RPM International Inc. (RPM) Q4 2012 Earnings Report, Transcript and Summary

Welcome to RPM International Conference Call for the Fiscal 2012 Fourth Quarter and Year End. Today's conference call is being recorded. This call is also being webcast and can be accessed live or replayed on the RPM website at www.rpminc.com. Comments made on this call may include forward-looking statements based on current expectations that involve risks and uncertainties, which could cause actual results to be materially different. For more information on these risks and uncertainties, please review RPM's reports filed with the SEC. During this conference call, references may be made to non-GAAP financial measures. To assist you in understanding these non-GAAP terms, RPM has posted reconciliations to the most directly comparable GAAP financial results on the RPM website. Following today's presentation, there will be a question-and-answer session. [Operator Instructions] At this time, I would like to turn the call over to RPM's Chairman and CEO, Mr. Frank Sullivan, for opening remarks. Please go ahead, sir.

Thank you, Shakwana. Good morning, and welcome to the RPM International Inc. investor call for the fiscal fourth quarter and year ended May 31, 2012. We are conducting our call today from the New York Stock Exchange, where we will hold an analyst and investor luncheon later today. This is the 40th anniversary of RPM releasing its year-end results from New York. At the end of the day today, Dave Reif, President of our Performance Coatings Group and his team will ring the closing bell of the New York Stock Exchange to celebrate their attainment of $1 billion in annual revenues. Many of you know Dave, who is RPM's Chief Financial Officer until he took over leadership of our Performance Coatings Group 10 years ago. At that time, our Performance Coatings Group was approximately $300 million. Through a combination of internal growth, new product development, market share gains, geographic expansion and acquisitions under Dave's leadership, this collection of RPM companies has grown threefold over the last decade. On the call with me this morning are Rusty Gordon, RPM's Vice President and Chief Financial Officer; and Barry Slifstein, our Vice President, Investor Relations and Planning. We are pleased with the strong performance of the RPM companies in our fourth quarter and for our 2012 fiscal year. I'd like to now turn the call over to Barry Slifstein to provide you with details of our fourth quarter results.

