RPM International Inc. (RPM) Q1 2013 Earnings Report, Transcript and Summary

Welcome to RPM International's Conference Call for the Fiscal 2013 First Quarter. Today's 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 measures on the RPM website. [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, Erin. Good morning, and thank you for your participation on the RPM investor call today. With me on the call are Rusty Gordon, RPM's Vice President and Chief Financial Officer; and Barry Slifstein, RPM's Vice President, Investor Relations and Planning. I would like to begin our call this morning by providing some perspective on the charges we took in the first quarter in relationship to a write-down of our Kemrock investment and related to a restructuring in our Building Solutions Group global roofing division. When I became CEO in 2002, RPM was a $1.9 billion in revenues business with more than 90% of that sales base generated in North America. One of our long-term strategic goals was to grow RPM on a more global basis. Over the last decade, we have more than doubled our revenue base and taken the percentage of our sales outside of North America from roughly 10% to 32% today, an increase over that decade of more than six fold. In more recent years, that focus has included expanding in the developing world. That backdrop should put into perspective the charges we have taken today. Kemrock has been a manufacturing partner for various RPM operating companies for the last 8 years. Over that period of time, its principal promoter, Kalpesh Patel, has been able to grow the business from roughly $8 million in annual revenues to $180 million in revenues last year. Over that period of time, we also accumulated a 23% ownership interest in the Indian market publicly traded Kemrock. As a result of a dramatic change in the credit and banking markets last year, which impacted Kemrock's debt-heavy capital structure, with interest rates that increased from 8% to 14%, a significant deterioration in the rupee-dollar exchange rate and a related decline in Kemrock's stock from roughly INR 500 per share in April of 2012 to a little more than INR 100 per share at our first quarter period end of August 31, 2012, we felt it appropriate to take a write-down of our investment. Accordingly, we recorded a onetime noncash charge of $45.3 million with a write-down of our investment in Kemrock Industries Limited based on these deteriorating Indian economic conditions and their impact on Kemrock's stock price and operating performance. Related to our international expansion efforts, the global roofing division of our Building Solutions Group undertook an effort to expand internationally, with a focus on roofing contracting outside its core North American market. Those efforts over the last 4 to 5 years have not proven successful, as we have not been able to obtain profit margins in this international roofing contracting business that meets our targets. Accordingly, the global roofing division is taking a onetime charge of $11 million to reflect expenses incurred associated with the decision to wind down and exit the unprofitable contracting business outside of North America in order to better focus the company's successful core roofing business on its U.S. and Canadian core marketplaces. Aside from these onetime charges, our underlying businesses are generally performing well. Our consumer businesses continue to show strong sales growth from successful new product introductions and market share gains with strong leverage to the bottom line. In our industrial segment, despite being challenged by poor results in Europe associated with a difficult economic environment and a significant negative foreign exchange translation from the euro back to the U.S. dollar, most all of our non-European industrial businesses are performing at double-digit growth rates with good leverage to the bottom line. This solid underlying performance, in combination with the positive impact expected from the acquisitions we completed in 2012 and the acquisitions completed in the first 4 months of fiscal 2013, put RPM on track to exceed the sales and earnings guidance we communicated at the beginning of this year, excluding the impact of the onetime charges just reviewed and taken in the first quarter. I would now like to turn the call over to Barry Slifstein, RPM's Vice President of Investor Relations and Planning, to provide you details on the quarter.

