RPM International Inc. (RPM) Q2 2014 Earnings Report, Transcript and Summary

Welcome to RPM International's conference call for the fiscal 2014 second 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] Please note that only financial analysts may be permitted to ask questions. At this time, I'd like to turn the call over to RPM's Chairman and CEO, Mr. Frank Sullivan, for opening remarks. Please go ahead, sir.

Thank you, Leeann. Good morning, and welcome to the RPM International Inc. investor conference call for our 2014 second quarter ended November 30, 2013. On the call with me today are Rusty Gordon, RPM's Vice President and Chief Financial Officer; and Barry Slifstein, RPM's Vice President of Investor Relations and Planning. We are pleased with the strong results generated by the RPM businesses in our 2014 second quarter and the first half of this fiscal year. Before Barry provides financial details on our second quarter results though, I thought it would be appropriate to comment on some of the underlying factors that are driving these results, and the actions and investments that we are making in future growth. Our consumer segment continues to generate very strong sales and earnings results. At Rust-Oleum, this performance is being driven by strong sales of new, unique, higher-margin product lines like LeakSeal and NeverWet. The benefits of leveraging a unique product line in the acquisition of Synta and its Restore brand of products. When we announced the Synta acquisition in September of 2012, we indicated that annualized sales of the acquired business then were approximately $30 million. With stronger marketing and promotions as part of Rust-Oleum and broader distribution, we are now on target to exceed $60 million in annualized sales with the Restore brand of products. Lastly, the Rust-Oleum management team, in response to challenges in their European base of business, last year in the fourth quarter, took action to rationalize their European manufacturing footprint by closing a major facility and moving production to other existing plants. Combined with expense reductions in that region, modest increases in this fiscal year in revenues are resulting in strong bottom line leverage. Kirker, a world leader in fingernail enamel business, acquired in the fall of 2012, continues to generate strong sales and earnings growth at margins somewhat higher than our overall consumer segment averages. Lastly, our DAP product lines are really the only consumer segment product lines impacted by the construction cycles. We're continuing to see solid growth due to new product introductions and the positive impact of the rise in U.S. housing construction. In our industrial segment, last summer we reorganized our former Building Solutions Group by making our Tremco sealant, waterproofing and roofing businesses, and separately our German-based Tremco illbruck businesses, as 2 freestanding divisions reporting directly to RPM. We further realigned our Euclid Chemical group with our Performance Coatings Group. The effect of this action was threefold: number one, to get back to more market-focused and geographically unrestrained business groups; secondly, to streamline cost in what was formerly our largest group; and lastly, in the case of Euclid Chemical, we continue to position this business for geographic expansion. The results of this effort so far, we're seeing improvement in our Tremco Roofing business. We're seeing modest revenue growth in Europe turn into good bottom line leverage, as a result of prior year expense reductions, and have an illbruck leadership team that is very excited about the opportunity to take its portfolio of patented tapes, foams and sealants, serving the energy efficiency market for both new construction and retrofit into markets and geographies outside of its previously Europe-only focus. At Euclid Chemical, we have a strong presence throughout the Americas now as a result of the June 2012 acquisition of Viapol in Brazil. While Viapol continues to generate double-digit sales and earnings growth in their functional currency, we are also spending millions of dollars and growing, to establish manufacturing and technical capabilities and sales forces to organically grow our admixture and polymer flooring product lines in Brazil and the Southern Cone region. While this is pure expense in fiscal 2014, we are excited about the sales and earnings growth potential with these key RPM product lines in this exciting and growing region of the world. More broadly, we are utilizing the realignment of Euclid with our Performance Coatings Group to begin expanding the Euclid Chemical product lines in other parts of the world, for instance, in the Middle East and South Africa by leveraging the existing Performance Coating Group assets in these regions for the distribution and ultimately manufacture of certain Euclid Chemical products. The growth strategies and unique entrepreneurial culture of RPM have allowed us to outperform the broader market, both on a long-term basis as evidenced by our outperformance over the prior decade of both the S&P 500 and our peer group for the 10 years ended May 31, 2013. And in more near-term basis, calendar 2013 where RPM's total shareholder return was 40.4% versus the 2013 S&P 500 TSR of 32.4%. I mentioned our organizational changes and growing investments in light of this performance, as we continue to work to maintain the right balance between investing and internal growth initiatives and smart acquisitions and a focus on leveraging this growth to the bottom line to consistently deliver growing value to RPM's long-term shareholders. I would now like to turn the call over to Barry Slifstein, to provide you with the financial details of our second 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 2014 second quarter, with prior year figures