Maximillian Marcy - Senior Manager, Treasury and Investor Relations Jim Owens - President, Chief Executive Officer, Director Jim Giertz - Chief Financial Officer, Senior Vice President.

Mike Sison - KeyBanc Mike Ritzenthaler - Piper Jaffray Rosemarie Morbelli - Gabelli & Company Steven Schwartz - First Analysis Dmitry Silversteyn - Longbow Research Jermaine Brown - Deutsche Bank Christopher Butler - Sidoti & Company Rick D'Auteuil - Columbia Management.

Good morning and welcome to the H.B. Fuller second quarter 2014 investor conference call. This event has been scheduled for one hour. Following today's presentation, there will be a formal Question-and-Answer session. Instructions will be given at that time, should you wish to ask a question. Management in attendance on today's call includes Mr.

Jim Owens, President and Chief Executive Officer, Mr. Jim Giertz, Executive Vice President and Chief Financial Officer, and Mr. Maximillian Marcy, Senior Manager, Treasury and Investor Relations. At this time, I would like to turn the meeting over to Mr. Maximillian Marcy. Sir, you may begin..

Thanks, Jen, and welcome everyone. Today's conference call is being webcast live and will also be archived on our website for future listening.

Before beginning, I would like to inform everyone that certain matters discussed during this call will include forward-looking statements, as that term is defined under the Private Securities Litigation Reform Act of 1995. Since such statements reflect our current expectations, actual results may differ.

In addition, during today's conference call, we will be discussing certain non-GAAP financial measures specifically, adjusted earnings per diluted share, segment operating income, and earnings before interest expense, taxes, depreciation expense and amortization expense or EBITDA.

Adjusted diluted earnings per share are defined in the quarter reported. Segment operating income is defined as gross profit less SG&A expense and EBITDA is defined as gross profit less SG&A expense plus depreciation and amortization expense.

All of these non-GAAP measures discussed today should not be construed as an alternative to reported results determined in accordance with GAAP. We believe that the discussion 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.

The non-GAAP information discussed today may not be consistent with the methodologies used by other companies. All non-GAAP information is reconciled with reported GAAP results on the last pages of our presentation.

For more information, please refer to our recent press release, quarterly report on Form 10-Q dated March 28, 2014 and annual report for the year ended November 30, 2013 on Form 10-K filed with the Securities and Exchange Commission. These documents are available on our website at www.hbfuller.com in the Investor Relations section.

I will now turn the call over to our President and CEO, Jim Owens..

Thanks, Max, and thank you, everyone for joining us today. A lot of exciting things have happened over the past few months. So we have a lot of talk today. Several of the accomplishments in the quarter represent major events that will change the profile of the company and the potential of the company for many years into the future.

We are especially pleased to announce that we have signed a definitive agreement to acquire Tonsan Adhesive based in Beijing, China. This acquisition is an important step into a large attractive market space that we do not currently serve. Tonsan will also strengthen our position in China and the Asia region which are key objectives for the company.

While we negotiated the deal with Tonsan, our Project ONE team led us through the initial go live of our new global SAP information technology platform. Project ONE is building a strong foundation for us to grow and optimize our business for the long-term. This initial go live was the riskiest portion of the multiyear project.

So we are very pleased to have moved through this phase successfully. In Europe, we closed our large production site in Pirmasens, Germany and the completion of our significant business transformation project is now close at hand. In the core of our business, some good things happened as well.

Our organic revenue growth rate improved in the quarter, and we ended the quarter with good momentum that should carry forward into the second half of the year. As I said, we accomplished a lot over the past few months and achieved some important milestones for the company. Unfortunately we also encountered some difficulties in the quarter.

Our challenges can be put into two buckets. First, our major projects caused disruption in our business and drove higher than planned customer support costs. Second, in several of our business segments, we experienced temporary margin contraction due to a variety of underlying issues.

Our commitment for the second half of this year is to push forward with our major projects with better execution, extend our organic growth momentum and bolster our margins setting us up for a strong performance in Q4 and delivery of our 2015 strategic commitments and our five-year plan.

During today's call, I am going to talk about the individual performance of each of our business segments in the second quarter, Project ONE implementation and the status of the business integration project. Jim Giertz will discuss the financial results of the quarter and our guidance for the remainder of the year.

Then I will take a few minutes to discuss the strategic rationale and the synergy opportunities surrounding this exciting Tonsan Adhesive acquisition. I will discuss the performance of each of our operating segments separately, since each is operating under unique circumstances today.

Our Americas adhesive business returned to solid organic growth this quarter with volume growth of nearly 5%. Given the current end market conditions have not improved dramatically, we are pleased with our revenue performance.

This is especially true when considering the additional effort required by everyone in the business to implement SAP in North America and support our customers.

On the profitability side, the reported results show a slight decrease in EBITDA margin versus the comparable period last year, which was fully attributable to additional unplanned costs related to the implementation of Project ONE. The contribution margins in the Americas were flat versus prior periods, which was our plan.

