Maximillian Marcy - Director, IR Jim Owens - President & CEO John Corkrean - EVP & CFO.

Mike Sison - KeyBanc Rosemarie Morbelli - Gabelli & Company David Begleiter - Deutsche Bank Eric Petrie - Citi Mike Harrison - Seaport Global Securities Jeff Zekauskas - JPMorgan Dmitry Silversteyn - Longbow Research Christopher Perrella - Bloomberg Intelligence.

Ladies and gentlemen, thank you for standing by and welcome to the H.B. Fuller Fourth Quarter 2016 Investor Conference Call. This event has been scheduled for one hour. Today's conference call is being webcast live and will also be archived on the company's website for future listening.

At this time, I would like to turn the meeting over to our host Director, Investor Relations and International Finance, Mr. Maximillian Marcy. Sir, you may begin..

Good morning and welcome to our fiscal year 2016 fourth quarter and full-year earnings call. We have two speakers today, Jim Owens, our President and Chief Executive Officer; and John Corkrean, our Executive Vice President and Chief Financial Officer. As always after our prepared remarks, we will have plenty of time to take your questions.

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

These filings can be found in the Investor Relations section of our corporate website 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 with the GAAP numbers we report on our Form 10-K.

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

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

foreign currency translation rates and raw material costs versus price dynamics. Foreign currency translation rates have been volatile over the past 24 months with a strengthening of the U.S. dollar versus most other global currencies. We generate approximately 60% of our revenue outside of the United States.

In most cases we produce our products in close proximity to where we sell them. Therefore we are fairly naturally hedged between revenue generation and costs minimizing the impact on margin percentage. However, our operating profit outside of the United States is mainly in local currency and is exposed to exchange rate fluctuations.

In addition since oil is a U.S. dollar-based commodity, a primary petrochemical-based raw materials although purchased in local currency are impacted by the strength of the U.S. dollar. Due to these factors, we face some international profit margin pressure when the U.S.

dollars shows long-term strength against local currency as it is done in recent years. U.S. dollar is currently stronger against most currencies including our large exposure to the Euro and the Chinese RMB. The dollar has strengthened against both currencies in the prior year by mid-to-high-single-digit.

The other economic factor that we are managing is our raw material cost versus customer pricing. Petrochemical prices have come down over the past 18 months and we have done a good job at driving down cost for the raw materials that we purchased.

As costs remain low in 2016, we pass along some savings to customers via price decreases and product substitutions. The petrochemical landscape is changing and some petrochemical prices are flattening and some are now increasing.

We expect flat to modest inflation in the raw materials that we purchased and modest gross margin pressure especially in the first half of the year as we ramp up our efforts to reformulate products, implement strategic price increases, and drive savings on our manufacturing cost to offset these raw material impact.

In December, we announced a proactive restructuring to better align our teams to the 2020 strategic vision. In addition to the long-term benefits we expect these actions to offset some negative short-term impacts of these macroeconomic factors I just mentioned. Let me now walk through the segment performance in 2016 and some expectations for 2017.

First, in the Americas segment, as we committed the volume trends continue to be positive as customer wins continue. When we separate out the extra week and the impact of mix, volume grew by about 2%.

We're pleased with the positive volume progression during the 2016 fiscal year which allowed us to deliver volume growth in line with our long-term goal for the segment. We expect continued volume growth in 2017 fiscal year.

Effective management of pricing and raw material cost management drove our solid EBITDA margin performance of 17.2% in the quarter. We delivered adjusted EBITDA margin of over 18% for the 2016 fiscal year. We will remain above our long-term EBITDA targets through raw material benefits and a watchful eye on discretionary expense.

Our construction products business completed a disappointing year with volume declining by about 4% in the fourth quarter versus the prior year. The primary drivers of the year-over-year decline were lower export sales in our Foster product line and lower sales of Lowe's due to difficult year-over-year comparison.

These two factors drove volume down about 9% for the full-year on a comparable 52-week basis. As we begin the 2017 fiscal year, the difficult comparisons of Lowe's and our Foster export business are now behind us. We are already seeing better results and expect revenue growth of low-to-mid-single-digits for the full-year.

Pricing and contribution margins remain strong in this segment but adjusted EBITDA margin was well below the prior year and our long-term target due to start-up cost associated with our newly renovated facility in Aurora, Illinois.

We believe that the majority of additional start-up cost will be behind us in 2017 and we will return to our historical profitability profile in the 2017 fiscal year with EBITDA margins back in double-digit range during the second half of the year. Moving now to our EIMEA segment. We delivered volume growth of 6%.

When adjusting for the extra week and a negative mix impact, volume was up about 1%. The volume growth trend should improve in 2017 as the tone of our overall business and the new business pipeline is getting stronger enabled by improved and consistent supply chain performance and higher growth trends in emerging markets.

We expect low-to-mid-single-digit volume growth in the 2017 fiscal year in line with our long-term targets for this segment. From a profitability perspective, we improved adjusted EBITDA margin by 330 basis point versus the prior year's fourth quarter up to 14%.

