RPM International Inc. (RPM) Q4 2016 Earnings Report, Transcript and Summary

Welcome to RPM International's Conference Call for the Fiscal 2016 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 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. Following today's presentation, there will be a question-and-answer session. Please note that only financial analysts will be permitted to ask questions. 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. Frank C. Sullivan - Chairman & Chief Executive Officer: Thank you, Ellen, and good morning. Welcome to the RPM investor call for our fiscal 2016 fourth quarter and year ended May 31, 2016. We're hosting today's call from RPM's offices in Medina, Ohio, as the combination of the Republican National Convention in Cleveland, which changed the timing of our year-end board meetings and earnings release and remodeling to New York Stock Exchange and their meeting rooms made it logistically easier to stay here this year. It is our intent to host an Analyst Luncheon next year in New York when we release 2017 results. On the call with me is Rusty Gordon, RPM's Vice President and Chief Financial Officer. Barry Slifstein, our Vice President of Investor Relations, could not be with us today due to a family illness. Today we'll discuss our fourth quarter and full year results, including some detail by Rusty and comments on the outlook for our 2017 fiscal year and then answer your questions. We're very pleased with our sales growth as well as our strong leverage to the EBIT line during our fourth quarter. The negative impact related to the strong dollar is still evident in our results, but diminishing as a percent as each quarter goes by. In Q1, currency translation reduced sales by 6.9%, in Q2 by 6.3%, in Q3 by 4.2%, and in the fourth quarter just ended by 2%. Overall foreign exchange in total, excluding transactional FX, reduced earnings per share by about $0.05 per share in the quarter. Although the negative impact from currency is expected to be less severe in fiscal 2017 than in the prior two years, Britain's exit vote from the EU has worsened things a bit since our fiscal year-ended. We continue to be challenged by weaker economies around the world, especially in our industrial segment, which has roughly 50% of its sales outside the U.S. with sales into the energy and heavy manufacturing industries affected the most. Consumer segment sales continued their upward momentum on a sequential basis with our fourth quarter revenues up 9.9% over last year's fourth quarter in the consumer segment. This predominantly organic growth has been driven largely by several product rollouts resulting from market share gains and new product placements earlier this fiscal year. Sales in our nail polish business were up slightly from last year, a trend we believe will continue in fiscal 2017. Continued strength in the U.S. housing market and strong consumer takeaway at our major retail customers has contributed to robust organic sales in the consumer segment. During last year's fourth quarter, we benefited from a one-time $9.9 million earn-out accrual reversal. During this year's fourth quarter, we recorded a legal settlement charge of $9.3 million related to a deck coating product. Excluding both of these non-operating items, consumer segment EBIT increased 18.2% quarter-over-quarter. The industrial segment representing RPM's largest exposure to international markets continues to be a mixed bag of performance with most regions outside of the U.S. generating declining quarter-over-quarter results when translated back to U.S. dollars. Our U.S.-based industrial companies serving the commercial construction markets performed well with mid-single-digit growth while our businesses having exposure to the global energy sector continue to be down by approximately 10% in revenues. Latin America, especially Brazil, continues to exceed our expectations and the dynamics in their economy with sales in the low-double-digit range in local currencies. In Europe, most companies are delivering low-to-mid-single-digit growth, a nice improvement over a more choppy environment there earlier in fiscal 2016. During the fourth quarter, we completed the acquisition of the 51% of Carboline Dalian Paint Production Company in China that we did not previously owned, representing our first complete acquisition in China. Related to this, we recorded a one-time gain of $8 million as a result of the revaluation of the company's original 49% ownership. Excluding this one-time gain, we were very pleased with EBIT growth in the industrial segment of approximately 7% on flat or slightly down revenues. In the specialty segment, sales were up 5.1% compared to the prior year, driven by several smaller acquisitions during the year. Specialty also had significant leverage to EBIT, up 20% for the quarter. All in all, we're encouraged by the performance of the majority of our businesses around the world in local currencies despite weakness in global energy and heavy manufacturing. I would now like to turn the call over to Rusty Gordon to provide more detail on our fourth quarter results. Russell L. Gordon - Chief Financial Officer & Vice President: Thanks, Frank. I'll review the results of operations for our fiscal 2016 fourth quarter and full year using fiscal 2015 adjusted figures, then cover some May 31, 2016, balance sheet and cash flow items before turning the call over to Frank who will discuss the outlook for fiscal 2017. Before we get started, as a reminder, in 2015 fiscal third quarter, we adjusted out an $83.5 million non-cash net charge for tax accrual, as previously disclosed. In our fourth quarter, consolidated net sales of $1.43 billion increased 3.9% from last year. Organic sales increased 4.6%, acquisition growth added an additional 1.3% and foreign currency translation reduced sales by 2%. In the industrial segment, sales decreased 0.7% quarter-over-quarter to $686.6 million. Organic sales increased 1.6%, acquisition growth added an additional 0.5%, and foreign currency translation reduced sales by 2.8%. In the consumer segment, sales increased 9.9% to $543.8 million. Organic sales increased 9.9%, acquisition growth added 1.4%, and foreign currency translation reduced sales by 1.4%. In the specialty segment, sales increased 5.1% to $196.2 million from $186.7 million in the prior year. Organic sales increased 1.7%, acquisition growth added 4.2%, and foreign currency translation reduced sales by 0.8%. Our consolidated gross profit increased 8% to $647.2 million from $599.3 million last year. As a percent of net sales, gross profit increased from 43.6% last year to 45.4% this year, representing 180 basis points of improvement. Contributing to the margin increase were lower manufacturing costs and supply chain improvements, partially offset by unfavorable transactional foreign currency exchange and unfavorable business and product line mix. Consolidated SG&A increased 7.4% to $424.6 million from $395.4 million last year. The increase was driven by the prior year benefit of an earn-out reversal, current year acquisitions, and higher professional fees. Other income includes the $8 million gain on acquisition of the 51% of Carboline's Dalian China business that it did not previously owned and a $9.3 million legal settlement charge. Consolidated earnings before interest and taxes or EBIT increased 7.9% to $220.4 million from $204.3 million last year. Excluding last year's earn-out reversal, this year's legal settlement charge and the Dalian acquisition gain, consolidated EBIT increased 14.1%. In the industrial segment, EBIT increased 15.4% to $107.9 million. Excluding the Carboline Dalian acquisition gain, industrial segment EBIT increased approximately 7%. In the consumer segment, EBIT decreased 2.6% to $98 million. Excluding the prior year earn-out reversal