Good morning, and welcome to the H. B. Fuller Q1 twenty twenty Quarterly Earnings Conference Call. All participants 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, Investor Relations. Please go ahead.
Good morning, and welcome to H. B. Fuller's 1st quarter 2020 earnings call for the fiscal quarter ended February 29, 2020. Our speakers are Jim Owens, HB Fuller President and Chief Executive Officer and John Corcoran, Executive Vice President and Chief Financial Officer. After our prepared remarks, we will take questions.
First, a reminder that our comments today will include references to non GAAP financial measures and references to organic revenue which excludes the impact of foreign currency fluctuation and the impact of acquisitions On today's call, unless otherwise specified, discussions of sales and revenue refer to organic revenues, and discussions of EPS, margins or EBITDA refer to adjusted non GAAP measures. These measures are in addition to is useful to investors 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 and uncertainties.
Many of these risks and uncertainties are and will be exacerbated by the COVID-nineteen pandemic and any worsening of the global 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 website at hbfuller.com. Now let me please turn the call over to Jim Owens.
Thank you, Barbara. I'd like to first express my thanks and concern to everyone on the call, and especially those of you from New York that are in the epicenter of the U. S. COVID-nineteen crisis. I know you're dealing with the challenges in your personal lives and inside your own companies, and I appreciate you being here to understand what's happening.
Within H. B. Fuller. In H. B.
Fuller, we've been dealing with this crisis since January 23rd when Hubei province went on lockdown. 18% of our employees and 12% of our revenue are from China. And we quickly learned how to manage social distancing, supply chain, quarantines and delivery of essential products. We've used that experience and the experiences we have seen turn to normal to guide our business plans and our expectations going forward in other parts of the world. The significant portion of our business in China and around the world supports hygiene, health, food and other consumer products, which have seen a significant increase Our position as the largest dedicated manufacturer of adhesives in the world and our culture of global collaboration have positioned us to manage the supply chain and resource needs of the business more effectively than our competitors, both big and small.
Our company is holding the world together in a time of crisis, whether in a personal hygiene product for your baby, a complex medical filter, electronic communication device or packaging for the foods we're all eating at home. HP Fuller is there as an essential product in our lives. It is this capability to meet the diverse technical adhesive needs of manufacturers across the world that is the long term value our company provides to the world and to our shareholders. We are squarely focused on protecting that long term value for you, the shareholders, along with the employees who run it, and the billions of people in the world who rely on our products in their daily lives. As a result of our actions through this crisis, we will be a stronger company better positioned for growth after the economy recovers from the crisis.
Last evening, we announced our financial results for our first quarter of fiscal 2020. Adjusted EBITDA of $78,000,000 and adjusted EPS of $0.34 were both in line with our guidance for the first quarter, which did not reflect any estimated impact from the COVID-nineteen outbreak. Given the and Additionally, we continue to drive outstanding cash flow improvement with cash flow from operations up significantly year on year in the quarter and our debt pay down plan for the year intact. Let me start by talking about what we are seeing on the ground. How COVID 19 is impacting our business and how our experience in China is guiding our plans and actions as the pandemic slows in China while it ramps up in the rest of the world.
Based on our success and lessons learned in China, we have already taken steps for business continuity and to operate effectively during this period of uncertainty, making sure that we are keeping our employees safe and healthy through social distancing and hygiene actions while meeting all of our customers' needs. We estimate that the disruption caused by COVID 19 and the shutdown in China to address it had a negative impact of approximately $15,000,000 on revenue in the quarter. China was the only affected geography in the quarter with 75% to 80% of the impact in engineering adhesives and the remainder in health hygiene and consumables. We estimated that this sales decrease in China translated to a negative impact on EBITDA of about 4,500,000 and EPS of about $0.06 in the quarter. The outbreak began to affect our operations in China in late January.
We have approximately 1000 employees in China, all of whom are safe with no reported infections. During the first quarter, the disruption to our raw material supply was very limited given our robust global supply chain and well established business continuity plans. As part of those plans, we have been actively securing alternate raw material sources. Quickly locking down supply materials, where we anticipated shortage could occur. We have 6 factories fully operational since the extended lunar New Year holiday ended on February 10th and all of our factories have now reopened and returned to normal production level In our China Engineering Adhesives business, we see March results at about 80% of expected levels and based on market feedback, expect able to be at about 90% of expected levels.
Our hygiene health and consumable demand is above budgeted levels in March as supply chains for these consumable goods are refilled and we expect that to continue into April and move back to normal levels in May. The total 3 month impact on HHC in China is resulting in a shift of volume across the months but not an overall decline in the total demand. Our engineering adhesive business is seeing about a 30% total decline from expected levels. Our planning assumptions assume similar short term impacts in Europe, North America and other parts of the world combined with recessionary impacts related to reduced employment and reduced consumption in other sectors of the economy. We are already seeing this scenario play out in Europe and North America.
Our March demand numbers are up significantly in HHC and down slightly in engineering adhesives. Our April projection shows continued strong demand in HHC, and sizable reductions in engineering adhesive market segments beginning to hit our numbers in April. We believe that our global supply strategy, robust business continuity plans and outstanding leadership on the ground provided us a meaningful competitive advantage to ramp up in other geographies in the coming weeks. The protocols we are implementing are similar as we leverage the lessons learned in China. From implementing disinfectant and social distancing procedures, utilizing internal chat tools to connect to each person in the company, ensuring effective remote work capabilities as practical and appropriate, allowing essential travel, while utilizing technology to connect with customers including our state of the art wearable glass technology to provide remote support to our customers.