The elements of the improvement were broad-based, volume growth, raw material cost reductions, price management, better supply chain efficiency, and lower manufacturing costs. We expect to continue to drive EBITDA margin improvement in 2017 but not at the same rate of improvement that we had in 2016.

Now turning to the Asia-Pacific segment, we grew volume by 16% in the fourth quarter or just over 8% on a comparable 13-week basis with strong growth coming from China. Foreign exchange rates have weakened again versus the U.S.

dollar especially the Chinese Renminbi which now sits near 6.9 Renminbi to $1 and has had a negative impact on revenue growth. Volume growth for the 2016 fiscal year was about 9% on a comparable 52-week basis and solid in all sub regions. This solid performance is directly in line with our long-term target.

We expect similar volume trends in the 2017 fiscal year with revenue offset by a weaker Chinese Renminbi. Adjusted EBITDA margin in the segment was up over 200 basis points in the fourth quarter versus the prior year reflecting volume leverage and raw material cost savings.

In engineering adhesives, we continue to show strong growth with volume up nearly 15% versus the prior year's fourth quarter on a comparable 13-week basis led by good growth in Tonsan and our automotive business.

For the 2016 fiscal year, adjusting for the annualization of Tonsan and the extra week, we delivered 14% volume growth with strong growth across all segments. We expect to continue our strong volume growth trend in the 2017 fiscal year and are targeting 15% growth in line with our long-term targets.

However the weakest Chinese Renminbi will likely bring overall revenue growth below 10% on a comparable 52-week basis. Our engineering adhesives adjusted EBITDA margin in the fourth quarter was 14.1%, up 70 basis points versus last year's fourth quarter.

Adjusted EBITDA margin for the 2016 fiscal year was 11.3% an improvement of about 40 basis points versus 2015. Contribution margins improved with our solid revenue growth and we expect further EBITDA margin improvement in the 2017 fiscal year.

However we will continue to invest in our commercial and R&D organizations in this segment to secure the long-term growth prospects of this high margin segment. Now I will turn the call over to John..

Thanks, Jim. Jim provided a few highlights of the fourth quarter results; I will provide some additional financial details. We grew about -- volume grew about 8% versus last year's fourth quarter, we estimate that the extra week added 7% to 8% to volume. On a comparable basis, volume was essentially flat to slightly up.

Adjusting for the extra week in 2016, the rate of volume growth in the fourth quarter was about the same as the third quarter. As we discussed earlier, our raw material costs have come down and this happens, we work with customers, providing value-added solutions at best possible price.

In some cases this includes substituting product SKUs that come at lower price at a similar cost to H.B. Fuller. This mix has historically been reported in our volume calculation. When we separate out on mix impact from volume, we saw volume growth in the fourth quarter in all segments except construction products.

The impact of product pricing and product substitution continues to be a significant factor in our result. For the quarter, price had a negative impact on year-on-year sales of about 2.5%, it's normal to see some price erosion during periods of prolonged raw material cost inflation.

That said we believe we are effectively handling this normal process of managing pricing with our customers. Going forward, we expect the raw material cost environment to stabilize and actually begin to increase with pricing stabilizing as well. Constant currency revenue growth on a comparable 13-week basis fell about 2% compared to last year.

Exchange also had an unfavorable impact on sales both versus last year as well as major expectations. The Chinese Renminbi and the weaker Euro are the biggest drivers in the unfavorable exchange impact on sales on a year-on-year basis.

Adjusted gross profit margin improved by 50 basis points sequentially and versus last year reflecting effective raw material and price management offset by higher year-on-year manufacturing cost driven by the excess costs associated with the new construction product facility start-up and incremental cost associated with the ramp up of the new facility in Indonesia.

Adjusted selling, general and administrative expenses remained at a more normal level in the fourth quarter as a percentage of net revenue. On a comparable 13-week basis, SG&A was up about 3% versus fourth quarter of last year.

We kept a watchful eye on discretionary expenses to ensure we are able to continue investing strategically in higher growth market segments. The net of this resulted in adjusted diluted earnings per share of $0.74 for the fourth quarter, up 7% versus the fourth quarter of 2015. With that now let me turn to our guidance for 2017 fiscal year.

Foreign currency continues to be volatile. Based on current foreign exchange rate we expect FX to negatively impact 2017 revenue growth by about 300 basis points. We expect constant currency growth of approximately 4% for the year on a comparable 52-week basis. As a reminder our fourth quarter 2016 included an extra week.

This will reduce net revenue growth by about 2% for 2017 fiscal year and reduce the fourth quarter 2017 net revenue growth by about 7% to 8% compared to 2016. We expect full-year EBITDA margin to be about 14% in 2017 which would be up 50 basis from full-year 2016 EBITDA margin. This translates to EBITDA of approximately $290 million.

We will achieve us by improving gross profit and reducing SG&A as a percentage of net revenue at about equal worth [indiscernible] the year. Cash flow from operations is expected to be incrementally better in 2017 at about $200 million driven by higher operating income and some improvement in working capital management.

