H.B. Fuller's (FUL) CEO Jim Owens on Q4 2015 Results - Earnings Call Transcript

| About: H.B. Fuller (FUL)

H.B. Fuller Company (NYSE:FUL)

Q4 2015 Earnings Conference Call

January 14, 2016 10:30 AM ET

Executives

Maximillian Marcy - Senior Manager, Treasury and IR

Jim Owens - President and CEO

James Giertz - EVP and CFO

Analysts

David Begleiter - Deutsche Bank

Rosemarie Morbelli - Gabelli & Company

Mike Ritzenthaler - Piper Jaffray

Jeff Zekauskas - JPMorgan

Dmitry Silversteyn - Longbow Research

Operator

Ladies and gentlemen and thank you for standing by. Welcome to the H.B. Fuller Four Quarter 2015 Investor Conference Call. This event has been scheduled for one hour. Today’s conference call is being webcast live and will also be archived on the company’s website for future listening.

At this time, I will turn the meeting over to our host Senior Manager, Treasury and Investor Relations, Mr. Maximillian Marcy. Sir, you may begin.

Maximillian Marcy

Good morning and welcome to our fiscal year 2015 fourth quarter earnings call. We have two speakers today, Jim Owens, our President and Chief Executive Officer; and Jim Giertz, our Executive Vice President and Chief Financial Officer.

As always after our prepared remarks, we will have plenty of time to take your questions. Let me also remind you that comments made by me or by others representing H.B. Fuller may contain forward-looking statements which are subject to risks and uncertainty. Our SEC filings contain additional information about factors that could cause actual results to differ from managements’ expectations. These filings can be found in the Investor Relations section of our corporate website at www.hbfuller.com.

Also please note that our reported results include non-GAAP financial measures. These results should not be confused with the GAAP numbers in yesterday’s earnings release or the GAAP numbers that we will report in our Form 10-K. We believe that the discussions of these measures is useful to investors because it assists in understanding our operating performance and our operating segments as well as the comparability of results. A reconciliation of these non-GAAP measures to the nearest GAAP measure is provided in the earnings release our company issued last night.

With that, I will turn the call over to Jim Owens.

Jim Owens

Thanks, Max, and thank you everyone for joining us today. We had a strong finish to the year as we met or exceeded the operating results and performance metrics that we forecast for the fourth quarter. Our adjusted gross margin was up nearly 400 basis points from the same quarter last year. Despite the ongoing negative effects from the strong U.S. dollar. We drove EBITDA to $79 million, an 18% increase over the prior year and EBITDA margin was up to 14.4% in the fourth quarter. These are the highest quarterly dollar performance in our history and the highest quarterly margin we’ve achieved in the past eight years.

Revenue was in line with our expectations with strong growth in key segments. This business is moving in the right direction as we enter the New Year. I think the primary topic of this call is the guidance we’re providing for 2016, but before we get to that I want to take a step back and reflect on several of the significant accomplishments over the past year as well as some of the disappointments. Basically a short report card as we close the year.

Overall you will see that we have a relatively long list of positive accomplishments offset by just a few notable challenges, which we will tackle in 2016 to make it an even better year. The first highlight was the successful acquisition and integration of the TONSAN business in China. The TONSAN team joined HB Fuller with positive energy and a focus on growth. Despite a slowing China economy and the changes associated with integration, the TONSAN team generated strong results in 2015 meeting or exceeding all the targets we set at the time of the acquisition, and they laid the foundation for further success in the future. I’m convinced that several years from now when we look back this acquisition will be viewed as a transformational event in our history.

Second highlight, we aggressively pursued raw material cost reductions and formulation changes to take advantage of the dramatic shift in the world price of oil and natural gas. These efforts generated the bulk of our gross margin recovery in the past year with the majority of the savings generated in the Americas segment.

Third, early in 2015 we stabilized the supply chain in our North America region, following the implementation of the SAP platform, and by the middle of 2015 we stabilized our supply chain in Europe, following the completion of the investment phase of our business transformation project.

Now both of these large core segments are operating with stronger customer service metrics in terms of lead time, quality and on time delivery and able to support sustainable growth going forward. Another key highlight was our Construction Product segment, which generated growth of over 20% in 2015 and improved EBITDA margin by over 300 basis points compared to the prior year. Growth was primarily driven by winning additional market share with our key customer Lowe’s as well as the successful integration of the Pro Spec acquisition completed in late 2014.