The core of our continuity utilizing our robust global supply chains to backfill raw materials as needed and shifting production between sites where needed. Manufacturing factories have generally been exempt from business shutdowns around the world. But whenever there have been manufacturing shutdown mandates, such as the recent mandates from the governors in New York, California and other states in the U S. HB Fuller Facilities have received a government exemption as they meet the criteria for an essential manufacturer under federal guidelines supplying the hygiene and food packaging or medical industry. We operate these facilities under strict protocol to avoid disease transmission.
Today, nearly 100% of our 70 two factories around the globe are operating fully. Now I will move onto the financial results in the first quarter. Organic revenues were down 1% year over year, driven by the impact on our China sales of the disruption caused by the COVID-nineteen outbreak. Outside of this impact, our business was our sales in China from the delayed holiday and the outbreak, we estimate that organic revenue was up approximately 1% year over year with volume growth in all three segments. Adjusted EBITDA was $78,000,000 in the quarter, which is consistent with our guidance despite an estimated $4,500,000 impact from COVID-nineteen.
Impacts from the virus were offset by lower raw material costs, restructuring savings resulting from the move to global business units, and solid organic growth, particularly in construction adhesives as well as strong growth in HHC adhesives, due to elevated demand within the paper packaging and hygiene end markets. Adjusted EPS of $0.34 was flat year over year, and would have increased by more than 15% without the COVID 19 impact of approximately $0.06 in the quarter. And cash flow continued to be very strong in the quarter, with cash flow from operations up significantly versus last year keeping us on track for and delivered savings in Q1 at the high end of expectations. The new global business unit organizations have been fully operational since December 1st. Strengthening the collaboration across our global teams and the support In the first quarter, we realized $6,000,000 of savings from our reorganization.
We are also accelerating several projects and now plan to see total annualized savings Now, I'll move to segment performance in the first quarter on Slide 4. Revenues and Engineering adhesives declined by 4% on an organic basis driven by lower volume compared with last year. As we said earlier, the impact of COVID-nineteen, Delta China was most evident in our engineering adhesive segment. We estimate that the virus impacted EA revenues by about $12,000,000 in the quarter and organic revenue would have been close to expectations in about even to last year, excluding this impact. With volume up in the low single digits year on year.
Which was up double digits again in the quarter based on market share gains. This was offset by slower results in automotive, insulated glass and new energy. These end markets will likely decline further through the fiscal year as economic impacts of the pandemic are felt. Adjusted EBITDA margin of 12.4 percent was lower than last year, reflecting unfavorable mix associated with lower sales volumes. Hygiene Health And Consumables segment or HHC organic sales were up about 1% year on year in the quarter.
As we said, we saw about $3,000,000 of sales impact from the shutdown in China in the quarter for COVID-nineteen. We estimate that organic revenue would have been up about 2% excluding this impact, reflecting strong growth in Packaging And Health And Beauty. HHC segment EBITDA margin of 11.5% improved 100 basis points year over year, driven by favorable mix, slightly lower raw material costs, and savings from the restructuring of the business. Construction Adhesives had a very solid quarter as the business returned to top line growth and double digit EBITDA, on track with our forecasted improvements. The improvement in the quarter was led by double digit revenue growth in roofing and improving results in flooring.
Construction Adhesives EBITDA margin returned to double digits and increased year over year, driven by volume growth and improved mix related to the portfolio repositioning and new product solutions as well as the operational improvements from the restructuring. Our visibility and pipeline for construction adhesives look solid in the 1st 2 months of second quarter. Looking further, we would expect a negative impact to this business if there is a pandemic related shutdown of new construction or a significant recessionary environment. Regarding our outlook for the second quarter and the rest of this year, This obviously continues to be a very fluid and difficult environment to predict. We are using China as a base on which to rigorously plan our operations and adjustments we need to make.
Our current assumption is that we will see economic contraction in the Second And Third Quarter of this year. More acute in the second quarter seeing for paper, tissues and towels, hygiene and health products will continue through the year, particularly in packaging as consumers continue to delay eating out. Construction will continue at close to the current pace in March April and likely slow into May 3rd quarter. Engineering adhesives will face declining demand in durable goods for transportation, solar and doors and windows, with some offsets in filtration, electronics, and MRO adhesives. We also expect that raw material costs will decline significantly based on softer global demand and lower underlying petroleum prices with these cost declines accelerating over the next several months.
Fundamentally a decline in petrochemical prices supports H. B. Fuller's margins and our cash flow. Importantly, under various scenarios, we continue to forecast sufficient cash flow generation to pay dividends of approximately $34,000,000 and $200,000,000 of debt repayment this year. We are also developing additional levers to improve our operating efficiencies underlying costs.