and the current year legal settlement charge, consumer segment EBIT increased by 18.2%. The specialty segment EBIT increased 20.1% to $32.7 million, principally due to better leverage on our core business and a favorable contribution from several smaller acquisitions during the year. Corporate other expenses of $18.2 million were slightly higher than last year's figure of $17.1 million, driven largely by higher professional fees as well as higher healthcare costs. Interest expense decreased from $27.3 million last year to $23.6 million this year. The decrease was primarily due to the $4 million of higher interest expense last year relating to the early retirement in May 2015 of the $150 million notes originally set to mature in November of 2015. Investment income of $2.3 million for the quarter was in line with last year's figure of $2 million. In regards to income taxes, our fourth quarter income tax rate decreased from an effective rate of 28.2% last year to 22.8% this year. The decrease in the quarterly income tax rate is due primarily to fiscal 2016 fourth quarter valuation allowance reversals, the benefit associated with the non-taxable gain from the Carboline joint venture re-measurement, a deferred tax benefit from state tax rate changes, and the comparative differences in levels of actual versus forecasted income. Net income of $152.9 million increased 19.5% from last year's $128 million. Current quarter EPS of $1.13 per share compares to EPS last year of $0.94 a share, an increase of 20.2%. And now here are some full year measures. Consolidated net sales increased 4.8% to $4.81 billion from $4.59 billion in the prior year. Organic sales increased 2.8%, acquisition growth added an additional 6.7%, and foreign currency translation reduced sales by 4.7%. Currency translation reduced sales by $215 million for the year. Net income of $354.7 million increased 9.8% from last year's $323 million. Current year EPS of $2.63 per share compares to an adjusted EPS last year of $2.38 per share. Now a quick look at the cash flows and capital structure. Cash provided by operating activities was a record $474.7 million for fiscal 2016 compared to $330.4 million last year. The improvement is primarily due to higher net income this year versus last year and overall better working capital management. As of May 31, 2016, total debt was $1.65 billion, which was slightly below last year. Finally, during fiscal 2016, the company repurchased 800,000 shares of its stock in the open market at an average price of $43.87 per share for a total cost of $35.1 million. There were no share buybacks during the fourth quarter. With that, I'll turn the call back over to Frank. Frank C. Sullivan - Chairman & Chief Executive Officer: Thank you, Rusty. I'd like to briefly cover our full year fiscal 2017 outlook. In general, RPM remains in a growth mode with capital spending planned to increase from $117 million in fiscal 2016 to $130 million in fiscal 2017, mostly supporting international organic expansion. We're also undertaking some activities in 2017 to drive greater operating efficiency with an eye towards achieving our publicly communicated fiscal 2018 goal of a consolidated EBIT margin greater or equal to 12.5%. Specifically in the consumer segment, market share gains and new product placements from earlier this fiscal year drove incremental sales during most of fiscal 2016, a trend we expect to continue in fiscal 2017. We believe that improved shelf presence and continued innovation against the backdrop of favorable U.S. economic fundamentals will position the consumer segment for another solid year. Therefore, consumer segment sales growth for fiscal 2017 is expected to be in the mid-single-digit range. In the industrial segment, we expect solid growth for those businesses serving the U.S. commercial construction markets to be somewhat offset by the continued slowdown in certain geographies and the global energy sector. We continue to invest in international expansion with a long-term approach, especially in our admixture, polymer flooring and construction chemical businesses. In relationship to foreign exchange, there is good news and bad news. I'll start with the good news. At current exchange rates, we anticipate that the negative impact from currency translation related to the euro, Canadian dollar, Brazilian real and South African rand will dissipate over the first half of fiscal 2017. And, hopefully, we'll have no impact in the second half of the year. The bad news, the British pound on the other hand will create additional currency headwinds from both a transactional and translational perspective, starting in this first quarter. We expect growth in Latin America and Europe to be in the low-to-mid-single-digit range. Therefore, sales for the industrial segment in fiscal 2017 are expected to be in the low-single-digit range. In the specialty segment, we expect these predominantly U.S.-based niche businesses to continue to gain share benefiting from a full year of recent acquisitions growing in total in the mid-single-digit range during fiscal 2017. From a diluted earnings per share perspective, there were certain one-time items in fiscal 2016 that will not repeat in fiscal 2017, including the Kirker earn-out reversal in the second quarter of $0.08 per share, the Dalian China joint venture acquisition gain of $0.06 per share in the fourth quarter, which was offset by a $0.05 per share loss on the legal settlement charge in the fourth quarter. Excluding these three items from the full fiscal 2016 diluted earnings per share of $2.63, an apples-to-apples starting point for fiscal 2017 would be an FY2016 earnings per share base of $2.54. We expect our core businesses to leverage 4% to 6% consolidated sales growth into 10% to 12% core earnings growth. However, in fiscal 2017, we anticipate an approximately $0.06 per share unfavorable currency translation, driven largely by the devaluation of the British pound against the U.S. dollar since our fiscal year-end and a $0.05 per share in higher benefit cost, mostly due to the continued decline in the U.S. discount rate and its impact on our pension plan expense. As a result of these factors, our earnings guidance for fiscal 2017 is a range of $2.68 to $2.78 per diluted share. As we discussed last year, fiscal 2016 was going to be characterized as a year of investing in growth initiatives, even during a period of global uncertainty. During fiscal 2016, capital expenditures were $117 million or roughly 40% higher than in fiscal 2016 and included additional capacity for both our AlphaGuard liquid-applied roofing products and our TUF-STRAND macro fibers. During the year, we combined our Euclid Chemical's business with sales predominantly in the Americas with our Flowcrete polymer flooring business, who has sales across Europe, Africa, the Middle East and Asia into what we now call the Euclid Group. These businesses complement each other both from a technology and geographic footprint perspective. Our goal over the next three years to five years would be to introduce local production of Euclid products at Flowcrete facilities and vice versa in strategic geographies around the world and begin to sell products like TUF-STRAND outside of the Americas. One of the strategic locations is in Malaysia, where we currently have a small Flowcrete manufacturing facility but intend to build it out to support a number of industrial product lines, including Euclid Chemical, Tremco and Carboline, similar to the current structure of what we're doing with Viapol in Brazil. During fiscal 2017, we will be investing in expanding capacity at DAP and expanding paint production at Rust-Oleum. So while markets and global economies remain choppy and unpredictable, we will continue to be focused on growth at RPM. We will now be happy to answer your questions.

Thank you. We will now begin the question-and-answer session Our first question is from Frank Mitsch with Wells Fargo Securities.

Good morning, gentlemen, and nice end to the fiscal year. Frank C. Sullivan - Chairman & Chief Executive Officer: Thank you.

I think you mentioned during the prepared remarks that Kirker was a bit better in 2016 versus 2015. Can you tell us how it ended the year in Q4 and how confident are you in the projection of 2017 seeing that highly profitable business continue to grow? Frank C. Sullivan - Chairman & Chief Executive Officer: Sure. Kirker was not better in 2016 than in 2015.

Okay. Frank C. Sullivan - Chairman & Chief Executive Officer: We've seen probably prior to this quarter six quarters sequentially of declining sales and earnings. In the fourth quarter, Synta (sic) [Kirker] (00:23:07) had its first positive year-over-year results in about a year and a half. And we expect to see that trend continue in fiscal 2017.

Okay. All right. That's helpful. Frank C. Sullivan - Chairman & Chief Executive Officer: Sorry. I meant Kirker.

Kirker, not Synta. Frank C. Sullivan - Chairman & Chief Executive Officer: I meant Kirker. Synta is in the same boat, since I mentioned it. As you know, our Rust-Oleum wood deck product line, where we've had some challenges for the last two years and we would expect to see contributions to sales and earnings in 2017 of that product line as well. Those were the two businesses that have posed the biggest challenges to us over the last 18 months.

Yes, yes. So that's what I was asking about. Yes. So it looks like that has turned, so headwinds are now reversing into tailwinds. And you talked about the potential of a dividend increase. Can you talk about use of cash, how your M&A pipeline looks and what can be our expectations there? Frank C. Sullivan - Chairman & Chief Executive Officer: Sure. First of all, this was our best cash generation year ever. And I think a combination of focus on improvement in working capital, strong income. We did get another year of some tax benefit from the SPHC payments. And so we are very focused on cash flow. You are seeing cash that was previously dedicated over a decade in significant amounts annually, $80 million, $90 million, associated with the past asbestos liability now being reinvested more aggressively into growth. On the capital spending perspective, we're going to continue to see that trend improve both to meet capacity issues at a number of our businesses and a more organic growth strategy, particularly focused to the Asian markets. Our M&A pipeline is good. We completed I believe six acquisitions in fiscal 2016, three of which were businesses where the management is going to stay and run that as part of RPM, the other three of which were product lines that we completely integrated. We are hopeful that we will have a similar result in 2017. And particularly on the product lines that we can integrate, while they are relatively small, the IRRs and the contributions to earnings are both high in terms of IRR and come pretty quickly. So that program is in good shape. Our board considers dividend action every year at its October board meeting. I'm highly certain that we will have our 43rd year of a dividend increase, but at this stage would not get in front of our board in terms of what our activity would be there.

Terrific. Thank you. Frank C. Sullivan - Chairman & Chief Executive Officer: Thank you, Frank.

The next question is from Ghansham Panjabi with Robert W. Baird. Frank C. Sullivan - Chairman & Chief Executive Officer: Good morning Ghansham Panjabi - Robert W. Baird & Co., Inc. (Broker): Hey, guys. Good morning. Apart from maybe the first quarter, you have tough comps in consumer following the very strong fiscal year 2016. How should we think about the various drivers for that business, Frank, in 2017 and also how much of the 4% to 6% growth in consumer is from acquisitions? Frank C. Sullivan - Chairman & Chief Executive Officer: Very little of the growth will be from acquisitions. As we think of it now, we had some product line acquisitions last year. The beauty of product line acquisitions in our consumer segment is that our very strong distribution and our real strong sales forces can accelerate some of that growth. And so, while there won't be a big contribution necessarily in terms of how we count acquisition activity, our ability to expand that growth in product lines in the future, which will be counted as core growth, certainly, will be important. And you'll see more of that. In general, I think, fiscal 2017 relative to very strong comps will be what we called out, kind of, a mid-single-digit growth as we continue to serve a pretty solid marketplace and hang on to the new product introductions and gains that we achieved in 2016. Ghansham Panjabi - Robert W. Baird & Co., Inc. (Broker): Okay. And then just some further color on the legal settlements, the deck coatings. What does that specifically refer to? Is it a warranty item or whatever else you can share with us on that topic? Frank C. Sullivan - Chairman & Chief Executive Officer: Yes. I mentioned on an earlier question Synta and I think it's no surprise. Typically we would not identify specifics around product lines or smaller companies like we have with Synta and also with Kirker. But in both cases, we had acquisition, structures that had potential earn-outs. And we've had those earn-out reversals. So in the case of Synta, we had an earn-out reversal a year ago indicating that the business was not performing up to kind of the projection that we had in the acquisition model. And so we structured it in a manner that gave us some flexibility. And there were some early issues with that product line that were resolved this year related to surface prep and a couple other items. All of those have been corrected and a product line that grew very strongly in its first year because of the strong Rust-Oleum sales, marketing and distribution declined significantly. We had that year-over-year last year earn-out reversal gain and this year the warranty settlement. And we would expect those deck coating product lines to be not big but solid contributors again to sales and earnings growth as opposed to the significant contributors to declines in sales, earnings and in this case a product warranty expense. It puts that issue behind us. Ghansham Panjabi - Robert W. Baird & Co., Inc. (Broker): Okay. And then just one final one on your comment on Brexit. How are volumes tracking in Europe thus far in the quarter? I know it's very early, but I was just looking for some incremental color there. Thanks so much. Frank C. Sullivan - Chairman & Chief Executive Officer: Sure. On Brexit, literally, our fiscal year ended. And as we plan for the new fiscal year and how to communicate it, the Brexit vote occurred and the immediate impact was a significant decline in the pound/dollar ratio. And so in relationship to our pretty strong presence in the UK and revenues in pounds literally starting the year, unless the pound changes for better or for worse, we'll lose somewhere in the neighborhood of $0.05 or $0.06 per share on our pound-based business relative to that pretty dramatic change that occurred. So we communicated that here. I would say that in the fiscal year we lost over $200 million in revenues and more than $0.20 a share due to FX transactional and translational impacts. And, as you'll recall, this time last year our forecasted FX would negatively impact us by $0.07. So I think that further highlights the strength of the underlying business contributions that our businesses created and generated throughout the year. Ghansham Panjabi - Robert W. Baird & Co., Inc. (Broker): Thanks so much.

The next question is from Vincent Andrews with Morgan Stanley. Matthew Gingrich - Morgan Stanley & Co. LLC: Good morning. This is Matt Gingrich on for Vincent. I was wondering if you could comment on the delta between sell-in and sell-through trends in consumer in the quarter. Frank C. Sullivan - Chairman & Chief Executive Officer: I don't have specifics on that data. So, I'd be speculating. I think that, in general, consumer takeaway has been pretty solid. And that has been building throughout the year. It was not true in the first quarter of last year. And it's pretty solid. It has returned to kind of normal levels. And so, traditionally, our consumer businesses in normal times would grow in mid-single-digits and that's what we expect this year. Matthew Gingrich - Morgan Stanley & Co. LLC: And then in regards to industrial, has the oil related weakness gotten sequentially worse or should we expect some incremental easing as you lap the year-over-year comps? Frank C. Sullivan - Chairman & Chief Executive Officer: It has gotten sequentially worse. And we are presuming it's going to stay that way for all of fiscal 2017. We actually had probably better performance than we anticipated in the first quarter or first four months or five months of fiscal 2016. And as we approach this first quarter, it's very weak. What you had was the kind of hang on of projects that were halfway completed and they were going to get finished. But the new project pipeline, if you will, and the oil and gas exploration and fracking has dried up. And that will be a negative impact for those of our businesses that serve the oil and gas markets throughout 2017. Matthew Gingrich - Morgan Stanley & Co. LLC: Great. Thanks, guys. Frank C. Sullivan - Chairman & Chief Executive Officer: Thank you.

The next question is from Ivan Marcuse with KeyBanc Capital.

Hi. Thanks for taking my questions. So looking at the industrial side within the U.S., like the Euclid chemical business and Tremco waterproofing, I imagine a lot of that – it was above average growth in the U.S. I was curious if – what kind of growth rates have you seen in those businesses in the fourth quarter? What's sort of your expectation looking out to 2017? Frank C. Sullivan - Chairman & Chief Executive Officer: So we're seeing in construction-related products, particularly in North America, high-single-digit growth and it's leveraging to the bottom-line very nicely. We think that'll mitigate a little bit in fiscal 2017, but it still should be very solid growth. Some of that has been driven by economic activity. And I think a lot of that has been driven by expansion of new product. And so, whether it's the AlphaGuard roofing product or the TUF-STRAND macro fibers, in both cases, part of our challenge is we're having capacity catch up with demand. And that's still an issue for us. One of the things that we plan for continued investment, for instance, in fiscal 2017 is an investment in Brazil to be able to produce the TUF-STRAND fibers in the Brazilian market. This year, we were exporting them from the U.S., and there is challenges both from a cost perspective and a transactional FX perspective there. But our goal was to get the product in the market, create some acceptance in demand. And now we're going to move production in the new fiscal year down to Brazil. That's just one example of kind of where we're headed with some of these product lines.

Got you. And staying in the industrial side, how big in terms of sales is the UK? And is it all industrial or is it just – or is there a little bit in consumer? Frank C. Sullivan - Chairman & Chief Executive Officer: I would take a – I'm not sure I know that number. It's hundreds of millions of dollars, and it's a split between industrial and consumer, probably 50%/50%. But I don't have the specifics on that.

Okay. And then moving over to consumer, real quick. Your consumer sales, at least for the fourth quarter, were significantly above where some of you other public competitors have reported, in that DIY market. How much is the market – was it all market share gains for you in terms of there because the market looked like it grew maybe, I don't know, 1% to 2 %. So is the delta to your 10% – is that pretty much all market share gains? And what product did you really see a big boost from, and was there any load-ins in the fourth quarter to think about? Frank C. Sullivan - Chairman & Chief Executive Officer: Yes. It's a great question. And so some of it is market share gains and some of it is – so it shouldn't be indicative of a rate that we can sustain in 2017. Again, that's why we have outlined kind of mid-single-digit growth and that's where it will be. But we have picked up market share significantly in interior wood stains with our Varathane product line versus their largest competitor and a number of major retailers. We have picked up share with a number of DAP products, including a new carded adhesive product. We are going to be adding to capacity for both DAP and Rust-Oleum paint production in the new fiscal year, so that will give you a sense that we've got pretty good demand there. We also had a very orderly transition from the President of DAP, who did a phenomenal job for us for 20 years, to a new President, who's brought in, a different approach to sales and marketing of DAP. And that's going extraordinarily well. And so, we've got a lot of good momentum both in terms of our approach to the market and in particular new product introductions. So while it translates to better sales and I suppose market share gains, it's not just replacing a competitor with like a product by an RPM company, but typically new products and new categories for us. We're pretty excited about that.

Great. And the last two real quick questions probably for Rusty. What are you expecting in total for the corporate expense line for the year, 2017, and how to think about the tax rate? Thanks. Russell L. Gordon - Chief Financial Officer & Vice President: Yes. Sure, Ivan. In terms of the tax rate, I'll take that first. We've been at – we were at 26% or so in fiscal 2016, same in 2015, if you look at our adjusted numbers. So we would expect it to be in the same range in fiscal 2017. And then as far as the corporate expense goes, in fiscal 2016, we averaged $17 million or – excuse me, we averaged a little over $18 million a quarter. And that's going to go up because of higher pension expense. And our healthcare experience was pretty good in 2016. I'm not sure we can expect that to continue. So for that reason, I would expect our corporate expense to be in the $20 million, $21 million range each quarter. Does that answer your question?

It does. Thank you very much. Russell L. Gordon - Chief Financial Officer & Vice President: Sure.

The next question is from Silke Kueck with JPMorgan. Frank C. Sullivan - Chairman & Chief Executive Officer: Good morning, Silke.

Good morning. How are you? Frank C. Sullivan - Chairman & Chief Executive Officer: Good. Thank you.

I was wondering if you can talk about how big the European business is for the consumer side and what has like did well on the consumer side in Europe? Frank C. Sullivan - Chairman & Chief Executive Officer: So, in general, our European business is just over $900 million. It was a few years ago over $1 billion. And while we continue to advance in local currencies and have good growth in units, the translational impact of the rising dollar has reduced that. And it pretty much mirrors RPM's mix between consumer and industrial. I would say it's roughly about a third, maybe a little bit less consumer and two-thirds, probably a little bit more industrial. So it's probably a little more industrial and a little less consumer than what RPM is on a consolidated basis. The consumer products tend to be split between the UK market which is their biggest sector by far and then a presence in the Benelux and in France. We're looking to expand into the continent more aggressively. But the consumer piece is most predominantly UK. And that's the area that is negatively impacting us versus translational and transactional impacts with the drop of the British pound. And we continue to do fairly well in the quarter. We were up 5% in Europe in actual rates and 6% in local currencies. And, as Rusty commented on, the euro has been relatively stable. It's been pretty much the British pound that's caused these challenges this year.

Okay. So it sounds like in both cases like the UK is maybe like half of the European sales, like something like that. Frank C. Sullivan - Chairman & Chief Executive Officer: No. I don't think that's correct. I think, again, if you think of – these are rough numbers. But if you think in consumer of about 30% Europe out of that $900 million to $1 billion of total revenues and industrial 70% and then better than half of the consumer piece is in the UK, whereas the industrial piece is split pretty evenly across all of Europe, UK, Germany, France, Southern Europe and a little bit in Eastern Europe.

Okay. I understand. Thank you for clarifying that. I also had a question on the specialty side. Like the incremental margin for the specialty businesses seemed really high, which is like nice to see. The sales were up $10 million. The profits were up $5 million. Like what's behind that? And are those like sustainable margins or those were particularly good for some reasons? Frank C. Sullivan - Chairman & Chief Executive Officer: I think the margins are sustainable. Those businesses are called specialty for a reason. And the reason is, is they typically don't fit in terms of product categories or markets or customers that fall into our consumer segment businesses or industrial segment businesses. But they also tend to be higher margin niche businesses. And so the growth rates tend to be a little bit more challenging but the margins are nice. And so when you get growth, it leverages to the bottom-line. It is also where – in the lower margin piece of specialty is where we have our OEM coatings, so powder coatings, wood coatings. We had an excellent acquisition in the wood finishes area of Morrells last year. And that contributed nicely to the EBIT growth. Very typical family-owned company that joined RPM, a management team that stayed. It was really kind of champing at the bit to get more capital to grow. And they had a really good first year as part of our wood finishes group in RPM. So that contributed to the EBIT growth as well.

Okay. Thank you. And, lastly, I was wondering if you could tell us what the tax benefit was from the SPHC payments in 2016? And what you expect for maybe 2017? Russell L. Gordon - Chief Financial Officer & Vice President: Yes. We were able on the tax front to collect a big tax refund on an NOL carryback in F2016. And we'll continue to get deductions on future trust payments. As we look forward, we have another trust payment due in December of this calendar year. Frank C. Sullivan - Chairman & Chief Executive Officer: Year-over-year, though, I think, Silke, we had a similar tax benefit last year in fiscal - Russell L. Gordon - Chief Financial Officer & Vice President: 2015. Frank C. Sullivan - Chairman & Chief Executive Officer: 2015. So you look at the cash from operations year-over-year improvement of about $130 million. And that was income and operational more than the SPHE (sic) [SPHC] (00:44:13) tax yield because we had it in the prior year as well. Russell L. Gordon - Chief Financial Officer & Vice President: That's correct. Yes.

Where exactly does it show up on your cash flow statement? Is it just sort of like – it's just like a change to your deferred tax line? Russell L. Gordon - Chief Financial Officer & Vice President: Yes. First of all, if you go to the deferred taxes line -

Yes. Russell L. Gordon - Chief Financial Officer & Vice President: On the cash flow statement -

Yes. Russell L. Gordon - Chief Financial Officer & Vice President: You see in the prior year we had a big $97 million change.

Right. Russell L. Gordon - Chief Financial Officer & Vice President: And then in the current year in fiscal 2016 that amount would show up looking forward now.

I apologize. I can follow-up offline. I was just – only if you had readily available, but that's okay. Frank C. Sullivan - Chairman & Chief Executive Officer: Yes. I think the big – the deferred tax line last year, the big item was related to the non-cash charge we took.

Right, right. Frank C. Sullivan - Chairman & Chief Executive Officer: So we will find out and clarify exactly where that is.

Yes. Frank C. Sullivan - Chairman & Chief Executive Officer: But, as you know, the SPHC payments are tax deductible.

Right. Frank C. Sullivan - Chairman & Chief Executive Officer: And so that – we've gotten the benefit of that if you want to call it a benefit. And we have three more of those payments at much smaller rates in the coming years.

Okay. Thank you very much.

Our next question is from Arun Viswanathan with RBC Capital Markets.

Good morning, guys. Frank C. Sullivan - Chairman & Chief Executive Officer: Good morning.

Good quarter. Just I wanted to understand just some of the puts and the takes in the guidance. Would you characterize – maybe would you say that there's a little bit more conservatism built in on the industrial side than the consumer side going forward? And is that mainly due to markets and the international exposure or is it kind of a comp nature? Frank C. Sullivan - Chairman & Chief Executive Officer: I think there's really no conservatism in terms of our outlook. And on the industrial side we'll be starring at difficult comps, particularly in oil and gas and heavy manufacturing, in the early part of 2017, as I mentioned with our Carboline product lines and other Carboline that serves the oil and gas markets. We were still benefiting from work on projects that were committed to and in process, even as oil dropped. And that's dried up. So that is going to be a very difficult market for us globally and anybody that serves that market with any products. And heavy industry, which is a big driver of a lot of our industrial coatings, fireproofing, flooring products, in terms of maintenance and expansion and what seems like it's third year of a pretty significant recession and we don't see that changing. So the industrial markets that we served will be challenging. We continue to focus on investing for growth and we also continue to look for ways to improve our SG&A spend, so that what growth we have will be nicely leveraged to our bottom-line.

Okay. That's helpful. And then on the M&A side, maybe you can just discuss the environment a little bit. I guess has there been any, I guess, change in either multiples or what you're seeing post the situation with Sherwin and Valspar now that they are hoarding cash for their merger in anticipation of closing that in the next year? Frank C. Sullivan - Chairman & Chief Executive Officer: We have not seen much change. There is still a robust pipeline of M&A opportunities in the small to medium-sized market. Valuations are consistent with what they've been historically. And the Valspar-SW merger has certainly significant valuation to it. I think that impacts large transactions and public company valuations. But we've got a nice pipeline. Just like in 2016, I would expect in 2017 that we would be able to complete a handful of small to medium-sized deals and particularly in the product lines where we can leverage growth pretty quickly. It's fun to have a $10 million or $20 million or $50 million product line that can add $0.01 per share to the whole total and we keep looking for those.

Okay. Thanks.

The next question is from Kevin Hocevar with Northcoast Research. Frank C. Sullivan - Chairman & Chief Executive Officer: Good morning, Kevin.

Hey. Good morning, everybody. I wondering if you could talk about – a few of your competitors called out destocking at a large retail customer. So wondering if you saw any of that during the quarter or maybe after the quarter ended or did you not see that at all. Frank C. Sullivan - Chairman & Chief Executive Officer: I think we've seen a little focus on working capital performance or inventory at some of our major customers here as we get into the new fiscal year. And so we did not see it, obviously, in the fourth quarter. We had good unit volume there. So we're seeing a little bit of it as we start the new fiscal year. I think, on a full-year basis, it doesn't concern us because there's pretty solid consumer takeaway in our categories.

Got you. Okay. And then from a big picture, I know you talked about earlier how Europe had done to the first two months of the quarter. Wondering if you can give, I guess, a big picture how business overall is doing with us being two months into the current quarter? If you're seeing trends kind of how you guided them, mid-single-digit growth in specialty and consumer and maybe lower in industrial, or if you're seeing any larger variations, I guess, from there as we start this year. Frank C. Sullivan - Chairman & Chief Executive Officer: Sure. We are off to a solid start to the fiscal year. There is some of the items that you mentioned that I think are just temporary relative to the consumer segment in Q1. It will be a challenging quarter for industrial because we had a pretty solid business, particularly in areas like oil and gas a year ago in the first quarter that just aren't going to be repeated. And so it will be – it's a rough economy. It's not changed any from the last year. We're focused on growth, investing, gaining share and introducing new products. And particularly on the new product piece, I think that's what's driving a lot of our growth. But the dynamics in heavy industry, oil and gas, and regional economies really hasn't changed. And so we would expect another year of putting our head down, expanding some of the successful new product ranges that we've had, and continuing to fight and gain market share.

Okay. And then wondering if – you talked about after you adjust the base this year growing sales mid-single-digits and leveraging that 10% to 12% in terms of earnings. And I noticed your gross margins were really great, saw great expansion here this quarter. So wondering if that leverage to earnings is going to come from the volume growth and leveraging SG&A or you also see gross margin expansion for XYZ reason. Wondering where that leverage is going to come from to earnings in 2017. Frank C. Sullivan - Chairman & Chief Executive Officer: Sure. I think related to the comments I just made, we had good gross margin performance in the quarter. We don't see a lot of expansion there for the balance of the year in general across our businesses. We continue to look for opportunities both through leveraging higher sales and also some opportunities for driving efficiency across some of our operations and across some manufacturing. A few opportunities for that continue in Europe. So the real focus on growth that we have is working. And in this environment, and I think our fourth quarter proves it, if you can drive growth, you can leverage it very nicely to the bottom-line. And so that's why we're so intent on keeping a growth footing. It's working even in places that is as challenged as Brazil. And I think that's the real fight in our markets, which is how and who can generate growth, because the dynamics otherwise are pretty good for being able to leverage that to your bottom-line. But it's a struggle out there. And that's not new. It's been that way for at least last year and a half and we're going to keep fighting and figuring out how to grow the businesses. So you've got to really look at our revenue growth. If we're at the bottom end of our range on the sales side, we will be at the bottom end of our range on the earnings side. If we're at the upper end of our range on the sales side, we will be at or better than the upper end of our range on the earnings side. So I really do think this year for everybody in our industry is going to be one of who's growing and who's able to get the growth because the dynamics for leveraging it to the bottom-line remain pretty good.

Okay. And then just last question. Curious what you saw out of raw materials in the quarter. Is that still a good guide for you guys? And being on FIFO accounting, do you expect, if it is a good guide, a need to carry forward into the 2017? Frank C. Sullivan - Chairman & Chief Executive Officer: Sure. I think the FIFO accounting is one of the reasons why our gross margin improvement showed up perhaps a few quarters later than some of our industry peers. Today raw materials are relatively stable. There are a couple of raw materials, TiO2, which we're not as big a buyer of as some of the more pure paint players. Those suppliers are trying to put through price increases. And so you're seeing some, I guess, stability in raw materials is how I would characterize the environment as we finish the year and as we think about 2017.

Okay. Great. Thank you very much. Frank C. Sullivan - Chairman & Chief Executive Officer: Excellent. Thank you.

The next question is from David Stratton with Great Lakes Review.

Hello. Thanks for taking the question. Frank C. Sullivan - Chairman & Chief Executive Officer: Good morning.

So a lot of the topics have been talked about already, but I was just wondering about: in your product lines that you've touted throughout the year, specifically AlphaGuard, RoofTec, TUF-STRAND, NeverWet, how did those perform? Are they meeting expectations going into fiscal year 2017? And are there any new products that might be added to the list that have some great prospects? Frank C. Sullivan - Chairman & Chief Executive Officer: Sure. Thanks for the call. The product lines – historically we've had a chance to talk a lot about consumer product lines. And both Rust-Oleum and DAP have been very innovative. But this past year was really a story of sales gains from new product introduction and innovation in our industrial segment. We continue to be able to sell all of the macro fibers we can make. And, as I commented earlier, we're looking to expand capacity now outside of the U.S. The AlphaGuard is a proprietary, a modified urethane coating system, very exciting for our Tremco roofing business. With that product range and our ability to clean roofs through the RoofTec business, we're able to get the recoating of Ford Field. We're looking at some similar large size, large scale projects there. And that's a product range that so far is pretty much being produced and sold in North America. And so there is opportunities for us to expand production and, therefore, capabilities and sales ability outside of the U.S. So those are good and we continue to focus on those. I think the other real story – and this is why it's an issue of market share gains. With few exceptions, we don't have market shares globally that should be impacted hugely by GDP growth. Obviously, GDP growth impacts all businesses. But our ability to expand Euclid Chemical on the back of existing flow free plants (00:57:48) in the Middle East, in India, in Malaysia, it's pretty exciting. And so it's not necessarily new products in construction chemicals that are growing those areas internationally, it's the fact that we're starting to manufacture those locally and can be much more competitive in terms of both price and service. So those are broadly speaking, I think, the areas where we're trying to drive growth in our industrial segment in what's otherwise a choppy market.

All right. And then the most recent acquisition, very small, having to do with expansion joints and things like that. Is that in any way related to the recent – I guess it's almost a year old now though – infrastructure bill and how is that playing out and affecting your business? Are you able to see any direct correlations there? Frank C. Sullivan - Chairman & Chief Executive Officer: So it's too soon to say about an acquisition that's not a month old. But our USL business and their product lines for expansion joints, for bridges and roadway works in the UK is very successful business, somewhat cyclical to government spending. And the business that we just acquired in North Carolina is very akin to that. So there's opportunities to share know-how and technology between what we're doing in the UK and parts of the Middle East and what does MAI business, which is headquartered North Carolina can do in the U.S. A lot of growth opportunities there and so we're very excited about it in general. I don't know that the highway bill is impacting us in any big way. I can tell you to the extent that it's driving protective coatings – and the corrosion control and protective coatings industry margin-wise is very challenged, because the players in that market also serve marine and oil and gas. And people are very aggressively bidding on big projects like that, because of what little growth there is globally in some of the heavier industry and oil and gas markets. The other acquisition we did, I think, since year-end is the Duram acquisition which is a small manufacturer in Australia for Tremco, again very exciting for us even though it's a small deal. Tremco has been exporting high single millions of business into the Australian market. And this will allow us to produce those products locally which will significantly add to price, margin and service.

All right. Thank you very much.

The next question is from Richard O'Reilly with Revere Associates.

Good morning. Thank you, gentlemen. Two quick questions. The first, I want to follow-up on your comments about the energy sales I thought you said oil and gas sales were down about 10% in fiscal 2016. Was that correct? Frank C. Sullivan - Chairman & Chief Executive Officer: That's correct. And we'll see that or worse in fiscal 2017.

Okay. Yeah. That's my follow-up question. It sounds like a significant drop-off from that level in 2017. Frank C. Sullivan - Chairman & Chief Executive Officer: I think that's correct. So, as you think about our industrial segment throughout the year, we'll have more difficult comps in the first quarter and the first half of the year. And then they'll be, I think, equalized because we've really been experiencing the trough (01:01:33) of those market challenges in the last half of 2016.

Okay, fine. Okay. Second question is can you – the legal settlement in the consumer business related to the deck coatings, can you go into that? It sounds like it's a consumer class action. Can you just go into a little bit about that because you've been pushing a new product in the last couple years for deck coatings? Frank C. Sullivan - Chairman & Chief Executive Officer: Yes. That's correct. And that's what it is. It was negotiated to resolve those issues. In fact, with the Restore product line when it was first introduced, I think, the timing of the introduction in the fall was difficult relative to kind of Freestar (01:02:21) cycles. It's an acrylic product. So if you put it on in a day and you've got freezing temperatures at night, you're going to have problems. It was surface preparation dependent and we've addressed all of those issues. We've relaunched the product line. There is a series of different products there. And we're very comfortable with where the product is and its performance. And so we're in good shape here going forward. But it was a painful year in that product range relative to a significant decline in sales that impact on earnings and then resolving what up until then had been warranty payments with a class settlement.

Okay. It was a consumer class, okay. I guess I should file my claims soon then. Okay. Thanks a lot. Bye-bye. Frank C. Sullivan - Chairman & Chief Executive Officer: Thank you

And we have no further questions at this time. So I'd like to turn the call back over to Frank Sullivan for closing remarks. Frank C. Sullivan - Chairman & Chief Executive Officer: We are proud of our great entrepreneurial businesses that continue to compete and win in their respective markets and continue to execute on finding growth throughout the world in these challenging markets. I'd like to thank more than 13,000 employees around the world for their continued efforts and dedication to RPM and for delivering another record year of sales and earnings and thank all of our investors for their investment in RPM and for you for joining us on today's call. We look forward to updating you on our progress throughout fiscal 2017 for what we expect to be another year of record results. Thank you and have a great day.

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating and you may now disconnect.