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Good day, and welcome to the H.B. Fuller Third Quarter Investor Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded.
I would now like to turn the conference over to Barbara Doyle, Vice President of Investor Relations. Please go ahead.
Good morning, and welcome to H.B. Fuller's third quarter 2020 earnings call for the fiscal quarter ended August 29, 2020. Our speakers are Jim Owens, H.B. Fuller President and Chief Executive Officer; and John Corkrean, Executive Vice President and Chief Financial Officer. After our prepared remarks, we will take questions.
Please let me cover a few items before I turn the call over to Jim. First, a reminder that our comments today will include references to non-GAAP financial measures and references to organic revenue, which excludes the impact of foreign currency fluctuation and the impact of acquisitions and divestitures. On this call, unless otherwise specified, discussions of sales and revenue refer to organic revenues, and discussions of EPS, margins or EBITDA refer to adjusted non-GAAP measures. These measures are in addition to the GAAP results in our earnings release and in our Forms 10-K and 10-Q. We believe that discussion of these measures is useful to investors to assist in the understanding of our operating performance and the comparability of results with other companies. Reconciliation of non-GAAP measures to the nearest GAAP measure is included in our earnings release.
Also, we will be making forward-looking statements during this call. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Many of these risks and uncertainties are and will be exacerbated by the COVID-19, and any worsening of the global business and economic environment as a result. Actual results could differ materially from these expectations due to factors discussed in our earnings release, comments made during this call or risk factors in our Form 10-K and 10-Q filed with the SEC and available on our Web site at investors.hbfuller.com.
Now, I'll turn the call over to Jim Owens.
Thank you, Barbara, and welcome to everyone on the call. In June, we reported second quarter results that were ahead of expectations and ahead of our competitors' performance. Last evening, we reported strong third quarter results, with $691 million in sales, $0.76 of adjusted EPS, and $106 million of adjusted EBITDA. Our third quarter results were also ahead of our expectations and ahead of the prior quarter.
In the fourth quarter, we expect to deliver EBITDA results in line with the fourth quarter of 2019. The performance over the last two quarters and our expected performance are a direct result of the actions we took to reorganize our business and invest in growth segments and opportunities. This performance is also a result of the strength of H.B. Fuller's leadership team and our position as a leader in the adhesive industry.
Our operational performance in the third quarter resulted in a solid sequential improvement in sales, EPS, and EBITDA. In the quarter, we leveraged new business wins and market share gains into revenue performance that exceeded our expectations. We also continue to capture raw material savings and realize operational cost efficiencies from our business restructuring, supporting EBITDA results that were better than we had forecasted. Cash flow performance continued to be strong, and year-to-date, cash flow from operations increased 20% versus the same period last year, and enabled us to exceed our paydown target for the quarter and keep us on track for full-year debt paydown of $200 million.
Throughout 2020, and especially in the last six months, we have leveraged our 72 factories and globally connected operations and supply chain teams to ensure consistent delivery of adhesives for essential goods around the globe during this crisis. We have not let our customers down. We have also leveraged our broad adhesive technology portfolio and the applications expertise of our people to support customers who needed to solve supply problems, or develop new products. While other companies may have taken similar actions, H.B. Fuller's dedicated focus on adhesive technologies and our global capabilities have positioned us to move first and fastest to deliver results for customers. We have leveraged our investment in digital tools to improve our service to customers, deliver innovation faster, collaborate internally more effectively, and increase the speed of decision-making.
Our global operations are agile and have been crucial differentiators for H.B. Fuller as our customers faced significant upwards shifts in demand of some products and downward shifts in other products. Our ability to meet increased demand and ensure customer supply, and our capabilities to remotely qualify new applications and troubleshoot complex problems have proven to be competitive advantages. As a result, we have been able to shorten sales cycles, increase share with existing customers, and win business with new customers. These results were evident in the second quarter as we outperformed the market and competition. Our sequential top line improvement this quarter directly reflects the proactive collaborative approach, including our ability to deliver new applications and provide world-class remote customer support.
Our performance in the third quarter also reinforces the value of H.B. Fuller's strong product, customer, and end market mix. Hygiene, health, and consumable results remain positive in the quarter, but moderated from the very strong performance in the second quarter as surge buying dissipated and economic slowdowns in India and Brazil impacted results. At the same time, Engineering and Construction Adhesives' performance improved meaningfully on a sequential basis, particularly in Engineering Adhesives we were well-positioned to meet increasing demands as markets opened up, new customers were gained, and China began moving toward more normal demand patterns.