Our 2019 restructuring project impacted SG and A costs and prior to COVID-nineteen, We initiated a review with external consulting support to improve efficiencies in our large factories, to establish a roadmap towards site consolidation, to build a plan to accelerate planned savings and timing during our Q2 conference call in June. While the economic backdrop continues to evolve and our underlying assumptions could change dramatically. We think that it is important to share with you what we are seeing today and how it is guiding our expectations and operating plans for the rest of the year and share with you other levers that we have at our disposal. Now let me turn the call over to John Corcoran to review our first quarter results and our revised outlook for fiscal 2020 based on the economic assumptions that
on Slide 5 with some additional financial details on the first quarter. Net revenue was down 3.9% versus the same period last year. Currency and the divestiture of the surfactants and thickeners business had a combined negative impact of 2.6%. Adjusting for currency in the divestiture, organic revenue was down 1.3%. As Jim mentioned, we estimate that COVID-nineteen impacted revenues by about $15,000,000 in the quarter, primarily in engineering adhesives and HHC.
Adjusting for the impacts of COVID-nineteen, organic revenue was up about 1% year on year, with volume growth in all three segments. Year on year adjusted gross profit margin was 26.5 percent, down 50 basis points versus last year, as lower volume associated with COVID-nineteen and product mix offset the impact of lower raw material costs and manufacturing efficiency gains. Adjusted selling, general and administrative expense was down 3.2% versus last year, reflecting actions related to the business reorganization and restructuring announced last year, as well as some foreign impact to foreign currency. Adjusted EBITDA for the quarter of $78,000,000 was in line with our expectations and guidance despite and higher savings from restructuring. Adjusted earnings per share were $0.34, the same as last year as underlying organic revenue growth, savings from our restructuring actions and lower interest expense associated with our debt reduction actions and lower interest rates offset Cash flow from operations increased by $34,000,000 compared with the first quarter of last year based on continued improvement in working capital performance.
This allowed us to continue to reduce debt during Regarding our outlook, based on what we know today and the assumptions that Jim laid out earlier, we anticipate revenue to be down 5% to 15% year on year and EBITDA to be approximately $90,000,000 to $100,000,000 in the 2nd quarter as business in China continues to recover While we anticipate disruptions in other parts of the world will increase and raw material costs will start to decline. Using our cash flow performance during the recessionary period of 20,082,009 as a reference point and given the lower expected working capital requirements associated with to reduce demand, as well as higher anticipated raw material cost saving, we continue to expect to see strong cash flow performance over the rest of the year. This is allowing us to maintain our target to pay down approximately $200,000,000 of debt during 2020, keeping us well ahead of our original de leveraging plan played out in late 2017. Additionally, we have more than adequate liquidity to meet any foreseeable need This includes a $400,000,000 revolving credit facility with a built in accordion feature that allows us to upsize the facility by $300,000,000 if needed We also have ample room under our debt covenants using even the most conservative scenarios.
With that, turn the call back
certain what the impact of COVID-nineteen will be on our business, but we do have good experience from China and a number of other facts that are working on our favor. These facts are as follows. Our first quarter was strong despite the impact of COVID 19 in China, for 5 weeks. Our 1st month of Q2 remains on track due to increased demand in our consumer goods and hygiene businesses offsetting slowdown in our engineering adhesive business. Our actions taken last year to decrease SG and A delivered savings in Q1 and will deliver further savings throughout this year.
Our actions for reducing manufacturing costs are moving forward as planned this quarter and will result in additional savings. The decrease in oil prices and reduced demand for chemicals globally will result in reduced raw material costs during the second half of this year for HB Fuller. HP Fuller is an essential supplier and remains open for business around the globe. While there are still many unknowns, the facts surrounding HP Fuller's business as an essential supplier will enable us to weather this storm successfully delivering strong cash flow and reducing our debt. Most importantly the fundamentals of our business and of your business investment in an industry leading company that creates significant value, remain firmly intact.
The execution of our strategy be the best adhesive company in the world and to grow by solving the world's adhesion challenges better and faster than our competitors has proven itself thus far through this crisis and will continue to be a source of strength for HB Fuller going forward. We are better positioned as a business today than we were 6 months ago, having completed the global business unit realignment in our business. We are more agile, able to more quickly assess and respond to end market conditions and customer needs under this new structure. Our robust global supply chain business continuity planning and Nimblebis give us a significant competitive advantage as reflected in our first quarter results. While there are significant global health risks that we all are managing and economic challenges to face over the next quarters, Adhesives will continue to be a high value part of the supply chain for vital products needed to address the pandemic today and the long term challenges we will all see afterward.
As customers need to accelerate manufacturing efficiencies and product innovations, Adhesives will be front and center in driving those outcomes. I am confident that HB4 will continue to strengthen our position in this industry because of our extraordinary collaboration with customers, our ability to quickly reformulate and repurpose our broad portfolio of adhesive applications our robust global operations and supply chain and our unmatched expertise in adhesives. I will again credit our entire team around the world us. That concludes our prepared remarks today.
We will now begin
session.
Our first question comes from Vincent Anderson from Stifel. Please go ahead with your question.
Good morning Vincent. Good morning.
I was interested in how your sales process is mitigating any limitations on your personnel working directly with customers, bringing visitors to view your prototyping operations? And then second, do you have any impression on whether product development cycles are being delayed in this environment. To the extent that there's risk of maybe missing out on new wins, potential customers are forced to move forward with product refreshes with just whatever materials are available at the time?
Yes. Well, I would say Vincent, again, with China as our guide, our sales teams continue to work throughout crisis, staying closely connected with customers. And, as our labs opened up, our R and D books were back in the labs and And today, as an essential business, we have people operating in our labs and working on projects. Importantly for staying connected with customers, we've put in place a lot of remote communication and the tools are there. We had piloted about a year ago this Google Glass technology where we can give a customer a set of remote glasses that they can wear in their factory as we're trialing products.
