H.B. Fuller Company 2026 Q3 Earnings Call

Thank you, operator. Welcome to H.B. Fuller's third quarter 2026 investor conference call. Presenting today are Celeste Mastin, President and Chief Executive Officer, and John Corkrean, Executive Vice President and Chief Financial Officer. After our prepared remarks, we will have a question and answer session. Before we begin, let me remind everyone that our comments today will include references to certain non-GAAP financial measures. These measures are supplemental to the results determined in accordance with GAAP. We believe that these measures are useful to investors in understanding our operating performance and to compare our performance with other companies. Reconciliation of non-GAAP measures to the nearest GAAP measure are included in our earnings release. Unless otherwise noted, comments about revenue refer to organic revenue, and comments about EPS, EBITDA, and profit margins refer 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. Actual results could differ materially from these expectations due to factors covered in our earnings release, comments made during this call, and the risk factors detailed in our filings with the SEC, all of which are available on our website at investors.hbfuller.com. I will now turn the call over to Celeste Mastin.

Celeste? Thank you, Scott, and welcome to today's call.

Through disciplined execution, we delivered strong revenue, EBITDA, and EPS growth in the quarter and continued to improve profitability and advance toward our EBITDA margin target of greater than 20%. Pricing actions are offsetting higher raw material costs, and our restructuring efforts continue to enhance operating leverage. With the anticipated closing of the AMS acquisition before year-end, we remain focused on strengthening our portfolio, executing our Quantum Leap program, and creating long-term value for shareholders. Turning to our consolidated results in the third quarter, revenue was up 5.2% year-on-year. Adjusting for foreign exchange and acquisitions, organic growth was 4.4%, driven by pricing of 7.4%, partially offset by lower volume year-on-year. From a profitability perspective, EBITDA of $187 million increased 9% year-on-year, and EBITDA margin expanded 80 basis points to 19.9%, with EPS up 21% versus the same period last year.

The continued execution of our pricing actions drove EBITDA growth and margin expansion across all three GBUs, enabling us to successfully offset elevated raw material inflation. Now let me move on to review the performance in each of our segments in the third quarter. HHC delivered 6% organic revenue growth year-over-year in the quarter, with strength in hygiene, beverage labeling, and tape and label more than offsetting softness in packaging. EBITDA margins were 17.6%, up 70 basis points versus last year, reflecting double-digit pricing performance. EA delivered organic revenue growth of approximately 5% year-over-year, excluding solar, with continued strength in aerospace and general industries. Electronics softened in the quarter as chip shortages weighed on mobile phone production in Asia Pacific, a reversal from the strong growth we saw in the first half of the year. Including solar, organic revenue increased 1% in the quarter.

We have now fully lapped the solar exit and do not anticipate a meaningful impact on EA or consolidated H.B. Fuller organic growth going forward. EA EBITDA margin was 23.8%, up 50 basis points versus last year, driven by favorable pricing and restructuring savings. BAS delivered another strong quarter, with organic revenue up 5% year-over-year. Growth was driven by strength in roofing and insulating glass, partially offset by softness in wood. Despite a muted construction environment, BAS delivered another quarter of consistent growth and solid execution, demonstrating the importance of the innovation the group has brought to market. EBITDA for BAS increased 8%, and EBITDA margins expanded 50 basis points year-on-year, driven primarily by the impact of positive price. Geographically, America's organic revenue was up 4% year-on-year, with positive organic growth in all three GBUs, led by BAS, up 9%.

Positive organic growth was driven by strong performance in roofing, insulating glass, and aerospace market segments. In EIMEA, organic revenue increased 9% year-on-year, with positive price in all three GBUs and strong volume growth in EA markets, including automotive and aerospace. Asia Pacific organic revenue was up 4% year-on-year, excluding solar, driven by strength in HHC, particularly in packaging. Total organic revenue was approximately flat year-on-year, including solar. Now let me provide an update on the petrochemical supply chain disruption and what we're seeing as we enter the fourth quarter and look toward 2027. The dislocation continues to be a defining feature of our operating environment. Supply chains remain disjointed, and we do not expect a normalization until well after the conflict subsides. We acted quickly and decisively in response to this situation and have been successful in maintaining supply continuity for our customers and will continue to do so.

