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

David Begleiter - Deutsche Bank Mike Harrison - Global Hunter Securities Rosemarie Morbelli - Gabelli & Company Dmitry Silversteyn - Longbow Research Steve Schwartz - First Analysis Bruce Zester - Advisory Research Christopher Butler - Sidoti and Company.

Good day ladies and gentlemen and thank you for standing by, and welcome to the H.B. Fuller Second Quarter 2015 Investor Conference Call. This event has been scheduled for one hour. Today's conference call has been webcast live and will also be archived on the Company's website for future listening.

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

Thanks, [Greem]. Good morning and welcome to our fiscal year 2015 second quarter earnings call. We have two figures today, Jim Owens, our President and Chief Executive Officer; and Jim Giertz, our Executive Vice President and Chief Financial Officer. As always after prepared remarks, we will have plenty of time to take your questions.

Let me also remind you that comments made by me or by others representing H.B. Fuller may contain forward-looking statements which are subject to risks and uncertainty. Our SEC filings contain additional information about factors that could cause actual results to differ from managements' expectations.

These filings can be found in the Investor Relations section of our corporate Web site at hbfuller.com also please note that our reported results include non-GAAP financial measures. These results should not be confused with the GAAP numbers in yesterday's earnings release or the GAAP numbers we will report in our Form 10-Q.

We believe that the discussions of these measures are useful to investors because it assists in understanding our operating performance and our operating segments as well as the comparability of results. A reconciliation of these non-GAAP measures to the nearest GAAP measure is provided in the earnings release our company issued last night.

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

Thanks Max and thank you everyone for joining us today. There are many good things happened at H.B. Fuller and our operating performance in the second quarter with strong evidence of improving execution and trend. Our adjusted EBITDA margin in the Americas and Construction Product segments were 18%.

Our Asia Pacific segment was at a record level near 11%, and the overall business exhibited strong cash flow generation again this quarter, bringing year-to-date cash flow from our operations to $116 million. Our EIMEA business continues to improve and will deliver the targeted performance but on a delayed time table.

Given the recent progress and improving margins across the business, we remain confident in our plan to deliver 15% adjusted EBITDA margin as we exit 2015 and for the full year of 2016.

Our current performance was delivered despite entering the year with several significant operational issues carried over from last year combined with some new challenges most notably the sharp revaluation of the USA dollar, which negatively impacted both revenue and earnings.

In the first half of this year, we have been focused on improving execution in our Americas and EIMEA operating segments, while at the same time taking advantage of significant opportunities to grow our business and expand our profitability profile.

Not every problem is fixed at this point and not every initiative is moving along at the pace we desire, but the list of positive developments is a long one and its expanding. Let me provide some examples. Our Asia Pacific operating segment is off to a fine start this year. We completed our first full quarter with Tonsan included in the H.B.

Fuller family, and the Tonsan business is operating in line with the expectations that were the basis of the acquisition. The entire organization is energized and excited about the possibilities that leverage the technology and the market access available through Tonsan.

At the same time, our legacy business in the region grew in the second quarter despite the end market challenges in the region, and the operating margin in the region was improved through strong margin management in the core legacy business as well as the addition of Tonsan.

Our Construction Product segment successfully executed a significant new product launch and expanded distribution plan with Lowe's. The segment increased revenue by over 30% in the quarter compared to last year and at nearly 18% posted the highest quarterly EBITDA margin in the history of the segment.

We have been successful in managing raw materials taking advantage of lower feed stock cost and the supply chain through the appropriate substitution of alternatives and effective price management of our products in the market.

The benefit is most evident in our Americas operating segment where operating margins improved significantly in the second quarter. And finally, I need to point out our positive cash flow performance in the quarter driven by strong earnings profile, reduced project expenses in Europe, and back to normal capital spending levels.

We still have work to do. Clearly, the European stabilization and optimization projects are taking too long to achieve the targeted operating efficiency and margin levels. In addition, we need to get our Americas region back on track of consistent and sustained organic growth.

Our plan for the second half of the year is to extend this success of the first half and convert our remaining operational challenges into opportunities creating a strong finish to the year and a positive launching point for 2016.

