Good day and thank you for standing by. Welcome to the H.B. Fuller Second Quarter 2021 Earnings Conference Call. [Operator Instructions] I will now turn the call over to Barbara Doyle, Vice President, Investor Relations to begin..

Thank you, operator. Welcome to H.B. Fuller’s second quarter 2021 earnings call for the fiscal quarter ended May 29, 2021. Our speakers are Jim Owens, H.B. Fuller President and Chief Executive Officer and John Corkrean, Executive Vice President and Chief Financial Officer. After our prepared remarks, we will take questions.

Please let me cover a few items before I turn the call over to Jim. First, a reminder that our comments today will include references to organic revenue, which excludes the impact of foreign currency translation on our revenues and the impact of acquisitions or divestitures. We will also refer to adjusted non-GAAP financial measures during this call.

These measures are in addition to the U.S. GAAP results that are reported in our earnings release and in our Forms 10-Q and 10-K. We believe that discussion of these measures is useful to investors to assist their understanding of our operating performance and how our results compare with other companies.

Reconciliation of non-GAAP measures to the nearest U.S. GAAP measure is included in our earnings release. Unless otherwise specified, discussion of sales and revenue refers to organic revenue and discussion of EPS, margins or EBITDA refers to adjusted non-GAAP measures. We will also be making forward-looking statements during this call.

These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Many of these risks and uncertainties are and will be, exacerbated by COVID-19 and the resulting impact on the global business and economic environment.

Actual results could differ materially from these expectations due to factors discussed in our earnings release, comments made during this call or risk factors in our Forms 10-K and 10-Q filed with the SEC and available on our website at investors.hbfuller.com. Now, I will turn the call over to Jim Owens..

Thanks, Barbara and welcome to everyone on the call. Last evening, we reported another quarter of strong revenue and earnings growth. Organic revenues in the second quarter were up 19% year-over-year, adjusted EBITDA was up 21%, and adjusted EPS of $0.94 increased 38% versus last year.

We overcame significant supply chain disruptions and moved quickly to raise prices in the quarter. We achieved an all-time record quarter in revenue as we met increasing customer demand and gained market share. Throughout the quarter, H.B.

Fuller experienced raw material and container shortages, but because of strong support and global collaboration with key suppliers and the ingenuity of our technical and supply chain teams, we made certain to keep our customers supplied. H.B.

Fuller’s ability to assure supply of critical adhesives and provide innovative solutions that customers need remains a competitive differentiator for our company, which is evident in our top line growth. H.B. Fuller’s revenue growth was broad-based across segments and geographies.

Organic revenues increased in each segment versus the second quarter of 2020, including strong double-digit growth in both Engineering and Construction Adhesives segments and very solid growth in Hygiene, Health and Consumable Adhesives against a very strong second quarter of 2020.

Revenues also grew in each geography, including organic growth of 19% in the Americas, 27% in EMEA and 9% in the Asia-Pacific region. Importantly, our revenues are also up from pre-COVID levels.

Total organic revenues increased by 9.5% versus the second quarter of 2019, which had no COVID-19-related impacts, with double-digit growth in HHC and Engineering Adhesives and mid single-digit growth in Construction Adhesives.

Strong volume leverage in the quarter, coupled with pricing benefits and operational efficiencies we are driving in the business, offset significantly higher raw material costs and drove a 21% increase in EBITDA dollars year-over-year.

Raw material input cost increased in the second quarter by about 10% from the end of 2020, with some raw materials increasing more rapidly than we forecasted. We have implemented $150 million of annualized price adjustments to-date and will implement an additional $75 million in the third quarter. We are prepared to do more as necessary.

These price adjustments will offset the impact of raw material increases in this fiscal year. Suppliers have made good progress in restoring capacity for the commodity and specialty chemicals we purchase. However, the rate of recovery going forward will likely be uneven until inventory levels are rebuilt to fully meet demand.

Our planning assumptions anticipate that the current supply volatility will lessen and pricing will begin to stabilize in the fourth quarter. We now expect the year-on-year raw material inflation to be over 10% and expect that our pricing will fully offset raw material increases by the end of the third quarter.

We expect gross margin headwinds in the third quarter, which is seasonally slower for volumes and we will see additional pricing and margin benefit in the fourth quarter, which is typically our strongest volume quarter.

Our global sourcing expertise, our innovative chemistries and our operational agility were more critical than ever this quarter and continue to provide competitive differentiation.

And the actions we have taken on price and to drive efficiencies across our business enabled us to seamlessly serve our customers and achieve our profit targets in the quarter, while at the same time, increasing our debt pay-down over last year’s level, in line with our target for $200 million of debt reduction in 2021.