And we've accelerated that program here in the U. S. And it's been a very successful program where we've used it. So is there some change in the cycle? Yes, but our as well have people working from home.
And those people that are working on new projects continue to work with our team. So, so I would say there's that work continues and based on our experience in China, it continued there as well.
That's great. Thank you. And then if I think about the effects of the slowdown in cross border shipments, are there any key exporting plans, for instance, that could suffer in your network, or on the other hand any business lines that are really focused on domestic customers that could benefit from a slowdown in import volumes?
Yes, I would say thus far that's been an advantage for us, but in a sizable advantage. A good example was we have some competitors that exported from China into Southeast Asia. Our facilities in Southeast Asia were able to meet those needs for customers that couldn't get the product there. Otherwise, in India before the recent shutdown there, we were able to fill in for some major customers that had supply issues making some hygiene products that weren't able to get materials. And even recently here in the States, there's somebody who exports into the United States from Europe unable to supply here.
So most of our business is very much As most of you know, it's we make around the world for those local markets, we certainly have some export But for the most part, we make in country for the country. And I think that's turned out to be an advantage for us in this environment.
Thanks. If I could sneak in a quick modeling question, just if you think about the second half slowdown that you're potentially expecting, how do we think about the flexibility in your R and D spending to kind of cushion cash flows?
Yes, the way we look at our modeling, is really around 3 things that we have in flight. We expect raws to come down as a result of significant decline in petrochemical prices as well as a slowdown in demand. And we've seen that through any other slowdown that's ever happened. The SG and A work that we did, is going to have a benefit and there's some things we can do there to accelerate some of that work. And then this manufacturing project I talked about, we had kicked that off before all of this COVID.
So we'll see some of those savings as well. We have a number of other levers but those are the 3 main ones that we see that are going to offset a slowdown. So but our intention is not to cut R and D, we're investing for the long term in our company.
Okay. Thanks very much and good luck.
Okay. Thanks.
Our next question comes from Mike Harrison of Seaport Global Securities. Please go ahead.
Good morning, Mike.
I think you guys are in a pretty good position having gone through, what you saw in China? And as you said, applying some of those lessons I wanted though to understand as you're seeing the effect of COVID starting in China and now obviously parts of Europe and maybe we're a couple of weeks behind that in the U. S. Can you talk about some of the trends that you're seeing
in
impact. It seems like China had more of a V shaped impact where things fell off very quickly. And now have recovered, more quickly than people would have assumed. Are you seeing the pattern be pretty similar in Europe in the U. S?
Or do you feel like at this point, the falloff has been a little bit more gradual in those 2 geographies?
Yes. So I would say, certainly it's 2 months difference between where the U. S. Is and China is pretty close to that and Europe is only a week or 2 ahead. So the recovery curve could be different in those different areas.
I think the big difference and we've looked at what the differences are. China had the extended lunar holiday for most of the country. So sort of an abrupt process there that was a little different than what happened in other parts of the world where it sort of take a wave across Europe and a wave across the U. S. But But our fundamental assessment is very similar.
We the steps that the government took there very similar to what's been taken by other governments. And the things that we learned, we've been able to, I think, do a better job as a company. We're doing a better job in Europe and North America. And I'm guessing that governments are learning from China. So there's a chance that governments in other parts of the world will have a faster recovery than China.
Of course, there's a chance it'll be slower. But for us, supplying raw materials, supplying logistics, really important getting the social distancing right, making certain that we quarantined employees and put ourselves in a position where other employees weren't going to get sick all were steps that we took in China that we were able to do very early in advance of issues. And you look at a plant like our plant in Italy in Venice. It's still operating today. They supply materials for essential goods.
None of our employees have caused the virus. We've quarantined any that have been that have family members that have the virus. And we've been able to keep our employees safe and keep our business running. And I would say our reaction and the attitude and energy of our China of our Italy team is a great example of how we've learned from China. So Did I answer your question or did you have more to it, Mike?
No, I think that they got to the the question that I was trying to ask there. The second question I have is, I think you did a good job mentioning that in hygiene and packaging and filtration, you're seeing some benefits and elevated demand. Can you help us quantify how much improvements you're seeing in some of those markets? Is some of it pull forward? And on your maybe the effect of hoarding or unusual spikes that would be not sustainable and other areas may be sustainable?
Maybe just a little bit more color on what you're seeing in some of those markets that are benefiting?
Yes. So, again, we're using China is our guide in terms of what's happened and what we expect to happen. Yes, our demand this month is way up in hygiene health and consumables around the world, including China, but in Europe and North America as well. And one of our priorities right now is filling that demand. We do think there's increased usage, I think, in a world where people are worried about coronavirus of anything that's related to a cleaning products, hygiene, personal hygiene products, there's an increased use of those products food packaging, I think has a potentially a long term shift as people are certainly eating out less.
And at some point in this process, they'll start eating out again, but there may be some resistance by some people to eat out. So I think we're anticipating this well, some of it's definitely a spike in demand, some of it's refilling pipelines, and some of it is we think a little bit of a shift in demand that's going to happen over time based on our customers. We don't see any hoarding. We see customers ramping up their facilities and meeting demand, whether that's our food customers or our hygiene customers. So they're not building inventory of adhesives.
They're using these adhesives as they as they get them.