At the same time we initiated a significant investment program in the business to improve quality, increase capacity, improve customer service performance and lower costs. This project will be completed in mid-2016.

We also generated strong operating and free cash flow. Cash flows improved significantly compared to the prior year, because we reduced our capital expenditures to more normal levels after completing the business transformation project in Europe and we reduced the amount of special charges related to the business transformation project from $50 million in 2014 to under $5 million in 2015. And beyond all of these specific accomplishments we once again demonstrated that our organization is resilient and able to adjust to changing operating conditions on the fly.

The foreign exchange environment and global end market conditions that we experienced in 2015 were significantly more negative than we anticipated in our plan for the year. But we effectively changed course during the year to mitigate a good portion of these negative impacts and produced the good result.

Of course we have some disappointments as well. Our Americas segment’s revenue performance was below prior year and did not meet our expectations. And although in Europe our customer service levels improved dramatically through the year, the cost to support these supply chain improvements was too high and the pace of improvement was too slow. In each of these situations we ended the year with positive momentum and a clear plan to turn these negatives to positives in 2016.

For the upcoming 2016 fiscal year, there are few key levers that we will pull to generate growth, and revenue and profit. First, we will extend the success for the Construction Products in Asia Pacific operating segments. The Asia Pacific segment will benefit from having the TONSAN business for a full year as well as the realization of commercial synergy between our legacy and acquired businesses.

Our Construction Product segment will benefit from an improving relationship with Lowe’s and other key customer partners as well as generally favorable end market conditions. Second, we will generate margin improvement through productivity gains in our global supply chain especially in Europe.

Third, we will achieve benefits from price and raw material management as the margin improvements realized in the second half of last year are carried forward for the full year in 2016. Fourth, we expect further gains in our cash flow generation as we grow, increase margins, control capital expenditures and further reduce the cost of non-recurring items.

Fifth, we will generate positive growth in the Americas and Europe segments because of our stable supply chain and the strong list of new customer wins as we enter the New Year. And finally, we look forward to the launch of our refreshed and sharp and strategic plan that will set our sights on 2020. I’ll let Jim G provide some more color on our 2016 guidance a little later.

Let me now provide some insights into current conditions within each of the operating segments. The Americas segment volume came in about 3% below a very strong quarter last year. Though still not meeting our own expectations, the fourth quarter result reflects a substantial improvement over the previous quarter. We have good momentum as we begin the first quarter of the New Year and we expect to return to modest growth in the Americas in 2016. Solid margin management is the big story in the Americas for 2015, where the team delivered 19.1% margin in the quarter. The team did an excellent job of managing price strategies, raw material cost reductions and product reformulations to take advantage of the drop in global oil and natural gas prices. These benefits are expected to carry forward through the full year of 2016.

Our Construction Products segment had a great year in 2015 and delivered revenue growth of over 20% and adjusted EBITDA margin of 14.4%. We expect the momentum generated during the 2015 year will continue into 2016. Revenue is expected to grow in the high single-digits based on a growing end market and continued gains in our traditional distribution channels. The incremental business we gained with Lowes in the late spring of last year will carry forward for the full year in 2016. We expect to maintain EBITDA margins near 15%. The investment program to be completed in mid-2016 will enable operational improvements, lower costs, improved quality, enhanced customer service levels in the short and long-term.

Our Asia Pacific segment also had a great year with the integration of TONSAN in China. Revenue grew over 30% and EBITDA margins were over 11%, over a 400 basis points improvement versus the 2014 fiscal year. This is especially impressive when considering the headwind of the segment faced from the devaluation of the Australian dollar and other currencies in the region.

In 2016, we expect growth of over 10% versus 2015. While it’s clear that many end markets in Asia Pacific had slowed the consumer markets we serve notably the hygiene market are still supportive of growth. In addition, we have a wider array of technologies and a larger product range to offer now after the TONSAN acquisition. And this will open significant new opportunities for growth even as market conditions in some sectors moderate.

Lastly our European business. We did a lot of work in 2015 to improve our operational metrics and deliver the financial results we know this segment can generate. EBITDA margins improved each quarter and the trend should continue throughout the next year. We expect to deliver more consistent constant currency revenue growth in 2016 fiscal year as we capitalize on available opportunities with ample capacity, much shorter lead times, plus an increased focus on growth in the emerging markets surrounding core Europe.

