions] We'll move to another follow-up from Rosemarie Mobley from Gabelli & Company. Please go ahead.

Jim, where do you stand in terms of manufacturing consolidation? Are those two particular facilities kind of the end or do you see more coming?

Yes. I think when we announced the closure of those two facilities we said there were four other consolidations that we had. Again there's smaller consolidations but we have four of them that are under study. So that would be two sites that are located near each other that we think we can bring together. And those projects are under study. So those are the ones that we have in sight in our plants here for the next 24 months. And long-term, there is probably a lot more that can be done Rosemarie, but we see a lot of value to be generated by running this pretty extensive network of plans, driving some of the cost synergies, driving the synergies. But long-term, there is probably some more consolidation. But other than those additional four, we don't see a lot here in the next 24 months. Does that help?

Yes. It does. 24 months, okay. Since taking that into two years, so that eliminates my next question about subject. And when you figure out very comfortable with your $465 million of EBITDA this year, what could cause you to miss that particular number? What would need to happen in the marketplace in order for you to be below that level?

Nothing Rosemarie, they play, we try to anticipate a lot of the things that are happening. We have a good pretty good visibility. I think – let’s see what happens with raw material inflation in the place in the second half of the year. So I think there will be some and we’ll have to recover that. So I think what we’ve committed to is basically with a good deal what we know now in terms of Royals and pricing. And versus last year, where we were step behind here in Q2, we’re going to step ahead of that. So we feel great about that. We continue to see robust revenue. We're partially through here now our fourth period of the year, and that continues to be in track with what we expect. So generally speaking, there is robust economies, our business is being run well, integration is going on as needed, our pricing which as I said upfront critical driver for us is looking really good. So there is nothing that screams at us. One of the great things about Fuller's business is, we're very diverse. There's not one thing that could really get us off track. And I would also say that, thanks to John's leadership, we have very good detail books in our business both our existing and our – the Royal business. So in terms of visibility on what's happening segment by segment, there’s a lot of that in our company. So I guess that's building the conference as well.

And this sounds great. And just making sure that I have this modeled down the path, every company small as including you all are anticipating raw material cost to stabilize in the second half. So what you're saying is that even if there is no stabilization you think that you will be able to get enough price to offset additional inflation, which at the moment you are not anticipating in the second half, correct?

Absolutely, correct. One of the things that happens is once you get in a positive pricing mode, it's a lot easier. By trading up the organization, putting in place the right processes and systems, that all takes a bit of work. Once you have those processes in place, nudging up that price as we need to in the second half the year will be much easier than it would have been say a year ago when we had had inflation for quite awhile.

Okay, great. Thank you.

Thank you, Rosemarie.

[Operator Instructions]

I would like to thank everyone for your time today and your continued support of our business and our strategy. Thank you.

At this time, there are no callers in the queue.

Okay. We will discontinue the call. Thank you, operator.