Maximillian Marcy - Senior Manager, Treasury and Investor Relations Jim Owens - President and CEO James Giertz - EVP and CFO.

Mike Ritzenthaler - Piper Jaffray Ram Sivalingam - Deutsche Bank Jeff Zekauskas - J.P. Morgan Christopher Butler - Sidoti & Co Dmitry Silversteyn - Longbow Research Rosemarie Morbelli - Gabelli & Company Steven Schwartz - First Analysis.

Good morning and welcome to the H.B. Fuller Third 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 and instructions will be given at that time, if 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..

Thank you Lisa 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 the non-GAAP measures discussed today should not be construed as an alternative to the 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. A reconciliation of these non-GAAP measures to the nearest GAAP measure is provided in the earnings release our company issued last night.

For more information, please refer to our recent press release, quarterly reports on Form 10-Q dated June 27, 2014 and 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.

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

Thanks Max and thank you everyone for joining us today. The disappointing results of this quarter are a result of two important transformation projects which went live in the second quarter and was scheduled to be fully operational in the third quarter. Both are taking longer and incurring more costs than originally planned.

I will start this call giving some broad perspective on these projects and the third quarter results and then provide clarity on the actions we are taking to deliver our targeted results going forward.

The summary is that we are unhappy with the quarter but remain very confident in achieving our long-term goals of 15% EBITDA margin and solid organic growth. I look forward to clarifying what is behind the numbers and answering your questions so that by the end of this hour, you’ll have clarity and confidence around the future performance.

In 2010, we set out to deliver a multiyear aggressive plan to deliver strong organic growth and EBITDA margins of 15%. In 2011, 2012, and 2013, we delivered significant progress and delivered our targeted financial results and improvements.

In 2014, we began the year with another aggressive step in our plan and two major events were scheduled to occur in quarter two; the smooth go live of SAP in North America and an efficient startup of new assets in Europe. When these two things did not go as planned, we put in a third quarter recovery plan.

That plan showed significant progress in quarter three. However, we learned that this plan was going to take months not weeks and be more costly than anticipated.

The fundamental investments are sound and will deliver transformational benefits as we reorganize Europe to make it more productive and upgrade an aging infrastructure and operating system around the globe. The positive impact on our financial results will be significant but it has been delayed and is resulting in extra costs in the short term.

We have taken significant actions to ratchet up our performance across multiple dimensions of our business, and as a result, our performance will improve significantly in the fourth quarter and next fiscal year.

Our action plan is has the projects mostly complete by the end of the fourth quarter paving the way to vastly improved operating performance in 2015. I’ll discuss some more specifics about this later in the session. We understand the root causes of our operational challenges this year, and they are project related.

They are temporary and they are fixable by us and do not change the fundamental strength of our strategy. In fact, we know once completed, these investments we are making on our European business and our global information technology platform will make us stronger.

So after a disappointing quarter, we picked ourselves up, made some significant course corrections within our business and recommitted to achieving our strategic and financial goals albeit a bit later than we originally planned.

One of the frustrating aspects of this year has been that our operational problems have overshadowed many significant achievements. For example, our growth outside of Europe was 5% in the quarter and 6% for the year-to-date.

Our construction products business has grown significantly and captured market share through innovative product introductions and the building of stronger relationships with our customers.

Our recently announced acquisition of the ProSpec business will make our construction products business better and will support further strong organic growth next year and beyond.

Our investments in India in electronics are showing sizable and profitable growth trajectories, and in June we reached an agreement to acquire Tonsan Adhesives based in Beijing, China.

Assuming regulatory approval in the months ahead, the addition of this business will provide a platform for growth for many years to come in the growing and attractive structural adhesives market, a segment that we do not serve today. These are just the few examples of accomplishments in our business that will drive our future strategic success.

For the remainder of the call, I’ll provide a little more color on what’s happening in each of our four operating segments and also discuss in more detail the status of our two major investment projects and the changes we are making to rapidly improve our execution.

Then Jim will give some more details on our financial performance in the quarter and our expectations for the fourth quarter and beyond. Finally, we’ll wrap up with a question and answer session.

Our Americas Adhesives business extended its organic growth trend this quarter with volume growth of nearly 4%, representing incremental improvement from the prior quarter. 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 manage Project ONE related issues in North America and support our customers.

On the profitability side, the reported results show a significant decrease in EBITDA margin versus the comparable period last year, which was primarily attributable to additional unplanned costs to support the ongoing efforts as a part of Project ONE.

Margins in the Americas were also impacted somewhat by the tightness in the vinyl acetate monomer, VAM market which reached the Americas during the quarter. We have taken steps to mitigate any ongoing impacts of the disruption in the VAM market, and this negative impacted margin should be eliminated in the fourth quarter.

Our construction product segment continues to grow in line with our expectations with volume up about 19% versus the prior year. We continue to build a great distribution network to deliver products to a broad range of end users.

