管理層發言
Hello, and thank you for standing by. My name is Tiffany, and I will be your conference operator today. At this time, I would like to welcome everyone to the H.B. Fuller Fourth Quarter 2025 Earnings Conference Call. I would now like to turn the call over to Scott Jensen, Head of Investor Relations. Sir, please go ahead.
Thank you, operator. Welcome to H.B. Fuller's Fourth Quarter 2025 Investor Conference Call. Presenting today are Celeste Mastin, President and Chief Executive Officer; and John Corkrean, Executive Vice President and Chief Financial Officer. After our prepared remarks, we will have a question-and-answer session. Before we begin, let me remind everyone that our comments today will include references to certain non-GAAP financial measures. These measures are supplemental to the results determined in accordance with GAAP. We believe that these measures are useful to investors in understanding our operating performance and to compare our performance with other companies. Reconciliations of non-GAAP measures to the nearest GAAP measure are included in our earnings release. Unless otherwise noted, comments about revenue refer to organic revenue and comments about EPS, EBITDA and profit margins refer 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. Actual results could differ materially from these expectations due to factors covered in our earnings release, comments made during this call and the risk factors detailed in our filings with the SEC, all of which are available on our website at investors.hbfuller.com. I will now turn the call over to Celeste Mastin. Celeste?
Thank you, Scott, and welcome, everyone. Our execution and agility in the quarter and throughout the year generated double-digit EPS growth and EBITDA at the top end of our full year guidance range amidst an unpredictable economic backdrop and challenging demand landscape. During this time, we helped our customers navigate this environment successfully, providing them with material optionality and flexibility while ensuring consistent quality and reliable availability wherever in the world they chose to make their products. These efforts, which strengthened our partnerships and enhanced H.B. Fuller's competitive positioning are reflected in our improved profitability and sustained margin expansion. As a result, we are exiting the fourth quarter with strong momentum heading into 2026 and are firmly on track to achieve our target of greater than 20% EBITDA margin. I am very proud of our team's resolve, resourcefulness, and the meaningful progress we made in 2025 as we continue transforming H.B. Fuller into a higher growth, higher-margin company. Looking at our consolidated results in the fourth quarter, net revenue was down 3.1%, reflecting a continued weak economic backdrop and our strategic actions to reposition the portfolio. Net revenue was up about 1%, adjusting for the impact of the Flooring divestiture, which was a key step in that repositioning. Organic growth was down 1.3% year-on-year, volume down 2.5% and pricing was up 1.2% with positive pricing in all three GBUs. EBITDA for the fourth quarter was $170 million, up 15% year-on-year, and EBITDA margin was 19%, up 290 basis points year-on-year, driven by favorable pricing, raw material cost savings and restructuring actions, which more than offset lower volume. Now let me move on to review the performance in each of our segments in the fourth quarter. In HHC, organic revenue was down 1.8% year-on-year, driven by lower volume. Strong growth in hygiene was more than offset by continued softness in packaging-related end markets. Despite the weak market and lower volumes, EBITDA was up almost 30% year-on-year for HHC in the fourth quarter and EBITDA margin improved 380 basis points to 17.5%, driven by favorable pricing, raw material savings and the impact of acquisitions, which more than offset lower volume. In Engineering Adhesives, organic revenue increased 2.2% in the fourth quarter, driven by both favorable pricing and volumes. Automotive, electronics and aerospace showed continued strength. Excluding solar, which we continued to deemphasize, EA delivered organic revenue growth of approximately 7%. As we progress through the year, EA continued to build momentum, reflecting our successful efforts to reposition the portfolio toward higher-growth markets. Adjusted EBITDA for EA increased 17% year-on-year in the fourth quarter, driven by favorable pricing and raw materials as well as restructuring savings. EBITDA margin increased by 260 basis points year-on-year to 23.5%. In BAS, organic sales decreased 4.8% on broadly lower volume across the portfolio. Although the team is executing well, construction conditions remain muted. Additionally, BAS had a tough comparison in the fourth quarter of 2024 when the business delivered strong organic growth on new customer expansion. EBITDA for BAS decreased 7% versus the fourth quarter of last year as pricing gains and restructuring savings were more than offset by lower volume. Geographically, Americas organic revenue was flat year-on-year in the fourth quarter. Solid growth in EA, particularly aerospace and general industries was offset by weaker results in packaging and construction-related end markets. In EIMEA, organic revenue was down 6% year-on-year, driven by lower volume in packaging and