Our reorganization into three global business units at the beginning of this year is helping us win with customers and execute more effectively in each of our market segments. The organizational realignment is also enabling us to generate $35 million of annualized savings, of which, $30 million will be realized in 2020, including $7 million of SG&A savings realized in the third quarter.
As discussed on our last earnings call, earlier this year we initiated a review of the company's manufacturing operations and supply chain utilizing the support of an external consultant. As an outcome of this review we identified opportunities in three areas. One, lower cost operations at individual sites by leveraging best practices into a number of our higher-cost facilities; two, a roadmap toward manufacturing footprint consolidation; and three, acceleration of our inventory reduction plan to improve supply chain processes. Based on specific projects identified, we have validated $20 million to $30 million in manufacturing cost savings from these initiatives, with approximately half of these savings to be realized in 2021. We are also targeting an inventory reduction of approximately $25 million, in 2021, through these initiatives.
Now, I will move on to our segment results in the third quarter on slide three. Hygiene, Health, and Consumable Adhesives' third quarter organic sales increased 1% year-on-year. Across the second and third quarters we have seen strong growth throughout this segment, including Packaging, Tissue & Towel, Hygiene, and Health & Beauty. Third quarter global growth in Hygiene, Health, and Consumables was muted by significant volume declines in Brazil and India. HHC segment EBITDA margins were strong, at 13.6%. Margin was down slightly versus last year primarily reflecting mix and the timing of some expenses, offset by lower raw material costs and savings from the restructuring of the business.
Construction Adhesives' revenue was down 12% versus prior year but improved from the second quarter with higher sequential revenues in both Flooring and Roofing. This positive progress was delivered despite continued COVID-19-related disruptions in commercial disruption, which is a significant part of our Construction Adhesive business. Retail channels remain strong for do-it-yourself activity, while contractor flooring work and commercial roofing activity improved at a slower pace. Construction Adhesives' EBITDA margin was solid at 15% reflecting new product introductions and improved product mix related to last year's portfolio repositioning, as well as operational improvements from the GBU restructuring. These operational improvements position this business for strong margins when commercial construction activity increases.
Engineering Adhesives' results improved significantly in the third quarter. Double-digit growth in Electronics, Recreational Vehicles, and Technical Textiles, and solid results in Insulating Glass and Woodworking offset slower but improving results in Transportation-related markets. Total organic Engineering Adhesive revenues declined less than 3% versus last year. Engineering Adhesives' EBITDA margin remained strong at 17%, and while margins were down versus last year, we sold very good sequential margin improvement of 210 basis points versus the second quarter due to better volume and mix, lower raw material costs, and restructuring savings.
Our planning assumptions for the fourth quarter have been developed in an environment that continues to evolve, and will be impacted by COVID-related restrictions and the corresponding recessionary impacts. We have taken a granular approach by segment and geography in analyzing our future results. Our core planning assumption is the COVID-related shutdowns will not worsen, but recessionary forces will result in a year-on-year economic contraction for the rest of this year and into next year. As discussed last quarter, we believe that the second quarter had the most acute impacts, with sequential improvement in the third and the fourth quarters. Elevated demand for hygiene and health products, packaging, paper tissues, and towels will likely continue through the year as consumers continue to spend more time in their homes. HHC volume should improve from Q3 to Q4 as manufacturers work down inventory levels and start restocking.
Construction Adhesives' performance in Q4 is expected to improve versus Q3 with commercial markets improving but at a slower rate than residential activity. Engineering Adhesives demand picked up throughout the third quarter, and we expect those trends to continue into the fourth quarter. We anticipate that demand for the transportation and durable goods markets will continue to improve in the fourth quarter supporting sequential improvement in Engineering Adhesives' volumes as we exit the year.
Raw material costs have started to flatten, and we expect raw material cost in the fourth quarter to be similar to cost in the third quarter, but still down year-on-year. Improving volume trends, our ability to capture raw material savings, and reduced working capital requirements will enable us to continue to drive strong cash flow. This will enable us to meet our commitment to pay down debt by $200 million in 2020, exceeding our three-year target. While the economic backdrop is not great, our performance in the first nine months of 2020 demonstrates that our business is diverse and resilient, our operations are nimble, and we are executing our strategy well. H.B. Fuller has multiple levers to deliver strong results in this fast-changing environment.