Now, let me move on to discuss performance in each of our segments in the second quarter on Slide 4. Hygiene, Health and Consumable Adhesives second quarter organic sales increased 3.3% year-over-year, which is an outstanding result considering the comparison to a very strong quarter last year when the business grew 7% organically.

Sales increased versus last year across the majority of our HHC markets, with strong growth across our packaging applications, beverage labeling, multi-wall bags and tape and label. HHC segment EBITDA increased by 11%, significantly more than the top line growth and EBITDA margin was strong at 14.7%, up 70 basis points versus last year.

Margin improved, driven by strong volume leverage, restructuring benefits and good expense management. Construction Adhesives’ organic revenue was up 23% versus last year, with strong growth in both flooring and commercial roofing as share gains and improving demand drove significantly improved top line performance versus 2020.

Even compared to a strong non-COVID-impacted second quarter of 2019, organic revenue was up 4%. Contributions from the pricing adjustments we have implemented in this segment were underrepresented in the second quarter as we fulfilled prior Construction Adhesives’ orders and backlog following the temporary disruption from the effects of Storm Uri.

We have already begun to see increased pricing roll through in the first few weeks of the third quarter and expect additional pricing realization in the P&L over the rest of the year.

Construction Adhesives’ EBITDA increased 4% versus last year as strong volumes were offset by higher raw material costs, unfavorable mix and some temporary manufacturing costs that were required to return to normal service levels after the extreme weather event in the first quarter.

Engineering Adhesives’ results were extremely strong, with organic revenue up nearly 40% versus last year, reflecting share gains and improving end-market demand.

Sales increased versus last year in all 14 of our Engineering Adhesives’ end markets with exceptional growth in adhesives for automotive, recreational vehicles, woodworking, electronics and insulating glass. And looking back to the non-COVID-impacted second quarter of 2019, organic revenues were up 11%.

We expect continued strength and double-digit full year growth in this segment. Engineering Adhesives’ second quarter EBITDA grew 42% year-on-year, driven by exceptional volume performance. We expect EBITDA margins to improve in the coming quarters as pricing actions are fully implemented and offset the impact of raw material cost increases.

Looking ahead at our full year results, our planning assumptions and the economies will continue to open up as vaccines are rolled out around the world. Raw materials will be tight through most of the year and pricing will remain elevated as supply chains begin to normalize and demand continues to be strong.

We anticipate continued strong demand and share gains in each of our business units to drive strong volume growth in 2021 versus 2020. Revenue in most of our end-markets will exceed 2019 levels.

Overall, when considering our strategic pricing actions, coupled with the solid volume growth in HHC, continued improving performance in Construction Adhesives and strong demand in Engineering Adhesives, we now expect full year double-digit revenue growth versus 2020.

Now, let me turn the call over to John Corkrean to review our second quarter results and our updated outlook for the full year based on these planning assumptions..

Thanks, Jim. I will begin on Slide 5 with some additional financial details on the second quarter. Net revenue was up 22.7% versus the same period last year. Currency had a positive impact of 3.9%.

Adjusting for currency, organic revenue was up 18.8%, with volume up 17.4% and pricing up 1.4%, with most of that pricing realized in the second half of the quarter. All three GBUs had strong growth versus 2020 as well as compared to the non-COVID-impacted second quarter of 2019, which we believe validates the strength of our top line performance.

When compared to Q2 2019, organic revenue increased 9.5% for the total company, with strong organic growth for all three GBUs. Adjusted gross profit was up 17.4% year-on-year and gross profit margin was down 120 basis points as volume growth and pricing gains were offset by higher raw material costs.

Adjusted selling, general and administrative expense was down 130 basis points as a percentage of revenue, reflecting volume leverage, savings associated with our business reorganization and general cost controls offset by higher variable compensation than last year.

In total adjusted operating income margin improved by 20 basis points year-over-year. Net interest expense declined by $1.3 million reflecting lower debt balances. The adjusted effective income tax rate in the quarter was 26.8% compared to 27.6% in the same period last year.

Adjusted EBITDA for the quarter of $122 million was up 21% versus the same period last year, driven by strong volume growth, pricing gains and restructuring savings partially offset by higher raw material costs and higher variable compensation.

Adjusted earnings per share were $0.94, up 38% versus the second quarter of last year, reflecting strong income growth and lower interest expense associated with our debt reduction.

Cash flow from operations in the first half of the year of $80 million compares to $108 million in the same period last year, reflecting working capital requirements to support strong top line performance as well as higher raw material costs.