Adjusting for the additional unplanned expenses EBITDA margin was significantly higher than this year's reported results and the prior year's second quarter. We will discuss the Project ONE implementation in more detail later in this call. Construction products continues to grow with volume up about 20% versus the prior year.

This is the result of an important piece of new business we landed at the end of last year and to a lesser extent modestly better end market conditions. We have a range of great products that we sell into this market segment and we are building a great distribution network to deliver these products to a broad range of end-users.

We highly value our strong and expanding relationship with Lowe's in the United States. We are excited about the new relationship with Menards and we are committed to enhancing our key relationships with independent distribution partners across the United States.

The growth in this business is a direct result of the investment we have made to strengthen our distribution network for the long-term. However similar to our situation overall in the second quarter, the positives in construction products were somewhat tempered by two issues that are temporally squeezing our profit margins.

The first issue is related to some core product pricing decisions we made during the end of last year, based on a view of our underlying material cost trends that did not play out as planned. The second issue we experienced was higher than normal manufacturing and supply chain costs in the facilities that support the new business with Menards.

These costs have been unusually high because we needed to quickly ramp up this new business and had to institute new business processes. Going forward, both of these drags on our margin performance will be eliminated and we will get back on track to achieve our long-term EBITDA margin expectations in this business by the end of the year.

Our Asia-Pacific segment also performed well on the revenue front, with volume growing over 13% during this quarter. The segment remains a story of three unique regions. Our business in China, again grew volume over 20%. At the same time, we achieved two important milestones in our China business integration project.

We closed the legacy Forbo facility located in Shanghai and successfully transferred this capacity to other sites in China. And we also completed the consolidation of our two facilities in Guangzhou to one enhanced and expanded site.

Several productions lines will be commissioned on the new site this quarter and the business integration work will be complete in China. Southeast Asia produced double-digit volume growth and is on track to maintain elevated growth rates through the remainder of the year.

Our dealership and the mix of business contribution margin was slightly lower than anticipated. Australia is finally starting to move in the right direction with single-digit volume growth. Our margins in Australia were squeezed as our raw material costs increased due to the depreciation of the Aussie dollar relative to the U.S. dollar.

Overall, this region is progressing in line with organic growth expectations and is continue working to elevate margins towards our long-term strategic goals. And finally, our European business continues its dual operating mode, running the business while at the same time transforming the business.

Although volume has not quite turned positive, the segment delivered its best volume performance in the past five quarters. As we finalize the business integration year-over-year volume growth is expected in the second half of this year.

From a profitability perspective, after adjusting for one-time cost of the business integration activities, we were slightly behind last year's reported EBITDA margin.

During the quarter, the entire adhesive industry was impacted by temporary shortages of vinyl acetate monomer or VAM, causing the price of this feedstock to spike dramatically in the second quarter and causing temporary margin compression.

This negative factor will be resolved in the second half of the year as VAM supply returns to a more normal level and our market pricing is adjusted to reflect the new conditions. Excluding this raw material impact and business integration cost, EBITDA margin in our EIMEA segment was higher versus the comparable period last year.

In summary, organic growth is moving in the right direction, contribution margin issues have been addressed and our major projects have reached key milestones. We anticipated return to expected performance levels by the end of this year which will provide a solid starting point to our target goal of 15% EBITDA margin in 2015.

Now let's switch gears and talk in more detail about our North America implementation of Project ONE. We went live on our new global SAP platform on April 7 in North America and I am pleased to report that today the system is stable and supporting the ongoing requirements of the business.

The path to get to this stabilization point was more difficult and more costly than we planned but we have achieved this important first milestone in the project without severe operational problems.

Many aspects of the go live event went very well, notably the system itself is performing well and most of the core business processes are running smoothly at normal rates.

The most significant problems we encountered were in the production environment, because we have implemented a standard solution, we are adapting our business process to match the workflow that we have built into our SAP solution.

The impact of these workflow changes was more disruptive than we had anticipated and caused us to utilize far more technical support resources at the plant than we had planned in order to ensure we met our customer needs. Of course, these additional complexities come with additional cost.

In total, we isolated about $8 million impact this quarter, which can be split into two discrete categories. First, higher-than-expected cost of technical support for the initial go live event.

And second, unplanned cost in the Americas adhesive operating segment to serve customers following go live, primarily additional labor costs, overtime costs and expedited freight charges. We have removed the impact of these expenses from our adjusted results and will continue to do so for the remainder of the year.

Although the business is currently operating at normal run rates, we have had to work through a backlog that was generated when our processes slowed down following the go live.

Going forward, we will continue to clean up and optimize the business processes in North America, while at the same time preparing for our second go live in our Latin America region in early fiscal year 2015. The other big project we are currently working is the European business integration.

The business integration project moved ahead according to the revised schedule and is still on track to be substantially completed by the end of the third quarter of this year. We have made good progress this quarter. About 85% of total product volume has been transitioned to the receiving facility.