We adjusted our EPS guidance for the full year down from $2.60 to $2.45, the primary driver of the change is an expected higher core tax rate, and this is driven entirely by the better than planned performance in our US-based operating segments, and at the same time lower than expected profitability in the European region.

However, it's important to emphasize that our outlook for a key financial metric EBITDA dollars has not changed materially from the outset of this year.

Specifically we entered the year targeting about $280 million of EBITDA in 2015 and our current outlook is for about $275 million in EBITDA for the full year, this despite significant devaluations of currencies around the globe. We have made significant course corrections to maintain this outlook.

In essence, the negative impact of adverse currency movement and the slower than anticipated operational improvement in Europe are being offset by the successful integration of Tonsan and the benefit of managing our raw material costs.

Given that the adverse currency movements alone cost us about $125 million of reduced revenue and tens of millions in lost operating income, we think that achieving the EBITDA plan for this year will be a solid outcome. With that overview, I'll now walk through the performance of each of the operating segments.

The performance of our Americas segment continues to be a bit mixed. On the positive side, the operational problems that we experience following the implementation of the SAP software in North America are behind us.

However, we have experienced a margin pressure due to foreign currency movements since in some areas we have US dollar based costs matched against foreign currency revenue, our business in Canada being one example.

Despite this negative trend, the operating margin in this segment overall has improved now at 18.2% well above our targeted EBITDA margin of 16%.

We expect continued margin improvement through the remainder of the year as we effectively manage raw material costs and continue to streamline our manufacturing costs following the SAP implementation last year. Our constant currency revenue growth, actually a year-over-year decline of about 3% was a disappointment.

We have aggressive plans for restoring consistent revenue growth in the Americas. There are two major factors driving the end of performance. First end markets in the Americas are still not robust. The well documented weakness in consumer spending impacts the products many of our customers produce.

Second, due to the business disruption with the SAP implementation last year, our normal pipeline of new business was temporarily diminished. We have rebuilt the growth pipeline over the past two quarters, and this series of customer innovation wins will drive more positive trends as we move into the second half of the year.

All of this taken together, we feel confident in our ability to drive strong results in our largest and most profitable operating segments going forward. Our construction products segment continued its solid performance with volume growth of nearly 30%. The recently acquired Prospect business has made a solid contribution to our financial results.

The launch of tenable [ph] grout with Lowes moved ahead of schedule. The feedback we have received thus far from both Lowes and consumers is positive. But we are focused on the volume growth in our construction product segment, the operating margins are improving as well.

The adjusted EBITDA margin in the second quarter was 17.9%, over 500 basis points above the same period last year.

This result was achieved because of additional volume coming on stream this year, our investments in new manufacturing processes, the integration benefits of the Prospect acquisition, and discipline around product cost and pricing, all combining to generate the strong margins in this segment.

Our Asia Pacific segment continued to grow with constant currency growth of more than 44% inclusive of Tonsan. Constant currency growth was positive across all sub regions. Despite some of the well documented end market challenge in this region, we are still optimistic about our future potential in this segment for a couple of reasons.

First, we primarily serve domestic and consumer oriented market in China, most notably the hygiene segment where we anticipate strong ongoing growth. Second we continue to build up our electronics business in China and we have a strong pipeline of opportunities that will convert to revenue through the rest of this year.

Finally the Tonsan business provides us many opportunities for growth based on the synergies of the aligned sales organization. We're also seeing positive trends in operating margins in the Asia Pacific segment. Our adjusted EBITDA margin in the second quarter of 10.7% was up more than 300 basis points compared to the prior year.

The margin improvement is based on a variety effect including overall better customer margin management, a richer mix of revenue. Ongoing cost control and the addition of higher margin Tonsan business, somewhat offset by margin pressure derived from foreign exchange rate movement.

Overall our Asia business is a good store with many new opportunities ahead to grow and expand our market participation and our market share. Lastly, our European business, most of it is expected our EIMEA segment had a tough first half.

There are several broad forces sweeping across our European business which provides a context for a relatively weak operating performance in the second quarter. Several key external forces continue to impact our business.

End market demand in core Europe is still sluggish and end market demand in the emerging markets around core Europe is not increasing at previous rate.

Looking inward our multi-year restructuring and business transformation is now completed and we are working through a stabilization and optimization process to enhance the service level of the customers and improve the overall efficiency of the operation.