We continue to reduce debt, paying down $62 million in the first half of 2021 compared to $51 million during the same period last year and keeping us on track for our full year debt pay-down plan of $200 million. Regarding our outlook, based on what we know today, we now expect full year revenue growth to be in the low double-digits.

As you will recall, we increased our adjusted EBITDA guidance range last quarter to $455 million to $475 million and this guidance remains unchanged, given our expectations for the continued strong volume growth and accelerating pricing offsetting raw material cost increases that we now expect to exceed 10% for the fiscal year.

Based on the seasonality of our business and the timing of raw material and price increases, we expect revenues in the third quarter to be up about 15% versus the third quarter of 2020 as we continue to deliver strong top line growth.

EBITDA margin in the third quarter is expected to be about 100 basis points lower than the second quarter on a sequential basis. As pricing actions are fully implemented, margins will improve in the fourth quarter, which is also our strongest quarter from a volume standpoint.

We expect cash flow to be strong for the rest of the year, allowing us to maintain our target to pay down approximately $200 million of debt during 2021. With that, I will turn the call back to Jim Owens for some closing comments..

Thank you, John. During our last conference call, I outlined the three critical priorities we set for 2021 in the current supply-constrained inflationary COVID recovery environment. These three priorities are volume growth, price and greater productivity and we executed well against each of these key imperatives in the second quarter.

Our first priority is to drive volume growth by supporting our customers in the current high demand and supply-constrained environment. Volume growth and share gains are our foundation for creating durable shareholder value.

Our 19% second quarter organic revenue growth is even more significant than it appears, considering our HHC business had a very strong quarter of 7% organic growth in the second quarter last year and our business overall grew 9.5% compared to pre-COVID levels in the second quarter of 2019.

Our second imperative is to strategically manage pricing aligned to the value we deliver in this inflationary environment. We implemented $150 million in price increases effective from March 1 through July 15 and we are planning an additional $75 million in price increases later in Q3.

We are also delivering on our third priority to release greater productivity and capacity through our operational excellence programs. In the second quarter, we outdelivered competitors in supporting customers and our factory labor and overhead as a percentage of revenue in the second quarter decreased versus the second quarter last year.

COVID-19 has changed how businesses operate and supply constraints and pricing volatility are challenges that are impacting our industry today. In this environment, H.B.

Fuller’s strategic clarity, the benefits of our robust global operation and supply chain, our culture of collaboration and market-based innovation and the speed and agility we have developed across our company is delivering results for our customers and for our shareholders.

We will continue to navigate the challenges of a constrained supply environment, grow our business and build on our rising leadership position in the global adhesive industry and we will continue to deliver strong results for our customers and for our shareholders. This concludes our prepared remarks today.

Operator, please open up the call so we can take some questions..

Thank you. [Operator Instructions] Our first question comes from the line of Vincent Anderson of Stifel..

Yes, thank you and good morning everyone..

Good morning, Vincent..

So, thank you for some of the extra detail on the outlook, but I am a little slow this morning and trying to still unpack a couple of things. So, depending on what we call low double-digit top line growth, you recorded it looks like about 14.5% organic in the first half of the year.

And then it sounds like the price actions will flow through more in the second half, at least weighted towards the second half. And when I kind of just carve all that up, it sounds like to get to just low double-digit organic growth, it doesn’t seem like there is a lot of room for volume gains in the back half of the year.

Am I missing something?.

Perhaps, yes, I think the – I guess, low double-digits is a broad term. Think of that as 13%, 14% overall, Vincent, so low double. So yes, we are not talking – we are talking something like in that range.

And I think as you pointed out, there is very significant price increases that are flowing through in those numbers, along with – I think we have more modest projections for volume growth, but certainly volume growth during the second half of the quarter.

But yes, the volume growth continues, pricing ramps up, and that gets you to the numbers that are somewhere – we probably should have said 13%, 14%, 15%, something like that.

John, what do you want to say?.

Yes. I think the other factor, Vincent, in for the second half of the year is we will have less favorability from FX. So, I think based on that number that Jim gave you, I think we still expect to see low-double digit growth or low-teen growth in the back half of the year and 13% to 14% for the full year..

Yes..

Okay. Yes, that’s helpful. I appreciate it.

And then one thing that hasn’t really been discussed in all of this is just how we should think about mix impact on margins as we get to a more normalized demand environment?.

Yes, I would say overall, the mix improvement is very positive for us. It was positive in the quarter. It’s going to get more positive as we go throughout the year as we drive EA and CA. And I think recognizing that the pricing actions that we have taken hit the second half of this quarter really ramp up in Q3 and Q4.