on an as-adjusted basis and then cover some November 30, 2013 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 balance of fiscal 2014. Just to remind everyone, in last year's second quarter, RPM incurred a one-time charge of $10.8 million for the write-down of its remaining equity investment in Kemrock Industries and Exports Limited in India. Using last year's as-adjusted figures, second quarter consolidated net sales of $1.07 billion increased 5.3% year-over-year due to acquisition growth of 0.8% and organic growth of 4.5%, which was predominantly due to higher unit volumes. Included in organic growth was unfavorable foreign currency translation of 0.8%. Industrial segment sales increased 2.6% year-over-year to $708.7 million due to organic growth of 2.2% and acquisition growth of 0.4%. Included in organic growth was unfavorable foreign currency translation of 0.9%. Consumer segment sales increased 11.2% to $362.8 million due to acquisition growth of 1.7% and organic growth of 9.5%, predominantly unit-volume driven. Foreign currency translation, a component of organic sales, was unfavorable 0.6%. Our consolidated gross profit increased 7.8% to $457.9 million from $425.0 million last year, principally due to restructuring activities in fiscal 2013, supply-chain initiatives and continued strong performance from prior year acquisitions, all of which have resulted in the recovery of margin loss in prior years due to material inflation. As a percent of net sales, gross profit increased from 41.8% last year to 42.7% this year, representing an increase of 90 basis points. Consolidated SG&A increased 5.3% to $343 million from $325.8 million last year, due primarily to variable costs associated with increased sales, such as commissions and distribution expenses, as well as higher employee benefits and advertising expenses. These higher costs were partially offset by lower pension, bad debt and M&A expenses. Consolidated earnings before interest and taxes, EBIT, increased 16.0% to $116.4 million from $100.4 million last year due primarily to higher unit-volume sales, especially in the consumer segment, efficiencies gained through plant operations and strong performance from prior year acquisitions. At the industrial segment, EBIT increased 7.4% from last year, primarily due to improved manufacturing conversion efficiencies, partially offset by higher variable selling expenses such as commissions and distribution. Consumer segment EBIT increased 34.0% from last year, driven by higher sales volumes due to new product introductions, continued strengthening residential market and a strong performance from Synta and Kirker, both of which were acquired in September 2012. Corporate/other expenses of $19.2 million increased $2.9 million from last year, primarily due to higher compensation, benefits and professional services expenses, which were partially offset by lower pension and acquisition expenses. Interest expense increased from $19.9 million last year to $20.8 million this year, primarily due to the issuance of a $300 million bond in October 2012. Investment income was $2.0 million for the quarter compared to $1.4 million last year, due primarily to less temporary impairment expense on marketable securities versus last year. Our income tax rate for the second quarter was 29.9% versus the prior year second quarter rate of 30.5%. The change in the quarterly tax rate is primarily due to lower recorded valuation allowances and the changes in the jurisdictional mix of actual and forecasted earnings. Net income increased 21.1% to $63.6 million compared to last year's $52.5 million. Diluted EPS increased 20% to $0.48 per share compared to $0.40 per share last year. With regard to the year-to-date results, consolidated net sales of $2.24 billion increased 8.2% year-over-year due to acquisition growth of 3.6% and organic growth of 4.6%, which was predominantly due to higher unit volumes. Included in organic growth was unfavorable foreign currency translation of 0.6%. Net income increased 21.4% to $166.7 million compared to last year's $137.3 million. Diluted EPS increased 20.2% to $1.25 per share -- $1.25 per share compared to $1.04 per share last year. And now a quick look at the balance sheet and cash flows. Cash from operating activities was $21.8 million compared to $127.6 million last year. The decrease was driven by higher working capital needed to support higher sales volumes in the $61.9 million settlement payment to the General Services Administration during the first quarter of fiscal 2014, which was accrued for in fiscal 2013. Depreciation and amortization expense was $44.9 million compared to $42.2 million last year. CapEx of $34.6 million this year compared to $30.8 million last year. Our accounts receivable DSO was relatively flat to last year at 61 days. Days of inventory increased to 88 days this year compared to 83 days last year in order to support higher unit sales volumes. Finally, a few comments on our capital structure and overall liquidity. As of November 30, 2013, total debt was $1.37 billion compared to last year at $1.42 billion. Our net debt to capital ratio was 46.4% at November 30, 2013 compared to 48.1% at November 30, 2012. Our long-term liquidity at November 30, 2013 was $970 million, with $224 million in cash and $746 million available through our bank revolver and AR securitization facilities. On December 9, 2013, RPM completed the issuance of 205 million 2.25% convertible senior notes due 2020. Substantially all of the net proceeds from the sale were used to repay 200 million in principal amount of unsecured senior notes due December 15, 2013, which carried an interest rate of 6.25%. Following the sale of these notes, virtually all of RPM's total debt is fixed, with an average interest rate approximating 5%. With that, I'll turn the call over to Rusty Gordon.

