H.B. Fuller Company (FUL) Q1 2019 Earnings Report, Transcript and Summary

Good morning and welcome to the H.B. Fuller’s First Quarter 2019 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions]. After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Barbara Doyle, Vice President of Investor Relations. Please go ahead, ma’am.

Good morning, and welcome to H.B. Fuller’s fiscal 2019 first quarter earnings call. Our speakers today are Jim Owens, H.B. Fuller President and Chief Executive Officer; and John Corkrean, Executive Vice President and Chief Financial Officer. After our prepared remarks, we will take your questions. Please let me cover a few items before I turn the call over to Jim. First, a reminder that our comments today will include references to non-GAAP financial measures. These measures are in addition to the GAAP results in our earnings release and in our forms 10-Q and 10-K. We believe that discussion of these measures is useful to investors to assist the understanding of our operating performance and the comparability of results. Reconciliation of non-GAAP measures to the nearest GAAP measure is included in our earnings release. Also we will be making forward-looking statements during this call. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially from these expectations because of factors discussed in our earnings release, comments made during this conference call and risk factors in our Form 10-K filed with the Securities and Exchange Commission and available on our website at investors.hbfuller.com. We do not undertake any duty to update any forward-looking statement. Lastly, we filed an 8-K on March 25, 2019 that provided restated unaudited historical financial information for the 2018 fiscal year that ended December 1, 2018. This filing reflects accounting changes implemented in the quarter ended March 2, 2019 as if the changes were implemented on a retrospective basis at the beginning of fiscal year 2018. The changes include an accounting standard update related to pension plans and a customer realignment between certain operating segments. These changes have no impacts on the company's consolidated net income, consolidated balance sheet, or consolidated statements of cash flows previously reported. Our remarks today will include comparisons to the restated 2018 financial information provided in this 8-K. Now, please turn to Slide 3 in the investor deck and I will turn the call over to Jim Owens.