And EA and CA are typically a little slower – have a little more customer notification in them than our HHC business. So, you will see a ramping up of their margins and that positive mix, combined with the fact that our HHC business is doing a great job, right. They have improved their margins here versus where they were last year.

So, I think you will see a very positive mix effect as we head into Q4 and certainly into 2022..

Great. Thanks. And then I just have one last quick one on the price side, so, well communicated on the price.

My question is, are they fairly standard pricing terms, and so you will hold on to this for a bit or are there some share of these where it’s somewhat exceptional because of how tight the raw material environment is and so some of those price – prices will just naturally unwind rather quickly with easing of raw material constraints?.

Yes. We don’t believe in temporary price increases or surcharges. So, you don’t have very little of that, right. We have – and that’s why we – our raw material prices go up quickly. What we do is we notify customers. We explain our value, and the price increases in our business are permanent, right. They stay in place.

So yes, there is no – very little, if any, temporary increases here – embedded in here..

Alright. Thanks a lot. Thank you. Best of luck..

Okay. Thanks Vincent..

Your next question comes from the line of Ghansham Panjabi of Baird..

Hi guys. Good morning..

Good morning Ghansham..

Yes. So if we focus on the EA segment, you called out your sales were basically 11% above fiscal year ‘19 comparable levels. The margin is down 360 basis points over that 2-year period. And obviously, there is a lot going on with price and you are working on price increases, etcetera.

But was there a mix impact relative to 2 years ago? And then what is the reasonable time line to recover to that level if, in fact, that is the right level that we should expect a convergence towards?.

Yes. So yes, I think you hit on it, right. The biggest challenge is raw materials. So, what happened in second quarter in terms of raw materials is one of the most significant spikes in raw materials that we have seen.

And in a business like EA, that’s a real opportunity for us, and we are taking advantage of it and getting a lot of the pricing, but it doesn’t happen automatically. So, that’s why you will see the margins slip a little here in Q2 and into Q3 as we fully implement the EA price increases.

But this is a real opportunity for us to reposition some customers there. So, it’s mostly a raw material and price situation. There is probably a little bit of mix just on where some of the markets have grown.

Aerospace is now positive again, but that’s a real nice high-margin business that’s not doing as well as some other businesses that are more durable goods kind of businesses. But it’s mostly raw materials more than mix.

And I think it’s one of the real positive upsides just what’s going to happen to margins here in EA and CA in the coming quarters and into 2022..

Okay. Got it. And then for the second half of this year, I mean, is there a way – can you give us – just give us the volume outlook by segment relative to the comparable 2019 period? I mean there is just so much complexity with maybe mobility increasing and some impact on HHC, converse impact on EA and so on.

So, just curious as to what you have specifically embedded for the back half relative to 2019? And then second, in terms of raw material velocity, you have already raised prices, your outlook for cost inflation twice so far this fiscal year.

Can you give us a real-time indication as to how things are progressing at this point so far in 3Q? And then also, I assume you were impacted by out-of-pattern movement in the second quarter relative to Winter Storm Uri. So, was there any specific call out on cost side that may not recur in 3Q? Thanks so much..

Yes. Okay, yes. A lot of good questions. I will let John try and unpack exactly what happened with 2019 volumes. As you know, we don’t go into that much detail by segment. I would say that each one of them has very positive volume trends for this full year versus 2019.

So – and rightly, we are pointing out towards 2019, significant expansion in our volumes. And I think that’s really a product of how well we manage the business throughout COVID. We got a lot of new qualifications. We were out in front of customers and won new business last year and especially what we have done here in the second quarter.

We haven’t talked much on this call about it. But the volume that we generated in this quarter was directly related to the agility of our company to respond in a supply constraint environment. So, we met the needs of our customers better than others in the market.

We also had all those gains that we are pulling together as we qualify new products and we are able to meet those needs. So, really great work by our supply chain team to get the raw materials and the sourcing guys and the supply chain teams to meet what was a significant uptick in demand in a constrained environment.

As far as the – there are 3 questions, and I will go to the third one, and I will come back to the second one. The third one was about exceptional costs. There were definitely exceptional costs in this quarter. We didn’t call them out, but we – I mentioned just a second ago what we did. We air freighted raw materials from China to the U.S.

at exceptional prices in order to meet the needs of customers. We had one supplier who had a ship stuck in the Suez Canal, one of those famous ships. We work with them to airfreight material from the U.S. to Europe in that case. And that was a significant cost that we share with that supplier to keep our customers running.

