Good morning, welcome to the H.B. Fuller fourth quarter 2018 investor conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Barbara Doyle, Vice President of Investor Relations. Please go ahead.
Good morning, welcome to our fiscal 2018 fourth 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 questions. Before I turn the call over to Jim, please let me remind you of our non-GAAP financial presentations and our safe harbor statement. 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 our results. Reconciliation of non-GAAP measures to the nearest GAAP measure is included in our earnings release.
Let me also remind you that we will be making statements during this call that are forward-looking. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially from these expectations because of factors discussed in our earnings release, comments made during this conference call, and risk factors in our Form 10-K and other reports and filings with the Securities and Exchange Commission. These reports are also available on our redesigned investor website at investors.hbfuller.com. We do not undertake any duty to update any forward-looking statements. Let me turn the call over to Jim Owens.
Thank you, Barbara, welcome to everyone on the call this morning. Our fourth quarter results were very encouraging. Organic revenue was up 4%, adjusted gross margins improved 150 basis points year-over-year, and EPS was up 27%, all resulting in us generating $146 million of operating cash flow and paying down more than $200 million in debt, exceeding our debt paydown target. The strategic positioning of our company in key market segments, combined with strong action plans, are creating positive momentum across all of our businesses. In fact, each of our segments showed year-on-year improvement in EBITDA margin in the quarter. In mid-September, due to the timing of our quarter end, we were one of the early companies that called out the slowdown in China and a shift in currencies as a headwind in the second half.
These impacts were seen in the fourth quarter, but the impact was somewhat more than we expected. Our forecasted lower rate of growth in the Asia Pacific region was actually a 2% decline in organic revenues in the fourth quarter. In addition, the US dollar continued to rise versus the euro and Chinese renminbi and against many Latin American currencies, creating a greater currency impact on fourth quarter revenue than we expected. Net of these shifts in currency and macroeconomic factors in the second half of 2018, we strengthened our underlying operational performance and enhanced our earnings growth in the fourth quarter. For the full year, we achieved 4% organic growth compared with 2017, pro forma for Royal. Through strategic pricing actions and delivery of our targeted cost synergies, we drove steady margin expansion throughout the year.
For the full year, organic growth and margin improvement resulted in adjusted EBITDA of $449 million, an increase of 50% versus prior year and an increase of 7% versus 2017 on a pro forma basis for Royal. Adjusted EPS of $3 was up 22% versus last year. Currency and a slowdown in China had a significant negative impact on EBITDA in 2018. Adjusting for currency and pro forma for Royal, our EBITDA growth rate was above 10%. Our full-year debt paydown of $204 million was ahead of our $170 million target. In total, it was a very strong year for H.B. Fuller, with good momentum headed into 2019. We provided 2019 guidance in our press release last evening.
At the midpoint of the ranges, our 2019 guidance includes a 10% EPS increase, an EBITDA dollar growth rate of 10% when adjusting for currency, and a debt paydown of $200 million, which will have us continuing to be ahead of our strategic deleveraging target. John will cover our guidance in more detail later in the call. During our first quarter call, we identified three business imperatives for fiscal 2018, as shown on slide four. I'd like to report to you the company's performance we achieved on each of these over the course of the year. We delivered on the first imperative to realize annualized pricing to offset last year's raw material inflation. The pricing actions we took in 2018 more than offset raw materials. Pricing gains have helped drive consistent gross margin improvement, including an increase of 150 basis points in the fourth quarter.
In 2019, we will see further benefit from these actions as raw material increases abate. Another priority was for $15 million of cost synergies from the Royal integration in 2018. We delivered an incremental $5 million of synergies in the fourth quarter to meet our full year $15 million target for fiscal 2018. For 2019, we have plans in place that will deliver $15 million of additional cost synergies. The third focus area for 2018 was free cash flow generation and a goal to pay down $170 million of debt by the end of 2018. I'm happy to report that our focus on this area, including good work in capital management, allowed us to exceed our target and repay $204 million of debt during the year. Cash flow and working capital management will continue to be a focus in 2019.