About 30% of pre-integration SKUs have been eliminated nearly to our planned reduction of 45%. The final push for this project is to complete the commissioning of newly installed equipment and complete the closure of the last two production facilities, one in Austria and one in Italy.

Completing this phase of the project will eliminate a significant amount of manufacturing expenses and drive our gross margin towards the target level for the region.

Because of the delays in the project and cost increases in certain raw materials in the region, we now to exit the year, slightly behind our 14% EBITDA net margin target in the EIMEA operating segment. The commitment to achieve 15% EBITDA margin upon the completion of business transformation has not changed.

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

Okay. Thanks, Jim. I will just touch on a few items that have not already been discussed or are already fully explained in our press release. First, a brief explanation of our tax rate in the quarter. The effective tax rate on our adjusted earnings which was 26.8% in the second quarter is obviously a lot lower than our tax rate guidance of 30%.

So I will try to provide a simple bridge between the two rates. First, our expected geographic mix of earnings has shifted towards lower tax jurisdictions and we are starting to get some benefit in Europe from moving legacy Forbo commercial activity into legacy H.B. Fuller entities that have lower marginal tax rates.

These factors together lowered our tax rate in the second quarter by about hundred basis points. These benefits are assumed to be recurring and form the basis of our revised tax rate guidance at 29%. And second, we had some one-time tax credits in the quarter that lowered the rate another hundred basis points.

And then finally, we had favorable discrete items that lowered the rate by over 100 basis points, which completes the bridge from the guidance rate of 30% to the effective rate in the quarter of 26.8%. Now just a few comments about our operating cash flow in the second quarter.

The two main drivers of the negative cash flow result were higher accounts receivable balances and higher inventory balances relative to the end of the first quarter.

The increase in accounts receivable was primarily attributed to the growth in the business overall, the high level of sales in the final month of the quarter, and an increase in overdue receivables in our North American business related to the process disruptions during the Project ONE go live.

We anticipate that all the Project ONE related impacts will be resolved and our receivable balances will be back into normal range by the end of the third quarter.

The inventory increase from the first quarter primarily relates to the business integration projects in Europe, Asia as we build safety stocks to bridge between the time certain production lines were shut down to the time the new production lines were fully commissioned and running at normal rates.

Again, we expect our inventory balance to return to more normal levels by the end of this fiscal year. Capital spending levels have been elevated in the first half of the year as the business integration winds down in Europe and China and as Project ONE progresses through the design and build phases of the project.

We expect capital expenditure levels to drop in the second half of the year, in line with our original projections for full-year capital spending of about $105 million. Now I will turn briefly to our guidance for 2014.

We are adjusting our full-year earnings per share guidance down to a range of between $2.80 to $2.95 from the previous range of between $3 to $3.15 per diluted share. Our original plan for the year anticipated margin improvement in the second half of the year following the completion of our business integration project in Europe and Asia.

Since the European portion of the project is delayed, margin expansion will be delayed as well. In addition, some of the other raw material foreign exchange pricing issues that were negatively impacting margins in the second quarter were not anticipated in our original plan and will take some time to overcome.

The large majority of the earnings reduction that we are indicating with our revised guidance is related to our expected results in the third quarter of this year, with the fourth quarter expected to come in only slightly below our original plan for the year.

We are also adjusting our guidance for our core income tax rate, which excludes discrete items to 29% for the full year, down from the previous guidance of 30% as I described in more detail earlier. Our outlook for revenue growth remains unchanged.

Specifically at the beginning of the year, we indicated that we expect our revenue to increase at the low end of our long-term growth range target. Our revised earnings guidance assumes full year revenue growth of about 5%. And with that I will turn the call back to Jim Owens to discuss the Tonsan Adhesives acquisition announcement..

Thanks, Jim. Before we open this call to your questions, I want to tell you how excited we are to announce that we have reached a definitive agreement to acquire Tonsan Adhesive based in Beijing, China. Tonsan is a premier company focused on the engineering adhesive market space.

Engineering adhesives make up approximately 30% of the global adhesive market and represent the most profitable segment with above average growth expectations. The engineering adhesives market is composed of the highest value technological formulations that address the most demanding customer requirements and solve specialized customer problems.

Tonsan brings unique and differentiated silicone, epoxy, anaerobic and cyanoacrylate technologies to H.B. Fuller and this will facilitate our global entry into this important segment.

With this acquisition, we will gain strong customer relationships in high-value, fast-growing engineering adhesive markets, state-of-the-art manufacturing facilities in Beijing and Suzhou, China and strong product and technology development capabilities.

We also inherit a great team of scientists and application experts who have outperformed global competitors in meeting some of the world's most demanding adhesive applications. Tonsan was created by four young entrepreneurs who built the company from the ground up over the past 20 years.

