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H B Fuller Co (NYSE:FUL)
Q2 2021 Earnings Call
Jun 24, 2021, 10:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day and thank you for standing by. Welcome to the H.B. Fuller Second Quarter 2021 Earnings Conference Call. [Operator Instructions]

I will now turn the call over to Barbara Doyle, Vice President, Investor Relations, to begin.

Barbara DoyleVice President, Investor Relations

Thank you, operator. Welcome to H.B Fuller’s second quarter 2021 earnings call for the fiscal quarter ended May 29, 2021. 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 organic revenue, which excludes the impact of foreign currency translation on our revenues and the impact of acquisitions or divestitures. We will also refer to adjusted non-GAAP financial measures during this call. These measures are in addition to the U.S. GAAP results that are reported in our earnings release and in our Forms 10-Q and 10-K. We believe that discussion of these measures is useful to investors to assist their understanding of our operating performance and how our results compare with other companies. Reconciliation of non-GAAP measures to the nearest U.S. GAAP measure is included in our earnings release. Unless otherwise specified, discussion of sales and revenue refers to organic revenue, and discussion of EPS, margins or EBITDA refers to adjusted non-GAAP measures.

We will also 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 COVID-19 and the resulting impact on the global business and economic environment. 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 Forms 10-K and 10-Q filed with the SEC and available on our website at investors.hbfuller.com.

Now, I will turn the call over to Jim Owens.

Jim OwensPresident and Chief Executive Officer

Thanks, Barbara. And welcome to everyone on the call. Last evening, we reported another quarter of strong revenue and earnings growth. Organic revenues in the second quarter were up 19% year-over-year, adjusted EBITDA was up 21% and adjusted EPS of $0.94 increased 38% versus last year.

We overcame significant supply chain disruptions and moved quickly to raise prices in the quarter. We achieved an all-time record quarter in revenue as we met increasing customer demand and gained market share. Throughout the quarter, H.B. Fuller experienced raw material and container shortages, but because of strong support and global collaboration with key suppliers and the ingenuity of our technical and supply chain teams, we made certain to keep our customers supplied. H.B. Fuller’s ability to assure supply of critical adhesives and provide innovative solutions that customers need remains a competitive differentiator for our company, which is evident in our top-line growth.

H.B. Fuller’s revenue growth was broad-based across segments and geographies. Organic revenues increased in each segment versus the second quarter of 2020, including strong double-digit growth in both Engineering and Construction Adhesives segments, and very solid growth in Hygiene, Health and Consumable Adhesives against a very strong second quarter of 2020.

Revenues also grew in each geography, including organic growth of 19% in the Americas, 27% in the EMEA and 9% in the Asia-Pacific region. Importantly, our revenues are also up from pre-COVID levels. Total organic revenues increased by 9.5% versus the second quarter of 2019, which had no COVID-19-related impacts with double-digit growth in HHC and Engineering Adhesives and mid single-digit growth in Construction Adhesives.

Strong volume leverage in the quarter, coupled with pricing benefits and operational efficiencies we’re driving in the business offset significantly higher raw material costs and drove a 21% increase in EBITDA dollars year-over-year. Raw material input cost increased in the second quarter by about 10% from the end of 2020 with some raw materials increasing more rapidly than we forecasted. We have implemented $150 million of annualized price adjustments to date and we’ll implement an additional $75 million in the third quarter. We’re prepared to do more as necessary. These price adjustments will offset the impact of raw material increases in this fiscal year.

Suppliers have made good progress in restoring capacity for the commodity and specialty chemicals we purchase. However, the rate of recovery going forward will likely be uneven until inventory levels are rebuilt to fully meet demand. Our planning assumptions anticipate that the current supply volatility will lessen and pricing will begin to stabilize in the fourth quarter. We now expect the year-on-year raw material inflation to be over 10% and expect that our pricing will fully offset raw material increases by the end of the third quarter. We expect gross margin headwinds in the third quarter, which is seasonally slower for volumes, and we will see additional pricing and margin benefit in the fourth quarter, which is typically our strongest volume quarter.

Our global sourcing expertise, our innovative chemistries and our operational agility were more critical than ever this quarter, and continue to provide competitive differentiation. And the actions we have taken on price and to drive efficiencies across our business enabled us to seamlessly serve our customers and achieve our profit targets in the quarter, while at the same time increasing our debt paydown over last year’s level, in line with our target for $200 million of debt reduction in 2021.

Now, let me move on to discuss performance in each of our segments in the second quarter on Slide 4. Hygiene, Health and Consumable Adhesives’ second quarter organic sales increased 3.3% year-over-year, which is an outstanding result considering the comparison to a very strong quarter last year when the business grew 7% organically. Sales increased versus last year across the majority of our HHC markets with strong growth across our packaging applications, beverage labeling, multiwall bags and tape and label. HHCs segment EBITDA increased by 11%, significantly more than the top-line growth and EBITDA margin was strong at 14.7%, up 70 basis points versus last year. Margin improved driven by strong volume leverage, restructuring benefits and good expense management.

Construction Adhesives’ organic revenue was up 23% versus last year with strong growth in both flooring and commercial roofing as share gains and improving demand drove significantly improved top-line performance versus 2020. Even compared to a strong non-COVID impacted second quarter of 2019, organic revenue was up 4%. Contributions from the pricing adjustments we have implemented in this segment were under-represented in the second quarter as we fulfilled prior Construction Adhesives orders in backlog following the temporary disruption from the effects of Storm Uri.

We have already begun to see increased pricing roll through in the first few weeks of the third quarter and expect additional pricing realization in the P&L over the rest of the year. Construction Adhesives EBITDA increased 4% versus last year as strong volumes were offset by higher raw material costs, unfavorable mix and some temporary manufacturing costs that were required to return to normal service levels after the extreme weather event in the first quarter.

Engineering Adhesives’ results were extremely strong with organic revenue up nearly 40% versus last year, reflecting share gains and improving end market demand. Sales increased versus last year in all 14 of our Engineering Adhesives end markets with exceptional growth in adhesives for automotive, recreational vehicles, woodworking, electronics and insulating glass. And looking back to the non-COVID impacted second quarter of 2019, organic revenues were up 11%. We expect continued strength and double-digit full year growth in this segment. Engineering Adhesives’ second quarter EBITDA grew 42% year-on-year, driven by exceptional volume performance. We expect EBITDA margins to improve in the coming quarters as pricing actions are fully implemented and offset the impact of raw material cost increases.

Looking ahead at our full year results, our planning assumptions are that economies will continue to open up as vaccines are rolled out around the world. Raw materials will be tight through most of the year and pricing will remain elevated as supply chains begin to normalize and demand continues to be strong. We anticipate continued strong demand and share gains in each of our business units to drive strong volume growth in 2021 versus 2020. Revenue in most of our end markets will exceed 2019 levels.

Overall, when considering our strategic pricing actions, coupled with the solid volume growth in HHC, continued improving performance in Construction Adhesives and strong demand in Engineering Adhesives, we now expect full-year double-digit revenue growth versus 2020.

Now, let me turn the call over to John Corkrean to review our second quarter results and our updated outlook for the full year based on these planning assumptions.

John CorkreanExecutive Vice President and Chief Financial Officer

Thanks, Jim. I’ll begin on Slide 5 with some additional financial details on the second quarter. Net revenue was up 22.7% versus the same period last year. Currency had a positive impact of 3.9%. Adjusting for currency, organic revenue was up 18.8%, with volume up 17.4% and pricing up 1.4%, with most of that pricing realized in the second half of the quarter.

All three GBUs had strong growth versus 2020, as well as compared to the non-COVID impacted second quarter of 2019, which we believe validates the strength of our top-line performance. When compared to Q2 2019, organic revenue increased 9.5% for the total company with strong organic growth for all three GBUs.

Adjusted gross profit was up 17.4% year-on-year, and gross profit margin was down 120 basis points as volume growth and pricing gains were offset by higher raw material costs. Adjusted selling, general and administrative expense was down 130 basis points as a percentage of revenue, reflecting volume leverage, savings associated with our business reorganization, and general cost controls, offset by higher variable compensation than last year. In total, adjusted operating income margin improved by 20 basis points year-over-year.

Net interest expense declined by $1.3 million, reflecting lower debt balances. The adjusted effective income tax rate in the quarter was 26.8% compared to 27.6% in the same period last year. Adjusted EBITDA for the quarter of $122 million was up 21% versus the same period last year, driven by strong volume growth, pricing gains and restructuring savings, partially offset by higher raw material costs and higher variable compensation.

Adjusted earnings per share were $0.94, up 38% versus the second quarter of last year, reflecting strong income growth and lower interest expense associated with our debt reduction. Cash flow from operations in the first half of the year of $80 million compares to $108 million in the same period last year, reflecting working capital requirements to support strong top-line performance, as well as higher raw material costs.

We continue to reduce debt, paying down $62 million in the first half of 2021 compared to $51 million during the same period last year and keeping us on track for our full-year debt paydown plan of $200 million.

Regarding our outlook, based on what we know today, we now expect full-year revenue growth to be in the low double-digits. As you will recall, we increased our adjusted EBITDA guidance range last quarter to $455 million to $475 million and this guidance remains unchanged, given our expectations for the continued strong volume growth and accelerating pricing offsetting raw material cost increases that we now expect to exceed 10% for the fiscal year.

Based on the seasonality of our business and the timing of raw material and price increases, we expect revenues in the third quarter to be up about 15% versus the third quarter of 2020 as we continue to deliver strong top-line growth. EBITDA margin in the third quarter is expected to be about 100 basis points lower than the second quarter on a sequential basis. As pricing actions are fully implemented, margins will improve in the fourth quarter, which is also our strongest quarter from a volume standpoint. We expect cash flow to be strong for the rest of the year, allowing us to maintain our target to pay down approximately $200 million of debt during 2021.

With that, I will turn the call back to Jim Owens for some closing comments.

Jim OwensPresident and Chief Executive Officer

Thank you, John. During our last conference call, I outlined the three critical priorities we set for 2021 in the current supply constrained inflationary COVID recovery environment. These three priorities are volume growth, price and greater productivity, and we executed well against each of these key imperatives in the second quarter.

Our first priority is to drive volume growth by supporting our customers in the current high-demand and supply constrained environment. Volume growth and share gains are our foundation for creating durable shareholder value. Our 19% second quarter organic revenue growth is even more significant than it appears, considering our HHC business had a very strong quarter of 7% organic growth in the second quarter last year. And our business, overall, grew 9.5% compared to pre-COVID levels in the second quarter of 2019.

Our second imperative is to strategically manage pricing, aligned to the value we deliver, in this inflationary environment. We implemented $150 million in price increases, effective from March 1 through July 15, and we’re planning an additional $75 million in price increases later in Q3.

We are also delivering on our third priority to release greater productivity and capacity through our operational excellence programs. In the second quarter, we out-delivered competitors and supported customers and our factory labor and overhead, as a percentage of revenue in the second quarter, decreased versus the second quarter last year.

COVID-19 has changed how businesses operate and supply constraints and pricing volatility are challenges that are impacting our industry today. In this environment, H.B Fuller’s strategic priority, the benefits of our robust global operations and supply chain, our culture of collaboration and market-based innovation and the speed and agility we have developed across our company is delivering results for our customers and for our shareholders.

We will continue to navigate the challenges of a constrained supply environment, grow our business and build on our rising leadership position in the global adhesive industry and we will continue to deliver strong results for our customers and for our shareholders.

This concludes our prepared remarks today. Operator, please open up the call so we can take some questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Vincent Anderson of Stifel.

Vincent AndersonStifel — Analyst

Yeah. Thank you and good morning everyone.

Jim OwensPresident and Chief Executive Officer

Good morning, Vincent.

Vincent AndersonStifel — Analyst

So, thank you for some of the extra detail on the outlook. But I am a little slow this morning and trying to still unpack a couple of things. So if — depending on what we call low double-digit top-line growth, you recorded, it looks like about 14.5% organic in the first half of the year, and then it sounds like the price actions will flow through more in the second half, at least weighted toward the second half. And when I kind of just carve all that up, it sounds like, to get to just low double-digit organic growth, it doesn’t seem like there’s a lot of room for volume gains in the back half of the year. Am I missing something?

Jim OwensPresident and Chief Executive Officer

Perhaps, yeah, I think the — I guess, low double-digits is a broad term and I think of that as 13%, 14% overall, Vincent, so low double — so, yeah, we’re not talking to something like in that range. And I think, as you pointed out, there is very significant price increases that are flowing through in those numbers along with — I think we have more modest projections for volume growth, but certainly volume growth during the second half of the quarter. But, yeah, the volume growth continues, pricing ramps up and that gets you to the numbers that are somewhere — [Indecipherable] said 13%, 14%, 15%, something like that. Go ahead, John. What were you going to say?

John CorkreanExecutive Vice President and Chief Financial Officer

Yeah, I think the other factor, Vincent, in the second half of the year is we’ll have less favorability from FX. So I think those kind of number that Jim gave you, I think, we still expect to see low double-digit growth or low-teen growth in the back half of the year and 13% or 14% for the full year.

Jim OwensPresident and Chief Executive Officer

Yeah.

Vincent AndersonStifel — Analyst

Okay. Yeah. That helps a lot. I appreciate it. And then one thing that hasn’t really been discussed in all of this is just how we should think about mix impact on margins as we get to a more normalized demand environment?

Jim OwensPresident and Chief Executive Officer

Yeah, I’d say overall the mix improvement is very positive for us. It was positive in the quarter, so it can get more positive as we go throughout the year as we drive EA and CA. And I think, recognizing that the pricing actions that we’ve taken hit the second half of this quarter, really ramp up in Q3 and Q4 and EA and CA are typically a little slower, have a little more customer notification than our HHC business. So you’ll see a ramping up of their margins and that positive mix combined with the fact that our HHC business is doing a great job. Right? They have — they’ve improved their margins here versus where they were last year. So, yeah, I think you’ll see a very positive mix effect as we head into Q4 and certainly into 2022.

Vincent AndersonStifel — Analyst

Great, thanks. And I just have one last quick one on the price side. So while communicated on the price, my question is, are they fairly standard pricing terms and so you’ll hold on to this for a bit? Or are — there are some share of these were — it’s somewhat exceptional because of how tight the raw material environment is and so some of those prices will just naturally unwind rather quickly with an easing of raw material constraints?

Jim OwensPresident and Chief Executive Officer

Yeah, we don’t believe in temporary price increases or surcharges. So you don’t have — very little of that. Right? We have — and that’s why we were — our raw materials prices go up quickly, what we do is we notify customers, we explain our value and the price increases in our business are permanent. Right? They stay in place. So yeah, there is a — there is no, no — very little, if any, temporary increases here — embedded in here.

Vincent AndersonStifel — Analyst

All right. Excellent. Thank you. Best of luck on the rest of the year.

Jim OwensPresident and Chief Executive Officer

Okay, thanks, Vincent.

Operator

Your next question comes from the line of Ghansham Panjabi of Baird.

Ghansham PanjabiRobert W. Baird & Co — Analyst

Hey, guys, good morning.

Jim OwensPresident and Chief Executive Officer

Good morning, Ghansham.

Ghansham PanjabiRobert W. Baird & Co — Analyst

Yeah. So, if we focus on the EA segment, you called out your sales were basically 11% above fiscal year ’19 comparable levels. The margin’s down 360 basis point over that two-year period and obviously there’s a lot going on with raw’s and you’re working on price increases, etc, but was there a mix impact relative to two years ago? And then what is the reasonable timeline to recover to that level if, in fact, that is the right level, that we should expect a convergence toward?

Jim OwensPresident and Chief Executive Officer

Yeah. So, yeah, I think you hit on it right. The biggest challenge is raw materials. So what happened in second quarter in terms of raw materials is one of the most significant spikes in raw materials that we’ve seen and in a business like EA that’s a real opportunity for us and we’re taking advantage of it and getting a lot of the pricing, but it doesn’t happen automatically. So that’s why you’ll see the margin slip a little here in Q2 and into Q3 as we fully implement EA price increases. But this is a real opportunity for us to reposition some customers there. So it’s mostly a raw material and price situation.

There’s probably a little bit of mix, just on where some of the markets have grown. Aerospace is now positive again, but that’s a real nice high-margin business that’s not doing as well as some other businesses that are more durable goods kind of businesses. But it’s mostly raw materials more than mix. And, yeah, I think it’s one of the real positive upsides is what’s going happen to margins here in EA and CA in the coming quarters and into 2022.

Ghansham PanjabiRobert W. Baird & Co — Analyst

Okay, got it. And then for the second half of this year, I mean, is there a way — can you give us — just give us the volume outlook by segment relative to the comparable 2019 period? I mean there’s just so much complexity with maybe mobility increasing and some impact on HHC, converse impact on EA, and so on. So just curious as to what you have specifically embedded for the back half relative to 2019? And then second, in terms of raw material velocity, you’ve already raised prices, your outlook for cost inflation’s twice, so far this fiscal year, can you give us a real time indication as to how things are progressing at this point so far in 3Q? And then also, I assume you’re impacted by out-of-pattern movement in the second quarter relative to winter storm Uri, so was there any specific call-out on cost side that may not recur in 3Q? Thanks so much.

Jim OwensPresident and Chief Executive Officer

Yeah. Okay. Yeah, so a lot of good questions. I’ll let John try and unpack exactly what happened with 2019 volumes. As you know, we don’t go into that much detail by segment. I would say that each one of them has very positive volume trends for this full year versus 2019. So — and rightly, we’re pointing out toward 2019, significant expansion in our volumes and I think that’s really a product of how well we managed the business throughout COVID. We got a lot of new qualifications. We were out in front of customers and won new business last year, and especially what we’ve done here in the second quarter. We haven’t talked much on this call yet about it, but the volume that we generated in this quarter was directly related to the agility of our company to respond in a supply constrained environment.

So, we met the needs of our customers better than others in the market and we also had all those gains that we are pulling together as we qualified new products and we were able to meet those needs. So, really great work by our supply chain teams to get the raw materials and the sourcing guys in the supply chain teams to meet what was a significant uptick in demand in a constrained environment.

As far as the — there were three questions and I’ll go to the third one and I’ll come back to the second one. The third one was about exceptional costs. There are definitely exceptional costs in this quarter. We didn’t call them out, but we — I mentioned just a second ago, what we did. We air freighted raw materials from China to the U.S. at exceptional prices in order to meet the needs of customers. We had one supplier who had a ship stuck into the Suez Canal, one of those famous ships. We worked with them to air freight material from the U.S. to Europe in that case. And that was a significant cost that we shared with that supplier to keep our customers running. We had — steel was short out there. We had shortage of steel drums. We bought raw material from one of our customers who had extra steel and had our supplier convert it into steel.

So we did exceptional things with exceptional cost. In some cases we had customers pay forward in a lot of cases. This was about enabling us to get the long-term price increases and the margins that we expect out of our business. So we made a lot of investments this quarter that are going to pay off both in share gains and also I think pricing realization as we go forward.

And before I turn it over to John on the 2019 question, what was the second question, Ghansham?

Ghansham PanjabiRobert W. Baird & Co — Analyst

It was on the raw material conviction that 10%-plus is the right sort of baseline.

Jim OwensPresident and Chief Executive Officer

Oh, yeah, yeah, in terms of where we got to. Yes. So what we see right now is the raw material increases are lower in Q3 than they were in Q2. So they’re still increasing in Q3, we see a flattening, potentially a decrease, but a flattening of — in Q4. We do see some downtick in some materials in China right now. That’s usually the early sign. It’s going to be tougher to realize those globally because of the supply chains. But, maybe a little slower than normal to see those flow around the world. But, yeah, definitely, I think we have a pretty good picture of where things are, and are headed here at least in the next two quarters, and it’s a little different than when we ended last quarter where it was a big question. We knew what’s going up, it was just a matter of how much. I think today we have a fairly good picture at least out over the next three, four months. So, go ahead, John, on 2019.

John CorkreanExecutive Vice President and Chief Financial Officer

Yeah, so — and I don’t have exact math here, Ghansham, but I think directionally, if you look at the second half of the year, based on the guidance we’ve given, you’re probably looking at — volume growth versus 2019 in the first half of the year was 9% to 10%, and second half of the year, we’re probably in the mid-to-high single-digits in terms of volume growth and overall company level, so reflecting maybe a little bit of pent-up demand in the first half of this year that lessens a little bit, modest, maybe attrition-related to some of the pricing gains we get. And by GBU, I think we really would expect to see EA in the high single-digits, low double-digits and Construction Adhesives and HHC, sort of, in that mid single-digit to high single-digit. Does that help?

Ghansham PanjabiRobert W. Baird & Co — Analyst

Absolutely. Thanks so much.

Jim OwensPresident and Chief Executive Officer

Okay.

Ghansham PanjabiRobert W. Baird & Co — Analyst

Great. Thank you again.

Operator

Your next question comes from the line of Mike Harrison of Seaport Research Partners.

Michael J HarrisonSeaport Global Securities — Analyst

Hi, good morning.

Jim OwensPresident and Chief Executive Officer

Good morning, Mike.

Michael J HarrisonSeaport Global Securities — Analyst

I was wondering if you can talk a little bit about — I don’t know if you have a great sense for this, but how much the supply chain disruption impacted your volumes. You just mentioned that maybe in the first half here, you’re benefiting from some pent-up demand. But the sense I get is that there is not a lot of restocking going on at this point. But if you had all the supply and all the raw material supply that you could have wanted, how much higher would your volume growth have been? And, maybe, what segment had the greatest impact from the disruption from a volume standpoint?

Jim OwensPresident and Chief Executive Officer

Yeah, really hard to quantify, Mike. So I can say that there is definitely some strain that we realized during the quarter. So I’d say, certainly, early in the quarter, we had some supply constraints in the HHC business related to vinyl acetate, which got very tight. And have we fully filled all those buckets? Probably not. Somebody already mentioned the auto business that we’re going hand to mouth there. We are picking up some business and winning some business because we’ve got a great supply chain, but there is definitely more backlogs today than there was a quarter ago. And probably the biggest place we have backlogs right now is in our CA business. So if I were to pick an area where we have a bigger backlog, it’s in Construction Adhesives.

But overall, we’re doing a good job of meeting demand, but there is definitely more. If you ask my sales team, they’d tell you a very big number, right, because it just feels like everywhere we go, customers are looking for more. And part of that’s because we’re doing a really good job.

Michael J HarrisonSeaport Global Securities — Analyst

All right. And then on the capital priorities front, you continue to be on track with your debt paydown plans. I think that the leverage situation is going to kind of resolve itself between free cash flow and EBITDA growth. Can you give us a better sense of when you expect to be more comfortable in shifting your capital allocation strategy toward M&A, particularly if an attractive target were to become available?

Jim OwensPresident and Chief Executive Officer

Yeah, so as you point out, right, our goal is to get our debt to EBITDA ratio below 3. I think the current projections will be around 3 to the end of this year. So that should happen early next year. So — and we see ourselves staying in that range long term. So we look at every target, every opportunity that’s out there. I think we’ve made a lot of great decisions for shareholders, both in the deals we have made and at the times that we’ve passed and the last couple of years bringing down our debt has been a priority. So we’ll make the right decisions for shareholders at the right time. But our long-term commitment is to be in that 2 to 3 debt to EBITDA ratio.

Michael J HarrisonSeaport Global Securities — Analyst

All right. And if I can sneak one more in, kind of a housekeeping question. The diluted share count, if my model is correct, went up by about 1 million shares sequentially. What drove that? And I guess how should we think about the share count progressing [Technical Issues] of the year.

Jim OwensPresident and Chief Executive Officer

Yeah, that’s definitely a question for John. So, I asked the same question, so he can give you the complex math.

John CorkreanExecutive Vice President and Chief Financial Officer

So it’s all a function of the dilutive share count calculation, meaning our higher share price results in less ability to sort of buy back shares in the calculation. So it’s not related to shares issued, it’s not related to anything we’re doing around share buyback or share issuance. It’s simply the math. And I would say, Mike, it will depend on where the share price goes, but I would project it’s probably going to be around the same number for the rest of the year.

Michael J HarrisonSeaport Global Securities — Analyst

All right, thanks very much.

Jim OwensPresident and Chief Executive Officer

Thank you, Mike.

Operator

Your next question comes from the line of Jeff Zekauskas of J.P. Morgan.

Jeff ZekauskasJ.P. Morgan — Analyst

Thanks very much. The margin progression in the Health and Hygiene business from the first to the second quarter was pretty good and it was good year-over-year, but not so much in Engineering. What’s the difference? Why is the margin profile improving in HHC but not in Engineering?

Jim OwensPresident and Chief Executive Officer

Yeah, I think the biggest difference was the speed at which they introduced pricing, Jeff. So our HHC business did a better job of getting ahead of this. They also had maybe more shortages of raw materials earlier, so they had a burning platform that they were able to point to with customers. And I think in these very high-value businesses, we want to have careful, more thoughtful dialogs with customers as we raise prices. So that’s fundamentally the difference, bit of a mix. But the HHC team did a great job of jumping on prices. The rest of the businesses had done the same thing, just with more customer notice.

Jeff ZekauskasJ.P. Morgan — Analyst

So, my memory is that in the last conference call, I think you thought that prices would be up about 3% in the quarter and they were up, whatever it is, 1.4%? And so is it the case that your assessment of your ability to raise price, it turns out it was tougher, but volume conditions were better? And why did prices go up faster?

Jim OwensPresident and Chief Executive Officer

Yeah, so I don’t know if we — I’ll have to look back at the scripts. So I would say, Jeff, certainly the last month of the quarter, they were up more than 3%. So, I think in the quarter, we said — it was the end of March, and we said that we’re going to raise prices in April and May. Right? So one of the — our challenge is, right, we’re a month into the quarter now than we were a month into the quarter. Most of our price increases went into effect April 15 and May 1. So you saw the impact in our numbers in Period 6 — our last period of the quarter and that’s why we were very confident in what’s happened, and we see it in our numbers here in P-6 and flowing into P-7. So — and I would say pricing happened a lot exactly like we expected. In fact, we ended up announcing more.

I think when I — during the last call, I said $100 million would be announced and we’re now at $150 million that’s implemented and agreed. Right? When I say it’s in place, this is implemented and agreed and changed in our system to happen between March and July 15. And then we’re, right now, planning this additional $75 million. So pricing happened like we planned. What didn’t happen like we planned is raws were a little stronger than we planned, little stronger and faster. And as you pointed out, volume was stronger. So I would say pricing was pretty much what we expected and maybe a little stronger than we expected, volume was stronger and raw material increases were stronger. So all three were higher.

Jeff ZekauskasJ.P. Morgan — Analyst

Why is the Engineering business doing so much better than it did in 2019 in your assessment?

Jim OwensPresident and Chief Executive Officer

Yeah. These are share gains, Jeff. I mean, we’ve built a great team there that understands market trends and this whole move to these GBUs has allowed us to really put a lot of power in the hands of those 14 segment leaders. So if you talk to our electronics teams, they know where the new products are coming out and they know where they’re going to win. You talk to our solar team, they see the trends that are happening, the new panels that are being developed, where the investments are going. If you talk to our RV team, they see who the winners and losers are in the market and what applications are going to create value.

So, that move, which saved us money — we talk on these calls about how much money that saved us, is really enabling us to grow faster and that model in our EA team is what we’re planning in the other businesses to generate organic growth, but it’s particularly valuable there when you’re part of new and evolving products. Electric vehicles, we’re doing a great job with electric vehicles. Our auto business has benefited from that shift. So it’s really the way we’ve designed the organization to get ahead of opportunities. And I would just add too, Jeff, in 2020, during the COVID, our team was very aggressive at qualifying new applications. So, some of that’s come in here [Indecipherable].

Jeff ZekauskasJ.P. Morgan — Analyst

Okay. maybe lastly, Ashland is interested in monetizing its adhesives business. Is that acquisition too big for you? Is that something that allures you?

Jim OwensPresident and Chief Executive Officer

Yeah, of course, we wouldn’t comment on any specific acquisitions, Jeff. I think they’ve said they’re doing a strategic review. I guess we’ll see what happens with that. But it’s a good business. I would say that. It’s a good adhesive business. And as I said earlier, we’re going to do what’s best for our shareholders with a clear view toward having the right debt to EBITDA ratio in the long run. So, we won’t ignore anything that happens in the market, if it happens. Right? Let’s see what comes out of their strategic review. But our goal is to be the best adhesives company in the world and we’ve done that by growing our business organically and when the right inorganic opportunities come up that are good for our shareholders, we look at those seriously.

Jeff ZekauskasJ.P. Morgan — Analyst

Okay, great, thank you so much.

Jim OwensPresident and Chief Executive Officer

Thank you, Jeff.

Operator

Your next question comes from the line of Eric Petrie of Citi.

Eric PetrieCiti Investment Research — Analyst

Hi, good morning, Jim and John.

John CorkreanExecutive Vice President and Chief Financial Officer

Hey, Eric.

Jim OwensPresident and Chief Executive Officer

Good morning, Eric.

Eric PetrieCiti Investment Research — Analyst

Just a question on strategy, you talked about ’19 and the applications in Engineering Adhesives. Is that the right number for you and you just want to get larger in those businesses or do you want to actually expand into other end markets?

Jim OwensPresident and Chief Executive Officer

Yeah, I would say, today, it’s the right number. Some of those are groupings of other markets, but I think it’s a good manageable number of end markets and we have expertise there so sometimes, these businesses evolve, there’s a whole sub-segment of electric vehicles that is becoming a business unit within automotive. Right? So — but yeah, we’re at the right number.

Eric PetrieCiti Investment Research — Analyst

Okay. And then secondly, just a follow-up to the prior question, you mentioned share gains because you’re better supplying your end customers. You noted EV’s were doing real strong. What other end markets is there recognizable or you would point out for us?

Jim OwensPresident and Chief Executive Officer

Yeah. So it’s a combination of two things that are driving the share gains. And in our business, being the innovator who solves the customers’ problem is the biggest way we win business. And I can point to examples in almost all of our 30 segments where we have an innovation that’s making a difference with a trend and I’ll comment on a couple of those. What’s unique about what’s happened here in the last year between COVID and especially the second quarter is our service levels have been a differentiator. Right? Usually service levels aren’t a differentiator, but in this supply constrained environment, our teams did exceptional things to support our customers and support customers in need and that’s driving share gain that’s exceptional. I’d say, normally, we don’t have that.

But in terms of where we win, and we continue to grow in electronics by finding new and different opportunities. Our insulating glass business, we developed some patented technology that includes some new equipment. That’s driving a lot of growth for us as people look to innovations to make more energy-efficient buildings. In solar, we’re a leader in China and as companies make investments outside of China, we’re getting those opportunities because of how global we are. And I already mentioned the electric vehicles. And then I think importantly in HHC, what that team has done since we went through the GBU structure, they thought very carefully about sustainability trends and how that’s changing adhesive needs and that’s opening up opportunities.

So — and then finally, I guess, in CA, probably the biggest growth area from an innovation standpoint is what are roofing team is doing to make easier-to-use environmentally friendly roofing adhesives that allow you to use less construction workers because there’s just such a problem getting construction workers or putting those roofs on faster with some of our new technology is a big winner there. So there’s a lot of little examples; little meaning, millions — multi-millions of dollars that are adding up to a significant impact.

Eric PetrieCiti Investment Research — Analyst

Helpful, helpful. And then just one follow-up on your outlook on supply chain. How much do you produce captively of your own, like, classifiers or resins or polymers and do you look to expand that to avoid these shocks in raw material prices?

Jim OwensPresident and Chief Executive Officer

Yeah, no, I would say, our goal is not to be backward-integrated. I think one of the things that helps us — if you dig in the details, what’s happened with raw materials, commodities went up a lot. We buy — only 13% of our raw materials are commodities. The specialty materials have less inflationary volatility. That’s good for us, it’s good for our shareholders. So we don’t have the kind of volatility that somebody who’s backward-integrated has. And then we’ve got a whole model building partnerships with suppliers, so we think that works to our favor. So, a small percentage of our business is polymers we make for ourselves captively, but we’re mostly formulators and where it makes sense, we’ll build the polymers where its proprietary technology.

Eric PetrieCiti Investment Research — Analyst

Great, thank you.

Jim OwensPresident and Chief Executive Officer

Thanks.

Operator

Your next question comes from the line of David Begleiter of Deutsche Bank.

David BegleiterDeutsche Bank — Analyst

Thank you. Good morning. Hey Jim…

Jim OwensPresident and Chief Executive Officer

Good morning, Dave.

David BegleiterDeutsche Bank — Analyst

Thank you. Going back to your comments on retaining these price increases, [Indecipherable] said, but historically have you — when you’re seeing prior periods of rapid inflation, has still been able to retain the entirety of the amount of these price increases or is there — historically, were there some portion that did go back to the customer, especially maybe in the automotive or maybe more assembly side of the business?

Jim OwensPresident and Chief Executive Officer

Yeah, I would say, historically, what you’ll see over time is a very slow leakage and really we don’t lower our prices anywhere. They become competitive pressures that put us in positions where we’d introduce new products or we meet a competitive situation. So I would say multi-quarters afterwards. But, in all, no, we don’t have any kind of price-up/price-down kind of commitments. We do have about 15% of our business that’s indexed with a lag, so not really automotive. So that part of the business will follow a pattern of the market, but for the most part — so you’re right, it’s not 100%, but for the most part, price increases go in place in there. They are more permanent in our business.

David BegleiterDeutsche Bank — Analyst

Got it. And, Jim, just on volumes, looking into next year, I know it’s early, but if we have more normalized year next year, how do you think about the volume growth for the three GBUs?

Jim OwensPresident and Chief Executive Officer

Yeah, it’s really early to predict volume growth. I think we’re going to get a lot of pricing benefit next year because we’re half a step behind the raw materials here and raising prices. That will drive a lot of margin benefit next year. I mean, I think we’re — so it’s going to be a higher revenue. We’re going to be higher margins and these growth wins we have, to put volume on top of that, it’d be amazing. But I think we’ve really set ourselves up well, not just to have a strong finish to this year, right, I think you’ll see it here as we head into Q4, but I think we’ve positioned ourselves for a very strong 2022 with or without a lot of volume growth and if we get a lot of volume growth, it could be exceptional.

David BegleiterDeutsche Bank — Analyst

And, Jim, last thing, any labor constraints in your business that you’re seeing right now?

Jim OwensPresident and Chief Executive Officer

Yeah. Everywhere. Right? It’s a big challenge for our factories and I mentioned, we don’t talk a lot about it in this call, but our three priorities are delivering on the volume growth, good on the pricing and then productivity. And we see this as a productivity opportunity at all of our facilities, either automate or just drive other efficiencies. But, yeah, there is labor constraints. I think we’re — we’re a 130-year old company, great employer. So we probably don’t have the same kind of things you see from other companies but it’s causing a little wage inflation in some parts of the country and pressure on employees. So far, our teams have done a good job, but everyone of my plant managers is looking for good workers.

David BegleiterDeutsche Bank — Analyst

Got it. Thank you very much.

Jim OwensPresident and Chief Executive Officer

Okay, thank you.

Operator

Your next question comes from the line of Paretosh Misra of Berenberg.

Paretosh MisraBerenberg Capital Markets — Analyst

Thank you. Good morning, Jim, John, and Barbara.

Jim OwensPresident and Chief Executive Officer

Good morning.

Paretosh MisraBerenberg Capital Markets — Analyst

Hi, good morning. On the raw material inflation, is the percentage increase in raw material cost — is that pretty much same for the three segments, or there is some contrast there?

Jim OwensPresident and Chief Executive Officer

Yeah, I’m looking at, John, we’re trying to sort that out. I would say it’s probably a little higher in EA, maybe a little higher in EA, but pretty much the same, probably a little less in CA, a little more in EA, pretty much the same across the business.

Paretosh MisraBerenberg Capital Markets — Analyst

I got it.

Jim OwensPresident and Chief Executive Officer

Yeah, OK.

John CorkreanExecutive Vice President and Chief Financial Officer

As a percent of sales, yeah.

Paretosh MisraBerenberg Capital Markets — Analyst

Okay, great. And then on pricing, which segments is going to see the biggest chunk of this more than $200 million price hikes? And then I guess just kind of related to that, it sounded like, in Construction, you said that pricing in Q2 didn’t really fully reflect what has been announced. So could you just elaborate on that as well?

Jim OwensPresident and Chief Executive Officer

Yeah, yeah, yeah. HHC, probably a little more than EA, but HHC and EA lead the charge with CA having less in terms of the dollar impact. But all the businesses have significant price increases that they’re putting forward. And, as I said, HHC is off to a great start on that. Yeah, CA, a little slower for two reasons. One, two of our factories were in the Texas area. So they had a backlog, so they took a while to get caught up and get the pricing out of those. And then because of how some of our distribution channels are set up, we didn’t have — the pricing timing is a little more delayed. So you see it flowing through in the numbers this quarter, but you saw lesser than last quarter. But they’re very much on point right now. And I’m pretty confident we’re going to see some really good benefits from them in the coming quarters.

Paretosh MisraBerenberg Capital Markets — Analyst

Thanks, Jim. And then I guess last one, could you talk about how your customers are getting affected by the chip shortage issues? I’m not sure if you could quantify the volume impact, but anything anecdotal? And is that mainly the automotive customers or you’re hearing that from solar or electronics customers as well?

Jim OwensPresident and Chief Executive Officer

Yeah, I would say, we’re seeing it mostly in the auto space and it’s mostly around the fact that as we all see, right, you’ve got a dearth of cars at every dealership in America and around the world. So I think the chip shortages shows up in a little bit lower demand. But I would say they’re still making a lot of cars and they’re still using a lot of adhesives and sometimes they’re parking them aside to put them in with these chips. So it’s an impact, but not one that I’d be the best guy to quantify because we’re seeing strong growth in our automotive business overall, a combination of some share gain and some opportunities, some of the EV work we’ve been doing has made our auto business strong despite the chip issue.

Paretosh MisraBerenberg Capital Markets — Analyst

Got it. Thanks for that insight. That’s all I had. Thanks, guys.

Jim OwensPresident and Chief Executive Officer

Okay, thanks, Paretosh.

Operator

We have time for one more question. Your final question will come from the line of Rosemarie Morbelli of Gabelli and Company.

Rosemarie MorbelliGabelli and Company — Analyst

Thank you. Good morning everyone and thank you for taking my question. Jim, you mentioned that you gained share because you were able to supply quite a few customers whose regular supplier could not do it. So do you think — in your opinion, have you gained those particular businesses for the long term or do you think that they will eventually return to their previous supplier at a lower price point?

Jim OwensPresident and Chief Executive Officer

Yeah, well, we only — it’s not like we were out there supplying everybody in the market, and incremental number of customers, we were able to serve. But those were — all were based on long-term commitments. So we are very much, Rosemarie, a priority for existing customers, but we added business where we saw it as a customer that really appreciated the value that we bring, and we got long-term commitments out of it. So, no, I wouldn’t say it’s temporary. Thanks for the question.

Rosemarie MorbelliGabelli and Company — Analyst

And then looking at your comment regarding the fact that you would — you are ready to raise prices more if necessary, are there any particular area where you could potentially see additional inflation?

Jim OwensPresident and Chief Executive Officer

Yeah, it’s a great question, Rosemarie, and I think that’s the question out there broadly in the market, right, and we all ask about just inflation in general. Is this an inflation super cycle or is it transitory, as our friends, as I said, say? I would say the inflation we’re seeing in the third quarter is less than second quarter. And I mentioned that China is starting to see a little bit of decreases. So, I tend to think that this is on its way down. But if, for whatever reason, there is a spike, my point, Rosemarie, to you and to all of our investors is, we are going to raise our prices in the market more than we get from raw material suppliers,. Right? And we just got to get that balance right. There’s a little timing that we got to manage but we will get the price increases in the market and we’ve shown a great ability to do that. So that’s the point of that comment. But right now, I would say, we think we see a tapering of inflation here going in the second half of the year.

Rosemarie MorbelliGabelli and Company — Analyst

Thank you and congratulations on a great quarter.

Jim OwensPresident and Chief Executive Officer

Thanks, Rosemarie.

Operator

Thank you. That was our final question for today. I will now turn the call to Mr. Jim Owens for any closing comments.

Jim OwensPresident and Chief Executive Officer

Thanks, everybody on the call for your support and your questions, and we’re excited about the quarter, but also what we’re building here for the future. So again, thanks for your support. Have a great day.

Operator

[Operator Closing Remarks]

Duration: 51 minutes

Call participants:

Barbara DoyleVice President, Investor Relations

Jim OwensPresident and Chief Executive Officer

John CorkreanExecutive Vice President and Chief Financial Officer

Vincent AndersonStifel — Analyst

Ghansham PanjabiRobert W. Baird & Co — Analyst

Michael J HarrisonSeaport Global Securities — Analyst

Jeff ZekauskasJ.P. Morgan — Analyst

Eric PetrieCiti Investment Research — Analyst

David BegleiterDeutsche Bank — Analyst

Paretosh MisraBerenberg Capital Markets — Analyst

Rosemarie MorbelliGabelli and Company — Analyst

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