All right. And then last question I had is on the 5% to skip 18% decline that you're guiding to for 2nd quarterrevenues. Just trying to frame up kind of what you're seeing thus far in March to inform that range maybe what assumptions you're using to get to that range? And is the 15% decline and a $90,000,000 EBITDA number Is that a worst case scenario? Is that just a pretty bad case scenario?
Kind of
how did you get to that?
Yes, we did a detailed assessment through each one of our segments because we know it would be an important question and people would have to model it. I can let John comment more, more on our process. I wouldn't call it guidance, right? I'd call it our planning assumptions. We have to build our plans and our business plans on what's going to happen.
As I mentioned in the comments earlier, if you looked at our March revenue numbers overall, you'd see a company that through Q1 and through through this month is right on plan. But we do see auto plant shutting down. We do see what happened in China in terms of certain market segments where where there was a clear short term dip in demand on especially more durable goods. So So we modeled what happened in China and aggregate into our views on our engineering adhesive business. And we looked at what's happening with HHC and the feedback we had for our customers in our HHC business and applied very similar numbers to Europe and North America.
Europe and North America could get through this quicker and the numbers would be on the high side of that or maybe better. There could be a much longer term problem in Europe and North America. But we see this all on the EA side. On construction adhesives, thus far, construction demand and some a lot of the things we did to advance some new products continue to see good demand here in in March. And at this point, looking into April, we still see solid demand in most of those segments.
We are thinking that construction slowdown in May a bit, especially related to recessionary forces and uncertainty. So that's what we modeled, Mike, but it was really educated based on what we saw. But all that is temporary, right? We see all that as temporary. And then the only thing that we all need to figure out is, is there a lasting recessionary impact that will last into Q3 and Q4, but the downturn we talked about there was temporary.
So I don't know, John, if you have anything else you want to add to that?
Maybe just a little color around the approach. I mean, Mike, we did it. We went to the people who are running the business in each GBU in the region to get their view. So it's really sort of a bottoms up and not surprisingly, there's pretty wide range of outcomes that they are, thinking could be anticipated given how early we are in this. The other thing we tried to assess is how quickly raw material cost savings could come.
And I think our position at least for this view is that they won't, not very much will show up in the 2nd quarter. And I think a big will be to try to accelerate those savings.
Okay. Thanks, Mike. Thanks for the question.
Our next question comes from Ghansham Panjabi of Baird. Please go ahead.
Hey guys, good morning. I hope all of you are safe. Thanks for taking my questions. I guess first, Josh, maybe following up on the last line of questions. Just from our check, I mean, it seems like there's a fair amount of concern about employee absenteeism along the supply chain and related disrupt with.
Jim, you mentioned that customers seem to be just sort of ordering like normal to service demand, but are you seeing a buildup on safety stock and some of the other businesses. I mean, your EA business is very, very specified, and on, I assume that there's a longer production cycle associated with that along the supply chain. So just curious as to your thoughts in terms of what you're seeing this week, maybe for last week? And if you're seeing customers start to worry about raw material accessibility, including what you produce?
Yes, I would say that well, first off, on the issue of absenteeism, I think that's a priority for us. And I think most manufacturers understand how important that is. And I'm part of the business community here, which has a lot of global companies in the twin cities. And clearly, everyone's doing a lot of work to keep their manufacturing employees safe and healthy and isolated from other employees. So So what I see around the world is manufacturing sector employees not having a major absentee problem up till this point.
The supply chain issues we see are mostly people filling demand that they have. So we don't see, even in some of the specified orders, the auto supply chain, people trying to load up on adhesives, right? So I think people are trying to get a balance of their supply demand. And we don't see, at this point, a lot of over ordering might that change in April May? And we see customers auto companies that are shut down trying to build up adhesive supply potentially but that's not what we see at this point.
Okay. And then in terms of the guidance specific 2Q and the 5% to 15% and looking at the midpoint of EBITDA, that sort of implies a 35% decremental. How do you see that, you know, manifest seeing in the back half of the year as raw material prices kick in on the downside and starting to buffer some of that impact. And John, you mentioned using 'eight, 'nine as it's the proxy for cash flow. So how should we going back to that timeline, how did detrimental kind of phase through, apart from the initial shock, which I assume that you do?
Yes. Yes. So as is clear from our commentary, we're not really commenting in detail on the second half of this year other than to say that we're going to get continued SG and A benefits that we're definitely going to get raw material benefits that will happen and we're quantifying and working to accelerate those. And that this manufacturing project that we already started will start seeing benefits in the second half of the year. We also have other levers that we could pull, but those are the 3 levers that we're targeted on.
I'll let John give more color on 2008 to 2009, but these are the high level numbers Our revenue from 2008 to 2009 was down 11% and our gross profit was up 3.80 basis points and our operating income was flat Working capital went from a use of capital to a source of source of cash and our We're in a different time and company is different, but the same fundamental things are what we anticipate and what we've modeled all the various scenarios. John, anything you want to add to that or? No, I think that was
a good description. I think, obviously 2008, 2009 could be very different than what we're seeing right now. But I do think those fundamental things that we talked that Jim hit on, if we see a revenue decline we expect offsetting lower raw material costs and we would see working capital free up. So those are the basic the middle things that we think will be the case for the rest of this year, and that's how we are looking at our cash flow.