Our plan reflects paying down an additional $200 million of debt in 2019, putting us ahead of our original two-year plan for debt reduction. Now I'll cover fourth quarter segment performance, which is shown on slide five, including our current view for the next year. In the Americas, organic revenue grew over 3% year-over-year. Strong pricing gains helped drive year-over-year margin improvement and the volume mix impact moderated compared to the third quarter. In 2019, we expect similar organic growth trends in the Americas, driven by pricing carryover and improving volume along with margin improvement versus 2018. EIMEA sales were up 3.1% organically, led by strong pricing actions, particularly in emerging markets, offsetting a weaker environment in core Europe. Pricing actions drove margin expansion over last year and sequentially versus the third quarter.
We move into 2019, we expect lower single-digit constant currency growth in EIMEA for the full year. Currency will have a negative impact on revenue in the first half of the year at a similar level to Q4 of 2018. The negative currency impact will lessen in the second half as comparisons become easier. In 2019, we expect EIMEA margins to be similar to 2018 as the impact of the weaker EUR and other currencies, combined with some dollar-based operating costs, offsets underlying margin improvement. Asia Pacific organic revenue was down 1.8% year-over-year with good pricing improvement partially offsetting a decline in China. EBITDA dollars were up 10%. EBITDA margin of 13% was up 180 basis points compared with last year and also increased sequentially from 10% in the third quarter.
Our current view is that the economic weakness in China will continue while the trade and tariff issues remain unresolved. Strong margin performance will continue to drive bottom-line growth. In Construction Adhesives, as we reported last quarter, we are managing complexity and moving away from underperforming products to customers in this segment in order to maximize profit performance. Organic fourth quarter construction segment revenues declined by 3% year-over-year as part of our plan to reposition Construction Adhesives portfolio following the Royal acquisition. We are driving improved margins with this portfolio repositioning. On a pro forma basis for Royal, construction EBITDA dollars increased by 12% versus prior year, and the margin of 17% in the quarter improved 260 basis points compared with last year. The repositioning of the Construction Adhesives portfolio will continue into 2019.
As a result, we expect negative growth in construction revenues in the first quarter of 2019 and flattish full-year revenue performance with strong margin improvement. Lastly, performance in Engineering Adhesives was once again very strong. Organic revenues increased 17%, with strong volume and pricing both contributing to the growth. We continue to win new applications with customers across many end markets by solving their problems faster than competition as we leverage our global know-how and our technology. We have maintained a mid-teens growth cadence in this segment all year, driven by a robust Engineering Adhesives portfolio and gains in the market. EBITDA margin was a very strong 21% in the quarter, up 460 basis points from last year and up 480 basis points sequentially from the third quarter. In 2019, we expect continued strong performance in Engineering Adhesives with low double-digit organic revenue growth and continued margin improvement.
Overall, we executed very well in the quarter, driving solid organic growth and significant profit improvement, counterbalancing the slowdown in China, raw material impacts, and currency headwinds. Our strong execution in the fourth quarter and throughout 2018 positions us very well for continued growth and margin improvement in 2019. Let me turn the call over to John to discuss our financials and our guidance in more detail.
Thanks, Jim. I'll provide some additional financial details on the fourth quarter, as well as guidance for 2019. Revenue grew 13% in the fourth quarter versus last year's fourth quarter. Organic revenue grew 3.8% versus last year, as we realized benefits from pricing actions that we took throughout the year. Volume mix was up modestly, and foreign currency had a negative impact of about 5% year-on-year, reflecting the strengthening of the US dollar throughout the year. On a pro forma basis for Royal, adjusted gross profit margin was up 150 basis points versus last year, driven by strong pricing actions taken during the year and raw material synergies. On a pro forma basis for Royal, adjusted selling, general and administrative expense was down about 2%, reflecting the impact of foreign currency, as well as thoughtful control of discretionary expenses.