We highly value our strong and expanding relationship with Lowes in the United States, and we are proud to be the exclusive supplier of tile setting materials from Menards. At the same time, we are committed to enhancing our key relationships with independent distribution partners across the U.S.

After the end of the third quarter, we successfully completed the asset purchase of ProSpec. ProSpec sells a similar range of tile setting and floor leveling products offered by our construction product segment. Whereas H.B.

Fuller has a solid manufacturing network in the Midwest and Northeast regions of the U.S., ProSpec will provide manufacturing facilities and a solid customer base in the South and West part of the U.S.

This additional footprint and solid distribution network will enable us to continue to grow this segment with new and existing customers but with a more cost efficient manufacturing and logistics footprint. Although growth remained strong, profitability in our construction product segment was below our expectations.

Hampered by higher production and logistics costs, as we developed an efficient supply chain model for our newly won business and also by some raw material cost inflation that was not yet fully offset through reformulation in pricing. Going forward, we expect further growth in the fourth quarter and margin expansion.

In the long-term, we continue to expect an EBITDA margin of over 15% in this operating segment as our manufacturing and supply chain processes become more efficient benefiting from new investments and additional scale. Our Asia Pacific segment also performed well on the revenue front with volume growing nearly 7% during the quarter.

Our business in China increased volume about 10%, Southeast Asia produced double-digit volume growth and is on track to maintain elevated growth rates through the remainder of the year, Australia delivered a flat organic growth performance.

Overall, the region is progressing in line with organic growth expectations and has continued working to elevate margins towards our long-term strategic goals. Finally our European business continues its still operating mode, running the business while at the same time transforming the business. Volume was again negative year-over-year.

This was a significant deviation from our expectations and a significant factor in missing our overall financial performance for the quarter. The landscape in our EIMEA operating segment continues to be sluggish and market demand in the core of Europe and relatively weak demand in the emerging economies such as Turkey and the Middle East.

This combined with the supply chain problems within our business has led to disappointing volume performance. The profitability performance is directly related to the business integration activity. When this project is finished, the profit profile of the business will move quickly towards the long-term targets.

In summary organic growth is moving in the right direction, albeit at slower rate than we anticipated due to the project distractions. Raw material cost increases and supply disruptions are being addressed and our major projects will be largely behind us in the next quarter.

Solid fourth quarter to provide a strong starting point for a successful 2015, a year for stepping forward again. Now I would like to talk about our two major investment projects in more detail. First was an example of the types of issues we are managing and then a view of how we are attacking the issues.

In Europe our capital investments are enabling us to move from a highly manual operation to an automated operation. An example of that is the nine automated packaging lines we have installed to fill small packages. All nine are commissioned. But at the beginning of the third quarter none were operating at the expected level of output.

Today three lines are operating at targeted levels and we expect by the end of fourth quarter that between 7 and 9 we will be operating to performance standards. Until these lines are operating effectively, we incur significant labor costs and reduced productivity to produce product on a new line that was not designed for manual packaging.

Optimizing each of the newly installed lines and operating units across the entire system is what will drive our financial performance. In Europe we have restructured our project management approach from startup mode to optimization mode in order to ensure completion of the business integration project in the coming month.

The changes include increasing the engineering resources at our production facilities to bring the capital equipment up to full run rates. Forming a team to address the increased rate complexity and associated costs and a revitalized focused on net margin management through pricing, reformulation, and increased use of newly available bulk materials.

The action list is extensive and there are many specific action items targeted in each category. Currently we have commissioned our new production equipment and we continue to transport for more volume each day to its final production home. And the lines are getting more and more efficient.

However, due to the inefficient lines speed thus far we have forgone volume growth opportunities because the capacity is not yet available. Overshadowed by our operational challenges in Europe are some great accomplishments over the past two years.

We have closed four of the five production facilities that we plan to idle, and invested a great deal of capital on the seven facilities that will remain.

We have reduced our SKU count by 45%, reduced packaging formants by 65%, transferred nearly 50 kilo tons of products to a new facility and dramatically improved our sourcing and sales organizations.

As you may recall, the ultimate goal of the project was to build a superior platform across the region to improve margins and to support profitable growth far into the future. Taking on this substantial project required a great deal of change and many simultaneous projects being completed and lock step with one another.

The initial vision for HB Fuller Europe is coming to reality. It’s delayed from our initial timeline. Now, just a few words about Project ONE, as I mentioned previously the effort required to adopt a new system and return to normal productivity levels has been longer and more costly than we had anticipated.

The system is stable and fully supporting our ongoing business needs but productivity is still below expectations, which is unacceptable. In SAP system, all elements of the business need to perform to standard at every site, every day.

And if it doesn’t manual intervention will happen outside the system and working outside the system can be very costly. For example, at the beginning of the quarter the weekly level of expedited freight we were incurring was 11 times normal levels. As our teams worked diligently to learn the system but still minimize impact to customers.