Thank you, Barbara, and welcome to everyone. During today's call, I will provide a summary of our first quarter business performance against our 2019 imperatives. And then I'll discuss business performance by segment. I'll turn it over to John to review our financials and then finally we will wrap up the call with some closing comments and then take your questions. We are off to a solid start for 2019. First quarter EBITDA and EPS results were in line with our expectations and our guidance despite organic revenue growth below our expectation. Our first quarter results demonstrated the resilience of our business model and the clear strategic positioning of H.B. Fuller in key market segments. Strong pricing carryover from 2018, cost synergies and effective expense controls, all helped to deliver solid performance. We entered the year expecting organic revenue growth to be lower in Q1 for a few reasons: Last year’s Q1 growth was unusually high, 11% on a pro forma basis; December, the first month of our Q1 was generally slow as was reported by many companies; The strengthening dollar, which impacted the year-over-year results in Q1; and the planned repositioning of our Construction Adhesive portfolio and a slowdown in China. In addition to these expected impacts, our revenue was lower than forecasted primarily because of softness in our roofing business and durable assembly solutions for the housing market in the US due to a colder winter with increased rain and snow. However, the overall benefit of Royal synergies, our pricing actions from last year and wins at key customers in targeted markets overcame these shortfalls and improved our profit performance. And our organic revenue is improving. Going forward as many of the elements impacting Q1 will not be a factor in Q2 and the rest of the year. This is all in line with the 2019 imperatives we identified at the beginning of the year in three key areas: First, we will deliver higher levels of EBITDA. Margin improvement continues to be an operational focus for us in 2019 as we look to build upon the EBITDA growth we achieved in 2018. You will hear this theme repeat across each of our segment. We met this objective in Q1 as adjusted EBITDA of $83 million increased on a constant currency basis and adjusted EBITDA margin of 12% increased by 40 basis points versus the first quarter of 2018. We expect EBITDA trends to continue to increase during the course of the year with solid improvement in total for 2019. Our second imperative is to continue to progress as planned with the integration of the Royal acquisition. We captured an additional $3 million of synergies in this quarter and we remain on track to deliver $15 million of total incremental cost synergies in 2019. Our third imperative is to deliver our debt repayment commitments. Our debt paydown of $12 million in Q1 was greater than Q1 of last year. Just like in 2018 our cash flow from operations and the rate of our debt repayment will accelerate throughout the year based on the seasonal profile of our business. Thus far we have paid down $216 million in debt since the beginning of 2018 and our $200 million repayment plan in 2019 will put us ahead of our original two year plan for debt reduction. Now, I'll cover the first quarter segment performance on Slide 4. In the Americas, revenues were up modestly in constant currency primarily on pricing gains from 2018 and strong packaging sales. These gains offset soft demand and some durable assembly areas such as doors and windows and a slowdown in demand for RVs in the US. Adjusted EBITDA margin of 12% improved 30 basis points year-over-year driven by positive pricing and lower SG&A expense. The EIMEA sales increased about 1% in constant currency with flattish overall sales in core Europe and mid-single-digit growth in emerging markets. Positive pricing contribution and strong volumes from our new generation, energy efficient, insulating glass solution were offset by a general market slowdown in core Europe in durable assembly and packaging. The weaker euro, British pound and Turkish lira compared with the first quarter of 2018 substantially impacted reported revenue. Currency also negatively impacted EBITDA as the weaker currencies combined with some dollar-based operating costs offset underlying margin improvement. Asia Pacific organic sales were flat, strong growth in Southeast Asia, hygiene and packaging offset slower sales in other geographies including lower demand for durable assembly products for woodworking and textiles, reflecting a softer export market. We saw some stabilization in China with positive growth in the quarter, although sales still lagged historical levels. EBITDA performance in Asia Pacific was very strong with a 25% year-over-year increase in EBITDA dollars and a 250 basis point increase in EBITDA margins, driven by our continuous pricing portfolio and margin focus. Construction Adhesives organic sales were up by 15% versus Q1 of 2018, as we reported in the middle of last year, we are moving away from underperforming products and customers in order to maximize profit performance, and we forecasted revenue decline in the quarter as a result. This planned portfolio repositioning accounted for a little more than half of this decline. The remainder was related to more severe weather in Q1 than anticipated, impacting this segment and roofing adhesives in particular. Low sales volume also impacted EBITDA. The roofing impact was pretty significant, especially in late January and February. For context, the single-ply roofing institutes an independent data source, reported February shipments of EPDM rubber roofing membrane was down 25% compared to February of 2018. Weather impacts are temporal of course, and a part of what drives the significant seasonality that we manage in our fiscal first quarter every year. For H.B. Fuller our fiscal first quarter includes Christmas, Chinese New Year, and weather-related slowdowns in December, January, and February. Both sales and contribution margin in Construction Adhesives have begun to improve going into Q2. Lastly, performance in Engineering Adhesives was strong. EBITDA dollars were up 21% and EBITDA margin was up by 330 basis points to 19% driven by strong growth in the higher margin parts of our business. Organic revenues increased by mid single-digits excluding a 4% currency impact. We continue to win new applications with customers across many end markets. In Q1, strong growth in electronics, new energy and aerospace offset slower results in automotive. We forecast continued strong performance in Engineering Adhesives, including higher organic growth in the second quarter and low double-digit organic growth for full year along with strong EBITDA performance. Overall, our bottom-line performance in Q1 was in line with our expectations and our guidance, even as we absorb some large unplanned weather-related impacts to construction. We are seeing improved results in the second quarter and we continue to forecast strong results in the second half of the year. Now, let me turn the call over to John to discuss our financials and our guidance in more detail.

