RPM International Inc (RPM) 2010 Q4 法說會逐字稿

Welcome to RPM International's conference call for the fiscal 2010 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. (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, Vanessa, and good morning. Welcome to RPM's 2010 year-end earnings teleconference. We're conducting this call from a conference room at the New York Stock Exchange. We have released our year end results from New York for the last 40-plus years. With me on today's call are Bob Matejka, our senior vice president and chief financial officer and Barry Slifstein, vice president and controller. On our call today we will provide you details of our fourth quarter ended May 31, 2011, some highlights of the full fiscal year, an understanding of the impact of the Bondex and Specialty Products Holdco Chapter 11 filing on our financial statements and our outlook for the RPM 2010 fiscal year, after which we'll be happy to answer your questions.

Please note that we would like to split our Q&A session today into two parts. The first being questions about our fourth quarter and 2010 full-year results. When we will finish answering those questions, then we'll move to answering questions about the Bondex SPHC filing impact on FY 2011 and our outlook.

In the fourth quarter, we experienced strong return to growth in our industrial businesses, particularly in flooring corrosion control, maintenance, and industrial OEM coatings and roofings and waterproofing products. Our consumer businesses continued to show good growth through sales of maintenance, repair, and small project redecorating products, new product introductions like Rust-Oleum kitchen and bath countertop refinishing kits and market share gains, especially in the DIY automotive channels. From a raw material perspective, we're having the same cost and availability issues negatively affecting our industry.

Having said that, a better overall product mix of sales from higher margin product lines versus last year and the diversity of RPM's businesses product lines and end markets versus some of the larger product area concentrations of some of our major competitors, has so far allowed RPM to perform relatively better in what is, and continues to be, a very challenging raw materials environment. Lastly, as Bob Matejka will note in his comments, SG&A spending was up considerably in the quarter to support continuing growth and relates to higher compensation levels, particularly compared to last year when discretionary spending was being aggressively cut and where compensation across many categories was substantially lower.

These SG&A comments relate to RPM across all of our businesses. The impact of higher spending on growth initiatives is especially noticeable in our consumer segment, as we deliberately ramped up advertising and promotion to support our continuing growth. With strong return to growth across almost all RPM's businesses, we're very pleased with our fourth quarter performance. I now would like to turn the call over to Bob Matejka to provide some financial statement details on our fourth quarter and year end, after which we'll open up the call for questions.

Thanks, Frank, and good morning, everyone. Thanks for joining us on today's call. I'll review the fourth quarter in detail, as Frank said, touch upon a few year-to-date measures, and then I'll turn it back to Frank for closing comments before we take your questions. All comments that follow exclude the one-time non-cash costs of deconsolidation of SPHC, of $7.9 million during our fourth quarter this fiscal year and the non-cash impairment charges of $15.5 million during the fourth quarter of fiscal 2009.

For the fourth quarter, consolidated net sales increased 13.3%, quarter-over-quarter, to [$971.5 million] (corrected by company after the call). This increase was comprised of 2.5% favorable foreign exchange movements, 2.1% from acquisitions, and 9.0% from sheer unit volume. In the industrial segment, net sales of $633 million, accounting for about 65% of total sales, increased 12.9% over last year's fourth quarter. Foreign exchange here in industrial contributed 3.0%. Acquisitions contributed 2.7% and volume was up 7.1%.

On the consumer side, sales were $338.5 million, an improvement of 14% quarter-over-quarter. Foreign exchange in consumer contributed 1.5%. Acquisitions were just under 1%, and volume was up 12.5%, and this volume was partially offset by pricing pressure of approximately 0.8%.

Consolidated gross profit was 43.1% for the quarter, up from 41.8% for the same quarter last year. And the industrial segment gross profit was 44.4%, an improvement from last year's 43% favorable mix, and improved plant operating leverage attributable to the higher sales volumes, helped on this increase. On the consumer segment, GP, or gross profit was 40.6%, improved from 39.5% last year, due to improved plant operating leverage attributable to the higher sales volumes. SG&A as a percent of sales increased to 31.4% of sales from 30.4% last year.