Thank you, Barry. Our strong second quarter can be attributed to a continuation of the recovery in our gross margins, the second consecutive quarter of significant revenue growth from our European operations, and continued success from our new product introductions. While we lapped the anniversaries of the Kirker and Synta acquisitions in September, these acquisitions continue to exceed our expectations, as does Viapol on a local currency basis, which was also acquired last year. As we look forward, we expect improved leverage as a result of our restructuring last year while our consumer segment continues to deliver strong performance in an improving residential market. Our outlook is muted somewhat by tepid capital spending in commercial construction activity in North America, as well as weakening currencies in certain international markets. As a result of Q2 exceeding our plan, we are increasing guidance for the second time this year. We now believe that the consumer segment will grow sales at an 8% to 10% rate, which is higher than the 6% to 8% growth previously communicated. Primarily as a result of stronger performance in our consumer segment, we are increasing our previous guidance of 10% to 14% EPS growth, or $2 to $2.07 per diluted share, to a range of 13% to 15% EPS growth, or $2.05 to $2.10 per diluted share, including the impact from the convertible bond issuance on December 9, 2013. Although the convertible bond had no impact on EPS in the second quarter, it will be slightly dilutive to our original earnings guidance for the year. This concludes our formal remarks, and we are now pleased to answer your questions.

[Operator Instructions] Your first question comes from the line of Ghansham Panjabi from Robert W. Baird. And the next question is from Mike Ritzenthaler from Piper Jaffray.

Can you describe how the extremely cold weather has affected the seasonality in your industrial businesses historically?

Historically, extremely cold weather has challenged our results on a near-term event basis, and I think this third quarter will be no exception. Likewise, when we've had very warm third quarter, it's really helped us. And so I think we're on target for sales and earnings gains in the quarter, but they may be muted somewhat depending on when this cold snap breaks. The other comment I would make about that is within our consumer segment, we've had real strong performance out of internally developed products like NeverWet and LeakSeal and an acquired product in the case of Synta. Try as we might, a lot of our products, and in the case of those 3, each of them, are principally used in the exterior, so they will have little or no impact on our results in the third quarter, but we would expect them to be nice contributors to our spring results.

Okay, so you would say that the weather component in the consumer business is muted, if I'm hearing you correctly?

Well, no. I think that the -- some of the areas of strength for us have been in products that are principally utilized in exterior. So they will accentuate our seasonality in RPM's consolidated but also in our consumer business, and then they will again be contributors to growth in the spring months.

Sure. Yes, that makes sense.

But, yes, the cold weather is never our friend, but I think that's circumstantial, as opposed to a long-term trend.

Sure. Absolutely. Can you talk a little bit about your growth prospects in Latin America, how your managers in the region are responding to softer economic activity? It doesn't sound from your prepared remarks as if order patterns are a concern in fixed currencies.

I think that's correct. Our biggest presence in Latin America has been with our Euclid Chemical group, and we've had great leaders down there that have grown that business over more than a decade throughout Mexico, Colombia, Chile and into a little bit of Argentina and Brazil. With the acquisition in the fall of 2012 of Viapol, it really gives Euclid as strong a presence in construction chemicals as anybody in the Americas from Canada, U.S. all the way through Mexico and the rest of South and Latin America. But we're continuing to see solid growth. We're not the biggest player, and so some of its market share gains and just growth expectations other than what GDPs might be doing. Viapol, in particular, despite some of the ups and downs in Brazil is continuing to show solid growth. It doesn't translate back into a solid growth in our results as we would like to see because of the weakness of the real versus the dollar, but they are growing double digits in sales and earnings on a functional currency basis. And I mentioned some of the spending we're doing. We're spending kind of middle-single millions of dollars and growing with Viapol and their management team and the leaders of our Euclid Chemical Latin America business to kind of finalize manufacturing, the technical capabilities and build up a sales force specifically focused on admixtures and polymer flooring, which are 2 global leading product lines for RPM, but product lines that Viapol was not producing or selling to any extent in the Brazilian marketplace. So we -- that's a process that will continue in the coming year, and we're excited about the opportunities there. So right now, Latin America for us is a source of strength when we think about our business regionally.