Now, let me turn the call over to John Corkrean to review our third quarter results and our outlook for the fourth quarter based on these planning assumptions.
Thanks, Jim. I'll begin on slide four with some additional financial details on the third quarter. Net revenue was down 4.7% versus the same period last year. Currency and the divestiture of the surfactants and thickeners business had a combined negative impact of 2.2%. Adjusting for currency and the divestiture, organic revenue was down 2.5% with volume down 2.1% and pricing having a negative 0.4% impact year-on-year in the quarter.
Year-on-year adjusted gross profit margin was 27.3%, down versus last year on lower volume and unfavorable mix offset by raw material savings. Adjusted selling, general, and administrative expense was down 6.4% versus last year, reflecting actions related to the business reorganization announced last year, lower travel expense, and general cost controls.
Adjusted EBITDA for the quarter of $106 million was above the high end of our planning assumptions reflecting strong improvement in top line performance, particularly in Engineering Adhesives. Adjusted earnings per share were $0.76 as strong volume improvements, raw material savings, and lower interest expense associated with our debt reduction actions with higher earnings per share than last quarter.
Year-to-date cash flow from operations of $193 million is up by more than 20% versus the same period last year reflecting continued improvement in working capital performance. This allowed us to continue to reduce debt, paying off $59 million of debt in the quarter, keeping us on track for a full-year debt pay down plan.
Regarding our outlook based on what we know today and the planning assumptions that Jim laid out earlier, we anticipate revenue to be up 4 to 7% sequentially from Q3, which is flat-to-down 3% year-on-year, and EBITDA to be between $110 million and $115 million in the fourth quarter as improving volumes and lower SG&A related to restructuring savings offset continued disruption and recessionary forces.
We expect cash flow to continue to be strong in the fourth quarter allowing us to maintain our target to pay down approximately $200 million of debt during 2020, keeping us well ahead of our original de-leveraging plan laid out in late 2017. Additionally, we continue to have more than adequate liquidity to meet foreseeable needs. This includes a $400 million revolving credit facility with a built-in accordion feature that allows us to upsize the facility by $300 million if needed. We also have ample room under our debt covenant using even the most conservative scenarios.
With that, I'll turn the call back to Jim Owens for some closing comments.
Thank you, John. Last quarter, we told you that we were in a stronger position than we were six months ago. Today, I can confidently say we are even stronger after another quarter of great execution. This performance is a direct result of consistent execution of our strategy and the way in which we have managed the business. We continue to benefit from our leadership position as the largest dedicated manufacturer of adhesives in the world, and we are focused on creating value for our shareholders through all business cycles. A decade ago we began building a strong portfolio focused on high-growth markets requiring highly specified adhesive solutions. When we acquired Royal, in 2017, we diversified our customer base and expanded our technical capabilities.
Our 2019 organizational realignment accelerated our ability to respond to end market trends, while generating $30 million of cost savings this year, and we have begun the next phase our operational cost improvement plan by driving efficiencies across our manufacturing footprint and reducing cost by $20 million to $30 million by the end of 2022. Our leadership team is strong and experienced, including the additions over the last year in HHC, Construction, and in the chief operating officer role. At multiple levels across the leadership team we have the right expertise to continue to proactively address our business opportunities and to drive results.
In the near-term we are well positioned to win during the reopening of economies around the world, and as end markets continue to improve. We are also well positioned for the future as new opportunities to differentiate H.B. Fuller evolve in electronics, sustainable packaging, medical, new energy applications, and as we help our customers reduce costs and deliver new products that improve the lives of consumer. While COVID-related uncertainties persist our end markets continue to show signs of improvement, and we are well positioned to grow as global economic forces continue to evolve. We will build on our success from this year and leverage those wins into the fourth quarter, and 2021, as we maintain the same level of focus and flexibility that helped us deliver strong results this quarter.
That concludes our prepared remarks today. Operator, please open up the call so we can take some questions.
Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Ghansham Panjabi with R.W. Baird. Please go ahead.
Hey, guys. Good morning. Hope everybody is doing well.
Good morning, Ghansham. Thanks. Hope you are doing well as well.
Thanks, Jim. Going back to the third quarter, Engineering Adhesives segment seems to be the outlier in the plus side versus the initial expectations. Just wondering, Jim, if can you sort of talk through the end markets that surprised you in the upside, maybe the geographies, and then also give us more color on what you're seeing in transportation as auto OEM production has started to normalize globally?
