1. Revenue: Up 1.9% year-on-year; organic revenue up 0.4%.

2. Volume: Increased 3% year-on-year.

3. Pricing: Declined 2.6% year-on-year.

4. Adjusted EBITDA: Up 6% year-on-year to $165 million.

5. Adjusted EBITDA Margin: Expanded by 70 basis points to 18%.

6. Adjusted Gross Profit Margin: 30.4%, up 40 basis points year-on-year.

7. Adjusted EPS: $1.13, up 7% year-on-year.

8. Operating Cash Flow: Flat year-on-year.

9. Net Debt to Adjusted EBITDA: 3.1 times, down from 3.3 times year-on-year.

10. Share Repurchase: 225,000 shares in Q3, total 407,000 shares year-to-date.

11. Segment Performance:

    • HHC: Adjusted EBITDA down 7%, margin decreased 70 basis points to 16.5%.

    • Engineering Adhesives: Adjusted EBITDA up 5%, margin expanded 40 basis points to 19.7%.

    • Construction Adhesives: Adjusted EBITDA up 36%, margin expanded 240 basis points to 16.4%.

    • Warning! GuruFocus has detected 7 Warning Sign with FUL.

    Release Date: September 26, 2024

    For the complete transcript of the earnings call, please refer to the full earnings call transcript.

    Positive Points

    • H.B. Fuller Co (NYSE:FUL) achieved positive organic sales growth of 0.4% in Q3 2024 despite a weak economic backdrop.

    • Adjusted EBITDA grew 6% year-on-year to $165 million, with an adjusted EBITDA margin expansion of 70 basis points to 18%.

    • Construction Adhesives segment saw a 10% year-on-year increase in organic sales, driven by strong demand in roofing.

    • The company completed the acquisition of HS Butyl Limited, enhancing its product portfolio and market presence in Europe.

    • H.B. Fuller Co (NYSE:FUL) was recognized by Newsweek as one of America's most admired workplaces, highlighting its strong corporate culture and employee satisfaction.

    Negative Points

    • Volume growth came in at the low end of expectations due to slowing market demand in certain durable goods segments.

    • Engineering Adhesives (EA) segment experienced a 2% decline in organic revenue, with significant volume declines in clean energy, particularly in China.

    • Adjusted EBITDA for the HHC segment was down 7% year-on-year, with a 70 basis point decrease in adjusted EBITDA margin to 16.5%.

    • The company lowered its full-year adjusted EBITDA guidance range to $610 million to $620 million, down from the original range of $610 million to $640 million.

    • Solar business volumes were significantly down globally, with a pronounced impact in China due to overcapacity and market dynamics.

    Q & A Highlights

    Q: On the EA volume decline, what was driving the significantly lower clean energy sales and expectations for the next several quarters? Do you expect any further deceleration in the autos and electronics growth rate? A: (Celeste Mastin, CEO) The solar business saw volumes down in all global regions due to overcapacity in the industry. However, we are expanding with new customers and regions, particularly with new HJT technology. For autos and electronics, we saw positive single-digit growth, but not the double-digit growth seen in previous quarters. We expect to hold steady in these markets despite the fatigue from higher interest rates.

    Q: Can you provide additional color on the actions to reposition the EA portfolio? A: (Celeste Mastin, CEO) We are selectively targeting parts of the solar industry where we can drive value and moving away from less profitable segments. We are focusing on new technologies and regions, such as HJT technology and new customers in India, while retrenching from overcapacity areas.

    Q: Can you discuss volume trends on a regional basis, particularly in China, and the impact of recent stimulus efforts? A: (Celeste Mastin, CEO) Our China business was down low single digits, but excluding solar, it was up high single digits. We saw strong growth in automotive and HHC segments. The recent stimulus efforts in China should create a more robust economic environment, benefiting our business.

    Q: What is your level of confidence in sustaining and growing adjusted gross margins above 30%? A: (Celeste Mastin, CEO) Achieving our 20% EBITDA margin target involves growing gross margins into the mid-30s. We are focusing on restructuring programs, footprint optimization, and enhancing our pricing process. Additionally, we are targeting higher-margin, faster-growing opportunities.

    Q: Is the growth in the construction business related to restocking or pent-up demand? How confident are you in sustaining this growth? A: (Celeste Mastin, CEO) The growth is driven by restructuring, innovation, and market demand, not restocking. We are taking share in roofing and benefiting from growth in data centers and institutional buildings. We expect this demand to continue into the fourth quarter.

    Q: What are the key factors within your control that will contribute to year-on-year EBITDA growth in fiscal '25? A: (Celeste Mastin, CEO) We plan to continue our restructuring program, which will deliver additional savings. Acquisitions will contribute to EBITDA growth, and we expect price raw material balance to be more normalized. We also anticipate synergies from recent acquisitions.

    Q: How significant was the impact of the solar business on your overall performance, particularly in China? A: (Celeste Mastin, CEO) The solar business, which is less than 5% of our revenue, had a significant impact, particularly in China where volumes were down almost half. The overcapacity in the solar market and redeployment of silicon sealants from the construction industry compounded the issue.

    Q: What caused the decrease in your EBITDA guidance for the year? A: (Celeste Mastin, CEO) The decrease is primarily due to lower-than-expected volume growth in the second half of the year. We initially anticipated mid-single-digit volume growth but experienced a slowdown in P7 and P8, leading to a revised guidance.

    Q: How much of your EBITDA growth comes from acquisitions? A: (John Corkrean, CFO) Acquisitions contributed about $7 million to EBITDA in the third quarter and will likely contribute similarly in the fourth quarter. Overall, acquisitions are expected to add $20 million to $25 million to EBITDA this year.

    Q: What are your expectations for price-cost dynamics in the first half of 2025? A: (Celeste Mastin, CEO) We expect price-cost dynamics to be more balanced and less volatile compared to 2024. We are already taking pricing actions in response to raw material changes, and we anticipate a more stable environment moving forward.

    For the complete transcript of the earnings call, please refer to the full earnings call transcript.

This article first appeared on GuruFocus.