Great. Just one last one if I could sneak one in on free cash. Even if we add the one-time settlement payment in 1Q, free cash for the first half was still down 30% or so. And it sounds like that year-over-year delta is predominantly attributable to cash tied up in working capital. Are there efficiencies that you're working on within inventory management and the distribution system that could be optimized? Or are you more or less satisfied with how the system is working?

We're not satisfied with our investment in working capital as a percent of sales and look to continually improve that. I think that when you look at the significant improvement over the last couple of years in cash from operations and free cash flow, very meaningful 20%, 30%, 40% last couple of years, some of that improvement we got at, and that seems to have stopped. We've also had very significant revenue growth. Just in this quarter, the organic growth in consumer is north of 10% if you exclude the impact of foreign exchange and north of 3% in industrial. So that's driving it. But there needs to be another level of working capital improvement that we get to.

And your next question comes from Kevin McCarthy from Bank of America Merrill Lynch.

This is Alex Yefremov for Kevin, actually. Frank, you mentioned in your prepared remarks that illbruck business may be looking at opportunities outside of Europe. Can you maybe help us get a sense of potential sales or opportunity in terms of sales and also timing and the regions that you're targeting there?

Sure. We do a little more than $800 million of revenue in the European region, and illbruck's not quite half of that or just about half of that. And previously, in this Building Solutions Group model, which we have changed, the business units in that model were geographically restricted for a goal of kind of cross-selling products, and that goal was never realized. So as a direct reporting group now to RPM, you've got probably our largest portfolio of patented products, most certainly in the construction chemical and sealant space. And they are very excited about an opportunity to take their portfolio of products and begin developed strategies of growing outside of what was kind of an internally constrained geography. And the flip side is going through the challenges in Europe, the leadership team there constrained cost and cut some expenses, and so we're seeing modest positive revenue growth out of that business and it's leveraging nicely to the bottom line. We should see some exciting investment opportunities, as they look for areas to take their portfolio of products outside of Europe.

Okay. And then on terms of pricing, could you talk about prospects for price increases in your consumer segment, maybe in front of the building season? And also, could you detail the impact of pricing in the second quarter on both consumer and industrial segments?

In the second quarter, pricing was almost negligible to nonexistent. Basically, what you're seeing in the second quarter was pure organic growth and some negative impact in translation back to dollars in some regions where we have some strong sales and then a modest impact on acquisitions, because most of the deals that we had done prior were annualized. With the exception of a product line called Expanko, which we acquired with our Stonhard business, it gets us into a couple of specialty areas of flooring that we were not into before, the terrazzo tiles and special rubberized and cork-based flooring for real unique applications.

And so, if I may follow up, do you expect prices to remain at about the same level over the next 2, 3 quarters? Or are you expecting any price increases?

I think pricing will remain stable. We're in an environment relative to raw materials where we have fought for a decade, along with everybody in our industry, through a commodity super cycle, and it was exacerbated in '05, '06 by the impact of the hurricanes and the chemical industry in the Gulf Coast, rise of China and India, consolidation of suppliers. Commodity cycles are still commodity cycles. And with the advent of significant capacity coming on, particularly in Asia, I think whether it's mining, metals, or in our case, commodity chemicals, I think you're seeing a moderation in prices. If you look at oil prices and gas prices, I would suggest we're kind of at a new norm. And so our outlook is stable raw material prices at the levels they're at now. We continue to look to expand our gross margins through product mix, through greater focus in acquisitions on higher-margin product lines that we acquired, as well as through the introduction of new products typically with higher margins.

And your next question comes from Charles Dan from Morgan Stanley.

Just wanted to clarify some of the comments you made earlier about the weather and seasonality. Your guidance for the second half implies sort of flat to mid-single-digit earnings growth, which is a pretty severe deceleration from what you guys have had in the first half. But just to clarify, you said you still do expect positive earnings growth in your February quarter?