This performance resulted in adjusted diluted earnings per share of $0.90 for the fourth quarter, up about 27% versus last year. Cash flow from operations was very strong during the fourth quarter, as anticipated. Cash flow from operations was approximately $146 million in the fourth quarter and about $253 million for the year. Excluding cash costs for the Royal acquisition in the fourth quarter of 2017, cash generated from operations increased by 17% in the fourth quarter and increased by 29% for the full year, reflecting the strong profit trends in the business, as well as improved working capital management. Strong cash flow allowed us to repay $204 million of debt during the year, beating our target of paying down $170 million of debt in fiscal 2018.
That reduced our net debt to EBITDA ratio to 4.7 x from 5.4 x at the end of 2017, based on pro forma combined EBITDA for the H.B. Fuller and Royal businesses in 2017. I'll now review our guidance for the 2019 fiscal year. Our projected organic revenue growth of 3%-5% in 2019 reflects good pricing carryover and low single-digit volume growth. Net revenue is projected to grow 1%-2% in 2019 versus 2018. Foreign currency continues to be volatile, but based on current rates, is expected to have an unfavorable impact on revenue of 2%-3%. From a segment standpoint, we expect continued double-digit organic growth in Engineering Adhesives and low to mid-single digit organic growth in the Americas, Asia Pacific, EIMEA, and [Consumable] Adhesives.
We expect that volume growth, pricing carryover, delivery of synergies related to the Royal acquisition, and underlying operational improvements will contribute to an adjusted EBITDA of between $465 million and $485 million. This represents growth of approximately 6% at the midpoint of this range. Based on the seasonality of the business, as well as the unfavorable year-on-year impact of exchange anticipated in the early part of 2019, we would expect to achieve about 17%-18% of the full year EBITDA in the first quarter. We expect full year depreciation and amortization to be about $145 million and expect full year net interest expense of about $95 million. Depreciation, amortization, and interest expense are expected to be incurred ratably over the year. We expect our 2019 core tax rate to be between 26% and 29%, compared to our 2018 core tax rate of about 25%.
The higher tax rate is a result of the unfavorable impact of certain elements of the new U.S. tax legislation that did not impact us in 2018, but will impact us in the 2019 fiscal year. Capital expenditures are expected to be approximately $100 million in the 2019 fiscal year, which includes approximately $20 million of investment for the integration of Royal. Cash flow from operations is expected to be approximately $330 million in 2019, demonstrating the resiliency of our cash flow and reflecting increasing profitability and continued improvement in working capital. The timing of our cash flow will be similar to 2018, with cash flow more heavily weighted to the second half of the fiscal year.
We expect to devote $200 million of our cash flow after CapEx investments for the repayment of debt, keeping ourselves ahead of our plan to pay down $600 million of debt from 2018 through 2020. Given all of these factors, we are introducing an adjusted full year EPS guidance range of between $3.15 and $3.45. The midpoint of this range represents growth of approximately 10% versus the 2018 fiscal year, driven by solid organic growth, synergies related to the Royal acquisition, and underlying operational improvement, offset by the unfavorable impact of a stronger dollar and a slightly higher tax rate. Let me turn the call back over to Jim to wrap us up.
Thank you, John. New business wins in Engineering Adhesives, effective pricing strategies, and synergies from our acquisition of Royal drove strong business results in 2018. This is evident in our solid organic growth rate, underlying double-digit EBITDA growth, 27% EPS improvement, and excellent cash flow performance and debt repayment in the fourth quarter. Looking ahead to 2019, we have set guidance that captures our current view that economics uncertainty in China will continue until trade and tariff disputes are resolved. We also anticipate that currency will remain a headwind going into 2019. In terms of sensitivity surrounding our guidance range, our guidance assumes relatively neutral raw material costs, a continued strong dollar and ongoing challenging conditions in China. Lower raw material costs provide the biggest potential positive impact that could enable us to deliver above the midpoint of our guidance range.