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 2013 first quarter on an as-adjusted basis excluding the onetime adjustments and touch upon a few August 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 the outlook for the remainder of fiscal 2013. On an as-adjusted basis, consolidated net sales increased 6.5% year-over-year to $1.05 billion, principally due to volume improvement of 2.8%, price increases of 2.0% and acquisition growth of 6.0%. These increases were partially offset by unfavorable foreign exchange of 4.3%. Our industrial segment net sales of $706.2 million accounted for 67% of total sales increased 5.9% over last year with volume improvement of 1.6%, price increase of 1.8% and acquisition growth contributing 8.1%, all of which were partially offset by unfavorable foreign exchange of 5.6%. At the consumer segment, net sales of $343.4 million increased by 7.7% over the same quarter last year, with 5.3% attributable to unit volume increases, 2.4% from positive price and 1.6% attributable to acquisition growth. Unfavorable foreign exchange of 1.6% partially offset these increases. Our consolidated gross profit increased 7.2% to $439.3 million from $409.6 million last year, principally due to higher sales volumes and price increases, which recovered margin lost in the earlier quarters due to material inflation. As a percent of net sales, gross profit increased from 41.5% last year to 41.9% this year, representing an increase of 40 basis points. Consolidated SG&A increased 9.6% to $300.4 million from $273.9 million last year due to increases in variable distribution and compensation costs, pension and acquisition costs, in combination with an insurance reimbursement last year that did not repeat this year. Earnings before interest and taxes, EBIT, of $139.8 million increased 2.4% from $136.5 million last year, due primarily to higher corporate/other costs. At the industrial segment, EBIT increased 5.6% to $97.7 million from $92.5 million a year ago. Consumer segment EBIT increased 14.2% to $58.8 million from $51.5 million last year, driven by higher sales volume and improved SG&A leverage. Corporate/other expenses of $16.6 million increased $9.1 million from $7.5 million last year, primarily due to the benefit last year of an insurance reimbursement that did not repeat this year, combined with higher compensation, pension and acquisition-related expenses this year. Interest expense increased from $17.8 million last year to $18.4 million this year, primarily due to borrowings associated with this year's increased acquisition activity. Investment income increased $7.0 million year-over-year, primarily due to an increase of $5.5 million in gains on sales of marketable securities. Our income tax rate of 29.6% for the quarter is relatively flat to last year's rate of 29.8%. Net income increased 10.4% to $84.8 million compared to last year's $76.8 million. EPS increased 8.5% to $0.64 per share compared to $0.59 per share last year. Now a quick look at the balance sheet and cash flows. Cash from operating activities of $17.7 million increased from $7.5 million last year. The improvement was driven by an increase in other accrued liabilities of $32.9 million, driven by the timing of tax payments and deferred income, which were partially offset by unfavorable net uses of working capital of $23.5 million. Depreciation and amortization expense was $19.4 million compared to $18.1 million last year, CapEx of $12.7 million for the first quarter compared to $4.9 million last year. Our accounts receivable day sales outstanding was relatively flat to last year at 62.1 days. Our days of inventory was relatively flat to last year at 77.1 days. Finally, a few comments on our capital structure and overall liquidity. As of August 31, 2012, total debt was $1.2 billion compared to last year at $1.1 billion. Our net debt-to-capital ratio was 43.5% at August 31, 2012 compared to 36.0% at August 31, 2011. The increase was attributable to a lower ending cash balance and higher long-term debt, both of which were attributable to recent acquisitions. Our long-term liquidity at August 31, 2012 was $871 million, with $257 million in cash and $614 million available through our bank revolver and AR securitization facilities. In June 2012, RPM renegotiated its $400 million revolving credit agreement maturing in January 2015 and replaced it with a new $600 million facility maturing June 2017. The new agreement contains lower facility fees and spreads, reducing 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. Based upon our most recent outlook, we are increasing our FY 2013 guidance for sales and earnings. During our year-end conference call on July 23, we anticipated 5% to 10% growth in both sales and earnings. Now we expect sales to grow by 8% to 10% and earnings to grow by 9% to 12% prior to onetime adjustments, or an EPS range of $1.80 to $1.85 per share. Our reasoning behind the improved outlook is the following: Number one, our margin recovery is beginning to take hold. Excluding onetime adjustments in the first quarter, our gross margin improved 40 basis points versus the prior year, as we were able to sell-through our higher cost inventory; Number two, the sliding euro stabilized since our July conference call, and now we expect more favorable foreign currency comparisons during the back half of this fiscal year; Number three, we expect that the impact of acquisitions completed so far in fiscal 2013 will be accretive to earnings in the second half of this fiscal year in addition to the momentum coming from acquisitions completed during FY 2012; Number four, due to improving trends in U.S. residential markets and continued success by our consumer companies, we now expect consumer segment sales growth of 8% to 10% this year. This is higher than the 5% to 7% growth which we expected in our July conference call; Number five, in spite of the challenges already mentioned in Europe and in our roofing division of the Building Solutions Group, we are holding to our original guidance for industrial segment sales growth at 6% to 10% this year. This concludes our formal remarks, and we now are pleased to answer your questions.

[Operator Instructions] Your first question comes from the line of John McNulty from Crédit Suisse. Abhiram Rajendran - Crédit Suisse AG, Research Division: This is actually Abi Rajendran calling in for John. So a quick question on raw materials. Could you talk a little bit about what raw materials did sequentially and year-over-year in the quarter and your outlook for the rest of fiscal 2013?

As Rusty commented, excluding the onetime charges, we saw about a 50 basis point improvement in gross margins year-over-year. We are continuing to see improvement between our cost and price on raw materials. We are on a FIFO inventory accounting basis, so you typically see the impact of raw materials up or down a quarter or so later than most of our peers who are in LIFO. So we are experiencing pretty good improvements now which will be reflected in our results in the coming quarters. Abhiram Rajendran - Crédit Suisse AG, Research Division: Got it. And then also specific to TiO2, last quarter you noted a decline in some of your TiO2 costs. I guess looking through the end of the calendar year, do you expect stable prices for TiO2 through year end or potentially further declines?

At the moment, TiO2 has been on a declining trend, but it's still higher compared to last year at this time. And as far as the outlook goes, I don't have any comment on that. Abhiram Rajendran - Crédit Suisse AG, Research Division: Okay, got it. And then last quick one, if I may. So there's recently been a fairly sizable acrylic asset outage out in Asia. Do you expect to see any impact to your acrylic purchasing from this? Or do you think the impact is kind of more limited to that specific region?

