RPM International Inc (RPM) 2013 Q2 法說會逐字稿

Welcome to the RPM International conference call for the fiscal 2013 second quarter. Today's call is being recorded. This call is also being webcast and can be accessed live or replayed on the RPM website at www.RPMinc.com. Comments made on this call may include forward-looking statements based on current expectations that involve risks and uncertainties, which could cause actual results to be materially different. For more information on these risks and uncertainties, please review RPM's reports filed with the SEC. During this conference call, references may be made to non-GAAP financial measures. To assist you in understanding these non-GAAP terms, RPM has posted reconciliations to the most directly comparable GAAP financial measures on the RPM website. Following today's presentation, there will be a question-and-answer session.

(Operator Instructions)

Please note that only financial analysts may 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 proceed, sir.

Good morning, and welcome to the RPM International Inc. investor call for the second quarter ended November 30, 2012. We are pleased with our performance in the second quarter, which was ahead of our plan and consistent with our expectations for growth for our 2013 fiscal year. Our consumer segment businesses generated strong top- and bottom-line growth as a result of what we believe to be a return to more normal spending in home maintenance and repair, and small project redecorating, driven by the dynamics of an improving housing market.

Gross margins improved as a result of some raw material cost relief for the first time in basically six to eight years, and particularly at Rust-Oleum as a result of positive impact of a multi-year effort to improve distribution, supply chain and manufacturing efficiencies. Acquisitions also contributed to the strong consumer segment sales and earnings growth. Last spring, we acquired Australia-based HiChem, which is continuing to show strong results under the leadership of its original owner and founder Ivan Moldovan; Synta in the fall, a deck coating product line whose results will be more impactful in the spring and summer months, given the seasonality of that business; and Kirker this fall, a leader of nail polish enamel.

Our industrial segment businesses generated what we believe to be excellent results, given the underlying uncertainty for many factors in our core North American and European markets and economies, with one exception. That exception is our Building Solutions Group roofing division. You will recall that in the first quarter, we communicated a change in leadership and a refocusing of the business on its core roofing material and installation businesses. This has lead us to exit certain contracting and service revenue areas, and a winding-up of the roofing division international growth effort.

Additionally, from a market perspective, much of the major re-roofing spending over the last few years had been driven by local state and federal funding for schools, institutions and various government work. Public funding levels in Canada and the U.S., our core roofing markets, have been reduced over the past year. As a result of these factors, we expect the BSG roofing division to operate at levels below last year for the balance of fiscal '13. Excluding the drag of the BSG roofing division results, our remaining industrial segment businesses collectively delivered double-digit sales and earnings growth over the prior year's second quarter.

In the quarter, we experienced generally flat performance from our European business units, a performance we believe is particularly strong given the economic challenges continuing in Europe. We also benefited from an improvement in foreign exchange translation impact versus the first quarter, and improving construction market in the U.S., strong results for many of our high performance coatings product lines, and a positive contribution to sales and earnings growth from the Brazil-based Viapol acquisition we completed in the first quarter.

When you look through the impact of our India-based Kemrock investment, which delivered $5 million of after-tax catch-up earnings in last year's second quarter as a result of our exceeding a 20% ownership interest at that time, and the more than $10 million hit to earnings this quarter from the write-off of our remaining equity investment in Kemrock, we feel particularly good about a quarter that delivered year-over-year sales growth of 11% and earnings growth of 17%, and feel that, excluding extraordinary items, these results are indicative of what we will generate for the balance of our 2013 fiscal year.

That completes my opening comments. I'd like to turn the call over to Barry Slifstein, RPM's vice president of investor relations and planning, to provide additional detail on our second quarter results.

I'll review the results of operations for our fiscal 2013 second quarter and year-to-date on an as adjusted basis, excluding Kemrock adjustments in both the current and prior year, and then cover some November 30, 2012 balance sheet and cash flow items. I'll then turn the call over to Rusty Gordon, RPM's vice president and chief financial officer, who will discuss the outlook for the remainder of fiscal 2013.

On an as adjusted basis, consolidated net sales increased 11.1% year over year to $1.02 billion, principally due to volume improvement of 2.2%, price increases of 1.6%, and acquisition growth of 8.4%. These increases were partially offset by unfavorable foreign exchange of 1.1%, which is improved on a sequential basis from 4.3% unfavorable in the first quarter. Industrial segment net sales of $691 million, which accounted for 68% of total sales, increased 7.7% over last year, with volume improvement of 1.5%, price increase of 1.3%, and acquisition growth contributing 6.5%. All of which were partially offset by unfavorable foreign exchange of 1.6%.

At the consumer segment, net sales of $326.4 million increased by 18.9% over the same quarter last year, with 3.9% attributable to unit volume increases, 2.4% from positive price, and 12.7% attributable to acquisition growth. Unfavorable foreign exchange of 0.1% partially offset these increases.