Although the financial and operational performance has lagged our expected timeframe, we have built a world class manufacturing network in the EIMEA segment. Our operational metrics continue to improve each month and now the financial improvements are beginning to come through as well. The business is a bit smaller today than we initially envisioned and therefore we announced some additional restructuring actions in November to more properly size the cost structure for the business. We remain committed to driving overall EBITDA margins into the mid-teens in this segment and these recent actions are evidence for that continued commitment.

With that as a summary of segment performance I’ll turn the call over to Jim Giertz to add some commentary on the fourth quarter and discuss our guidance for the 2016 fiscal year.

James Giertz

Okay, thanks Jim. We’ve already provided much of the summary analysis of the operational results for the quarter. So I will just focus on several items of interest in the quarter that might require some elaboration.

So I’ll start by reviewing the positive cash flow and balance sheet results for the quarter and the full year. Solid operating results drove solid operating cash flow in the quarter of $57 million. For the 2015 fiscal year operating cash flow was more than $210 million, compared to operating cash flow of only $30 million in 2014. The primary driver of the improved cash flow performance was the increase in reported earnings and the increase in reported earnings was driven by the reduction in special charges and other non-recurring charges in 2015.

So net debt was reduced by $38 million in the quarter and our key leverage ratio of total debt-to-EBITDA declined to 2.9 times at the end of the fourth quarter and should level off around 2.5 times in mid-2016. A strong operating cash flow this year and reduced capital spending levels have allowed us to quickly reduce our leverage ratios following the acquisition of TONSAN early this year.

Capital expenditures came in at $10 million in the fourth quarter and $59 million for the year. The full year result is about $10 million below the estimate that we communicated at the beginning of the year just due to project delays. And would also note in the fourth quarter we were awarded through an arbitration process financial relief from Accenture related to the services they provided leading up to and through the initial go live of the SAP platform in North America. About $12 million of this award was recorded as a reduction to the SAP asset in our balance sheet and about $2 million was recorded in our income statement in operating expenses and both impacts have been adjusted out of the numbers we’re presenting today.

In the fourth quarter adjusted EBITDA margins increased year-over-year for the Americas, Construction Products and Asia Pacific operating segments. These operating segments posted significant margin gains for the full year as well. Special charges related to the European business transformation were only $62,000 for the quarter and $4.7 million for the year, reduced substantially from $50 million in 2014 and essentially in line with our expectations communicated at the beginning of the year.

And putting all this together we delivered adjusted diluted earnings per share of $0.69 in the fourth quarter essentially in line with our most recent guidance, which represents the solid operational performance. Our full year result was $2.17 per diluted share and the primary factors which caused the difference between our initial guidance and the full year actual results were lower revenue in the Americas, the adverse impact of global foreign exchange rates, higher than expected cost in our EIMEA segment and a high effective tax rate, many of the negative impacts were offset by the successful integration of the TONSAN business and effective price and raw material cost management.

Now let me turn to our guidance for 2016 fiscal year repeating and expanding on the comments already made by Jim Owe earlier in the call. We expect to deliver 4% constant currency revenue growth offset by 3% in negative foreign currency translation resulting in about 1% overall revenue growth for the year. Several key factors will support revenue growth in 2016. First we expect growth to continue in the Asia Pacific segment primarily from growth in hygiene across the region, market share gains in our electronics business and the benefit of having TONSAN for the full year in 2016. Second with stable supply chain networks in place the Americas and EIMEA segments are expected to deliver modest constant currency growth after several quarters of [indiscernible] performance.

Then third, our construction products segment should extend its growth trend based on incremental market share gains, the carryover benefit of market share gain during last year and generate favorable end market conditions. One final note on revenue growth we will have a 53rd week in our 2016 fiscal year. This will add over 1% to net revenue growth, which is already contemplated in our guidance to 4% constant currency revenue growth. The impact of the 53rd week on EPS is minimal and is also incorporated into our guidance.

We expect further gross margin expansion in 2016 following on the strong gains in 2015. There are two primary drivers of the plan margin increase. The first is continuous improvement in productivity and the manufacturing and supply chain networks globally, but especially in Europe. And second, the carry forward of the lower raw material cost that were realized in the second half of 2015.

Our long-term goal is to consistently operate at or above the 30% gross margin level. We expect to approach that level towards the end of the year. SG&A expense is expected to increase at a rate slightly higher than net revenue as we invest to support growth in key market segments, recorded of full year of TONSAN in our results and provide for higher incentive compensation and other related employee benefit cost.