Thanks, Frank, and good morning, everyone. Thank you for joining us on today's call. I'll review the results of operations for our fiscal 2012 fourth quarter and touch upon a few May 31, 2012, balance sheet and cash flow items. I'll then turn the call over to Rusty Gordon, RPM's Vice President and Chief Financial Officer, who will discuss RPM's fiscal 2013 outlook. During RPM's fiscal 2012 fourth quarter, consolidated net sales increased 12.2% year-over-year to $1.1 billion, principally due to volume improvement of 7.9%, price increases of 2.7% and acquisition growth of 4.0%. These increases were partially offset by unfavorable foreign exchange of 2.4%. Industrial segment net sales of $724.8 million, which accounted for 66% of total sales, increased 15.8% over last year with volume improvement of 10.8%, price increase of 2.7% and acquisition growth contributing 5.6%, all of which were partially offset by unfavorable foreign exchange of 3.3%. At the Consumer segment, net sales of $377 million increased by 5.9% over the same quarter last year, with 2.9% attributable to unit volume increases, 2.7% from positive price and 1.1% attributable to acquisition growth. Unfavorable foreign exchange of 0.8% partially offset these increases. Our consolidated gross profit increased 10.6% to $460.4 million from $416.4 million last year, principally due to higher sales volumes and price increases. As a percent of net sales, gross profit declined by 60 basis points to 41.8% due to the continuing high cost of raw materials. Consolidated SG&A increased 8.4% to $322.2 million from $297.1 million last year generally due to increases in variable costs associated with higher sales volumes such as compensation, benefits and distribution. Partially offsetting these higher costs was a lower bad debt expense resulting from the Lancaster bankruptcy last year. As a percentage of net sales, SG&A decreased 100 basis points to 29.2% of sales from last year's 30.2% due to increased leverage on higher sales. Earnings before interest and taxes, EBIT, of $139.5 million increased 16.5% from $119.8 million last year due principally to higher sales volumes and improved leverage on SG&A expenses. Partially offsetting these improvements was the continued unfavorable trend of higher raw material costs. As a percentage of net sales, EBIT improved 50 basis points from 12.2% to 12.7%. At the Industrial segment, EBIT increased 28.7% to $90.4 million from $70.3 million a year ago, driven by increase in sales of 15.8% and improved leverage on SG&A expenses. Consumer segment EBIT increased 12.5% to $60.3 million from $53.6 million last year, driven by higher sales volume and lower overall SG&A expenses this year due to the $5.6 million bad debt expense associated with the Lancaster bankruptcy last year. Corporate/other expenses of $11.2 million increased $7.1 million from $4.1 million last year due to the benefit last year of favorable insurance reserve adjustments at our captives, which were partially offset by lower environmental, professional services and benefit expenses this year. Interest expense increased from $16.4 million last year to $18.4 million this year, primarily due to the issuance of an additional $150 million in debt in May 2011 and increased borrowings associated with this year's increased acquisition activity. Investment income decreased $3.6 million year-over-year due to $2.8 million in gains on sales of marketable securities last year that did not repeat this year and an increase in other than temporary impairments on marketable securities of $670,000 this year. Our income tax rate of 27.4% for the quarter compared to last year's rate of 31.9%. The tax rate decrease is principally a result of changes in the jurisdictional mix of actual and forecasted earnings, favorable adjustments to valuation allowances associated with foreign tax credit carryforwards and the impact of lower effective tax rates on foreign income. Net income increased 17.7% to $82.6 million compared to last year's $70.2 million. Earnings per share increased 16.7% to $0.63 per share compared to $0.54 per share last year. With regard to the year-to-date results, consolidated net sales increased 11.7% to $3.8 billion from $3.4 billion last year principally due to unit volume improvements of 5.7%, price increases of 2.9% and an acquisition growth of 3.1%. Foreign exchange was neutral on a full year basis. EBIT increased 14.9% to $396.1 million this year from $344.8 million last year due principally to higher sales volumes and improved leverage on SG&A expenses. Partially offsetting these improvements was the continued unfavorable trend of higher raw material cost. Net income increased 14.2% to $215.9 million compared to last year's $189.1 million. Earnings per share increased 13.8% to $1.65 per share this year compared to $1.45 per share last year. And now a quick look at the balance sheet and full year cash flows. Cash from operating activities for the year of $294.9 million increased 23.8% from $238.2 million last year. The improvement was driven by increased earnings and improved working capital turnover. Pension and foreign exchange account for most of the unfavorable change in the other category. They impact other line items as well, netting to a 0 impact on cash flow from operations. Depreciation and amortization expense increased slightly to $73.7 million compared to $72.8 million last year. CapEx of $71.6 million for fiscal 2012 compared to $39.8 million for fiscal 2011, representing an increase of $31.8 million or roughly 80%. Our accounts receivable days sales outstanding improved 4 days from 62.1 days to 58.1 days. And days of inventory improved roughly 5 days from 73.7 days to 68.8 days. Finally, a few comments on our capital structure and overall liquidity. As of May 31, 2012, total debt was basically flat to last year at $1.1 billion. Our net debt to capital ratio was 40.3% at May 31, 2012, compared to 34.8% at May 31, 2011. The increase was attributable to cash paid for acquisitions during the year, combined with an unfavorable adjustment to accumulated other comprehensive income due to the strengthening of the U.S. dollar against other major currencies during the fiscal year and an unfavorable adjustment to other comprehensive income relating to the company's pension plan due to a decline in the discount rate and lower than expected return on plant assets. Our long-term liquidity at May 31, 2012, was $813 million, with $316 million in cash and $497 million available through our bank revolver and AR securitization facilities. Subsequent to year end, RPM renegotiated its $400 million revolving credit agreement maturing in January 2015 and replaced it with a new $600 million facility maturing in June of 2017. The new agreement contains lower facility fees and spreads, reduced our all-in cost from 200 basis points down to 150 basis points. With that, I'll turn the call over to Rusty Gordon.

Thank you, Barry. And I would like to briefly cover our outlook for the 2013 year. First, allow me to break down our expected 2013 sales growth expectations for each of our segments. We would expect sales in the Industrial segment to be up 6% to 10%, where we are encouraged by the recovery in sales and domestic commercial construction. The higher exposure to Europe in this segment is a concern, however. Our businesses are starting the 2013 year with a euro translation rate of $1.24 versus $1.44 at the beginning of the 2012 year. Besides currency, there are a number of other economic challenges to contend with in Europe as well. Fortunately, our sales are heavily weighted towards Northern Europe. In the Consumer segment, sales are expected to increase 5% to 7% as we expect consumer takeaway to improve as a result of housing turnover recovering toward more normalized levels. On the expense side, we will be challenged in 2 areas in 2013 versus 2012. The first of these is pension expense. Like many companies, we reduced the discount rate on our pension liabilities by one percentage point in May. This is expected to cause a $10-plus million increase in pension expense for 2013. Another potentially unfavorable comparison for 2013 is our effective tax rate. Clearly, 2012 was an extraordinary year, and a return to our more normal historical tax rate of 31% to 32% will result in additional tax expense of $8 million to $10 million in 2013. Let me move now to margins. Due to recent reductions in most of the key raw materials that we purchase, we believe that 2013 is the year that we see some gross margin recovery. After we turn our higher cost inventory, as well as the stepped-up inventory from the Viapol acquisition early in this fiscal year, margins should stabilize and start to finally recover. Speaking of Viapol, we expect this acquisition to be accretive for the rest of the 2013 year after step-up and other acquisition-related costs are incurred in the first quarter. In summary, we are planning on another year of record sales and earnings at RPM. Although we face uncertainty in Europe, as well as in our own country due to the November election and expiration of certain tax cuts at year end, we are anticipating sales and earnings to increase between 5% and 10%. We expect to continue our momentum in gaining market share and expanding geographically. Another driver of this growth is coming from our recently accelerated acquisition program, which is a key component of our plan to reach $5 billion in sales by 2015. Many of these acquisitions are helping to diversify our geographic presence, such as the recently announced Viapol transaction, adding $85 million of annualized sales. This concludes our formal remarks, and we now are pleased to answer your questions.