Okay. And just one final one on the construction segment. I think, Jim, you mentioned in your comment of the backlog being pretty, pretty healthy or I forget the exact word that you used just give us some more color on that, which particular end market kind of separate between roofing and flooring or whatever else is relevant to that. Thanks again.
Yes. So, so we've had conversations with all of our major roofing customers, right, which is the biggest segment. And out with contractors and roofers, right? And there's a pent up demand in that space. So they have current projects and insight into their next projects that they see continuing to go forward.
So they're concerned about filling supply chains and ordering and moving forward. How and when that will slow down really, I think depends on people, the overall economic conditions in the country. But what we see, certainly what we've had, we have the orders in hand and product shipped and sold and in March and what we see into April is still pretty robust there. In the flooring business, we're seeing more activity at the big boxes than we're seeing at the distributors. So I think there's a bit of a DIY piece going on and maybe some planning around there.
So we see more activity there than the other. And then on, in our utility infrastructure business, pretty stable so far in terms of the projects and the things that are going forward. But again, in a recession, we'd expect that to slow down if there is a recession as we go forward. And then we have some anomalies in the business. We have a disinfectant product that we in our utility infrastructure business that's used when people in stall new insulation, especially after hurricanes or other issues.
That product of course is selling off the shelves and our team is doing everything they can. To get that out in the hands of users, it's effective against coronavirus and is an uptick. So we have things like that that are out there as well that are and things out. But yeah, we see right now, we see construction strong, but we're really anticipating it to slow down here in the second half of the quarter.
Thanks so much. Stay safe.
Okay. You too.
Our next question comes from Eric Petrie of Citi. Please go ahead with your
Hey, good morning, Jim and John.
Good morning,
Eric. So a question on electronics you noted that volumes were up double digits and a lot of that was due to share gains. But if I'm looking correctly at your planning assumptions for 2020, it looked like you have electronics under down moderately. So just give any color there, whether it be impact of lower shipments of smartphones And remind us to how much of sales those electronics represent?
Yes. So, I appreciate your persistence on the second question. We don't we don't share specifically our electronics business, but it is growing sizably and becoming a sizable part of our business We are gaining share, both through wins that we had that are impacting products that are being launched. As well as the really great work that our team did in China helped us fill some needs that are out there in the market that others weren't able to fill needs. So business that we maybe were, were about to replace got accelerated because of our ability to get our Yantai up and running so quickly.
I would say the down moderately is only because of what we read externally. Our business very strong in electronics and it could be up, it could be down. Certainly, it would have been up a lot more in Q1 if the coronavirus hadn't hit China.
Thank you. And as a follow-up, are you seeing any near term pressures on the smaller mom top adhesive suppliers? And can you gain share there or is there an opportunity for consolidation in the industry?
Yes, I think everybody is in a different position depends on the nature of their business. Certainly, if somebody is a smaller company that exports around the world, they've got a lot of challenges, right. There's a number of those that have a sizable part of their business or at least a piece of their business where they're trying to ship around the world. That's a big challenge for small companies. And then in their local market, depending on the nature of the situation, if you're a small adhesive company in Hubei province, your ability to serve all of China is dramatically impacted.
So it depends on who they are, but I would say broadly speaking, as I said in the script and my other comments, our global supply chain, our team's ability to work around the world has been a competitive advantage to enable us to serve customers really well and benefit and demonstrate the benefits of our strength as a company. Not just versus small suppliers, but also big suppliers who maybe are distracted with other parts of our business. Where everybody in this company worries about the adhesive business and where and how to serve it. And I think that's a fundamental advantage that we have in our understanding and our singular focus in making that happen versus companies that have a lot of other needs and a lot of other different parts the business.
Our next question comes from David Begleiter of Deutsche Bank. Please go ahead.
Hi, this is David Huang here for Dave. I guess first question just on the restructuring savings, how much do you expect to realize in Q and then the second half?
Yes, let me, let me give that to John, but I think we said originally, it would be 2 thirds this year and we're doing work to accelerate that and move some of those savings forward. So that $25,000,000 to $35,000,000 we originally said was going to be 2 thirds. We're now saying we're at the high end and we're also working to accelerate that some of those savings. So John, I don't know if you have a specific number on Q2 you can share.
Yes, I think Q2 will be at least what we realized in Q1, which was $6,000,000 and we'd expect that to increase slightly over the year. As Jim said, we originally had a range of $25,000,000 to $35,000,000 with two thirds of that. Realized this year, which would put us, you know, so you could, you can do the math on that. Obviously, our goal is to, exceed that.
And second one, I guess, how much pricing erosion do you expect this year from lower raw materials and probably weaker demand?
Yes. So we're not really in a position to quantify that on the we certainly see that the dramatic change in petrochemical prices is something that's very unique to happen that quickly And we definitely know it'll benefit us. Normally, it takes a couple of quarters for us to see those benefits. We think in this environment, there could be an opportunity to accelerate that. But we don't go up and down with petrochemical with oil prices, except when it makes dramatic moves like this.
And normally there's a phasing of that. Supply demand drives us more than anything. And if supply demand slows down, that will also be a contributing positive factor. But the models we're running show that the what we're seeing is potential downturn in the second half of this year will be offset by raw material savings. So John, do you want to add anything
Yes, well, there's only point is, even though raw materials have been dropping, they are customers are more concerned with supply than price right now. And so and their big focus.