Capital expenditures are expected to be about approximately $60 million for the year. Most significant capital project next year will be the implementation of SAP in our Latin America business. All these factors considered we are introducing an EPS guidance range of between $2.57 and $2.77.

This represents our 10% growth at the midpoint versus comparable 52-week 2016 fiscal year. Given that our fiscal year starts in December our historical EPS delivery has been more weighted to the second half of the year driven by U.S. and Chinese holiday. EPS is typically about 40% lower in the first quarter versus the fourth quarter.

We expect this turn to be similar in 2017. With that I will now turn the call back over to Jim Owens to wrap this up..

sizable margin improvement in our European segment and 15% volume growth in our engineering adhesive segment. Overall this was a great result especially in the face of volatile macroeconomic condition. We've built on our solid foundation and realigned our teams to drive further growth and profit enhancement.

The 2017 plan reflects additional top and bottom-line growth another positive step toward our 2020 strategic objective of 17% EBITDA margin, solid organic growth, significant cash flow, and double-digit EPS growth.

2017 will be another strong step forward toward our 2020 plan as our teams around the world continue to deliver on our promise to be the best adhesive company in the world. This is the end of our prepared remarks and now we look forward to answering your questions..

[Operator Instructions]. We will now take our first question from Mike Sison from KeyBanc..

Hey guys good morning. Happy New Year..

Good morning, Mike. Happy New Year..

Can we walk through you gave us some outlook for volume growth in 2017.

So and I think you said 4% but it's really going to 2% right because you lose a week or you lose the one week?.

Those are adjusted for the extra week, Mike. So the 4% -- so we would be growing 4% on a same week basis volume and then you have a negative 3% impact..

Okay, got it. And then so if you think about some of the volume growth outlooks that you provided, let's start with -- with the Americas 2%.

How much the 2% seems I don't know if seems like but can you walk through what your macro assumptions are and how much of that is really just your sales force finding new products and winning new business next year..

Yes. So I did a combination Mike in our North America and our European team business that falls into that 2%. There is some sizable wins in areas like packaging and hygiene and some of our durable assembly business. You also have some of the older H.B. Fuller business that are shrinking.

So I would say good solid market share wins along with some other segments that are just aging manufacturing segments in North America.

So there is no rebirth of manufacturing build into this it's a steady manufacturing where we gain share with new technology and hygiene packaging and a bit in durable assembly and then we have a little retrenchment in some of the -- are from the old-school market segments. Similar trend in Europe but in Europe we have the benefit of emerging market.

So our Africa business is still into those numbers that's very strong, our India business is very strong, and then core Europe is more in those low-single-digit. So the real growth phenomena for our business is the engineering adhesive business which is global, some of that happens in the U.S.

and Europe as well and that's where we're seeing the 15% volume growth and really nice wins in our electronics business and some of our engineering areas that are enabled by the two really strong acquisitions we made Cyberbond has been really a great attitude to Tonsan to accelerate our growth and Tonsan itself has been a real success.

So that's sort of a look at it and you get that 15% growth engine and then a low-single-digit growth in the Americas..

Okay. And just as a quick follow-up when you think about your EBITDA growth for the total company in 2017 versus 2016 you know $290 million versus $280 million or so it's up 3% yet you're growing organically 4%.

Is FX kind of a 3% hit and then as raw materials another couple of percent hit so, if you exclude those too, you'd have better leveraged as I guess the organic sales growth and just stronger EBITDA growth is that kind of way to think about it..

Yes, I think that's exactly the way to think about it right. So the extra week at last year is probably $5 or $6 million so that brings it down to $275 million. FX is probably $8 million to $10 million. So you're talking about a $25 million improvement underlying when you take those two elements out.

The raw material impact we're managing but we're also doing this restructuring which enables us to offset that. But I think underlying is just two factors the extra week in FX. So the business itself is performing when you take out those sort of math factors about $25 million better than the prior year..

Thank you. And we'll go next to Rosemarie Morbelli from Gabelli & Company..

Jim could you give us you talked about the restructuring focusing on the construction but if I look at the Americas as adhesive in the fourth quarter the margin was substantially lower than last year's fourth quarter.

So are you doing anything there could you help us understand what is needed and then if you could address the lower level of business with Lowe's I just kind of missed what you talked about?.

Yes, so the first question is about the Americas margin, yes I think, think we said we expect that margin to be 17% to 18%. I think first quarter of this year was 17%, fourth quarter was 17.2% second and third quarters were much higher but I think that's the kind of range we're expecting for this business.

We'd like to see it close to 18%, 17.5% to 18% on average. And so there is a natural fluctuation and John can talk maybe talk more some details around what's going on there but we're pleased with that business and we expect those margins to stay. It's a really strong team that adapts to whatever the conditions are.

We saw a couple years with some volume challenges, they were able to manage their cost as raw materials have gone up or down they've done a really nice job of managing through those and I'm confident that business going forward..