[Operator Instructions] Your first question comes from the line of Kevin McCarthy, representing Bank of America Merrill Lynch.

I was wondering if you could comment on what your raw material cost experience was on a year-over-year basis in the fiscal fourth quarter and then looking ahead what your outlook would be for fiscal 2013, please.

On a year-over-year basis, in Q4, we saw again some deterioration in our Consumer business, relatively flat performance in our Industrial businesses. Remember, we are on a FIFO inventory accounting. So typically, we have about a 3-month lag in relationship to the benefits of -- or detriment of changing raw material prices. For 2013, we fully expect to see gross margins improve in both of our segments, and we are experiencing in the early part of this new fiscal year the first significant raw material cost declines that we've seen in a couple years.

Just as a quick follow-up on that subject, are you seeing any relief yet in TiO2? I know you don't buy quite as much as some of the larger architectural coatings producers, but I think you have some for DAP, and we're starting to hear about potential for sequential cost relief with some $0.05 to $0.10 type declines in the third quarter. Are you seeing any of that yet?

Yes, and very much in line with what you're talking about, and it's really the first decline in TiO2 costs in a couple years after a few years of robust multiyear price increases.

Okay. That's helpful. And then a second question, Frank, on Viapol, a decent-sized bet, I guess, you're making on the Brazilian market there. Can you remind us how large your presence is in Brazil, taking into account the $85 million in sales that you're adding there? And then maybe a comment on what margins -- associated margins would be with the acquisition and your outlook on building materials for Brazil.

Sure. In Brazil, from one year to the next, our business before Viapol might be $5 million or $10 million driven by project work. Viapol, at current currency exchange rates is about $85 million in annualized sales. Its margin profile, while we don't provide margin profiles on specific business units, is certainly consistent with the RPM averages and it's a great platform. They're in waterproofing, caulks and sealants, concrete admixtures. About 75% of their business goes into commercial and industrial markets. 25% of their business is sold into builder marts. There's about 25,000 and growing kind of builder mart outlets, and they sell into about 5,000 of them, and that penetration is increasing. So we think over time, with a very strong management team and a real strong asset base and distribution that Viapol can be the base not only for our Building Solutions Group and Euclid Chemical products, but also for other RPM businesses and product lines.

And your next question comes from the line of John McNulty representing Credit Suisse. John P. McNulty - Crédit Suisse AG, Research Division: Just 2 questions or I guess 2 related questions. When you think about uses for cash in 2013, first, can you give us kind of what you're thinking on the CapEx side, but also on the accelerated M&A front, because it does sound -- it does seem like you've been -- you have started to get more aggressive? So I guess how should we be thinking about M&A in 2013 and the uses of cash for that? And then also in terms of bandwidth, how many acquisitions do you think you can actually handle at any given one time during 2013?

Yes, that's a great question, the tail end there. This past year, we acquired 6 businesses. Viapol, that was in fiscal '12 starting with a $5 million MultiSpec product line, which was kind of a unique product. It can be completely integrated into Rust-Oleum. And we would expect that, that integration and leverage across Rust-Oleum's distribution would allow that $5 million product line. While not material to RPM, when you do something like that, and you can enhance the bottom line and double or triple the sales volume over time, that really helps. And so I think we have a lot of capacity at our businesses, particularly in our Consumer businesses that do product line acquisitions like that. And then the question about capacity to do deals is really around our group structure. And so certainly, 1 or 2 per year at the different groups is something that we would have the capacity to do, which means we could probably handle anywhere from 6 to 10 acquisitions depending on their size, location and whether or not their product lines are freestanding businesses. Keep in mind, Viapol is a good example. We are integrating that into RPM's cash management backing system. Over the early months, we will get them involved in our planning process, our raw material purchasing activities and things like that. But the beauty of our acquisition philosophy with a business like Viapol is they were a very successful, good margin, growing business with a strong management team. Post the acquisition by RPM, they are a very successful, growing just fine without our help, business. And so we don't make big bets that generally require a lot of integration to make the transaction successful. And as it relates to kind of our pipeline, like a lot of companies, we came out of the recession building up cash and balance sheet capacity. At the same time, we really tried to rev up our direct activities with privately held and family-run businesses in a broader geography. And those activities have been successful, evidenced by HiChem that was done in Australia, Viapol in Brazil. And so I would expect in the next 12 to 24 months, you'll see a similar number of transactions. It's always hard to predict if and when an acquisition will get done. But certainly, our activity levels have been pretty good.