I would expect -- as you know, we don't provide specific quarterly guidance, but I would expect in the second half of the year for us to continue to consistently post positive sales and earnings numbers. The second -- the third quarter, pardon me, is a little bit of a fooler. We can show up some meaningful percentage gains, but it's a relatively modest quarter relative to its seasonality, so they don't mean a lot. In the fourth quarter, I think we expect continued good performance, although starting in the spring, we're going to start to annualize some pretty robust comparisons.

Understood. But it sounds like most of your businesses, what you've said so far about them has been pretty good. I just wanted to make sure there's no negative offsets on the horizon that you're seeing.

The only area of disappointment for us, I think Rusty touched on, which is there just doesn't seem to be any "get up and go" in the U.S. industrial or construction activity. It's not negative, but it's not -- interestingly enough, maybe it's because it was a deeper hole. We're seeing regionally better performance in Latin America and, quite candidly, regionally better performance in Europe.

And your next question comes from John McNulty from Crédit Suisse. John P. McNulty - Crédit Suisse AG, Research Division: A couple of questions. So on the industrial side, when I look at the back half of the year guidance, you're definitely looking for what seems to be a reasonable pickup relative to kind of what you saw in the first half. So I guess I'm wondering, how much of that is due to kind of the end of paring down a business that I know you were trying to clean up over the last year or so? And how much of it is just what you're seeing in terms of true end markets starting to pick up, especially given what you just said on the U.S. maybe still being a little bit on the soft side?

We're not planning on any real pickup in end markets. I think we're planning on -- but we're not planning on any deterioration. I think you'll see continued sequential improvements, in part because, from a cost perspective, we're better positioned to leverage revenue growth to our bottom line. And I think that's part of why we provided the guidance for the balance of the year that we have. We would welcome some improvement, particularly in the U.S. industrial and construction markets, from what's a pretty tepid low single-digit growth, but we are not counting on that in relationship to what we see in the coming quarters. John P. McNulty - Crédit Suisse AG, Research Division: Okay, fair enough. And then with the liquidity comments that you had where you've got $970 million worth of liquidity. And at least relative to what we were looking for, your cash flow actually was much more solid than actually we expected in the second quarter. So I guess, how are you thinking about deploying that capital? And I guess, how much are you comfortable with deploying in the remainder of 2014 based on kind of the opportunities that you're seeing out there?

Sure. Well, for starters, we're preserving some of that liquidity to refund the 6.25% bond that matured in December. And I think that the capital markets and in particular the dynamics of the convert market were so attractive that we decided to pursue that route as refinancing. I think you'll continue to see us deploy capital as we have: small- to medium-size acquisitions that we continue to pursue; a growing dividend; and a CapEx that this year should come in, in the $90 million, $95 million range. So you'll see a little bit of pickup in the CapEx area in the second half relative to our plans than what we actually committed to and spent in the first half of the year. John P. McNulty - Crédit Suisse AG, Research Division: Okay, great. And then just one last question. When we look at the consumer business, I mean it had a huge start to the year. And when I -- if I kind of back out what you did in the first half of the year, your guidance actually for the second half is basically calling for kind of negative growth to just a modest 2% to 3%. So I guess, is that just being conservative? Or is there something that we should -- need to kind of think about in terms of an incremental headwind or something like that?

Well, I think it's circumstantially around kind of the winter months we're seeing, and not real certain of what our third quarter is going to be. And then secondly, in the fourth quarter, particularly in our consumer business, we are annualizing some very strong comps. But our consumer business should continue to be pretty good in the spring. Again, we've had real good performance on a lot of these new higher-margin product line introductions. Synta, as you heard in my opening comments, we acquired that business probably 15 months ago. And in that time frame, we're set to more than double the original $30 million in revenues. And the incremental impact on that, earnings wise, is very good, and that's entirely due to what Rust-Oleum could do with that privately owned business. And so there is still good momentum there, but we're a little bit wary about the fact that, when you look at our fourth quarter, our first quarter and the quarter reporting now, we're starting to annualize some very difficult comps and we're cognizant of the fact that fundamentally we're in a business that should be growing middle single digits and generating leverage off of that, and that the double-digit revenue growth and the leverage we're experiencing, which is also coming from some of the asset redundancy and consolidation that Rust-Oleum effected last year. That's going to annualize too in the next couple of months or next couple of quarters. So I think we'll have to see what happens economically in terms of the top line. We're pretty well poised both in the consumer and the industrial businesses to put good top line growth on our bottom line.

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

The first one is more towards Europe. Is it -- it looks like things are going well -- are going fairly well there. Is there a particular region or a particular market that is doing better than the others? Or is it pretty much across the board where you're seeing some nice growth?