Thanks, Jim. I’ll begin on Slide 5 with some additional financial details on the first quarter. Net revenue was down 5.6% versus the same period last year, driven by a significantly stronger dollar which negatively impacted net revenues by nearly 5%. Adjusting for currency, organic revenue was down 1% as solid pricing carryover was offset by softness in construction related markets over the winter months and repositioning away from underperforming products and customers in the Construction Adhesives segment. Year-on-year adjusted gross profit margin increased 90 basis points reflecting strong pricing actions taken last year, acquisition synergies and manufacturing efficiency gains. Adjusted selling, general and administrative expense was down about 2.5% versus last year, reflecting the impact of foreign currency exchange and thoughtful control of discretionary expenses. Adjusted EBITDA for the quarter of $83 million was in line with our expectations and guidance. EBITDA margin increased 40 basis points versus the same period in 2018 reflecting strong pricing carryover, improved business mix, manufacturing efficiency gains and expense control offsetting weaker volume in construction related markets. Adjusted earnings per share were $0.34 compared to $0.35 for the same period last year as improved margins, good expense control and lower interest expense associated with our debt reduction actions offset significant currency headwinds versus last year. With that, let me now turn to our guidance for the 2019 fiscal year. We continue to expect adjusted EBITDA of between $465 million and $485 million for the full year 2019. This represents an increase of 6% versus 2018 adjusted EBITDA at the midpoint. EBITDA will continue to improve over the remaining three quarters based on the seasonality of our business, improving volumes and moderating foreign currency exchange impacts and we expect approximately $120 million to $125 million of adjusted EBITDA in the second quarter. We also continue to expect full year adjusted EPS of between $3.15 and $3.45. This range represents growth of 10% versus the 2018 fiscal year at the midpoint of the range. With that, I will now turn the call back to Jim Owens for some closing comments.

Thank you, John. Our strategic plan to win business in highly engineered applications and to improve margins through effective pricing, synergies and raw material costs, all were executed well in Q1 and continue to show positive momentum. In the quarter we leveraged acquisition related synergies and the strong pricing actions that we soaked in 2018, along with continued customer wins in Engineering Adhesives and other key markets, we delivered earning results and debt paydown in line with our guidance. Based on improving trends in several segments throughout the quarter, we expect stronger organic growth in the second quarter and continued EBITDA improvement throughout the year. We are on track to deliver EPS, EBITDA and debt paydown within our guidance ranges for fiscal 2019. Our first quarter results show the resiliency in our business model as we build on our strategic disposition as a global leader in adhesives. We are winning customer business and gaining share in our targeted growth markets. We can't control the macro factors that occur external to our global business. However, we can and we are gaining share and margin through our business model of solving customers’ toughest adhesion problems. That concludes our prepared comments for today. So operator, let's open up the call for some questions.

[Operator Instructions] And our first question today comes from Ghansham Panjabi with Baird. Please go ahead.

I guess first off, in the past you've given us a volume breakdown by segment, I was hoping you can do the same for the first quarter as well. Just trying to reconcile that 4% decline and how that kind of flow through by segment? And then also the same with price mix if you could?

Yes, so I'll comment and maybe John can add. We talked a little bit about this during our Investor Day. The volume mix breakdown is something especially by a segment on a quarter-by-quarter basis that really hasn't been providing enough meaningful information. And the reason for that Ghansham is because for any customer that we have, we can change the product, the price, the packaging, as well as the amount of adhesives that that customer uses. So we look specifically at organic revenue as the big driver of our business, this has gotten even more important as we've integrated Royal. We sell adhesives in 30 CCs up to tank trucks. So these volume metrics I think were creating a lot of noise on a quarter-by-quarter basis that weren't really driving. And that's why we've stopped doing it on a segment basis by quarter. But we still reported for the overall business as well. So John, you want to add something to that?

Yes, I mean, I think we tried to give a little color in the script too but just maybe to reemphasize it, let’s say in regional adhesives markets, it's very similar picture to Q4 with pricing really driving the net impact there with a little attrition in volume, similar to what we saw in Q4. Engineering Adhesives is volume driven, right. And that's been the case and construction is really a volume story as well. So hopefully that gives you some color.