construction, which more than offset positive results in hygiene. Asia Pacific showed solid organic revenue growth in the quarter, up 3% year-on-year, driven by higher volume. Positive growth in EA and HHC, particularly in automotive, electronics, and packaging more than offset lower year-on-year revenue in solar. Excluding solar, Asia Pacific organic revenue was up 10% year-on-year. Reflecting on fiscal 2025, the economic backdrop for the manufacturing sector was weaker than expected and end-user demand remained sluggish; however, we took proactive steps to overcome these headwinds in order to deliver on our profit commitments. Specifically, we executed well on pricing and identified meaningful opportunities to reduce raw material costs and offset tariff impacts. We continue to reshape our portfolio by investing in higher-margin, faster-growing market segments while selecting out of businesses that didn't meet our growth or profit criteria. We also launched our manufacturing footprint and warehouse consolidation initiative, now known as Quantum Leap, which significantly improves our cost structure. As a result, we are exiting the year with strong momentum, driven by the determination and outstanding execution of our team. Looking ahead to 2026, we expect the economic environment to remain challenging, similar to 2025, marked by ongoing geopolitical tensions, tariff uncertainty, elevated inflation and interest rates, and continued labor constraints, all of which are likely to weigh on manufacturing investment. Despite these challenges, we anticipate delivering another year of profit growth and margin expansion in 2026 by building on the meaningful progress we made this year while staying firmly on track to achieve our target of greater than 20% EBITDA margin. Now let me turn the call over to John Corkrean to review our fourth quarter results in more detail and our outlook for 2026.
Thank you, Celeste. I'll begin with some additional financial details on the fourth quarter. For the quarter, revenue was down 3.1% versus the same period last year. Currency, acquisitions, and the divestiture of the flooring business collectively had a negative impact of 1.8%. Adjusting for those items, organic revenue was down 1.3%, driven by lower volumes. Pricing was up 1.2%, reflecting positive pricing in all three GBUs. Adjusted gross profit margin of 32.5% increased 290 basis points year-on-year. The impact of pricing, raw material cost actions, acquisitions and divestitures, and targeted cost reduction efforts drove the year-on-year increase in adjusted gross profit margin. Adjusted selling, general, and administrative expenses were down modestly year-on-year, driven by continued cost-saving efforts and lower variable compensation. Adjusted EBITDA in the fourth quarter of fiscal 2025 was $170 million, up 14.6% year-on-year, driven principally by the impact of pricing and raw material cost actions as well as restructuring savings. Adjusted EBITDA margin increased 290 basis points year-on-year to 19%. Adjusted earnings per share of $1.28 was up 39% versus the fourth quarter of 2024, driven by higher operating income and lower shares outstanding as a result of our repurchase of approximately one million shares in fiscal 2025. Fourth quarter cash flow from operations of $107 million was up 25% year-on-year, driven by higher net income. Net working capital as a percentage of annualized net revenue increased 130 basis points year-on-year to 15.8%. Net debt to adjusted EBITDA of 3.1x was down sequentially from 3.3x at the end of the third quarter and down from 3.5x at the end of the first quarter, consistent with our plan to reduce leverage during the year. With that, let me now turn to our guidance for the 2026 fiscal year. Despite a challenging economic backdrop, which we anticipate will be similar to 2025, we expect to deliver another year of profit growth and margin improvement. We anticipate full year net revenue to be flat to up 2% versus 2025, with organic revenue expected to be approximately flat. We also expect foreign currency translation to positively impact revenue by about 1%. We expect adjusted EBITDA to be between $630 million and $660 million as pricing and raw material cost actions and Quantum Leap savings more than offset wage and other inflation. We expect our 2026 core tax rate to be between 26% and 27% compared to our 2025 core tax rate of 25.9%. We expect full year net interest expense to be approximately $120 million, depreciation and amortization to be approximately $185 million and the average diluted share count to be between 55 million and 56 million shares with share repurchases offsetting shares issued through compensation plans. These assumptions result in full year adjusted earnings per share in the range of $4.35 to $4.70. Finally, we expect full year operating cash flow to be between $275 million and $300 million, weighted to the back half of the year before approximately $160 million of capital expenditures, which includes approximately $50 million of capital related to Project Quantum Leap. Taking into account the typical seasonality of our business and the later timing of Chinese New Year, we expect first quarter revenue to be down low single digits and adjusted EBITDA to be between $110 million and $120 million. Now let me turn the call back over to Celeste.