During the fourth quarter, as Frank mentioned this year, SG&A increased due to higher year-over-year advertising expense and employee benefits and this spending was consistent with increases experienced in both segments. Earnings before interest and taxes, or EBIT, increased to $111.2 million this year from $98.9 million last year, a 12.4% increase, and it was due principally to the higher sales volume and the benefit of improved manufacturing leverage in both segments. Interest expense increased from $12.2 million last year to $16 million this year, due to the higher average interest rate we experienced of 6.25%, compared with 4.6% last year, and it was partially offset by lower average borrowings.

With our new $300 million 6.125% bond that was issued in October of 2009, substantially all of our outstanding debt at May 31, 2010 is fixed. Investment income of $2.6 million this quarter improved from a net expense of $6.6 million for the same quarter last year, mainly due to a $7.7 million other than temporary impairment charge last year compared to zero for this year. Our income tax rate of 29.7% for the three months ended May 31, 2010 compared favorably to the tax rate last year of 31.9%, principally due to the jurisdictional mix of earnings and the impact of certain foreign operations on our U.S. taxes. Net income of $68.5 million or $0.53 a share improved over the same period last year from $54.6 million, or $0.42 a share, representing an increase of 26.2%.

I'll now cover a few of the 2010 fiscal year to date measures as well. Our sales increased 1.3% year-over-year. Foreign exchange accounted for 1.1% of the increase with price and acquisitions contributing 1.2% of the growth, which were partially offset by lower volumes of 1%. Consolidated gross profit was 42.1%, up from 40.2% for the same period last year. Consolidated SG&A, as a percent of sales, improved slightly from 32.5% to 32.4%. EBIT, or earnings before interest and taxes, here we had an increase to $328.1 million from $256.6 million last year, representing a 27.9% increase. As a percent of net sales, EBIT ended the year at 9.6%, up significantly from last year's 7.6%.

I'll now close with a few comments on the balance sheet and cash flows. Our balance sheet on May 31, 2010 -- on that balance sheet, you will see that Bondex International, Inc. was deconsolidated with SPHC, its parent company. And as a result, all of the related Bondex asbestos liabilities are no longer reflected on the balance sheet of RPM International. Our CapEx this year was $23.2 million, down from last year's $55 million. Depreciation and amortization expense, combined, for the full year was $84.3 million compared to $85.1 million a year ago. Receivable and inventory days improved nicely. Receivable days were down 4.7 days year-over-year, and inventory decreased 3.3 days year-over-year.

On the cash flow side, cash from operating activities for the year ended May 31, 2010 provided $203.9 million compared to $267 million last year. The decline was due to higher working capital requirements driven by significant sales growth this year in our fourth quarter. Free cash flow for the year -- we define that as cash from operating activities less CapEx and cash dividends -- was $75.3 million this year compared to $110.2 million last year.

Lastly, a few comments on our capital structure and overall liquidity. As of May 31, 2010, total debt was $928.6 million compared with $930.8 million a year ago. Our net debt to cap ratio was 39.8% and that compares to 37.2% last year. Our total long-term liquidity at May 31, 2010 sat at $689 million, with $215 million of cash and $474 million available through our bank revolver and account receivable securitization facilities. Before we go back to Frank, I want to have Barry Slifstein, our controller, spend a few minutes talking about the impact of the deconsolidation of SPHC. Barry's comments will help all of the analysts recalibrate our 2011 models -- or your 2011 models, excuse me -- for RPM.

Thanks, Bob. On May 31, 2010, SPHC and its wholly owned subsidiary, Bondex International, Inc. filed Chapter 11 in Delaware. SPHC, a holding company, owns a collection of companies that will not be affected by the filing, but will be included as part of the deconsolidation. The deconsolidated companies accounted for approximately $300 million of total consolidated RPM sales of $3.4 billion, or less than 10%. They also accounted for approximately 6% of consolidated net income of RPM for fiscal 2010. In our press release, we reported full-year EPS of $1.39. We indicated that the one-time non-cash costs of deconsolidation of $7.9 million equated to $0.06 per share. Excluding this one-time charge, full-year fiscal 2010 EPS was $1.45 on an adjusted basis.

I would like to now walk you through a bridge that gets you to our fiscal 2010 proforma results of $1.26 per share as if the deconsolidation of SPHC occurred prior to fiscal 2010. There are two pieces in the bridge. The first is the loss of the results of operations and cash flows of the roughly $300 million in net sales of the deconsolidated companies, which will reduce our go-forward EPS by approximately $0.08 per share. The second piece relates to accounting rules regarding noncontrolling interest, which require RPM to record SPHC's operating business units' noncontrolling ownership interest in certain RPM foreign subsidiaries as a non-cash reduction to net income. On a proforma basis for fiscal 2010, that non-cash, noncontrolling interest would have been $14.4 million, or approximately $0.11 per share.