We had steel, steel short out there. We had shortage of steel drums. We bought raw material for one of our customers who had extra steel and had our supplier converted into steel. So, we did exceptional things with exceptional costs. In some cases, we had customers pay for it.

In a lot of cases, this was about enabling us to get the long-term price increases and the margins that we expect out of our business. So, we made a lot of investments this quarter that are going to pay off, both in share gains and also, I think, pricing realization as we go forward.

And before I turn it over to John on the 2019 question, what was your second question, Ghansham?.

It was on the raw material conviction that the 10% plus is the right sort of baseline..

Yes. Yes, in terms of where we got to yes. So, what we see right now is the raw material increases are lower in Q3 than they were in Q2. So, they are still increasing in Q3. We see a flattening – potentially a decrease, but a flattening of a – in Q4. We do see some downtick in some materials in China right now. That’s usually the early sign.

It’s going to be tougher to realize those globally because of the supply chains, but maybe a little slower than normal to see those flow around the world. But yes, definitely, I think we have a pretty good picture of where things are and are headed here at least in the next two quarters.

And it’s a little different than when we entered last quarter where it was a big question. We knew it was going up. It was just a matter of how much. I think today, we have a fairly good picture at least out over the next three months to four months. So John, on 2019….

Yes. So and I don’t have exact math here, Ghansham, but I think directionally, if you look at the second half of the year based on the guidance we have given, you are probably looking at volume growth versus 2019 in the first half of the year was 9% to 10%.

And second half of the year, we are probably in the mid to high-single digits in terms of volume growth and at an overall company level. So, reflecting maybe a little bit of pent-up demand in the first half of this year that lessens a little bit, modest of maybe attrition related to some of the pricing gains we get.

And by GBU, I think we are able to expect to see EA in the high-single digits, low-double digits. And Construction Adhesives and HHC sort of been in that mid-single digit to high-single digit.

Does that help?.

Absolutely. Thanks so much..

Alright. Thank you..

Your next question comes from the line of Mike Harrison of Seaport Research Partners..

Hi, good morning..

Good morning Mike..

I was wondering if you can talk a little bit about – I don’t know if you have a great sense for this, but how much the supply chain disruption impacted your volumes. You just mentioned that maybe in the first half here, you are benefiting from some pent-up demand. But the sense I get is that there is not a lot of restocking going on at this point.

But if you had all the supply, all the raw material supply that you could have wanted, how much higher would your volume growth have been? And maybe what segment had the greatest impact from the disruption from a volume standpoint?.

Yes, really hard to quantify, Mike. So, I can say that there is definitely some strain that we have realized during the quarter. So I would say, certainly, early in the quarter, we had some supply constraints in the HHC business related to vinyl acetate, which got very tight. And have we fully filled all those buckets, probably not.

Somebody already mentioned the auto business that we are going hand to mouth there. We are picking up some business and winning some business because we have got a great supply chain, but there is definitely more backlog today than there was a quarter ago. And probably the biggest place we have backlogs right now is in our CA business.

So, if I were to pick an area where we have a bigger backlog, it’s in Construction Adhesives. But overall, we are doing a good job meeting demand, but there is definitely more. If you ask my sales team, they would tell you a very big number, right? Because it just feels like everywhere we go, we are – customers are looking for more.

And part of that is because we are doing a really good job..

Alright. And then on the capital priorities front, you continue to be on track with your debt pay-down plans. I think that the leverage situation is going to kind of resolve itself between free cash flow and EBITDA growth.

Can you give us a better sense of when you expect to be more comfortable in shifting your capital allocation strategy toward M&A, particularly if an attractive target were to become available?.

Yes. So as you pointed out, right, our goal is to get our debt to EBITDA ratio below 3. I think we will – I think the current projections will be around 3.2 at the end of this year. So, that should happen early next year. So, we see ourselves staying in that range long-term. So, we look at every target, every opportunity that’s out there.

I think we have made a lot of great decisions for shareholders both in the deals we have made and at the times that we have passed in the last couple of years bringing down our debt has been a priority. So, we will make the right decisions for shareholders at the right time. But our long-term commitment is to be in that 2 to 3 debt to EBITDA ratio..

Alright. And if I can sneak one more in, kind of a housekeeping question. The diluted share count, if my model is correct, went up by about 1 million shares sequentially.

What drove that? And I guess, how should we think about the share count progressing end of the year?.

Yes, that’s definitely a question for John. So, I asked the same question. So, I think he can give you the correct math..

And so it’s all a function of the dilutive share count calculation, meaning our higher share price results in less ability to sort of buyback shares in the calculation. So, it’s not related to shares issue. It’s not related to anything we are doing around share buyback or share issuance. It’s simply the math.