Today, the company has about $100 million in annual revenue and a normalized EBITDA margin of just under 20%. The company has delivered a five-year compounded annual growth rate of 20%. The growth prospects for the company are bright based on both the current positioning of the company and the additional resources that can be provided through H.B.

Fuller's global network. This business is a great strategic fit for H.B. Fuller. First Tonsan provides a strong entry point into the attractive engineering adhesive market where H.B. Fuller currently does not play. Second, Tonsan will make us stronger in China.

The acquisition not only provides critical mass for our Chinese business, but it also brings a strong commercial presence and solid technology and application development resources that can be leveraged across the entire business in the region.

Additionally though Tonsan does not currently have a significant position in the electronics adhesive market segment, the broad technical capability of the company will be leveraged to support the previous organic and inorganic investments we have already made to establish a strong position in the electronics market segment.

This acquisition provides three significant synergy growth opportunities. First, we will be able to sell current Tonsan products to multinational companies that currently manufacture in the region. Many of these customers require global partners. They have a global presence to ensure quality and consistency around the world.

They also require presence at the global headquarters where global decisions are made. H.B. Fuller has the global account management confidence, the presence and reach in Europe, Japan and the Americas and a global brand with 127 years of success behind it. The second major area of synergy will be the ability to sell H.B.

Fuller products through Tonsan's local sales channel. Although they have a robust product portfolio, we at H.B. Fuller have many different technologies that can add additional value to Tonsan's local customer base. The largest opportunities reactive hot melt products, which we produce at our Nanjing, China location.

The final significant area of growth will be globalization of Tonsan's range of high-performance products to high-value markets such as electronics, automotive, heavy machinery, transportation and solar and globalize them. Tonsan has built a $100 million business in China, but the global market is more than five times as large as China.

With our combined technical breadth and expert market knowledge, we will grow in ways that were not possible when Tonsan was an independent single country company. Clearly this is a strategic significant milestone for H.B. Fuller full of opportunities in both the long and short-term.

If you go to Tonsan's website, it will show you their corporate model, together we create. It speaks to how Tonsan collaborates with customers to create specialized high-value new solutions. With H.B.

Fuller, together we create, takes on new meaning as the management of Fuller and the owners of Tonsan are committing to creating an exciting future for the employees, customers and the shareholders of both companies. That's the end of our prepared remarks, and now I would like to open the call up for your questions..

(Operator Instructions) We will take our first question from Mike Sison of KeyBanc..

Hi, guys. Good morning..

Good morning, Mike..

In terms of your reduced guidance, can you walk us through, I guess that the midpoint is down $0.30.

Will you get that $0.30 back in 2015? And then just as sort of a quick for the follow-up, given that you have delayed some of these savings and margin expansion, do you think your team is ready to bring Tonsan on and integrate and maybe what the synergy level would be? Would it be like $20 million, $10 million? Kind of give us a little bit more info on that.

Thank you..

Okay. So yes. Two good questions, Mike. Let me cover a bit of both and then I will throw it to Jim. In terms of the guidance, I think it's $0.20, the midpoint moved. And as Jim mentioned, the biggest part of that is third quarter and the biggest part of that is related to the European transformation.

So I will let Jim give you a little more color on that, but I would say that is the primary driver of what's happening. It's a significant change in our dynamics and it's a significant part of our 2015 plan.

So I think what you are seeing here is simply a result of this transformation project is delayed and the benefits are delayed, along with a couple other issues as I covered in the business that are going to affect us in the third quarter.

Jim, do you want to add to that?.

I think that's pretty much it. I think it's critical that we get to the fourth quarter results that we are looking for and we indicated that we think our fourth quarter is going to come in very close to what our original expectations were. So I think that's a critical milestone for us.

With respect to 2015, of course we will give you the specific guidance once we get closer to that. But for now, I can just tell you that we are still committed to making our key milestone at 15% EBITDA margin.

That's still our goal, and when we put our plan together for next year we are fully anticipating that we are going to drive the organization to that level..

And then on a second question, well a couple of points. One, we have an opportunity like this and this is a very significant business strategically. The opportunity to enter a new space, strengthen us in China and very sizable synergy opportunities.

So as this opportunity develop itself, it's certainly a strategic move that the company needed to capitalize on as it became available. So I think these kinds of opportunities do not come around every day. This makes a big difference.

It is a very significant global competitor that fortunately we have been able to work together with to make certain it becomes part of our success plan for the future. In terms of handling it, in lots of ways, the timing is good. We will be on the back end of the transformation. We will be through Project ONE go live.

We have a team that's dedicated toward this. And the other thing I would say about this deal very different than what we would have done with Forbo is this won't be a huge integration project. We are going to take a very successful well-run company and leverage resources to help them, but we don't intend to do some massive integration project here.

This is about driving those three areas of organic growth synergy that I talked about bringing success to multinationals in China, bringing some H.B. Fuller products, putting it in the hands of the Tonsan team and then globalizing this effort.