Thank you, John. During 2025, the execution and determination of our team allowed us to deliver on our profit commitments for the year while continuing to make meaningful positive long-term changes to the portfolio as we build for the future, including manufacturing footprint consolidation, price and raw material management, and portfolio mix shift. M&A continues to be an important part of our value creation strategy as we shared during our October Investor Day. In 2023 and 2024, we acquired eight companies with a combined EBITDA of $41 million. Those acquisitions delivered $73 million of EBITDA in 2025, representing a post-synergy purchase price multiple of 6.7x EBITDA. During 2025, we executed on several acquisitions in medical adhesives and fastener coating systems. Early in the year, we completed the acquisition of GEM and Medifill, formulators, manufacturers, and marketers of state-of-the-art medical-grade adhesives for internal indications. These businesses have performed exceptionally well with revenue up approximately 15% versus pre-acquisition 2024 and EBITDA up almost 30%, consistent with our deal model. Recall, we acquired ND Industries in 2024 for its unique encapsulated adhesive technology, knowledgeable employees, and the coating service to apply these unique adhesives to mechanical fasteners. ND Industries expanded our product range for customers in high-growth markets like automotive and aerospace and put us in a position to provide a service, further linking us to those customers. We saw ND as a platform from which we could expand this technology and service offering globally. And in 2025, we did just that. We acquired three small fastener coating companies to aid our global expansion. Early in 2025, we acquired businesses in Taiwan and Shanghai, giving us access to the fastener coating markets in Asia. And in late 2025, we acquired a fastener coating business in Turkey, giving us access to the broader European and Middle Eastern markets. Collectively, we paid $17 million for these three acquisitions, which are expected to generate $3 million of EBITDA in 2026. While the collective value sounds small, these three outposts give us access to a fast-growing $0.5 billion market in Asia and Europe. This expanded platform features a differentiated technology offering, long-tenured customer relationships, and a strong competitive position in the fastener coating market. As we shared at our Investor Day, our M&A strategy is an EBITDA compounder. This is an excellent example of a platform business with a good organic growth profile that we expect to significantly expand through revenue and cost synergies as we rapidly build share in this technology-driven, fast-growing and expandable market. Finally, I would like to take this time to acknowledge and thank all our employees for their dedication and hard work throughout the year. Your commitment and the strength of our culture have enabled us to make meaningful progress on all of our strategic initiatives. That same culture has been recognized externally as well with Newsweek naming us one of America's most Admired Workplaces for 2026 and Forbes naming us one of America's Best Employers for engineers. As we look ahead to 2026, we remain committed to advancing the long-term strategic plan we have set in place. While global conditions remain unpredictable, we're taking the necessary steps to manage costs responsibly, execute our global initiatives with discipline, and navigate through this period with focus and resilience. That concludes our prepared remarks for today. Operator, please open the line for questions.
分析師問答
Your first question comes from the line of Mike Harrison with Seaport Research Partners.
Congrats on a nice finish to the year. I was hoping we could start with the Q1 guidance. You mentioned a couple of times that you feel good about the momentum that you finished the year with. But for Q1, you're kind of pointing to a low single-digit top line decline. I think FX is a pretty good tailwind. So maybe we're thinking more like mid-single-digit organic sales decline. Maybe just give us a little more color on what you think would be driving that weakness. And I'm curious if you can comment at all on what December looked like and if that's informing some of the weaker outlook.