Today our automated performance in the system is better and expedited freight is about five times normal levels. This is expected to be close to normal levels by the end of the quarter. We have taken several significant steps this quarter that are improving our situation.

Most significantly we have added a new project leader who has extensive experience implementing SAP. We have also refocused our core implementation teams on quickly resolving lingering productivity issues in North America rather than investing time preparing for future phases of go lives in other regions.

As a result of this decision we have adjusted the timeline for completing this multiyear multiphase project. We now expect our Latin America business will go live in mid 2015, a few months later than the original plan. At that point the entire Americas segment will be running on a single instance of SAP.

Later in 2015 we’ll begin the implementation plan in the Asia Pacific region with a specific go live date yet to be determined. We have also designed the implementation date on our EIMEA operating segment to sometime beyond 2015. We’ll set a specific timeline for Europe in the future.

The primary task within Europe now is to complete the business integration. Once the business is running smoothly and achieving its strategic and financial objectives we will implement Project ONE.

By that point our experience as SAP platform and the improvements in our project management capability should allow us to complete this go live in an efficient manner. Both of these projects represent huge undertakings. Both are designed to fundamentally change and enhance our business platform for the future.

We are disappointed with the degree of execution challenges that we’ve encountered in both the projects. That said we have made course corrections to quickly complete the ongoing European project work and to reduce the risk associated with future implementation events within Project ONE.

We have also invested to support customers and minimize disruption in the market. We will be successful in completing our projects and the results of this will be seen in the short term. With that I’ll now turn the call over to Jim Giertz to provide more details on the quarter just completed and our outlook for the remainder of the year..

Okay, thanks Jim. I’ll just spend a few minutes providing some additional information about our financial performance in the third quarter and then briefly discuss the implications currently resolved for the remainder of the year.

On the revenue front we posted relatively strong organic growth in each operating segment other than EIMEA with the soft end market conditions combined with our internal supply chain issues led to a volume decline of about 5%.

Revenue shortfall in EIMEA was a significant factor in missing our internal operating volume and earnings per share productions for the quarter.

As Jim mentioned earlier, the volume growth in Americas is a positive result especially considering the disruptions in our supply chain that have occurred as part of the Project ONE implementation in the North America region.

Volume growth in construction products in Asia Pacific were again very solid, roughly in line with our projections for the quarter. Moving onto gross margin, the vast majority of the negative impacts are attributable to the European business integration and the disruption in North America following the go live of Project ONE.

In addition we continued to struggle with the availability and price inflation of VAM. The VAM situation emerged in Europe in the second quarter and then moved to the Americas in the third quarter. We believe that the negative impacts of VAM availability and cost will be fully mitigated during the fourth quarter.

SG&A spending is being impacted by incremental costs related to our Project ONE implementation. However, we have kept a close watch on discretionary spending this year and after adjusting for the excess Project ONE cost, SG&A as a percentage of net revenue is essentially flat versus the prior year.

Our reported core tax rate in the third quarter was just over 32%, a significant increase over our previous expectations of a full year core tax rate of about 29%. A number of factors impacted our core and reported rate in the quarter but the most significant net impact came from a shift in our expected mix of earnings by region.

At the end of the second quarter we determined our expected core tax rate for the full year based on an operational forecast that envisioned completion of the EIMEA business integration project in the third quarter with meaningful margin improvement in Europe in the remaining months of the year.

Due to project delays discussed previously, we are not experiencing this profit lift and we have revised down our internal projections for our European business. Lower profits in Europe drive our effective tax rate higher. Since our blended income tax rate in Europe is relatively low.

We expect our tax rate to trend down towards our longer-term target of 29%, as the profit profile of our European business improves but the core tax rate will remain elevated in the fourth quarter around the 32% level. Due to all the factors discussed today, adjusted diluted earnings per share came in at $0.42 for the third quarter.

This result was well below our internal expectations and below the prior year. Cash flow from operations was positive $21 million in the third quarter, capital spending remains elevated this year as we complete the European business integration and continue the Project ONE investment. We will overspend our original capital estimates for the year.

The primary driver of the excess capital spending is the European business integration project. Our revised estimate for capital spending in the year is $135 million. Turning now to the future, we expect to achieve significant improvements in our operating performance in the fourth quarter of this year.

The various project execution issues that have dented our financial performance to be mostly resolved in the current quarter and the impact should be noticeable in terms of lower manufacturing and logisting cost and overall better margins.

Our adjusted diluted earnings per share guidance for the quarter -- for the fourth quarter is a range of between $0.60 and $0.70.

Looking beyond the fourth quarter, 2015 we expect to be back on track towards achieving our long-term strategic goals for organic growth and margin expansion and financial performance next year is expected to be substantially improved from the current year.

Our long-term objective of achieving a 15% EBITDA margin for the consolidated business is unchanged. However, the timetable for achieving this goal is delayed by about one year. We will provide more specific earnings guidance for 2015 during our regular earnings conference call in the middle of January following the end of our current fiscal year.