Improvements in China or a weakening US dollar could also positively impact results. At this point, we do not see a broader economic slowdown outside of China, but if it were to happen, it could negatively impact top-line results. However, for H.B. Fuller, a broader slowdown will be offset with lower raw material costs that would positively impact the bottom line. We'd expect raw materials combined with other actions will make certain we remain in line with our earnings guidance in the case of a broader slowdown. We estimate the strengthening of the dollar and the change in economic conditions in China negatively impacted 2018 EBITDA by approximately $20 million versus our original expectations, and we forecast an incremental impact of $20 million from these factors in 2019. Our EBITDA growth rate adjusting for these factors is between 10% and 12% in 2018 and 2019.
This underlying performance is in line with our strategic plan outlined a year ago and during our investor day. The significant changes in currency rates in China that have occurred since our investor day will impact the time to achieve our $600 million EBITDA target by about a year. We remain well-positioned to meet or exceed $600 million of debt paydown by 2020 based on our high cash flow conversion rates, strong profit performance, and our targeted capital management plan. Our underlying strategy is sound and remains unchanged. We are targeting highly specified market segments for differential growth by leveraging our global competence as a world leader in adhesives. The Royal acquisition is on track to deliver $35 million in cost synergies and $15 million of EBITDA from commercial synergies by 2020.
Operational improvements in our core business are improving our EBITDA margins, and a focus on capital management is delivering significant free cash flow and debt paydown. Our financial targets through 2020 are to deliver organic growth of 3% - 5%, underlying EBITDA growth in excess of 10% at a constant currency, and cash flow, which will result in over $600 million in debt paydown by the end of 2020. That concludes our comments. Operator, let's open up the call for some questions.
We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. The first question is from Ghansham Panjabi of Baird. Please go ahead.
Hey, guys. Good morning and happy New Year to you.
Hi, Ghansham. Happy New Year.
Happy New Year, Ghansham.
Thank you, guys. First off, I guess on the Americas adhesive segment. Did the margins for that segment on an EBITDA margin basis come in where you thought it would for the fourth quarter of fiscal year 2018? You also mentioned, Jim, that you expected improving volumes for that segment in 2019. Can you expand on that?
Yeah. I think we said coming into the second half of the year that we would be above 17%. Last quarter, we were 18%, this quarter we were 17%. I think that 17%-18% is what we'd expect. I think it's just a pattern of how some costs flow through the P&L. We were pleased with the underlying performance of the Americas. The pricing work we did early in the year really brought that business into the range that we expect now and going forward. Yeah, in terms of volume, as I mentioned a little bit last quarter, we have this Wisdom volume that we exited last year that's had an impact. If you take that out of the quarter, I think if you take mix and volume together, we were down about 1.6% this quarter.
If you take that out, we probably would've been slightly positive this quarter, if you took the Wisdom piece out. That's a combination of really good, strong volume performance in areas like hygiene, packaging, and durable assembly, offset in some of our more price sensitive areas like paper and polymer and a little bit in Latin America, where we had some volume pullback. I think underlying in the biggest piece of our core business, we see good volume performance that we expect will start showing up in that PVM mix that we present in next year. You also have some price impact that'll be positive. Do you want to add anything to that, John?
No, that's good.
Yeah. Okay.
That's helpful. I guess second, referring to the macroeconomic sort of slowdown. You keep referring to China. You mentioned some softness in core Europe. Macro data out of Europe has been weak. Construction in the U.S. has been kind of choppy. Is the slowdown that you're seeing from a volume standpoint specific to China at this point? What have you seen in December and thus far in January that gives you confidence on that sort of 3%-5% core sales growth in 2019? Thanks so much.
Yeah. Great. Thanks, Ghansham. Yes. When you look at Q4, it was predominantly China. We had estimated weakness in China. It was actually worse than we expected. I commented on our Engineering Adhesives, how strong it was. We actually would've done better, if we didn't have a little pullback in China in Engineering Adhesives. Outside of that, we do see a little weakness in core Europe. As far as the last month or two, I think we've seen less negative in China. We think there was a little bit of de-stocking in Q4. That gives us a little positive, right? That there was probably some de-stocking in the Q4 numbers. I think there's weakness overall in China. For us in Q1, we have both the Christmas holiday, all the winter months and Chinese New Year, all hitting us between December and February.