Yes. So what we'll see going into Q1 will be continued performance much like we saw in the fourth quarter of this year. I mean if you look at volume progression throughout Q4, what you would see is that EA was strengthening throughout the quarter. BAS was improving, but it's still weak. And in Q4, we had a pretty tough comp there of plus 7%. And it's going to be a continually challenging environment for HHC. What we saw at the end of the year was just a step down the last couple of months, particularly by the CPG customers in their order patterns. So we'll probably get a little more of an uplift there. That said, the biggest impact in Q1, Mike, is going to be Chinese New Year. So the timing of Chinese New Year in Q1 will result in some of that revenue being pushed into Q2. I don't know if you want to comment further, John.
Sure, the main reason Q1 appears a bit weaker is due to the timing of Chinese New Year. In 2025, it fell in late January to early February, while in 2026 it will be in late February extending into March. Revenue typically declines significantly during Chinese New Year, but then rebounds strongly after the holiday. Last year, we experienced that recovery in Q1, while this year, it will take place in Q2. As a result, we expect to see a revenue shift of 1 to 2 weeks from Q1 to Q2, which could affect revenue by $15 million to $20 million and EBITDA by $6 million to $8 million. So it's essentially a shift from Q1 to Q2. Regarding December and how revenue is shaping up, that is not behind our slightly softer guidance. It is primarily due to Chinese New Year. The year began as anticipated overall, with some irregularities in December owing to holiday timing. However, the first six weeks are aligning with our expectations, and we believe the impact of Chinese New Year will push some revenue into Q2.
Understood. And then, just wanted to ask another one on raw materials. In fiscal '25, you started the year with a little bit of raw material versus pricing headwind, and I think that got better as the year progressed. How are you thinking about raw materials and pricing in fiscal '26? And I'm just curious kind of what that means for the year-over-year comparison on margins. Is the assumption that pricing versus raws is kind of slightly positive all year? Or is it maybe more of a tailwind in the first half and turning into more of a headwind or more neutral in the second half? Any kind of thoughts on that cadence would be helpful.
Yes. So in 2025, we delivered around $30 million of combined price and raw material benefit. As we mentioned in the last quarter, we anticipate seeing a carryover benefit of around $25 million into 2026, plus our continued efforts to reallocate sourcing to drive pricing to drive our business towards the highest margin, most differentiated spaces has led us to increase that benefit of price and raws in 2026 to about $35 million. So that will be the year-over-year comparison you're going to see, Mike.
Yes. And I think in terms of timing, maybe slightly weighted to the first half of the year, but we will see, I'd say, a favorable spread for the entire year because we will get additional new pricing in 2026.
Yes, you'll see expanded margins in all GBUs in 2026, similar to what we achieved this year.
Your next question comes from the line of Ghansham Panjabi with Baird.
Maybe we can focus on the BAS segment and some of the drivers that impacted your 4Q and there was a lot going on in the quarter with, obviously, the government shutdown, et cetera. Just curious as to whether it had any impact on you? And specific to that, if it did, was there any change in trajectory December onwards?
We faced a challenging comparison in the fourth quarter for BAS. Ghansham saw a 7% increase in Q4 of '24 for the overall BAS business, but several factors contributed. We are transitioning from a significant customer win in 2024, which impacted our fourth quarter results. We continue to have success in serving data centers and LNG, but the construction market remains weak. However, there are exciting developments in BAS. I am particularly pleased about our increased involvement in LNG, having recently secured a major project on CP2 using our Foster's product for cryogenic insulation systems. As global capacity expands and LNG grows at approximately 7%, we expect to capture more opportunities. We have also begun shipping a sizable data center project in Texas, which will span four million square feet upon completion. Additionally, our glass business is thriving, with our 4SG product experiencing 18% growth in 2025 despite a 6% decline in housing starts. None of these businesses have been significantly impacted by the government shutdown. Overall, we are facing tough comparisons surrounding new customer business and a generally challenging construction environment.