Included in our press release was a proforma P&L for fiscal 2010 by quarter, as if the deconsolidation occurred prior to fiscal 2010, highlighting EPS by quarter. As you can see, proforma fiscal 2010 includes sales of $843 million and EPS of $0.49 per share for the first quarter, sales of $784 million and EPS of $0.37 per share for the second quarter, sales of $603 million, and an EPS loss of $0.08 per share during our seasonally low third quarter, $886 million in sales, $0.47 per share for the fourth quarter. With full-year results of $3.1 billion in net sales, and EPS of $1.26 per share.

On our consolidated balance sheet at May 31, 2010, as Bob said, please note that the asbestos liability is no longer included as it was part of the deconsolidation of SPHC on that date. Beginning June 1, 2010, the start of fiscal 2011, the results of operations and cash flows of SPHC's group of companies will not be included in the consolidated results of RPM International. Going forward, we expect cash flow to improve by approximately $50 million per year as a result of the deconsolidation. With that, I would like to turn the call back over to Frank.

Thank you, Bob. Thank you, Barry. Please note that my 2011 outlook comments are based upon and should be compared to the 2010 proforma results just reviewed by Barry Slifstein. We expect sales growth for the 2011 fiscal year to be in the range of 4% to 6%, with our industrial businesses growing 5% to 8%, driven by flooring, maintenance, corrosion control, and waterproofing and roofing systems. Products driven by commercial construction should bottom out this fall and begin to show growth in the second half of our fiscal year.

Lastly, a broader and growing international presence will also continue to support growth across our industrial businesses, though this also exposes this segment to swings in foreign exchange rates, especially the euro and British pound. Our consumer segment growth is expected to slow to a range of 2% to 4%, with higher growth in small project paint and patch and repair products, and an expectation for flat results in the caulks and sealants category.

Earnings in the first half of fiscal 2010 should be up modestly in the 2% to 4% range compared to our record first-quarter and second-quarter results of fiscal 2010 and in part due to expectations related to the current raw material cost environment. Second-half earnings are projected to be up 15% to 20% as a result of a return to growth from our businesses associated with construction markets and expectations for a more stable raw materials environment this fall. Free cash flow will approach record levels in 2011. Key issues to watch for the year are three -- raw material costs/product price mix, the impact of foreign exchange rates, and our expectations for continuing modest macroeconomic recovery.

This forecast does not include acquisition activity, which from a timing, cost and size perspective, it's very hard to predict, so we don't. Having said that, we would be disappointed if we do not complete $100 million, or more, of product line or freestanding company acquisitions in 2011. That concludes our prepared remarks. We would now be pleased to answer any of your questions.

(Operator Instructions) Your first question comes from the line of Kevin McCarthy with Banc of America-Merrill Lynch. Please proceed.

Yes, good morning, gentlemen. How are you?

Good morning, Kevin.

Frank, you mentioned the challenging environment in raw materials. Would you advise us how much raw material costs would have inflated in the quarter on a year-over-year basis and perhaps also any sequential comments? And then what your expectations would be for fiscal 2011 there?

Starting this spring, a number of critical raw materials for our entire industry saw significant price increases and, in some cases, product shortages related to some of the major chemical manufacturing suppliers' plant shutdowns for various reasons. In some instances, we saw price increases up 10%, 15%. In other instance, we saw price increases that were up double or triple that. At the same time, there were certain product categories, in terms of raw materials, that were on allocation.

As I mentioned, I don't have, Kevin, a specific impact to that handy, but it was certainly mid-, single-digits across RPM. We were able to overcome that in the quarter as a result of a better product mix to generally higher margin product lines that had better growth in the fourth quarter versus some of our lower market product declines, which had slower or no growth.

And then lastly, as I mentioned, the diversity of RPM's companies and products are such that we don't have the single exposure that companies that have a much bigger concentration in certain product categories have. So that's kind of the circumstance that we're in now. Those challenges remain over the summer. The availability issue has lessened for the most part, which is a good thing. And we anticipate, from what we hear in the industry, that some of the pricing situation will settle down towards the end of the summer or this fall. But nonetheless, as we sit here today, in the middle of the summer, in the middle of our first quarter, we certainly are facing higher year-over-year raw material costs than we experienced a year ago.