We're not hearing of any impact here and I think given some of the sluggishness in demand and what we're seeing in price trends, we would expect to see continued improvements in raw materials as it relates to our prime margin or gross margin, although we'll certainly keep an eye on that. But it's not on our radar screen in terms of what we're seeing here in North America and we are not an acrylic purchaser in Asia.

Your next question comes from the line of Kevin McCarthy from Bank of America Merrill Lynch.

This is Alex Yefremov for Kevin. Frank, a follow-up question on Kemrock. Could you maybe describe a little bit more what kind of the end markets deteriorated for that business? And also what are the prospects of potential recovery in the business?

The situation at Kemrock is really not one of end markets. It's really one of capital structure and liquidity. Indian manufacturers not unique to Kemrock face their own version of the U.S. 2008 and 2009 with a massive rise in interest costs for floating rate capital structures, which a lot of good-sized Indian companies had through the banking system. Interest rates in Kemrock's case went from 6 -- 8% to 14% in 6 months. And the vast majority of their debt was floating rate bank debt. The rupee declined pretty significantly and like a lot of Indian manufacturers, this is true of Kemrock. A lot of their raw material costs were procured from overseas and paid for in dollars or euros, so that negatively impacted their margins. And as a result of that, they essentially had a liquidity crisis. And then their stock, which was thinly traded, started being driven down. To the best of our knowledge, the business has stabilized at about $100 million to $120 million. The challenge this year for them was sufficient cash flow to meet the orders they had in hand. Their end-use markets are FRP grating into all types of structures. They're a leader in the Indian market for FRP and resin wound pipe for water installation and water movement, still a very good business. And they are leaders in blade manufacturing for windmills in India, and that business is still going well. There's still a lot of orders there for wind farms that are on the books and paid for with major wind producers for the Indian marketplace. And so all of those businesses remain strong. The final issue that Kemrock had that really was their biggest challenge, which I think is a significant hope for recovery in one form or another is, and kind of what put them in this circumstance was a license from the Indian government to produce carbon fiber. They put $100 million into a new carbon fiber facility that was not yet up and running, and so that's really what put their capital structure in jeopardy, and then unfortunate circumstances really put them in a tough spot. So the long and short of that is, is that their business is stabilized, and they are pursuing various strategic alternatives around their business, as well as around certain of their divisions.

So Frank, do you see opportunity for RPM to help them improve their capital structure?

I wouldn't speculate about the future of Kemrock other than the principal promoter there is a guy named Kalpesh Patel, who in 8 years took his business from $8 million to $180 million, did not have the type of financial sophistication with his CFO staff, which has been changed to avoid a kind of an unforeseen circumstance relative to the market, but he is not a guy given the challenge he's faced that I would count out given what he's proven he can do with his business over the last 8 years. And so I guess that's as much as I would leave it. We still have a 23% ownership in that business, and I think we're hopeful that they'll get through this challenge, and it will be interesting to see what the final chapters of Kemrock look like in the coming years.

Okay. And maybe turning to North America. In your press release, you mentioned weakness in the roofing business. Maybe can you talk about that, what's driving that and also how -- what were the prospects of improvement there?

There's really 3 components to the $11 million charge that we took. One is to wrap up unprofitable contracts. The Tremco Roofing business has been highly successful in the U.S. and Canada, has the best sales force in the industry and for many years and we will continue to do contracting work where we are applying Tremco materials. Their international expansion efforts really were led by contracting because we were not manufacturing materials overseas. It did not prove to meet our profit targets. We're unwinding those projects. We had a U.K. office that was the center of specifications and projects and contracting. That is being closed. And the former president of the roofing business retired in May and agreed to stay on in a consulting capacity, and we have a new leader of that business who is part of driving the changes.

So if I may, a follow-up. There's no weakness in north -- in the core North American business, because that's how I read the press release?

There are aspects of our contracting work that in a division that was doing contracting around buildings and roofs, unrelated directly to the application of Tremco Roofing materials, and much of that is being wound down as well, and that's what's resulting in declining revenues in general, that piece and the -- mostly the global roofing piece was resulting in declining revenues in the Tremco or the Building Solutions Group Roofing division through 4 months.

And your next question comes from the line of Rosemarie Morbelli from Gabelli & Company. Rosemarie J. Morbelli - Gabelli & Company, Inc.: Just following up on the roofing business. If I understand properly, you are out of the European business or at least you are on your way out. Did you also have some bad contracts in Canada? I think you've touched on North America, but is that mostly Canada? Is that mostly U.S.? Or do you have some of those poor contracts in both regions?

The contracting work that we're exiting globally is overseas. Some of the biggest contracts we're exiting in the coming months and the cost of doing that are reflected in the charge are in India. Our Canadian business remains strong. Our U.S. business remains strong. The core roofing division, which is a manufacturer, and in many instances an applicator of Tremco Roofing materials is doing quite well. As I said before, we've got the best sales force in the industry, and we've got a lot of strength in our core North American operations. And we ventured into some different contracting areas and some different areas internationally that we are in the process of exiting. Rosemarie J. Morbelli - Gabelli & Company, Inc.: So Frank, when you look at industrial, have you -- have we seen on the top line the entire hit from all of those revenues that you are not going to have going forward? Or are we going to see a small piece until we anniversary, meaning next first quarter?