Yes. And I guess the last question is assuming the current prices based here. At what level of raw material savings are we talking about? And then how much cash would you expect you realize from working capital?
Yes, again, we're not modeling or providing guidance on what that's going to be in the last half of the year, but I think the it's a it's a sizable tens of 1,000,000 of dollars of benefit on raw materials and we see that flow through on working capital as well. So John, do you want to add any more?
No, I think your question also on working capital, we would we've been targeting to reduce working capital by 100 basis points as a percentage of sales this year. We think that we're still on track to do that. If we have lower sales, we'll see lower working capital. So the percentage should hold.
Our next question comes from Jeff Zekauskas of JP Morgan. Please go ahead with your question.
Hey, Jeff, you might be on mute.
I am sorry about that.
Hi, Jeff.
Hi, how are you? Can you remind us what percentage of your sales were to the auto market and 2019? And how you expect Fuller's adhesive sales to the auto market to fair in 2020?
Yes. So, that's a great question. So if you can figure that out, we're looking at external numbers in terms of, of car builds and trying to manage our plans around that. Certainly, at this point, we're expecting a decline. I think the latest numbers I saw in the U.
S. Were 20 percent decline in builds, but that number moves around every day and every week, Jeff. So, we're building that into our 2nd half model. A decline, but we don't know exactly what it is. Our revenue in auto is between 5% 10%, on the lower end of that.
So I wish you could just speak a little bit more specifically to the I think you said a 30% decline in revenues in engineering adhesives in the second quarter. So that must have pockets of much better performance and pockets of much worse performance. Can you give us an idea of what the levers are in that
Yes. So solar and new energy was down sizably. And again, these are things we're expecting around the world. Auto and anything transportation related was downsizably. Markets like textiles, footwear, filtration, down less so.
So I'd say things that are more consumer oriented or construction oriented were down less and things that are more heavy, durable goods, bus truck rail, and then solar for infrastructure panels were down more. John, do you want to add something to that?
Yes, just for your reference, Jeff, we added a slide in the presentation that was posted in the appendix that sort of shows those different markets. And so on the down moderately, the one other other than construction, those are the are the engineering adhesives markets that would be down moderately.
Okay. Normally, when oil falls you say, well, we don't buy oil, difficult to know how our would attack some raw material costs, but your stance is much different. With oil being down very sharply. Do you expect to see a widening of your price raw material gap for a period of time and then to have it close-up. The customers really want prices to come down very quickly or or do you think they'll be more patient?
Yes. It's true that normally when oil comes down and normally oil is moving I'm at $10 a barrel and people are asking, are you going to see raw materials at mine? And I say no, right? Because it goes up and down $10 or $15 a barrel that Now, when it moves $30 a barrel, there's a substantial change in the cost structure of our suppliers that we think will eventually get passed on to us. Normally, that's a 9 month cycle.
We think the fact that their costs are down, combined with the supply demand dynamics that will likely be unfavorable across the chain. And with China's chemical production ramping up, we see a positive dynamic for us And it's not like huge, but it's sizable, right? In 2008, 2009, we shared there. So, and so that gives you some color, right? We think it will buffer any kind of recessionary decline that we see in volumes.
As far as customers reaction, we have about 15% of our revenue that moves on some sort of an index. Some of those are tied to external numbers and some of those are just tied to what our costs are. So we've set agreements up with customers. The other 85%, most of those products are specified. We won't see any change in pricing.
And some of them will have negotiated pricing. So yes, some of it will be given back to the market, but a lot of it will be retained.
Can you turn off your CapEx if you need to, or are you pretty much fixed on what you're going to spend this year?
Yes, I think one of the things you saw on the slide on our earnings release was a very strong commitment to deliver the $200,000,000 in debt and I think 2 fundamental principles John and I have and our leadership has is build the company for the long term and make certainly deliver that 200,000,000 in debt paydown. So we definitely have some levers on capital that can be pulled back and In fact, some projects we've been able to delay already. So yeah, I think there's an opportunity there. And we also think there's a sizable opportunity on working capital, Jeff. So So, so yeah, we think those are two levers that we can modify depending on how the world looks when we come out of this.
I guess just the last question. Like order of magnitude, Jim, I know it's early days and the virus issue and the downturn Like, do you think that H. B. Fuller's experience will be similar to what it was in the 20 2009 downturn, maybe you guys were down 20% in EBITDA. And when you look at your the kinds of near term forecast that you have.
It seems sort of similar.
Yeah. Interestingly, Jeff, we were, we were flat in EBITDA from 2008 to 2009 and into 10. So it was this this raw material piece and some of the savings we're able to generate that offset declines in volume. So And I think, our base case, as I said in the script, is this Q2 decline, mostly around EA and somewhat in construction. And then some recessionary forces, we're not we're not expecting a great recession type of decline.
We've got scenarios that are built like that. We've got scenarios that are built worse than that. But some recessionary impact into Q3, maybe into Q4, is what our planning assumptions are, right? So I wouldn't call that a projection or guidance, I'd just say. That's what we're planning for.
Our next question comes from Rosemarie Morbelli with Gabelli and Company. Please go ahead with your question.
Good morning, Rosemary.
I was wondering if you could touch on the potential financial issues from some of your customers. Have you taken some bad debt into consideration receivables that you are not going to get, some smaller customers filing
Yes, we've looked at 2008 and we factored some of that in, I don't know, John, do you want to comment on that?
