Good morning, and welcome to the H.B. Fuller Q3 2019 Quarterly Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Barbara Doyle, Vice President of Investor Relations for H. B. Fuller. Please go ahead.

Good morning, and welcome to H.B. Fuller's fiscal 2019 third 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 in the understanding of our operating performance and the comparability of results with other companies. 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 due to factors discussed in our earnings release, comments made during this call or risk factors in our Form 10-K filed with the SEC and available on our Web site at investors.hbfuller.com. We do not undertake any duty to update any forward-looking statements. 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 on the call. In the third quarter, we delivered solid operating performance and strong cash flow and weakening environment for global industrial production. Adjusted EBITDA margin of 16% improved 40 basis points versus last year. Strong cash flow performance allowed us to double our debt pay down to 97 million and increase our full year debt pay down commitment to 260 million. Our share gains in Asia in engineering adhesives one of the impact of slower manufacturing activity around the world. We also announced the reorganization of our company into three global business units instead of the combination of two global and three regional business units which we had in the past. This will provide better strategic clarity and growth and will enable significant cost savings and efficiencies. I will talk more about this later in the call. In the third quarter, we continued to drive share gains in strategic markets including engineering adhesives. Our engineering adhesives segment grew organically by mid to high single digit this quarter and double digits year-to-date, when excluding auto related businesses. Strong growth in electronics and new energy markets drove the share gains. And our auto business, while negative outperformed car builds globally this quarter and year-to-date. We improved our margins by leveraging lower raw material costs, delivering acquisition synergies and controlling expenses. Raw material costs were favorable in the quarter and were down about 1% of second quarter levels. This was inline with our expectations. In terms of the Royal acquisition benefits from this business combination continue to accrue H.B. Fuller. We captured an additional 4 million of cost synergies in the third quarter versus our 2018 exit rate and are on track to deliver the plant 15 million of incremental cost synergies this year. And…

Thanks, Jim. I'll begin on Slide 6 with some additional financial details on the quarter. Net revenue was down 5.8% versus the same period last year, driven by a stronger dollar and the divestiture of the surfactants business, which combined negatively impacted net revenues by 2.5% in the quarter. Adjusting for currency and the divestiture, organic revenue was down 3% as volume growth in engineering adhesives and Asia Pacific was offset by lower volume and construction adhesives primarily due to the repositioning away from underperforming products and customers in that segment and EIMEA. Americas adhesives revenue were about flat on an organic basis. Adjusted gross profit margin increased 40 basis points year-on-year reflecting lower raw material costs, acquisition synergies and favorable mix. Adjusted selling, general and administrative expense declined about 6% versus last year reflecting the impact of foreign exchange and good control of discretionary expenses. Adjusted EBITDA for the quarter of $116 million was down 4% versus last year. EBITDA was up year-over-year adjusting for currency and the lost EBITDA from the divested business. EBITDA margin of 16% increased 40 basis points versus the same period in 2018. Adjusted earnings per share were $0.86, the same as last year. EPS was up excluding impacts from currency and the domestic business has improved margins, good expense control and lower interest expense associated with our debt reduction offset lower volume and currency headwinds versus last year. On a year-to-date basis, cash flow from operations of 160 million was up 50% compared to the nine month period in 2018. The strong year-to-date operating cash flow as well as the proceeds from the sale of the surfactants business allowed us to pay down $97 million of debt in the third quarter, more than double the amount of debt repayment for the same period…