Yes, as you know, Ghansham, Engineering Adhesives is our growth engine in the company, and it was at double-digit growth over the last number of years. So I think the biggest driver there is some good share wins that we've seen. So, our electronics business did really well as some of the projects that we'd been working on came to fruition. Wins in China auto came through really nicely in the quarter, and combined with the fact that China auto is moving forward, so some of the work that we did to position ourselves well in the China auto market is really improving, and also, I talked a little bit about the cultural approach we've taken to embracing this pandemic as a new way to qualify adhesives, and in the U.S. assembly market, the team has done a great job of gaining share there, as well as some of the innovations in IG, so as the IG market, the Insulating Glass market came back, our innovations are growing faster than the overall market, so some of that technology investment.
In terms of the markets themselves, as I mentioned, Technical Textiles is strong right now, RVs is very strong right now, China auto is strong. So, if you think about the market forces, RVs, Technical Textiles, and China auto, but I think the biggest thing you see that differentiates our business there is just winning in the market with customers.
Got it, and then, in terms of Construction Adhesives, a lot of your peers that sell into the construction end markets have talked about an improvement relative to what they saw in 2Q. Just curious as to -- I know there's some nuances in terms of commercial construction exposure, but is it just a delay that you haven't benefited from or is there something more secular going on just given the challenges in certain pockets of commercial construction?
Yes, I think the construction business is very differentiated. So first, let me say we are improved, right. We were down 15.5% last quarter, and we're down 12% this quarter, which is a good improvement. We see a difference between commercial and residential, so we're much more exposed to commercial, closer to 70%, and our retail business, which is only 10% of our business, so the Menards, Lowes, and Home Depots of the world, they're up very nicely, but for us it's only 10% of our business. So, others might have a bigger exposure in those channels, but I think the way to think of it, very differentiated, is if you're exposed to the retail piece, very strong; if it's residential wholesale, that's definitely improved, and then commercial is a little delayed, but I will say, Ghansham, that as we look into Q4 we see that pulling back as well, or pulling forward in a positive way as well, so commercial construction was a little later to get into the delays related to the pandemic and a little later to come out. So, yes, I think construction did well. It's improving, and looking forward we're pretty positive about, [that we are excited] [ph]. More retail exposure though, you definitely are going to see a bigger bump.
Got it, that makes a lot of sense. Thanks so much, Jim
Okay, thank you, Ghansham.
Our next question comes from Vincent Anderson with Stifel. Please go ahead.
Hi, good morning, and nice job again this quarter.
Thanks, Vincent.
Yes. I did want to go back to construction briefly. I was hoping for a little bit more detail and specifically why margins weren't able to expand versus the second quarter. It sounded like you had favorable operating leverage, favorable raw material tailwinds. I guess maybe utilities business was carrying something with a fairly positive mix impact maybe. I'm just trying to understand how the margins progressed through the quarter.
Yes, construction is a business with a lot of mix impacts, so you're spot-on, Vincent, that's -- your assumption is right. In our utility and infrastructure business, we had very nice positive mix in Q2. I'd also comment that our commercial roofing business is a nice, positive mix business for us, and that was a little weaker this quarter. So I think it's just quarter-to-quarter mix. Although overall we're really pleased with where we brought the margin. So the portfolio realignment we did last year has put us in a position where -- this business is down 12%, and we're getting above 15% margin. So, you don't have to imagine, you can do the math. I'd be very nice margins as we pull out of this. So I think the portfolio repositioning has enabled us to expand margins more.
John, is there anything you want to add to that?
No, I don't think so. I mean we -- I think we did reduce inventories in the quarter, and although that was a good help from a cash flow standpoint, that does create a little bit of under absorption and that weighed on margins in all three businesses.
Got you. Thank you, that's very helpful, and kind of staying on that topic, maybe a little bit focused on construction given the portfolio mix shift last year, but companywide, if you look into next year and compared to what we saw this year, and level that you can estimate the tradeoff between negative operating leverage and then what you got back on raw materials in terms of whether you're going into next year with a very strong upside from operating leverage or if you got most of that back in [raws] [ph]?