That's helpful. And then just from a high level basis, obviously, I mean volumes did step down meaningfully in the first quarter versus the previous quarterly run rate, probably lower than you thought during initially when you constructed the guidance for ‘19. I guess what are the offsets that give you confidence in your reiterated guidance, is it lower raw material cost, is that something that you're seeing from a synergy standpoint or a commercialization, et cetera? What are the offsets that give you confidence on the guidance? Thanks so much.

Yes, thanks, Ghansham. Yes, as we pointed out, some of the things that happened in Q1are going away in Q2, right, so from an organic revenue standpoint. But more importantly, I think even in that kind of environment where we had weaker organic revenues, the benefits of raw materials, and the benefits of Royal synergies are flowing through our P&L. So I think the combination of an improving trend, and if you look at the quarter, December was a problem for us as it was for other people, it continued to improve and we see that continuing to improve here into March. So the top-line has definitely improved as the quarter went on. The roofing impacts, which were sizeable for our business, go away. But I think most importantly, why we have a lot of optimism is because of what's underlying in our business, stronger margin performance due to raw materials, and the synergies taking effect as we go forward.

And our next question comes from ‎Dmitry Silversteyn with Buckingham Research. Please go ahead with your question.

A couple of things that I kind of wanted to dig into the construction products transformation that you guys are undergoing. So you talked about a little bit over half of the decline being caused by you walking away from some business or however you want to term it. I guess what I'm trying to understand is, how long is this pruning going to last as far as it being overwhelmed, if you will, or overwhelming the growth in your other businesses and resulting in slower behavior for the division overall? And also, as you're executing this transformation, are you running into any kind of equipment or capacity issues where I'm assuming you're making smaller batches of higher volume or higher margin products and as part of your transformation, is your equipment and your plant setup and processes, are they aligned with that type of a transformation or is there work that needs to be done there on the CapEx side?

Yes, thanks for that question, Dmitry, it's a good one for us to spend a little time explaining. And I think a good thing to do is look at our Q4 in terms of what happened in our results, so we had a decline in revenue, but an improvement in EBITDA. And I think if we hadn't had this roofing effect, you’d see that same kind of effect this quarter, you would have actually seen EBITDA up on lower revenue. And so it was really about defining those pieces of our business, this business, we were supplying that was very high volume growth business that was ultimately negative profit once we took away some of the costs. So in terms of your question on capital, we have the capital to manage this, but I think it's a business that has -- not like it's a dramatic shift into a completely new area. We had both product lines or both types of product lines and it's about shifting our growth focus on those areas where there's better profit performance, and those things that are -- I’ll call them more commoditized businesses that are lower technologies, cement and sand in a bag or things like mortars, pulling those things, the volumes down on those, well we don't have the value add that we have in the rest of our product line. But we have the capacity we need. And in fact, part of this whole thing drives a better more efficient supply chain, because we're moving products inefficiently around the country. So part of this was an efficient process to move relatively low margin products around the country. So does that give you the background you need Dmitry?

It does, Jim, Thank you for that. And if I could follow-up really quick, you did make recent announcement of getting into the Japanese markets as a H.B. Fuller rather than for a joint venture that you already have there. Can you spend a little time explaining to us how that's going to work and why the decision to get into Japan directly was made at this time? And how do we think about that business going forward?

Yes, I think that's a technical issue Dmitry. Our business is through a joint venture with Sekisui Fuller, it's a great joint venture. It gets reported as such in our P&L below the line, and that's the primary driver of our businesses. There's some technicalities in the contract that said that we had to have certain people employed locally. So it's a technicality, and not at all a change in our strategy. We love the joint venture and it's very successful.

Okay, so this is not a competing business that you …?

No, not at all, not at all. It allows us to do some things in a couple of areas, specifically in Engineering Adhesives that we weren't able to do directly through the joint venture, but it just helps us accelerate our Engineering Adhesives growth strategy.