And I would say, Mike, it will depend on where the share price goes, but I would project it’s probably going to be around the same number for the rest of the year..

Alright. Thanks very much..

Thank you, Mike..

Your next question comes from the line of Jeff Zekauskas of JPMorgan..

Thanks very much. The margin progression in the health and hygiene business from the first quarter to the second quarter was pretty good, and it was good year-over-year, but not so much in engineering.

What’s the difference? Why is the margin profile improving in HHC, but not in engineering?.

Yes. I think the biggest difference was the speed at which they introduced pricing, Jeff. So, our HHC business did a better job of getting ahead of this. They also had maybe more shortages of raw materials earlier. So, they had a burning platform that they were able to point to with customers.

And I think in these very high-value businesses, we want to have careful, more thoughtful dialogue with customers as we raise prices. So, that’s fundamentally the difference a bit of a mix. But yes, the HHC team did a great job of jumping on prices. The rest of the businesses have done the same thing just with more customer notice..

So my memory is that in the last conference call, I think you thought that prices would be up about 3% in the quarter, and they were up, whatever it is, 1.4%? And so is it the case that your assessment of your ability to raise price, it turns out it was tougher, but volume conditions were better and why didn’t prices go up faster?.

Yes. So, I don’t know if we look back at the scripts. So I would say, Jeff, certainly, the last month of the quarter, they were up more than 3%. So I think in the quarter, we said it was the end of March, and we said that we are going to raise prices in April and May, right.

So one of the challenges, right, we are a month into the quarter now than we were a month into the quarter. Most of our price increases went into effect April 15 and May 1. So, you saw the impact in our numbers in period six, our last period of the quarter. And that’s why we are very confident in what’s happening.

We see it in our numbers here in P6 and flowing into P7. So now, I would say pricing happened a lot exactly like we expected. In fact, we ended up announcing more. I think when I – during the last call, I said $100 million would be announced and we are now at $150 million that’s implemented and agreed, right.

When I say it’s in place, this is implemented and agreed and changed in our system to happen between March and July 15. And then, we are right, now planning this additional $75 million. So pricing happened like we planned. What didn’t happen like we planned as well, were a little stronger than we plan, a little stronger and faster.

And as you point out, volume was stronger. So I would say pricing was pretty much what we expected and maybe a little stronger than we expected. Volume was stronger and raw material increases were stronger. So, all three were up higher..

Why is the Engineering business doing so much better than it did in 2019 in your assessment?.

Yes, these are share gains, Jeff. I mean we’ve built a great team there that understands market trends. And this whole move to these GBUs has allowed us to really put a lot of power in the hands of those 14 segment leaders.

So, if you talk to our electronics teams, they know where the new products are coming out and they know where they are going to win. Talk to our solar team, they see the trends that are happening, the new panels that are being developed, where the investments are going.

If you talk to our RV team, they see who the winners and losers are in the market and what applications are going to create value. So that move, which saved us money, we talk on these calls about how much money it saved us, is really enabling us to grow faster.

And that model in our EA team is the one we’re applying in the other business just to generate organic growth. But it’s particularly valuable there when you’re part of new and evolving products, electric vehicles. We’re doing a great job with electric vehicles. Water business has benefited from that shift.

So, it’s really the way we’ve designed the organization to get ahead of opportunities. And I would just add too, Jeff, in 2020, during COVID, our team was very aggressive at qualifying new applications. So some of that’s coming here is a benefit..

Okay. Maybe lastly, Ashland is interested in monetizing its adhesives business.

Is that acquisition too big for you? Is that something that you were seeing?.

Yes, of course, we wouldn’t comment on any specific acquisitions, Jeff. I think they have said they are doing a strategic review. I guess we will see what happens with that. But it’s a good business. I would say that it’s a good adhesive business.

And as I said earlier, we’re going to do what’s best for our shareholders with a clear view toward having the right debt-to-EBITDA ratio in the long run. So, we won’t ignore anything that happens in the market.

If it happens, right, we will see that comes out of their strategic review but – because our goal is to be the best adhesives company in the world. And we’ve done that by growing our business organically. And when the right inorganic opportunities come up that are good for our shareholders, we look at those seriously..

Okay, great. Thank you so much..

Thank you, Jeff..

Our next question comes from the line of Eric Petrie of Citi..

Hi, good morning, Jim and John..

Hi, Eric..

Good morning, Eric..

Just a question on strategy. You talked about ‘19 and the applications in Engineering Adhesives.

Is that the right number for you, and you just want to get larger in those businesses or do you want to actually expand into other end markets?.