It's pretty much across the board. I mean I commented about the actions Rust-Oleum took to downsize their footprint manufacturing-wise and cut some costs, commented on the illbruck business. In our Performance Coatings Group, we did a lot of the same. And whether it's U.K. or Germany -- and most of our exposure is in kind of Northern Europe and the U.K., we have less exposure in Southern Europe. But consumer, industrial, it's all showing modest revenue growth, and the actions that we took over the last year is allowing us to leverage that growth nicely to the bottom line. And disappointingly, and without getting into opinions on economics, it's outperforming as a region what we're seeing, particularly in our industrial segment, what's happening in North America.

Okay, all right. And then if you look at your new products, they've done very well. And if I understand correctly, typically, you're -- about 15% of sales, I think, are related to products that are 2 to 3 years old. Is that trend growing, where it's becoming a bigger percentage of your total sales? Or is it just that the products that you've had have just been -- maybe have done better than what we've seen in the past?

I think it's a mix of both. I think that, when we acquire product lines and integrate those into our businesses, we typically expect very nice returns, and with few, few exceptions, we get them. Having said that, an acquisition like Synta, with the Restore product lines, is somewhat unique and the ability to double revenues of our already meaningfully-sized group of products inside of 18 months is a real home run. But we are very focused on new product introduction. We're getting better at taking technologies from one part of RPM and having them be introduced in another part. On a prior call, we highlighted the -- what's the DAP product?

SmartBond.

SmartBond. SmartBond is a technology that came out of our illbruck business in Germany, used commercially there. It is an aerosolized subfloor adhesive, a totally unique product. It's a $45 or a $50 per cartridge or per can product that replaces 10 tubes of caulk. The application is much easier. We've got to get out and promote that more aggressively. But that's just one example of being able to take technologies in one part of RPM, perhaps in industrial segment, and introducing it into consumer markets in North America. As we grow internationally, particularly in developing world, we're getting better at acquiring businesses and utilizing them, like Viapol, as a base for multiple RPM product lines. As opposed to what we would have done 10 years ago, which is buy, typically, a business in the U.S. and Europe and pretty much let it alone and freestand. So all of that is having a positive impact. And the last comment I'll make is, is that we lost a lot of margin over the last decade because of this commodity super cycle, and so we are really focused across all the RPM businesses on margin improvement in 3 areas. One is new product introduction. The second is leveraging our existing asset base, particularly in the developing world. And the third is being better about, because we averaged down our mix, some acquisitions in the first decade of this century, this new century, and we'd like to start utilizing acquisitions to average up our margin mix going forward.

Great. And then just 2 questions, I guess, for Rusty. The $19 million in -- on your corporate line, is that sort of how to think about the corporate line, at least for the remainder of the year? And then the second question would be, what's sort of the rationale between convertible debt versus just, I guess, straightforward notes?

Sure, Ivan. On the corporate/other expense, for the year-to-date on corporate/other, we are at $33 million, and that is implying that our average is in the $16 million, $17 million a quarter range. So I think that's pretty close to where you should expect it to be for this year. In terms of the convertible bond and the rationale for doing it, we saw the convertible as attractive financing for us. We like the fact that we replaced debt that was 6.25% and refinanced it with a cash coupon of 2.25%. We also like the fact that if it follows the track record of our other 6 convertible bonds in our history, it'll convert to equity at some point in the future and strengthen our balance sheet and financial flexibility as we go forward.

It's got a 7-year maturity. It's contingently callable after the fourth year. Our stock would have to be somewhere north of $60 a share, I think $63, to actually force a contingent conversion. And we look forward to working hard to achieving that stock price and explaining to our shareholders -- I say explaining to our shareholders that dilution. The fact of the matter is that we would fully expect to more than overcome the modest 2% or 3% dilution that this thing would add between now and any conversion period. And so [indiscernible]. It's 2.25%, fixed-rate money for 7 years, which we like.

And your next question comes from Rosemarie Morbelli from Gabelli & Co.

If we look at the consumer side, Frank, the margin improved by 200 basis points in the first quarter, 240 in the second quarter versus last year. I know that the comparison is going to the -- is going to be a little more difficult in Q4, let's forget Q3. But could that translate into a full 200% -- 200 basis points for the full year in terms of margin improvement, which would get you to about 16.6% or thereabout? Or am I too optimistic?