And with that I will turn the call back to Jim Owens to wrap it up. .

Thanks Jim. Before we open the call up to your questions I want to point you back to my remarks at our 2013 Investor Day about 18 months ago. At that time I walked through the numerous changes we had made up to that point in the business since I became CEO.

It was these changes in the business that enabled us to transform the business and deliver the financial performance we did in 2011, 2012 and 2013. Likewise we are currently working through two important projects that are making us a better company. And those projects are enabling significant financial improvement in 2015 and beyond.

As both Jim and I have said the end goals for improvement have not changed and are clearly attainable, 15% EBITDA margin and solid organic growth. The current expectation is that the financial performance will come as planned just a bit later than we initially anticipated.

Myself and the entire management team are deeply committed and highly confident. We will successfully realize these goals and then set the stage for further advancement in our next five year plan. This is the end of our prepared remarks and now I would like to open the call up for your questions..

Thank you. The company would like to provide everyone an opportunity to ask a question. You may re-queue as often as you would like time permitting. (Operator Instructions). And we’ll take our first question from Mike Ritzenthaler with Piper Jaffray..

Good Morning..

Good Morning Mike..

Just to kick things off by making sure I understand what’s included and excluded in the non-GAAP numbers.

So excluded from non-GAAP would be acquisition cost, facility closures, and certain SAP implementation inefficiencies but included are things like EU integration, manufacturing inefficiencies, and of course things like Roth, does that sum it up adequately?.

I’ll let Jim tackle the specifics there..

If I cut all that I think that’s exactly right. So in North America we are picking up -- just to restate, so in North America in our adjusted earnings, we’re adjusting out the direct cost of the Project ONE implementation team.

And then within our North American business segment, we are adjusting out what we can I guess, I would say, easily identify as additional costs related to the disruption in our supply chain that’s ongoing. That includes some expedited freight, some outside labor or temporary labor, and some other minor items.

Now -- but it is clear that we don’t pick up all the disruption costs within North America. It’s the easily identifiable or the readily identifiable piece is what we’ve adjusted out.

But certainly there is other costs and other productivity issues within the North American business that’s not being adjusted out and flowing into the reported gross or the adjusted gross margin..

Okay, that helps.

And then just as a follow-up on, I guess, were there any particular end markets that were soft or cold in 3Q, was it like packaging durables if you could kind of frame it up, maybe not so much geography wise but maybe end market wise?.

Yes, I wouldn’t say we saw specific softness as we commented in the call. The organic growth around the world was relatively strong and we performed nicely outside of Europe with 5% organic growth, 6% volume growth in the quarter; year-to-date 6% organic growth, 7% volume growth.

So I think our European issues were probably related more so to the production lines where we were having problems. But I wouldn’t say those are end market related. They are more in line with the theme of the quarter. There are areas where we had issues with the startup of assets also led to some of the organic growth issues in Europe by segment..

Okay, thanks guys; I’ll jump back in the queue. .

Okay..

And we’ll go next to David Begleiter with Deutsche Bank. .

Hey, guys, good morning. This is Ram Sivalingam sitting in for Dave. Just quick question, if you sort of bucket the reasons for the shortfall in Q3 and Q4, obviously you have the Project ONE impact, you have the European integration, and you have the raw math pressure from VAM.

Is there any way you could quantify those three buckets for us, both for Q3 and Q4?.

I’ll give you a relative impact, and I’ll let Jim try to quantify them because one of the things that happens is these things are all interrelated. Certainly, the European integration had the biggest impact. Of the European integration, the volume shortfall was the biggest impact.

But certainly, the cost associated with serving customers was high, and I would point that a lot of these costs were fundamentally because we took a strategic decision to invest what we needed to serve our customers and minimize disruption, so we invested a lot of costs to minimize problems in the market and also to work to expedite getting through these projects.

So, while it didn’t happen fully in Q3 and we expect it to happen in Q4, we made progress in Q3. So, Europe first, Project ONE second, and VAM third. I would say though even the VAM impact is probably -- would have been smaller had we not had these two project issues to manage.

So, they are all interrelated because our ability to focus effort and adapt to changing market conditions is reduced when we are working on trying to manage some of these project issues. So, they are interrelated, but that would be my order. I don’t know if we have a quantification of those three issues though in detail Jim..

No I am not -- I think I would just leave it with what Jim just said, he kind of rank ordered them for you , I think that's probably about the best we can do for you..

Okay, that's helpful.

And then just a quick follow-up, did I hear you correctly in saying that you think the VAM pressure is going to abate as we get into the last quarter of the year?.

Well, I think we are managing it a lot better. The VAM pressure is lower, I mean the situation is getting better but we are on top of it both in Europe and North America both in terms of availability, cost management, and price management out in the markets.

So, I think all three issues needed to be managed making sure we got enough of the material at the right place at the right time, the cost associated with VAM and then how we manage pricing in the market in both Europe and North America.