Yes, right now we see a lot of positive operating leverage, right. We've got the SG&A savings that we still have a little more to get on the GBU realignment. We're going to start seeing the benefits of this supply chain and operations project, so that'll help drive things, and of course volumes are going to be better next year given what we've dealt with this year on COVID. So we see a lot of positives. As far as raw materials, they're flattening out, but we definitely for next year see positive leverage on raws. Unless economies really took off we don't see a drag at all in raw materials.
Okay, fair enough, and if I could sneak one more in, are you comfortable with your customer inventory levels in Engineering Adhesives, and just kind of more generally on the fourth quarter order book, is there anything that's kind of bucking typical seasonal trends?
Yes, we've four weeks into the quarter; we see good, positive seasonal trends as we normally would. So, I don't think there's anything out of the ordinary happening in terms of the seasonality of the business. I think our electronics business is stronger the end of the year, that's turned out positive as we exited the quarter and into next year. Certainly auto was the slowest business -- auto, outside of China, was the slowest business to ramp up and get to an improved order pattern. So, in Europe and North America, we see auto finally coming around, so a lot of positive trends as we enter Q4 that we feel good about.
All right, thank you.
Yes, thank you.
Our next question comes from Mike Harrison with Seaport Global Securities. Please go ahead.
Hi, good morning.
Good morning, Mike.
Jim, within the HHC business you had expected that some of that surge buying was going to subside, and you did see, it looks like, about a 7% sequential decline, but it sounds like also that there are kind of a lot of moving pieces within that segment. Can you provide a little bit more color on what you're seeing there in terms of that surge buying coming to an end. Maybe the weakness you referred to in India and Brazil. Any trading down that's going on related to products that use less adhesive or lower-end adhesive, and also what you're seeing in terms of share gains and new customer wins?
Okay, that's a big; broad question full. Yes, so we had organic growth of 7% in Q2. That was after positive organic growth in Q1. So in this quarter our organic growth is 1%. There's two factors that bring us off that 7% from Q2. India and Brazil the economy is, and especially around these kinds of materials have really slacked off if you think about what they're dealing with down there, and not being in developed economies these products aren't so much necessities in a lot of that economy. So think of that as taken about 2% to 3% off of the organic growth overall for HHC. So HHC this quarter would have been 3% to 4% versus 7%, and that delta is mostly a de-stocking phenomena. So, I think we're targeting mid single-digit as kind of growth, maybe a little less than 5% overall as we go forward, but certainly not at 1% or 2%; 3%, 4%, 5% is what we see as the underlying growth.
In terms of market share gains, I think there's two things that are happening for us in that area. Our supply chain team has done an outstanding job by keeping all of our factories open, but keeping our employees safe, by avoiding the spread of COVID we've been able to take advantage of opportunities where competitors maybe that export product around the world haven't been able to meet a need, our team was able to step in. The second thing we've done, and this is across all of H.B. Fuller, we've taken a very aggressive approach toward living in the new reality by finding ways to qualify products remotely. Our lab personnel have been in our 30 technical facilities around the world throughout the crisis, and their connection with customers and our technical teams in the field is enhanced. So, we're building a skill set that's helping us not just against large competitors, but especially against small competitors to stay connected in this environment. So that's how we're getting the market share gains. So the HHC business is doing a great job, and if you look at the entirety of their year with the strong start, the outstand Q1, and Q1 still being up despite India and Brazil, it's really a good news story.
So, did I cover all your questions in there, Mike?
Yes, I think you covered everything. Maybe the one thing you didn't touch on is the seasonality. I think that IG business sometimes has some weakness during the summer months. Did you see that again?
Yes, it does, yes. Yes, especially in China, interestingly enough. So China has less consumption of hygiene products in the summer months, and we see that normal seasonality pattern happened, and it's fascinating business that does that, but yes, it'll pick up here in Q4, and then there's a few other consumer-oriented markets that pick up in the fourth quarter that drive sequential growth Q3 to Q4 every year.
Right, okay, and then a question for John, you guys seem to have done a pretty nice job managing cash flow over the past couple of years, and particularly in this challenging environment. Can you provide some early thoughts on how we should think about cash flow and debt paydown next year, maybe some of the key deltas in fiscal '21, as it might relate to working capital, CapEx, any cash restructuring costs next year versus this year?
