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HB Fuller (FUL -8%) is heading lower today after lowering FY24 (Nov) adjusted EPS and adjusted EBITDA guidance. This follows an earnings miss in Q3 (Aug) with downside guidance. As the largest pureplay adhesives company in the world, FUL is being impacted by a weak manufacturing environment. Customers use its adhesives products in making all types of common consumer and industrial goods.

• The silver lining is that FY24 revenue guidance was generally in-line. However, what stood out to us was that FUL lowered its full year adjusted EPS guidance quite substantially to $3.84 from $4.10-4.20 and for adjusted EBITDA to $594 mln from $610-620 mln. There is only one quarter left, so that means Q4 (Nov) came in well below expectations.
• FUL said that Q4 revs and earnings were impacted by weaker-than-expected conditions and delayed orders, particularly in consumer product goods and packaging related end markets as well as durable goods distribution. In addition, delayed customer order patterns shifted price increase realization into FY25 while higher raw material costs, primarily in Hygiene, Health and Consumable (HHC) Adhesives, impacted adjusted EBITDA.
• Specifically, late in Q4, there was a negative inflection point on volume whereby a number of market segments exhibited topline deceleration vs Q3. This follows similar commentary from the Q3 call when FUL said volume growth came in at the low end of expectations due to slowing market demand in certain durable goods-related market segments.
• Volume growth was relatively stable sequentially in Q3, but FUL had been anticipating incremental strengthening throughout the year. But today's guidance looks like hope for a volume recovery will be pushed into FY25. It was also disappointing to hear that its HHC segment performance was a bit weak. On the Q3 call, FUL said HHC organic revenue development continued to improve significantly, driven by strength in bottle labeling, packaging, and medical.

Overall, this guidance was a letdown for HB Fuller. However, we suspect it was not a total surprise given the pullback in the stock in December. We think the main catalyst was interest rates rising in December, which may have caused customers to pull back on orders and investors responded by sending shares about 12% lower last month.

One thing to understand about FUL is that raw material costs make up roughly 75% of its cost of sales. As such, FUL estimates that even a 1% change in its raw material costs has a $0.24 impact on EPS, which helps explain the big drop in EPS guidance. And many of its raw materials are petroleum and natural gas based derivatives. Rising oil and natural gas prices in December could impact the start of its FY25. What FUL really needs is for rates to come down and for industrial / manufacturing activity to pick up, not only to drive volume but also to improve margins by spreading costs over a larger revenue base.