HB Fuller

HB Fuller’s CEO crowed how the company’s price increases more than offset inflation and even expanded their margins

HB Fuller’s CEO told analysts the company “supported our margins by offsetting continued inflation in every element of our costs.”  “JAMES J. OWENS, PRESIDENT, CEO & DIRECTOR, H.B. FULLER COMPANY: We maintained our strategic pricing rigor, which supported our margins by offsetting continued inflation in every element of our costs. Raw material and delivery costs were up in the first half of the year by about 15% from the fourth quarter of 2021. We expect raw material costs will continue to rise in the third quarter and full year raw material costs will be about 20% higher than the fourth quarter 2021 exit rate.” (HB Fuller Q2 2022 Earnings Call, 6/23/2022)

HB Fuller told analysts it “more than offset” inflation thanks to over $800 million in price increases since 2021. “JAMES J. OWENS, PRESIDENT, CEO & DIRECTOR, H.B. FULLER COMPANY: “We implemented approximately $130 million of pricing in the first quarter, over $200 million in the second quarter, and we are delivering additional pricing actions of over $175 million in the third quarter. When combined with about $450 million of annualized pricing executed in fiscal 2021, our total pricing actions are forecasted to more than offset raw material and delivery cost increases. We are closely monitoring supply costs and other inflation, and we’re prepared to implement further increases as necessary. Our second quarter performance again demonstrated our ability to consistently deliver outstanding operating results. (HB Fuller Q2 2022 Earnings Call, 6/23/2022)

HB Fuller’s CFO reported the company’s profits were up double digits thanks to “solid volume growth and strong pricing gains.” JOHN J. CORKREAN, EXECUTIVE VP & CFO, H.B. FULLER COMPANY: Thanks, Jim. I’ll begin on Slide 5 with some additional financial details on the second quarter. Net revenue was up 20% versus the same period last year. Currency had a negative impact of 4% and acquisitions had a positive impact of 2%. Adjusting for currency and acquisitions, organic revenue was up 22%, with volumes up 3.4% and pricing up 18.5%. All 3 GBUs had double-digit organic growth versus 2021, with HHC up 25%, Engineering Adhesives up 22% year-on-year and Construction Adhesives up 14%. Adjusted gross profit was up 16.4% year-on-year on solid volume growth and strong pricing gains. Adjusted selling, general and administrative expense was down 130 basis points as a percentage of revenue versus last year, resulting from volume leverage, pricing gains and good expense management, offset by higher variable compensation expense. Adjusted EBITDA for the quarter of $139 million was up 14% versus the same period last year and adjusted earnings per share of $1.11 increased 18%, driven by strong volume growth, pricing gains, and good cost controls, offset by higher raw material costs. (HB Fuller Q2 2022 Earnings Call, 6/23/2022)

HB Fuller told analysts that its price increases were sticky and were unlikely to change even as costs went down 

HB Fuller’s CEO told an analyst the company expected “sizeable margin expansion” as costs declined because of “extremely sticky” prices and said the company would “push harder” on price increases.

JAMES J. OWENS, CEO: Yes. So yes, I think you would definitely expect to see more margin expansion in (Engineering Adhesives), especially as raw material slowdown. So I think the way to think of this for the whole company, right, as inflation peaks and at some point slows down, you should expect to see sizable margin expansion, and that’s across each one of our segments. And more of that will happen in EA. So keeping EA at this 15%-ish range will show some very nice natural expansion as raw materials come down. So that would be fundamentally it. I think there’s a little less opportunity to substitute, which we can do in HHC. That’s been happening in the last couple of years, substitute alternate raw materials and maybe some more aggressive pricing in certain segments where the EA pricing is extremely sticky. So we try to manage that in a controlled thoughtful approach. So it’s much better long-term sustainability of the margin growth. So I think the overall point, our long-term plan is to keep HHC in that 15-ish range and to see EA up closer to 18% to 20% range. And I think as you look at where the world is now and you project out what might happen in 2023, I think you’ll see us moving very much in that direction.

MICHAEL JOSEPH HARRISON: Just to be clear, when you talk about being a little more aggressive on pricing in EA, do you mean that you’re pricing lower to capture more share or your pricing pushing harder and (inaudible) potentially?

JAMES J. OWENS: I mean pushing harder, right? So I think in HHC, we have some things that are a little more indexed and some areas where there’s been availability shortages that have driven more aggressive pricing.

 (HB Fuller Q2 2022 Earnings Call, 6/23/2022)

HB Fuller’s CEO told analyst that “we don’t reduce prices on the back end of these increases.”

ROSEMARIE JEANNE MORBELLI, FORMER RESEARCH ANALYST, G.RESEARCH, LLC: Congratulations also to Barbara. I will miss you and thank you for your help for all of those years. And of course, we welcome your replacement whoever that may be. I don’t think — I may have missed the press release. In addition — so this being said, could you talk about John or Jim, the SG&A ratio, which has now declined to slightly below 16% of sales, is that sustainable? Or is it just during this environment that you are probably controlling expenses?

JAMES J. OWENS: Yes. No, well, at a very high level, I think it’s a relatively sustainable level. As you know, Rosemarie, we don’t reduce prices on the back end of these increases. So I wouldn’t see a big reason for this to go in a different direction. John, do you want to comment further?” 