I think there may be some continued exiting of certain contracting business in the coming quarters, but the core material business is doing fine. And the biggest challenge that we have in our industrial sector is Europe. Our European sales and earnings are off slightly from last year on a standard basis. And then when translated back into the U.S. dollar, particularly in this first quarter, we really got clobbered by the translation rate. We actually see in the second half of the year, if our actual underlying performance of flat to down a couple of percent in Europe, which we think is better than some of the underlying economics, if that holds, we should have better performance in the second half of the year because the real hit between the euro and the dollar happened in the spring of last year. But this time last year, you had a dollar-euro exchange rate of $1.40, $1.45, and today it's $1.25 and that is a -- the disparity hurt us the most here in the first quarter. It will hurt us a little bit in the second quarter. Then the second half of the year, unless there is another big downdraft in the euro from current rates, year-over-year we should be fine. Rosemarie J. Morbelli - Gabelli & Company, Inc.: Even in the third quarter when it is touch and go in terms of whether you make money or not?

As it relates to the euro-dollar relationship, I think the answer to that is yes, unless there is another significant deterioration of the euro beyond where it is today. Rosemarie J. Morbelli - Gabelli & Company, Inc.: Okay, and then...

Which is not anything that we anticipate. Rosemarie J. Morbelli - Gabelli & Company, Inc.: Okay. All right, no, I appreciate it. On the CapEx where -- and it's a lot in the first quarter, what kind of projects? Is it a question of timing or are you starting at some new projects, which somehow I had missed?

I think it's a question of timing, as well as some projects that led in from the fourth quarter of last year. In total, I think, you look at our cash from operations in the first quarter, we had a good year, solidly ahead of last year and that's despite a big jump in CapEx for the quarter. And on a full year basis, we anticipate about $85 million of CapEx for fiscal '13 versus what I recall of about $74 million last year. Rosemarie J. Morbelli - Gabelli & Company, Inc.: Okay. And then lastly, if I may. It looks as though you have a substantial adjustment on the EPS last year. I mean yes, because if I look at my numbers, which were straight out of your adjusted numbers, your EPS was $0.53 last year, not $0.59. Could you -- maybe Rusty can tell me where the difference is?

I think that may have come from the conference call last year. I mean, one of the things that I think hides an actually stronger quarter than what we've even discussed here on an adjusted basis was referenced in Barry Slifstein's call. This year in corporate/other, we have $5 million of year-over-year additional pension expense. And last year, we had a $5 million insurance recovery from a plant fire of the year before. So you've got about a $10 million negative swing year-over-year. So Rosemarie, the only -- and we did reference the onetime insurance recovery last year on the conference call. Rosemarie J. Morbelli - Gabelli & Company, Inc.: So I probably have that out?

Yes, the only thing I can imagine is maybe you backed that out of your results in comparison. And I think that's accurate. Again, last year's first quarter had a $5 million onetime gain in corporate/other. And this year's first quarter does not have that. And on top of that, we had substantially higher pension expense driven by a lower discount rate. I might add that the net effect of those 2 items on the first quarter is about $0.05 per share.

And your next question comes from the line of Ivan Marcuse from KeyBanc Capital Markets.

Real quick and so just to get your -- I know you've described it in detail, but I think I'm still a little confused. In your release, you said your North American business, base business in roofing continues to be down year-over-year. That's just the contract business; it's not the core manufacturing business.

I think that's correct. What we are exiting principally is international contracting, and because we weren't manufacturing overseas, a lot of what we were doing was leading with contracting, and there is -- there are some pieces of contracting really unrelated to the application of the core Tremco Roofing materials that had been growing as part of the Tremco business in North America that we are also exiting over time.

Why didn’t the European business work out for you in roofing? It seems to be serving your warehouse being probably a highly repair and replacement type of market.

First of all, it's not just Europe. The biggest project wind-ups we have are in India. But in other areas, the headquarters was in the U.K. because that's the site of a lot of international engineering and architectural firms as it relates to being specified on projects. In a number of instances, because our manufacturing for roofing is in North America, the U.S. and Canada, we were taking contracts but we were utilizing private label material from other suppliers to build the business. And I think a combination of our experience, or lack thereof, and just the financial performance over the 4 or 5 years that we've been doing this suggests to us that this was a swing and a miss and it's a strategy that we're ending.

Got you. How big is the roofing business now? Is it about $100 million?

The total roofing business is about $400 million...

$400 million.

And the vast majority of that is in North America.

Great. And then on the raw material cost, so it's being on FIFO, just the sort of the price cost spread on a year-over-year basis for margins should be higher on a year-over-year going to the second quarter because I think lower raw materials are continuing to flow through and your pricing tends not to really do all that much? Is that how to look about it?