Just a minute, I'm sorry, I knew because I was looking at that operating income and margin not on an adjusted basis the operating margin and so last year fourth quarter was 17.3% but this year fourth quarter unless I made a mistake which is always possible I calculate 14.6%..

I think the most meaningful number to look at Rosemarie would be the adjusted EBITDA numbers which where would have American adhesive is about 17.2% this year.

That was much higher last year, last year was 19.8% was probably one of our highest EBITDA margin that we printed in that business and we were -- as we exited last year it was probably the peak of the raw material savings we had yet to gave back very little in pricing. There is a lag that happened I mean the capture raw material savings and pricing.

And we knew that we would experience some of that addition and we see those EBITDA margins return to sort of the level that we expect kind of in the 17% to 18% range and that's what happened this year though..

Excellent very helpful and actually you can come back to answer my question I apologize..

No problem that's great. And I think that's more important point, this business we will end the year full-year at 18.1% EBITDA margin which is actually up versus last year..

Okay and so no consolidation..

I'm sorry the second question Rosemarie?.

In terms of your restructuring are you doing anything on the American adhesive or is it mostly on the construction side of your operations and what is happening with those..

Yes, so the restructuring we announced in December was over 200 people across the company was pretty broad-based mostly focused on functional areas including operations and mostly functioned on Europe and the Americas including some work in constructions products.

And I think was an overall drive to find efficiencies in the business a number of small projects that added up to a sizable initiative and we did that as a proactive effort to make certain that we can continue our march toward our 17% EBITDA margin.

We see the change in dynamics on raw materials we want to make sure, we get ahead of that from a cost standpoint. And we also want to do the right things proactively to get the right technical people in front of our customers, leverage technology that we've invested in.

So the combination of lot of small projects, Rosemarie, but it definitely does include the Americas and again it was a proactive initiative to get ahead of what we see as -- as things like the currency challenges. Currency over the last couple of years has impacted our revenue by over $200 million.

So we still delivered EBITDA growth and EPS growth even though we've had that that phenomena of just currency going down from a dollar standpoint for revenue. So that's sort of a high level summary what we've done anything do you want to add to that John..

No, I don't think that's right on I would say, as we looked at that places where we thought some opportunities to restructure for savings we've obviously focused in the areas where they are not in the customer facing areas but in the functions and in the supply chain more than customer facing and then obviously we've done very light in the areas where there is higher growth opportunities..

A notion is a decline in your business there a question of, they are going away from your products there you are not able to deliver the proper product lines or is it more general with the construction business at Lowe's?.

Yes, so it’s mostly the year-over-year phenomena, if you look at our construction products business it grew nearly 20%.

I think it was over 20% in 2015 it grew nearly 20% in 2014 so there is a sizable amount of growth and lot of that was driven by our major customer so but I think there is a, in inventory re-shifting there was one product line that was in a successful as we wanted so.

But that was more the side story than the fact that we had a lot of a pipeline selling and growth that happened as we gain new shares that was more pipeline selling and growth that will now stabilize.

When we look at the comparables to next year, you'll see a more stable single-digit growth pattern as we go forward until we get another one of those wins but at this point we see a more stable single-digit growth pattern for 2017 and 2016 was really a phenomena of we just grew a lot faster the last two years and some of that was not was pipeline selling..

Thank you. And we'll go next to David Begleiter from Deutsche Bank..

Just to clear on Americas adhesive EBITDA margins are you expecting margins to be flat in 2017 or up modestly?.

Yes, we take flattish may be down modestly. I think we're expecting margin improvement in Europe we're expecting significant margin improvement in construction products, margin improvement in Europe and margin improvement in Asia.

So all those businesses will be up Americas at 18.1% will come down into the high 17s I would say that's our current projection but somewhere in that range but 17% to 18% is our target for that business and we expect to stay in that range..

Very good and then looking at the volume expectation of 2% on a comparable 52-week basis, can you break out some of the sectors that are performing above that or below that in 2017?.

In 2017, we expect hygiene to be above that, we expect our packaging business to be above that and we expect durable assembly business to be above that and then some of our older, I will call them more paper converting type businesses, those have a natural drag on them. That will be below that 2% but hygiene packaging and durable assembly.

John, are you going to add something?.

Yes, David may be I confuse the issue trying to respond Mike's question. But on a comparable 52-week basis volume growth would be 4%. So not adjusting for the extra week it will look like..

But in Americas it is adhesives only or just -- but that the global summer?.

Yes but in Americas it's about 2% next year volume growth and hygiene packaging and durable assembly will be more than the 2% and then our paper converting businesses will be --.

Right.

And is that 2% for American adhesives that comparable for 52-week basis?.

Yes..

Thank you. We will go next to Eric Petrie from Citi..

Just wanted to focus then on your manufacturing cost especially 2016 Investor Day you outlined overall it reduced by 200 basis points.

Can you accelerate this effort and if you did would that improve the FX translation impact?.