Yes, I would say today, it’s the right number. Some of those are groupings of other markets, but I think it’s a good manageable number of end markets, and we have expertise there. So sometimes these businesses evolve.

There is a whole subsegment of electric vehicles that is becoming a business unit within automotive, right? So – but yes, we’re at the right number..

Okay. And then secondly, just a follow-up to the prior question, you mentioned share gains because you’re better supplying your end customers. You noted EVs was doing real strong.

What other end markets is that recognizable or you would point out to us?.

Yes. I’d say it’s a combination of two things that are driving the share gains. I mean in our business, being the innovator who solves the customers’ problem is the biggest way we win business. And I can point to examples in almost all of our 30 segments where we have an innovation that’s making a difference with a trend.

And I’ll comment on a couple of those. What’s unique about what’s happened here in the last year between COVID and especially second quarter, is our service levels have been a differentiator, right? Usually, service levels aren’t a differentiator.

But in this supply-constrained environment, our teams did exceptional things to support our customers and support customers in need, and that’s driving share gain that’s exceptional. I’d say normally, we don’t have that. But in terms of where we’re winning, continue to grow in electronics by finding new and different opportunities.

In our insulating glass business, we’ve developed some patented technology that includes some new equipment. That’s driving a lot of growth for us as people look to innovations to make more energy-efficient buildings. In solar, we’re a leader in China.

And as companies make investments outside of China, we’re getting those opportunities because of how global we are. And I already mentioned the electric vehicles.

And then I think importantly, at HHC, what that team has done since we went to the GBU structure, we set very carefully about sustainability trends and how that’s changing adhesive needs, and that’s opening up opportunities.

So – and then finally, I guess, in CA, you probably saw the biggest growth area from an innovation standpoint is what our roofing team is doing to make easier-to-use, environmentally friendly roofing adhesives that allow you to use less construction workers because there is just such a problem getting construction workers.

So putting those roofs on faster with some of our new technology is a big winner there. So there is a lot of little examples, little meaning millions, multimillions of dollars that are adding up to a significant impact..

Helpful. Helpful.

And then just one follow-up on your outlook on supply chain, how much do you produce captively of your own like tackifiers or resins or polymers? And do you look to expand that to avoid these shocks in raw material prices?.

Yes. No, I would say our goal is not to be backward-integrated. I think one of the things that helps us is dig in the details, what’s happening with raw materials. Commodities went up a lot. We buy only 13% of our raw materials or commodities. The specialty materials have less inflationary volatility. That’s good for us. It’s good for our shareholders.

So we don’t have the kind of volatility that somebody who’s backward-integrated makes. And then we’ve got a whole model of building partnerships with suppliers. So we think that works to our favor. So a small percentage of our business is polymers we make for ourselves captively. But we’re mostly formulators.

And where it makes sense, we will build the polymers where it’s proprietary technology..

Great. Thank you..

Your next question comes from the line of David Begleiter of Deutsche Bank..

Thank you. Good morning. Hey, Jim….

Good morning. .

Just going back to – Thank you.

Going back to your comments on retaining these price increases, I hurriedly said, but historically, have you – when are you seeing prior periods of rapid inflation has still been able to retain the entirety of the amount of these price increases? Or is there historically, was there some portion that did go back to the customer, especially maybe in the automotive or maybe more assembly side of the business?.

Yes, I would say historically, what you’ll see over time is a very slow leakage. And really, we don’t lower our prices anywhere they become competitive pressures that put us in positions where we either introduce new products or we meet a competitive situation. So I would say multi-quarters afterwards.

But in auto, no, we don’t have any kind of price-up, price-down kind of commitments. We do have about 15% of our business that’s indexed with a lag, so not really automotive. So that part of the business will follow a pattern of the market. But for the most part – so you’re right, it’s not 100%.

But for the most part, price increases go in place, and they are more permanent in our business..

Got it. And Jim, just on volumes looking into next year, I know it’s early.

But if we have a more normalized year next year, how would you think about the volume growth for the three GBUs?.

Yes. It’s really early to predict volume growth. I think we’re going to get a lot of pricing benefit next year because we’re half a step behind the raw materials here in raising prices. That will drive a lot of margin benefit next year. I mean I think we’re going to be a higher revenue. We’re going to be higher margins.

And these growth wins we have could put volume on top of that, it’d be amazing. But I think we’ve really set ourselves up well, not just to have a strong finish to this year, right? I think you’ll see it here as we head into Q4, but I think we’ve positioned ourselves for a very strong 2022 with or without a lot of volume growth.