Thank you, John. In the third quarter, we continued to execute despite a difficult macro economic environment. Unfortunately, these economic challenges have only intensified since June. Additional tariffs have been introduced. Increased uncertainty from the tariffs in Brexit has affected Europe and parts of Asia and now certain end markets in the U.S. are showing signs of weakness. Our revised full year 2019 guidance reflects all of these factors and while there are signs that auto sales in U.S. construction could be improving, we are not factoring this into our guidance. It is true that our results could be better if macro economic trends improve in the manufacturing sector around the world. Well, in this challenging environment, we are delivering strong cash flow performance, improving our EBITDA margins and increasing our share in strategic market segments. I'm proud of our entire team for remaining focused on what we can control, serving our customers, gaining share, responding quickly to market trends and executing efficiently. The realignment of our operating structure into three global business units puts our employees in a better position to continue to win with customers and operate more cost efficiently. We're improving our ability to understand our markets and quickly anticipate and meet customers adhesive needs and we are aggressively managing our cost structure as we deal with the new economic realities. We're confident that simplifying our business under this new operating structure will result in a more nimble organization, well positioned for higher growth. That concludes our prepared comments for today. Operator, let's open up the call for some questions.

We will now begin the question-and-answer session. [Operator Instructions] The first question will come from Vincent Anderson with Stifel.

Good morning. Thanks for taking my question. I know it's early to discuss 2020. But if you kind of held current trends in your head, how much margin improvement would you say your mix shift that you've seen so far this year add on a full year basis?

Yes. I think you're right. It's a little early to talk about 2020. But, I do think as you point out our mix improvements is positive across a number of our businesses. We continue in engineering adhesives to improve our mix. We did some significant work on our construction adhesive business to improve our mix and some of the things we're doing around the realignment of our hygiene, health and consumables this is will be reported next year is also driven around improving the mix. So I would say a positive number. I'm not ready to put a number on it at this point. Go head, John, you want to comment?

I would say in general, that's in the last couple of years we probably driven 20, 30 basis points of margin improvement annually related to mix from really faster growing engineering adhesives business at higher margin. And I would anticipate that would be in the range that we'd be targeting next year just on mix.

That's helpful. Thank you. And then, just quickly will the pace and success of the business, real alignment be in any way contingent on completing your ERP investment. And if that's the case, can you just remind us where you are on that from both the spending and an implementation perspective?

Yes. Our ERP investment as some of you on the call probably know is, is one that we've decided to roll out over a number of years. So, we're taking small chunks of the business and moving it forward. I anticipate that lasting at least another four years. And we've divorced that from our ability to drive these savings. So yes, we get some benefits out of our ERP, but we have overall business intelligence systems that tie our business together. So, no reliance on ERP. And in terms of the terms of cost, maybe John can comment…

Sure. That I'd say, generally that then about 15 million to 20 million of costs, both expense and capital on an annual basis for the last several years. And I would anticipate, it will probably stay on that pace. That's always factored into targeted capital expenditures for the year as well.

Right. About half of its expense and half of its [category] [ph].

Exactly.

Okay. Thanks. And if I could sneak one more in. I think you mentioned a realignment of accountability along with the realignment of the business unit. And it had me thinking, can you discuss the current compensation mechanisms at the sales level for those businesses? Is their sales staff variable compensation more based on revenue dollars or do they get compensated more on gross profit or some other unit profitability metric?

Yes. It varies a little bit by business unit. And part of what we'll do here is standardize some of those things and a lot -- some of the synergies we're going to create by bringing these businesses together is, is taking out some of the complexity associated with having five segments and five different approaches and simplifying them. Broadly speaking though, we compensate our sales group and certainly on the variable piece on what happens with their, we call it our contribution margin, but it's either a contribution margin or a gross margin is the predominant part. There is some revenue components in some businesses, but more contribution related than revenue related.

That's great. Thank you.

Okay. Thank you, Vince.

The next question will come from Mike Harrison with Seaport Global Securities.

Hi, good morning.

Good morning, Mike.

Jim, can you talk a little bit about what you saw in terms of the volume trends as the quarter progressed? It sounds a little bit like the month of June was maybe a little bit stronger and you saw some weakening as we got into July and August. And can you maybe provide a little bit of color on how those trends may be varied by region or by specific market segment?