It's a weak quarter for us overall. I think we expect because of certain seasonality factors, Chinese New Year, where it's just been a little weaker, that you may see a little weaker organic growth down to that lower end of our range, 2% or 3% to start the year, with maybe as much as 5% currency impact if you remember last year, because currency was very strong quarter one of last year. Net revenue will look a little weaker in Q1. Underlying in North America, we see positivity. We continue to get strong wins in Engineering Adhesives. It's very impressive what that team's doing in terms of winning in the market. Around the rest of the world, we don't see any weaknesses so far anyhow, in December, January, outside of really China and a little bit in Europe.
Perfect. Thanks so much, and good luck this year.
Thanks a lot.
The next question is from Mike Harrison of Seaport Global Securities. Please go ahead.
Hi, good morning.
Good morning, Mike.
Wanted to ask about the raw material impact. You mentioned offsetting most of that during 2018 or fiscal 2018. In your guidance, it sounds like you're assuming more of a neutral impact, whereas if you look at where some of the raws have moved up to this point. Is it fair to say that your neutral assumption is a conservative assumption at this point? I guess could you share some details on what you're seeing in terms of raw material trends? Thanks.
I'd say our assumption is middle of the road right now. If you recall, a quarter ago, there was no talk of raw material declines and lots of talk of raw material increases. Oil's come down. You're right, certain commodity materials have come down. In China with the slowdown, we see some things coming down. 87% of what we buy is not commodity materials. It's specialty materials. They're supply and demand driven. I think our view today is the net of all that is neutral. There continues to be slowdown around the world. If the supply demand moves, oil stays below $50, I think we could see some benefits in the second half of the year. I would say that our view today is increases have stopped. I think on all those specialty materials, we're seeing increases stop.
Certain commodity materials are coming down a little bit. The world changes a lot in a quarter, as you'd see if you listen to our transcripts. I would say it's still a little too early to say we're going to have a big raw material decline in 2019.
Wanted to ask about the Engineering Adhesives business. That business, as you pointed out, did hold up very well, and it sounds like would've been even better if not for some of the slowing in China. Can you talk about what you did see in China, specifically in areas like electronics and automotive, that may be showing signs of slowing?
I would say that most of what we saw in China, the hardest hit businesses were customers who are exporters. If we have customers that buy our product and then export them around the world, those are the ones that had pretty dramatic downturns. We sell products into areas like hygiene and packaging, and especially for higher end consumers, we did see a slowdown generally. I would say that my perception, our perception of China is across both the business community and the population. There's a little bit of hesitancy until the trade and tariff dispute gets resolved for people to spend money. I think people are pulling back generally in the economy. The hardest pieces that were hit were things that were export driven. For us in areas like electronics and automotive, these are mostly commercial wins for us.
I think they might've been bigger wins had there been more autos produced or more electronic materials. These are big growth wins where we've identified opportunities and won them. That's why we're not seeing as much impact there.
All right. Thanks very much.
Thank you, Mike.
The next question is from David Begleiter of Deutsche Bank. Please go ahead.
Thank you, and good morning.
Hi, David.
Jim, in terms of Royal synergies, what are the incremental synergies in 2019?
I'll give a high level, John can give you a little more detail. I think we still have some raw material synergies coming through. We're doing a lot more work on indirect savings. John can comment on some of those. A couple of plant closures we announced last year will start hitting this year. Those are, I would say, the three biggest chunks. You want to add some color?
Yeah, that's a very good description. Down the indirect side, this is things like MRO as well as service providers that we've got some nice wins in the fourth quarter of this year that'll show up next year. Jim alluded to manufacturing. Really didn't have manufacturing cost synergies this year, those will start to kick in. On the non-cost side, obviously, the revenue synergies step up pretty dramatically starting next year.