Got it. And then for packaging, as it relates to HHC, you called that out as weaker. Anything going on there relative to the recent trend line apart from customers just managing inventory aggressively into year-end, et cetera? And then also on fiscal year '26 guidance, I'm sorry if I missed this, but can you give us a sense as to core sales by segment? I know you're guiding towards roughly flat for the year.
Sure. In North America, we are experiencing a decline in demand from our packaging and related consumer packaged goods customers. We observed a similar trend as last year, with a slight ongoing decrease in volume that worsened in the latter half of the year. This area is likely to remain challenging for us in the upcoming year due to issues related to affordability and limited mobility, which has affected household formation. Despite this, we are making progress with exciting innovations in this segment. Our HHC business has performed well in the EIMEA region, where we gained market share in countries like Algeria and Turkey thanks to successful production at our new facility in Cairo. We're also seeing growth in India. HHC is shifting towards growth in higher-potential developing nations, and our plant strategy focuses on cost-effective production in these areas to leverage this trend. In the Asia Pacific region, we experienced growth in our packaging business, spurred by a recovery in China and new packaging innovations such as anti-slip coatings. Overall, the packaging business in HHC is strong in Asia, and we are strategically aligning our efforts toward regions where we can excel, building the necessary infrastructure to support this. Your second question was about core sales by segment?
Yes. And I can take that, Ghansham, just we'll try to unpack our revenue guidance here just a little bit. So we said that we expect revenue to be flat to up 2%, that organic revenue will be flattish. So the difference there really being FX. So we do expect about one point of favorability for the full year from FX if rates stay where they are. Acquisitions really won't have a meaningful impact, at least not the ones we've done so far because the carryover is very small. So what it implies is organic revenue might be up slightly, down slightly. We expect pricing to be positive in all three GBUs, probably 0.5% to 1% positive. And then if you look at the GBUs in terms of kind of volume, we'd expect EA to deliver positive volume growth despite the headwind from solar. We'd expect HHC and BAS probably to be down slightly year-on-year. So does that help?
Yes, it does. It does. Very comprehensive.
Your next question comes from the line of Kevin McCarthy with Vertical Research Partners.
John, I was wondering if you could speak to your free cash flow outlook for 2026. Your capital expenditure budget looked to be on par with what we would have expected, but the cash flow from operations may be a little bit lighter than we would have thought. So is there anything in particular you would call out that might be weighing on the free cash flow conversion in terms of working capital or any other extraordinary cash needs?
Yes. So I'd say if you look at cash flow from operations, Kevin, we guided to $275 million to $300 million versus $263 million this year. So it's the midpoint, roughly $25 million increase, which is driven almost entirely by higher income. Working capital, we would expect to be similar. So I would say if you look at kind of the last couple of years, operating cash flow has been weighed down a little bit by working capital. And we mentioned at the Investor Day that we are going to carry higher inventory as we get through Quantum Leap. So I would say that's the primary picture. If you think about free cash flow, it's CapEx sort of in line with what we have been talking to and operating cash flow driven by income and working capital remaining a little higher in the near term.
Very good. And then on your EBITDA outlook, I heard the comments on the Chinese New Year timing, which was very helpful. But I was wondering if you could just expand on the key assumptions that you're baking into the annual guide and just trying to get a feel for what sort of macro help, if any, you might need to achieve the earnings targets.
I will address the first question regarding macro assistance. Kevin, we do not anticipate any macro support. We have adopted a strong self-help strategy for the year, similar to what we implemented last year. While we are confident that we will maintain positive pricing across all our business units, we are also focusing on strategically selecting the areas of our business to operate in. On the volume front, we do not expect any favorable macro conditions to assist us. We will need to approach this from a different angle, and we are ready to do so. However, there may be unexpected positive developments in volume that could provide some support.
