US HB Fuller expects slowdown despite persistently strong demand

HOUSTON (ICIS)–US-based producer HB Fuller expects demand for its adhesives to slow down later in 2022 after remaining strong so far this year, the CEO said.

In the months again, demand could slow for new construction and for consumer goods in emerging markets, which are struggling to get inflation under control, said Jim Owens, CEO. He made his comments during an earnings conference call on Thursday. Another trend that could slow down demand is a strengthening dollar.

HB Fuller’s fiscal second quarter ended in May. It is often the first major US-based chemical producer to release its quarterly earnings because its fiscal year starts a month before most of the other companies’.

As an adhesives producer, HB Fuller’s raw materials include tackifying resins, polymers, synthetic rubber, plasticizers and vinyl acetate monomer (VAM).

INVENTORIES
Inventory levels among customers are mixed, Owens said.

“There are definitely shortages out there. We have customers who are a little more hand to mouth than we would like in this environment and that’s driven by raw-material availability,” he said. Other customers have more standard inventory levels.

In the roofing business, HB Fuller has been able to supply customers, but they cannot get other materials that they need, Owens said.

STRONG DEMAND SO FAR
Although HB Fuller expects demand to weaken in the upcoming months, it has so far seen no slackening during the first half of its fiscal year and during the first weeks of its fiscal third quarter.

“We’re four weeks into the quarter and we’re still seeing robust growth,” Owens said.

Quarter on quarter, second-quarter volumes rose for the company’s business segments for Engineering Adhesives and for Hygiene, Health and Consumable Adhesives. Volumes for Construction Adhesives were flattish, Owens said. Demand from new construction slowed in the US and the UK.

Even for construction adhesives, Owens stressed that the supply constraints were hindering sales volumes. Construction companies are having difficulties getting materials and labour.

“What we are hearing – outside of some residential – from all of our commercial customers is there’s a lot of pent-up demand,” Owens said.

Electronic adhesives did have some spots of weakness.

Shortages in semiconductors led to weaker demand from the smartphone market during the second quarter, Owens said. HB Fuller was able to offset this through share gains.

REGIONAL PERFORMANCE
When HB Fuller breaks down its performance by geographic region, business in the US has been very robust, Owens said. The company’s performance in Europe is nearly as strong as the US once exchange rates are factored out. HB Fuller’s European results include the Middle East, India and Africa. “Latin America is surprisingly still robust, even in this inflationary environment,” he said.

For Asia, volumes grew slightly during the second quarter, Owens said. Typically, volumes would rise by a much faster pace. “It’s mostly an Asian phenomenon, mostly China, that we see a slowdown.”

Volumes in China still rose because of share gains, although these were offset by some of the effects from the COVID lockdown in Shanghai, Owens said. The Shanghai shutdown made it difficult for some of HB Fuller’s customers to get semiconductors, which caused a little bit of a slowdown in adhesives volumes for electronics producers.

The company is optimistic about China’s automobile markets, and it expects consumers to resume purchases after the country’s COVID lockdowns, Owens said. “We personally are seeing some uptick.”

HB FULLER’S SECOND QUARTER PERFORMANCE
For the second quarter, HB Fuller’s net income fell because of higher taxes.

Taxes were $23.6m, up from $16.7m reported during the second quarter of 2021.

The following shows the company’s second-quarter performance. Figures are in thousands of dollars.

$ thousands	Q2 22	Q2 21	% Change
Net revenue	993,258	827,873	20.00%
Cost of sales	739,737	610,323	21.20%
Gross profit	253,521	217,550	16.50%
Net income	47,203	49,102	-3.90%

Source: HB Fuller

The following breaks down the company’s performance by segment. Figures are in thousands of dollars.

Hygiene, Health and Consumable Adhesives	Q2 22	Q2 21	% Change
Sales	437,889	364,814	20.0%
Operating income	43,267	38,929	11.1%
Engineering Adhesives	Q2 22	Q2 21	% Change
Sales	405,346	345,373	17.4%
Operating income	42,917	32,075	33.8%
Construction Adhesives	Q2 22	Q2 21	% Change
Sales	150,023	117,686	27.5%
Operating income	11,285	6,338	78.1%

Source: HB Fuller

ECONOMY AT TURNING POINT
HB Fuller released its earnings amid growing signs that the economy is reaching a turning point.

Earlier in the week, the ICIS leading business barometer (LBB) fell for the fourth consecutive month in June, bringing the decline to 2.6% from its February peak of 132.7. After such a string a of declines, if the barometer’s cumulative decline reaches 3.0%, it would signal a recession.

The risk of a US recession in the next 12 months stands at 40-45%, according to Kevin Swift, ICIS senior economist.

For manufacturing, some parts of the US are showing signs of slowing down.

The federal reserve banks in the US conduct monthly manufacturing surveys. For the most recent ones from New York state and from the Federal Reserve Bank of Philadelphia, the general-business-conditions indices were negative.

For the Federal Reserve Bank in Kansas City, Missouri, the composite index of its monthly manufacturing survey remained positive at 12, down from 23 in May.

In the US real-estate market, the combination of rising prices and mortgages have likely led to a peak in existing home sales, Swift said. Sales fell for the fourth consecutive month in May.

May housing starts and building permits fell.

Average mortgage rates for a 30-year loan continued to rise, reaching 5.81%, according to Freddie Mac, a company that purchases and securitises such loans. Rates have not been that high since the end of 2008.

For June US builder confidence in the market for newly built single-family homes posted a sixth straight monthly decline.

Sales of new houses did rise by 10.7% in May, breaking the string of weak trends for the housing market.

HB FULLER OUTLOOK
In the event of a recession, Owens said HB Fuller’s volumes would perform well when compared with most companies because of the diversity of its products. Some products perform well during one part of the business cycle, while other ones would perform well during a different part.

A downturn could lower HB Fuller’s raw-material costs. Given the resilience of its volumes, a slight recession could increase earnings, he said. “But even a deep, heavy recession, I feel like we’ve shown in 2000, 2008, good resilience in that environment.”

HB Fuller maintained its 2022 guidance of $530m-550m in adjusted earnings before interest, tax, depreciation and amortisation (EBITDA). The forecast for the 2022 fiscal year represents an increase of 14-18% from the fiscal year of 2021.

Adjusted earnings/share for fiscal 2022 should be $4.10-4.35, up by 18-25% year on year, unchanged from the company’s previous guidance.

“Given all of the noise that is out there, raising our guidance would be a bad idea,” Owens said.

Shares of HB Fuller were up by 2.31% in late afternoon trading. On Thursday, they fell by 3.58%.

Additional reporting by Joseph Chang and Stefan Baumgarten

Thumbnail shows construction. Image by Mak Remissa/EPA-EFE/Shutterstock

Focus article by Al Greenwood