Your next question comes from the line of Rosemarie Morbelli, representing Gabelli & Company. Rosemarie J. Morbelli - Gabelli & Company, Inc.: Could you -- regarding raw material costs stabilizing and actually declining, in addition to that, however, you do have demand slowing. So have customers already asked for price concessions? And how confident are you that you can hold your gross margin? And actually, I think I heard Rusty talked about the gross margin being lower in the first quarter and then picking up later on in the year. Could you please talk about that?

I don't know, obviously, what the gross margin in the first quarter will be. What I can tell you is we'll have some onetime hits in our Industrial segment in relationship to the Viapol transaction and inventory step-up, and then the rest of it really depends upon the answer to your first question. We have relatively wide guidance for sales and earnings growth for the year, and that's based upon some concerns about what we're seeing in Europe, which represents about 20% of our sales, as well as reports of kind of slowing growth in North America related to, I would guess, uncertainty around the election as opposed to economic activity. So what that means is we are certainly seeing raw material cost improvement today. And if we can generate revenue growth at the higher end of our range, you will see nice leverage to our bottom line. And so the real challenge for the year is what happens with revenue growth and volumes. The dynamics, long term, in the U.S. relative to improvement in new home construction and commercial construction, we see as continuing. Nothing huge there, but it's a positive forward momentum for another year. We see Consumer segment takeaway getting back to kind of normal levels of mid single digit, and then it's really a question of what happens globally. Rosemarie J. Morbelli - Gabelli & Company, Inc.: And when you look at -- talking about your guidance, you gave the same one for both categories, sales and income. Do you still think that you could have a higher growth in the bottom line than you will in the top line based on what you are looking at and what you just talked about?

If revenues come in at the higher end of our range then we will have higher income and higher leverage to our bottom line than what is reflected in that guidance at the EBIT level. Keep in mind we're facing some headwinds in the corporate/other. Our pension expense year-over-year is up about $11 million. This is associated or related to the lower discount rate. We'll also have some other higher corporate expense related to health care and other issues. And then the last comment is that we don't expect the 28% tax rate for the year. We would expect to be in the more 31% to 32% range, which has been typical of us. So at the EBIT level, if we are at the higher end of the sales range, you will definitely see good leverage to the bottom line, and then that will somewhat be hindered to net income on the factors I just mentioned.

Your next question comes from the line of Ivan Marcuse, representing KeyBanc Capital.

If you have -- I know acquisition costs tend to be fairly lumpy on a quarter-to-quarter basis. How much were there in this quarter? And then when you look out at the first quarter with the Brazilian acquisition, how much in costs will be incurred there? And how much of a difference will that be versus the cost that ran through the P&L last year?

We haven't provided and won't provide specific detail on cost on specific deals. I can tell you that for the 2012 fiscal year, our acquisition transaction expense was about $7.5 million. That was across 6 deals, all kind of small to medium sized. That was about twice what it was the year before. And so I would anticipate, including our expense at Viapol, that our acquisition expenses would be somewhere in that $3.5 million to $7.5 million range.

Great, and then...

And that's in total for the year.

Got you. And then if you look at -- your businesses have been fairly resilient. Even through the last recession there’s been more maintenance and repair. What businesses are you seeing sort of companies being more cautious on spending? Is that specific to like roofing or is it generally across the board? And then on top of that, the European business has also been fairly resilient. Is there a certain sector or region where you're seeing sort of maybe a little bit more caution than you were seeing in the third quarter?

Let me answer that related to our 2 segments. Our Consumer segment, as far as we can tell, is about 90% driven by home maintenance, repair and redecorating. And we see that back to kind of this historic norm of middle single digit consumer takeaway and do think that that's resilient. And unless there's some return to the 2008, 2009 economic challenges, that, that should be just good, steady growth accentuated by some new products and/or small acquisitions. On the Industrial side, about 70% of our revenues are maintenance, repair and remodeling. So both of those facts really answer part of your question in relationship to our company's resilience. As Rusty highlighted, the vast majority of our business in Europe, which is a little more than 20% of our total revenues, is in Northern Europe, and the largest portion of it is in Germany. I think our second largest geographic exposure or country exposure would be the U.K. We are concerned about what we're seeing there in terms of slowdown in a number of our European businesses. And obviously, to the extent that the euro continues to deteriorate, that will negatively impact all of our results as they're translated back in U.S. dollars whether or not the underlying core business has some positive sales and earnings growth or in some cases, which we're already seeing, some deterioration in their performance. So those are the key factors as it relates to how we think about the coming year. But most of our business is maintenance and repair, and we think that we'll fare better than many of our peers in relationship to that.

Great, and then one last question is -- and within your outlook or your sales guidance, how much of that is volume? And then what's your assumption for euro for the year?

Sure. Our assumption for euros for the year is basically at current spot rates. It's hard for us to guess where the euro will go. And so if there is significant further deterioration in the euro, some of that is captured within this 5% to 10% range. And so if we have that, I think you'll see us perhaps at the lower end of the range depending on the magnitude of that. The last comment I would make is that we are seeing continuing positive momentum in the new construction portion of our business, which is principally North American as we see residential, which impacts us a little bit, and commercial, which impacts us more, continuing to show positive momentum for another year.