If you assume we have $15 million-$20 million of incremental synergies from Royal in 2019, I think you're forecasting at the low end EBITDA growth of roughly $20 million. My question really is, ex Royal, there isn't going to be much growth, if any, in the base business. Is that an accurate assessment?
I think as we alluded to in the script, there's a big impact of currency that's flowing through our P&L that hit us for the second half of this year. It hits even harder during the year next year. I think you have to build that into any model that you have.
Then I think you see a more robust number.
Yeah, I think that's right. I think the impact of currency and obviously China, we believe if you look at what that impact is in 2019, our underlying growth rate is right in line with what we had expected going back a year ago. The synergies are certainly right in line with the expectations as well.
Jim, lastly, on your long-term EBITDA target, you've pushed that up by a year. What's your level of confidence in actually achieving that number in that 2021 timeframe?
I think the way we look at this is this double-digit EBITDA growth, when you build in what's happening with our cost synergies and the underlying performance of our business is what we expect to see. If you run the math, it comes out somewhere around that 12-month range. If currencies go crazy, if economies go off, then things will delay that. I think strategically, a couple of things you should expect to see from us, this 3%-5% organic growth rate, this double-digit EBITDA growth, the $600 million debt pay down by 2020.
All that should lead to us in that $600 million range at 2021, depending, of course, what happens in the world. As I said, it changes a lot quarter-to-quarter. Year-to-year it could be a lot. I assure you we're driving toward those numbers as quickly as possible.
Thank you.
Thank you, David.
The next question is from Mike Sison of KeyBanc. Please go ahead.
Hey, guys. Happy New Year. Jim, I was wondering if you think about the outlook you have for 2019, midpoint EBITDA $475 million and getting to the $600 million, $125 million. Can you maybe walk us through how much of that will come from organic growth? How much of that will come from cost savings and maybe other variables that get to that $125 million over the next couple of years?
Yeah. I think the plan is no different than what we laid out in our investor day, Mike, right? You have a very strong performance in Engineering Adhesives, both top line and margin improvement. You saw a very nice margin number this quarter. I think we committed to get up north of 21% by 2020. I think we're on track to meet or exceed all the numbers we laid out for Engineering Adhesives when we started. The synergy number is another $20 million in cost savings and $15 million in commercial synergies. Both of those are very solidly on track. I have a long list of projects, about 93 different projects, that we're executing on this year and next that'll bring those to fruition.
I think the thing that you see underlying in all our business is a real focus on EBITDA margin improvement. I mentioned all five of our businesses showed EBITDA margin improvement, and that's just good blocking and tackling. Looking at efficiencies in our manufacturing plants, managing our product portfolios and pricing. That's the third bucket of what we see. Engineering Adhesives, Royal synergies, and then these operational improvements. If you go back to our investor day, the numbers are right there. I think you take out some of this currency in China effect, and you'll see that it's fundamentally exactly what we talked about at investor day. That's what happened in 2018, and that's what we're seeing in 2019.
Right. Okay. Just one quick follow-up on Engineering Adhesives. Again, the growth rate has been pretty impressive for the last couple of years and the outlook, again, pretty impressive given the confidence that you have. Can you maybe walk through maybe in terms of Engineering Adhesives, where are you winning share? What technologies are really driving that growth? How much of the growth this year in 2019 is going to be driven by what you've won already? You got pretty good visibility. Just maybe breaking down that double digit growth again would be helpful.
Yeah. I think the biggest driver of well, one of our very nice businesses is the electronics business. We built that business organically by understanding some opportunities in the market, leveraging technology. That business has now become a sizable business that's growing very nicely, and we have had a couple touches of acquisitions that have helped it grow, but it's a very sizable double-digit growth, both by penetrating the globe. We started with a couple of big customers on the West Coast and a great job with Chinese customers. We've now penetrated a customer in Korea. All of that's really going very well in our electronics business. We're also moving to different applications. Your cellphone that you're carrying in your hand, Mike, has 100 different adhesive applications. As there's a problem, we're solving it, and we're getting the opportunity.