To provide guidance for EBITDA for 2026 compared to 2025, we anticipate an improvement of about $35 million year-on-year due to pricing and raw material changes. Based on current exchange rates, we expect a benefit of $5 million to $10 million from foreign exchange. The Quantum Leap initiative will keep progressing, and we foresee an additional $10 million in savings in 2026 compared to 2025. On the downside, we expect an increase of $10 million in variable compensation expenses based on the conclusion of 2025, along with around $20 million from wage and other inflationary pressures. These are the main components to consider. While volume is expected to remain mostly stable, it could potentially change the overall outcome.
Your next question comes from the line of Jeff Zekauskas with JPMorgan.
When I look at your other income adjusted in the fourth quarter, it looked like it's a little bit more than $10 million. And you spoke of an insurance payment. How much was that? Or what's going on in other income? And other income for the year adjusted was a little bit more than $30 million. And last year, it was $17 million. Can you talk about those numbers?
Yes, Jeff. So there's two items that are kind of driving that. The primary ones are higher pension income year-on-year. So that's probably half of that difference. So the pension assets earning higher returns generate more pension income. The second part of it is FX hedging gains or losses. I think we've done a really good job this year in managing that and reduce that impact significantly through, I'd say, both part of its cooperation in the market, cost of hedging come down a little bit, but I think we've managed it well and reduced any potential leakage from a hedging standpoint. So those are the two main items driving that year-on-year improvement.
Your deferred taxes were a use of $50 million versus $36 million last year. Can you talk about what's going on there? And your accounts payable was down about $20 million year-over-year. What's going on there?
Yes. The main factor affecting deferred taxes is the significant dividend we pulled from China in 2024, which incurs a withholding tax. We successfully brought back over $100 million in cash from China, subject to a 15% withholding tax. Although we declared the dividend in 2024, the withholding tax will be paid in 2025, impacting the deferred tax line. As for trade payables, there has been a substantial year-on-year change, which reflects timing issues with inventory. Overall, our payables and their percentage of revenue remain consistent year-on-year. In 2024, we saw marked improvement, and then it stabilized, with a slight decrease in DPO in 2025.
And then lastly, is there an incremental penalty because of weakness in the solar market in 2026? And do you expect 2026 to be a meaningful acquisition year?
I'll address that. In 2025, we reported around $80 million in revenue from our solar business. However, we anticipate that this will decrease to approximately $50 million by the end of this year. Throughout the year, particularly in the first three quarters, we expect a decrease of about $30 million in revenue due to our decision to phase out a specific product in solar that we are deemphasizing. Looking ahead to 2026, we believe it will be a significant year for acquisitions. We have a robust pipeline, as we held back on acquisitions during the last three quarters of 2025 to reduce our leverage. Our year-end leverage was 3.1 times. Although we have not yet reached our target range of 2.5 to 3 times, we are proceeding cautiously. Nevertheless, our pipeline is active, and we are carefully evaluating it. You can anticipate that our acquisition activity in 2026 will return to a more typical level for us, with expected spending on purchases around $200 million to $250 million.
Your next question comes from the line of Patrick Cunningham with Citigroup.
I was hoping you could just dig into sort of the level of confidence in the volume growth in EA 2026, maybe ex solar. I guess, do you expect any normalization of what has been pretty consistently strong outperformance in autos and electronics in '25? Or do you feel like you have a good line of sight in terms of both market growth and new business?
I believe we have a clear view of our progress. The EA team has been empowered, and we saw around 7% organic growth in the fourth quarter, excluding solar, with 5% volume growth. I expect we will maintain this growth trajectory in the long term, excluding solar. For instance, our ND Industries acquisition, which we integrated in 2024, achieved 8% organic growth in 2025. This team knows how to expand the business. While we do face a challenge from the solar segment, which will impact us by $30 million in 2026, our electronics, aerospace, and particularly automotive markets are thriving. In Asia, for example, our automotive business has significantly increased its share in interior trim and grew over 100% in exterior trim last year. Our lighting business also saw 50% growth, and our EV powertrain sector increased by over 40% in 2025. The team has secured a strong market position and is successfully collaborating with customers to drive innovation and contribute to their new product development efforts. Therefore, we are very optimistic about the future of EA.