On raw materials, prices have stabilized at elevated levels, and we expect them to remain at or near current levels for at least the remainder of the year. As conditions warrant, we will judiciously raise price to offset raw material costs and protect our margins. We remain confident in our ability to continue mitigating inflationary pressure. Now let me take a moment to provide an update on Project Quantum Leap, our multi-year initiative to optimize our manufacturing and distribution network, improve factory utilization and service levels, and increase the efficiency of our global supply chain. We continue to make good progress and implementation is tracking as expected. The team remains focused on disciplined execution and delivering the long-term benefits we've outlined. As a reminder, we began this project with 82 manufacturing facilities at the end of 2024.

We expect to exit 2026 with approximately 62 facilities and, excluding AMS, further reduce the footprint to below 60 by the end of 2027 while progressing to our goal of 55. These actions are improving network efficiency while positioning us to better serve our customers with a more streamlined operating model. From a financial perspective, Quantum Leap remains a significant value creation opportunity. We continue to target approximately $75 million of annualized conversion cost savings by the end of 2030. Through the end of 2026, we expect to have realized approximately $25 million of those benefits. Looking ahead, we expect the program to deliver an additional $20 million-$25 million of incremental savings in 2027. In support of this initiative, we expect to invest $150 million of capital over the life of the program.

We plan to invest roughly $50 million of capital in 2026 and anticipate capital spending of less than $25 million in 2027 as key projects are completed with a further reduction in spending expected after 2027. We anticipate approximately $50 million of total one-time cash costs associated with the program, with about a third of those already realized. Importantly, total one-time costs are projected to be more than offset by proceeds from real estate sales. Beyond direct cost savings, Quantum Leap is expected to generate substantial cash flow benefits through improved working capital efficiency, inventory reduction, and lower maintenance capital requirements. Overall, we remain on track and are even more confident today in Quantum Leap's ability to help enable meaningful earnings growth, cash flow improvement, and progress toward our long-term margin objectives.

Now let me turn the call over to John Corkrean to review our third quarter results in more detail and our updated outlook for the remainder of 2026.

Thank you, Celeste. I will begin with some additional financial details on the third quarter. For the quarter, revenue was up 5.2% year-on-year. Currency and acquisitions contributed a positive 0.8%. Adjusting for those items, organic revenue was up 4.4%, with pricing of 7.4% offset by lower volume. Adjusted gross profit margin was 33.5%, up 120 basis points versus last year, driven by pricing execution and restructuring savings. Adjusted selling, general, and administrative expense was up 8% year-over-year and down 7% sequentially from the second quarter of 2026, reflecting the timing of certain expenses. Adjusted EBITDA for the quarter of $187 million was up 9% versus last year as pricing execution and restructuring savings more than offset lower volume. Adjusted earnings per share of $1.52 was up 21% versus the same quarter in 2025, driven by higher operating income.

Net working capital in the third quarter of fiscal 2026 was 18.5% of annualized net revenue, up 150 basis points year-over-year. The increase was primarily driven by actions taken to support Quantum Leap, as well as strategic inventory investments made to secure raw materials and ensure supply continuity for customers. Year-to-date cash flow from operations was $183 million, up 17% year-over-year, driven by higher income. At the end of the third quarter, net debt to adjusted EBITDA was slightly less than three times, down from 3.3 times at the end of the third quarter of last year. With that, let me now turn to our guidance for the 2026 fiscal year. Please note this outlook does not reflect the impact of our proposed acquisition of Advanced Medical Solutions.

Net revenue is still expected to be up mid-single digits, and organic revenue is still expected to be up low single digits versus fiscal 2025, with pricing up mid-single digits and volume down low single digits. Adjusted EBITDA for fiscal 2026 is now expected to be in the range of $655 million-$670 million, and adjusted EPS is now expected to be in the range of $4.70-$4.85. Cash flow from operations, excluding AMS-related items, is still expected to be in the range of $300 million-$325 million. Let me turn the call back over to Celeste to wrap us up.