Right. So, I would say, yes, I mean working capital has been the main driver of the positive cash flow. As we get into next year, we will expect to be delivering kind of similar, kind of, let's say, cash flow conversion metrics, but it'll probably be a little bit different set of levers. This year, although revenues get down, working capital has been a source of cash, and that's partly due to lower revenue, but partly due to the actions we're taking in terms of working on increasing payables, reducing inventory. So, those will continue next year. I would say, working capital will probably be more neutral to a slight source of cash as revenue increases, and we have this project that we've kicked off in terms of operations improvement that should help us drive improvement in inventory. So, I think you're going to see the same type of cash flow conversion metrics, but it's probably going to be a little bit different set of levers.
All right, and CapEx up a little bit next year or pretty similar to this year?
I would say it would be probably up a little bit next year. We pulled back on a few projects, probably more so it kind of pulled themselves back, given the environment, as opposed to us pulling them back, and those will probably get back on track. So, I would expect it to be up a little bit next year.
Got it. All right, thanks very much everyone.
Thank you, Mike.
Our next question comes from Jeff Zekauskas with J.P. Morgan. Please go ahead.
Thanks very much. Your HHC business is the largest business you have, but it has the lowest EBITDA margins. Why is that? What are the businesses in there that are pulling your returns down?
Yes.
Yes, I would say, Jeff, it's -- as you know, we work to transform our business to be more highly specified adhesive. So, this is the segment of our business where we have more localized competition. With that said, I think we do see a real opportunity to drive continued margin improvement, which we have. You know, I think when I joined the company this was probably a single-digit margin business. We think we can push it above 15%. It's all the nuanced details, Jeff. It's running our plants more efficiently, which we're doing. This couple plant consolidation opportunities, I mentioned those in my comments, I think there are some things we can do to help improve those. We continue to work on our pricing strategies in this business.
And then the really important thing that Andy is trying to drive today is making certain that the growth opportunities grow faster. So, I look at some of the sustainable packaging strategy, which we have in place. The healthcare initiatives that we put in place, you know, part of setting up HHC was to enable us to focus on health and beauty. It's turning quickly into our fastest growing segment as we target new growth opportunities in health and beauty. So, really getting the kind of growth dynamics in that business that we have in terms of more highly specified adhesives, in EA, is the strategies that will drive those margins higher.
Yes, it's funny, because year-over-year the sales are sort of flat and the margins are sort of flat, like, it doesn't look like your cost reduction program has really touched HHC yet, is the cost reduction program more focused on the engineering business and the construction business?
Well, I would say, year-to-date, and again, we talked about this quarter; I think year-to-date margins are up 50 basis points in that business, and that's definitely a result of some the GBU realignment that we've done, Jeff. So, if we had a little more growth, we would have more improvement, but 50 basis points year-to-date is a -- I think a good improvement in this environment.
Did you say your construction business would be stronger in your fiscal fourth quarter than it was in your third quarter?
Sequentially the growth rate would be improved. So, we're down 12, and we'll be -- I would say in the single-digits down next year, Jeff.
Thanks, and then for John, I think you said that you expected to lower your inventories by $25 million. What's the base? Is it your average inventory level in 2020?
Yes. So, there is some seasonality in our business as you know, Jeff. So, it's not going to be -- it's going to -- I would say, be a reduction kind of year-on-year. So, you will see inventories rise during part of next year, and you'll see them go down as we move into parts of the year where volume is slower, but overall, we expect by the end of the year to be at a run rate that'll have our inventory $25 million lower year-on-year.
Okay, and then, lastly in engineering, can that business be up year-over-year in the fourth quarter, I would imagine although it was really tough, and it's really roaring back and your other businesses are growing, you could have positive year-over-year volumes in that?
Yes, at this point Jeff, we're not projecting it, but the momentum is very strong, but right now, when we model out fourth quarter, it's still slightly down, but I would say the momentum is very positive, as you say autos going to come back. China continues to drive forward as it has. I'm bullish on the business, but today from a modeling standpoint [technical difficulty].
Okay, great. Thank you so much.
Thank you, Jeff.
Our next question comes from David Begleiter with Deutsche Bank. Please go ahead.
Thank you. Good morning. Jim, you mentioned a few times in the release and comments about low raw materials, can you quantify the impact in Q3 and what you're looking at and expecting in Q4 from Ross?
Yes, well, let me have John give you some specifics on where our roles are, but I think obviously down year-over-year and then as you mentioned flat sequential Q3 to Q4, John?