Well, let me make this point Mike. I think we saw some trends early in the quarter and I think one of the points that John brought up in his script that I think is really important is that when you adjust for the divestiture and currency, our results in Q3 showed positive EBITDA growth and about 5% to 7% EPS growth. And year-to-date, we're showing 5% in the middle of our guidance, 5% EBITDA growth and EPS growth of about 7% to 8%. So, what we saw was we went into the quarter was a little bit of slowing less than what we have. And now the point I've tried to make here, lots of times when I've talked to investors is, we have a resilient business model. And, and when there's a little slowing in revenue, there are levers we can pull in terms of raw material costs that we can get and also expense controls. And I think this quarter was a great example of that, right? We definitely saw through the quarter less revenue growth than we expected. And our ability to drive bottom-line performance in that environment I think speaks to the resiliency of our model and the capabilities of our team, would have been a much better quarter, if we had a positive revenue growth. But in this environment to deliver those kinds of numbers I think was good. So, I would say we saw it early in the quarter. It probably got a little worse as the quarter went on, but I wouldn't say it was broadly like some big decline in period seven or eight. It varied by segment. Is that helpful?

Got it. Yes, it does. And then also was just, I think I was surprised to see that pricing declined year-over-year after several quarters where pricing is very consistently been higher. Is that price decline really just a signal that we're starting to see raw materials come lower and that's getting passed through to customers or is it a signal that that may be competitions intensified or something else? And just wondering, should we expect a pricing that continue to be negative year-over-year as we get into Q4 and into 2020 or what are your thoughts there?

Yes. I think the biggest component is the fact that we're lapping now the big increases we saw last year. So, we made some significant increases in Q2, some other sizable ones in Q3, but not as big as Q2. And then, you're right, Mike, as raw have come down this year, we give some of that back in the market. Some of it is triggered through some agreements we have with customers and some of it is just competitive dynamics. Generally as raws come down, we give some of it back to customers, but less than we get in raws and that's what we saw this year. So, as far as the future's concerned, some of our businesses and especially some of our specialty products in certain segments have annualized price increases that happen at the end the year. So that'll be some positive momentum we will get on price more towards the end of the year. And then, of course, there'll be some give backs as raws come back. So, it'll be a combination of the two as we go forward, but we don't expect dramatic positives or negatives in the next couple of quarters related to price.

All right. Thanks very much.

Okay. Thank you.

The next question will come from David Begleiter of Deutsche bank.

Good morning. This is Katherine Griffin on for David. So, first Jim in construction adhesives, directionally, how much of the decline in the business has been due to repositioning the portfolio. And minus when you expect the repositioning could be complete and perhaps when could we see your comparison start to get better?

Right. Yes. So, most of the decline was related to the repositioning. And as I mentioned during the call, we did see some slow down in construction spending that made up the rest of the decline. So that would be what I would say for Q3. Going forward, this repositioning work went forward in earnest in the middle of Q4. So, you'll definitely see a better organic growth rate next quarter, still negative but much better than what we saw this quarter. And you should expect to see positive organic growth in Q1 of next year. You'll also see next quarter improve margins because we'll have the full effect of this thing starting to have. And certainly year-over-year, I mean year-over-year margins in Q4 and then Q1 we should definitely see positive year-over-year margins as a result of the repositioning work.

Okay. Thank you. And I'm wondering how business has been thus far in September. Have you seen any up ticks or as you mentioned that in Europe you get seasonally better demand, maybe coming out of August or if construction-related markets have improved, if some of the decline in activity over June through August was due to weather. So, where are we thus far in Q4?

Yes. So we're three weeks into our Q4. I would say, what we said in the script was our guidance is based on continuation of every trend that we see. You can find a few pieces of data that are out there, auto sales or even when they're negative, they're better than auto builds have been, housing starts are picking up. So there's a few pieces of data out there that are positive. I wouldn't say that we're predicting some big upturn, but we don't see a lot of negative things happen in here as we go into [P10s] [ph]. So I think that's we're projecting flat and we don't see things that necessarily get us off of that, certainly not in a negative direction.

