In February 2015, H.B. Fuller acquired TONSAN Adhesives, the largest independent engineering adhesives provider in China, for about $216 million. Engineering adhesives is a $12+ billion market and commands much higher margins because they are used in demanding markets such as aerospace, medical, electronics, and automotive. Management hopes to double this $200 million segment by 2020 to improve the company’s mix.
As seen below, management is gradually improving the company’s portfolio to focus more on strategic areas with better profits and growth potential.
Source: H.B. Fuller Investor Presentation
As a result of management’s focus on manufacturing cost savings and shifting mix into higher-growth, higher-margin businesses (e.g. engineering adhesives), the company believes it can expand its EBITDA margins from 12.8% in 2015 to 17% by 2020.
H.B. Fuller’s other 2020 goals are to achieve 3-5% organic sales growth per year ($3 billion in revenue by 2020 compared to $2.1 billion in 2015), grow EPS by 15% per year, and improve return on invested capital to 15% (from 8% in 2015). The company also expects to add roughly $100 million of revenues per year via acquisitions.
We think H.B. Fuller is extremely durable and believe that management’s actions will further strengthen the company’s moat and opportunities for growth.
H.B. Fuller’s Key Risks
H.B. Fuller’s near-term financial results can be impacted by several factors, but we don’t believe they have any impact on the company’s long-term earnings potential.
Slower economic growth generally reduces demand for adhesives as fewer goods are manufactured and sold, particularly in durable assembly markets (20% of sales).
Raw material cost inflation can also hurt profits because about 75% of the company’s costs of goods sold are raw materials. If costs rise faster than the prices charged by H.B. Fuller, gross margins will compress.
Management’s execution on productivity projects can also impact near-term earnings. The company has experienced several cost overruns and delays in recent years, but the bulk of activity and spending is now behind the company and should substantially reduce this risk going forward.
Thinking longer term, the biggest risk factors seem to be H.B. Fuller’s ability to grow its high-margin engineering adhesives business (10% of sales; expected to double in size by 2020) and maintain its strong profitability in North America.
Engineering adhesives applications are very demanding and require high technical specifications. As one of the newer, smaller players in the market, H.B. Fuller has a lot to prove. It can also take a long time to quality as a supplier in markets such as automotive and aerospace. If management’s growth assumptions turn out to be too optimistic, earnings growth and margin expansion could disappoint. Only time will tell.
In the United States, which accounts for about 60% of sales, H.B. Fuller must contend with a rather mature adhesives market. The company will need to lean on its strong customer relationships and technical expertise to reduce potential price pressures.
Overall, we believe H.B. Fuller’s fundamental risk profile is very reasonable. The company sells essential products that have been used by manufacturers for hundreds of years; it is well diversified by end market and customer type; and its business model consistently generates cash.