Yes, so I think David, I would say probably down 2% to 3% year-on-year. So that's roughly $8 million to $10 million, and it will be flat sequentially to Q4.
Very good, and Jim, do you have early read and John on perhaps incremental margins in '21 given the impact and the various cost actions and probably a continuation of low loss in next year versus this year?
Yes, as you know, David, the big drivers what's going to happen to economies and volumes and revenues, so that's going to be a big factor. We're committed to grow EBITDA significantly in all kinds of different environments and set an internal benchmark that will have EBITDA above 2019 and 2021. How far above depends on a lot of different factors, but we built scenarios. I think we're getting very good visibility at quarter out, but we can't predict exactly what happens in 2021 today it will be little premature.
And I know you're not really in the EMEA market right now, but how do you see the pipeline developing over the next couple of years as you pay down debt and get to a level where you could look at some other opportunities on the M&A front?
Yes, so as you know, we're targeting to get our debt-to-EBITDA ratio down below three before we get active in the M&A market, but we have between Ted and I, Royal and myself, and the leadership team identified a strategy and a number of targets. So we think there's a good pipeline out there. It's a very fragmented market, and I think we understand strategically where we would invest. So I think as we look to lower our debt-to-EBITDA ratio, there will be a pipeline of opportunities, and we'll have 5% share, and we're still number two in the market overall globally. So I think there's a lot of opportunity there as we move from paying down debt to investing in M&A opportunities couple of years down the road.
Thank you very much.
Okay. Thank you, David.
Our next question comes from Eric Petrie with Citi. Please go ahead.
Hi, good morning, Jim and John.
Good morning, Eric.
Good morning, Eric.
There's been a recent push towards a green energy economy and renewables to reduce carbon emissions. Can you just discuss how Fuller's positioned to take advantage of those trends?
Yes, so we're the world leader today in adhesives for solar panels to strong position. Most of those are made in China and we're very strongly positioned but globally with other manufacturers around the world. So we see ourselves as very well positioned from a solar energy standpoint, we also have some applications in wins, the bigger trend that we see is electric vehicles. So, we have a strategic focus towards targeting our electrical vehicle opportunities. I mentioned earlier also that in HHC, we see a real focus on growth opportunities, and for us, in the packaging space that's about sustainable solutions. So we have a disproportionate number of our projects focused on sustainable R&D opportunities, whether that's new types of packaging, less packaging, paper straws those types of things.
And then in construction, we target those applications that are making buildings more energy efficient. So think about our roofing business. Most of the energy in a building goes out of building, interestingly enough and focusing on new systems that make buildings more energy efficient is a big driver in construction. Then a final one in our durable assembly business is the insulating glass business, which is again a big driver of sustainability and lower energy and our focus in innovation there has been around there. So we see it as an integral driver of our innovation strategy, and it's paying off, frankly.
Thank you for those comments, and then I believe, Royal, you see supply adhesives and sealants in the aerospace, can you just talk about how much of a drag that's been on either top line or bottom line?
Yes, so fortunately for us, the aerospace business has been a share gain opportunity. Royal had developed some technology that enabled airplanes to be built faster and lighter weight. It was a significant development project that that was coming to fruition as we bought Royal. So, those share gains are still coming through. So while we're still negative this year, we're negative a lot less than the aerospace build numbers that you'll see out there, and that's because the team is doing a great job of gaining share. The other thing that the Royal aerospace team has been able to do is leverage some H.B. Fuller technology. So that's not showing up in the numbers, there's a number of pieces of technology that Fuller had that was qualified in aerospace, that we're now getting traction that we see as a growth opportunity. So, while aerospace is a drag, it's not a big drag on us, and we see it as a big growth opportunity.
Thank you, John.
Thanks, Eric.
Our next question comes from Rosemarie Morbelli with G Research LLC. Please go ahead.
Thank you. Good morning, everyone and congratulations on the quarter. Jim, yes, I was wondering if you could touch on Europe, as they are going through a second wave of COVID deal which is going to happen here most likely. Have you seen it? Are you hearing anything from your customers? Can you talk about the trends there during the quarter, if you look at the different months, and what you're seeing so far in September?
Yes, so regionally our strongest region was definitely Asia in Q3. Both Europe and North America were down less than Q2, Europe was down a little more than North America, but both were down. In terms of recent trends, we don't see, I know there's a lot of news about this, but from a manufacturing demand standpoint, we don't see an impact of the most recent news that's coming out of Europe, we're certainly keeping an eye on it, and John and I stay close with the team there in Europe. We do we know we have in this COVID environment gotten very granular by business on a biweekly basis on our forward projection. So I can tell you that as of our latest projection, there's not a downtick seen in Europe, and we haven't seen it so far this month.
You see -- I'm sorry. Go ahead.
John, anything you want to add to that?
Nope, that covers it.
I was wondering how much visibility you have with your customers and whether in the past, they have actually seen their business as it occurred or whether they were wrong in their assumptions?
Yes, I would say, what we've done is -- because we have such a diverse array of customers, we've been able to, I'd say, triangulate because I think you're right, Rosemarie, some people are more optimistic and some aren't, and I think if you look at what we projected in Q2, which at the end of Q1 was pretty difficult. I think we had a good view of what was going happen in Q2. We did the same in Q3. It was a little better than we expected, but it was -- I think when I look segment-by-segment, geography-geography, we did a good job. So, I think we do have a good picture. Not always what I our customer says is going to happen, but when we triangulate all those customers along with our own know-how and experience, we have a pretty good view.
Okay, thanks, and then looking at your discretionary expense, could you give us the size and how much of those will be coming back as people start moving around again?
Yes. So, John, maybe you can give a sense of what the T&E savings are, and how long we think that might back?
Excuse me. So, yes, and we saw a little bit of that coming back in Q3. I think we probably saw a reduction on the magnitude of a million dollars a month in terms of T&E spend, sort of the middle of Q2 to the middle of Q3, and we saw that start to come back. So, it's not a significant number in the big picture, but it'll be -- we would expect SG&A to be up a little bit sequentially from Q3 to Q4.
All right, thank you very much.
Thank you, Rosemarie.
Our next question comes from Paretosh Misra with Berenberg Capital Markets. Please go ahead.
Thank you. Good morning. In the electronics business, I just wanted to understand how much of the growth in that business is driven by more electronics getting produced as opposed to just more use of adhesives and new cellphones and tablets, and along those lines, I guess, as we think ahead, as we look ahead and the telecom industry goes to 5G and electronic devices carry more hardware, is that a meaningful tailwind for you guys?
Yes. So, I would say, Paretosh, the biggest driver for us are share gains in the electronics space. We still -- while it's now turning into a sizeable business, we sold a relatively low share, and we are gaining new applications each year as these products are redeveloped and redesigned. So, that's a bigger driver of our growth than the market itself.
Yes, we see change as the best opportunity for us. So, as 5G comes and new devices are developed, or new applications occur or more hardware has to be put into devices, we see that as opportunity for us leveraging our electronics business strength into automotive and other areas. So, we have a group we call automotive electronics, right? So, we are building that conversion strategy across those two is also a driver for us. So, yes, I think 5G is a meaningful opportunity because it's when change happens that we get the opportunity, right? That's when we get our opportunity to solve a problem and get speced into a new product that will stay in place for quite a while. So, we see the 5G evolution is very good for our business.
Thanks for the detailed color, and then, just a quick follow-up on your earlier comments about the automotive sector. I guess it sounds like you are expecting strong momentum in Q4 in the automotive sector. That's across the globe, right, or is there specific end markets like China that are only those that are growing?
No, I think China is already growing. So, the China is a good positive spot. We have the market in a positive place and we've got share gains there. So, China for us is very positive in auto. I think the comment I was trying to make is that auto ramp up was slower than some other markets. So, we finally saw here in August some ramp up, and we think that's going to continue. I don't know if I am predicting some auto boom in these numbers just that the revenue for us in Europe and North America will be better than Q3, because we'll have a whole quarter of this new ramp up. So, it will definitely be more positive in Q4 than it was in Q3.
Understood, and if I could just squeeze in one last one, I guess for John, are you anticipating any special charges in Q4 like I am thinking a goodwill impairment test, or any restructuring cost that might flow through in Q4?
No. I mean I think what you are seeing in those special charges are mostly the restructuring that we put in place at the end of last year. We are in the middle of this operations project. So, depending on what comes out of that, we could have something in Q4, but we don't have anything planned at this point.
Great. Thanks everyone.
Thank you, Paretosh.
And thanks…
Operator, are there any more questions?
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Thanks everyone for your time. Thanks for your support and it in H.B. Fuller. Hope everyone has a great day. Thank you.
Operator, we will close up the call now.
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