Our long-term goal for SG&A is 18% in net revenue and we expect to be at or near that goal as we progress through the second half of the year. We expect to deliver approximately $290 million in EBITDA for the full year or just short of 14 as a percent of revenue, up about 100 basis points compared to 2015. We expect to reach 15% EBITDA margin as we exit the fiscal year.

Our core tax rate is expected to drop to 33% in 2016 as the negative conditions and factors that drove our rate higher in 2015 are expected to be mitigated. Capital expenditures are expected to be $60 million again in 2016, just under 3% of revenue versus our long-term strategic target of 2.5% of revenue.

We’re introducing our adjusted diluted EPS guidance range of between $2.40 and $2.60. This represents growth of 15% at the midpoint of our guidance range in line with our long-term goals. The solid operational performance will generate a significant amount of operating cash again in 2016. We intend to use the cash to pay down debt, finance, capital investments and dividends and continue our share repurchase program to offset dilution from equity compensation plans. We’ll provide more detail on our long range strategy for capital deployment at the upcoming investor event.

That’s all I have for the day. So now back to Jim Owens for some summary comments.

Jim Owens

Thanks, Jim. 2015 was a year of building momentum and improving financial results and an economic environment that was working against this. As the year progress currency and economic conditions deteriorated and added challenges to our business. But our results continue to improve. Ending with the quarter of record EBITDA and continued strong cash flow.

Our teams around the world work hard and adapted to changing conditions as we successfully integrated a transformational acquisition. Delivered constant currency growth of 5% absorbing a $125 million currency impact to our top-line. We generated the necessary improvements in the Americas and European operations to enable our growth going forward. Our construction products business grew 20% and delivered EBITDA of 14.4% and each of our businesses ended the year with EBITDA margins in excess of 10%.

Overall the business generated 100 basis point increase in EBITDA margin as we delivered a full year margin for the company of nearly 13%. Our growth platforms of engineering adhesives and electronics performed well as did our business in hygiene and our investments in India and other emerging markets. We have strong momentum across all of our segments as we enter the New Year.

We’ve laid out a solid plan for 2016, which enables us to focus on adding value to customers, growing our business and improving our operations to deliver further margin expansion. This is the first step in our new strategic plan, which outruns our path over the next few years. We look forward to sharing the details with you at our investor event in New York on February 3rd; we will provide a comprehensive update on current business conditions and introduce a refreshed strategic plan looking forward to 2020. If you need more information or the link to register please contact Max.

This is the end of our prepared remarks and now I'd like to open the call for your question.

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from the line of David Begleiter with Deutsche Bank. Your line is open.

David Begleiter

Thank you. Good morning.

Jim Owens

Good morning, David.

David Begleiter

Jim just on America adhesives volumes typical year in 2015 volumes down over 4%, what’s going to change in 2016 to drive volumes up year-over-year.

Jim Owens

Yeah. Well and I think the cause the biggest cause of our 2015 results was the fact that we had core momentum coming into the year related to the SAP transformation. So the service issues and the problems that we had going that entered the year really impacted our results certainly more than we expected. I think if you look at the differences here in Q3 to Q4 and what we expect in Q1. First off the losses have stopped; we had our last loss in July of any customers that had moved against us. We have a number of regains that are coming in, so these are long-term customers that want to come back to us because of the value of our products and our service.

And the team is back on the offence. So we have a number of key wins that we’ve gotten here just in the last quarter that are coming through in the pipeline. So all the negatives are gone and the positive momentum is coming in the numbers. So you’ll see that progress quarter-by-quarter as we go into 2016. And I think good evidence is the fact that we went from a very negative Q3 to a much less negative Q4.

David Begleiter

Understood. And maybe good segue into Q1, how should Q1 be on overall EBITDA for the company vis-à-vis last year up modestly, up more than modestly and any color on Q1 year-over-year?

Jim Owens

So as you know our EBITDA levels are always lower in Q1 because for us we have December in our Q1 and we have a China business that has February which is Chinese New Year in it. So always have this contraction plus construction products had a weaker winter. Maybe I can ask Jim to give you some more specifics on how much EBITDA growth we expect to see in Q1 versus the prior year.

James Giertz

Yeah, I don’t think I can really provide a real specific answer to the question and kind of beyond what Jim has already offered. But obviously the momentum we had in the second half, I think the second half of the year is more reflective of the kind of profit profile that we should see carrying into the first half of 2016 if that helps.