We expect to see significant improvements in our yields, our logistic cost and our manufacturing cost as the year progresses. Of the six facilities in core Europe four are operating efficiently at the other two facilities we see steady improvement in the internal operating metrics which indicates the health of our manufacturing network.

Metrics such as scheduled payment and right first time are moving in the right direction. Excess costs are being eliminated across the network. We're also seeing improvement in customer wins and a reduction in attrition rate. Progress is happening, our issue is that all of this is not happening fast enough relative to what we think is possible.

Our ability to accelerate the ongoing improvements in Europe will be an important factor in achieving superior financial performance for the year and our focus on this is intense.

With that summary of the regional performance, I’ll turn the call over to Jim Giertz to share more specifics on the financials and an update to the building blocks of our guidance for the remainder of the year.

Jim?.

Okay, thanks Jim. Our adjusted diluted earnings per share were $0.63 in the second quarter.

The increase in our expected core tax rate reduced our EPS by about $0.04 in the quarter, so if our tax rates had been maintained at the rate we assumed in our earnings guidance at the end of the first quarter our adjusted EPS would have been $0.67 essentially in line with our internal projections for the quarter.

The expected core tax rate increase due to strong earnings growth in our U.S based operating segment where our effective tax rate is relatively high while at the same time our projected earnings from other lower tax jurisdictions declined most notably Europe.

In 2016 and beyond we expect our core tax rate to decline towards the 30% level as the margin improvement initiatives in Europe take full effect and our business in the Asia Pacific region continues to grow. Our overall revenue development was soft in the quarter with constant currency revenue growth of 6.4% inclusive of Tonsan.

Foreign currency translation lowered revenue by 7% in the second quarter. Adjusted gross margin in the second quarter was up 100 basis points versus last year's second quarter and up nearly 300 basis points sequentially. The large majority of the improvement both year-over-year and sequentially was driven by lower raw material cost.

Adjusted SG&A spending was up 8% year-over-year the primary driver of the sequential increase is the inclusion of the Tonsan business. Excluding the Tonsan business, adjusted SG&A was down 2% versus last year. Adjusted SG&A spending in the second quarter was 18.1% of adjusted net revenue in line with our long term target.

Adjusted EBITDA margin for the second quarter was 13.5% driven by enhancements to gross margin and tight control over discretionary expenses. Three of the four operating segments posted significant increases in EBITDA margin compared to the prior year with each of those segments operating at historically high margin levels.

Operating cash flow was strong in the quarter supported by solid net income generation offset somewhat by higher networking capital requirements to support seasonal increases in commercial activity.

Net debt was reduced by $34 million in the quarter which equals over 6% of net revenue as capital spending has been reduced to more normal levels [accruing] up cash flow for leverage reduction. The reduction in debt reflects our commitment to improve our leverage metrics during the 2015 fiscal year following the Tonsan acquisition.

Capital expenditures came in at $11 million in the second quarter and $39 million for the year to date in line with our plan for the year. And as a final comment about our second quarter financial performance I will just add this historical perspective.

We generated 73 million adjusted EBITDA dollars in the second quarter essentially equal to the adjusted EBITDA dollars generated in the second quarter of last year. In this EBITDA generation represents the highest level ever achieved in the single quarter in the history of the company.

And this is with only three of our four segments operating at or near their full potential. So I think this is good evidence that we are getting back on track to achieve our longer term financial goals. Now let me turn to our guidance for the remainder of the year.

We still expect that year-over-year revenue growth will be negatively impacted by about 600 basis points in 2015 due to foreign exchange rate movements were about $125 million.

We are revising down our constant currency growth largely due to the lower than expect revenue growth in the Americas and EIMEA operating segments in the first half of this year. Tonsan businesses expected to add above 400 basis points of growth or about $80 million in 2015.

In total we now expect our net revenue for the full year to be about $2.1 billion, about flat from the prior year. Our core tax rate before the impact of discrete items is expected to be higher than anticipated as earlier described in detail.

Due to our current estimate of mix of earnings for the full year, we now expect the full year core tax to be 34% versus our previous guidance of 31% and last year's comparable rate of 32%. From an EBITDA perspective, we expect to deliver approximately $275 million for the fiscal year.