Your next question comes from the line of Jeff Zekauskas, representing JPMorgan. Silke Kueck-Valdes - JP Morgan Chase & Co, Research Division: This is Silke Kueck for Jeff. I've a couple of questions. The first is a question of clarification. The Industrial segment sales growth guidance of 6% to 10%, does that include Viapol or this is just purely organic?

That does not include Viapol. That includes the core business as of May 31, which did have some marginal year-over-year acquisition impact from some of the transactions that we did in 2012, but it does not include Viapol. Silke Kueck-Valdes - JP Morgan Chase & Co, Research Division: Okay. And it's on an organic basis, meaning the sales growth guidance also does not include currencies, correct?

That's correct. I think the range between 6% to 10% hopefully captures the downside on the euro. The vast majority of our European exposure is in our Industrial sector. Silke Kueck-Valdes - JP Morgan Chase & Co, Research Division: And does the EPS guidance of 5% to 10% growth include Viapol?

No, it does not. Silke Kueck-Valdes - JP Morgan Chase & Co, Research Division: It does not, okay. So any additional earnings growth that you, I don't know, expect from Viapol is something in the neighborhood of, I don't know, $85 million. Is it similar in margin to the Industrial business, currently?

I think that's correct. We haven't disclosed specifically the contribution of Viapol on the bottom line other than to say that it will be dilutive to earnings on a net and EPS basis in the first quarter as a result of inventory step-up and the expensing of acquisition cost. And it should be accretive to our results for the balance of the year. Silke Kueck-Valdes - JP Morgan Chase & Co, Research Division: By as much as $0.05 or that's too positive?

We have not articulated that. Silke Kueck-Valdes - JP Morgan Chase & Co, Research Division: Okay. The last question on Viapol that I have is are there any cash outlays associated with the charges to the Viapol acquisition? Are there any cash-related expenses? The inventory step-up seems to be a noncash item, but I don't know if there are also any cash-related costs.

No, the only cash-related expenses are the due diligence and deal expenses, all of which are real cash expenses and will be expensed in the first quarter. And then on a go-forward basis other than the purchase price, it will be a normal RPM operating company. We expect probably a higher than RPM average investment in capital spending given some of the plans we have for that with new product areas of existing RPM product lines, as well as the growth rate at Viapol, which continues in the early months as part of RPM to certainly be better than the revenue growth range we provided for the 2013 fiscal year. Silke Kueck-Valdes - JP Morgan Chase & Co, Research Division: That's helpful. If I can ask one question on the Industrial business. There was very nice volume growth in the quarter, 10.8%. Can you discuss how fast the U.S. business grew, what happened to the European business, and then how that change may reflect the June and July period?

Sure, that's a good question, and it’ll give you a sense of the strength in North America, as well as some of the developing parts of the world that are, on a small base, growing pretty quickly for us. So in the fourth quarter, on a net-net basis across all our businesses in Industrial, the contribution to sales and earnings growth in the quarter from our European operations was relatively flat. And so most of the growth came from both North America, as well as higher rates of growth in places like South America and India but again on a relatively small basis. Silke Kueck-Valdes - JP Morgan Chase & Co, Research Division: And as growth in Europe turned negative in June and July, has it slowed even further?

It's a mixed bag. We have a number of businesses that are still putting up positive sales and earnings growth. It has a little bit to do with their geography and, I think, more to do with the markets they serve in relationship to maintenance, repair, remodeling. In some cases, for instance, our USL business part of our Performance Coatings Group, is a leader in deck coatings and expansion joints that go into highway and bridge markets that are government supported. Then there are a number of businesses, particularly in the southern part of Europe, that are experiencing in our first quarter already negative sales and earnings versus the prior year.

Your next question comes from the line of Saul Ludwig, representing Northcoast Research.

The corporate expenses averaged about $11.5 million a quarter as they went through this year; a little wiggle in some quarters, but that was about the average. And you talked about pension. I guess pension gets charged into corporate. You talked about some other pressures on the corporate number. Should we be looking at something like $14 million, $15 million? What should we be thinking about corporate expense on a quarterly basis?

Saul, yes, you're thinking on the right guidelines. We've said in the past $11 million to $12 million is kind of a good range to use. And now with the increased pension, you're talking in the right range.

So more like $14 million, $15 million?

Yes.

Okay. And another question, on the Industrial side, Frank, this was really interesting. When you look at your volume as you went through fiscal '12 kind of rough terms, first quarter was up 2%, second quarter was up 3%, fourth (sic) [third] quarter was up 5%, and the fourth quarter was up almost 11%, averaged up 5% for the year, but that was increasing momentum in the Industrial side as you went through the year. Are you suggesting that's sort of going to decelerate now because of, in part, Europe is a negative but you also talked about new construction being a positive? How should we think about volume in the Industrial sector as we go through 2013 considering the very strong progress that you made through 2012?

