Highlights From H.B. Fuller's (FUL) Q3 Conference Call: Organic Sales Declined Almost 10%; Sees In-line Q4 Sales

September 23, 2009 2:03 PM EDT

H.B. Fuller Company (NYSE: FUL) reported Q3 EPS of $0.48, ex-items, 12 cents better than the analyst estimate of $0.36. Revenue for the quarter was $315.3 million vs. consensus of $315.45 million. Shares are trading flat on the session.

Highlights From FUL's Q3 Conference Call:

• Sees Q4 sales about $330 million, versus the consensus of $332 million.
  
• (CEO) Although organic sales were still down nearly 10% in Q3, volume declines increased over 250 basis points on a sequential basis.
  
• Our volume development improved slightly during the quarter since the most parts of the company, we exited Q3 with stronger demand than we had at the beginning of the quarter.
  
• Our efforts to reduce raw material costs lead to a decline in this cost of about 15% year-over-year, and are little more than 1% sequentially.
  
• Q3 gross margin expanded by 680 basis points year-over-year and 190 basis points sequentially.
  
• We grew EBITDA margin on a sequential basis by 70 basis points to 13.7%. The improvement was driven by the expansion of gross margin offset somewhat by higher selling, general and administrative expense.
  
• SG&A expenses were up about 11% versus the second quarter or about $6.8 million.
  
• Cash flow from operations, Year-over-year, it was up $57 million to $59 million.
  
• North America region's strong performance continued in Q3. While the Asia-Pacific region made progress in it's turnaround affords. North America increased its operating income over 50% year-over-year. While Asia-Pacific went from a loss of $500,000 in Q2 to generating operating income of $2 million this quarter.
  
• While it is encouraging that the trend in volumes improved slightly in Q3, volumes were still down more than 12% year-over-year.
  
• (CFO) We have set a goal to grow between three and 5% on a compound annual basis from 2007 through 2012, which is five-years of our five-year plan.
  
• In Q3, organic growth was down 9.6% year-over-year.
  
• Cash flow from operations increased $37 million year-over-year to $59 million and was even up slightly over last quarter's very strong performance.
  
• In Q3 net debt was $64 million down approximately $55 million versus Q3.
  
• On a pricing front average selling price moderated from Q2 levels, but still positively contributed to organic sales year-over-year by more than 4%. Operating income posted strong improvement, increasing more than 50% versus Q3 of last year and nearly 7% sequentially.
  
• However, relative to last year's Q3 operating income was down 17%. Unfavorable foreign currency translation depressed operating income by about 13% compared to last year, the remaining decline year-over-year was driven by weaker volumes.
  
• For the paints business, a further deterioration in consumer demand resulted in additional declines in volume versus Q2 and a lower average selling price.
  
• Although adhesives grew it's operating income more than 80% year-over-year, it was not enough to offset the significant decline in paints.
  
• We're pleased to report that Asia-Pacific began a turnaround in operating performance in Q3. On the top line the volume development in Asia improved the most of all the regions. The return in certain markets which had all that disappeared in the first half of the year, together with new customer wins led to much improved volume versus the second quarter. As a result, volume declines eased by over 800 basis points sequentially, from down a 11% to down less than 3%. Average selling price was down slightly versus Q2, but up 4.6% year-over-year.
  
• Consequently, Asia was the first region to start posting positive organic growth in Q3.
  
• Also worth noting this quarter is the strong performance of our joint venture in Japan with Sekisui Chemical. Through knowledge sharing, raw material cost reductions and the adoption of more disciplined pricing tools and processes, the joint venture has considerably improved its financial performance.
  
• (Q&A) In your cost of goods sold, what -- roughly speaking, what is the fixed cost component and what happened with this component over I don't like half, two years? (A)Broadly speaking, in our cost of goods sold, about 75% of our cost of goods sold is raw materials and the balance is everything else. And some portion of the everything else is clearly fixed and other parts are partially fixed and some are variable.
  
• And were you able to reduce your fixed cost component over time or it remain fixed?(A)Well, --- you now that we are strong believers of May 16 and we believe in continuous improvement. So when you really look at our factory labor manufacturing overhead over the years, we have generated lot of efficiencies, we continue to do that. And whenever needed not just from an efficiency standpoint but
  also from a strategically footprint perspective we also adjust our capacity. I think, we've done a pretty good job over the years and clearly that together with pricing actions, sourcing negotiations and product line reformulations is what is contributing to these gross margin improvement. (A) Yeah, the other thing, -- I just point out, we mentioned in our press release that we had a facility restructuring in North America in Q3 and that's a specific example of actions taken to manage down our fixed cost in our manufacturing operations here in North America.
  
• When you look at the volumes for a minute then, on some of these new wins are you gaining market share in North America in a significant way? (A)Well, I think that we are winning new business both with new accounts and existing accounts. But I've also seen that we've got much better and also protecting our current business and at building customer loyalty. So it's both new accounts is existing accounts and I think that some of the changes we made in the organization and some of the training we've been investing into are already paying back.

H.B. Fuller Company manufactures and markets adhesives and specialty chemical products worldwide.

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