Yes. So I'd just say at current state, we aren't we haven't seen any customers, file. We're doing pretty in-depth review of customer credit quality, as we always do, but we're stepping that up given the current situation. So I think, we would be in a position to get out ahead of, hopefully, a situation where a customer was under significant stress?
I would comment Rosemary that our our credit team is outstanding. They've leveraged a lot of learning around the world. So if you look at our numbers relative to industry benchmarks, in times in normal times, we've outperformed external benchmarks.
Okay, thanks. And could you give us a little more details vis a vis your comment on China's durable goods having spiked recently, which areas was that? And were those particular areas down substantially and now just filling up the pipeline?
Yes. So I didn't say the durable goods spiked. HHC, so all the hygiene products, the packaging products, consumable products, those have come up dramatically and we see a lot of demand there. And we see consumers using them, right. Today, I was on the phone with our guy who's leading China people are on the streets of Beijing in parts of China now.
Restaurants are opening. Life is not normal yet, but it's getting back to normal where where people are back to living a or moving toward living a normal life and there's normal consumption patterns. That's driving a lot of business in HHC, but also an increase in other spending around construction products and other other durable goods. And as I said, the exception to that is what's happened so far in the new energy, the solar space and transportation so far. So those are the 2 that really haven't seen that uptick.
And then, of course, China, some of our customers export around the world. So they're wrong with that. I would say the China domestic economy is moving forward very nicely. Any of our customers that export out of China, they're going to deal with the next couple of months. Of lack of demand in the U.
S. And Europe.
So as we are all confined at home, at least most of us, and everyone has bought a lot of packaged food, we may or we may not eat it all. So do you think that we could see a very slow recovery as everyone is kind of eating from their pantries. As opposed to going back to the store. And therefore, we could expect some decline in the demand when this is all over, that could last maybe a quarter or 2?
Yes. I guess, from a packaging food in particular rosemary, I think people are it's not just filling their pantries. People are eating a lot more packaged foods today all around the world and we saw it in China. Our thesis is that, that after the crisis, people definitely be, as I'm sure you are dying to get to their favorite restaurant, but there will be a trend that has, has people eating more packaged foods. So that's what we're hearing from our customers the people that are studying the market.
And of course, that's a positive trend for us. All this everything around hygiene, around medical, around packaged foods are positive trends that we think will continue certainly throughout this year.
And if I may squeeze in a couple small ones Of the seventy two plants that you currently have, how and you have that and the study, many do you think you can get by with?
Oh, you mean after our study, we're going to evaluate rosemary. So it's premature to say what we would do with the whole network.
And then lastly, can you share the size of the areas that are considered essential and that are benefiting from the current situation?
Yes. So it depends on the region Rosemary and what's happened. And again, as China is our guide, fundamentally, our factories supply all these consumer goods, food, health products. But also, if you think about areas like some of our construction products, Some of those are being used in hospitals and medical facilities. So our business has as a manufacturer in every geography around the world has been deemed essential.
Now today in India, they're sorting through that. Everything is shut down today in India. But India is sorting through. 1 of the big markets for our products in India are hygiene and baby diapers. And assuming the baby diaper production continues, I'm certain our plant there would be operational.
But other than that place, where there's been a government edict, our our facilities are open for business and supplying the various markets. John, did you want to add something there?
Yes. And this is just a kind of a indication how fast things move. I just got an email that our Pune government has approved our India plant as essential.
So at this moment, all seventy two of our factories are, our operating resume.
And the size of those essential product lines?
Well, again, we have a number in the appendix, but, but I would say across all of our businesses, the products are deemed essential in some way or another. So it's not like we're supplying products to non essential markets. So in everywhere around the world, the facilities we have supply essential markets and therefore, the facilities are open.
Okay. Thank you very much. And you guys stay healthy.
You as well, Rosemarie, you and your family.
Our final question comes as a follow-up from Mike Harrison.
Hey, just a quick one here. You've talked a lot about cash flow and your expectation of cash flow is still going to be solid for the year and your $200,000,000 of expected debt pay down I was just wondering, can we think of that as maybe you'll keep that $200,000,000 or approve that cash the balance sheet rather than pay down the debt right away in an environment where cash and liquidity is going to be very important. Or are you definitely committed to some kind of timeline for specifically paying down the debt?
Yes. So our liquidity situation is extremely strong in the most ridiculous of scenarios. So and we've run them all, Mike. So we don't have any concerns about managing cash. So we haven't set a specific timeline on our debt pay down As you know, it's weighted toward the 3rd and 4th quarters because of how our demand cycles, and that's probably how it'll happen this year.
So, but we have a very strong focus on making certain that we continue to bring that debt down and and we're going to focus on essentially our 3 priorities that I talked about, right, supplying our customers, making certain that our employees and our communities are safe then preparing for the future. And we're doing a great job of managing this crisis and hopefully you felt that through this call, but importantly, I think for our investors is this is going to make us a stronger company coming out of this crisis. And I'm really proud of the work our employees are doing. So It's I really appreciate the question. Certainly, the timing probably won't be affected by that.
Okay.
Thanks. All right. Understood. Thanks very much.
Thank you. Thanks everybody for your time on this call. Again, our hearts are with all of you. We appreciate your time here with H. B.
Fuller and, please keep yourselves, your families and your community safe.
The conference is now concluded. Thank you for attending today's presentation.