As a follow-up, then, Frank, if I may, would you foresee the need or the opportunity to recover those costs via price increases, let's say in the consumer segment relative to the 0.8% year-over-year decline that you referenced in the quarter?

It's really a combination across our different businesses. In some select categories, we're getting price increases because we just got to have them. In some of our industrial businesses, we've already enacted some price increases. And so as I mentioned, and we're seeing price increases starting to come across a lot of our major competitors in different areas. And so I think a combination of seeing where the pricing increase efforts in our industry settle out and where raw material costs settle out, I think that settling out should happen this fall, really in our second quarter. We would expect to see a better raw material cost/price mix, but that's going to be a fall phenomenon, not necessarily a first quarter phenomenon.

Okay. Thank you very much.

Thank you.

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

Good morning, everybody.

Good morning, Saul.

Frank, in your 4% to 6% revenue growth for the current -- for the new fiscal year, how much of that 4% to 6% is price, just kind of following up on Kevin's question?

1%.

That sounds pretty modest.

It is pretty modest. Again, it's circumstantial versus where we are. That will change as the raw material circumstances that we're facing are more persistent. I think there are expectations that this fall we're going to see some better pricing. We're already seeing the availability issues ease up. There are expectations that there will be more capacity coming online. If that is not the case, then as I indicated in my prepared remarks, we will see price increases much more aggressively.

I'm trying to reconcile the comments you had about the substantial increase in advertising and promotional activities that you spent money for in the fourth quarter, followed up by pretty modest expectations for revenue growth. I guess I would have thought with a big increase in advertising and promotion, you would expect more of that spending to have translated into top-line growth.

As I indicated, Saul, we're expecting kind of a 2% to 4% in our consumer business. In our small project paint categories, it will be higher than that. In our caulks and sealants categories, it will be flat and perhaps even slightly down. That's a result, in particular, of our DAP businesses, which began generating record results last summer and really came out of the recession early. So they are having a challenging comparison. They are the only portion of our consumer segment that has some impact of the housing market in terms of new construction. And so it's really a balance between expected higher growth in our small project paint and patch and repair categories, and expectations for flat results in caulks and sealants.

Finally, Bob, where is SPHC on the balance sheet? How do we -- what are you valuing that asset at, or where does it show up?

Essentially, Saul, the investment is carried -- it would be a long-term, other asset. And the other asset has four subcategories; goodwill, intangible, deferred, it's in the other. And essentially it's down at a value that recognizes the issues of taking this $7.9 million charge that we took here in our fourth quarter. The whole balance sheet just collapsed into that $101 million that you see in the balance sheet.

Into other long-term liabilities?

No, other long-term assets. $101.4 million that we have there. There's a group of things, but that's where we categorize SPHC for now. It's a long-term asset.

Other -- oh, in that $101 million? And how much is the SPHC component?

It's essentially zero, which is a little bit misleading. It's the offset between some assets and liabilities that were netted, that got to the $0.06 loss as of May 31.

And the noncontrolling interest are portions of your assets that are owned by somebody else?

No, it's the -- interesting nuance of accounting, the noncontrolling interest, which normally would be equated to what used to be called minority interests, are actually the ownership of SPHC operating businesses that were deconsolidated in RPM International foreign affiliates. So for instance, the Day-Glo businesses overseas are not part of the filing, aren't part of the Day-Glo structure, but there is a minority interest by Day-Glo and some of its foreign affiliates. So with that example, it is the ownership -- minority ownership and foreign affilliates of SPHC companies. Collectively it's all owned by RPM.

Got you. Thank you very much.

It's accounting and it's non-cash.

Thank you very much.

Thank you, Saul.

Your next question comes from the line of Edward Yang with Oppenheimer. Please proceed.

Good morning, Frank. Just following up on the SPHC questions, I was a little surprised that the EPS impact, particularly for 2009, was a bit higher. I guess it was related to this ownership interest in foreign subsidiaries again. I think in the June press release, you had alluded to a pretax income hit from SPHC around $19 million, back into a net income effect of $13 million. And when I look at my model and the proforma, it looks like that hit in 2009 was $23.9 million. Was that a surprise to you or change in thinking since June, that additional impact from the select deconsolidation of these units?