I think that the 2 factors that are changing as we go into 2013 are Europe, which up until the spring of this past year was part of that good forward momentum. And we are losing that forward momentum both as a result of a number of our businesses starting to see some deterioration and the impact of the declining euro on our translated results. So that's one piece. The other piece is that there is still growing but we're sensing some lessening of decision-making really around big investments in North America. And I think that's temporary related to the elections as much as anything and some of our larger clients in the industrial sector as it relates to industrial capital spending and expansion projects putting some things on hold until more clarity is provided by the election. That's our best guess. I mean, there is no economic situations that we see. We see capital spending continuing to rise. We see a marginal but steadily improving construction environment. So the underlying fundamentals still seem to be there, although there is a little bit of a temporary hiccough on some major projects.

What percentage of your Industrial business is now non-North America because Viapol is a big chunk in Brazil, which is facing its own economic challenges and also a depreciating currency, and then you're adding Europe? So what percentage of Industrial is now non-North America?

I would guess, Saul, it's somewhere in the neighborhood of 35% to 40%. It's about 50-50 with our Performance Coatings Group, which, as I mentioned in the call earlier, hit $1 billion in revenues this year, and probably about 70-30 in our Building Solutions Group.

Okay, great. And then the final question and this is a fourth quarter question. The Consumer business, when you add back in the bad debt from last year, had relatively flat earnings even though your revenues were up about 6%. Was that sort of disappointing or surprising to you that, that group didn't perform better?

No. I mean, if you recall back to this call last year and our communications throughout the year, we had planned on and actually executed on a number of spending initiatives in terms of expanding sales forces, new product introductions and really spending the dollars in SG&A. We had a challenge in raw material cost versus pricing in our Consumer business, which really hadn't turned around until the last couple of months. And so was that disappointing? Yes. Is it improving now? It -- the answer to that is yes as well.

I know you published this in your annual report, but do you know how handy -- in Consumer, how much your SG&A expenditures were up versus a year ago? Or it actually may have been down because last year, it included the bad debt but -- so what was the decline in SG&A expense in the Consumer segment in the fourth quarter?

I don't know the answer to that off the top of my head.

Yes, Saul, you had $87.5 million last year for the quarter. That included the $5.6 million for Lancaster. So if you back that out, the Consumer segment was probably up about $4 million.

Up $4 million versus a year ago, which we should take $5.5 million off of?

No, that's adjusted for the $5.5 million.

Yes.

Your next question comes from the line of Carly Mattson, representing Goldman Sachs.

So in the press release, there is a little bit mentioned about M&A and the fact that available credit and the ability to tap capital markets could enable RPM to more aggressively pursue acquisitions, which I know you spoke a bit about earlier on the call. So can you maybe just frame though -- does this suggest that you're seeing more sizable acquisition opportunities? And how much debt would RPM be willing to add for the right opportunities?

Sure. We've had a pretty good track record over the last 30 years of pursuing acquisitions with good discipline, good strategic fits. And something I learned from my father was he was never interested in understanding how cheaply he could buy a business. He was interested in understanding how much we could pay for a business that worked for RPM. So when we think about acquisitions, we look to price transactions as aggressively as we can, keeping in mind that it's got to meet our profit and return criteria. And so we stick to that discipline. We have pursued larger transactions in the past. And if some larger transactions pop up and they're a good strategic fit and we can get them at the right price, we would pursue them. But in every instance, we figured out how to fund those transactions in the capital markets in a manner that would allow us to maintain our investment grade rating. And so our debt/cap ratio over the last 30 years has ranged from the mid 30s up to 60%. And as we got to the higher end of that range, whether it was some type of convertible security or perhaps equity issued in relationship to a specific transaction, we figured out how to fund deals with elements of capital cost that fit our return criteria on a specific deal and allowed us to maintain our financial flexibility. So our goal is not to go out and do big deals. We'd rather stand at the plate and hit singles and doubles, and I think we have a track record that proves we're really good at that. Hopefully, every once in a while, when you're hitting a double, you get a home run, whether that's in a higher return than you expected or a larger transaction that we can get at the right price. So hopefully, that kind of history and commentary answers your question.

So there's no really peak leverage or a certain amount of debt that you view as being optimal for the company with a particular acquisition? Or I guess, maybe rightly [ph] said, have you had conversations with the rating agencies that suggested that if you add debt above a certain level that, that would jeopardize the investment grade rating that you've mentioned you're committed to?

Yes. There is nothing in our wheelhouse per se that would raise those issues today. But again, we have kept an eye on the ratios that we believe we need to maintain our investment grade rating. We have long believed that kind of a middle BBB is the right space for us in terms of ideal capital cost, and we will continue to manage our balance sheet and capital structure towards that goal. And if we bump into a larger transaction, as we have in the past, we will figure out how to fund that transaction in a manner that, on a long-term basis, allows us to continue to focus on and maintain that goal, both for our capital structure and what we believe to be the ideal capital cost situation.

Okay. Could I ask one follow-up from that?