Great. Thank you.

Thank you.

The next question will come from Ghansham Panjabi of Baird.

Thank you. Hey guys. Good morning.

Hi, Ghansham.

Jim and John and Barbara, I guess first off on the engineering adhesive segment, thoroughly it's been a workout for us in terms of growth and profitability over the past several quarters. Jim, you called out autos as being particularly weak on at least specific to 3Q, but autos have been weak for a while in terms of the production schedules on a global basis. So can you just give us some more context as to where exactly, are you seeing weakness maybe from a regional standpoint and auto parts, where are you actually seeing the weakness?

Yes. So, yes, I think you bring up a good point. I mentioned this briefly last quarter, I re-read the script. Our organic revenue growth in EA last quarter was plus 11%. And that was with a big drag on auto. So, underlying we were a lot better than 11% x-auto. And so we're seeing similar trends I think in auto in Q3 versus Q2 that worsening in some other areas. But, I think China's latest reported numbers are minus 12.2% or something is what I saw on the last reported number. So, there's a big decline year-over-year in auto. And we felt that as you point out throughout the year, our numbers are a little better than what we see in the auto builds and that's because of some share gains. But, big negative numbers, pull down your total number. In terms of our business, our business is -- think of our business as tied to things like interior trim applications, headlamp applications, where some of our growth is, things related to more electronic vehicles where we've got some tie ins. We're tying our electronics business into some of the auto wins. So, but think about it in terms of interior trim, headlamps and then electronics is the growing share piece of the business, but usually tier one suppliers.

Got it. That's helpful. And then just related to the EA segment, in terms of the new project activity, the customer level, have you seen any deviation from the trends just based on what we're seeing, obviously on the macro and just continued uncertainty more broadly?

Yes. While the wins are fantastic. I mean, this team continues to go from strength to strength and some of the -- we've got some of the early quick wins with the Royal integration last year and early this year. There's a couple of the bigger Royal integration wins that are in the pipeline Q4 into 2020. So, yes, a lot of momentum with that team. I think there's new applications we're winning. There's an expansion globally, is that business, if you think about the acquisitions we've made in the business, which we had, it was China, U.S., core Europe centric. We're doing a good job of bringing that business now and growing it nicely. And in India, we're getting some growth in that business in Korea. So yes, bottom line is yes, a good pipeline of wins underlying it. And just finally a two-part question, just on the EBITDA margins for the American segment, did I comment where you thought it was below our forecast and also the year-over-year margin trend over the past five quarters. And then, lastly, on the segment realignment in the 20 million to 40 million in cost savings that you referenced. Can you just give us some high level buckets as to how you expect to get those savings? Thanks so much.

Okay. So, yes. So, I think the Americas margin was broadly in line with what we expected. I think it was up sequentially versus Q2. I think if you maybe why some people's estimates were office, they were comparing it year-on-year to Q3, but I think that's a business you want to look at sequentially. We expected margins to tick up. They did in the quarter. Our long-term goals are to stay in that 16% to 18% range in that business. So, we want to see it up in that 17% to 18%, not the 16% to 17%, but it was a positive up tick. And, as I mentioned in the script, a nice up tick in the volumes quarter-over-quarter driven by some wins in our consumables business. And then, the second question?

Was that the cost savings, 20 to 40 for 2020, the realignment plan, the buckets associated with that?

Yes. So maybe, again, it's -- we're doing the work right now on that. So, I don't want to get into too much detail about where it's coming, but fundamentally I think you can see where it's coming from. The fact that we have three segments instead of five creates in and of itself eliminates some redundancies. Part of the strategic positioning is to make certain we focus our resources on the real growth opportunities. So where there's areas that we have resources that aren't focused on growth, we're going to find a way to trim some of those resources. And then, the other thing is that, on a corporate level, we had a level of complexity in all of our corporate functions managing a combination of regions and global businesses. So on a corporate level, we're able to trim some costs as well. So, I think there's things that naturally come out of this realignment. And whenever you go through a process like this, it's a chance to re-examine everything you spend money on and we're going to do that as well. So I think there's -- those are the buckets, but we think there's sizable numbers there and we look forward to reporting out the details of that next quarter and we'll give you a very clear picture piece by piece.