This estimate is essentially unchanged versus our initial guidance of $280 million. We expect EBITDA margins to improve sequentially over the next two quarters and the exit the year over the 15% level that we have been targeting in a multi-year plan.

Our expectations for capital expenditures for the full year remain at $70 million, the most significant capital project this year is supporting expansion and productivity enhancements for our construction products operating segments.

We expect strong free cash generation performance for the remainder of the year as we mostly eliminate special charges related to the business integration project, reduced other one-off cost, improved profitability steadily through the year and implement a reduced spending plan relative to prior years.

We will continue to use the bulk of any excess cash flow this year to reduce our debt levels with the near term target of reducing our financial covenant leverage ratio to below three times by the end of this fiscal year. And with that, I'll turn the call back to Jim Owens to wrap this up. .

Thanks Jim. A result of moving in the direction, we committed and our goals are sound. We expect to deliver double-digit growth in EBITDA, despite currency challenges as we take advantage of opportunities for margin expense. We fully expect the growth trends in Asia Pacific and construction products continue and to open up future opportunities for H.B.

Fuller. Our European and North American businesses will move back to growth in the second half of the year. The plan for this year is the number of moving parts in the financial deliveries is weighted to the second half of the year.

We're confident in delivering our targets for the remainder of this year, because the growth and profit drivers are already in place and are building momentum.

This include things such as, lower raw material cost and strong price management, new products shipments [allow us] Project ONE cost products in North America, efficiency improvements in Europe, improved sales pipeline in North America and Europe, new wins in electronics, and the growing Tonsan business adding to the strength of our Asia Pacific business.

[Relate] to 2015, with EBITDA margins of over 15% and being in a position to deliver our targeted plans for EBITDA margin and organic growth in 2016 and beyond. This is the end of our prepared remarks, so now I'd like to open up the call for your questions..

[Operator Instructions] We can take our first question from David Begleiter with Deutsche Bank. Please go ahead..

Thank you, good morning. Jim and Jim, just on the Americas volumes down 4%.

I know there are issues behind it, I know the pipeline is slowing up but has anything happened to the market, are you losing any share, can you bring it down by country, any more color as to why this is an aberration and will improve?.

Yes, as I said in the opening comments, there is two factors here. The one is related to this pipeline, and I think when you look at our performance in the Americas last year, as we had SAP issues, we were actually growing volume by over 4% in Q2. We're growing volume in Q3 by 4% as well.

But the issues we had distracted the organization, so our sales organization wasn’t focused on wins, and in fact we had service issues that cost us some business. So, the way we analyze it, 1% to 2% of the impact is customers who we lost due to service issues.

There is 3% or 4% that’s related to the weaker pipeline, and of course the economies don't help us here. So, a lot of our business as consumer goods, so that's impacted us.

But most of those issues -- well those issues are behind us and the momentum is really building on the pipeline, so if you look at the internal metrics on the pipeline and the wins we're having, we're back to a pipeline that looks more normal as we head going into the SAP issue.

So, that sort of gives you some perspective, but it's mostly related to a sales and marketing organization that was very focused on serving customers and not on growing the business for second half of last year, and that led to a weak pipeline this year.

That helped?.

It does.

Do you expect Q3 volumes to be up year-over-year in America?.

Well, they will certainly be better than they are this year on a year-over-year basis, whether it will be back to positive or not is a question. It will definitely be positive for the second half of the year. .

Fair enough.

And lastly just on raw materials, will the biggest benefit be in Q3 and Q4 versus Q2? Can you just describe the cadence you're seeing on raw material release for you guys?.

Yes, we'll see further improvements in Q3 versus Q2, and then less improvements in Q4 would be the way I’d look at it. It's a mix there, somethings that are actually moving in the wrong direction, and there's somethings moving in the right direction.

And the weak euro hurts us overall, because you don't get the benefits in Europe, because there has been a huge devaluation in Europe. But, I'd say, as a cadence expect more improvement in Q3 and then less or flatter improvement in Q4..

And we can take our next question from Mike Harrison with Global Hunter Securities, please go ahead..