David Begleiter

Thank you very much.

Jim Owens

Okay, thanks, David.

Operator

Your next question comes from the line of Rosemarie Morbelli with Gabelli & Company. Your line is open.

Rosemarie Morbelli

Thank you good morning everyone.

Jim Owens

Good morning Rosemarie.

Rosemarie Morbelli

I was wondering if you could give us a feel for Asia Pacific volume growth if you exclude TONSAN. And then the same question with Pro Spec in construction, what is the underlying business?

James Giertz

Yeah, Rosemarie I’ll give you a technical answer. So in Asia Pacific in the fourth quarter, our legacy volume growth was middle single-digits. And then with respect to CP in the fourth quarter, we had lapped Pro Spec acquisition in the fourth quarter so the numbers are all apples-to-apples with Pro Spec in both quarters.

Rosemarie Morbelli

And so that strong growth rate in volume, is that more or less the level you are expecting for next year?

Jim Owens

Yeah, we expect continue -- well and Jim just talked about the growth in our core business, we also had good solid growth in Q4 in TONSAN. So, yeah, I think we expect continued growth certain segments of the Chinese economy are certainly slowing. But lot of the areas we’re focusing are not slowing and our team is gaining share. So we’re positive on the Asia business despite slowing in certain sectors we have really strong growth in some others. Maybe Jim you want to give little more specific color on Asia growth.

James Giertz

No, I think that’s it. We just -- Rosemarie are you just asking Asia or also CP?

Rosemarie Morbelli

Both of them. And then if you could also address the margin, I don’t understand why the margin was so much lower in Q4 for both of those businesses compared to the nine months level?

Jim Owens

Alright, okay. So let me just comment broadly, yeah, I’d say on CP I think we said in the script will be high single-digits of growth. And I would say in Asia our expectation is double-digit growth into next year. And - go ahead.

James Giertz

And then with respect to margins, I think construction products we’ve mentioned this in prior conference calls, but there is a pretty heavy fixed cost load in CP, so when we have volume fluctuations because of seasonality our margins swing around. So I think it’s probably better to look at CP on a longer term multiple quarter full year basis.

Jim Owens

And just to add to that, generally speaking Q2 and Q3 will be better than Q4 and Q1 of that business.

James Giertz

Exactly. And then in Asia Pacific, our margins are up 200 -- our adjusted EBITDA margins are up 200 basis points year-over-year in the fourth quarter. So I think we had solid margin performance there.

Rosemarie Morbelli

I was referring to sequentially.

James Giertz

Sequentially, yeah, I don’t have that one in front of me, I’m sorry. I don’t have ready answer for that one.

Rosemarie Morbelli

Okay, thanks. I’ll get back with Max.

Operator

Your next question comes from the line of Mike Ritzenthaler from Piper Jaffray. Your line is open.

Mike Ritzenthaler

Yeah, thanks. Just a couple of follow ups on TONSAN and I guess are the effect of Fuller’s multinational backing resulting in share gains in TONSAN. Is that something that’s palpable? And to the extent that organic growth is outpacing the end markets there. And I guess, as a nuance there, are you more optimistic about personal devices and other key electronic end markets like that now versus say early 2015?

Jim Owens

Okay. So you asked a couple of questions there. I would say – so, certainly the synergy between the two companies is real and we’re seeing it in some of the numbers although I’d say a lot of the 2015 performance was because we bought a good business and gave it the resources it needed to win. So the synergy has come in three flavors for us, one is TONSAN now has new products to sell, because they can bring HB4 products into their portfolio.

Two, we help TONSAN win with multinationals and that’s coming through in some of the numbers. So where companies have headquarters and other opportunities around the world we’re able to bring resources to help them win. And then of course expanding TONSAN around the world. That really hasn’t happened yet, but that’s certainly part of the 2016 and 2017 but the first two have started in 2015 and we’ll see good momentum there. And all three of those elements of commercial offensive synergy are real and tangible benefits of bringing the two companies together.

As far as electronic personal devices, it’s a new space for us. So the wins we have are in new opportunities. So exactly what happens to the market is less important than where and how we serve customer needs. And we see that as a good opportunity for us as well Mike as we continue to focus resources and penetrate in that area.