We are in a much better position today than we were three months ago, and it will get better throughout the quarter as well. .

Got it, thank you. .

And we will go next to Jeff Zekauskas with J.P. Morgan. .

Thanks very much. My guess is that you are falling somewhat short of your targets for this year.

So if you look at management variable compensation, how much will it be down this year versus last year?.

Yeah, it will be down significantly I think across the business Jeff. Our steps are directly related to our performance and the performance is directly related to our budgets and that goes from the top management all the way down to the lower level of the organization. In terms of specifics maybe, Jim can share with you some insights. .

Yes, sure, if you just look at our management compensation, there is very little compensation at the management level. I think that's what you are referring to. For the year-to-date we have a positive variance of about $6 million and as we have projected out for the full year it is probably more like $9 million favorable variance.

Relative to what we paid last year. .

Favorable means you are paying yourself $9 million more or $9 million less, forgive me?.

Favorable to the shareholders, less favorable to the recipients. So $9 million less to the employees in the company this year versus last..

Prices in the U.S. Adhesives were negative, if you look at your September U.S.

Adhesives prices versus your average prices in the quarter just ended, did they change very much, were they positive or were they negative and by how much?.

September, you are talking about the first month of this next quarter..

Yes. .

Yes, there is sizable moves that we are taking from a pricing standpoint Jeff. And I think one of things, two things have happened with pricing in 2014; the VAM was significant in terms of the cost increase and as I said with Project ONE happening I think we are half a step behind instead of half step ahead in managing our reaction to that.

And then the other thing that’s happened is for all of our other raw materials, they have weaked very slowly. So, the amount of increase is very small. But again I think we have been, because of the distractions not as quick as we would normally be in moving those prices. Those things have changed here in Q4.

We have publicly announced some price increases and we have implemented -- we are in the process of implementing them some September 1, some October 1. So, yes, that dimension is changing in our North American business significantly right now..

Okay and then lastly what’s the amount of restructuring charges still to go to become efficient, and what are the remaining cash outlays to complete your restructuring that you haven’t yet spent having to do with charges that you’ve taken previously?.

Right, so you are looking for the difference between what’s been accrued and the actual cash outflow, maybe Jim can tap some of that..

Right, and how much more cost are there to come, right?.

Yes, so Jeff I’ll try to give you an idea. I think we are talking about our special charges now and those are mostly related to the completion of their business integration in Europe.

So, I think our rough estimate for the fourth quarter is that we will have special charges again in the fourth quarter that are similar to the levels we had in the third quarter. Which I don’t have right in front of me, I think is 12 million or something like that. And then we haven’t lined out the full details of the budget for 2015 yet.

But my expectation was that you’ll see a pretty sharp drop off in special charges starting in Q1 because the only remaining special charges that we will have once the final commissioning and ramp up of the equipment is done in Europe, will be the cost related to the idle facilities.

Basically maintaining those facilities in a proper way until they are ultimately sold and then at the end of August we’ll sell the properties and have a little benefit come back to us, okay. It’s kind of long answer but basically we’ll have one more quarter levels about where we are and you’ll see a substantial drop off in 2015..

Right and what are the cash outlays that have to do with charges you’ve taken previously that remain, that you haven’t yet deployed?.

Well Jeff that’s a good question. I don’t have that right in front of me but definitely the big item is the accrued compensation which has been a negative cash flow for us this year because throughout the whole project we’ve accrued upfront.

We’ve been accruing the cost of the severance payments and now since most of these plants are closed now, most of the payments have been made so, it’s simply been a negative cash flow items for this year. I just don’t have that number in front of me right now Jeff..

Like order of magnitude, is that 30, $30 million to go $40 million or $20 million?.

Yes, I just don’t know the number so I’d better not say anything as opposed to giving a wrong number Jeff..

Okay, great. Thank you so much..

And we’ll go next to Christopher Butler with Sidoti & Co. .

Hi, good morning guys. .

Good morning.

How are you today Chris?.

I’m well. Looking at your Project ONE, if I remember from the second quarter the conversation was that you went live and it took a lot more to get the Project ONE stable than expected.

Now with the third quarter it was stable but low productivity yet if we look at the numbers it looks like the third quarter kind of took a step backward with the production using ERP.

Could you kind of walk me through how this has worked out that we seem to be moving backwards a little bit?.

Yes, our financials are backwards but the performance is forward as the question. Well for one it was the middle of the second quarter that we began the implementation.

So it wasn’t at the beginning of the quarter and then I would say part of why we got in the hole was because the issues that we had to manage started to show themselves three, four weeks into the process. So it was at that point that we had to exert a lot more resources and started to see some of the issues related with the problem.

So -- and then the cost unwind those problems is higher than actually the cost to create them. To give you an example of what I mean by it’s a lot better, when we started this quarter there is something called available to promise. This is when a customer service person puts in an order.

