RPM International Inc. (RPM) Q4 2011 Earnings Report, Transcript and Summary

Welcome to RPM International Conference Call for the Fiscal 2011 Fourth Year and Year End Conference Call. 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.

Live from New York, it's the RPM Investor Conference Call for the Fiscal Year Ended May 31, 2011. On the call with me this morning are Bob Matejka, our Senior Vice President and Chief Financial Officer; and Barry Slifstein, RPM's Vice President and Controller. We had a strong finish to a good year. During the year, we took action to bring to a close the Bondex asbestos liability situation, we continued our focus on geographic expansion and worked to restart our acquisition activities and rebuild our pipeline. From a performance perspective, we benefited from a strong rebound in industrial market maintenance and capital spending, which drove our specialty coatings and waterproofing product lines serving these markets up double digits. We experienced a flattening of results in our product lines serving construction markets after 2.5 years of significant declines and generated modest improvement in product lines serving mostly North American consumer DIY markets, as a result of new product introductions and market share gains mainly in our small project paint categories. We are very pleased with these results in the face of continuing weakness in North American residential and commercial construction and housing turnover as well as poor U.S. retail takeaway. We also faced dramatic increases of raw materials throughout the year. Despite these challenges, our strong finish to the 2011 fiscal year showed the benefits of the RPM entrepreneurial model and our company's response to the recession, with Industrial segment sales up 14%, driving EBIT growth of 24% in the fourth quarter, and Consumer segment sales up 5%, and excluding the onetime $5.5 million write-down of receivables associated with a major distributor bankruptcy in our Consumer segment. This 5% growth drove a 12% increase year-over-year in Consumer segment EBIT. I'd now like to turn the call over to Bob Matejka to provide you some details on the fourth quarter and full year, after which we'll take your questions on our 2011 fiscal year, our fourth quarter and our outlook for 2012. Bob?

Thank you, Frank. Morning, everyone, and thanks for joining us on today's call. I'll review the results of our fiscal 2011 fourth quarter, touching on a few balance sheet and cash flow measures, then I'll turn it back to Frank for closing comments before we take your questions. All of the income statement comments that I'll make compare fiscal 2011 actual results to fiscal 2010 pro forma results, which exclude the results of Specialty Products Holding Corporation. We refer to that as SPHC. As you all know, SPHC was deconsolidated from RPM International Inc. effective May 31, 2010. Getting to the fourth quarter. Consolidated net sales increased 10.9% from the fourth quarter last year to $981.8 million, driven by volume increases of 5%, acquisition growth of 1.3%, price increase of 1.8% and favorable foreign exchange of approximately 2.8%. The Industrial segment net sales of $625.9 million, which account for approximately 64% of sales, increased 14.4% over last year, with volume up 6.6%, price up 1.8%, acquisition growth up another 2.1% and favorable foreign exchange up 3.9%. In the Consumer segment, net sales of $355.9 million increased by 0.1% over the same quarter last year, with 2.5% attributable to volume and the balance split fairly evenly between price and foreign exchange. Consolidated gross profit increased to $416.4 million from $384.2 million last year, principally due to volume increases. As a percent of net sales, gross profit declined by 100 basis points to 42.4% due to continued availability issues and increases in raw material cost. Pricing and material availability impacted margins negatively by some 230 basis points, almost half of which was offset by pricing action. Consolidated SG&A increased 7.7% to $296.6 million due to variable cost increases associated with the higher sales volumes. As a percent of sales, SG&A decreased to 30.2% of sales from 31.1% of sales, representing a reduction of 90 basis points mostly due to better overall leverage and higher sales. The Industrial segment's SG&A increased 8% to $205.1 million from $189.8 million last year due primarily to variable expenses associated with the higher sales volumes such as compensation and benefits, distribution and environmental expenses, which were partially offset by lower warranty expense. As a percent of net sales, Industrial SG&A declined from 34.7% to 32.8% or 190 basis points by leveraging a substantial portion of fixed SG&A with higher sales volumes. In the Consumer segment, SG&A increased 3.1% to $87.5 million from $84.8 million last year, due to increases in certain variable costs related to higher sales volumes. Included in the Consumer SG&A is additional bad debt expense of $5.5 million that Frank mentioned related to the Chapter 11 filing by Lancaster that occurred in late May. Lancaster was one of our larger distributors. Earnings before interest and taxes increased to $119.8 million this year from $108.7 million last year due principally to higher sales volumes and better SG&A leverage, partially offset by higher raw material costs. In Industrial segment activity, EBIT increased 23.5% to $70.3 million from $56.9 million last year. It's driven by a 14.4% increase in sales combined with improved SG&A leverage, partially offset by higher raw material cost. As a percent of sales, Industrial EBIT improved from 10.4% last year to 11.2% this year. The Consumer segment EBIT increased 1.8% to $53.6 million from $52.7 million last year, excluding the $5.5 million charge associated with the Lancaster Chapter 11 filing. Consumer segment EBIT increased 12.3% to $59.1 million and, as a percent of sales, would have been 16.6% compared to 15.6% last year. On the corporate and other side, EBIT increased $4.1 million for the quarter from $900,000 last year due to higher compensation and benefit expenses this year attributable to improved overall performance year-over-year, higher acquisition and environmental cost, the timing of expense reimbursements from SPHC, which -- all of which were partially offset by lower insurance cost due to a more favorable claim and loss experience rate this year. Interest expense increased $16 million – up from $16 million last year to $16.4 million this year, due primarily to additional borrowings associated with acquisitions and a slightly higher average interest rate. Investment income of $4.5 million this quarter improved from $2.5 million for the same period last year mainly due to gains on sales of marketable securities, the income tax rate of 31.9% for the quarter compared to last year's rate of 30.6%, primarily due to changes in jurisdictional mix of actual and forecasted earnings, the impact of certain foreign operations on our U.S. taxes, state and local taxes and adjustments for certain tax valuation allowances. The net income attributable to RPM shareholders increased to $70.2 million or $0.54 a share compared to last year's $61.1 million or $0.47 a share. I'll cover some year-to-date measures as well. Consolidated net sales increased 8.5% year-over-year to $3.38 billion, driven by volume increases of 5.3%, acquisition growth of 1.9%, price of 0.9% and favorable foreign exchange of 0.4%. The year-to-date growth was driven predominantly by the Industrial segment, which increased 11.3% year-over-year on the strength of repair, maintenance and industrial capital spending. The Consumer segment was up a modest 3.4%. Consolidated gross profit increased to $1.4 billion from $1.32 billion last year on volume increases but decreased 90 basis points to 41.4% of net sales due primarily to the unfavorable raw material cost and availability issues. Net income attributable to RPM shareholders increased to $189.1 million or $1.45 a share compared to last year's $162.9 million or $1.26 per share. The per-share income represents an increase of 15.1%. I'll close here with some comments on the balance sheet and cash flow. CapEx was $39.8 million for fiscal 2011 compared to $23.2 million for fiscal 2010. Depreciation and amortization expense, combined for the year, was $72.8 million compared to $84.3 million last year, with approximately $9.6 million of the decrease attributable to the deconsolidation of SPHC. The receivable DSO turnover rate was 62.1 days this year compared to 61.4 last year. And on the inventory side, our turnover days of inventory was 73.7 days compared to 69.5 days last year. Cash from operating activities were very strong for the year at $238.2 million compared to $203.9 million last year. Increases in working capital attributable to higher material cost and significantly higher sales growth were offset by some foreign exchange adjustments, which are captured in the other line for operating activities. Finally, a few comments on cap structure and overall liquidity. At May 31, 2011, total debt was $1.1 billion compared to $928.6 million last May. On May 24, 2011, we issued and sold $150 million of principal amount of notes at a 6.125% phase rate, which was a further issuance to our $300 million aggregate principal amount of 6.125% notes due in 2019 issued initially by us on October 9 of 2009. The offering was priced at a premium, with an effective yield to maturity of 4.934%. The proceeds will be used for general corporate purposes. Our net debt-to-cap ratio was 34.8% at May 31 this year compared to 39.8% last year. And our long-term liquidity at May 31, 2011, was $887 million, with $435 million in cash and $452 million available through our bank revolver and accounts receivable securitization facilities. With that, I will turn it back to Frank.

Thanks, Bob. We are planning for another strong year of growth at RPM for our 2012 fiscal year, with sales up in the 8% to 10% range. One of the drivers of this growth is coming from our geographic expansion. In fact, on a regional basis in fiscal 2011: North American growth was mid-single digits; growth in the European markets, the biggest driver of which for us is Germany, was up in the low teens; and we experienced a 20%-plus growth from small but exciting business spaces in South America and Asia. The potential downside to this in 2012 is our growing exposure to foreign currency translation impacts. Our 2012 forecast assumes that the dollar relationship to foreign currencies stays at current levels. Wild swings, especially in the euro, Canadian dollar and British pound could negatively affect our ability to meet our 2012 goals. We are also assuming continuing strong industrial market spending and a modest uptick in North American construction activity and retail takeaway. Given the government fiscal crises in the U.S. and parts of Europe, none of these improving economic assumptions are certain. Raw material cost and availability remain a challenge and a concern. Our forecast anticipates a leveling-off of raw material price increases as the year develops and that our own pricing actions in fiscal 2011 and planned in certain areas for 2012 will be sufficient to maintain or marginally improve our consolidated gross margins in our new fiscal year. Lastly, we have positioned our balance sheet to weather almost any storm, with a debt capital structure that is 95% long-term fixed rate and with more than $800 million of long-term liquidity. Having said that, our recent bond transaction was done in anticipation of more acquisition activity in fiscal 2012. If we are unable to put these new dollars to use in successfully completing acquisitions in 2012, then the negative carry of these new $150 million, 4.9% yield bonds will be a drag on earnings growth. We are planning for another year of strong growth in the RPM companies but have a rather wide range of possible earnings outcomes depending upon the impact of a number of challenging issues in an uncertain period of economic recovery. That concludes our formal remarks. We'll now be pleased to answer your questions.

[Operator Instructions] Your first question comes from the line of Mike Sison of KeyBanc.

In terms of Industrial, we've heard here and there that things are slowing, things are not slowing. Any changes in the growth rate you've seen in June and July?

I think our Industrial businesses, in particular those serving industrial maintenance and capital spending markets, were the biggest drivers or the highest performing units of RPM in 2011 as a result of renewed focus by industrial companies on maintenance CapEx and also because those businesses are our most geographically diversified. And we expect those same dynamics to continue to drive low-double digit growth rates in our markets for industrial maintenance spending, roofing, waterproofing, corrosion control coatings, floor coatings. So we see a continuance of the same -- an example I've given in the past, and it holds true again this year, is RPM's own industrial -- our own capital spending on a consolidated basis is expected to go from the $40 million we spent in fiscal ’11 to approximately $70 million in our new fiscal 2012. And we see similar increases across most of our Industrial customer base. Having said that, that $70 million is still slightly below where our capital spending was about 2.5 years ago.

Got it. And then when you take a look at the growth rates you've outlined for 2012, how much of that is priced just to offset the impacts of raw materials?

I think, on a consolidated basis, you're looking at a price about 3%, obviously with 50 independent reporting units and as we grow in new geographies, places like India and South America, again very modest but growing business spaces, there are certain elements of inflation in places like Brazil or India that are driving some price there. There are other key product lines in North America, both Industrial and Consumer, that we are planning price increases. But on a consolidated basis, about 3%.

Okay, great. And then on acquisitions, can you help us understand the backlog? Is it -- do you have a pretty good hopper there that you can add on this year?

I guess the only comments that I would make in acquisitions is that, for 30 years, it's been a very disciplined part of our growth strategy. And like many companies, starting in the late fall of 2008, we cut back very aggressively on our capital spending, managed our businesses for cash and really stepped back aggressively in our acquisition activities. And so it's taken us some time to rebuild that pipeline and really be market-focused there, and the last 12 months has been a very good period of time of getting out to opportunities. And so our pipeline is growing, and we would expect in the coming years that we ought to be able to consistently generate 10% to 12% growth and that 40% to 50% of that growth would be coming down the road from acquisition activity. Obviously, if we do some more sizable deals -- and just to remind folks on the call, we think of acquisitions as kind of a $10 million to $200 million range, which is really in our wheelhouse. Some larger transactions will obviously drive larger growth percentages year-over-year than what we're forecasting.

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

So it sounds like that if you didn't have that bad debt, that hits you by about $0.04 a share?

I think that's right, maybe $0.03 a share? I know we had a couple of things in the fourth quarter that the negative was about a $5.5 million receivables write-down associated with this Lancaster bankruptcy, which is entirely in our Consumer segment. And then the fourth quarter also had a continuation of what we saw earlier in the year, which is, at the corporate other nonoperating, some benefits from captive insurance company experience. As you know, we had marketable securities gains throughout the year associated with prior year recession-driven write-downs. And we've also had a second year in a row of better claims expense, and so our premiums on our captive insurance companies and risk management costs in general year-over-year are down. And so those were positive impacts in the fourth quarter that are probably not likely to be repeated next year.

How much was the benefit from lower warranty cost? And is this warranty now at a level that you think the go-forward rate may -- would be comparable to whatever your expenses were in the fourth quarter? But first, how much were they less than a year ago? And then the go-forward question.

About $5 million less than a year ago, and I think that the levels that we're at now are consistent with the historic levels in relationship to sales, associated principally with roofing and flooring product lines in terms of our ongoing warranty expense, which is just a normal part of those businesses.

And now was there any restatement from the way you reported last year in the Industrial sector where certain profits were removed and credited to corporate? Or were these the same way you result -- reported these numbers a year ago?

These are all the same way that we reported these numbers a year ago. Obviously, throughout this year, we've had pro forma results, excluding the impact of the SPHC transaction. We did have 100% of the SPHC expenses in last year's fourth quarter. And this year, it was spread evenly across the year.

Got you. And then finally, I don't know if there's a way to do it because you have so many different reporting units, but we always are concerned about raw material cost and the degree to which they're covered by selling price increases. So some companies have been able to say that, "Hey, in this quarter, we recovered 80% of our raw material cost, or 50%, or 92%." Any way that you guys can package it in that manner so it's clear how well you're doing in recovering raw material cost?

We obviously look at that business unit by business unit, and the leaders that are responsible for those businesses have a very good sense of that, and we focus on it. I guess the best I can do for you there on a consolidated basis, Saul, and this goes back to the comments that Bob made in his prepared remarks, is I think we covered about 2/3 to 70% of our material cost rises in price increases. But our price increases, at least where we sit today, were insufficient to make up for the extent and timing of raw material price increases. You may recall, at the beginning of last year, following a year then of very significant raw material price increases, that we had received indications both from some of our major raw material suppliers in the market that we thought that the raw material price increases would be mitigating or slowing down in the second half of the year, and in fact, just the opposite happened. We rolled into the second half of our fiscal year and rolled into January of the calendar year and saw significant double-digit price increases in a couple of key raw materials categories. So I think that our companies are adjusting appropriately, but it's just been difficult to get ahead of the curve. We anticipate 2012 is a year in which we will get ahead of the curve. And as I indicated in my comments, we see to a combination of raw material price increases settling down, not going down, but settling down, the impact of our 2011 price increases on 2012 and some 2012 price increases in certain areas, combined with mix, resulting in a modest improvement on a consolidated basis in gross margins.

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

This is Alex Yefremov for Kevin. Gentlemen, I wanted to ask about availability of raw materials. Could you quantify the impact on volumes, perhaps, and how long this availability issues might last?

I think the only major raw material -- and for us, given the diversity of our businesses and product lines, we don't have any particular raw materials that are significantly material to RPM as a whole. We certainly have certain raw materials that are significant to some of our subsidiaries. TiO2 has been a challenge. The rest of the availability issues have been somewhat of a supplier-based communication, which always leads to available raw materials as long as you're willing to pay the price. And there are a few categories, some specialty raw materials -- seedlac, which is a primary raw material for shellac, and we're the only remaining refiner of shellac, an old technology that we love, has been an issue. Some of the rise in our inventories, which resulted in a "higher than we had hoped for" working capital investment this past year, was associated with maintaining what we feel are appropriate levels or even, in some rare instances, safety stock on some of these critical raw material areas.

And so were there an impact on sales volumes, so far, or not?

Not for RPM companies, really, but there was an impact, certainly, on gross margin and our income and leverage to the bottom line, which are in our results. And there was also an impact -- a deliberate impact in certain inventory categories in terms of how we managed concerns over availability.

Okay. Switching to commercial markets, how are your commercial product lines? How fast are they growing right now compared to Industrial segment overall? And do you see potential acceleration in that growth over next few quarters?

Are you talking about commercial construction activity?

Right.

Okay. Well, I think we finished the year with a lot of those product lines flat to slightly up. And there's really 2 reasons for that. It feels like, in North America, the construction activity is kind of bumping along the bottom after 2.5 or 3 years of declines and some categories significant declines. I think the other area of strength for RPM, because our construction chemical businesses and product lines, in many ways, outperform the underlying market dynamics, we tend to have a very strong and long-standing base of distributors in a number of areas of repair products and sealant products and waterproofing products. And so in some areas, we picked up market share just based on our strong distribution, which is more focused on maintenance and repair and really small projects that would go through that distribution base, as opposed to the bigger specified projects, which we compete with major global players. And those are still woefully lacking in terms of driving performance or seeing pick-ups. So we anticipate in 2012 some modest improvement in those markets. I think we're well positioned with our strong distribution to continue to show positive in sales and earnings growth. The last comment I would make is, in terms of a cost position, we're in a really good place to leverage higher sales growth on our bottom line, when it comes. But we are not forecasting anything close to robust pick-up in residential or commercial construction activity.

Your next question comes from the line of Silke Kueck of JPMorgan. Silke Kueck-Valdes - JP Morgan Chase & Co: On the industrial side, can you talk about how much volume performance came from the Stonhard, Tremco business and how much came from illbruck this quarter?

We don't disclose the particular volumes of an individual operating company. I can tell you, as I said in my earlier comments, that on a consolidated basis from geography, we were growing in the 5% to 6% range in North America. Obviously, more of that was industrial maintenance- and capital spending-driven, as opposed to very modest or flat construction chemical product lines or Consumer products. And we had kind of low- to mid-teen growth in Europe, and Germany is the lion's share of that. That's mostly waterproofing and sealant construction chemical products. And so we've had pretty good experience there. A lot of it is driven by building envelope products that are really focused on either new construction or renovation to create more energy efficiency in structures. And a lot of that is ahead of the curve in Europe than it is in the U.S. There are national specifications or building code requirements in places like Germany or the Scandinavian countries, which are benefiting the sales of our products, which in a number of instances, are leading products in those areas. Silke Kueck-Valdes - JP Morgan Chase & Co: And on the Consumer side, has volume growth changed from May going into June and July? Or can you tell whether business in the big-box stores have picked up in June and July versus May? Would you...

I don't think that what we're seeing is really a reflection of much improvement in consumer buying activity. Unfortunately, Consumer retail DIY takeaway has been very sluggish throughout the year, and I think that continued in the fourth quarter. Our small project paint categories outperformed the market nicely, and it was a combination of new product introductions throughout the year in areas like kitchen and bathroom countertops or cabinet refurbishing products. We've also picked up market share in certain retail accounts as well as in the automotive sector. And so those are the product categories that are driving our improvement in our Consumer segment. The patch repair and caulks and sealants categories were down year-over-year in sales and earnings. And while we expect them to be modestly improved in the new fiscal year, I think that's tracking more of just a very flat to modest improvement in retail takeaway.

You next question comes from the line of Edward Yang of Oppenheimer. Edward Yang - Oppenheimer & Co. Inc.: The investment gains that you saw this quarter, how much was that?

$1.7 million. Edward Yang - Oppenheimer & Co. Inc.: Okay, and these investment gains are from sales of securities from your captive insurance company?

Yes, we have a number -- 2 captive insurance companies that have been pieces of our risk management for many years basically associated with our ability, through fully funded and licensed captive insurance companies, one in Vermont and one in Ireland, to manage back to dollar one on product liability and other issues on a much more efficient basis than the market for insurance would do if we bought it all that way. Above $1 million or $2 million, depending on the category, we have general insurance. And so like any insurance company, we hit our companies with premiums, we invest those assets. During the recession, Accounting required that we marked to market a significant portion of these longer-term marketable securities that were associated with these captives and so, basically, marking down their cost from their original purchase cost to a perceived value in relationship to the big market declines. Edward Yang - Oppenheimer & Co. Inc.: Yes, I remember that. So how much more is there left in terms of reversing some of those accruals or getting some of these gains?

Yes, not a lot more. And again, these things are managed by insurers, and they need to liquidate certain -- they need to liquidate securities to meet insurance claims and things like that. And so most of that -- I think there's a little bit that's left, but most of that has worked through our P&L and our insurance companies and how they're managed in the past year. I don't have that number, maybe Bob or Barry do. I know it will be included in a footnote in our 10-K when that's filed in a week.

Okay, and I would say there's no more than $2 million in there.

So not a lot. Edward Yang - Oppenheimer & Co. Inc.: Okay, got it. And the -- there was also a warranty benefit you mentioned in corporate and other that was about $5 million?

No. In combination, the 2 of them for the full year, and again some of this is old news, in combination, the 2 of them are a little bit in excess of $15 million. It was $8 million plus. And that's just a function of lower premium costs throughout the year as well as some insurance recoveries. You'll recall its biggest impact on a quarterly basis was in our second quarter. And so on a comparative basis, while we don't provide quarterly guidance per se, the onetime benefits that related with some insurance recoveries, lower premiums that we experienced in the 2011 second quarter, we don't expect to repeat. And so there's -- those are the issues that were kind of onetime benefits. The improvement in our experience will continue to result in lower premiums but, I don't believe, to the full extent that we experienced in 2011. Edward Yang - Oppenheimer & Co. Inc.: Okay. So what's kind of a good recurring corporate and other quarterly expense number? It was $4.1 million this quarter.

Let me have Bobby answer that.

Typically, either as a baseline spend or somewhere around $11 million, $12 million, Ed, and then you get the onetime issues of some gains and then some losses, depending on the events that happened in that quarter that will cause that $11 million to go either up or down. But $11 million, $12 million is a good baseline number for corporate. Edward Yang - Oppenheimer & Co. Inc.: Okay, got it. And with regards to your guidance, you are looking for, looks like, some margin leverage because, 8% to 10% top line, you expect that to leverage to 10% to 15% EPS growth. How would that compare or shake out between Industrial and Consumer? Do you expect more leverage from one or the other?

Absolutely. And I think we're looking at probably high-single digit, low-double digit growth in our Industrial businesses and better, but still relatively modest, kind of 4% to 6% revenue growth in our Consumer segment for the year. So we anticipate better results across all of our Consumer segment businesses, but still relatively modest. I think the real kicker on the top line will be if and when the construction chemical sealant waterproofing type of markets that serve principally North American construction markets, if that picks up a little bit better than we anticipate, and we're not anticipating much, then certainly we could be at the top end of that earnings range. Edward Yang - Oppenheimer & Co. Inc.: Okay. And just finally on Lancaster, could you provide some additional detail around that?

Lancaster was a -- or is a -- one of the remaining few independent distributors who provide distribution services to the independent retail and independent hardware store chains. And they were a significant customer of most anybody in the DIY that was serving that kind of independent store and independent hardware store chain marketplace or channel segment. And they declared bankruptcy in May, and as a result of that, we took between all of our businesses, DAP, Rust-Oleum, any of our Consumer product lines collectively, a $5.5 million write-down of our then outstanding receivables. It's not at all certain that we would lose that or not get that back as they go through their reorganization, but that was the extent of our unreserved exposure when they declared bankruptcy in May. Edward Yang - Oppenheimer & Co. Inc.: Are there any other customers within Consumer that's on shaky financial ground?

None that I'm aware of.

Your next question comes from the line of Rosemarie Morbelli of Gabelli & Company. Rosemarie Morbelli - Gabelli & Company, Inc.: Frank, could you give us a feel as to what is in the $70 million worth of CapEx compared to $40 million this year? Any specific...

Sure. About half of that is basically maintenance CapEx across our different businesses and plant equipment as well as regulatory-driven capital spending, and then the remaining half is some plant modifications or capital spending expansion, plant expansion principally in facilities outside of the United States. The exceptions to that are those businesses of ours who are serving the industrial maintenance market, so corrosion control coatings, specialty coatings in the flooring product areas like that who have experienced continued growth through the recession and a pretty aggressive growth in the last year. So those are the categories, broadly some facilities that we need to expand outside of the United States, particularly in some of the developing world where we have relatively small businesses that are growing very fast, and we've got to make sure that we can meet that growing demand and then these industrial maintenance and capital spending-driven product lines. Rosemarie Morbelli - Gabelli & Company, Inc.: Is it mostly a question of debottlenecking capacity expansion? Or do you have any greenfield plans in that?

It's mostly an expansion there. We have one greenfield plant that will be coming online this year in the Middle East. And beyond that, it's expanding of existing facilities. Rosemarie Morbelli - Gabelli & Company, Inc.: Okay. On the raw material, you discussed the pricing. With oil coming down -- and I know oil does not necessarily affect TiO2, but it must affect some of your other raw materials, are you seeing any sign of decline? You talked about leveling off, but are any of them actually coming down?

Ask Andrew Liveris. Rosemarie Morbelli - Gabelli & Company, Inc.: All right.

We do not. We see raw materials costs through the year hopefully flattening after a few years of extraordinary growth, in some cases growth that doesn't quite match up with demand. It's still pretty punky relative to where the world was a few years ago. But it's still a challenge out there, as I commented earlier, though a combination of mixed price increases that we initiated in our 2011 fiscal year and some select price increases we're planning for 2012 are such that we are planning for a gross margin that incrementally will be better in 2012 than it was in 2011 on a consolidated basis. Rosemarie Morbelli - Gabelli & Company, Inc.: Okay. And then on the availability, have you seen any capacity, new capacity coming on stream either in China or in the Middle East?

There's a lot of new capacity that will be coming on stream in the coming years. I'm sure you and all on the phone are aware of this. Akzo, the largest paint manufacturer in the world, has announced a multibillion-dollar joint venture with a Chinese company to produce TiO2. I believe DuPont's going to expand their TiO2. This morning, Dow announced a $20 billion investment in a big chemical refinery across, apparently, 20 different product categories that's going to come online in 2014 or 2015. So I think you're seeing a combination of companies, including RPM companies, learning how to source material from different places and capital spending in critical raw material areas for coming expectations of growth. But that -- there's not a lot of capital -- I'm sorry, not a lot of production expansion that really will impact 2012. I do think that the levels that raw materials are at now in a number of areas hopefully are as high as they're going to get because, as I indicated earlier, there's a number of product categories where demand is not equal to where it was 2 years ago. But industry consolidation and other issues, I think, are, in part, the result of the raw material issues that our industry's been facing over the last 12 or 18 months. Rosemarie Morbelli - Gabelli & Company, Inc.: And I guess with high price and those companies making money, there is no intention on their part to add capacity before that 2014 timeframe as they can keep their prices at this level. Is that your perception?

Well, I think capacity is coming on slowly. Big capacity will come on with big investments, which are being announced. But I think it's pretty telling when a major user of critical raw materials like TiO2 decides to make a billion-dollar investment in partnership with somebody in China, as opposed to rely on their historic suppliers to meet their future needs. Rosemarie Morbelli - Gabelli & Company, Inc.: Okay. And if I may ask one last question. In last quarter, you talked about the possibility of having to add more money to pay for legal expenses, I think, on SHPC (sic) [SPHC]. Can you bring us up to date on that?

The SPHC situation is going as we envisioned. It's going well. And the legal expense of that process principally comes from the cash flow of the SPHC companies and not from RPM. Our ongoing legal expense is what it is, in relationship to the types of things that we spend legal dollars on, and as you know, it is substantially below the spend when Bondex was part of RPM and not in this bankruptcy process.

Your next question comes from the line of John McNulty of Crédit Suisse. Abhiram Rajendran - Crédit Suisse AG: This is Abhi Rajendran calling in for John McNulty. Two quick questions. One, your investment income was up quite a bit year-over-year in fiscal 2011. How should we think about that, looking ahead to next year?

We had commented about the -- our marketable security gains from our captive insurance companies. I believe that's in that category as a net offset, and so that's the biggest element in there, and that was probably $7 million or $8 million. And that is not likely to be repeated next year. Abhiram Rajendran - Crédit Suisse AG: Okay, got it. And then just another quick question. Would you expect a similarly higher working capital level in fiscal 2012 based on your outlook for raw materials in terms of availability, pricing and so on?

We -- the answer to that is yes. There's 2 things we expect. Increase in working capital, and I hope it's big because I hope our revenue assumptions are met or exceeded, but I think that will be more in line with our revenue growth. And then the other impact to our free cash flow will be a capital spending budget that grows from $40 million to $70 million. Abhiram Rajendran - Crédit Suisse AG: Okay, got it. And then just a last quick question, if I may. Are you seeing any sort of trend among consumers to trade down to, like, a lower price point in terms of paints or any other products?

Not in our categories, and that's for a couple reasons. Number one, we're bringing out a lot of new products that we think are meeting some interesting consumer demands. For instance, we have introduced, through some of our major retailers, renovation kits for kitchen and bath countertops and kitchen and bath cabinets, and these are kits that, on the shelf, range anywhere from $300 to $600 per kit. So they're price points that nobody's ever seen in paint aisles before. The initial response has been very exciting because it allows a DIY-er and/or a painting contractor to really refreshen a kitchen area or bathroom area, which has long been a focus of consumers in terms of remodeling or renovating their home but to do so with a $500 million (sic) [$500] spend on specialty products, as opposed to a $25,000 spend on new cabinets and new countertops, new granite, stuff like that. So we're actually introducing some products that, we think, and early indications are positive, will address your concern about people trading down. We just want them to, while they're still watching their nickels and dimes, be able to do renovation and small project redecorating, which fits right in our wheelhouse, until such time as our economy's in better shape and people can start spending money again. So to a certain extent, I think that will favor our product categories. And it's one of the reasons why our Rust-Oleum business has outperformed the broader market and the other parts of our Consumer segment this past year.

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

I wonder if you could detail, with the year over now, where you stand in terms of revenues by geographies, maybe the main geographies.

Yes, we had commented on that earlier, and I can tell you that, just in terms of growth, we were up about 5%, North America; low teens in Europe; and then 20% or so -- and if you'll give me a second, we did about, oh, $770 million in Europe, about $2.3 million in North America and saw our total kind of southern hemisphere grow nice 20-percent-plus, but that was all on $100 million basis of business. So we went from just under $300 million in kind of South America, Middle East, Africa, Asia, to something that looks more like $340 million or so, and that's continuing to grow nicely.

Okay, great. And regarding your share repurchase program, anything there? Or are you more focused on the M&A efforts?

In general, you'd see any of our pure repurchase activity in our Qs and Ks. I can tell you that we have tried to bulletproof, to the extent it's possible, our balance sheet. I think Bob and Keith Smiley, our VP and Treasurer, have done a really good job with a very rock-solid, 5-tiered, long-term fixed-rate debt capital structure and a lot of liquidity. Our focus in the coming years is growing our business through internal investment, and there's a number of categories of long-term product development investment that we're funding today, making sure that we have the cash flow to support that, a strong balance sheet and good cash flow and good liquidity to support our acquisition activities and an expectation that our investors should have forward dividend that will continue to grow. At the same time, we get our payout ratio down below 50%. So that'll be a cash dividend that should grow year-by-year and earnings growth in combination that can let us get that payout ratio down. So those are our primary focuses on free cash flow and investing. Historically, we've been more of an opportunistic buyer of our stock, as opposed to a regular buyer of our stock. We think that's the right way to do it. And I would suggest that, when RPM's in the market buying its stock, it's a pretty good time to buy it. And we have certainly the liquidity to do that, in the event that our stock were to decline significantly in a way that we thought was not in relationship to our outlook for RPM's cash flow or stability or growth but in response to some of the more macroeconomic issues that are out there around U.S. budget deficit or debt ceiling or things like that.

Okay, and relative to Kemrock, you've mentioned in the release that you're over 18.3%. That triggers a provision where you can buy up to another 20%. When does that offer, tender offer, expire?

The tender offer. So Kemrock is a joint venture and partner and also a company that we have an investment in, in India. It's a pretty exciting business. When we first made an investment in Kemrock, it was in 2006. It was a modest investment, and it was about a $15 million to $17 million in revenue business. This year, Kemrock revenues will exceed $200 million. Our investment is up to 18.3%. We have a tender offer that is just getting through. It was announced a few months ago, but it's just getting through the Indian equivalent of the SEC for final approval. We would expect that to commence, actually, in the market in the next couple of weeks, so we would announce in the first quarter the results of that. It's our belief, although we'll find out afterwards, that our likely ownership investment post-tender would be somewhere in the 20% to 25% basis. The good news about that is that we can then reflect the modest positive impact of Kemrock in our income statement on an equity basis accounting method.

Okay, great, that's a good elaboration. And back on the Merit [ph] or Lancaster or Five Star [ph] or I guess it's all of them. Relative to Rust-Oleum and DAP, are they continuing to work with this group? It seems like they're trying to get sold out to someone else, I guess, but just wondered if you could elaborate on that.

I can't answer that question. I know that we took the hit in the fourth quarter. That business is in reorganization, but beyond that, I really can't answer what our activities are with them. I can find out, but I don't know the answer to that.

Okay. So you may not be using them as a distributor, currently?

I assume we are, Greg, but I don't know.

Okay. And one final one. I know you've been in the throes of a CFO search. I'm just wondering how that is progressing.

Well, Bob's sitting across the table from me and looking rosy. But we are working with our audit committee, and I would expect this year that we will find a suitable replacement to step into Bob's shoes. And in the interim, he is continuing to enjoy his CFO-ship at RPM. I think he's expressed to me that he'd love to stay longer, but at 67 or 68 years old, it's time that we find his replacement. And in the meantime, he's doing a nice job.

Okay, but it doesn't appear like it's a pressing concern from your standpoint.

I think it's important that we find the right person, and we've had somewhat of a quiet -- not so quiet, but an internal search that we've conducted, and it's likely that we will engage a major search firm in the next month or so. And once we do that, we're probably 2 or 3 months away from finding a good successor.

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

Chantelli, thank you. I'd like to thank the RPM employees for their dedication and commitment to generating the strong results that we reviewed today and also thank our shareholders who have been with RPM for many years. We continue to outperform the S&P 500 in our peer grope -- peer group over long-term periods, including the most recent 5- and 10-year periods significantly, beating the S&P 500 by 221% over the last 10 years. Our shareholders should expect us to continue to grow our business and at the same time grow our cash dividend to shareholders. And lastly, I'd like to thank you for your participation in our 2011 year-end investor call. Have a great day.

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