Mike Ritzenthaler

Okay, that makes sense. It’s helpful thanks. And for Jim G, on the conversions between GAAP and non-GAAP I guess for 2016 some of the new restructuring being announced late calendar ‘15. Obviously the channel fill at Lowe’s and that European restructuring charges being sort of the most notable there. I'm just curious about how much those two metrics might converge in ‘16?

James Giertz

Okay. So if I interpret your question properly, you’re asking what the -- what our expectations are for kind of non-recurring adjustments in 2016.

Mike Ritzenthaler

Yeah, particularly about Lowes and then these new initiatives in Europe?

James Giertz

Yeah so with respect to Lowes or with respect to the CP business overall, there will be minimal adjustments. We don’t anticipate -- in our plan we don’t have any new product or new launches with Lowes anticipated, so which would normally drive those kind of charges. With respect to Europe, we will have there is a residual gap entry that has to be made for the restructuring charges that we announced in our 8-K earlier in the quarter. And I think that somewhere around $4 million Bob? About $4 million that we’d expect to take as residual charges for that program that was announced in the fourth quarter will happen in 2016.

And then I think the only other ones that I can really think of or just maybe it’s good time to point out that with respect to Project 1, the actual timing of the launch of the next wave of project when implementation is not yet been settled. So to the extent that we have extraordinary cost around that we’ll either adjust our guidance or we’ll have to adjust it out of our numbers or something. But we’ll have to communicate to you later exactly how we’re going to handle that. But other than just kind of base cost of the Project 1 work that we have ongoing, we have not put any of that into our any other incremental cost into our guidance for 2016.

Jim Owens

And since Jim brought it up, I mean our plan is a longer-term plan in smaller steps. So if we move forward with Project 1 will be the second half of this year it will be just in Latin America and we wouldn’t have any go lives in 2016 the next go live would be in 2017.

Mike Ritzenthaler

Okay, thanks guys.

Operator

The next question comes from the line of Jeff Zekauskas from JP Morgan. Your line is open.

Jeff Zekauskas

Hi, good morning.

Jim Owens

Good morning, Jeff.

Jeff Zekauskas

Hi. Can you talk about your general price trend that is our price is going up or are they going down what’s the general trend for next year?

Jim Owens

Yeah they’re doing both right, so yeah I think one of the things that we’ve really focused on over the last few years Jeff is being very clear about our value proposition and our partnering with customers and managing our prices in a way that’s effectively reflecting the value that we create. So some customers as raw materials come down our prices go down with them and we do that lock step as our cost go down and move forward.

Another situation is we’re reformulating and reintroducing new products into segments so allow us to take advantage of new raw materials and those were at the same prices or even sometimes lower prices but higher margin. So the whole process of how we manage our margins is both, but if I were to take a step back and look overall I think you’ll see a net negative on pricing with some areas going up and some areas going down, but not a dramatic impact on our -- the numbers will be low single-digits.

Jeff Zekauskas

How does your acquisition pipeline look, or is it that in the integration of TONSAN you’re taking a break from buying things for a while?

Jim Owens

I think we’re always active, we understand the market really well we’re focused in the adhesive space and things that are very close to where we’re at. So acquisitions are about what opportunities come up when and at what valuation. So I think financially we’ll be in a position to do more deals if they came available I think capacity wise with TONSAN moving as well as it’s going we’d have the capacity to do more, so it’s a matter of whether there were other opportunities.

I don’t see us doing huge deals, I see us finding the right incremental deals that enhance our businesses whether that’s geographically or adding the right kind of chemistry or technology in market segment. So not a huge program, but I think it’s possible especially if valuations come down, which is I think likely this year that we do some small bolt-on acquisitions.

Jeff Zekauskas

Can you just speak briefly on business conditions in United States and Europe generally there has been the all of this turmoil in stock market and people wonder whether that reflects underlying fundamentals or whether it doesn’t?

Jim Owens

Yeah I would say most of the fundamental slowdown is happening outside the U.S. and Europe, I wouldn’t say there is accelerated strong economy in North America and Europe. But we don’t see a fundamental slowdown in our customers in either North America or Europe here over the last few months that would be my take on what we see in terms of the manufacturing sector, which is who we sell to broadly.

Jeff Zekauskas

Okay. Your volume growth in Europe and in the United States was negative in the fourth quarter, do you expect it to be positive in the first half of 2016 or you can’t tell?

Jim Owens

Yeah I would say, look at the first half all together.