If the system is working right, they push the button and product is available to promise. And then the system for the most part runs -- should run very smoothly. When we started this quarter, available to promise was 50%. That means that happy orders had to be managed outside of that normal available to promise process.

By the end of the quarter that available to promise number was at 80%, just this last week we tipped 90%.

So the progress here is very significant in terms of where we were at P6 and where we are today and the added costs are because we are doing everything we need to support customers in any way, so we minimize disruption and doing everything we can to upscale the capabilities within the organization so that it is running as efficiently as possible, as quickly as possible.

Does that give you a good flavor for the answer Chris. .

It does and shifting gears over to the additional CAPEX spending for the year, could you give us a little bit more detail there, is this new unexpected expenditures or have you pulled forward from 2015 a little bit in order to get things up to speed that you thought you would be able to do next year?.

Yes, Chris, Jim G. So we upped our full year estimate of CAPEX from $105 million to $135 million. So delta is $30 million. So I can break that down for you. $15 million of that comes from increased capital spending in our European integration project and $5 million of it comes from higher capital spending in Project ONE.

I think the European integration number is just basically -- we had original estimates for capital spending and they have come in higher. I think the Project ONE variance is more of a timing issue. It is the timing of the capital spending versus our original estimates, not really an overspend.

And then there was another $10 million that I would probably classify as just bad forecasting on our part to be quite honest with you. It is a matter of internally trying to translate our internal forecast into an external casual forecast and I think just being quite honest with you we missed some of that. So, I put that last $10 million on me.

Probably we didn’t do quite a good a job of forecasting as we have could. We might have made some mistakes on that. So, that's my breakdown of the difference for you.

And then that $15 million in Europe is the real spend difference versus what we planned and that’s a combination of cost associated with installing equipment that we thought was going to take ex amount of time, labor, and effort from outside contractors that went way up.

Some equipment that didn’t operate to standards or didn’t have the kind of spares that we needed to upgrade as we installed it. Those types of changes to make certain that the equipment really drives at the productivity levels that were expected. So, that’s the summary of where we are at. .

I appreciate your time. .

Yes, thanks Chris..

And we will now go to Dmitry Silversteyn with Longbow Research. .

Good morning.

I would just like to follow-up on a couple of things, first of all can you talk a little bit and then provide a little bit more visibility on the North American versus Latin American business within the Americas Adhesives? And then secondly the construction margins or construction business margins 2014 over 2013 have been declining fairly steadily.

I understand it is function of probably general filling in these new big boxes that you have highlighted.

But when can we look for the margins there to actually start reflecting the strong volume growth that you are getting in those businesses?.

Let me tackle the first question -- the second question first. You should see a big uptick in Q4 in the margins of the construction products business, so that would be our expectation here. And you are exactly right, again what we have targeted here is we have a major customer that has a different way that we need to fill the supply chain.

It was costly at first. It is getting less costly and it will improve as we go forward. We have also got some formulation changes that we have made in a couple of our product lines that are kicking through in Q4 along with some small additional price increases.

So, there are a few things that have happened there Dmitry that we will show in the margins in Q4. In terms of the North America versus Latin America, I don’t have good data here in front of me on the detail, a level below. I will say that the shortfalls we are talking about are really about the North American business.

It is the bigger driver and it is where we are having the issues in the business. So, there is not a hidden Latin America problem in here. It is fundamentally North America problem. .

Okay, that’s helpful.

And then just looking at -- it looks like most of the impact from the issues that you have highlighted were on the gross margin, your SG&A was fairly flat, I would have assumed that at least some of the costs particularly servicing the customers would have been SG&A related, should we expect basically SG&A then to stay at these levels and the gross margins to improve meaningful in 2015, that sort of the caves in to earnings recovery?.

Yes I think that’s in line with our strategic plan Dmitry and we’ve talked about moving ourselves as we get to this 15% to a gross margin close to 30% with an SG&A cost as a percentage of sales below 18. So that’s our strategic goals, that in line with where we will be headed in 15 and 16. So I think that’s fundamentally spot on..

Okay, thank you very much..

Thank you..

And we’ll now go to Rosemarie Morbelli with Gabelli & Company.

Thank you and good morning all. .

Good morning Rosemarie..

I was wondering going back to one of the original questions, while I understand you cannot separate the different buckets of higher cost, could you give us a feel however as to what the full amount was of those additional costs and then how much do you expect it to be done in the fourth quarter.

So we have a feel we can follow the progress for this peak?.

Okay, so you’re saying the full cost associated with the changes..

Right, on an adjusted basis because somebody will see you took a lot out already on an adjusted basis and you still have a heck of a lot in order to get to that 24.8% gross margin?.

Right, let me give a little more color on some of those things and then I’ll let Jim try to attempt to answer the question in quantified fashion. Things aren’t adjusted out.

When you have these kind of problems and we have a customer with an issue we’ll shutdown a production line, insert a new product that for some reason wasn’t produced as it should have been through the SAP system, and then go back to our normal production.