We're expecting stable raw material costs in the second quarter, so we're expecting to continue to claw back and get some improved margins in the second quarter.

Great. And then in the consumer segment, you continue to make -- introduce new products and it looks like you're gaining share in certain places. Going to the second quarter, do you still expect the volume sort of to be up in this mid-single digits? Or we're going up again to tough comparably via the channel fill last year about this time. So how do you look about it? How do you look at it in the near term?

I think you should expect to see pretty solid growth there. Some of that's from acquisitions. We completed the acquisition of HiChem with Rust-Oleum at the end of last year. It's an Australian-based producer of spray paints, mostly into automotive, and there's a lot of excitement around broadening out their product line with other Rust-Oleum products. The new products that have been introduced the last couple of years are having good sell-through. A lot of the kitchen cabinet, kitchen countertop refurbishment products are selling well. And you're seeing more spending on small project redecoration and maintenance and repair than we've had in the last couple of years. I think people are more comfortable in investing in their homes. You're seeing housing turnover pick up modestly which is good. And then the Synta acquisition that we just announced last week is an excellent product line. The developers of that product are staying to run that business as part of Rust-Oleum. It is a deck and concrete lines of restoration products that are growing double-digits. And so a combination of new product introductions by Rust-Oleum and acquisitions that are growing at a faster rate even in the core Rust-Oleum business gives us good confidence there. The DAP patch and repair and caulk and sealant business is a just steady eddy type of business in terms of home maintenance and repair and is doing well but not growing at the same rate as Rust-Oleum's product lines.

And then just 2 quick, this is actually probably for Rusty. In the other expense or other income, what was that $7 million? And then on the cash flow, in the investing, what was that $17 million inflow of cash?

Okay. First of all on the income statement, can you help me find that?

Well, in other income you had -- it's at $6.9 million or $7 million.

Ivan, that's gains on sales of marketable securities year-over-year, about $5.5 million is the bulk of that number.

Okay. And then in the cash flow statement, you had a $17 million inflow in investing. What was that related to?

$17 million from investing activities. Yes, some of that is related to our acquisition program, and it's related to some proceeds that have yet to be dispersed. And that's related to the line -- 3 lines above it saying acquisitions of businesses. It's actually a portion of that, those proceeds from acquisitions that are going to be dispersed later on.

. And your next question comes from the line of Edward Yang from Oppenheimer. Edward H. Yang - Oppenheimer & Co. Inc., Research Division: Rusty went through a number of items in terms of the revised guidance and like to just better understand the math. The prior guidance, if I look at revenue, was up 5% to 10%. That did not include acquisitions year-to-date. Including the acquisitions year-to-date, I would think that, that adds about 6% to your annual revenue. So where is -- does the revised guidance include the acquisitions, the $225 million in revenue that you've made year-to-date? And where are some of the puts and takes in terms of why is the revenue increase less than the acquisition revenue-related increase?

The revised guidance does include acquisitions completed so far this fiscal year, so that is definitely included in our sales growth of 8% to 10% growth this year. I mean some of the trends that go the other way, of course, are in Europe and in terms of roofing, as we've discussed earlier, those trends are definitely weighing down somewhat on these results. But nevertheless, we think we can safely assume we'll increase sales guidance, thanks to the good acquisitions we've completed this fiscal year.

We have a little bit north of $700 million of our revenues in Europe. And as we indicated, the underlying strength of our non-European industrial business is actually pretty good. The Europe business on a group basis geographically is seeing sales slightly down from last year on a standard basis. Obviously, that's hurting earnings as well. And then on a translated basis, in the first quarter and a little bit into the second quarter, we anticipate we're looking at significant year-over-year drops in the high single-digit range. So what this forecast really does is serve to overcome that. The forecast for revenue growth in the industrial segment is still rather wide. A part of that is not as uncertainty in relationship to what's happening in Europe. Edward H. Yang - Oppenheimer & Co. Inc., Research Division: Okay. So with the industrial revenue growth of 6% to 10%, how much of that would be organic volume growth?

Right now, organic growth's in the low single-digits. And again, it's a company by company. If you're Carboline or you're Stonehard, you are growing at double-digits. If you're the Stonehard operation or the Carboline operation in Europe, you are not. So it's really geographical in nature. And on a consolidated basis for the industrial segment, we're looking at a relatively modest low single-digits of unit volume growth across what we would expect for our industrial segment this year because of that geographic mix and then acquisitions. And you can add all that up and, Ed, you're right, it comes to a higher number and you've got to take 4 or 5 points off it because of negative foreign exchange translation. Edward H. Yang - Oppenheimer & Co. Inc., Research Division: Okay. And staying with industrial volumes again, that did slow from the prior quarter which was very strong, and it sounds like if you're looking for low single-digits, that should still be somewhat of an improvement from what you saw in the first quarter. But the comps get tougher on a year-over-year basis. So are there parts of the business that were weaker in the first quarter that you expect to pick up as the year progresses?