The market is a lot bigger outside China, and the technological success they have had we can bring around the rest of the world. So I think from a separation of resources and targets, I think the organization is very well poised to leverage this.

Jim, did you want to add something to that?.

No..

Is that good, Mike?.

Yes. Thank you, guys..

Thank you..

We will take our next question from Mike Ritzenthaler of Piper Jaffray..

Hi. Yes, good morning..

Good morning, Mike..

On the Americas adhesives margins, looking at them basically being flat year-on-year.

Is that a trend that is expected to filter into 3Q and 4Q? Or are there, as we enter a higher selling periods, is there room to move that higher?.

That was specifically the contribution margins that were flat. So I think contribution margin is raw material rate relative to pricing. So we don't expect upward or downward movement in contribution margin. But as I said, when you take Project ONE cost aside, we were able to drive EBITDA margins higher this quarter, and I think we are optimistic.

It's a strong business. They have made it through two very big changes, the European or the Forbo integration, and now the Project ONE go live. So we are optimistic about what that business is able to do, both in terms of growth, but also they have shown a good ability to stepwise and improve their margins over time.

So that answers your question, Mike?.

Yes, and just to follow up on that. On the confidence in 4Q being less impacted than 3Q, I guess this particular step has been a little tough to predict over the past six months or so. I am interested in gauging your confidence in being able to deliver that fourth quarter..

I would say, it's very high around Q4, right. I think as an organization, we are through a lot of the troubles here in Q2, right. I think the challenges we faced were some big changes in the European transformation and made it over the biggest plant closure, some scale up in Europe that had to happen, two major closures in China.

All that happened in Q2 along with the Project ONE go live. So I think when you think about where we are at, lots of things happened in Q2. There is some residual effect to the P&L into Q3 but really it will be very minimal impact by the time we get to Q4. So is there more color you want to add to that, Jim.

No?.

Okay. Just one final one on Tonsan, if I can. As we think about the financing of the deal and I realize that we are still bit early days here, but this will primarily be debt financed? Is that fair to --.

Yes, that's correct, Michael. That's the plan, is to 100% debt finance the deal with all the details to be worked out and communicated later..

Sure. Okay, thank you, guys..

Thank you, Mike..

Our next question comes from Rosemarie Morbelli of Gabelli & Company..

Looking at Tonsan, what is your definition of that normalized EBITDA of $20 million? Does it include, well, actually I will let you tell me what it includes..

Okay, I will let d Jim describe the word normalized. So, go ahead..

Yes. So, Rosemarie, first of all, as we said, it is slightly below 20%. So it's just an indication of what we think the run rate EBITDA should be when we are fully operational with the business. They run at about that level right now, and that's our expectation, that should be 20%.

It should be moving up towards the 20% EBITDA margin business following the closing of the deal..

So what is the amount of D&A that you are taking into consideration, and on the interest side, are you estimating, picking a number 4% or 5% on the $230 million?.

Okay. So I think there is two different things there. First of all, it's too early to say. We will communicate a lot more of the details of this. I think you are talking about accretion expectations for the deal now.

I could just generally tell you that the way we have modeled this is that the acquisition should be about neutral, about over the first year of the acquisition and then significantly accretive thereafter, but all the details of the purchase accounting and how all that's going to lay into our, consolidated into our financial statements, I am going to have to push that forward as we get a little closer to the closing and we could communicate all that to you..

And the timing of the closing? I don't remember seeing it..

Well, subject to regulatory approval, which I think is probably the biggest unknown for us, is how long that will take. We are anticipating that the closing should occur in the fourth quarter of this year. We are not exactly fully in control of that..

Yes, the biggest variable there Rosemarie is the various agencies we have to approval for, local and other jurisdictions within China. So it could happen sooner, it could happen longer but I think fourth quarters is the most likely answer. So somewhere around October..

Okay. So finishing up on that, if I may. When we look at your 2015 target of 15% EBITDA and EBITDA for Tonsan is higher than that particular level, you are not counting on any contribution for 2015 to ensure goal.

It is legacy Fuller, right?.

Yes, Rosemarie. When we talk about all of the discussions we have had about 2015, exclude any impact from Tonsan. So we will have to when we come out for 2015 guidance, we will have to assume that the deal closes. We will refresh and revise all that to incorporate Tonsan into our numbers..

Okay. Thank you..

Thank you, Rosemarie..

(Operator Instructions) Our next question comes from Steven Schwartz of First Analysis..

Good morning, guys..

Good morning, Steve..

Jim G, is it possible for you to just give us the basic split among the segments of the special items that were in COGS and SG&A?.

Absolutely..

Or basic numbers?.

Yes, that's a great question. So I will just give you the numbers. You don't have broken down between COGS. So I will go through the segments and its not broken down between cost of goods sold and SG&A but just the impact on operating income of the adjustments. I think that's what you are asking..

Yes, that's right..