Since the June 1 announcement, and we were communicating what we knew at that time with the filing of Bondex and SPHC on May 31, and very much focused on the deconsolidated entities, and subsequent to then, we became aware of the accounting treatment for this noncontrolling interest, which is non-cash. All those businesses are wholly owned by RPM or have a minority, a small minority interest, and is owned by one of the deconsolidated businesses.

The sales, earnings and cash flow of those companies are fully incorporated into our consolidation. So as I indicated earlier, it's the nuance of accounting, which seems a little bit odd that we have to reflect a noncontrolling interest because of the deconsolidation. Because normally that would indicate an ownership interest by an independent third party, which is not the case here. So, it is an accounting issue that we had not fully vetted as of June 1, and that's the proper way to account for it, but it is non-cash and all of those related businesses are part of the RPM International consolidation.

Would the asbestos plaintiffs have -- would they be entitled to get the noncontrolling interest through the 524(g) trust?

No. The asbestos plaintiffs and their lawyers are entitled to the appropriate value associated with the Bondex products and their liability, which is the process by which through 524(g) we essentially determine the value of those liabilities as they exist today and prospectively for the future.

Okay. And on FX, looks like you got a boost from FX this quarter. I thought that was surprising, given that the euro and British pound was down.

FX hurt us a little bit in the full year, but in the quarter, just a combination of how the euro had recovered a little bit versus the dollar. And it also was a function of where foreign exchange rates were a year ago at this time, which oddly enough helped us in the quarter. But one of the key things that we need to pay attention to for fiscal 2011 is just that. Because foreign exchange rates, particularly the dollar and euro relationship, which is our largest foreign exchange exposure, has been hugely volatile. And so that's an issue that people need to pay attention to relative to our reported results.

How do you account for FX? Is that just the average exchange rate during the quarter, or do you just take a spot rate at the end of the quarter?

No, the accounting for that is the average exchange rate over the year in the year, and then in the quarter it's the average exchange rate for the quarter.

Okay, and you talked a lot about raw material being a pressure on the margins, but actually your gross margins were up and from an operating basis, it looked like most of the pressure came from SG&A. What was the breakout -- what's the dollar breakout or percentage breakout in your SG&A line item by advertising or salaries and commissions and so on? And what were those up for the quarter?

The area that I focused on is in the consumer area. We had a generally good leverage to the bottom line in industrial segment in the fourth quarter. Both in the industrial segment and consumer and across all of our businesses, we had significantly higher compensation and benefit costs. We had higher pension cash costs and expense for the year. And then across almost every category of compensation, from participants in our incentive equity plans all the way through to selling commissions, were higher in the quarter year-over-year versus where they were a year ago.

And then in particular, in the consumer segment, we had about $5 million of additional advertising, TV advertising spend in the quarter versus last year. And also in the consumer segment, we had a one-time, $2.5 million environmental charge to permanently resolve a long-standing superfund site. So it was $7.5 million in terms of detailing in consumer year-over-year.

Okay, thank you.

Thank you.

(Operator Instructions) Your next question comes from the line of Rosemarie Morbelli with Ingalls & Snyder. Please proceed.

Thank you, good morning. Frank, in your press release, you said that you expect -- that commercial construction is nearing bottom and you expect the volume to increase by the second half of next year, which will be February, May, 2011. Do you have any concrete evidence that this will be the case? Is it a question of backlogs, customers comments, customers actions? Could you give us a better feel as to why you made that particular comment?

It's as much related to easy comparisons, Rosemarie. Housing starts are down dramatically, but they are not zero. Commercial construction is down dramatically, but it's not zero. And in some of our product categories, we will be comping negative sales of 25% to 30%, 35%, and so some of it is just hitting bottom and actually in certain product categories, we're starting to see that this summer.

Other parts that I anticipate some pent-up demand and some freeing up, which seems to be slowly happening of financing, a big part of the construction market's challenges have been the availability of project financing, which for the last 18 months, has been basically zero. So those are the reasons that we anticipate things improving and that, at least anecdotally, we're starting to see that in a couple product categories as we speak.

Okay, and could you talk a little bit as to the trend you see in terms of the demand level both in the U.S. and in Europe? In other words, when you look at your quarter, we know based on the comments you made the previous quarter that March was strong. Did you see a continuation of that strength in April and May? Are you seeing -- did you also see it in June since we are now off of that and we are almost at the end of July? Could you give us a feel as to what you are actually seeing out there in terms of trends sequentially?