Just kind of continuing down the North America volume question, are you seeing any customer inventory destocking or did you see any during the quarter? Were order patterns pretty steady during the quarter?.

We didn't see a trend in the quarter, I can have Jim answer that especially with respect to destocking. So I wouldn't say there is a market destocking issue, but I would say a number of our businesses are consumer goods oriented, and we do see general weakness in a lot of the customers, especially the larger customers in the consumer goods business..

And then in the construction business, you saw a very strong margin there obviously, some seasonal benefit as well as the ramp up of the Lowe's business.

Is that margin level kind of sustainable as we look out to next quarter or were there other unusual dynamics going on there?.

I'll let Jim comment on next quarter, but generally our view based on the work we've been doing in the last couple of years is that a long-term target of being in the mid to high teens in this market is what we expect to see in this business, so this is in the sweet spot of what we expect long-term.

As far as the rest of the year, Jim, is there any comments you wanted to make there?.

No, I think the second half of the year we expect those margin levels to continue, and I'll just reiterate what Jim said, I think now finally this quarter the business is operating on an EBITDA margin level that we always expected for this business, and it's finally starting to come to reality, it seems..

Then last question from me, we're starting to hear that there're reasons to be optimistic on demand patterns in Europe.

What markets are you watching there, what end-markets are you watching that are kind of most in need of recovery and are you seeing signs of improvement or still pretty cautious on the demand outlook in Europe?.

Yes, so for us Mike, I mean most of the issues we've developed from a demand standpoint are related to some of the transformation issues we've had.

So the businesses that were effected earlier by transformation are seeing good positive signs, so we have four different business segments in Europe and three of them we expect good, solid, positive growth this quarter.

So some of that is the market, most of that is us improving internally, but we certainly don't see Europe economically getting worse in the third quarter based on what we see..

And we'll take our next question from Rosemarie Morbelli with Gabelli & Company, please go ahead..

Thank you, good morning everyone.

Looking at -- back to construction Jim, you talked about the current margin being sustainable over the longer term, that was your target, could you talk about the growth rate when you eliminate the ProSpec for example and then the [new field] at Lowe's, what type of a normalized growth rate can we expect going forward?.

Yes, so I'll talk in broad terms and then maybe Jim can take some numbers. So ProSpec is about 6 million a quarter, this is what we said, since we acquired the business, so if you back that out roughly to get the numbers of the growth underlying. I think we've had seven or eight quarters of double digit growth in that business.

It's a business where we're winning because we're doing good work with our key distribution partners for choosing the right distribution partners and we're innovating.

So we follow the market but we've certainly, especially even if you look out in 2011, '12 and '13, we've outperformed what you would see as the construction market overall and that's because our teams had a good channel strategy and a good innovation strategy that allowed us to outpace the market.

Jim you want to comment more on the [growth rates on both]?.

No, I was just going to comment Rosemarie that ProSpec and Lowe's are different things, because ProSpec is acquired, I understand that that's a different kind of growth, but our growth with Lowe's and our growth with [indiscernible] as examples over the last number of years are really hard one organic eminent growth and share growth, and we have more that we can -- more share growth is available to us in future years.

So I think we're pretty optimistic about the next couple of years and seek the opportunities at least that are ahead of us..

So, when you are talking about the next couple of years, you are talking about continuation of the housing and of the construction continuing to grow and recover in North America and I believe the U.S. in particular.

Once we are always be particular part of the cycle, are we looking at less than GDP or if GDP let's say grows for that particular sector is kind of flattish or declining, can you still grow above that?.

Well again Rosemarie, I think over the next couple of years I think the growth prospects are probably as much or more to do with the opportunity to gain additional market share than it is related to the underlying end market demand situation..

And Then I was looking at Asia Pacific similar question, what kind of legacy growth did you have excluding Tonsan?.

The legacy growth in the region is in the middle single digit in the quarter..

And we'll go next to Dmitry Silversteyn with Longbow Research. Please go ahead..

Just a follow-up on Rosemarie's questions about Tonsan, so was this a sort of a $25 million quarter for you in terms of revenues you've gotten from that business?.

Yes, I think that's the way we're looking at in the quarter, it was close to that number..