Thanks so much, Jim.

Thank you.

The next question will come from Dmitry Silversteyn of Buckingham Research.

Yes. Good morning guys. Thanks for taking my question. The couple of questions, if may. First of all, you completed a small acquisition of -- I think a Carolina-based company in the third quarter -- towards the end of May. So, basically at the end of the second quarter like in construction, did it have any contribution in terms of revenue or margin, positive or negative, for the third quarter? And do you expect something more or less for the fourth?

Yes. So, you read every detail Dmitry. Very impressive. Yes. That actually was a distributor relationship that Royal had in North America, in the insulating glass business. And we integrated that within the company. So, the impact in the quarter was minimal in terms of the -- both the revenue and EBITDA performance.

Okay. Got it. So, it was basically a customer you were selling to that you now own?

Right, exactly. When we brought all the capabilities, resources, et cetera. Yes.

Got you. I mean, you've got, should I be -- how much of leaf reading should I be doing here in terms of you buying a distributor? I mean, is this something that, could be a beginning of a longer term trend for you or is this a one off?

No. To talk about the specifics there. So short answer is no, it's not a long-term trend. We in our insulating glass business sold direct in the U.S. Royal when we bought them, sold direct in Europe, but through this distributor in the U.S., so he had a conflict between the Royal business and ours that we had to resolve. So, it was about resolving that conflict in the market.

Got you, Jim. Thank you for that. Secondly, just to follow-up on an earlier question on pricing, it was down a little bit and I understand the reasons why, obviously, the competitive environment, raw material pricing is coming down, so you have a little bit more room to keep the businesses that you want to keep. What was the -- were the price declines either concentrated in any one region or any one division or business unit, or were they pretty broad based?

Yes. I think they were -- every business showed either less price increase or a slight price decline versus last quarter. So, yes, it wasn't concentrated in any single business.

Okay. And then, I guess I'm trying, I understand your question on American adhesives EBITDA, but this was the first time in over a year that we saw are down year-over-year, EBITDA margin for that business. What does that signify?

What does that signify? Yes, I think what you saw last year was an exceptional jump Q2 to Q3 because we put forth a really strong price increase in Q2. And then, we were rebalancing our volume and our position with customers. So, I think it's reasonable. It's that up tick sequentially, but year-over-year, we had a special third quarter last year as the way I look at it.

Yes. I actually looking at it now, you almost get 18% margin in that quarter on the EBITDA line. So yes, we weren't going up against a very tough comp. Okay. And then, final question, Jim, you maybe touched on this, but maybe you can provide a little bit more detail, in this realignment, which, by the way, great that you guys are doing it. I think simplifying, obviously operating structure and managing managerial structure is key to getting your SG&A in order. Besides sort of short-term gains of this $20 million to $40 million in cost settings you're going to generate over the next couple of years, what are some of the sort of more sustainable mid to long-term benefits of this realignment and how do you see, these businesses performing, in the new format and under more perhaps direct management control going forward?