The U.S. assembly market is a really nice one for us. If you recall, we bought Tonsan with a lot of technology, bought Royal with a lot of packaging capability, with Cyberbond, we got some great talent. All of that is coming together to some very nice growth rates in North America as we're leveraging technology, people, plants, to really grow nicely in our North America, what I'll call our general industries part of the business. We've got the world leading position in solar as solar moves outside of China. Tonsan wouldn't have been able to deliver that. We're getting solar wins around the world as new demands are coming on in the solar area. Aerospace, I think is another great one. Royal had done some great work to get themselves specified on some very important specifications. With H.B.
Fuller's infrastructure around the world, we've been able to accelerate the growth in some of those spaces. That would be four or five good examples. I have a long list of others, Mike, but it's really an energizing team. I love spending time with that team, and when we're together, we're talking about all kinds of opportunities that exist around the world and just leveraging the capabilities of H.B. Fuller. Does that help give some color?
Yeah, that's great. Thank you, Jim.
Thank you.
The next question is from Eric Petrie of Citi. Please go ahead.
Hi, good morning, Jim.
Morning, Eric.
When does your guidance assume trade uncertainty with China resolves? I'm just curious if you could split out that $40 million EBITDA impact in 2019 between China weakness and FX fluctuation.
Yeah. We don't have that crystal ball. I think we've assumed that it's an extended period of time for 2019. I think that's true, right?
Right. Eric, was your question how much of the impact in 2019 is currency and how much is China? Was that one of your questions?
Yeah.
Yeah. It's roughly half and half. The impact of currency is roughly half of the $40 million, China is the other half.
Okay. Secondly, are you seeing any impact on durable assembly from slowing manufacturing or housing markets? You noted destocking in China. Is there a possibility for inventory destocking in other regions?
Yeah. The only durable assembly slowdown we've seen so far, Eric, is in the recreational vehicle market. I think there was an overstocking there. You see some slowdown there. I would say as far as North America and Europe are concerned, we haven't seen a real fundamental slowdown in the durable assembly space outside of China.
Great. Thank you.
Thank you.
The next question is from Vincent Anderson of Stifel. Please go ahead.
Hi, good morning. Thanks for taking my question. I just want to get back to specific markets that you're excited about next year. When you look at 2019, are there any areas where there are an outsized number of new product development cycles coming up where you believe you'll have a good opportunity to go and win additional business? That's outside of Engineering Adhesives as well. On the other side of the coin, are there any areas where you expect you'll be able to bow out of lower margin businesses? I know across a broad portfolio, there's probably many, but anything specifically lumpy to 2019 would be helpful.
I think across our businesses, we've got some good momentum in our durable assembly business. I've talked in the past about how durable assembly is a sister market to Engineering Adhesives. Specifically in the insulating glass area, we have some new technology that's driving growth. Across a bit of our durable assembly, we have the same kind of dynamic that we talked about in Engineering Adhesives, just not quite as dramatic. That's very nice work that's going on. We're also, I think, doing a very nice job in our hygiene business with core customers and local customers around the world. I think we'll see good growth in those two areas. In terms of slowness, I mentioned RV. I think we're going to see a little bit of slowdown there.
These old core businesses, these paper converting type businesses, they continue to be a bit of a drag. The only other area where there's a shift is some of this portfolio work we're doing in our Construction Adhesives business. That's really a strategic move to reshape the portfolio, and that'll cause a bit of a top-line slowdown there. It's pretty strategic in terms of us improving profits by pulling out some costs.
That's helpful. Thanks. If I could drill back into solar. You mentioned the opportunity outside of China, but in 2018, photovoltaics in China certainly had some pretty big issues with the cancellation of tax credits. Can you update us today where you're exposed within the supply chain geographically? What that business will look like going into 2019, assuming 2018 gives us some easy comps, at least in China?