Not really. Again, I think the big story in the first quarter in industrial is the geographic story as opposed to a business story. We have some business units that are based in Europe and do most of their business in Europe, so those businesses are having a challenging time. And then as I mentioned, referencing Carboline or Stonehard, we have some businesses that are much more global, and there are regions of the world where they're experiencing high single-digit or low double-digit revenue growth. And then in particular, as it relates to Europe, they're not. And so at this point, it's really more of a geographic story than a different product line story, with the exception of the Global Roofing division.

And your next question comes from the line of Greg Halter from Great Lakes Review.

Obviously, you guys have been in the acquisition market, and there's also, I presume, some step-up on inventory and so forth. Would you kind of venture what those costs were in the quarter?

We haven't disclosed those, but there is step-up and you'll see a little bit of that in the second quarter as well. But in general, you're going to see some strong performance. The Synta, Kirker and Viapol acquisitions, all of which have been completed in this fiscal year, all are experiencing higher growth rates than the core RPM businesses are experiencing over that quarter, and we expect that to continue for different reasons. The construction markets and the infrastructure spending in Brazil is really hitting its stride and while Brazil has had some challenges on global issues related to mining and other things, a strong currency in terms of exports, the Viapol business serves the Brazilian market and a lot of the infrastructure and construction spending, whether it's under the core Brazilian economy or in relationship to the World Cup and the Olympics, that business is doing very well. The Synta business is growing at high double-digit rates before it was part of Rust-Oleum, and we would anticipate some additional ad spending and some synergies with Rust-Oleum that will at least continue that very aggressive growth on a relatively small base of $40 million, but it's doing really well. And then the Kirker business, there was an article in today's Wall Street Journal about nail polish. Kirker is a great traditional RPM company, it operates as part of RPM too, and it's a leader in a high-performing niche. They are one of the largest producers of nail enamels and one of the most sophisticated producers in relationship to color and trends, and that business is growing nicely as well. So we're pretty excited about the deals that we have completed at the beginning of this year, and they will be accretive to sales and earnings growth certainly in the second half of the year and into 2014 and beyond.

Sounds good and I can certainly concur on the nail polish, given the bottles in my household with my wife and daughter. With your comments on geography, can you comment on how Latin America, Asia Pacific and Middle Eastern businesses did in the quarter?

The Latin America business is growing very nicely for us. On a core basis, it's up in the low single-digits. And on a consolidated basis, obviously, it's up big because of the Viapol business. But even excluding Viapol, we're looking at double-digit growth there on our business. If you look at the Middle East, it's relatively -- kind of Middle East Africa is relatively flat to last year. We think that the performance there is better. A big slug of that, probably as much as 1/3 of that, is our Performance Coatings Group operation in South Africa, and their business was disrupted for a period of months because of these mining strikes. And so we think the underlying performance there is better. In the Asia Pacific region, we're seeing declines not dissimilar to Europe. But the fact of the matter is, is that we don't have a very big presence in the Asia Pacific market, and so the impact on RPM on a consolidated basis really isn't much.

All right. And back on the M&A side and its impact on the year-over-year numbers on inventory and receivables, any comment on what the core numbers would be, either up or down for those 2 categories?

On inventory and receivables, our DSO and inventory days are fairly flat to last year, so I think everything's in line with prior year and our run rate.

All right. And Rust-Oleum's business in the U.K., which I think is newer, I should say, just wondering how that is performing for you?

In general, it's performing well. But the U.K. is part of that European challenge. I think we're doing better in the U.K. than we are in continental Europe, but still not particularly well. The European markets in continental Europe in particular, where we have a real strong business base in our industrial sector and our Building Solutions Group continues to be weak. The U.K. is flat to modestly down, and I think it's in relationship to what's happening in Europe, as well as some post-Olympic malaise.

And one last one for you. I think on the last call, you had mentioned some temporary stalling given uncertainty in front of elections and so forth. I believe that was in the U.S. or North America. Just wonder how that played out in the quarter and what you expect with another month to go before the election?

I certainly think that our industrial segment results could have been better in the quarter if the underlying economic sense in the U.S. were better. I still think and we are still seeing what we believe to be holdups in investment and in projects in the United States that hopefully are related to the election. But as somebody mentioned earlier, we had some challenging comps last year. And there is some delay in projects and in certain sectors, it seems like people sitting on their hands in relationship to the election and what's coming. Hopefully, the American people will make the right choice and whoever's in office will be making the right decisions to kind of keep this rather tender economic recovery going and improving.

And your next question comes from the line of Kevin Hocevar from Northcoast Research.

In terms of the acquisitions that you made, I know you don't give company-specific information on any one of the acquisitions, but in the second quarter, between Viapol, Kirker and Synta, do you expect these to be accretive or dilutive or maybe Viapol be accretive, the rest are offset. How do you expect that to go in the second quarter?