Yes. Well, thanks for the feedback Dmitry. Yes, I think you're right. It's really, really good for our company and you've followed us a long time, so you understand the complexities that we had and how we had to move forward. I think I tried to make this point in the commentary, the biggest benefit to this are around growth. And what we've done in engineering adhesives is, we've been able to identify trends in markets and then allocate resources aggressively toward the both opportunities. We see those in our other businesses, but the regional structure sometimes got in our way. So, so that's both in terms of a new sustainability initiative that's coming down the road that we can put resources on or a new thing that's happening in the hygiene world that we see an opportunity, or as I mentioned, the medical adhesive space, right? Those were all things that I would say today, we aren't aggressively putting resources behind them. We'll be able to in the future. So, I think the biggest change is our ability to -- and it's also geographic and our engineering adhesive business, they pick the geographies they want to go after based on where the world's moving and in our current structure and some of our businesses because we're regionally managed, we have resources there that we can't ship as well. So, I think the real opportunity is around sustainable growth and ability to tackle big growth initiatives. But the cost benefits are very intuitive. They come from workout exercises, they come from allowing us to simplify our businesses. And I'd say the third piece Dmitry is, we're going to have three businesses that while they are unique and how they go to market and the markets they go after, we can have some standardization of processes which also drive cost efficiencies and simplicity so that people are focusing on mission, which is just serving customers. So, hopefully that answers your question, but, there's a lot of benefits to this on the opposite side.

Okay, Jim. Thanks a lot. Thanks for that response.

Yes.

The next question will come from Eric Petrie of Citi.

Hey, good morning, Jim.

Good morning, Eric.

You showed nice margin improvement of 400 basis points in engineering adhesives. Why did they ask, are margins different or relatively similar across regions?

Yes. I would say we look at those by the end segments. So I think the -- in engineer -- you're asking about regions within engineering adhesives. And I think, right, the shift that we're talking about is not a regional shift. It's a shift toward more higher end market segments. Regionally, I would say, it depends on which segment we're strong in, but in any given segment, we're similar. So, electronics margins are similar across the regions. Automotive segment margins are similar across the regions. So, hopefully that answers your question.

Okay. And you commented on medical being end market growth opportunity. Should we think of the ramp in that segment similar to engineering where you have to be specked in or what kind of lead times to recognize, revenues and profitability should we expect?

Yes. I think you can think of it in terms of maybe not all of engineering adhesives, but what we saw in the electronics business and think about what we did within engineering, adhesives. We started with electronics. It was a business actually that when we started about the size of our current medical business. And then, we put lots of investment behind it and we were able to grow -- sizable growth. So, still very early days for me to be committing. But that's what we're looking at. I don't think you're going to see some big impact from our medical and beauty business in 2020 and the overall corporate numbers, but two or three years from now, I think it'll be something you'll hear us talking about having a sizable impact. Go ahead, John.

I think to your question on the ramp and getting specked in, I would say it is more similar to electronics business and some of our other businesses. But, that's one of the reason it is higher margin and it is more sticky, so that's one of the reasons we like it as well.

Okay. And then, lastly, do you see any risks for your revised guidance, in terms of regional, does Europe or China keep you awake at night or how should we look at downside risk, the guidance?

Yes, I think when we look at what happened this quarter, it was certainly a lot worse than we expected going into Q2. I think when I look at Q4, I don't see a precipitous downturn from that, I see, certainly even, and as I mentioned, you could, if you wanted to, point to some things that are very positive that that could make it a lot better than that. But we don't see a lot of downside to this. I think would be the fair answer.

Okay, helpful. Thanks Jim.

The next question will come from Jeff Zekauskas of JPMorgan.

Thanks very much. You're moving from a regional business model to more off global operational model. Exports a large part of your business, like of 3 billion revenues that you have -- how much are export revenues?

Yes. I wouldn't call it a global functional model, I think exports are very small part of our business. So, yes, but I think the way to think about our business and why this is really important is, decisions are made in one part of the world that drive revenue in another. So, if you're in the electronics business, decisions made in California are driving revenues in Asia. Equipment manufacturers that sell packaging equipment around the world specify new packaging that ends up being sold all over the world. So, it's strategic -- it's driving off of the strategy of where our business decisions made. And oftentimes they're made in one part of the world and the revenue is in another part of the world. So that's why that's really important for our business.

So, basically the theory is, you have regional managers and you have functional managers and what you think is you need only, you want to blend those two strengths, is that is and downsize it?