So I guess what I would say Eric is that we are probably actually getting some benefit with FX translation as it relates to manufacturing from a pure dollar standpoint but not from a margin standpoint. Some of our costs are in Euros and other currencies Renminbi which are obviously coming down as the currencies devalue but so the sales.

So and really as we manufacture very close to our customers, there is usually a pretty good one for one match. So I said no there is not an opportunity to accelerate that. There is not a opportunity to reduce the rate of impact by accelerating -- the rate at which we reduced impact..

Although I would say that when you look at our plan overall, right I think it was the core of your question the strategic plan that we have is a significant reduction in manufacturing cost and some of that in our 2017 plan but there's certainly more of that in the latter half of that.

So as we move those savings projects forward that's a key driver of our 17% EBITDA margin is really building efficiencies into our manufacturing supply chain which we have lined out and we're investing in.

The one big one you will see this year is a significant improvement in our construction products margins and that's solely driven around the efficiencies we are going to build in manufacturing and supply chain. So there is definitely an opportunity to accelerate from an overall project move forward kind of approach.

So I think that is on your question, is that right Eric or is a bit more?.

Yes it does.

And if I could shift to engineering adhesives, you mentioned some wins in electronics but could you discuss the pipeline opportunities in 2017 may be in terms of project launches compared to 2016?.

Yes I think our list is even better this year and this year business that is going from strength to strength, we invested organically a couple of years before the Tonsan acquisition and got some real good momentum on some smaller projects, this year we want some medium sized projects doing very well with some international players in this space.

So we are involved in a lot of big projects and we will find out as the year goes on which one is fit and how they drive forward. But and we have expanded from simple assembly adhesives to other electronics adhesives.

So we feel really good about the momentum in that business and we are getting very high double-digit growth rates on higher numbers each year. So they are having a sizeable impact on our business.

So actually the pipeline is very strong in the electronics business as it is in our Tonsan and Cyberbond businesses which are more in the engineering adhesives side. We feel good momentum there..

Okay.

Are you cross-selling Tonsan and Cyberbond products between the regions, then could you qualify or quantify that opportunity?.

Yes, we are, the Cyberbond acquisition really was about accelerating that. So I would say this year we had low-single-digit millions of revenue that we generated outside of China with Tonsan products.

But we have initiated a lot of projects this year that include bringing Cyberbond products into China which was actually the easier wins and those have already started kicking in some of those and then we have significantly upsized our resources to grow the Tonsan out in North America.

So we want to see that growing to the tens of millions of dollars over the coming year, that will be the way I think of it but it's still while we see momentum in terms of impacted the overall corporation there is still a big upside of which we will see some next year and even bigger impact in 2018..

And my last question I wanted to shift to your pricing management, you talked about rising raw materials especially the Americas Adhesives and you announced pricing initiatives back in October, can you just give us a little of how that's been implemented and you think that pricing will improve from a negative 300 [indiscernible] than 2016?.

Yes. So we have initiated selective price increase. Certainly where anything is tied on an index basis so we move down and then move up with customers, we have introduced those and those have been implemented actually in Q4. What we are seeing right now is with the weakened RMB is some price pressure in China.

So I think that's the first place you will see pricing go up because the strength of the U.S. dollars there. But also in Europe this prolonged weakening of the Euro has seen a little bit of pricing for international areas. So I would say the first half of this year will be targeted strategic increases where it makes sense depending on the phenomena.

Now we are facing the phenomena, we're in 2016 we had some price decrease. But we will lapping some of those first half of this year. So we had some decreases the first half of this year really none I would say the last four, five months an increase is picking in the end of this year and we will see some of those continue this year.

So I would say the net-net next year will not be some sizable uptick but you won't see this downtick going forward..

Thank you. We will go next to Mike Harrison from Seaport Global Securities..

Just kind of piggybacking on this last question here around the pricing dynamics, I was wondering if you could give us a little bit better sense of how these customer discussions are going, if you are in a situation here where you've seen several quarters where raw materials are deflating, the customers obviously want some return on that but now your outlook calls for these raw materials to may be inflect higher and just wondering how well you can hold your ground and kind of what segments are most sensitive to movements in raw material pricing.

I'm guessing that you're able to kind of dig in your heels a little bit more on the more specialized things that you sell in Engineering Adhesives and maybe there are some more commoditized products in other segments where you have a harder time digging in, is that the case?.

Well you're right; there is a wide array of pricing and pricing strategies across our business. As you might imagine given the nature of the customers and the nature of the products and degree of specification of the products.

So some products are very sensitive to raw material costs, those are highly sensitive we have index as I said about 10% of our business moves in that direction.

There is this chunk in the middle where there is a competitive market dynamics that we manage, so as well as have come down we have found ways to introduce new raw materials, new products to customers keeping our margins home and giving some of that to customers and keeping some of it for ourselves as raw materials go up and but as I said the obvious case right now is in China where there is a weakening RMB, we go to customers and explain them why changes are happening and we introduced increases.