Yes, I think, certainly, Viapol is, in the second quarter, past the inventory step-up and the acquisition expense hits that would have flowed through SG&A, so we would expect them to be part of our growth story obviously and begin to contribute after-tax to earnings. There's a little bit of a higher capital cost structure to that. In the second quarter, we will have some inventory step-up, and we will have to expense through SG&A all the deal transaction costs associated with Synta and with Kirker and I believe in both instances, there was a broker fee associated with that which will be a part of our expenses. In the second half of the year, if both of those businesses continue the growth that they're on, they will both be accretive to earnings, particularly in relationship to the incremental funding costs on a revolver where our all-in costs were about 2%.

Okay. And in terms of the consumer volume growth that you had in the first quarter, the 5-or-so percent, how much of that was from the market share gains versus movements just in line with industry?

I don't have a really good answer to that, but I can speculate a little bit. And in this sense new product introductions, to a certain extent, are market share gains because very often, you are putting new products in the shelf space, sometimes at the expense of your own products and often at the expense of competitors' products. So it's a combination of when you introduce new products and they are seeing good retail takeaway, whose cheese did you move? Did you move your own products out and typically you've replaced a lower-ticket item, lower-margin, lower-moving products with better-selling products to the benefit of both the retail partner and our consumer businesses. But in many instances, you're replacing competitor products on the shelf, which again are typically slower-moving, lower-margin type products. So it's a combination of both. I don't know if that answers your question appropriately but beyond that, there's just the normal give-and-take in the primer category or the spray paint category, and in those 2, for instance, we have continued to maintain, or in some instances, gained share at different accounts.

Okay. And finally, just 2 quick financial questions. Just in the industrial segment, how did the SG&A compare to last year? And also on the corporate expense, is that $16.6 million a decent run rate for the rest of the year?

I think the corporate expense is a decent run rate for the rest of the year, and the biggest item in there is going to be higher pension expense year-over-year.

Yes, probably about $3 million a quarter of higher pension expense. And of course, the corporate SG&A varies with DLCs and acquisition costs, which in the first quarter, were probably higher than average due to the large level of activity going on.

And then on the industrial SG&A, I think some of what you're seeing there is in relationship to the unwinding clause in contracting and the Tremco stuff in the international markets.

Okay. Actually on an adjusted basis, it was up -- excluding those, it was up kind of -- is it kind of in line -- SG&A as a percent of sales kind of in line with historical standards or was it up a little bit?

The answer to that is yes. Again, it's a geographic story in relationship to good leverage on non-European industrial businesses that are seeing some improvement in gross margins and seeing SG&A as a percent of sales drop because we're growing and poor leverage on European-based businesses because you've got flat or declining revenues on a standard basis.

And your next question comes from the line of Carly Mattson from Goldman Sachs.

I have a quick question on acquisition opportunities going forward. It seems like there's been a couple of comments over the past quarter or 2 regarding the debt-to-cap ratios appear low and with capital markets accommodative, that RPM could potentially fund acquisitions in part with debt and maybe new debt issuance. So can you maybe just talk to what level of leverage you would be comfortable with increasing to how RPM views its ratings and really the current M&A environment and the size of potential opportunities that RPM could be willing to consider?

Sure. Yes, the 2 things I'd point to is: number one, our cash flow has been sufficient in the last couple of years, as well as our cash balances to really cover, up until this first quarter, the vast majority of what's been a couple of hundred million dollars of acquisitions in 2011 and fiscal 2012. The biggest hit to our capital structure in 2012 was a lowering of the discount rate in relationship to our pension plan and other comprehensive income hit in relationship to the deterioration of the euro. So it was not a debt issue or an acquisition issue when you look at our balance sheet at May 31, 2012. I'm proud of the great cash generation our business has generated and our utilization of cash balances and generated cash to fund our acquisitions up until this quarter. On a go-forward basis, I would anticipate that at least in the next year or 2, we'd be looking at smaller product lines that we can integrate. And we're also looking hard, believe it or not, for opportunities in Europe because valuations have come down now in line with lower performance. And in places like Europe, the Middle East, Africa, for instance, we have essentially trapped cash that if we can find the right transactions that make sense for us, we can put that cash to use better than having it sit in a pool of cash management system in Europe or parts of the Middle East. So that's how we think about acquisitions going forward. The acquisitions that we have completed now are deals that we've worked on for a long time. The Viapol deal was in the works for 3 years. The Kirker transaction was in the works for 18 months. The Synta one was relatively quick. I think it transpired over the last 6 or 8 months. But that's probably more in line of what you would see in the next year or 2, transactions that are smaller, that we can add value to with an existing operation.

So the comments regarding just low debt-to-cap ratios, it's not implying necessarily that RPM would look to bring new debt issuance?

I don't know about that. I mean, I think if we look at bringing new debt issuance into the market in the next couple of quarters, that would be in conjunction with discussions with our board. Certainly, we have, post-Synta and post-Kirker, a few hundred million dollars of revolver debt. And we also have a $200 million bond with a 6.25% coupon that's maturing in December of 2013. So I think it's highly likely at some point, in light of that maturing bond and sitting on albeit floating rate, attractive floating rate 5-year revolver that isn't due until 2017, I do think it's likely between those 2 elements that we would at least look at some type of debt -- longer-term debt issuance sometime in the coming quarters.