Jeff Zekauskas

For the first quarter you know…

Jim Owens

Yeah I think the Americas will be less negative, but probably still negative, they are targeted to get to flat I think will be in the low negative single-digits, but definitely much better than where we’re at today. And I think Europe will do a little better, so I think they will be on the plus side of zero in the first quarter. So that’s the kind of momentum we see here in Q1 and we’re five or six weeks into the quarter, so we have some transparency to that.

Jeff Zekauskas

Lastly what’s your tax rate look like for next year?

James Giertz

Yeah our tax rate is -- the core tax rate is projected at 33%.

Jeff Zekauskas

33%, and is that the same as your cash tax rate?

James Giertz

Yeah, basically yes essentially.

Jeff Zekauskas

Okay, great. Thank you so much.

Jim Owens

Thanks, Jeff.

Operator

Your next question comes from the line of Dmitry Silversteyn from Longbow Research. Your line is open.

Dmitry Silversteyn

Good morning, guys. I would like to follow-up a little bit on first of all on in EIMEA segment I think there’s still a small acquisition that you guys are anniversarying maybe through the first quarter of next year, can you talk about the impact of that on revenue was in the November quarter?

Jim Owens

I think that was... let me just get you, it’s a very small acquisition.

Dmitry Silversteyn

That’s the answer, it’s very, very small.

Jim Owens

Yes.

Dmitry Silversteyn

I just want to make sure that was part of the overall results.

Jim Owens

I think it’s $1 million or $2 million, less than $2 million.

Dmitry Silversteyn

Less than $2 million. Okay, so that’s same run rate that it’s been for most of the year. Okay. Switching gears to Asia Pacific, you mentioned expectations for 2016 of double-digit growth there on revenue 5% to 6% is going to be one mark quarter of TONSAN being treated as acquisition. So does that imply that organic growth is kind of basically mid-single digits in that business or in that division in 2016, is that what your expectations are?

Jim Owens

Yes.

Dmitry Silversteyn

Okay. And…

Jim Owens

And TONSAN has two months, right? We closed that deal February 1st.

Dmitry Silversteyn

Right, exactly. But it’s still going to be if you translate for the year roughly, my math at least suggests it’s about 5.5% impact for the full 2016 from that two months. Is that too high? Am I being overly optimistic on what you can do with TONSAN in February quarter?

James Giertz

I don't know about the last part of your statement, but your estimate is pretty close. So that’s a good estimate.

Dmitry Silversteyn

Okay, very good. And then on the 400 bps improvement in the Asia Pacific margins, which is pretty dramatic, congratulations on that. How much of that was sort of you are moving into more into the hygiene and some of these higher value markets and how much of that was just the impact of TONSAN perhaps getting a higher margin business and your core business if that’s the case?

Jim Owens

Yeah, it was both. We certainly manage the core business very well. The team in Asia did some really nice work in terms of strategically focusing on the right segments and then doing the right things in terms of managing our pricing and our cost. So there is a lot of good work in our core and then TONSAN has a positive impact from a percentage. I don’t know I can quantify the two, but both were very positive.

Dmitry Silversteyn

Okay.

James Giertz

I’ll just add two other points while we are at it. One is actually the margin improvement is even more impressive when you consider that our Australian business was under a lot of pressure during the year because of the currency was pressuring margin. The devaluation of Australian dollar put a lot of margin pressure on us. And then the other one is just a real technical thing, which you’ll see it right away in our first quarter numbers. We don’t allocate corporate expenses to our acquired revenue, and so the margins were a little artificially high because the TONSAN revenue wasn’t attracting our corporate allocation during the year. So that’s I can’t quantify that one right up to top of my head here, but just to let you know that that was another factor.

Dmitry Silversteyn

Got you. Okay, that’s helpful. And then just finally on EIMEA it sounds like things there are improving as 2015 came to end, calendar 2015 and assuming China doesn’t weigh in too much. It looks like 2016 is going to be at least a slightly positive year. In that environment do you expect your growth there with the new customer gains you mentioned sort of swinging into kind of mid-single-digit growth by the second half of the year as you anniversary some of the customer losses that you mentioned you suffered through the middle of 2015 or is that too aggressively is low-single-digit sort of a better way to look at the second half of 2016?

Jim Owens

That is two questions. One is where we are targeting, we are targeting to get to the mid-single-digits. But I think realistically we think low-single-digits in Europe is the right number and given the momentum very attainable and once we get that momentum more than that’s possible and you’ve been around a few years with Fuller 2011, ‘12 and ‘13 we were well up in the high single-digits in Europe when you consider the whole EIMEA segment. Our plan is built on low-single-digits not mid-single-digits.