Okay, you talked about it before being in line with expectations but you also I think in your prepared remarks talked about some slowing growth in Asia overall, are you still between the initiatives that you have and the shares that you're going to gain with or without Tonsan either through the cross-selling or just a better execution of your business, do you still see yourself maintaining kind of this mid-single digit organic growth if you exclude the contribution from Tonsan in that geography?.

Yes, when we said slowing growth we mean middle single digits because we've been growing our Asian business in double digit rates the last couple of years, so yes we think that's sustainable or as Tonsan improves as we look into 2016 perhaps even better than that but I would say that would be….

Just to follow up on the construction products opportunity and execution, you have pretty nice pick up in volumes here in the second quarter which sounds like you expect to [lay absence] in the third quarter on Lowe's channel sale and you had a margin expansion at the same time, I am not that familiar with sort of the categories that you're supplying to Lowe's, but I know it in other large categories at Lowe's typically the channel sale not just at Lowe's but at big boxes in general, channel sales the first year does not generate a lot of income when you make money sort of in the second year or in the refill, so kind of what's different with you channel sales that you're able to match and get the volume, but actually looks like you get very nice incremental margin from that volume?.

Well, Dmitry, the first part of the answer is that we adjusted out some of the onetime cost associated with the launch of the new business with Lowe's so that's -- and that's disclosed in our -- at the back of our press release somewhere.

So some of the onetime cost, I don't remember exactly what the numbers were its probably in access of $1 million in the quarter that was strictly related to the launch of the new business with Lowe's, we did adjust out as kind of a onetime or nonrecurring cost of acquiring the business..

Okay, I got you. And that explains that. Okay..

And even without that, we've had a good history with our launches there to be positive, so I can't comment on what other people who work with Lowe's, but we expect good performance in any one of our wins with Lowe's..

Very good, and then just a longer question, a longer term question on the EMEA the year you're still sort of a little bit behind on the margin profile of that business and you've talked about some of the things you can do internally as far as improving cost and then servicing the customers better, but at the end of the day how do you grow margins in that business when you're continuing to see volumes go with the wrong direction and your utilization rates not improving meaningfully..

Yes, so we need the volumes to change, right. So I think we've seen -- this time third quarter last where I think volumes were down 5%, were down to now 2.5% we expect that to get close to zero and then move positive to the second half of this year, so volumes have to move in the right direction.

There are some very solid pockets of growth and as I mentioned previously three of our four businesses now are growing, we have one and it's the one site where we've had the longest lasting problems, the shrinking of the four businesses. So we do expect to see volumes pick up and go forward because it needs to happen.

EMEA includes India, Middle East and Africa we have very strong growth in India, a solid performance in Africa, so the region overall has the growth potential that we expect to see out of it.

And there is a lot of cost that can come out of the business, so we have done a lot to serve customers and to make certain that we were meeting the needs of customers and the work we're doing today is very different, it's about optimizing our freight cost, optimizing our manufacturing cost, pulling out the cost associated with the business.

So both of those will change in terms of direction second half of this year, growth will come back to the business and cost are going to pull out of the business..

Got you and then one final question just on EMEA, the contributions from Continental Products that was about the same as it was last quarter something like on the order of $0.5 million to $1 million?.

Yes, $0.5 million in revenue and very minute in terms of profit..

And our next question comes from Steve Schwartz with First Analysis. Please go ahead..

I guess the first question, in the footnotes of the press release you note that the expenses related to a new facility in China, electronics facility in Ying Tai and I'm just wondering is that a facility that you acquired while it's under construction or did legacy Fuller start that up?.

Those are green field [indiscernible] investment related to our electronics business..

Okay and we are hearing you talk more about electronics opportunities quarter by quarter.

What kind of contribution can we expect from the facility in terms of a revenue standpoint and just because it's in the startup phase was there any impact on the region's operating margin in the quarter?.

Yes, so we'll talk more about electronics as we go forward. It's still small in the overall scheme of things but it's growing at very nice rates, so I would expect this as we get to our Investor Day which will happen certainly either at the end of this quarter or beginning of next year, we'll probably talk to in more depth about that market segment.

But today it's still relatively small in the scheme of the business. In terms of impact on the quarter I don't think there was any..