And your next question comes from the line of Greg Halter from Great Lakes Review.

I know no one's asked for a while and it's kind of been out of the limelight, if that's what you want to call it. But relative to the asbestos situation, if there's any update you could provide, we'd appreciate it.

Sure. The Bondex SPHC process is continuing in line with our expectations. The judge has set for January of 2013 an estimation case. The Bondex SPHC team has been working for 2 years really targeting that. My impression is, is that the asbestos lawyers on the other side of this process have been trying to avoid that. And I do think it will be a critical point for this. I have long believed, going back years, that the real liability for Bondex should be in relationship to their miniscule market share. The fact that their total product sales were less than $6 million in their history, and that this was a hardware store-only product line that didn't have the type of commercial and industrial exposure that is the real cause of asbestos disease. I have also long contended that it would drove our costs and claims to a hard-to-imagine 60%-plus market share of mesotheliomas was a suborning of perjury fraud scheme in the tort system. So it will be interesting to see if this case progresses, whether a fact-based presentation around market share and our product versus something that's based on tort system fraud prevails. I think as the facts come out and the 2 sides position themselves, it's our hope that we are in a venue that will look at economic facts, look at the real facts that we've long talked about and that the elements of this process will lead to a consensual resolution of this situation. So we are on target and the next step is really this January 2013 estimation case based on what the judge has set. And it's our expectation it will go forward, but it is possible, as it's been the case the last 2 years, that things can be delayed or put off to the future.

All right. Is that case being heard in Cleveland, in Ohio?

I believe the case will be heard in Federal Bankruptcy Court in Delaware.

And your next question comes from the line of Rosemarie Morbelli from Gabelli & Company. Rosemarie J. Morbelli - Gabelli & Company, Inc.: Just quickly, Rusty. Could you give us the amount of the cash sitting overseas and that would be available for acquisitions in Europe, Middle East, and South Africa?

Yes. Of our cash, very little of it is in the U.S. Most of it's in foreign countries and most of that is overseas, yes. Rosemarie J. Morbelli - Gabelli & Company, Inc.: So by most, you mean 80% of the cash on the balance sheet. Is that fair?

Yes, yes, that's good.

[Operator Instructions] Next question comes from the line of Jeff Matthews from RAM Partners.

On acquisition strategies... [Audio Gap] U.S., as you've mentioned early... [Audio Gap] successfully. I'm just curious...

Jeff, you're on a cellphone that's breaking up and it's hard for us to hear. [Technical Difficulty]

Your acquisition strategy... [Audio Gap] By the U.S., and you have a fairly unique acquisition strategy of buying companies, leaving them alone, letting them grow on their own, keeping the cultures. And I'm wondering how your growth outside the U.S. has done in terms of profitability and return on capital and attracting new acquisition candidates versus where you thought you might be when the start of the process?

Sure. The question relates to our acquisition strategy really outside the U.S. It has proven to be very successful in Europe, and it has proven to be very successful in Latin America. Just broadly geographically and particularly given the economic circumstances now, I would say that in terms of margin profitability and returns, we're not seeing, versus our core North American business, the same type of margin profitability or returns in Europe as we speak. A lot of that's circumstantial. And using the U.S. as a base, we are seeing higher margin profitability and better return on capital, for instance, in Latin America. In general, our philosophy is proving to be very successful in Latin and South America and in Europe. It has not proven to be successful in Asia, and I think that's the principal reason why on a global basis, the vast majority of our business is everywhere but Asia. We probably do just less than $100 million in Asia on our -- what this year will be a base of business in excess of $4 billion. I do think that our lack of success there goes exactly to your question around our fundamental operating philosophy and our acquisition philosophy and where has worked and is working and where we have yet to figure out how to match up with the characteristics of that market.

And there are no further questions at this time. I would now like to turn the call over to Frank Sullivan for closing remarks.

Thank you, Erin, and thank you all for your participation on our call this morning. We are excited about the back half of this fiscal year as it relates to our businesses outside of Europe. We do see some relief there assuming that there is no further deterioration in the euro-dollar relationship. We have not been one of those companies that sat on our balance sheet. We have worked, as I indicated on this call, for the last couple of years on some of the acquisitions that we've been successful in completing here in the first part of fiscal '13, and believe that these acquisitions will be nice contributors to sales and earnings growth in the second half of this fiscal year and certainly beyond that. Tomorrow, at 2:00 at the Holiday Inn in Strongsville, Ohio, we will welcome 1,000 RPM shareholders to our Annual Meeting of Shareholders, and we'll review for them our 2012 fiscal year results, our FY '13 first quarter results, as well as the outlook that we provided for you today, and we would welcome as many of you who can make it to our annual meeting. Thank you for your time on our call today and for your investment in RPM. Have a great day.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.