Generally customers who we work with over that time are understanding and accepting, nobody wants those increases but they understand and accept that it works both ways and we continue to also introduce new products. Right so what we work to do is work with raw material suppliers who want to help us win with customers.

So there is a new chemistry or a new supplier, we will bring them into the mix with the new product and that is what we will introduce as we raise prices and customer can buy their old product at a higher price or buy a new product at a slightly lower price to help them offset the change and that's a high level of how we managed it..

Okay. And in the construction product segment, you mentioned some of the duplicate cost and getting the new plant started out, can you just give us an update looking at the EBITDA numbers about $3 million lower quarter-on-quarter sequentially on a similar revenue number.

So is all of that $3 million impact related to the duplicate cost and when should we see those quarterly cost normalize?.

Yes so maybe I will let John talk about the specifics on the numbers and I will cover the high level. Yes so the biggest piece of that is duplicate cost, there is a few pieces to that, one is running the two factories themselves, another one is additional tooling costs that we incurred as we outsourced the production of some of those materials.

Those are pretty sizable and then in order to meet the demand for customers we're making products at non-ideal locations. So there is a cost efficiency penalty and there is a freight penalty when we bring a product from Florida to the Mid-West where it's supposed to be made. So there is three or four different buckets of those costs.

The plant in Palatine, the double operating costs, that went down in December. So that bucket of costs will go away here in Q1 but we are running the Aurora factory, the one that is the consolidation factory at lower efficiencies than we will be ultimately.

So there is extra cost there, there is still the extra tooling cost and there is still the extra also called product transfer costs. So those are rolling off partially in Q1 fully in Q2 and that's why I say by Q3 of this year, you will see double-digit margins back in that business.

But it's solely a manufacturing and supply chain cost phenomena that we are dealing with that..

I think that explains very well and just kind of quantifying and perfect from the number standpoint I think in the last call we said we got all those costs we are adding roughly $5 million of expense this year, it might be slightly higher than that and it did peak in the fourth quarter as we had some of these additional transportation costs that Jim alluded to and some other clean-up costs and then that will come down as we go into first quarter, it will completely be behind us but as we get into the second quarter it should be behind us to think about the way that should play out, I would think about it that way..

Now that's useful. Last question I want to ask is about the special item related to the Tonsan call option, it looks like the way you adjusted your earnings here that the value of that call option declined by about $5 million which I think is pretty substantial relative to the overall value.

Can you give us an explanation as to why that value decline so sharply and I was wondering if you can also comment on the current fair value of the contingent consideration for Tonsan that you disclosed was north of $60 million and it's going to be based on Tonsan's fiscal 2018 gross profit?.

Yes so I will let John try and get into the technicalities, I will give you an overall view. So Tonsan is going extremely well from an overall performance, the earnout element to this contingent consideration is based on assumptions on what the future profitability of the business is going to be.

Those numbers get adjusted each quarter and that's what you see flow through here. So as the future assumptions which have been pretty high get adjusted up or down, it's a pretty steep curve, so a slight adjustment can make a big adjustment in the overall valuation.

So that's why you see these variations, I would say things like the RMB changing can have a big impact on that number. So even though you will generate the same number of RMB, you might have less dollars.

So I will let John try and give you more technicalities on the number but its Tonsan is going as planned with slight adjustments to our forward projection I would look at that contingent consideration..

Yes so that is a very good explanation. It's a -- obviously there is – these are shortage in Renminbi, so the currency impact is also bringing that down but it is a sensitive number. So small changes some of delay in synergies meaning we will capture what we make and we capture them a little bit later, it has an impact on the valuation.

So I think it went from about $21 million at the end of the third quarter is above $50 million or so and it is fairly sensitive number and you have to factor in the fact impact the as well as I mentioned..

Thank you. And we'll go next to Jeff Zekauskas from JPMorgan..

What is the cost settings that your cost savings plan is suppose to deliver and how much will you achieve in 2017 and how much will you achieve in 2018?.

I'll give round numbers, Jeff it's about $18 million and about half that will happen in next year and you want to get more..

And exactly that's how we look at it from a budgeting standpoint above less than half in 2017 and then our goal we should capture most of that $18 million by 2018..

And in which geography will that be in primarily or is it across the board?.

It really is across the board Jeff and as I would say it lines up to some extent kind of based on our footprint but it also as we said, we've done later in the year where we think we have thicker growth opportunity..

So little less in electronics and engineering adhesives is probably the way to think of it and more -- more..

So in 2016 your SG&A costs were up about $23 million and your sales were flat can you analyze what's going on there and did you have in general some unusual events and looking into 2017 for the year should your SG&A be flat or down because you have such large cost inflation this year?.

Yes, let me, let John take that and I can add some comments..

So, I think Jeff one of the things we have to consider is that we did see a pricing impact this year that has a direct impact on sales and so that obviously has an impact year-on-year on sales. And then currency is the other thing we mentioned that has a outsized impact on sales and also as an impact on percent..

The question was about SG&A?.

Yes, and I was kind to go back there..

Okay..

Some of our cost are in U.S. dollars as a percentage of our cost than our revenue is in from separate client. So you have the impact that we're sort of overweighed towards dollars cost and impact on engage on sales is not the same as the impact on SG&A.

Looking forward, we would expect expenses come down year-on-year in part due to because we have the extra week in 2016 but also because we are taking cost out through restructuring. And of the things that will offset that merit increases bonus rebuild but if you adjust for the extra week will be flattish to down slightly in 2017..

Extra week is about $8 million in each year to Jeff right, $8 million outsized this year and then $8 million benefit next year..

Right..

Are there pockets of price pressure in the U.S.

and if there are where are they?.

Yes, I wouldn't say there is really strong price pressure in the U.S. today. I'd say it's a competitive market that we manage but I wouldn't say that’s anything in particular that has a lot of price pressure. We have a couple of small competitors in the market that we need to manage around in certain segments but generally not a lot of price pressure..

Because your EBIT or you know your EBIT, your EBITDA sequentially was pretty flat in the U.S. and your revenues were I don't know $18 million higher and so it was just as about a mix effect or when you look at the sequential comparison why the U.S..

From Q3 to Q4..

Yes, exactly right..

Yes, yes. There is a little bit of variability that's natural and underlying related to our mix in the business so and we went some 17 up to almost 20 down to 17 throughout the year so. So there is a little bit of that that's going on.

There is a phenomena on though we've had raw material prices down for a period of time so eventually those come back to customers either in the form of a new product that's had a lower price or in terms of some get back that will give as we work with them to maintain their business.

So I'd say it's probably a long-term phenomena the fact that petrochemicals over the last couple years come down. There is also a lag in any of our index price so anything that's indexed generally lags in terms of when we give back to customers so, those are couple phenomena's with respect to price.

But I've told them less price pressure than collaborative behavior with customers in terms of how we're working on these things, okay and see a lot of pressure that helps..

Yes. So I think maybe earlier in John's comments sorry he said that the first quarter tends to be 40% lower on an EPS based system in the fourth quarter and things are a little bit confusing because have the extra week and all that.

So if you learn $0.74 in the fourth quarter of 2016 and I guess you are thinking, you're going to earn something around $0.45 or $0.44 or may be less in the first quarter is that the mean of that?.

Well, yes that the math right and so that some of that is the -- the extra week obviously making for that is the extra week in the fourth quarter..

This is the extra week. Okay good lastly when you look at the global economies did they, do you see signs of acceleration or deceleration or business or more less the same as they way you thought they would be,.

Yes, it's been what, I say the year overall we didn't see a robust phenomena interestingly Jeff we have seen some strengthen in China and Asia the start of the year, the end of this year and the beginning of this year that's the only thing that I find a little surprising right now in terms of the feedback we’re getting from customers but stable we don’t see any real negative trends anywhere versus what was the relatively weak 2016 continued strength in India, continued strength in a small business in Africa and for us and it's prior mostly share gains in just the momentum we're building with this whole electronics front end of engineering of these will be strong.

But when you think about overall global economy India continues to very strong and China seems to be picking up..

Thank you. We'll go next to Dmitry Silversteyn from Longbow Research..

Good morning guys. Thanks for taking my call.

Most of my questions have been answered but I just want to go back a little bit to the your European business is the market improvement that you've seen which hundreds of basis points year-over-year is that a function of sort of the lagging effort of the restructuring that you’ve done or is this a function of your emerging market business has growing faster and becoming more profitable just from a scale perspective.

Can you talk about it was probably the most serious margin with in terms of year-over-year metrics..

Yes, I think it's mostly a results of that restructuring effort, I think we'd really targeted to have some of that done in 2015 and 2016 we saw the benefits of lot of investment and lot of good work, we've a much better run business.

And with European ISO business, we had a share service center, we had centralized lab that are really helping us win with customers and we have manufacturing facilities that are more efficient and there is more to do in those right so well it’s a great year in 2016, there is more there.

I've said since I've been CEO that the delta in large in-between are North America and Europe business should be very small, they're similar business it's similar dynamics and we're moving our European business up into the range that it should be operating and there still more movement to go I think as we look forward but it's running well now the metric, it's fundamentally that.

As far as the emerging market piece they’re going to help us with the growth. I don't know that it's higher margin in the core European business so, it should be similar margins so it's not an uplift in margin from that but it should help us on the growth side..

Got it.

Switching gears to the construction business as you look towards 2017 obviously you had tough quarter this year margin wise because of the start up of the Chicago plant and I think that's going to be impacting in the first quarter as well if I remember before that gets all said and done, besides that sort of the margin recovery once those cost go away and once the plan is up and running efficiently what are kind of the growth strategies for this business.

I mean you had a very successful penetration on Lowe's it looks like and [indiscernible] and you're starting to take this business globally I think a little bit more.

But is this a question of getting more shelf space at existing customers is it a sort of a globalization play or is this just getting border distribution channel within North America beyond the first mart to channels that you serve right now?.