Well actually Steve, I think some of the impacts we already started to see last year and I don't know how much we mentioned them but we actually the entire facility was brought up last year I think in the second half of the year and so some of the excess, some of the extra manufacturing cost, the cost associated with that facility were starting to be seen in the second quarter and now in the second quarter of this, or the second half of last year now the second quarter lot this year, we're kind of ramping up the volumes and that's the impact that we're seeing..

Okay, okay and then if I could ask you just a follow on, Jim G you noted that the higher tax rate is in part because of higher sales business in the US and other higher tax rate jurisdictions, yet even if we include construction products in with the Americas it's not quite clear then why you were down 4% in volume in the Americas.

Can you see what I'm having trouble reconciling here?.

Maybe.

Well so our core tax rate you know, you know this, I mean our core tax rate is set from the beginning of the year and then adjusted every quarter based on our own internal estimates of our profitability by geography for the full year, so we're always working out the full year estimate of earnings by geography, total earnings and mix of earnings and then we're adjusting that and making corrections every quarter so that's how we do it, that's how everybody does it I guess.

So basically what the change in our rate is, is just reflecting a change in our own estimates internally of where we're earning margin.

And what's reflected there is that for the US business both construction products and American adhesives they have very strong margin quarters and those higher margin levels are expected to continue and I think as the higher margin that is offsetting the relatively weaker revenue growth in North America which you referenced, and then the other part of it is just that the Europe business on the other side of that is performing at a lower level than we expected.

So, don't know if that answered your question or not..

It does and it helps frame up the idea of looking at it on a single quarter basis versus your annual basis and the outlook for the year. So, no, that's very helpful..

And of course in the quarter because we made the change you get a higher than normal impact cause we have to catch up the rate for not only the second quarter but we catch up the rate for the first quarter as well so it's a bigger impact in Q2 than we'll see in Q3 and Q4. That's how you get to the $0.10..

We'll take our next question from Bruce Zester with Advisory Research, please go ahead..

Hi, thanks for taking my question. I just had a question going forward.

If you look into fiscal '16, if you do get some recovery in Europe do you think the tax rate trends back towards 30-31 or do you think it stays more in like this 33-34 range?.

Yes, so it should definitely trend back towards the 30% rate, I don't have a forecast for you right now so I can't give an actual estimate but I would think that this 33-34% tax rate that we're talking about right now should be our high water mark because we know we're just really not earning a lot of money in Europe right now which is where our -- and the money we are earning there is at a relatively higher tax rate now.

This has got to be our high water mark and every improvement in Europe and also in Asia is going to drive our rate down..

And then just looking at cash flows, it looks like you had pretty strong free cash in the first six months, I think it's about 77 million.

If you look at the back half of the year do you think that in the last six months of the year you'll generate a similar amount of free cash?.

Yes, yes. Similar. I think in the first half there were a couple of items that were maybe non-recurring but in general I would say the second half cash flow should be at or better than first half..

And we'll take our next question from Christopher Butler with Sidoti and Company. .

Looking at gross margin year-over-year, could you give us a sense on how much of the improvement was raw material related.

And how you think raw materials are going to factor us as we go into the back half of this year?.

Okay so I don’t have a specific number on that maybe Jim has one at hand. But yes raw materials we have improvements in our North America operating performance in our manufacturing sites that had excess cost this time last year and then we have a mix improvement. So we have a richer mix in our products.

So all three of those combine to give us the improvement we saw in the quarter..

And if I remember last it was the second quarter last year where you first started to see some of the difficulties. So as we're looking at the year-over-year number we're starting to lap some of the challenges that you began to have in the second quarter and then the second half of the year last year.

Is that correct?.

It didn’t show up as much in the second quarter as it did in the third quarter, but the challenge is started in the second quarter and started to impact our numbers a bit in the second quarter and more in the third quarter.

So you will see year-over-year significant improvements as we go forward because last year at this time is we went live on SAT on April 7. So that was right in the center of our quarter and the European transformation issues really started to effect towards the second half of second quarter and really in third quarter.

So it will be a sizable year-over-year improvement is what I would expect Chris in the coming quarters..

With cash flow it definitely sounds like reducing debt is the priority right now after the Tonsan deal. But historically you’ve targeted acquisitions, are you slowing down the pipeline in this time period or are you continuing to pull out and then just keeping sort of a higher bar to jump over if something became available today..