Yes. I would say the way to think about it, Jeff, is we have global strategies regionally executed, and that's where we run our engineering adhesive today, right? So, we have a global aerospace strategy, a global electronics or global auto strategy, and then it's executed in each one of the regions. That's what we would do more and hygiene, in packaging, in health and beauty. In the past, we sort of had a backwards, right? We were building these global strategies but the leadership was all regional. So, it's global leadership, global strategies regionally executed, but regionally executed within those businesses. So, I'm not going to have a regional execution across the businesses. There's going to be a regional leader for Europe in each one of those businesses. So, hopefully that helps.

And then, lastly, the detrimental margins and construction products were really pretty large. And I had thought that that had been an area where you had rationalized some of your plant functions, you had some newer plants and you had closed some older facilities, which I thought would have listed your -- or would had been a positive in terms of EBITDA growth. So can you talk about why the EBITDA drop is so large relative to the revenues and what have you done on the cost side positively in that area?

So, I'll let John comment further. I mean, I'm not sure if I understand your question. I think we've improved our -- it's a high margin -- it's a high incremental margin business. And as you point out, we've improved it incrementally. The problem is, when you have negative revenue, then the impact on your EBITDA is even greater, right? So when you have high margin businesses that are down, which we've got you have now. As they grow again next year, you'll see very positive increments. So yes, it's a sizably positive incremental margin business, which one of the reasons we really like it strategically. In terms of cost reduction this year, I mentioned in the script, we've got a 5% year-over-year reduction in total SG&A [indiscernible] in that business. So, we pulled out a lot of costs that's a combination of shift projections of plants. We've taken some resources that were focused on product lines and customers that weren't profitable. We took those out of the business and we closed the facility last year. So we did do a lot of cost as we [indiscernible].

Okay, great. Thank you.

Go ahead, John.

You look at the contribution work, sort of the underlying revenue minus material box is up versus last year related to this repositioning of the portfolio. So, I think if you look at the cost take out and underlying margin improvement, it is really getting weighed down by volume. But, I think we all have a much healthier business as we start to annualize that and add volume.

I think the overall point that this is a high incremental margin business is true and we need to get it growing so that we can see the benefits of that.

Okay, great. Thank you so much.

Thank you.

The next question will come from Rosemarie Morbelli of G Research.

Thank you. Good morning everyone.

Good morning, Rosemarie.

Jim, you mentioned auto being down and based on what we read and what we hear, it sounds as though auto built might be stabilizing, but it also sounds as though heavy truck and ag equipment are beginning to show some slow down. So are you involved in those particular applications as well or is it mostly auto?

Yes. Our exposure to heavy truck and equipment is very -- is much smaller than our automotives. So, yes, we sell into those markets, but it's very, very small incrementally.

And do you see a change in the recent trend in that particular area?

In that particular area? Yes, I think again the external data says that there's a slow down, especially in the U.S. and some of the ag equipment. But I don't have a good read through Rosemarie early. But, yes, I think the overall market data is out there on that area. And in terms of your comment on builds, I don't think there's any data that shows builds are moving. There is some data that shows that sales aren't as bad as builds, so that would imply that builds are going to get better. But, no data yet that builds are moving that I've seen.

Okay, thanks. And then, you mentioned that you started electronics at a very small level. And this is a same situation for medical. Can you remind us [indiscernible] the size of electronics when you started and what size it is today?

Yes. So that's not something we typically share publicly on the sub-segment level Rosemarie, but I think I've said in the past it was low tens of millions of dollars when we started, right? So…

And has it doubled, tripled?

It's grown very significantly.

All right. And then lastly, if I may, on the construction business, is that remaining as thoroughly U.S. business? Are you planning in expanding it globally?