Yes, I think you're a little too optimistic. And I can have Rusty address some of the metrics on that. But just to remind you of the things that are driving our improvement there: we've done some rationalization, particularly at Rust-Oleum, with a major facility in Europe; as well as closing a manufacturing facility and a warehouse with the Testors product lines of Rust-Oleum. And we are seeing higher mix at Rust-Oleum and at DAP in terms of margins on new products. And lastly, as I mentioned, the Kirker business has higher margins than traditional RPM consumer segment averages. So those are the key factors that have been driving our margin improvement in the consumer sector. I think we're about where we would be, and Rusty can provide some metrics on that.

Sure. First of all, I wanted to interject, in response to the last question from Ivan: the corporate/other expense this year is $38 million year-to-date, and I would expect us to be closer to $18 million a quarter on the corporate/other.

Good. And so hopefully, that answers your question, Rosemarie, about the consumer segment. We're very pleased with the results. And it's a -- I think, the result of very smart strategies that have been well executed across all our consumer businesses.

Okay. You have, in the past, used convertibles to make acquisitions. So you have now used a -- I mean, a convertible bond. Are you planning in using your stock or convertibles of a midsized type of acquisitions in the future?

No. We -- I think we're comfortable with our capital structure where it is today and certainly post the bond offering we did in November. And in terms of future acquisitions, it's really circumstantial, Rosemarie, in terms of the size of the acquisition, how we would fund it. But in any acquisition that would involve equity, we would either communicate to our investors the price and how we were funding it. Or, and we haven't done this for a while, although there's more demand for it, it's certainly possible that we could complete some acquisitions of privately held companies for cash rather than stock. We haven't done that for a while, but we have done that in the past. In any event, that doesn't change our acquisition discipline in terms of pricing. And so I think all of that is just some commentary that's speculative and really dependent on what acquisition opportunities might pop up in the future years. But we have no plans to do anything else, capital structure wise, than what we have already done.

Okay. And I was wondering if you could give us a feel of, regarding Europe, are there any market segments that are doing better or worse than others, as far as you can tell?

No, I mean, my previously comments on that, Germany, for us, is doing pretty well, Northern Europe, Scandinavia, U.K. That tends to be where we have the lion's share of our revenues. We do have some revenues in Spain and in Italy. I think those businesses are growing but much more modestly. But in general, we're seeing consumer, industrial business-unit by business-unit improvement in Europe.

Okay. I was thinking more in terms of end markets. So if you'll look at the industrial side, is it oil and gas? Which areas are doing better than others?

We're seeing improvement in all areas, and that's not cavalier. It's consumer, it's Performance Coatings Group companies, it's illbruck, it's U.K. mainland. And it's very modest, but it seems sustained. And we've positioned our cost structure to be able to leverage that modest growth to the bottom line.

And lastly, if I may. Rusty, what is a fully diluted number of shares that we should be expecting in the third quarter and for the balance of the year once we take into consideration the convertible bond?

Yes. Well, we'll have to get back to you in the third quarter, on the exact impact. That did not affect the second quarter. And we're just finalizing the accounting for that, so I'd just ask you to wait till our third quarter earnings release.

Okay. So no, I don't know, ballpark number, so we can adjust our models?

I think, on an annualized basis, you're looking in the neighborhood of 2% or 3% dilution. And you're going to look at $0.01 of dilution versus our original forecast for the balance of the year. And we will work out the calculation for the -- again, you're averaging them in. We'll work out the calculation for the third quarter and be able to talk about the fourth quarter and future share count on the next call.

[Operator Instructions] And your next question comes from Edward Yang from Oppenheimer. Edward H. Yang - Oppenheimer & Co. Inc., Research Division: On the consumer side of the business, continues -- you continue to see very strong growth there. Is there any way to differentiate? Or are there any differences between consumer pull-through and inventory build at the retail level?

No. I mean we had good sell-in with products like LeakSeal and NeverWet, but we've had good consumer takeaway as well. I think, in general, the retail sector broadly that's been doing the best is hardware and big box across the board. We've commented on that for probably the last 4 or 5 quarters. It feels like, post recession, while we're not seeing anything that anybody would call exciting growth, consumers feel secure in their homes and secure in their jobs again. And so what we have seen, and you can see this broadly across our customer base, consumers reinvesting in their homes, whether it's getting back to normal maintenance and repair. In particular, in our case, small-project redecorating seems very strong, which positively impacts almost all of our different product lines. I say that as opposed to the prerecession $50,000 and $100,000 bathroom and kitchen remodelings and additions. But even that seems to be starting to perk up a little bit. And so I think people are secure in their jobs and homes and, therefore, investing in their homes again in ways that they had not for a couple of years through the recession. And I think you could see that in the performance of the kind of home center and hardware retail sector versus other retailers. Edward H. Yang - Oppenheimer & Co. Inc., Research Division: And Frank, do you expect any impact from rising rates on the consumer business? You're starting to see mortgage applications come down a bit? Or what's more important for that business?