Next question comes from Mike Harrison with Seaport Global Securities. Please go ahead.

I was wondering if you can talk a little bit about -- specifically about the Engineering Adhesives business, it seems like that sales growth maybe decelerated a little bit. Maybe talk about which specific regions or markets were holding up and which of those deteriorated? It sounded like it was auto, which is not surprising. But maybe give us a sense of what gives you confidence that we're going to return to better volume growth rates in the rest of the year?

Yes. So a couple comments there, Mike. We -- first off the growth we're seeing is in electronics, in aerospace, in some of our general industries, opportunities, particularly in the US, where we're seeing really good growth as we leverage technologies from Royal and from Tonsan into North America. You're right, the auto business was weaker, and particularly in China and particularly in December. So we see that not as bad going forward. We're not overly optimistic on the auto business, but what we do see is a lot of the winds keep rolling in, specifically in electronics. Some of our micro electronics efforts are now starting to take hold. We're winning some business now in Korea that's helping that business. We're able to expand our solar business, which is really a solar assembly business to some of the accessories and some of the installations around solar. So, a lot of those good wins are still rolling through that business. As you know, our model there is to leverage our technology and really solve problems faster than everybody else. And that piece of the model continues to churn out wins. I would also point out, Q4 of last year was very strong for that business, Q1 of last year was very strong at that business, so the fact that we went down to the single-digits, we're very confident that that business will be back up in double-digits soon despite the fact that auto is probably going to be either flat to the headwind this year.

Got it. And then I was also hoping that you could talk a little bit about the SG&A number. If we do the math right, it looks like on an absolute basis your SG&A costs were down in terms of absolute dollars, but up in terms of percent of sales. I guess we're a little surprised by that, given some of the efforts around Royal synergies, but does that reflect just some normal inflation or growth investments. Wondering when we might expect to see some better SG&A leverage?

Yes, so let me start by saying that a lot of the Royal synergies weren’t on the SG&A side, so there's some -- they're mostly in operations costs and in raw material and indirect savings costs. And then the other thing I'd say is that there's a fair amount of lumpiness in any one quarter in our SG&A cost as a percentage of sales. So I'd be -- I think we look at this over the course of the year rather than as a percentage of sales each quarter. But let me turn it to John to maybe be more precise about what happened in the quarter, maybe more color on that.

Yes. Those are all the right points, Jim, I think the only other thing I would add is that if you look at our cost structure relative to our revenue structure, we have more constant dollars, right. So we have a larger US based headquarters that has an impact in terms of looking at it as a percentage of sales. We believe we're getting the leverage and the synergies out of SG&A as we planned but we do have a little bit of a currency impact.

Alright, understood. Thanks very much.

Just as a color there Mike on the currency, the euro -- it happened last year, but the euro today is 10% weaker than it was a year ago today. So it's a big number.

And our next question comes from David Begleiter with Deutsche Bank. Please go ahead with your question.

Hi, this is Dave Huang here for David. I guess, first, given your comment on cold and wet weather in Q1 impacting construction volumes. I was wondering if you can quantify roughly what percentage would be shifted to Q2 from Q1, and if those would again be offset by some lingering impact in March?

Yes, so it's tough for us to really know when you have these kind of weather effects on roofing. I can tell you, I pulled up in our parking lot today and it warmed my heart to see a bunch of roofers climbing up on our roof to do some repairs that were up there. I can tell you the business is very strong here in March but how much that's going to come into Q2 versus Q1 is something that we're not able to predict but it should be positive.

Okay. And secondly, do you need to take additional cost actions to achieve say your mid to high end at your EBITDA guidance for the year?