Sure, first of all, in the fourth quarter, we saw that continuation in April and May. And, as you see from our results, we had industrial segment sales up very nicely, 7% plus of that was volume. Consumer segment sales were up nicely in the spring, 12% plus volume increases there. We are starting to experience, and that is part of the reason for our forecast, some slowing in consumer take-away. It's still positive and we expect it to remain positive, but for some reason it seems to be slowing this summer versus the pretty robust take-away in our fourth quarter and spring levels. Our industrial segment is continuing to show good revenue growth here in the summer. And, again, we expect that to be positive both from a sales, pricing and volume for the balance of the year. But our forecasts are for modest growth in the 6% to 8% range versus what we've been experiencing over the last quarter. So the biggest slowdown is really coming in our consumer businesses, and that's just a function of what we're experiencing over the summer. It will be interesting to see whether a higher level of growth picks back up, which is certainly possible relative to economic activity, or whether the slowing we're seeing is a trend to slower economic activity.

And any difference between what is going on here and what is going on in Western Europe?

No, our Western European business is continuing to do pretty well for a couple of reasons. In our industrial segment, we are very well positioned with a base in Germany for products that go into the building envelope and energy efficiency. Those products continue to sell well. We continue to expand in a broader geography. And they are being driven by national standards for energy efficiency, which quite candidly, don't exist in the United States. Also, in the European marketplace, Rust-Oleum in particular, through a combination of acquisitions and some new investment, we invested in a aerosol filling line in the UK. I believe it's the first new aerosol filling capacity investment in Europe in probably 30 years. And despite the challenges in Europe, we are continuing to grow nicely there, just through picking up market share.

Okay, thanks.

And last comment is that Latin America, India, and a little we do in China are booming, but those numbers are relatively small on the total of RPM.

Okay, and no major change here, you already addressed that?

Yes, that's correct, thank you.

Thank you.

Your next question comes from the line of Mike Sison with KeyBanc. Please proceed.

Good morning, Mike.

Hey, good morning. Nice end to the year.

Thank you, and welcome to RPM's conference call.

Yes, in terms of, in terms of the consumer segment, I think I understand the lack of leverage in the fourth quarter. Does that start to improve in the first half of the year, as some of those costs, advertising costs flow through?

I think that should. It's really just a function of seeing some slower growth in our consumer segment over the summer months and the raw material challenges that we see. And that's why when you look at our forecast, our forecast for our first half is really for very modest earnings growth. We think we can overcome most of the raw material challenges, but on a slower sales basis in our consumer businesses. And, hopefully things will perk back up a little bit, but it's growing at a slower rate than what we experienced in the spring. And lastly, in our consumer businesses in particular, and RPM in general, we generated record results in our first quarter last year and our second quarter. And then just had too big of a hole to fill in the second half of the year, although we're making good progress on that as well.

Okay. And in the industrial segment, I'm trying to get a better feel for how you ended the quarter in terms of year-over-year growth. Did the strength improve as the month went on? Is the June sort of -- sort of that 7% or better level?

Yes. We had a very strong quarter. We're still experiencing good growth, mid- to high-single-digit unit volume growth in certain product categories. In our performance coatings group, we actually had a significant amount of business in the Gulf states area. And so far, we haven't been hurt too much by what's happened in the Gulf. But if you're a major producer of fireproofing products and corrosion control coatings, nonslip floor coatings, a lot of products into oil platforms and chemical plants in that region, we've been very sensitive to paying attention to what's going on down there. And it's hard to say whether we will see a significant slowdown or there's certain product categories, because of the activity down there that over time will pick back up and we'll pay attention to that and as that trend becomes clearer, communicate it.

Okay, and last question, on acquisitions, you noted about $100 million sort of a target for 2011. Any particular areas of focus?

No, we completed an $80 million-plus this last year. I think when you look at our cash flow and our debt levels were down slightly, we'll generate hopefully record levels of free cash flow this year. But there is a good pipeline of small product line acquisitions and freestanding company acquisitions that we have. And so I would expect that we would do $100 million, at least, throughout the fiscal year. The vast majority of those acquisition opportunities that are in that pipeline are outside of the United States. And it's just a function of our focus of trying to pursue growth more aggressively in regions of the world -- like India, Latin America, or China -- with their higher levels of growth. And then also opportunities like what we're seeing with Rust-Oleum, which in the last 18 months, has really broken out of its mostly North American DIY presence so far successfully.