There is a lot of cost associated with cleanout of the lines, added labor, reduced productivity in our system that is what’s flowing through that gross margin line. So those are the types of costs that as organization took heroic efforts to make certain that we minimized impact to customers resulted in a lot of additional costs.

People work huge amounts of extended hours, we brought in temporary labor, we had cleanouts between products all in effort to make certain that we minimized any kind of glitches to customers. So it’s those types things and when Jim say it’s tough to quantify that are embedded in the cost of our business.

And when we look at how we are operating before these two projects went live and how we are going to operate afterwards you can see clearly the margins moving up to our strategic level.

So the best indicator Rosemarie is going to be the significant improvement in gross margin that you should see next quarter and then the big step in 2015 as these projects deliver the benefits. But it’s a gross margin percentage change that you should expect to see in both Europe and North America in Q4 of next year.

Jim is there something you can add. .

I think I’d leave it at that unless you want to ask something more specific following that Rosemarie..

Well I was wondering if what’s your gross substantial for example would be 100 basis point gross margin improvement sequentially into Q4 which is still going to be way below where you were for the first half of the year? Or if you think you can do even better than that and get closer to that 27% level already by the end of this year, for the first quarter not for the full year obviously?.

Okay, so I guess I’ll go back to basically the framework that Jim provided. So if you look at our expectations for the fourth quarter, our SG&A spend is going to be similar or maybe slightly lower than our Q3 levels. And so to get the uplift in earnings per share that we are talking about sequentially, it has to come out of the gross margin line.

So you can -- I just ask you to go back and work the different scenarios on your own. And come out of the gross -- it has to come from a gross margin percentage improvement..

So I did and that is just a little under 100 basis points sequential improvement and I was just wondering whether I was a little too conservative because that gets me to the low end of your expectations which brings me to my next question. You talk about a solid Q4 and you have EPS target between $0.60 and $0.70, this compares with $0.68 last year.

So what is the likelihood that you will be at least flat with last year EPS, what do you need to happen to get there?.

Well Rosemarie given the last quarter we want to be careful to give guidance that’s well in line with something that will definitely be a ten. Our expectations is to grow the performance of this business while making changes that are definitely going to drive that in the future.

But in the short term as we did in Q3 we’re going to in Q4 invest resources to get these projects done as quickly as possible and invest resources to support customers. So that $0.60 to $0.70 includes those investments and the changes we have to make. So if your question is could we do better than that certainly, if things go well.

But I think today the prudent answer is the one we gave you in terms of where I think the performance is and the goal clearly always is for ongoing improvements in our business and we’ve shown that in the past up before this quarter and we’ll show that again going forward..

And Jim if I may ask one last question looking at Europe, just making sure I understand where you are at the four facilities you were planning in closing are all closed.

Is there anything left, do you have another two small ones that were supposed to be shutdown as well or am I dreaming?.

Just one Rosemarie, so four are closed, one is to be closed and that now has a definitive timeline in October. So, the fifth one will be closed this quarter..

So the issue was definitely not duplication of manufacturing and therefore the higher cost.

It was really that the new line were not operating the way they were supposed to, correct?.

Well in the case of this fifth facility it was duplication. So that was certainly something we didn’t plan on having that we had, but it was only that fifth plant. The wells plant that we closed in the third quarter was behind our original schedule. So there was some duplication there.

So definitely those have impacted us, but the bigger issue is the productivity issues..

Okay. Thank you very much..

Thank you Rosemarie..

And we’ll go next to Steve Schwartz with First Analysis..

Good morning everyone. .

Good morning Steve..

Yes, so just to confirm the EBITDA margin target is now set at 15% consolidated by the end of FY16?.

Well I think we knew people wanted to have a good sense of where we were. The projects are delayed about nine months if you think about our original timeline plus or minus. So I think it will be unreasonable for us given what we need to do to drive the productivity to expect that.

Beginning of 2015 we are going to be able to ramp up all the productivity and deliver 15% for the full year of 2015. So I think it will be reasonable to expect that there will be a big step forward in our EBITDA margins in 2015 and that the 15% will be delivered in the full year of 2016.

So that will be a reasonable expectations but we still have work to do to build our budgets and reassess all of those specific details. And we will give you that data in January when we’ll lay out very clearly exactly what we expect in --.

I mean it’s been very helpful Jim that you have given some of the details around the on stream time for these nine new production lines and available to promise.

It suggests a very quick recovery but the margins getting -- targets getting pushed out a full year, we really need to think about earnings and their earnings recovery being pushed out that full year or more so then just one or two quarters, is that correct?.

I would say Steve that if you think about the timeline where we were, these things were going to go live in Q2 and we were going to spend the second half of this year really getting up to speed where we needed to be. They are going to be where we needed them to be back in April by the end of this quarter.

And that means to get all that productivity you got to take the first couple of quarters of next year to really get up to the levels of performance that we wanted.