Yes, I would say that if you look to the mid to the high end, that's I think a combination of revenue -- organic revenue stabilizing to where we expect them and then the benefits of raw materials, right. So the raw material benefits only flow through our P&L in a modest way, we'll see more benefits in Q2. Currently, we're projecting for raws to flatten out or maybe get a little worse in the second half of the year. So I think for us to hit the upside of our plan, we probably expect to see a little bit organic growth and certainly the raw material benefits come through. So that's the way we look at the upside of the plan. And I think we went into a year with that as the expectation, and we're still there, that's what drives the top end.

And our next question comes from Eric Petrie with Citi, please go ahead.

You not4r signs of stabilization in China and positive growth in the region, do you think that's sustainable, there's no trade resolution, or how do you see that playing out into the rest of the year?

Yes. Well, I hate to be the prognosticator of China but I would say it is the fact that we grew in our regional business in China. So I thought that was a good sign. I think as I said last quarter, there was definitely two things going on: a slowdown in China and destocking. I think the destocking has stopped because things stopped. So I would say, certainly if the trade war and as a great grand deal, I think is going to really help China a lot and it'll help our business a lot. If there's not, I think slow low growth is where we're at today and what I’d expect and what we're building our plans on. And -- but not that negative downturn that we saw in Q3 and Q4. So John, you want to add anything to that?

No, I think that's exactly right. I think maybe we saw a little more improvement in sort of the consumer-led parts of the business as opposed to those that are more impacted by exports.

Yes. That's a great point. So things like hygiene and packaging did better than some of the exports.

Helpful. Thank you. And then could you give a little color as to why organic growth in EIMEA is doing better than Americas?

Yes, but let me give a high level and then maybe John can. I think our EIMEA business has a higher percentage of business outside of core Europe. So Middle East, India, Africa are the fundamental growth drivers for our business, it's not core Europe. So John, do you want to add?

I think that that was the point I was going to make, and I think we've always kind of said that as we've looked at the growth in EIMEA versus Americas we've always sort of looked at 1, roughly 1% higher growth target in EIMEA based on higher growth in emerging market.

And our next question comes from Rosemarie Morbelli​ with G Research. Please go ahead. Rosemarie Morbelli​: Jim, you mentioned that there are certain areas which are showing signs of pickup. So you have mentioned roofing that that is weather related and I was wondering if fundamentally speaking, you could talk about some of those areas and what you see going forward?

Yes. I'm not sure I said that we saw great signs of growth out there. I think we've seen stability in China. We’ve seen really strong growth in Southeast Asia, I think Southeast Asia has benefited as well as our team is doing a really solid job out there. As John mentioned, the consumer businesses in China have been positive. In North America, the things that we saw that were a negative were recreational vehicles and then construction related production of materials that would be used in homes. But -- and then the other places where we see some positive growth, as John just mentioned was Middle East Africa, India, we see things there picking up a little, so… Rosemarie Morbelli​: Any particular areas picking up in those -- in the Middle East Africa, India?

Yes. I would say for us Africa, we made investment there a couple years ago. We’ve put some teams on the ground so we're doing pretty well in Africa. And then our India business, India got a little bit of a shock as the currency devalued in the middle of last year, I think that's stabilizing. India has been a good solid growth engine for us. Last year that slowed down. We see that picking up. So those would be the two particular ones. Rosemarie Morbelli​: So then, looking at your debt reduction, that $200 million target for this year, is that a level that you are anticipating going forward? And then in case of a recession, what would be a comfortable net leverage level. I mean if you do pay down another $200 million this year, you will be at about $1.9 billion of net debt and a 4.0 type net leverage, which seems high in a recession in particular, so can you talk about what you are planning and doing in order to offset what maybe coming?

Yes, so, I want to give you the high level and then maybe John can give you some more depth. So, our commitment was to pay down $600 million over the first three years after the Royal deal. Last year, we exceeded that number by $30 million, this year -- and despite issues this year -- some organic growth issues, we’re well committed to do $200 million or better, and then next year our original plan was to do $230 million. So I think we have a very clear three year plan on this debt pay down with a goal to get the low 3.0 as quickly as we possibly can. And there are a number of levers that we can pull with respect to working capital, capital management, that if there were a recession that we would look to pull on to make certain that we brought our leverage ratios down, but it's a strategic priority for us to do that. John you want to comment further?