I think it's a great point. Again, because we're so fragmented, we don't go too deep into any one of these areas because they're not that large in the scheme of H.B. Fuller. They're sizable businesses in and of their own selves. It was a tough year in China for solar, but we did pretty well. For us, I think we see the opportunity. There's probably some upside in solar in 2019 versus 2018 because of some of the regulation changes or the government incentive changes there. Especially for us, leveraging this around the world is the opportunity. There are a number of manufacturers and different applications that we see as opportunities for us as manufacturers now start transplanting their facilities around the world. Solar should be a net positive for us in 2019, both in China and especially outside of China.
All right. Thank you.
Thank you.
The next question is from Dmitry Silversteyn of Buckingham Research. Please go ahead.
Hi, good morning. This is Wahid Amin for Dmitry. Just a quick question on your Engineering Adhesives. Pricing was about 2.1% above year-over-year. Would you mind breaking that out a little bit and talking on how sustainable that is going forward? Is that mostly because of contracts from the beginning of the year flowing in towards the end of the year, or is it something else that I'm missing there?
Yeah, I would say, well, Engineering Adhesives, as we talked about in Investor Day, is one of the areas where we have the highest degree of pricing power. Typically, though, the way we manage our margins and our pricing there is based on new specifications and new wins. We were a little slower in getting pricing up in that business as we were focused on growth. Towards the second half of the year, we got good pricing momentum, and that's very sustainable in that business.
Thank you. Just one more right here. We've seen a lot of shutdown in the Chinese environmental players. Would you mind speaking on how that'll affect pricing moving forward and if there's an opportunity for increasing market share there?
I'm sorry, you said a shutdown in environmental players? What were you mentioning?
Sorry, for environmental pollution within China, there's been shutdowns in some chemical producers.
Yeah. We haven't seen a big impact of that yet this year, although it's been a recurring theme the next couple of years. What we are seeing is an oversupply of raw materials, so that's helping us from a raw material cost standpoint in China. I think it'll be interesting to see what happens this winter, how much of a pullback there is. Right now, most materials are long in China because of the slowdown. To date, we haven't been impacted by any shortages because of environmental-like shutdowns in China.
Thank you very much.
Thank you.
The next question is from Christopher Pereira of Bloomberg Intelligence. Please go ahead.
Good morning. Thank you. A question on the raw material outlook. I know for the full year, your expectation's a very neutral environment. How long before you hit the inflection point on the raw materials in terms of them tipping to balanced? I expect 1Q is probably going to still be a headwind. Then, does your pricing initiative run slower as that raw materials become neutral to positive in the back half of the year?
Yeah, it's a great point. Year-on-year, I would say you're probably right. Our Q1 raw materials are going to be a little bit higher. Pretty neutral, I think, is where we're seeing, especially when you consider the impact of China. I would say that our pricing now will become more opportunistic. I think there are certain specialty products, lower volume opportunities where you'll see pricing leverage. The very aggressive pricing strategy that we started early last year and really paid off for us. I think it's one of the key drivers of our success was our ability to do that upfront and get after pricing was very helpful for us in terms of positioning ourselves for the second half of the year and into 2019. Those more aggressive approaches will turn off here in Q1.
All right. A bit of housekeeping. I might have missed this, the Wisdom deselection. That's pretty much complete at this point, or does that drag a bit into 1Q? With the Construction Adhesives, I guess that's going to be a negative mix effect for the balance of the year, or did you start that already in the back half of 2018?
Yeah. The Wisdom has two out of three months in Q1, so it'll be two-thirds the size this quarter. The Construction Adhesives portfolio ship was really a Q4. It started impacting the numbers in Q4, a little bit in Q3. We mostly have three quarters to work that through.
All right. Thank you very much. Appreciate the time, guys.
Again, if you have a question, please press star then one.
At this-
There are no other questions at this time. This concludes our question and answer session. I would like to turn the conference over to Jim Owens for closing remarks.
Thanks everyone for joining us today, and thanks for all your support for H.B. Fuller.
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