No, I mean new home construction is actually picking up. And if you look at the statistics there, and there's really 2 areas where new home construction impacts RPM and they're relatively modest. A portion of it is our DAP business, as contractors buy cases of DAP caulks to install windows or doors, or subfloor adhesives, things like that. The other portion of it is in a relatively small division of the Tremco commercial sealants business called Tremco Barrier Solutions. They're the leading provider of basement insulation and waterproofing products. They were booming before the recession. Their revenues literally got cut in half as the housing market imploded, and they are showing double-digit increases in sales and earnings for a second year in a row. And so you're seeing new home construction improve, and it seems sustainable and pretty steady. The statistics they show us, this is the leaders of the TBS business, will tell you that we are still at a below-replacement build level, long term. And so that suggests that the rise in new home construction in the U.S. is going to continue. And it -- having said that, it'll be a long time before we get back to the housing start levels hit before the recession. Edward H. Yang - Oppenheimer & Co. Inc., Research Division: Well, I guess my question was also just on just existing housing turnover, the -- not just new homes, basically.

Sure. And again, all I can tell you is what we are seeing in our businesses, which is very strong takeaway and strong, good reception of new product introduction, and a customer base that is doing very well. Edward H. Yang - Oppenheimer & Co. Inc., Research Division: Okay, great. And just finally, on the currency impact in the quarter, was that just all Canadian dollar impact? The euro was up during the quarter. Or Brazil, I think, in prior quarters had an impact as well.

No. Brazil, South Africa, the Australian dollar, the Canadian dollar, these are all regions that, while they're not big, we have nice presence in. I would like to have a global market share, like we have across our businesses in Canada. We've had a few billions of dollars, we've got a really good presence there in a relatively small economy compared to the U.S. We have a growing presence in Australia. We have a bigger presence now in Brazil because of Viapol, and the real has not exactly performed well in relationship to the underlying very good performance of Viapol. And we have a $50 million South African business, very well run, very profitable, and the rand is also hurting us there. I would anticipate in the next couple of quarters that we'll see some further negative impacts if the dollar continues to appreciate versus the euro, which is -- the euro and the Canadian and the U.K. sterling are our biggest exposures.

And your next question comes from Kevin Hocevar from Northcoast Research.

I was wondering if there has been any developments in your work with OEMs to try and make -- find applications for NeverWet to use on different OEM products? I wondered if there's any developments you could update us on.

Sure. The update on that is, originally, the license that we had for NeverWet was confined to North America. It is now a worldwide global license. And we are continuing to pursue OEM applications. We're spending dollars there, putting proposals together. We don't have a lot of revenue, which again it's mostly an expense effort at this point. Part of that was to make sure that we could procure worldwide rights because, while our North American -- our consumer business is mostly North America, the OEM businesses, particularly some of the OEMs that we would talk to, have manufacturing outside of North America. So we've been successful in procuring worldwide rights for that and are continuing to pursue both OEM applications and various second-generation formulas that would allow the product, for instance, to be more user friendly on things like outdoor fabrics. So that's a -- some continuing efforts to expand on that NeverWet franchise. And at this point, it's expense with a lot of hope, and we'll see where it goes.

Okay, great. And then just a quick one for Rusty. What's your expectations for the tax rate this year?

Yes, for the tax rate, we're -- I think we will see the tax rate for the year approximate where it was in the second quarter, which is probably a little under 30%, so somewhere in the range between 29% and 30%.

I would now like to turn the call back over to Frank Sullivan for closing remarks.

Thank you, again, Leeann. Many thanks to the RPM associates around the globe who everyday are competing and winning in the marketplace and, as a result, generating good growth and strong results for our shareholders. Thank you for your participation on our call today and for your investment in RPM. And best wishes for a happy, healthy and prosperous 2014.

Thank you for your participation in today's conference. This does conclude the presentation, and you may now disconnect. Have a great day.