I think you hit all the key points. I think getting below 3 long-term is our goal. That's where we'd be comfortable. We do try to model what the implications would be in a recession and typically in the short-term they're actually neutral to positive if raw materials are coming down and if there's kind of working capital release. So we're comfortable, we're going to stay on this debt repayment plan sort of regardless of the external environment.

So we have -- the models we have done and action plans that we’ve put in place if a recession were to take place, and as John pointed out, this working capital release is really helpful in that kind of environment.

And our next question comes from Curt Siegmeyer with KeyBanc. Please go ahead.

If I could just ask for a clarification on your organic growth outlook, coming into the year you are expecting 3% to 5%, obviously 1Q is a little lower than you expected. So is that -- are you still thinking 3% to 5% or if you've maybe tune that down a little bit internally, what would be the positive offsets that are allowing you to maintain your EBITDA and EPS guidance?

Yes, maybe I'll comment, I’ll let John be more specific, but yes, I think if you looked at our current internal models today, you’d see the lower end of that guidance would be where we’d be at with margin improvements due to all the reasons I talked about, that raw materials are more positive than we expected going into the year and then the synergy delivery. So, those two things would offset something where -- I think if you did 3% to 5% for the rest of the year, that's probably about what we expect and that's what we're seeing going forward. But that wouldn't get you to the center of the range, would be closer to the lower end of the range.

Yes, that's right. I think we have a little bit of an easier comparison probably in Q4 with China sort of declining pretty precipitously and we're not projecting China to recover significantly but we're -- if we kind of continue on our current trend that would be a little bit of a positive comparison.

Got it, that’s helpful.

3% to 5% but very confident in the mid-range on the EBITDA and EPS is the answer.

Okay, great. And then just to follow up, your guidance now includes 20 million of pre-tax Royal integration expenses, which I think is up some 15 million to 20 million range. Can you just give us a little more color there as to why the adjustment?

I think it's kind of timing of projects more than anything with particularly related to some of the operational projects. So we're probably incurring a little bit more in restructuring. I don't think it will change sort of our expectation for the full project.

And our next question comes from Paretosh Misra​​ with Berenberg. Please go ahead.

So, just in terms of your Q2 guidance, what have you assumed in terms of FX and raw material costs?

I will let John maybe give you some specifics there.

So FX Paretosh I believe that was very similar year-on-year to Q1, if you account currencies for the last year in Q2 versus this year instead of Q1. Raw materials, I think we view them as moderately better than Q1. We saw some improvement in Q1 in terms of raw material costs, a lot of that is probably still hung up in inventory and will come through in Q2. So modest improvement in raw material costs in Q2.

Thank you. And then going back to China, it sounds like consumer is doing slightly better than the export end markets. Have you seen any impact of some of your growth supported policies that the government has announced there earlier this year and late last year? Or are you expecting something maybe seems to improve because of that in the second half?

Yes. I would say the only one that I think is, there's two areas that were impacting on some of those initiatives. One would be solar continues to be an area that the government is supporting, and that that helps drive output in a market where we're very strong. And we've done very well with electric vehicles, especially electric buses. So some of the initiatives that are there have been helpful for us and we see those being positive, both of those impacting our Engineering Adhesives business.

Got it. And then the last one from me, on your construction business, can you remind me how much is the US based versus non-US based?

Yes, I think today it's about 85% to 90% US based.

Okay, great. Well, thank you, everyone, for your time on today's call. We really appreciate the support of H.B. Fuller and we're very optimistic about our overall performance going forward, particularly given the results of this first quarter. So again, thanks for your support.

And this concludes today's conference. Thank you for attending today's presentation. You may check the company's website for the replay options. You may now disconnect your line at this time.