So in Americas adhesives, the total adjustments were $5.8 million. In EIMEA, the total adjustments were $3.2 million. In Asia-Pacific, the adjustments were $1.4 million. In construction products, the adjustment was $0.8 million. That should add to $11.3 million. Maybe it is rounding there somewhere..

Okay. No, that should more than good enough..

Then for corporate, I could just give you a little bit more as long as we are on the subject. If you look at the corporate consolidated P&L, I will break the adjustments down between COGS and SG&A. So the cost of goods sold amount was $5.4 million and the balance was in SG&A..

Okay. All right, and then if I could just do one follow-up. Jim O, on Tonsan, the five-year revenue CAGR 20%.

Do you see that going higher with the sales force synergies? Or do you think it maybe tapers off a little bit? And behind that question is, is your sales force, the Fuller sales force outside of China already capable of taking these products into the new markets that this opportunity opens up for you?.

Yes. So well, we do expect significant growth rates. I am not ready to say that it will be 20% or exactly what number it would be but significant growth rates is what we expect in combination of those three areas of synergy and a very strong underlying business.

So the Tonsan success has been built on an ability to identify markets and do extremely well in those markets. So as we identify market segments, invest and grow in those markets, that's a big part of the success formula.

So significant growth rates, but we need to look at today's world, today's opportunities and then share that with you as we lay out our plans going forward in 2015 and beyond where I will be giving you a 20/20 plan and I will include some of this in there as well. But significant growth rates would be my short answer.

In terms of our capabilities around the world, we need to build those capabilities. So we have a good network. We have people that competencies and capabilities. But the actual people that will leverage and sell these products will be experts in those market segments.

So we will develop those and grow that global network to support Tonsan in China, but also leveraging Tonsan products around the world. So we will leverage the existing management team, the existing infrastructure, the existing technology team, but we will have to build more in terms of specific confidence in this market segment..

Okay, great. Thanks, guys..

Thank you..

Our next question comes from Dmitry Silversteyn of Longbow Research..

Good morning. A couple of questions, if I may..

Good morning, Dmitry..

How are you? One on Tonsan acquisition, (inaudible) businesses as it stands right now.

Can you talk about the plans for, or if you have plans to getting to 100% ownership or in other words, what's the sort of earnout and what's the path for the owners of the business to become managers to monetize the remaining 5%?.

Dmitry, this is Jim G. So as we indicated in the press release, the founders of Tonsan are going to remain shareholders in the business and they are going to remain key parts of the management of the business going forward, which we think is a great asset in the deal.

The people who are accretive to the company are going to stay with us and be part of our team and help us drive the business forward going into the future. And we anticipate that sometime down the road that we will become a 100% owner of the company, but that's down the road and we will just have to see how that develops as it goes forward..

And I would say, an important objective for that team, Dmitry, is these people have built a great business. They have a great pride in what they have done. They have a great team of individuals who have come along with them and their key objective here going forward is to make certain that the success continues.

So while the globalization of the business is a key corporate objective for Fuller, it's also a dream and a purpose for these people. So for them, the ability to be a part of this is really an important part of what they want and fortunate for us, it's a part of what we want.

These are four very talented individuals that have built this company and they have built a great team of people. So that whole process of driving the success is a joint vision of us and the Tonsan management that we are going to make a reality..

Jim. So just to clarify, there is no time frame or no IRR type of considerations in the purchase agreement. So everything is going to be decided on the road, basically..

Yes. Well, we have certain parameters. We have a certain timeline and a certain set of parameters around how the 5% will be transferred or could be transferred in the future. But the precise details of at what cost and what time are not fully resolved.

So I think these are also things that we can communicate more to you, once we get closer to the closing and we can talk to a little bit more about details about what our expectations are for turning the 5% into a wholly-owned situation, but again I think right now we are working on trying to get the deal closed, and before we get into all the details about what happens after the deal closed..

Got it. Okay. The market that this business is selling into, which you have described and which obviously are very attractive in the region that you have done the deal, also, at least in my understanding are speculative markets and therefore have somewhat longer selling cycle.

Can you talk about how quickly you can exploit the three synergies that you see in the sales side? In other words, getting your products into their customers and getting their products into your customers in China and then globalizing the business as a third step? Are we talking about six-month selling cycles? Are we talking about 18 to 24 months design type selling cycles?.

Yes. Each one of these segments is a little bit different, Dmitry. So there is no short answer, but is somewhere between six and 18 months. I would say, there is none that are longer than that. I think the first two synergies can be capitalized on more quickly. So the idea that we can leverage through multinationals.

They have relationships with the local people. They have the technology and the reputation in China. By bringing a global backbone to that, our ability to penetrate multinationals in China will be an early win. Certainly the ability to bring our reactive hot melts into their business. This is a core technology that H.B. Fuller is very strong in.

We have a great facility right there in Nanjing. And that's a tool that will be in their toolbox that can happen quickly. So those two pieces we see rather quickly. The ability to globalize this business, Steve Schwartz just asked the question, we have to build some of the competencies and the infrastructure globally.

So that will take a little longer but we are developing very specific plans on that one as well..

Got it, and then one follow-up question, Jim, and just a clarification on Rosemarie's question earlier, regarding the EBITDA margins and what you mean by normalized. So if I understand the answer correctly, and please correct me if I am off, but it is something under 20% as a standalone entity now.

You expect it to decline a little bit after the acquisition, because of all the extra costs, D&A and so on and so forth.

But then make its way back up to 20% in two or three years as you integrate the business and get after some of these synergies? Is that the right way to think about the margin progression on that business?.

I think that's our working scenario. And so, yes, I would just say I think that's probably a pretty good way to look at it..

Okay. Thank you very much. I will go back into queue. Thank you..

Thanks, Dmitry..

Our next question comes from David Begleiter of Deutsche Bank..

Hi. Good morning. This is actually Jermaine Brown, filling in for David Begleiter..

Hi, Jermaine..

A few questions.

How did Americas adhesives demand progressed through the quarter and how is it currently trending in Q3? And then can you sustain the volume growth of 5% in the second half?.

So I think I mentioned in the script, we saw a good positive strong finish to the quarter. So we do expect a continued positive volume growth as we go through the rest of the year. So we feel pretty good about that. I think that the team in the Americas really did do an amazing job this quarter. These SAP implementations are tough.

They work through all those issues, worked exhaustively, make certain we didn't impact customers dramatically and grew the business sizably. So we are optimistic about what the team can do as they focus fully on some of their growth agenda..

Understood.

Is your market share stable or growing within Americas adhesives?.

Well, I think in our view of what's happened in the economy at 5% volume growth, I think most people would agree that's an increase in share..

Got you, and then within Asia-Pacific, what drove the 14% volume growth? And is this also sustainable?.

Well, it's a pretty diverse business, we are in Jermaine. So there are all kinds of issues. So as I said, there is a -- our team in China has built some really good success in our core markets, hygiene, packaging, durable assembly. They have got targeted customers, targeted wins and they have also leveraged that multinational confidence.

So these multinational companies are trusting H.B. Fuller to help them grow and develop. So those all come together to really be a great story in our China business as well as Southeast Asia.

And as I mentioned, in Australia we have got a couple of years where we have seen actually negative growth and seeing Australia go positive for us is a really good sign and we expect that to continue. So on all fronts, we have high expectations and we see good positive progress across all parts of our Asia business..

Understood. Thank you very much. I will head back in queue..

Thanks, Jermaine..

(Operator Instructions) Our next question comes from Christopher Butler of Sidoti & Company..

Hi, good morning, everyone..

Good morning, Chris..

Just staying on Asia, could you remind me what the anticipated savings from the plant consolidations will be as we start to think about that segment in 2015?.

I don't think we have identified a number out there, because it's both an investment and a savings. There is some savings in the plan.

Jim, do you have more color to add there?.

No, I don't. It's a good question. I don't specifically know the number, Chris..

Yes. At a strategic level, Chris, what we have looked to do is, reshape the business with more productive assets and higher capacity. So we are investing for growth here with a smaller footprint. So that's the overall strategic play.

It's not a huge cost play but there is some cost savings there that are that are built into these two plants being consolidated into the other facilities. But it's not a huge number..

And looking at the SAP implementation, as you think about 2015, do you see benefits from that as you can better utilize it in North America understanding that there are going to be cost associated with the South American rollout?.

Yes, I think as we similarly rolled it out, our plan here is to do a really nice job of implementing this through 2015 and into early 2016 and then attack the benefits in 2016. The benefits we are going to see on the back end of this are going to be certainly working capital reduction.

We see some savings in sourcing, some productivity improvements in some of our shared services as well as in our IT cost. But those are mostly back end and I guess, late in the year, we will probably give you view of, if and how any of those are going to effect us in 2015 but I think that was our view going in and I think it is still our view..

And just finally, do we get to volume growth in Europe in the third quarter? Or with the final closures and vacations and World Cup, is this going to be more about fourth quarter volume growth story out of Europe?.

Well, given the results so far in the World Cup, it doesn't look good in Europe. So I would say, as I said that a couple of quarters ago, we expected it to go less negative. It did. I expect it to be better in Q3.

Whether that's slightly positive or slightly negative, we will see that as the quarter progresses, but closer to flat and then positive by Q4 would be the way I would look at that. But positive progression from where we are today is what we are predicting in Europe in Q3..

I appreciate your time..

Thank you, Chris..

Our next question comes from Rick D'Auteuil of Columbia Management..

Good morning. Just a quick question regarding the acquisition.

There was a reference, a question on whether your revenue synergies would be additive to the historical growth rate of 20%? And you made, I think in your answer, a reference to, in these conditions or -- maybe it would be helpful to learn what their most recent two years growth rate was within that five-year CAGR?.