Sure.

You just mentioned mid BBB. So should we think of RPM looking to delever and move towards a mid BBB rating over the next while? Or was that more of just a funding level mid BBB?

I think that's more of a long-term goal of ours. I think in the interim, we're going to continue to look for small- and medium-sized acquisitions and we will fund them out of cash flow, available cash balances or the available credit that we have today.

Your next question comes from the line of Greg Halter, representing Great Lakes Review.

Well, I wonder if you could speak to the new product performance, as well as market share gains that you may be seeing in certain -- with certain retailers or across some of your product lines.

Sure, with 50 independent business units, it's hard to be expansive about all the places that that's happening. So let me just give you a few examples. In our Stonhard flooring business, a little more than a year ago, we introduced a new decorative product range to go after commercial markets like showrooms. Liquid Elements is the brand name, and it's off to a good start. It's a totally organic effort. And if we could get more traction there, and we had a good start this past year, it literally put Stonhard in a decorative commercial flooring space, which has got huge market potential that they have not previously served. On the Consumer side, 2 interesting categories of note at Rust-Oleum: One is their transformation products. They started with a countertop transformation product they introduced a couple years ago. Last year, they introduced a kitchen cabinet transformation product. And both of these have had good consumer takeaway. They're on their way from a standing start being introduced 2 years ago, in one case in the last year, to what we hope will be in the next year to a $40 million category. Another new product introduction is LeakSeal. It's a product that almost -- it's an aerosolized product that almost instantly can seal leaks in plumbing applications and, you name it, almost any application where you need a quick leak seal. That product was introduced and, in its first 6 months, did almost $10 million. And we will be introducing new colors this year and expect that very strong growth to continue. And I could go on and on. Those are just a couple examples from Consumer and Industrial, but as we highlighted in the comment earlier, and 2013, will be the same way unless and until economic conditions dictate that we adjust. We plan another year of investing in new product introductions, expanding our distribution and our sales forces, as well as our marketing and advertising dollars around these new product introductions.

Okay, and there is not a corporate R&D effort, is there? That's done at each one of the independent businesses.

That's correct. Our model is with a relatively lean corporate staff that focuses on banking, finance, cash management, raw material purchasing, planning, risk management and all the duties or responsibilities that we have as a public company. We are firm believers in independent sales, marketing, customer service, tech service and product development, and we're not believers in centralizing that. We've got salespeople and R&D people in all of our 50 different businesses every day, trying to come up with either new products or be responsive to problem-solving in the marketplace.

Okay. And I didn't hear your commentary on CapEx spending thoughts for fiscal '13 and also wonder if the plants you had slated for, I think, Nevada and the Middle East have opened and how they're doing.

We will be open in Nevada, which is a new Carboline plant, this fiscal year. And I would expect mid part of the year we will be opening another Carboline plant. It's all set. We're outfitting it, equipment-wise, in Saudi Arabia. And so both of those should be active in fiscal '13. CapEx for the year should be up probably in the $10 million to $15 million range over the $71 million we spent in fiscal '12.

All right. And one last one, any comments on how Kemrock is doing?

Kemrock is an Indian business that we own 22% of, roughly. The business is continuing to grow well. Their growth is slowing down a little bit, as is a lot of the growth in India in relationship to a lot of tightening in the Indian banking and capital markets, as well as deterioration of the rupee. But the Kemrock business, as you'll recall, is not consolidated into RPM. We reflect that on an equity basis. And I would think for planning purposes, this year, it might contribute on an equity basis a couple pennies per share. Remember, last year, in the second quarter, we had a catch-up that added about $0.04 a share, which was a onetime catch-up once we went over the 20% range and had to catch up prior year's accumulated earnings that were not reflected in our income statement once we went to the equity method of accounting.

Your next question comes from the line of Edward Yang, representing Oppenheimer. Edward H. Yang - Oppenheimer & Co. Inc., Research Division: Industrial volume growth of 10.8%, just coming back to this, it really stood out because it seems contrary to what the end markets are doing or what I'm hearing other industrial companies saying in terms of deceleration. So was there anything lumpy in there, any restocking into the channel or any sales force incentives that might have influenced that number in the fourth quarter?

No. I mean, when you think about the Industrial businesses we have, they are very diversified across many market segments and channels and becoming more geographically diversified. The big trends that we talked about for the last couple of years, I can put some numbers on. So when you think about energy, that's driving about 10% of our RPM's consolidated growth. All of that is in our Industrial segment and that continues to expand, whether it's in the North Sea or the Middle East, where we just commented on adding a new facility. Actually, things like frac-ing is driving some pipe coating for our Carboline business. Our Fibergrate business is doing some backer rods or...

Sucker rods.

Sucker rods -- I'm not...

Containment pans.