Okay, and one last one, in terms of the outlook for raw materials, you said the pricing would be up 1%. That's about $30 million or so. Hopefully it's going to be in the first half of the year in terms of the raw material hit?

That's correct. And, we anticipate, and I think our whole industry anticipates, and are starting to at least see some trends that the availability issues are getting better and that the raw material pricing challenges are getting better. It's pretty volatile still. And if that assumption does not change and we are challenged the way we were at the end of spring, then we will have to revisit price increase issues across many of our businesses this fall.

So the plan for 2011 would just be neutral on raw materials within that assumption?

That is correct. And so the plan is neutral and that impact is in the first half of the year.

Okay, great. Thank you.

Thank you.

Your next question comes from the line of Jeff Zekauskas. Please proceed.

Good morning. This is Silke Kueck for Jeff. How are you?

Good morning, Silke, good.

A couple of questions. Existing acquisitions you already made, should those add something like, I don't know, $60 million or $70 million to your sales line next year, if I look at Universal and FibreGrid and all the others?

That's correct. Probably somewhere in the $60 million to $70 million range is correct.

And some questions on SPHC, was SPHC consolidated still in the fourth-quarter results?

Yes, they were. They were part of the $0.53 and the $1.45 for the year.

Okay, and I apologize for being a little slow, but can you explain again what the $0.06 charge represents?

Sure. At the, at the point of deconsolidation, we had to remove SPHC from our balance sheet and so the actual filing date was May 31, 2010. So as of that date, we had to accomplish the deconsolidation and the impact of the assets and liabilities and our investment in SPHC and all of those offsets in terms of the balance sheet hit, was $0.06, which flowed through our P&L. The impact of the deconsolidation on a proforma basis relative to sales and earnings really started on June 1, and that's the detail we provided on the proforma quarters in our earnings release and what Barry Slifstein talked about today in the call. Does that answer your question?

Yes.

Thank you.

And one follow-up, if I may. Is the deconsolidation approved by the bankruptcy court, or does it have to be approved or is it something that's still pending?

I believe it's been approved. Again, we -- from that process, we are in a probably three- to four-year process. At least in the early stages, probably the first 9 to 12 months, it's going to be kind of quiet in a sense. It will be fact gathering, jockeying for position by all sides in terms of issues, but so far all the issues relative to the filing have been approved by the court.

So, that bankruptcy judge has made the decision that he allows the subsidiary to go through bankruptcy and to actually establish the asbestos trust?

Again, the answer to that is yes, but this is a process by which various issues could come up for the challenge any time between now and the next three or four years. But as we sit here today, and all the issues relative to our filing and how we -- how Bondex and SPHC filed and ended that filing, have all been approved by the court, that's correct.

And then last question on that subject, what will happen on the -- if I remember, there's like an August 9 trial date. What will happen on that day? What will be discussed?

I don't know the specifics to that question. That's really a SPHC/Bondex situation. What I do know is really what I referenced before. The court schedules hearings monthly, so it's partly a slow process because the court has a lot of cases to cover and they take generally a day or two every month to address this particular case, so that's part of the timeframe here. And as I indicated, whether it's August or September, it's our understanding that the next 9 to 12 months is really a period of time of fact gathering by all sides around this filing. And we don't expect any major issues or material rulings for that period of time. If there are any major rulings or impactful decisions, we would certainly communicate those.

Okay. Thanks very much.

Thank you.

Your final question for today comes from the line of Saul Ludwig with Northcoast Research. Please proceed.

Your total raw material bill on your $3 billion of revenue is approximately what?

Oh, generally raw materials for us, Saul, I mean this is off the top of my head, but depending on the business, generally raw materials run 45% sales.

Would you say 45%?

Yes, generally, conversion costs and between factory overhead and direct labor are 15%, but that's a generalization. It ranges widely from one business unit to another.

And if you exclude raw materials as part of cost of goods sold, your all other costs, did they change a whole lot in the fourth quarter compared to a year ago? If you look at your non-raw material costs?

In SG&A or in general?

No, in cost of goods sold.

In cost of goods sold. Nothing really changed materially. But I think that the product mix that was favorable for us in the quarter and some of the leverage over conversion costs, whether it's factory overhead or direct labor over higher sales, masked what has been a massively challenging raw material situation for everybody in our industry. And we're not the only one to address it.

