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H.B. Fuller (FUL -2%) is in a slightly sticky situation today after posting minor earnings and revenue misses in Q1 (Feb). Due to slowing global economic conditions, the adhesives, sealants, and other specialty chemicals manufacturer also trimmed its FY23 (Nov) top and bottom line forecasts. FUL now expects FY23 EPS of $4.10-4.50, down $0.05 from its prior estimates, and sales to fall 1-4% yr/yr, a 1 pt decline from its previous projection.

• Drilling deeper, Q1 numbers were impacted by demand weakness, primarily affecting FUL's smallest segment: Construction Adhesives, which comprised 11% of overall revenue in the quarter. This business continued to endure customer destocking, which started last quarter and carried into Q1, spurring an 18% decline in sales yr/yr. Management noted it was uncertain how long this event will take to completely unfold.
• On the plus side, FUL's much larger segments, Hygiene, Health & Consumable Adhesives and Engineering Adhesives, helped partially offset the woes in Construction Adhesives. Although sales also fell yr/yr in FUL's other segments, it was by a much slimmer margin than Construction Adhesives, resulting in overall revs slipping 5.5% yr/yr to $809 mln.
• Looking ahead, FUL projects a mild global recession in 2023, which will pressure future financial performance, explaining its trimmed FY23 outlook. The good news is that FUL still expects to grow its adjusted EBITDA despite the bearish scenario, reiterating its $580-610 mln forecast.
• FUL's newly announced restructuring plan will play a meaningful role in growing adjusted EBITDA this year. The company is focused on reducing costs across the organization, particularly in Construction Adhesives. Its actions are estimated to deliver annualized cost savings of $30-35 mln, with $10 mln realized in FY23.
  • Assisting in these savings is continual easing in raw material costs. FUL noted it is on track to deliver $130-160 mln in net benefit from price and raw material cost management.
  • However, lower volumes due to the current environment and still-high inflation, when measured on a yr/yr basis is, taking an $80 mln chunk out of these benefits.

The main takeaway is that the global economic slowdown is beginning to take a more severe toll on FUL's quarterly figures. A silver lining is that only a small portion of its construction business is exposed to the residential sector, mainly participating in commercial construction, which has been relatively more resilient. Still, FUL is not seeing any factors catalyzing market demand, primarily leading to its restructuring decision as the company prepares for lingering volume weakness.

With realistic expectations set, shares of FUL could see a considerable rally if market conditions improve. However, we think it would be better to wait out FUL's current struggles, as the construction markets may still experience further downside over the near term.