Got it. That's very helpful. And I wanted to come back to free cash flow. Obviously, conversions, another year below historic averages. I guess, how should we think about long-term free cash flow conversion? And then maybe what should we expect in terms of peak working capital drag and peak CapEx drag associated with Quantum Leap?
Sure. So Patrick, I would say if we think about kind of what we talked about at Investor Day, we would expect that operating cash flow will remain a little muted here in the next couple of years, primarily due to higher working capital associated with Quantum Leap. I think we finished this year at working capital of 15.8% as a percentage of revenue. Our goal is to be below 15%. I would expect that we'll be above 15% this year and possibly in 2027. But our ultimate goal is to get below that. The other benefits we'll see from a working capital standpoint as we complete Quantum Leap by reducing the number of facilities we have, we should be able to take out CapEx related to maintenance capital. So we expected, as we said at Investor Day, maintenance capital, which is roughly $50 million annually, we expect we could eliminate as much as one-third of that. We'll also be completing our SAP implementation at the end of this year. And so that's roughly $20 million of capital that we spend every year that should be reduced dramatically. From a working capital standpoint, as it relates to these initiatives, we talked about the Quantum Leap initiative and how we see that improving inventory management and days on hand by roughly 5 days, which I think is about $15 million. So I do think we'll probably be a little bit lighter from a free cash flow standpoint the next couple of years as we have slightly elevated CapEx and slightly higher working capital related to Quantum Leap. We get through Quantum Leap and the SAP implementation. I think we should see a nice step up.
Your next question comes from the line of Lucas Beaumont with UBS.
I just wanted to go back to the organic growth outlook, if we could. So I mean it looks like first quarter is going to kind of be down low single digits. I assume maybe second quarter is potentially flattish with the benefit of the shift there on Chinese New Year. So I mean, to get to kind of flat for the year, you probably need the second half to kind of be up low single digits there. So I was just wondering if you could kind of walk us through kind of where you see the acceleration coming from across the portfolio to drive that.
Yes. If you look at 2026 overall, you should expect EA to perform organically in the mid-single digits excluding solar, and in the low single digits including the solar business. Meanwhile, the BAS and HHC businesses are expected to be slightly down. However, all our businesses will show positive performance in 2026, indicating that the changes will mostly come from volume impacts.
And I think your question, Lucas, around second half versus first half, I think the biggest driver is probably the fact we'll have mostly annualized against the solar decline by the second half, right? So we're kind of up against that the first half, particularly the first quarter becomes less of a headwind, almost no headwind by the second half, fourth quarter. So that's the primary difference.
Great. And then I guess just on the pricing side. So I mean, you mentioned that's going to kind of be in the 50 to 100 basis point range. I mean you're exiting 4Q at a bit over 1%. And I mean it's continued to increase. We're going to kind of have some tougher comps there as we sort of get through the year. And I know there's the continued sort of backdrop of raw materials deflation. So I guess just kind of walk us through how you sort of see that slowing. I mean you mentioned that you're going to kind of potentially go out with some more price too. So I guess, as we move through the year, I guess, how much do you think you can kind of hold that in there with the new initiatives that you've been undertaking?
The pricing strategy is shaped by our planned actions throughout the year, which differ based on business unit and market segment, as well as regional factors at any specific time. Historically, we observe more pricing changes occurring earlier in the year. Our ability to maintain and increase prices throughout the year mainly hinges on two aspects. First, the portfolio mix, as we continue to shift our business towards more differentiated and solution-oriented markets, which is also reflected in our acquisitions. Second, there is a cultural shift at H.B. Fuller, as we increasingly recognize how our technologies enable our customers and account for a minimal portion of their end product costs. This allows us to help them achieve overall cost reductions through our superior, higher-priced products.