So you could argue optimistically, it should be second half of 2015 but again we got to deliver this quarter, deliver the improvements, and that’s why we are leaving a wide open window there until we have exactly where we are at. But think of 2016 as a backstab on our expectations..

Okay understood and then as my follow-up if you could, Jim G just give us some numbers around the 22.2 million in special items that you adjusted, can you give us those by segment?.

Yes, I can. Well 22 that includes our special charges. So special charges are not assigned to a segment. So the adjustments that were not special charges totaled $9.9 million and I can tell you I can break that down by the operating segments for you.

So the Americas Adhesives you would adjust up by $5.9 million, EIMEA at $3 million, Asia was $0.6 million, and construction products was $0.4 million and those should add to $9.9 million..

Great, okay, thank you..

Steve just before you go, just to clarify the special charges actually in our Q we do break them down by operating segment in our Q, they are primarily related to Europe. Okay..

I see, okay..

And we’ll go next to Mike Ritzenthaler with Piper Jaffray..

Mike are you there?.

Yes, sorry about that.

Just a couple of follow-ups if I could on the pace of business in Europe and maybe its affect on for its ability or the mechanism for passing through raw materials as that get more challenging in software volume environments? And then I guess on a consolidated basis, organic growth in 4Q is it a reasonable assumption, something similar to 1Q and 3Q of this year in the 1% to 2% range?.

So on the first question, I don’t think it’s the slow European environment that’s the issue for us it’s the fact that we are managing lots of issues in the market.

It is the fact that we have our productivity issues and service and freight issues that we are managing with customers makes the price increases -– has been making the price increases more of a challenge. And that’s changing as we are able to deliver for customer.

So I would say the external environment is normal from a pricing standpoint and it’s our project that’s slowing down -- that slowed down our ability to raise prices as much as we will going forward. The second question was about organic growth. We are optimistic about organic growth overall in the business.

I think in each one of the regions including Europe we expect to see, well especially Europe and North America we expect to see better performance. And some of these wins that I mentioned whether it’s in electronics India, some of the work we’re doing in Beijing are positive.

So, I think the trend we saw in Q2 is far more indicative of our expectations going forward than one and three..

Okay, very good. Thank you..

And we’ll go next to Jeff Zekauskas with J.P. Morgan..

Thanks. I guess I have a basic question, the SAP issues you have you’ve taken out as a nonrecurring charge and you have a slew of other nonrecurring charges.

So if all of that is non-recurring and there is a little bit of raw material cost inflation, why are the adjusted earnings down so much? In other words your adjusted pretax income I think is maybe $17 million below the year ago period.

What’s that difference, what’s caused that drop if we’ve already adjusted out all this stuff?.

I’ll let Jim try and cover the specifics Jeff. But I think fundamentally and Jim mentioned it a little bit earlier, most of the noise and cause of disruption you are not able to pull out individually. I mentioned the good example of how we have production facilities that have breakings in production lines.

We have an SAP problem, have a customer need that wasn’t anticipated that should have been in the business. We jumped out of production line, clean out the line, get it up and running, make a product, go back to our old run all of those costs associated with that kind of break are not pulled out of our P&L and not adjusted.

So those are directly related SAP but they are not pulled out. And that’s the biggest issue that’s in the business, right. We can pull out some things like expedited freight as very specifically directly up as a result of this. Other things are more broad across the business.

The entire organization has centered itself on doing what it takes to support our customers and that’s incurred a lot of incremental cost in all parts of the business. And I don’t know if you have more to add to that Jim..

No, I think that’s exactly the right answer Jeff. But I am going to take the opportunity to go back and answer the question you asked me before that I couldn’t answer I think. .

Oh good..

Yes, I think what you asked me is of all of our cash special charges that we’ve put through the income statement so far how much of it is already paid for and how much is yet to be paid for?.

Right..

So our best estimate, our total cash special charges from inception total $129 million and our best estimate is that only $10 million of that has not been paid in cash. So only $10 million of that is outstanding cash flow yet..

Okay great. .

I hope that was your question and the answer..

Yes, that is. It is very helpful. And then lastly in Asia, the sales went up nicely but I guess and even adjusted for it but profits were either flat or flat to down depending on how you adjust things.

Where is the margin pressure in Asia and is that temporary or is that going away?.

Yes, so two things there. One, we have a mixed phenomenon that happened this quarter that was detrimental in terms of where some of the growth came and if you look at the projections for Q4 that reverses itself.

We also put on some new business in our construction products business in Australia, again related to some of our relationships in North America and actually had to import products from half way around the world at high expense and that flowed through the P&L this quarter.

And that actually may have a little bit of that next quarter but that will be localized in 2015. So those are the two big elements of that for this quarter Jeff..

Okay, great. Thank you so much..

Thank you. Okay, hey thanks everyone for their time and their support and your time today..

Thank you ladies and gentlemen. This does conclude today’s HB Fuller third quarter 2014 investor conference call. You may now disconnect..