Right.

I think that the product mix and the diversity of our product lines benefited us so far in this circumstance.

And finally, will you -- will RPM incur any ongoing costs during this current fiscal year relative to the SPHC? Or do you expect your results on a quarterly basis to be pretty clean, or will they be encumbered with special costs as we go through the year?

Our expectation at this point is that there will be zero costs associated with that. The costs of the filing by Bondex in specialty products sold will be borne by those entities and will have no impact on RPM. And so as you look at the deconsolidation and its impact on our sales and earnings, if you also look at the impact on our cash flow, our cash flow ratios could get substantially better. And we should be generating at or near record levels of free cash flow from RPM. So there will be zero costs associated with the filing. Those are borne by the filed entities.

Thank you very much.

Thank you, Saul.

You do have one follow-up question from the line of Jeff Zekauskas. Please proceed.

Yes, Silke Kueck one more time. I wanted to just ask one more question on business trends in the industrial side. Have capital expenditures levels at your customers you do maintenance work for picked up? Have you seen that trend yet?

Yes, we have. And I think one of the things that's driving good growth in our industrial businesses is we're seeing industrial capital spending improve percentage-wise significantly. And RPM is a good example. Our CapEx this year should be $40 million, maybe a little bit higher. Last year it was $24 -- the year that just ended, it was $24 million. We are still a little -- just slightly more than half of what we were two years ago. So, while industrial capital spending levels are not near where they were two years ago, the percentage improvement is significant. And we're benefiting from that and we would expect that to continue.

And how far are you off of like peak levels?

I can't answer that other than from an RPM perspective. Our peak raw materials were somewhere -- I'm sorry, our peak capital spending was somewhere in the $75 million, $78 million range. And last year it was $24 million, $25 million. This year it will be $40 million plus. So if we're any indication, and if you look at our -- the growth in our industrial businesses and what we're seeing, I think you're seeing 15%, 20%, 25% improvement in some areas in capital/raw materials of major industrial companies globally. My guess is they're still half of where they were at the peak. So on the one hand, there's a long good tailwind in terms of things that will drive our core industrial businesses' continued good growth. On the other hand it depends on the continuation of the modest economic recovery that we're seeing. And we are seeing it in our businesses and we are seeing it in our industrial customers, but obviously there is a lot of concern amongst economists and major banking institutions about the sustainability of that. So that, as I mentioned in our prepared remarks, will be one of the things that we pay attention to relative to our ability to outperform these forecasts or whether these forecasts become more challenging.

Have you been able to gain any new customers during this period, now?

I think we've gained a lot of new customers, particularly internationally, as a number of our industrial businesses have expanded their geographic footprint. And in our consumer segment, we are picking up market share in a number of different categories. We can now find Rust-Oleum products in some select outlets or channels in the building materials area is a new product category area for them. And we picked up a lot of market share in automotive, DIY channels. So we are picking up new customers both in our industrial markets, more globally, and in our consumer markets in some different categories than the ones that we've traditionally played in.

If I could ask a very last question on raw materials, so when I look at some basic commodity chemical prices, they have really fallen pretty fast, like the past two, or maybe even three months. And so I'm a little surprised that you are expecting raw materials to sort of hit a peak probably like next quarter rather than it having peaked already this quarter and costs actually coming down. Why is that?

Our expectation is that we'll see -- hopefully, it's our expectation that we'll see a better cost/price margin really in the fall. I think some of it is just what our experience has been. A small part of it would be FICO accounting versus LIFO accounting for us versus some of our competitors, but that's what we're currently seeing.

Okay. Thank you very much for clarifying.

Sure, thank you, Silke.

I would now like to turn it back over to management for closing remarks.

Thank you, and thank you all for your participation on our call today. We are very pleased with the strong revenue growth in our industrial and consumer businesses in the fourth quarter. We look forward to reporting our first-quarter results, which we expect to be continued strong sales in our industrial segment and more modest sales in our consumer segment for the first quarter, which ends in August. We will report those results in early October. And we look forward to following up on any questions that you all may have, particularly related to the deconsolidation and the comparative quarters that we released on a proforma basis in our earnings release. Thank you to all the RPM employees, again, for a tremendous performance in a challenging environment, and thank you for everybody for your investment in RPM. Have a great day.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.