Yes. So I think as we review the closing, we will be able to review more details about Tonsan, the market segments they have grown and the specifics, but given where we are in the process, sharing all the details of their history is not something we can share today. But I would say that the long-term history of this business has been very positive.

Part of their success was built on very significant growth in the solar market, which as many of you know, if you look back over the last couple of years, it hasn't grown as much but is now growing again.

So we will parse out some of that as we go forward, Rick, and give some more specifics, but I don't think we are at liberty to just go to all the details of their numbers year-by-year at this point in the process. Once we close, we will be able to give you that in more specifics..

Okay, thank you..

Okay..

Next question comes from Dmitry Silversteyn of Longbow Research. Mr. Silversteyn, your line is open..

Good morning. Again, sorry for getting in the call repeatedly.

I just wanted to follow-up on the conversation earlier about the construction business and I guess trying to understand the significant topline growth which we are experiencing in lower year-over-year operating profit dollars, which I think you attributed to the pricing strategy to meet the Menards demand.

Can you talk a little bit about? And how quickly you expect pricing to recover so we can actually see profit growth year-over-year in that business, not just topline growth?.

Yes. So there is two specific issues, right. One is actually the manufacturing and operating costs related to Menards. So they have a different business process and we had to load up their organization very quickly. It was a very significant transition across all of their stores quickly.

So that led to a lot of temporary labor or new processes, cost that weren't as efficient as we needed to. That's the biggest chunk of what happened in CP the first half of the year.

The second thing I have referenced was not specifically related to Menards but some pricing decisions that were made at the end of last year, expecting some costs to come in line that did not happen as we had projected. We are now in the process of adjusting some of those prices and those costs.

Those will get better in Q3 and we would expect to see some sizable progress in profit performance again by Q4 this year. So good positive progress in Q3, sizable progress by Q4, Dmitry..

Got it, and then a final question, just to sort of put it all together but you talked about the integration project in Europe being about six months later but Project ONE is costing you more than you anticipated. You have a raw material spike.

You have the pricing issues in construction products that you just referred to that will take a couple of months to resolve. With all of that, I guess you are still very confident about your 2015 targets.

So I guess my question is, what will be the positive offset to all of this? Whether it is topline or quicker margin realization? Or did you have a lot of safety built into your 2015 expectations? So that even with all these issues, you are still confident that you are going to hit those numbers?.

I would say the real important part of both the European transformation story and the Project ONE story is that the extra costs we put into the business were all about supporting our customers.

So we took a very decided approach to delay some things on the European transformation and to invest a lot of people's money and time doing the SAP implementation in support of customers. And that's showing up in our volume growth, right. So Menards is another similar story, right.

Because they wanted us to move so quickly, we had to put a lot of cost in the business. So I would say the positive that's come out of this is clearly some good positive organic growth in the midst of some major significant effort. So you can see as those cost peel off, as those extra cost peel off, what's going to happen to the P&L.

So I think it's a delay and added cost upfront all about supporting our customers so that we are a strong long-term healthy business..

Okay. Thank you..

Thank you..

(Operator Instructions). Our next question comes from Rosemarie Morbelli of Gabelli & Company..

Thanks.

Dmitry asked my question on construction, but if I can follow-up, that 20% volume growth that is because of filling up pipelines, right? Where are in that particular project and what kind of a normalized topline growth can we -- I mean the volume growth can we expect on the construction side once you are done in the timing of that?.

Rosemarie, this is Jim G. Yes, the volume growth is really not related to the channel filling or however you describe..

Pipeline..

Pipeline. We just ramp the business up to its annual run rate in the first quarter and we ran at run rate in the second quarter. So I don't think there was really any impact there.

Like we have indicated that at the beginning of the year that we thought our CP business volume would be up close to 20%, it is up close to 20% and we think the second half looks favorable. So we may not achieve full-year volume growth of 20% but we are really pretty close. I think that's our expectation..

And that is because of the recovery in the U.S.

housing market and you are participating in new business related to that particular trend?.

No. Well, the vast majority of the year-over-year growth in CP relates directly to the new business, one with Menards and then a smaller portion relates to overall growth in our other channels..

Okay, and the margin was lower because of what you said to Dmitry as an answer to his question that was then a factor in that as well? The higher cost of VAMs?.

VAM is not a factor in that business, Rosemarie. It is a factor that affected a little bit our North American business. They were able to overcome it because of the nature of some of the contracts and supply chains but it had big impact on our European business..

So now that you have gotten your act together, if I can phrase it this way, then we should have a substantial margin improvement sequentially on the construction products business?.

Yes, and as I said to Dmitry, we expect fully to get there by Q4, but some nice positive progress here in Q3..

Okay. Thank you..

Thank you, Rosemarie. Okay. Thanks, everybody, for your time, attention today and for your support of H.B. Fuller and our objectives..

Thank you, ladies and gentlemen. This does conclude today's H.B. Fuller second quarter 2014 investor conference call. You may now disconnect..