Yes, as you say that the priority one is get that margins back to where they should be and they will this year as you point which is a big uplift to the overall company it's just moving our CP margins up to where they were much less beyond that which we think is possible, one of the big impact on the corporation.

As far as growth strategy is concerned, there is couple elements.

If you remember we bought the prospect business so we would have broader footprint across the country so, our share in the Southwest and the western part of the U.S is disproportionately lower those capabilities are going to help us grow regionally with most more distributors in that part of the country.

The fact that our supply chain will be more efficient allows us to win with customers throughout the country but the big driver of our business has been innovation. We've introduced new products that help the contractors and the consumer have a higher quality, higher efficiency job and those additive products have been the real driver of our growth.

So better coverage across the U.S. innovation agenda and then I think when you think of our global agenda our existing business is not a big growth platform for us, but it does enable us maybe to make the right bold-on investment in certain areas.

So I would say that's not a big part of the organic growth strategy but it is an opportunity for us because we have a very strong franchise here and we can leverage some of that technology to other place..

Got it and one final question another company that supplies products into the packaging and hygiene market and had a similar November year-end to yours mentioned that these markets for them weakened significantly as the November quarter ended largely and perhaps inventory control by their customer not necessarily market weakness but I was wondering if you seen anything like that in your business as packing and hygiene are big end markets for you and or whether you think that maybe a little bit of on a delay versus, versus other component suppliers into that market..

Yes, we didn't see any weakness going into the start of the year. Our December was positive. We thought good about the start of the year, Dmitry, and I won't say we saw any phenomena that would work against us in December.

So could be different material that this, I know who the customer, who the other supplier is, but for us hygiene and packaging were both solid in our first period which is now be hygiene..

Thank you. We’ll go next to Christopher Perrella from Bloomberg Intelligence..

Good morning. The guidance, your long-term target is 17% EBITDA margin and you’re going to be at 14% this year if all goes according to plan.

So how do you grow margin 300 basis points from 2018 through 2020? I know restructuring a lot of little bit to that but what’s the driver, is it volume, is it price sort of how does the waterfall breakout to catch you there now?.

Right, yes I think it’s a -- it’s the key question that drives the value of our company we targeted about 80 basis points a year next year we're saying, we're going to deliver at least 60. Beyond that there is a number of things that happen.

I mentioned a couple of times the supply chain efficiency that we have in the organization is much lower then we expect long-term. So we made some investments that are going to drive benefit and really a lot of what we -- we're right now we're at the peak from a manufacturing cost as a percentage of sales.

So we see a real opportunity there over the next three years that will be fundamental driver in all of our business units. Our European segment, if you look at that just think of that been very close to our North American segment in terms of the operating performance.

So that's not just the things we've done so far and the supply chain additions but how the supply chain runs and how our SG&A cost is structured especially as we grow a little bit in the emerging market segment of that. And then the big driver is our engineering adhesive business.

So that business today is as we invest for growth is running around 12% or 13% EBITDA margin if you see where it's going to be at the end of the plan its 20% margin fundamentally these business run at the level or higher and as we look at the back end of the plan we’re going to drive that to 20% margin.

So when you take those all together, you get to that 17% plus margin and I think it's a each piece when your benchmark it versus our business more competitive businesses are very attainable goals throughout the course of the plan and taking 60,80, 100 basis points a year is the approach we are taking to this.

We are not trying to squeeze the company up to 17% in one chunk but take the steps whatever they are, whatever the economic conditions to make certain that we march to that 17% over the next few years. So, I think it’s 80 basis points a year and I feel pretty good that we can deliver..

So at this point there is no real big cost chunks that are going to come out, it's running the business better and leveraging what you've already done at this point?.

Yes, I would say it's a definitely exactly there right. I mean I think we made some good investments in 2010 to 2015 that are shown benefits and even in the phase of what's pretty sizable currency impact, we continue to improve our margins over the last couple of years.

So the 300 basis points is all up and down the P&L across our European segment, our Construction Product segment and our Engineering Adhesives segment but those are the three elements..

All right.

A quick question on the Construction Products, the cost the manufacturing cost overhang that shall clear up by the third quarter?.

Yes..

Okay. All right. So it will be little bit in the second quarter than drag from extra manufacturing costs..

That is what we are projecting now, we would like to say it all out by the end of first quarter but I would say definitely by the end of the second quarter. And if you just took our CP business as it was, if that margin drop hadn't happened this year that would have been 60 to 70 basis points in and of itself.

So it was a big drag on that, it is a really good year had CP not taken that margin hit more than 70 basis points higher this year. So that is a big driver of our performance in 2017..

All right, we will get that back over year-and-a-half as it rolls through. Okay, all right. Thank you very much..

Okay, I think that's our last question. So I would thank everybody for their time and for their support of the company..

Thank you ladies and gentlemen. This does conclude today's H.B. Fuller's fourth quarter 2016 investors' conference call. You may now disconnect..