And a lot of containment pans there. And so energy, in general, is only 10% of our consolidated sales, obviously, a bigger portion of Industrial and continuing to grow at higher rates than what we're seeing. Infrastructure spending is probably about 15% of our consolidated sales. That's hit or miss, here and there. Some of it's driven by government spending. And then energy efficiency or high performance buildings is driving about 20% of our consolidated sales, both in North America but also in parts of Europe and Germany and Northern Europe, where a lot of the high performance building attributes are becoming coat. And so we think that that's one of the reasons why we've had some better performance in certain parts of Europe that seems to be a little bit in contrast to the underlying economic fundamentals. We are expecting a slower growth rate in our Industrial segment in 2013, principally associated with the difficult European economies as well as the deterioration of the euro. Edward H. Yang - Oppenheimer & Co. Inc., Research Division: Okay. And you mentioned -- I wasn't aware that you were on a FIFO accounting. Is that correct?

That's correct. So we probably -- we have about 70 days of inventory on a consolidated basis. Obviously, it's different places, but it takes us a little more than 2 months to translate raw material changes into our P&L. And so we will catch up a little bit later than industry peers that report their inventory or account for their inventory on a -- or on a LIFO basis. Edward H. Yang - Oppenheimer & Co. Inc., Research Division: So on a FIFO basis, as raw materials actually come down initially, doesn't that hurt your margins because you're flowing through historical cost raw materials?

Yes, it does. So you could go and look at spot rates today, and those spot rates are actually what we're purchasing at. But what's flowing through our P&L is the capitalized cost of the inventory that we acquired, let's say, 70 days ago. Edward H. Yang - Oppenheimer & Co. Inc., Research Division: Okay. Then just a clarification on the guidance again. The numbers don't include Viapol, which is a positive, but they also exclude currency impacts, which is a negative. Is that kind of a fair characterization?

Generally, yes. I think we are trying to capture some further negative in the euro in the wide range of 5% to 10%. And so I hope that we do have some cushion on the bottom end of that range that anticipates further deterioration of the European economy and the euro. If there is a wipeout coming, then that's certainly not reflected in our results or anyone else's results. But keep in mind, Europe is about 20% of our consolidated sales. The 80% of our other sales are principally North America and faster growing parts of the developing world.

Your next question comes from the line of Richard O'Reilly, representing Revere Associates.

A couple of quick questions. Your guidance for the Consumer business in the new year that the takeaway is improving about in the mid single digits, does that compare with like the 10% overall growth the segment had in fiscal '12? Is that how we should conceptualize that?

No. We're -- historically, our Consumer business is relatively recession-resistant. And from one year to the next, the takeaway in our unit volume is somewhere in the 4% to 6% range. You can add price to that, but we would expect more moderate traditional takeaway and growth rates in our Consumer business in 2013 than what we experienced in 2012. 2012 was again somewhat of a recovery year, we think, and we would expect somewhat more moderate rates of growth, consistent with the traditional kind of levels of growth in that business of middle single digit.

Okay, and then seasonally, you had a very strong third quarter in the Consumer business due to the mild weather.

Correct.

We shouldn't be looking for that. That should be a tough comparison. That should be a fairly difficult comparison.

That's a accurate statement. We had, particularly in our Consumer business, I think, a -- some business in February that normally would have been put off until March or April because of the mild winter weather across the U.S. And so next year's third quarter comparison will be the biggest challenge that we'll face just quarter-by-quarter-by-quarter as we go through the year.

Okay. And second, in your comments about raw materials, are you seeing declines in, let's say, packaging and containers, the nonchemical stuff that you consume?

A little bit. Not anything robust, but we're seeing some moderate improvements in pricing on packaging, some better improvements in certain chemical raw materials. And we are hopeful that those will lead to both a better gross margin and if we can maintain our top line, some nice leverage to the EBIT line.

You have a follow-up question from the line of Jeff Zekauskas, representing JPMorgan. Silke Kueck-Valdes - JP Morgan Chase & Co, Research Division: I wanted to just clarify a comment you made on TiO2. So other paint companies have commented that their prices haven't really gone up any further but they're sort of like stable on a year-over-year basis or still up. Is that the way that you see it or you think it effectively stepped down from, I don't know, the beginning of the year?

We have experienced a price decline in recent TiO2 purchases versus where we were, but... Silke Kueck-Valdes - JP Morgan Chase & Co, Research Division: Versus where you were when?

Versus where we were a quarter or 2 ago. So as you know, TiO2 has been going up very aggressively for the last couple of years. And so we are seeing improvements or declines in the prices that we're paying for TiO2 versus where we were 4 or 6 months ago, but we are nowhere near TiO2 levels of what we might have been paying 2 or 3 years ago.

At this time, there are no further audio questions. I would like to turn the call back over to management for closing remarks.

Thank you very much for your participation on our call today. We look forward to hosting a number of equity analysts and investors at our luncheon here at the New York Stock Exchange and would encourage other analysts or investors to participate in this annual event. I'd like to congratulate all of the RPM associates worldwide for their performance in fiscal 2012, and we look forward to reporting to all of you our continued growth in sales and earnings for our new 2013 fiscal year. Thank you, and have a great day.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, and have a great day.