And Lucas, just to tie that back to the comment you made around potential for raw material weakness and how does that impact pricing. That's really the primary reason we look at the two together, right? So we believe that we're better forecasters of the two combined than each one individually. Because if the economy were to weaken further and pricing were harder to come by, I think that would create a raw material upside or if raw materials were, let's say, we saw some economic pickup and raw material prices started to move up, I think we could be more aggressive on pricing. So I think we feel good about the pricing and raws together. We feel good about our pricing strategy, but feel particularly good about our ability to predict pricing and raws.
Your next question comes from the line of David Begleiter with Deutsche Bank.
Just in construction, you mentioned the environment is weakening. Is that more a U.S. comment or a European comment?
David, it is both. The construction market has been particularly weak in Europe. And I'm not saying that's not the case here in the U.S., but with the construction of data centers here in the U.S. and our success penetrating that market, we're able to offset some of that commercial construction weakness here that I think others may be feeling.
Understood. And just on the packaging weakness, can you discuss the competitive intensity in that market as volumes decline? And do you think you've maintained your share, i.e., not lost any share in this downward trend?
Sure. So it is a competitive market. It always has been a competitive market. I do think that is becoming more and more intense. And it actually coincides with our portfolio review and our interest in making sure that we are working with the best customers where we can bring the most value, where we can bring innovation, and they're seeking solutions, whereas there are parts of that market where we have deemphasized them kind of organically selected out of some of those spaces. And so yes, it's competitive, but I still feel like we're bringing a lot to the table for those customers. And our service delivery is what makes a difference, that in innovation.
Your next question comes from the line of Jeff Zekauskas with JPMorgan.
I guess just two final questions. When you look at your overall geographic markets, if you exclude the places where you're gaining market share, do you see an acceleration in demand growth in any of your three major regions? Are there green shoots?
Excluding places where we're gaining share, and I'd like to say that we're creating our own green shoots, Jeff, right? But the greatest acceleration that I saw in Q4 was China. China was really exciting because we finally saw a bounce back there that took it to a level that it had historically operated at 2024, Q1 of 2025, et cetera, double-digit organic growth. And what we had seen in Q2 and Q3 was really a pause there, right? While with all of the tariff chaos that occurred, we saw the Chinese manufacturers pull back a little bit. But I don't know if you saw this, China just reported a $1 trillion trade surplus for 2025, which is a record. So they're back on track and shipping to other parts of the world. I think that's why our packaging business did well in China in Q4. And if I had to point to any green shoots, I would say that would be the one.
Okay. And then finally, why do you expect as a base case for your HHC volumes to be down a little bit in 2026?
I expect really continued constraint in the packaging space, Jeff. Our CPG customers, the packaging customers are struggling with affordability in our bigger economies, which are Europe and the U.S. for that business. So I think that in Asia and Latin America, we may see something different. But in the bigger economies, we continue to see that constraint.
Your next question comes from the line of Kevin McCarthy with Vertical Research Partners.
I just had a housekeeping question for you. In your Reg G reconciliation, I think there's a $37.4 million special item related to, as I understood it, two issues, litigation and product claims and also an insurance gain partially offsetting that. Can you unpack that a little bit and help us understand what's going on as well as comment on whether it's a cash item or noncash?
Sure. The number is mainly driven by a legal claim, which is a noncash item for the quarter. It pertains to a product liability legal claim associated with the divested flooring business, totaling around $35 million pretax and approximately $25 million after tax. We recorded a reserve in the fourth quarter that does not account for any potential insurance recovery. However, we believe we have coverage that will cover a significant portion of it, predominantly related to the product liability claim from the divested flooring business.
Your next question comes from the line of David Begleiter with Deutsche Bank.
Just in BAS/BAS in Q1, what do you expect volumes to be down?
So I'd say we probably won't get into that level of detail, but I would say it's probably not dissimilar to Q4. I think we see some of the macro headwinds. We have some of the impact of having the customer gains last year that we've sort of annualized against. So I'd say similar to Q4, David.
That concludes our question-and-answer session. I will now turn the call back over to Celeste Mastin for closing remarks.
Thanks to everyone for joining us today. We look forward to speaking with you again next quarter.
Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect.