RPM International Inc. (RPM) Q4 2013 Earnings Report, Transcript and Summary

Welcome to RPM International's conference call for the fiscal 2013 fourth quarter and year end. 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 report 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 of the most directly comparable GAAP financial measures on the RPM website. [Operator Instructions] At this time, I would like to turn the call over to RPM's Chairman and CEO, Mr. Frank Sullivan, for opening remarks. Please go ahead, sir.

Thank you, Alex. Good morning, and welcome to the RPM International Inc. investor call for the fiscal year 2013 year end and fourth quarter period ended May 31, 2013. With me on today's call are Rusty Gordon, RPM's Vice President and Chief Financial Officer; and Barry Slifstein, RPM's Vice President of Investor Relations and Planning. Our 2013 fiscal year was certainly an interesting one. To paraphrase Charles Dickens, it was the best of times, it was the worst of times. Throughout the year, we had a number of one-time adjustments or charges, including in the fourth quarter. These generally fell in 4 categories: The first related to our prior investments in Kemrock Industries Limited in India. Our fourth quarter charges here have totally eliminated any carrying costs associated with Kemrock. The second area was our Building Solutions Group roofing division and the settlement of our GSA issue. The charges in the fourth quarter also square away this issue, and we have a tentative agreement, which we hope will be finalized in the coming weeks. Also in the fourth quarter, our Rust-Oleum Group announced plant closures in 2 areas: One in Rockford, Illinois, associated with the Testors division; and the other in Europe, associated with our European operations. Rust-Oleum has been working for the last couple of years to streamline manufacturing in their supply chain, and while they are a top-performing group in fiscal '13, are continuing their focus on rightsizing manufacturing in Europe, as well as positioning their hobby division for stronger growth in the future. Those were the reasons behind the plant closures and related charges in the fourth quarter associated with the Rust-Oleum. Lastly, earlier in the year, in conjunction with our acquisition of Viapol in Brazil, we made the decision to discontinue a small Stonhard flooring operation in order to take advantage of the manufacturing, sales, marketing, distribution and leadership of Viapol in the flooring area for the Brazilian marketplace. Aside from these one-time adjustments, our deliberate strategic balance between consumer and industrial markets paid off again. While on the prior year, strong growth and good leverage to the bottom line in our Industrial segment led to double-digit earnings and cash flow growth, this year, 2013, in the face of very different global economic conditions and some well-timed and good-performing acquisitions, our consumer segment posted strong sales and earnings growth, leading our full year consolidated performance to record levels of earnings and cash generation on an as-adjusted basis. We experienced solid performance in the fourth quarter and for the full year in a number of our Industrial segment businesses, especially those serving North American construction markets, and largely throughout Latin America, including a strong first year of growth from Viapol in Brazil. As we experienced throughout the year, in the fourth quarter, broad economic weakness throughout the Eurozone countries resulted in year-over-year declines in sales and earnings for our European-based companies. And our roofing division remains significantly challenged by the distractions around resolving the GSA contract issue, which we hope are now resolved, and cut backs in spending in our core public sector markets at the local, state and federal levels. Nonetheless, the solid performance of most of our Industrial segment businesses, combined with robust internal and acquisition growth in our consumer segment, resulted in double-digit earnings and cash flow growth for fiscal 2013 over the prior year on an as-adjusted basis. Overall, we are pleased with our 2013 performance and we are off to a strong start to the new fiscal year. I'd now like to turn the call over to Barry Slifstein to provide the details of our fiscal 2013 fourth quarter on an as-adjusted basis.

Thanks, Frank, and good morning, everyone. Thank you for joining us on today's call. I will review the results of operations for our fiscal 2013 fourth quarter and year-to-date on an as-adjusted basis, then cover [ph] some May 31, 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 fiscal 2014. On an as-adjusted basis, for the fourth quarter, consolidated net sales of $1,170,800,000 increased 6.3% year-over-year due to acquisition growth of 7.1%, which was partially offset by unfavorable foreign currency translation of 0.8%. Organic sales were flat. Industrial segment sales were down 2.1% year-over-year to $709.2 million due to an decrease in organic sales of 5% and unfavorable foreign currency translation of 1%, which were partially offset by acquisition growth of 3.9%. The consumer segment generated 22.4% sales growth to $461.6 million due to organic growth of 9.6% and acquisition growth of 13.3%, which was slightly offset by unfavorable foreign exchange of 0.5%. Our consolidated gross profit increased 9.5% to $504.1 million from $460.4 million last year, principally due to higher sales volumes, supply chain initiatives and accretive acquisitions, resulting in the recovery of margin lost in earlier years due to material inflation. As a percentage of net sales, gross profit increased from 41.8% last year to 43.1% this quarter, representing an increase of 130 basis points. Consolidated SG&A increased 8.6% to $349.9 million from $322.2 million last year, due to additional SG&A from acquisitions, higher pension and legal costs, higher advertising and promotional expenses, predominantly in the consumer segment, and increases in variable distribution and compensation costs attributable to higher sales volumes. Consolidated earnings before interest and taxes, EBIT, increased 11.3% to $155.2 million from $139.5 million last year due primarily to efficiencies gained through plant operations, combined with accretive acquisitions earlier in the fiscal year, which were partially offset by higher SG&A expenses. At the Industrial segment, EBIT increased 0.6% from last year. Excluding the negative impact on EBIT attributable to the roofing division, EBIT would've increased double-digit year-over-year. The gradual improvement in commercial construction, combined with accretion from Viapol's acquisition, partially offset continued rightsizing initiatives at roofing. Consumer segment EBIT increased to $78 million from $60.3 million last year, an increase of 29.2%, driven by higher sales volumes due to new products, the strengthening residential market and strong acquisition performance from HiChem, Synta and Kirker. Corporate other expenses of $13.7 million increased $2.5 million from last year, primarily due to higher pension expenses, partially offset by lower insurance expense. Interest expense increased from $18.4 million last year to $21.0 million this year, primarily due to borrowings associated with this year's increased acquisition activity and the issuance of a $300 million bond in October, partially offset by a lower interest rate. Investment income was $5.2 million for the quarter, which was approximately $4.3 million above last year due to gains on sales of marketable securities at our captive insurance companies. Our income tax rate, although our full year-over-year tax rate was essentially flat, our fourth quarter income tax rate increased from 27.4% last year to 28.3% this year. The change in the quarterly tax rate was due principally to comparative changes in jurisdictional mix of actual and forecasted earnings. Net income increased 15.5% to $95.4 million compared to last year's $82.6 million. Diluted earnings per share increased 14.3% to $0.72 per share compared to $0.63 per share last year. With regard to the year-to-date results, consolidated net sales increased 8.1% to $4.08 billion from $3.78 billion last year, principally due to acquisition growth of 7.2% and organic growth of 2.1%, which were partially offset by unfavorable foreign exchange translation of 1.2%. Net income increased 14.5% to $241.3 million compared to last year's $210.7 million. Earnings per share increased 13% to $1.82 per share this year compared to $1.61 per share last year. And now a quick look at the balance sheet and cash flows. Cash from operating activities of $368.5 million increased $73.6 million from last year. The improvement was primarily driven by improved net working capital management and successful results from acquisitions. Free cash flow increased 43.5% to $159.4 million from $111.1 million last year. Depreciation and amortization expense was $83.7 million compared to $73.7 million last year; CapEx of $91.4 million this year compared to $71.6 million last year. Our accounts receivable DSO was flat to last year at 58 days. Days of inventory were 74 days this year compared to 69 days last year. Finally, a few comments on our capital structure and overall liquidity. As of May 31, 2013, total debt was $1.37 billion compared to last year at $1.12 billion. Our net debt-to-capital ratio was 46.2% at May 31, 2013, compared to 40.3% at May 31, 2012. The increase was attributable to additional borrowings to fund acquisitions. Our long-term liquidity at May 31, 2013, was $1.086 billion, with $344 million in cash and $742 million available through our bank revolver and AR securitization facilities. In October 2012, RPM issued a 10-year, $300 million bond with an interest rate of 3.45%, thereby lowering the effective average interest rate from 6.1% to 5%. With that, I'll turn the call over to Rusty Gordon.

Thank you, Barry. I would like to briefly cover our outlook for the 2014 year. With the GSA and Kemrock issues behind us in the prior year, we look forward to getting back to more typical RPM performance in FY '14. We will be benefiting from the full year's performance of our acquisitions that were completed in the last 12 months, and we are confident that our recent actions to reduce overhead in Europe and restructuring at the BSG will address some of our problem areas. We are hopeful that Europe is nearing the trough of its recession and our volume growth begins to turn positive there in the back half of FY '14. Until the volume does pick up there, we have lowered our cost structure so that our earnings leverage will be improved in Europe. On a consolidated basis, we expect our sales to grow by 5% to 7% in FY '14. The combination of improving market conditions and innovative new product development will lead us to continued success in our consumer segment where we expect sales to grow in the 6% to 8% range. On the industrial side, we expect more moderate sales growth in the 4% to 6% range, as we expect BSG roofing to still face negative comparisons until the second half of the year. In our nonoperating segment, we are expecting pension costs to be flat in FY '14 versus the prior year, which is a nice change from FY '13. With our well-balanced portfolio, solid management philosophy and disciplined planning and M&A processes, we look forward to executing upon our FY '14 plan and leveraging our 5% to 7% sales growth into EPS growth of 9% to 13% or $1.98 to $2.05. This ends our formal presentation, and we are now pleased to answer your questions.

[Operator Instructions] Our first question comes from Ghansham Panjabi. Matthew R. Wooten - Robert W. Baird & Co. Incorporated, Research Division: It's Matt Wooten sitting in for Ghansham today. On the consumer business, the 10% organic growth rate in the quarter was certainly impressive. Based on your guidance, you expect the growth to be tempered in fiscal year '14. Can you talk about what drove the performance in the quarter, and then how we should think about the breakdown of sales growth, organic sales growth, between the first half of fiscal year '14 and the second half of fiscal year '14?

Sure. In the consumer segment, I think the underlying economic factors that are supporting our growth is a return to a normal housing market. Certainly, the new home construction helps us a little bit, but more directly is housing turnover, where we benefit on the fix upper repair or redecorating by homeowners when they prepare a home for sale and then by the new homeowners when they take possession of it. We also think that there is a return to normal levels of repair and maintenance and small project redecorating from very depressed levels a few years ago. And then lastly, particularly at Rust-Oleum, we are picking up both market share and also creating new categories with a string of exciting new product introductions, whether it's 2x, which is a unique aerosol process that allows us to distribute twice the coverage out of a can of spray paint or whether it's the newly introduced NeverWet product. We are continuing to introduce new products at higher-than-typical price points, and all of that both helps us pick up market share and also expand the broader market. And we see that continuing into fiscal 2014. Matthew R. Wooten - Robert W. Baird & Co. Incorporated, Research Division: Okay. And then in terms of SG&A, it certainly seems that there might have been a slight less operating leverage than we would have expected in the consumer business, at least in this quarter. Do you expect SG&A to temper through -- as we progress throughout fiscal year '14?

I think as we get into fiscal year '14, if we experience the revenue growth that we're hopeful for, the answer to that question will be yes. We are introducing a number of new products. Our businesses, whether it's industrial or, in this case, consumer, still remain relatively seasonal, so we had a pretty healthy dose of marketing and advertising in the spring and early summer months to support new product launches. And I think our results would show that, that's the right thing to do. But if we experience the growth throughout the year that we expect, you should expect some better leverage to the bottom line out of that division for the consolidated full of fiscal '14.

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

Frank, I guess you started your remarks talking about some of the charges, and I'm sure there were more than you would've preferred in fiscal '13. As you close the books, though, and look ahead, was the slate reasonably clean as it relates to charges for fiscal '14, would be my first question. And then second one, on the restructuring charges related to Rust-Oleum any way to quantify the prospective impact on earnings or margins associated with that?

To your first question, as far as we can tell, the slate is clean for 2014. We are fully written off anything that we have with Kemrock. We anticipate a finalization of an agreement in principle on the BSG roofing division issue in the coming weeks. And so I think we're in pretty good shape to once again be more typical RPM, which is to deliver clean results, and certainly FY '13 was not a year in which we did that very well or quite candidly that we're proud of in that regard. On the Rust-Oleum front, these are very smart moves by a management team that's doing a great job. Rust-Oleum had a terrific year as did DAP as did performance of the consumer acquisitions that we completed throughout the year, and those things resulted in the consumer segment results that we posted, both for the year and the quarter. I recite that because, to the extent that we have a presence in our consumer segment in Europe, and that is most exclusively at Rust-Oleum, they experienced the same thing all of our European businesses did, which is a reduction in revenues and a reduction in earnings. And so with some acquisition activity that Rust-Oleum has had over the last 5 or 7 years to create a presence in the European marketplace, they found themselves with some excess capacity and have made the culturally and people-wise difficult decisions, but financially smart decisions to address that capacity now. And as Rusty commented on a return to growth in Europe and a recovery in those markets, we should certainly be in a better position to leverage that growth back to our bottom line. And in terms of that piece, as well as the Testors piece, I think the payback period for both of those will be about 3 years, and that's based on our current outlook in Europe. Obviously, if economic activity picks up, that payback will be much quicker.

Okay. And then shifting gears, if I may, what is your current outlook for raw material cost across the company?

It's pretty stable. With 50 different business units and thousands of different product lines, you've got a mixed basket of raw materials for every different product. So as we speak, we have some raw material relief in certain product categories. Having said that, for instance, at Rust-Oleum, they're RPM's largest purchaser of acetone as a critical raw material, and we're in a period where acetone prices are actually rising. And so it really is a mixed bag across the different companies and product lines of RPM. But on a consolidated basis, we think we're planning for and anticipate flat to slightly down raw material costs. Oil, which is moving in the wrong direction currently, could have an impact on that throughout the year, but that's our best guess at this point in time. The last comment I'll make there is that we continue to have a focus across all of RPM on improving our gross margins. And a lot of that activity is coming through, whether it's manufacturing, streamlining or different looks at our supply chain, it's a challenge across all of our businesses that we are taking on. Product mix also is an area relative to new product introductions and also a mix between our different companies that will impact gross margins throughout the year.

Our next question comes from the line of Mike Ritzenthaler from Piper Jaffray.

I wanted to dive a little deeper into some of the industrial pockets of strengths, waterproofing and the concrete admixtures in particular. Was there more infrastructure spending on your specific end markets or was it something else? I guess the spirit of the question is around the sustainability going into '14.

Sure. The strength that we've had has been throughout the Americas. And our sealant business, waterproofing and construction chemical products throughout the Americas, with the possible exclusion of Canada, which has had a little softness, has been quite good. One of the things to understand about our sealant business, our admixture business, construction chemicals is that while we are certainly competing in the areas of specifications on major projects, our biggest strength is broad distribution towards repair, maintenance and smaller projects. And that's the area where we're seeing the greatest strength. So this is not a resurgence of big project construction. It seems to be more of a resurgence of repair and maintenance, of growing commercial construction, of industrial construction across the board in North America. So we're seeing good takeaway from our industrial distributors in the sealants, waterproofing and construction chemical areas. And we've seen real strong results on what historically has been a pretty small base, but it's a growing base, particularly with the acquisition of Viapol throughout Latin America, where we have plant operations in almost every country. We're in Mexico, Chile, Colombia, Argentina, Brazil. And so that's been very strong, and that continues as we speak.

So perhaps, you guys don't get as upset about the yellow -- the orange cones as the rest of us do, but your answer kind of dovetails perfectly into the earnings outside the U.S. and Europe. They're still pretty small on a relative basis, but I'm curious about the performance versus planning and margins in some of these international markets outside U.S. and Europe to the larger organization and where you see some of the opportunities and risks as you develop in these emerging economies.

Sure. First of all, for Europe, it's not really small for us. It represents about 20% of our revenues. And on a year-over-year basis, whether it was that small portion or smaller portion in our consumer segment, mostly Rust-Oleum, or the Industrial segment businesses in Europe, from the construction chemicals to high-performance coatings, to flooring, we saw single-digit declines in revenues, low single-digit declines in revenues, and then unfortunately, higher declines in operating income across almost every product category. And when you look at Europe over the last year, because of austerity and because of spending cuts and economic conditions, quite candidly, there hasn't been growth at the government level, at the business level or at the consumer level in terms of spending. We are seeing some limited signs that that's starting to hit bottom. Part of that is, is that when you dig a big enough hole, eventually, people stop digging and you start seeing positive sales results on the sales and earnings line from prior year lower performance. We anticipate some positive sales and earnings growth in the second half of the year, as Europe begins to stabilize a little bit. And we're actually seeing some flatness, which is a good sign, as the new fiscal year begins to unfold.

Yes, that's all really helpful. And I apologize for not being as articulate as I could have been, but I meant outside of the U.S. and Europe, Latin America, certain parts of...

Latin America is doing great for us. And despite headlines around Brazil, the construction markets there are still very robust, and that is exactly the area that the Viapol business and other RPM product lines that we hope to leverage by Viapol in terms of epoxy flooring or construction chemicals or admixtures are all doing quite well. The rest of Latin America is growing high double -- or high-single digits, low double-digits. The balance of our business tends to be Middle East, India. Those businesses are doing fine, but it's a real mixed bag based upon different countries and different product lines. Still relatively small in the grand scheme of things, but growing on a go-forward basis. The only region in the world where we have continued to see deterioration is Europe.

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

Real quick. Your -- on the consumer business, back to it, your growth in that business is -- I understand that you're benefiting from market demand with housing turnover, et cetera. But you're outperforming your peers, and it seems like you're outperforming the industry substantially. So would you lump that into -- how would you gauge your gains there? Would it be more market share, or would it be more new products or would you say maybe more of a trend towards, I don't know, lack of a better word, cheaper remodeling going forward? So how would you view it?

I think you hit all of the right areas. I do think that consumers and homeowners are much more comfortable. The recovery in the United States is still pretty tenuous, and we see that in industrial activity, which could be more robust. But I think given where the economy is today, there are no longer fears about people losing their jobs or losing their homes. I think people are more secure in both, and so they are spending more in their homes. Rust-Oleum, in particular, has introduced a number of brand-new product areas from various kitchen transformation product lines that allow people to do small project redecorating in bathrooms and kitchens, and then just the general patch and repair and remodeling, that would impact DAP or the core Rust-Oleum product lines, are going well. So I think in general, we're in a space market-wise that's growing. I'm not too sure that the $50,000 and $100,000 bathroom and kitchen remodeling has come back. Of course, that is not our space, but just to make a comparison there. Then the other area is just new products. There are a number of new categories that we are working on with our major customers. They're very exciting, and to the extent that they can create new demand by solving new problems. NeverWet is an interesting product line introduced this summer by Rust-Oleum. It's doing quite well in its introduction. And it's interesting because it's the first RPM product that I'm aware of where we don't exactly know the use by contractors or consumers. In almost every new product introduction, we have a very strong sense of where those products will be used, and then we find out that there's another 10% or 15% per se of use that might be something we didn't think of. In this case, we are on a discovery process with consumers and OEM -- potential OEM customers. And it's fun in that regard because it's not exactly a market share gain. It's a new product that can solve some new and different problems. It's pretty exciting for us and our major customers.

Great. And then real quick, I might have missed it, what was your volume gain in the fourth quarter on a year-over-year basis for both the industrial and the consumer business?

Well, organic growth in the fourth quarter consolidated was fairly flat.

On -- for volume?

Well, volume's part of organic. It's volume price mix...

Right, I understand that. So what was the volume gain? What was the breakout between volume and price mix for the segment on a year-over-year basis in the fourth quarter?

You're looking at 9.6% organic growth in the fourth quarter from consumer, and Barry would have the rough percentage breakout of that between price and units. It's about 50-50. And in industrial, organic growth was actually down. And so you had a little bit of price and negative units. Again, you have to, as we've talked earlier on the call, take that with a grain of salt across our whole Industrial segment. The biggest pieces of that were negative impacts from Europe and roofing. If you excluded, for instance, the roofing division in fiscal 2013, you would see positive organic growth and positive unit volume growth across the rest of our Industrial segment, including Europe.

Okay. And then if you look at the Kemrock, you had a bad debt expense in there as part of the -- I guess, as part of the GAAP numbers but was adjusted out. And I understand, you're a supplier to Kemrock. Do you continue to still supply this business? And is there any receivables that are at risk going forward? Or is this completely cleaned up at this point?

It's completely cleaned up. In the fourth -- we had written off all of our equity investment in prior quarters. We had left a previously written-down convertible bond and a business-related advance. And all of that has been written off. And we effectively have 0 exposure and are doing, for the most part, 0 business with Kemrock.

Our next question comes from the line of Rosemarie Morbelli from Gabelli & Company. Rosemarie J. Morbelli - Gabelli & Company, Inc.: Frank, looking at Europe, you are rightsizing Rust-Oleum, but the consumer side has the smallest percentage in Europe. So 2 questions: One, what is the percentage of revenues in Europe for both -- for independently, consumer and industrial? And then, what are you planning in doing on the industrial side? And is it needed?

Okay. I'd like to clarify one point to Ivan's earlier question. In the quarter, of 9.6% organic growth, very little of that was price, and the vast majority of that was unit volume. So it was a -- it was quite a good year and a good finish to the year for our consumer segment relationship to market share and new product introductions. Rosemarie, to your question, about 25% of our European revenues are associated with our consumer segment, and the balance is in industrial. And both of them have been equally challenged. As I commented, there's really no pocket of strength in Europe over the last year, and we see things flattening out at what are significantly lower levels than business activity was, for instance, a couple of years ago. Rosemarie J. Morbelli - Gabelli & Company, Inc.: So any thought of eliminating some capacity on the industrial part of your European operations? Why is it just Rust-Oleum that is shutting down some plants?

I can tell you that we don't have any plans at this point. And Rust-Oleum management looked at their manufacturing footprint throughout the European marketplace and made a, I think, a very smart forward-looking decision. We don't have any plans for additional plant closures. We have had single millions of dollars of severance and manufacturing adjustments in our Industrial segment throughout the year, but that was -- whether it was headcount reductions or manufacturing adjustments, we have not had any significant plant closures. The one big area that we did have, as you recall in the first quarter, was part of that whole BSG roofing collection of charges. In this case, we took about $11 million charge in the first quarter to totally shut down the roofing division international effort. Rosemarie J. Morbelli - Gabelli & Company, Inc.: Okay. Yes, I had forgotten that. If -- when we look at your outlook for next year in terms of, well, top line and EPS, so at first, for the top line, what would be the acquisition contribution revenues that were not in 2013, since next year we will have full year? And then what would cause you not to reach the top of your range on the EPS side?

The outlook comments that Rusty provided incorporated our outlook in consumer and industrial, including the remaining months of acquisitions we completed last year. Viapol was completed at the end of June, so there's very little comparability there. And Synta and Kirker were completed in the second -- early in the second quarter. So we will have benefits from those in the first 3 or 4 months of the year. I think the impact of that is about 1% of the sales guidance that we provided for the year. Rosemarie J. Morbelli - Gabelli & Company, Inc.: Okay. And what kind of a disaster -- or do you need a disaster not to reach the $2.05 on the EPS side?

Well, our outlook for the year is $1.98 to $2.05. It's a relatively broad range, and it's really broad for 3 reasons: Number one, we are anticipating, on a consolidated full year basis, flat results year-over-year out of Europe and flat results year-over-year out of our roofing division. We think that we are positioned in both cases to deliver flat results and focus particularly in roofing on a return to focusing on sales and earnings growth in that very good and profitable RPM business unit. If we are long in both of those, we are going to be at the lower end of the range and not the upper end of the range. The other wildcard for us, and I think all companies throughout the year who have exposure to international markets and currencies, is what will happen with U.S. dollar. And we expect some pretty robust growth in places like Brazil. Despite the headline challenges in South Africa, we're doing quite well there. Both of those currencies have deteriorated significantly in the last couple of months versus the U.S. dollar. So on a translated basis -- not an actual operations basis, but on a translated basis, that does not help us. And so in particular, as it relates to the euro and the Canadian dollar, which are 2 of our largest currency exposures, those are the other things that we kind of scratch our head about as it relates to what seems to be a wide range. So back to your comment, if we have a reasonable, very modest recovery in Europe and in our roofing division, and we don't get whacked by currencies, we should be at the upper end of that range.

Our next question comes from the line of John McNulty from Crédit Suisse. John P. McNulty - Crédit Suisse AG, Research Division: With regard to the Industrial segment and the outlook that you have, what would the growth expectation be if it wasn't for the roofing kind of unwind that you're still in the process of for the first half? How much of a drag is that in your guidance?

It's not really a drag in our guidance. It's -- we're assuming, on a full year basis, that it will be flat year-over-year both on the top and bottom line. It will hurt us a little bit, I think, in the first quarter, but then as the year unfolds, it should be at least flat, if not, picked up a little bit at the end of 2014, so the spring of next year. It hurt us significantly, as you heard this year, along with Europe. Excluding Europe and roofing, which those are 2 core pieces of our business, so you can't readily say that, but if you did, we would have an industrial division whose sales were up high, single digits and earnings were up low, double digits. John P. McNulty - Crédit Suisse AG, Research Division: Okay, fair enough. And then with regard to the margin implications, now that a lot of the roofing issues, the roofing unwind has been kind of finished off, how should we think about the margin improvement potential in the Industrial segment, say, in 2014?

I think the margin improvement in relationship to that particular area, really, is a function of revenue growth. We have exited some unprofitable international activities, as well as some non-core roofing-related contracting business. And so over time, we would expect a higher gross margin from that business unit. But that's not going to positively impact our mix or our bottom line until we get back to revenue growth, which we are intensely focused on. John P. McNulty - Crédit Suisse AG, Research Division: Okay, great. And then just one last question, with regard to M&A. Your fiscal 2013 was a pretty strong year for you with regard to M&A. How should we be thinking about 2014 in terms of what you see in the pipeline and maybe your ability to get that done?

Sure. Our corporate development team and our business units had a great year in acquisitions. And in every case, these were acquisitions that we pursued over a number of years and were able to privately negotiate and bring these businesses into RPM, and we're real pleased with those. Our pipeline is pretty typical. We are looking at a range of small- and medium-sized transactions. And so the pipeline hasn't changed much, but the timing of acquisitions is impossible to determine, whether it's something that would get completed in the next 3 or 4 months or something, for some reason, relative to market activity, or a disagreement around valuations might be put off for a couple of years. So we still have a lot of activity going. It's really hard to say what, if anything, acquisitions will add to fiscal 2013 on top of the results that we've communicated today in terms of our guidance. I'd be disappointed if we didn't get a couple of small product lines completed. Those, typically, don't move the needle in a big way, but the IRRs in those are typically very strong, because we can integrate those, and you're looking at paybacks that are more in line with capital investment decisions as opposed to big acquisitions.

Our next question comes from the line of Charles Dan from Morgan Stanley.

Just wanted to clarify for your new guidance that this includes only the positive impact from M&A that's already been executed.

That is correct.

Okay. And just a follow-up to the comments you just made. Is there anything in particular that you're -- that is more a driver of sort of a slowdown in M&A? Is it being valuation? Or is it just different for every -- sort of across the board?

It's different across the board. I mean -- and an M&A process is a little bit like a selling process. Certainly, you've got to find the right strategic fits at the right value. Much like the process that analysts go through, you've got to look at a lot of opportunities to find the good fits. In some cases, in the larger size, which, for us, is hundreds of millions of dollars, there has been, in the last year there. And as you read the paper, on much larger transactions that we typically wouldn't be looking at a disconnect between seller value expectations and buyer discipline. There's a lot of private equity assets on the market across all industries, and I think there is a disconnect between seller expectations and buyer pricing discipline. And that is part of the reason that on a macro basis, you're seeing relatively modest M&A activity versus certainly activity before the 2008, 2009 recession.

And, I mean, so the last several years, you've been able to deploy most of your excess free cash flow towards acquisitions. Do you still feel like you'll be able to do that over the next several years? Or should we think about the uses of cash going -- a different way going forward?

No, I think the way we think about capital allocation is first funding our internal investments. And to the extent that we have some exciting new product areas, that will continue to be the primary first driver of capital allocation. And then towards acquisitions, the other thing that I would comment on that everyone on the phone knows is that we've increased our dividend for 39 straight years. We will review that again as we do every year in October, and we are certainly interested in continuing that strength for many years to come. And so that puts a real discipline on our planning process and our capital allocation with a focus on cash flow, to make sure that we are generating positive cash to meet our internal needs, grow that dividend and have enough left over along with credit availability to fund our acquisition program. I don't see anything changing in that regard for the next couple of years.

And just wanted to point out that the NeverWet video that was posted a month ago crossed through 5 million hits on YouTube this weekend.

Excellent. Well, to the extent that anybody will be at the New York Stock Exchange investor luncheon today, we will have a number of Rust-Oleum executives to talk about new product introductions and what's really been a very innovative period of time for Rust-Oleum.

Our next question comes from the line of Edward Yang from Oppenheimer. Edward H. Yang - Oppenheimer & Co. Inc., Research Division: Maybe just piggybacking on that earlier question on uses of cash. What are the -- what's the likelihood of reconsolidating, especially holdco, there were some developments on that a couple months ago, has that kind of pushed out the timetable for potentially trying to reacquire those businesses?

I think the best thinking of our lawyers, as well as the lawyers for SPHC, is that we are in an appellate process. That process could likely go through a District Court and then a -- and then the Third Circuit appeals court. And depending on how that moves, we could be in that process for another 2 to 3 years. At that point, staring at the details, hopefully, of a reconsolidation, it has been our goal from the beginning to get to the point where we can negotiate a 524(g) trust and all the legal elements that go with that, in a manner that's appropriate for asbestos claimants as well as RPM, our shareholders and our business. Edward H. Yang - Oppenheimer & Co. Inc., Research Division: You mentioned public sector demand as one of the headwinds in the quarter. What's -- how big is that business for RPM?

It's a big business for our roofing division. And so that is fundamentally one of the big drivers. We are putting behind us the GSA contract issue. But the biggest driver of underperformance has been the fact that 95% of their revenues are North American-based, almost exclusively, reroofing and institutional-related. And better than half of their activity, let's say, over the last 6 or 8 years, has been generated by local government entities, school systems, state activity and federal work. And in every instance, there are lower levels of funding at almost every level of government in the U.S. And then the balance of their business, let's say, the other 50%, has been institutional customers, corporate campuses, corporate accounts, hospitals, things like that. And so the cutback at almost all levels in government funding and capacity for construction has hurt the roofing business. Edward H. Yang - Oppenheimer & Co. Inc., Research Division: Is there kind of a rough percentage of your RPM consolidated sales that the public sector would represent?

No. I think the only other area that -- where we have real exposure to the public sector is in our Carboline business, to the extent that we're involved with state departments of transportation on highway bridge work. And we've seen some of that in the past. And obviously, there's a huge need for that, but it seems to be a relatively modest area now. When you combine that with our roofing division, I'd be willing to bet that we have about a $200 million or $300 million exposure to kind of government activity. But the only place where we had a GSA contract was at our roofing division. The rest of it is just through third-party contracting or products that would get into government-specified or government-funded work through distributors or contractors. Edward H. Yang - Oppenheimer & Co. Inc., Research Division: Okay. And finally, your guidance on industrial revenues, you expect that to grow, Rusty mentioned up 4% to 6% for fiscal year '14. I mean, obviously, it's 2/3 of your business, so twice as large as your consumer business. So a key driver of the overall earnings growth. But if I look at the sequence of organic growth throughout 2013, we began in industrial organic growth 3.5%, then it came down to 3%. Then it was flat in the third quarter and down 5% in the fourth quarter. So what's the inflection point to get that progression back up to positive 5%?

Sure. If you look at -- and I don't have the breakdown, Ed, by quarter in front of me, but as I commented earlier, if you were to exclude out of our Industrial segment results the negative impact of Europe, as well as the negative impact throughout the year of declines in sales and earnings in our roofing division, the balance of our Industrial segment businesses had high, single-digit revenue growth and low, double-digit earnings growth. So there's a base in there that continues to grow. And our assumption, which gets us right to your question, which is a very good one, is that we will see a stabilization at current levels of our activity in the industrial businesses in Europe, as well as by the end of the year, see a return to sales and earnings growth in our roofing division. And as I had commented earlier that the principal reason for a pretty wide range in our earnings guidance is if we actually see a modest return to growth in those segments and a continuation of the rest of RPM's businesses doing what they have been doing, including in the fourth quarter, we'll be at the high end of that range. If we're wrong on roofing, and we're wrong on Europe, and we get whacked a little bit by currencies, you're going to see us working hard to be at the low end of that range. So those are the variables as to how we see them relative to how we expect FY '14 to unfold.

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

Frank, I believe in your commentary, you mentioned that you're off to a strong start, so far, in fiscal 2014. So I was wondering if you could comment on if you're seeing an acceleration in any of your businesses or end markets? Or is it more just the strength that you saw in the fourth quarter spilling into the first quarter? I'm just wondering if you could give some color on that.

I guess, the only thing I would say now without getting too far in front of a first quarter that is only half over is that we're off to a good start. Our assumptions about flat results in Europe and roofing for all of 45 days are proving to be true. And we're seeing a continuation of the underlying good performance in most of our consumer businesses and the remainder of our industrial businesses. But 45 days don't make a quarter, and they certainly don't make a year.

Okay, and then in terms of...

But [indiscernible] a bad start.

In terms of looking to the margin expansion for next year, in gross margins, particularly, price raws have been a nice tailwind here, the last couple of quarters. It looks like it hasn't anniversaried yet in the first quarter, so you'd likely get some nice gross margin expansion there. But wondering after that if you expect to continue to see levels of gross margin expansion and kind of what your outlook is for the year.

Sure. We -- as I mentioned earlier, if you go back, boy, to the early 2000s and then fast forward to a couple of years ago, we lost a significant amount of gross margin at RPM, some in our industrial business and more in our consumer businesses. And so for the last couple of years, we have had a real focus on improving those gross margins, obviously, as it relates to cost price issues, but also a focus on mix between companies and within companies on product lines. And, lastly, in relationship to streamlining certain areas in our supply chain and looking at manufacturing efficiency initiatives. Rust-Oleum has been leading the charge in that. They've been done a great job in their plants. They have been -- begun sourcing some raw materials in places like Asia. We are sourcing chemical raw materials outside of North America, and that's happened in the last couple of years. We are looking at plant efficiency initiatives across a lot of our businesses, and as you're seeing in this fourth quarter, where we have excess capacity, some plant closures. So we have a very good focus across all our businesses on regaining lost gross margin. We're not there yet. And it's not just a function of raw material prices, it's a function of plant efficiency, supply-chain efficiency and mix and where we want to be in our industrial and consumer segments and innovation areas and in problem-solving areas, as opposed to commodity products that really don't add a lot of value to consumers. And so that focus is continuing. I would expect our gross margins to be up, perhaps not as much as they were in fiscal '13, but to be up again in fiscal '14. And if we hit these revenue targets that we are communicating, I would also expect us to see a little bit more leverage through SG&A to our bottom line.

Our next question comes from Greg Halter from Great Lakes Review.

Your CapEx was up this year, and just wondering what your thoughts are for fiscal '14, as you come out of the recession?

Sure. We would expect our CapEx to be up about the same rate as sales.

Okay. And you mentioned, Rusty, the pension up quite a bit in fiscal '13. Can you provide some background for that either in dollars or percent? And why you think it will be relatively flat for '14?

Yes. Back on May 31, 2012, we reduced the discount rate on our pension liability by 1 percentage point. And as a result, in fiscal '13, we had pension costs that were up in the $14 million to $16 million range for the year. This year, on May 31, 2013, our discount rate on our pension plan is virtually unchanged, since we had the big increase already last year. And as a result, we think pension expense will be flat.

Okay. And are there any ERP systems to be deployed that you're thinking about, either corporate-wide or any of the units?

We are in the final stages of switching out of Hyperion Enterprise consolidation software to the Hyperion Financial Management system across all of RPM. That's been an interesting challenge and relates directly both to very timely and detailed financial reporting for management purposes and, obviously, consolidation for public company reporting purposes. So that's been a significant undertaking over the last year. And we are going live in the first quarter of fiscal '14 with that new global consolidation software. The only other ERP area that we're looking at is bringing Viapol on to the Building Solutions Group SAP platform, which will happen throughout fiscal '14. And that's all part of the guidance that we've communicated.

All right. And any thoughts on your advertising budget for fiscal '14? And I presume that's all encompassed within the SG&A line item?

That's correct. And as we saw in the fourth quarter, and I think you'll see throughout the summer, we will continue to have a pretty good advertising spend. And our goal with new product introductions and the underlying growth is to continue that. Obviously, it's a chicken or the egg in terms of deciding whether you want to get out in front of these new product introductions with advertising or wait to get some sense of revenue growth to cover the advertising cost. But our ad spending has been increasing over the last couple of years, and this year is no exception. It's, obviously, an area that we can cut back quickly on, but again, it's a chicken or the egg decision in relationship to the impact on your bottom line or your top line and what's the right timing. As we speak, we're going to be spending more money on advertising.

All right, sounds good. And one last anecdote, I've heard people are using the NeverWet on their iPhones, so they don't get destroyed by water. I don't know if that's true or not, but that's what we're hearing.

No, I don't know if that's true or not either. We're in a discovery process. I know that there is an online video of NeverWet, where somebody took apart their iPhone and applied the NeverWet treatment to the interior, and then put the phone back together again and applied it to the exterior and dropped it in a bucket of water and pulled it out, and it worked. And that's a brilliant video. People should be reminded that if they take their iPhone apart, they will null and void their Apple warranty. We are looking at not only consumer uses but the potential for some OEM uses of the NeverWet product. And Rust-Oleum is working on kind of next-generation formulas for different surfaces. The outcome of that, obviously, is a development process, and we're hopeful. But we can't count on anything, until we get a next generation that is suitable in different product areas on different substrates. But it's a pretty exciting new product launch for us and just one of a number of good product lines and a lot of innovative thinking that are really driving that 8% or 9% unit volume growth that we experienced in the fourth quarter in our consumer segment.

Sounds good, and we have some on some of our stamped concrete, and it's just fabulous.

Good.

And your final question in the queue comes from Ivan Marcuse from KeyBanc Capital Markets.

Sorry, most of my questions have been answered, but real quick. Did you -- Rusty, did you say that corporate expense should be flat year-over-year in terms of dollars?

No, what I said is that pension costs should be relatively flat year-over-year. Our quarterly cost should be up in the single digit range, just for normal increases in compensation. And, also, insurance costs, we expect to be up a little bit too.

But maybe all in, up 3% to 4%, you think, in that range?

Yes, that's possible, yes.

Got you. And then on the -- what are you looking for tax rate in fiscal '14?

On the tax rate, as you know, we typically guide people in the 31% to 32% range. There's a lot of variability in terms of the outcomes. As you know, we did a lot better than that in fiscal '13 and in fiscal '12. So like I say, there's a fair amount of variability. And, hence, you have some variability already built into our EPS guidance of $1.98 to $2.05.

And then last question, investment income from your insurance -- captive insurance has been -- was a decent tailwind this year. And within your guidance, do you just sort of model that as flat? Or are you looking for that to be a benefit or a headwind to some sort of reversal?

I think it depends on the year. And we don't -- we model it to be flat. We don't plan on gains or losses. And as you know, in the past, and it can pop up in any quarter, we can end up with securities gains or losses. That portfolio is managed. Those are fully licensed captive insurance companies. One is in Vermont and one is in Ireland. And they cover the first level of product and liability insurance for most of our companies, and they're managed by professional managers. And so the good news is in a rising stock market, is the repositioning of portfolio, we get gains. And in a falling market, we get losses. And as you'll recall, back in the 2009, 2010 period, every quarter, we were talking about OTTI write-downs. Fortunately, in the last quarter, we had a couple single millions of dollars of gains on sale. We do not plan on those activities. And they're not exactly part of our core operations, but those captive insurance companies have been part of our risk management planning for more than a decade. And so they really are core to how we risk manage and provide a level of insurance to our companies.

We have no further questions in the queue. At this time, I would like to hand back to Frank Sullivan for closing remarks.

Alex, thank you. For more than 40 years, RPM has been coming to New York City to release our year-end results, and this year is no exception. We're pleased to host a investor and analyst conference and luncheon this afternoon at the New York Stock Exchange. We appreciate your participation on today's call. And I'd like to close by thanking the associates of RPM around the world for delivering another year of record sales, earnings and cash flow growth results and look forward to working with all of you and to answering our investor and analyst questions on our 2014 fiscal year results throughout the year. Thank you for your participation in our call today, and thank you for your investment in RPM.

Thank you, ladies and gentlemen. That concludes your conference call for today. You may now disconnect. Good day.