I think when I look at the second half of this year, we want to drive the performance which ever going to deliver. So you'll see us really focused on performance we do have a pipeline of opportunities. So I think as we deliver the plans we want second half of this year some of those small deals could come to bear early in 2016.

But our primary focus is bring down the debt with the cash that we're generating in the short term..

[Operator Instructions] We will go with a follow up from Rosemarie Morbelli. Please go ahead. .

Jim if I look at Asia Pacific and your previous EBITDA margin target of 14%. That was given to us I believe pre Tonsan acquisition.

Are you still looking at that 14% or do you think you can do substantially better following that acquisition?.

So Rosemarie I think that’s a great question. We're in the process of trying to reevaluate what our medium and longer term targets are in Asia. So we had originally targeted 14% in Asia I think most recently but we kind of climb down from that tomorrow at the 12% based on what we saw in our legacy business.

And now we'll have to reevaluate what the Tonsan addition and some other factors mean for our longer term targets in Asia. So that’s kind of word is right now. Let's keep it on slogs..

[You are talking about the target we set] 2011 Rosemarie and I would say overall we think the Americas are going to be better than those targets, we think CP is going to be better than those targets and then Asia and Europe will be slightly less than those targets overall potentially.

But overall the 15% that we've set is something we're very comfortable with. The other thing I'd point with respect to Asia in particular we've done really well in all the emerging products in China. But if you look over the last few years Australia and New Zealand which was good profit driver for us is been a challenge each and every year.

So a lot of what we perform overall will depend on how well we can crop up and deliver the performance that we historically have in that part of Asia. .

Is the issue in Australia and Asia due to their own economy or is it fuller and you are not adjusting your structures there in line to the new demands of the new slower market..

Yes I think it's a combination right we need to deliver the performance that we want out of A&Z. But if you look at the last few years in Australia and New Zealand your question is specifically about that.

Any kind of a growth in that part of the world has been delivered by the mining and construction businesses and we need to make certain that that's deliver the performance we expect long term and it's something we're working to it. .

So is there almost as much work to be done there as there is in Europe?.

No not nearly..

This year especially in Australia they have a margins squeeze because of the weakness of the Australian dollar is a big impact is flowing through the business this year that we're recovering from. .

Okay and then if I may ask a question on Europe. You were planning and improving it substantially more than you did this quarter. You were disappointed so and it is obviously nothing has happened the way you expected it.

So, what makes you confident that in the second half and in 2016 you are actually going to reach those targets?.

So I think the things we're working on improving the business are about service and performance for customers, and those steps we've seem good performance Rosemarie. So for instance there's two sides where we have our biggest issues. The one side, the output is 15% higher to last eight weeks than it was the prior eight weeks.

On the other side the output is 30% higher than it was in first quarter, the last six weeks of this quarter. Our output with respect to right first time has improved three or four fold. So, when I look at the performance metrics of what we expect out of those plans and able to serve customers; those are moving in the right direction.

We expect some of that to happen quicker. We also expect they will apply some cost as we did that. Those cost savings initiatives are things that work better in process right now.

So, I'd say the delay in the timing of our focus from performance to cost, we know where the excess cost are, we have good benchmarks from our businesses around the world and from our European businesses from where we can get to. So, it's very much a delay in executing on the cost part of the plan.

First step, will stabilize our ability to get the output we wanted and serve customers and in Q2 that's what we succeeded in achieving..

So, if I look at that 14% EBITDA margin target which obviously was given a while ago, but in one or two quarters ago, you mentioned that the target would be reached with one year delay because of the plants did not shut down as quickly as possible, and then you had manufacturing issues with the new facility.

Are we looking at that 14% target to be reached in 2017 or is that too optimistic considering what is going on right now?.

I think that would be a realistic way to look at things Rosemarie..

[Operator Instructions] And it appears we have no further questions at this time. I'll return the program to our presenters for any additional or closing remarks..

Okay. Thanks everyone for your time today and your continued support of our business and our strategies..

Thank you. Ladies and gentlemen, this does conclude today’s H.B. Fuller second quarter 2015 investor conference call. You may now disconnect. Have a great day..