And if we get a lot of volume growth, it could be exceptional..

And last thing, any labor constraints in your business that you’re seeing right now?.

Yes, everywhere, right? So it’s a – it’s the big challenge for our factories. And I mentioned, we don’t talk a lot about it in this call, but our three priorities are delivering on the volume growth, getting the pricing and then productivity.

And we see this as a productivity opportunity at all of our facilities, either to automate or just drive other efficiencies, but yes, there is labor constraints. I think we’re a 130-year-old company, great employer.

So we probably don’t have the same kind of things you see from other companies, but it’s causing a little wage inflation in some parts of the country and pressure on employees. So far, our teams have done a good job, but every one of my plant managers is looking for good workers..

Got it. Thank you very much..

Okay, thank you..

Your next question comes from the line of Paretosh Misra of Berenberg..

Thank you. Good morning, Jim, John and Barbara..

Good morning..

Hi, good morning.

On the raw material inflation, is the percentage increase in raw material part, is that pretty much the same for the three segments or are there some contrast there?.

Yes. I’m looking at John, and we’re trying to sort that out. I would say it’s probably a little higher in EA, maybe a little higher in EA, but pretty much the same, probably a little less in CA, a little more in EA, pretty much the same across the business..

Got it..

As a percent of sales, yes..

Okay, great. And then on pricing, which segment is going to see the biggest chunk of this more than $200 million price hikes? And then I guess just kind of related to that, it sounded like in construction, you said that pricing in Q2 didn’t really fully reflect what has been announced.

So could you just elaborate on that as well?.

Yes. Yes. Yes, HHC probably a little more than EA, but HHC and EA lead the charge with CA having less in terms of the dollar impact. But all the businesses have significant price increases that they are putting forward. And as I said, HHC is off to a great start on that. Yes, CA a little slower for two reasons.

One, two of our factories were in the Texas area. So they had a backlog. So they took a while to get caught up and get the pricing out of those. And then because of how some of our distribution channels are set up, we didn’t have – the pricing timing is a little more delayed.

So you see it flowing through in the numbers this quarter but you saw less of it last quarter. But they are very much on point right now, and I’m pretty confident we’re going to see some really good benefits from them in the coming quarters..

Thanks, Jim.

And then I guess last one, could you talk about how your customers are getting affected by the chip shortage issues? I’m not sure if you could quantify the volume impact, but anything anecdotal? And is that mainly the automotive customers or you’re hearing that from solar or electronics customers as well?.

Yes. I would say we’re seeing it mostly in the auto space, and it’s mostly around the fact that as we all see, right, you’ve got a dearth of cars at every dealership in America and around the world. So I think the chip shortage shows up in a little bit lower demand.

But I would say they are still making a lot of cars and they are still using a lot of adhesives. And sometimes, they are parking them aside to put them in with these chips.

So it’s an impact, but not one that I’d be the best guy to quantify because we’re seeing strong growth in our automotive business overall, a combination of some share gains, some opportunities, some of the EV work we’ve been doing has made our auto business strong despite the chip issue..

Got it. Thanks for that insights. That’s all I had. Thanks guys..

Okay. Thanks, Paretosh..

We have time for one more question. Your final question will come from the line of Rosemarie Morbelli of Gabelli & Company..

Thank you. Good morning everyone and thank you for taking my questions. Jim, you mentioned that you gained share because you were able to supply quite a few customers whose regular supplier could not do it.

So do you think, in your opinion, have you gained those particular businesses for the long-term? Or do you think that they will eventually return to their previous supplier at a lower price point?.

Yes. Well, we’re only – it sounds like we were out there supplying everybody in the market. It’s an incremental number of customers we were able to serve, but those all were based on long-term commitments.

So we had a very much, Rosemarie, a priority for existing customers, but we added business where we saw it as a customer that really appreciate the value that we bring and we’ve got long-term commitments out of it. So no, I wouldn’t say it’s temporary. Thanks for the question..

And then looking at your comments regarding the fact that you would – you are ready to raise prices more if necessary, are there any particular area where you could potentially see additional inflation?.

Jim Owens:.

[49:45] [indiscernible] just I said:.

Thank you and congratulations on a great quarter..

Thanks, Rosemarie..

Thank you. That was our final question for today. I will now turn the call to Mr. Jim Owens for any closing comments..

Thanks, everybody, on the call for your support and your questions, and we’re excited about the quarter, but also what we’re building here for the future. So again, thanks for your support. Have a great day..

Thank you. That does conclude the H.B. Fuller second quarter 2021 earnings conference call. You may all disconnect your lines and have a wonderful day..