(HB Fuller Q2 2022 Earnings Call, 6/23/2022)

HB Fuller’s CEO talked up how a recession would benefit the company by cutting their costs even more 

HB Fuller’s CEO said “a nice light recession would be perfect for us” because it would bring raw material costs down even more. “JAMES J. OWENS, cEO: Yes. So — and you followed the company a long time, David. I mean, we do relatively — extremely well relative to most companies in terms of volume, mostly because of the diversity of our business, right? So we’ve got a lot of products that are across different cycles. Certainly, the consumer goods business has very limited impact. And all of that impact, if you look at our cash flow and our margins gets us to a point where the EBITDA is generally up even though we have downturns and cash flow expands, and that’s because raw material prices come down. So — so I think going into a recession, a nice light recession would be perfect for us, but even a heavy deep recession, I feel like we’ve shown in 2000, 2008, very good resilience in that environment. So — and especially given how well we’ve managed pricing and margins, I think, we would fare extremely well.” (HB Fuller Q2 2022 Earnings Call, 6/23/2022)

HB Fuller’s CEO cited nearly $800 million in price increases since the beginning of 2021 and said “we are prepared to implement further price increases as necessary.” “JAMES J. OWENS, CEO: The tragic events in Ukraine have all of us concerned for the safety of people in the region, and our concerns at H.B. Fuller are with them, first and foremost. From a trade perspective, the conflict is impacting a fragile supply chain with even higher prices for raw materials and transportation. Raw material inflation will be greater than we forecasted in January. And as a result, additional pricing actions are being implemented this quarter to remain ahead of the inflation. We have implemented approximately $130 million of pricing in the first quarter with at least an additional $175 million planned in the second quarter. These actions are in addition to the $450 million of annualized pricing executed in fiscal 2021 and are expected to more than offset raw material and delivery cost increases. Our teams are monitoring the situation daily, and we are prepared to implement further price increases as necessary.” (HB Fuller Co Q1 2022 Earnings Call, 3/24/2022)

HB Fuller CFO said net revenue was up 18% compared to the same period last year, with pricing up 14.7%. “JOHN J. CORKREAN, EXECUTIVE VP & CFO, H.B. FULLER COMPANY: Thanks, Jim. I’ll begin on Slide 5 with some additional financial details on the first quarter. Net revenue was up 18% versus the same period last year. Currency had a negative impact of 3.7% and acquisitions had a positive impact of 0.9%. Adjusting for currency and acquisitions, organic revenue was up 20.8% with volumes up 6.1% and pricing up 14.7%. All 3 GBUs had double-digit organic growth versus 2021 with Construction Adhesives up over 38% year-on-year and HHC and Engineering Adhesives up 21% and 17%, respectively, against what was a very strong first quarter last year for both GBUs.” (HB Fuller Co Q1 2022 Earnings Call, 3/24/2022)

HB Fuller’s CEO said customers aren’t ‘prebuying’ to escape price increases: “price increases are happening every quarter. So there’s not really a prebuy on price increases. And frankly, there’s not enough material around for people to prebuy.” “JAMES J. OWENS, CEO: So those are really the 2 big drivers, I think you saw it in some of our results last year in Q4, and you’re definitely seeing that momentum build here. As far as prebuy on price increases, price increases are happening every quarter. So there’s not really a prebuy on price increases. And frankly, there’s not enough material around for people to prebuy. So that’s definitely not driving any kind of quarterly impact here. John, you want to add something?” (HB Fuller Co Q1 2022 Earnings Call, 3/24/2022)

HB Fuller’s CEO told an analyst that the company is doing “some great work on pricing that’s improving the margins.” “DAVID L. BEGLEITER, MD AND SENIOR RESEARCH ANALYST, DEUTSCHE BANK AG, RESEARCH DIVISION: Just going back to guidance. For Q2 through Q4 ex M&A, is it fair to say that this guidance is unchanged versus prior guidance? JAMES J. OWENS, CEO: Pretty similar. Pretty similar. I think — yes, pretty similar. But I’d say that’s the net-net. There’s a lot that goes behind that, right? I think there’s a lot of good momentum in the business, some great work on pricing that’s improving the margins. And then there’s this tempering of enthusiasm given the fact that we’ve got this war in Ukraine. So that’s built into the guidance.” (HB Fuller Co Q1 2022 Earnings Call, 3/24/2022)

HB Fuller’s CEO said the Ukraine crisis lead directly to “why we have this big increase that we’re putting in place here in Q2, the big price increase.” “JAMES J. OWENS, CEO: Yes. I think I even said it on the last call, right? What we were seeing in Q3, Q4 and projecting into Q1 was a slowing of inflation, still inflation but less inflation. And that’s what we had predicted for Q2, right? So inflation but less inflation. In fact, our current view is that inflation in Q2 will be the highest inflation quarter we’ve had, and that’s mostly driven by Ukraine. So we do a lot of forward look and we get really good visibility a quarter ahead, and there’s a lot of shortages, there’s a lot of downstream effects from commodity materials that will impact this year and the quarter. So our perspective is up a lot from where we were in Q1, mostly driven by the shortages in Ukraine, and that’s why we have this big increase that we’re putting in place here in Q2, the big price increase.” (HB Fuller Co Q1 2022 Earnings Call, 3/24/2022)