Yes. Well, we want to get it running really, really well in the U.S. There are definite global opportunities with the portfolio we have. The roofing business we bought from Royal has some clear and short-term opportunities in other parts of the world. And we do have a piece of that business that's in Australia. So, yes, I think in the long run, we think that the technology and the approach we have has a global presence, but that's not our short-term priority. Our short-term priority is getting back to growth and expanding the margins in 2020.

Okay. And then, if I may again, if I look at your 2020 targets by the different segments, if we bunch all of those up based on the new segmentations, are we looking at similar targets or because of the current environment? There is no way you are going to get to those numbers.

Yes. I think what we said at the end of last year, Rosemarie, when we reestablished the targets, we think we have an opportunity in this business to grow our EBITDA by 10-ish percent, which would imply a higher than that, maybe 15% EPS growth over the next few years. And we're building our plants with those ideas in mind. So, it's a slower world might have to get more cost out, but that's what we're looking at in terms of our future over the next few years.

All right. Thank you.

Thank you.

The next question will come from Paretosh Misra of Berenberg.

Great, thank you. So in your engineering adhesive business, how much is currently automotive?

Yes. So again, we don't describe that out publicly, but I think you can -- well, I think the thing we have said is, it's a little over 5% of the overall company is our exposure.

Got it. So then, for the rest of the engineering portfolio -- engineering adhesive portfolio, what would you say, is that kind of the right growth rate -- organic growth rate in the current environment, like it's high single-digit achievable?

Yes. Certainly that are better. I think our average for the year is double-digit. We're getting a lot of wins in that business. All those markets are slowing down as you saw in Q3, but it's also a lumpy business. Some of these things come in from quarter-to-quarter. So, I would say x-auto, we're delivering double digits and even in this environment, that's our expectation overall.

Got it. Fair enough. And then, moving on to construction, and I'm sorry if I missed that, but can you quantify maybe just ballpark, how much revenue this year you lost because of portfolio actions you took?

Yes. I think we said in this quarter, it's a little more than half of the -- well, it's more than half, not even a little more. So, the majority of it is in the portfolio mix and the rest of the shortfall this quarter is because we saw sizable decline in construction spending versus what we saw last quarter.

Got it. And a last one for me, Q4, what's your raw material assumption?

Yes. We're assuming raw materials are flat. I think there's generally a little more favorability across the batch, but there are certain materials that are going up. So, overall flat.

Flat to Q3.

To Q3, not the prior year to Q3.

Understood. Thanks guys and good luck with everything.

Okay. Thank you.

The next question will come from Christopher Perrella of Bloomberg Intelligence.

Hi, good morning. Hey, quick question. In terms of the order book, across the businesses, and maybe it varies depending on the end markets, but what's your visibility in your orders for the next couple of months or how far out does it extend?

Yes. So customers in our business, most of them order a month in advance or less. So, it's a two to three lead time, weekly time business. So and it varies a lot by business and by market.

All right. And then..

We do have a lot of visibility on our wins and our business overall, but actual orders was your question. And that's the timing on that.

And then the -- with the accelerated bad debt pay down ahead of schedule. And I know you have the target for next year or that you're looking though the leverage ratio that you're looking for. Did you, I guess it's the pace of debt pay down going to slow going forward, once you get through this year. And what does that free up in terms of cash?

Yes. We've got a very aggressive view on what we need to do in debt pay down. I think we've made a great acquisition in Royal. We levered higher than we would normally do. And our view is that's a key priority for us and for our investors. So, you'll see in all kinds of environments, us taking the steps necessary to drive debt, pay down, not just along the commitments that we've just up for this year, but also we expected aggressive pay down again in 2020.

All right. Thank you very much.

Yes. Thank you.

And this concludes our question-and-answer session. I would now like to turn the conference back over to Jim Owens for any closing remarks.

Okay. Well, thanks everybody for your time today. It's been -- what I see as a very positive result in a tough environment. We're committed to deliver for our investors, and I think our next step in our realignment of our business, we'll also show a very positive step. So thanks for everybody's time today.

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect. Have a great day.