Dmitry Silversteyn

And Jim just one final sort of a philosophical question I guess or not philosophical but a big picture question. It took you a while, but you got sort of the cost structure in Europe that you envision when you bought [indiscernible] and you sort of came up with your restructuring plans and SKU rationalization and more effective manufacturing and things like that. It sounds like you are pretty much there in terms of cost. So what you need now is basically volume growth. How much of volume growth do you think you will need over the next couple of years to let this business come up to the mid-teens EBITDA margin you’re targeting?

Jim Owens

Yeah so it’s a combination. I think there is still some cost to pull out as I said we are still doing some work to pull out cost of that business. So there is some of that along with more volume growth. I can give you a specific number on that, but I think that’s a great question in New York and I will be prepared for it to meet you if you’re going to be there in a few weeks. And in fact we’ll have a specific presentation on Europe. So you can see what the path is going forward so we can talk about that. But you’re right we do have to generate some volume, but there is still cost to pull out of that business. And we’re doing a nice job here quarter-by-quarter pulling those out.

Dmitry Silversteyn

Okay. Is the cost that you’re looking to brought is that more consolidation or is it just sort of back office getting rid of some of the stranded cost if you will after you did the first big round of consolidation sort of what this reflect -- any rationalization or is it sort of…

Jim Owens

Yeah we just did some restructuring right, so that’s one piece, but the bigger piece is in the operations. I’d say our operations now are serving customers and meeting the needs, but there is a still lot of ways. So as we now can focus on attacking that ways quarter-by-quarter on manufacturing costs as a percentage of sales will go down. So that’s where the cost is more than in the SG&A. So a combination of growth and then taking out some of that waste in our operations.

Dmitry Silversteyn

Thank you very much.

Jim Owens

Yeah.

Operator

[Operator Instructions] The next question comes from the Rosemarie Morbelli with Gabelli & Company. Your line is open.

Rosemarie Morbelli

Thank you. If I understood properly Jim, I think you mentioned that you are going to introduce construction prospect I mean construction project into Asia Pacific first of all did I understand probably? And can you elaborate on what you are doing?

Jim Owens

No I didn’t say that sorry if I misspoken yeah.

Rosemarie Morbelli

And is my misunderstanding then…

Jim Owens

Sorry if I was confusing there. Our construction products business is a North America business. We do have some construction products business in Australia and a little bit in Europe. But those are reported under the Asia and the European businesses our construction products business, the North America business.

Rosemarie Morbelli

Okay. So there is no plan in introducing that particular product line into Asia Pacific.

Jim Owens

I think it’s a strategic opportunity and I think that’s a great question to ask with respect to the strategy. But no, there is no specific plan to introduce that product line to Asia Pacific.

Rosemarie Morbelli

Okay. And then lastly, could you remind me of where your debt location is U.S. versus Europe?

James Giertz

The currency of our debt?

Rosemarie Morbelli

Yes.

James Giertz

I must say well essentially all is dollar based, U.S.-based.

Rosemarie Morbelli

And is it mostly all fixed?

James Giertz

It is about half and half floating and fixed. It’s actually 55% floating and 45% fixed.

Rosemarie Morbelli

Thank you.

James Giertz

Yeah.

Jim Owens

Thanks, Rosemarie.

Operator

Your next question comes from the line of Dmitry Silversteyn from Longbow Research. Your line is open.

Dmitry Silversteyn

Yeah sorry one question I forgot to ask, it’s for [indiscernible], and someone said mid-single digit growth in Asia Pacific ex-TONSAN? That sounds like TONSAN did about $32 million to $33 million in the quarter, is that right?

Jim Owens

Yeah we’re not reporting the details on TONSAN. I think what we said is it was a $100 million business and it was pretty and evenly spread throughout the year. So that would be the way to look at the underlying TONSAN.

Dmitry Silversteyn

Alright, fair enough. Thanks.

A - Jim Owens

Okay. Okay great. Well thanks everybody for your time today and for your support of the business. Look forward to seeing many of you in New York in a few weeks when we can talk about our strategic plan. Thanks.

Operator

Thank you ladies and gentlemen. This does conclude today’s H. B. Fuller fourth quarter investor conference call. You may now disconnect.

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