Our consolidated gross profit increased 15.2% to $425 million from $369 million last year, principally due to higher sales volumes and price increases, which recovered margin lost in earlier quarters due to material inflation. As a percent of net sales, gross profit increased from 40.3% last year to 41.8% this year, representing an increase of 150 basis points.

Consolidated SG&A increased 15.5% to $325.8 million from $282.2 million last year, due to additional SG&A from acquisitions and increases in variable distribution and compensation costs, as well as higher pension, professional fees, bad debt, and insurance expenses. Earnings before interest and taxes, EBIT, of $100.4 million, increased 14.3% from $87.8 million last year, due primarily to strong consumer segment and certain industrial segment business performance, improving gross margins and contributions from recent acquisitions.

At the industrial segment, EBIT increased 6.9% to $78.1 million from $73.1 million a year ago, reflecting improvement in construction related-products and the Viapol acquisition, which were partially offset by weaker results in European-based businesses and the Building Solutions Group roofing division. Consumer segment EBIT increased 44.1% to $38.6 million from $26.8 million last year, driven by higher sales volumes, a partial recouping of gross profit margin lost in previous quarters, and strong acquisition performances from HiChem, Synta and Kirker. Corporate/other expenses of $16.3 million increased $4.3 million from $12 million last year, primarily due to higher insurance, professional fees and pension expenses this year.

Interest expense increased from $17.9 million last year to $19.9 million this year, primarily due to borrowings associated with this year's increased acquisition activity and the issuance of a $300 million bond in October. Investment income was $1.4 million for the quarter, which was relatively flat to prior year. Our income tax rate of 30.5%, compared to 31.4% last year, generally due to fluctuations in our jurisdictional mix of income, changes in valuation allowances, and difference between forecasted and actual results.

Net income increased 17.4% to $52.5 million compared to last year's $44.7 million. Diluted earnings per share increased 17.6% to $0.40 per share compared to $0.34 per share last year.

With regard to the year-to-date results, consolidated net sales increased 8.7% to $2.1 billion from $1.9 billion last year, principally due to unit volume improvements of 2.4%, price increases of 1.8%, and acquisition growth of 7.2%, which were partially offset by unfavorable foreign exchange of 2.7%. Net income attributable to RPM shareholders increased 13.0% to $137.3 million compared to last year's $121.5 million. Earnings per share increased 11.8% to $1.04 per share this year compared to $0.93 per share last year.

And now a quick look at the balance sheet and cash flows. Cash from operating activities of $127.6 million increased $17.6 million from last year. The improvement was primarily driven by increases in other accrued liabilities of $51.6 million, accrued loss reserves of $10.7 million, and a decrease in prepaid expenses and other current and long-term assets of $24.8 million, which were partially offset by unfavorable net uses of working capital of $76.5 million. Depreciation and amortization expense was $40.9 million compared to $36.9 million last year. CapEx of $30.8 million for the first six months of this fiscal year compared to $18.4 million for the same period last year. Our accounts receivable day sales outstanding was relatively flat to last year at 61 days. Days of inventory was relatively flat to last year at 83 days.

Finally, a few comments on our capital structure and overall liquidity. As of November 30, 2012, total debt was $1.4 billion compared to last year at $1.1 billion. Our net debt-to-capital ratio was 48.1% at November 30, 2012, compared to 38.7% at November 30, 2011. The increase was attributable to additional borrowings to fund acquisitions. Our long-term liquidity at November 30, 2012 was $962 million, with $262 million in cash and $700 million available through our bank revolver and AR securitization facilities. In October 2012, RPM issued a 10-year, $300 million bond with an interest rate of 3.45%. With that, I'll turn the call over to Rusty Gordon.

Thank you, Barry. Now, I would like to comment upon our outlook for the remainder of this fiscal year. We are optimistic that RPM's balanced portfolio will continue to drive successful results overall, as success in the home improvement sector and rebounding commercial construction will continue to offset our challenges in Europe and weaker BSG roofing results. For the remainder of this year, we are confident that our margin recovery will continue, and that the acquisitions completed in FY 2013 will be accretive. In addition, it appears that the foreign exchange translation headwinds experienced through the first half will be less of an issue as we progress through the back half of this fiscal year. It seems that the uncertainty in Europe's economic outlook has lessened somewhat.

Based upon our most recent outlook, we are maintaining our FY 2013 guidance for consolidated sales growth of 8% to 10% and earnings growth of 9% to 12%. This equates to an EPS range of $1.80 to $1.85 on an as adjusted basis. For the full year, we now expect consumer sales to come in at the higher end of the previously-stated 8% to 10% range, while industrial sales are now expected to come in towards the lower end of the previously-stated 6% to 10% range. This concludes our formal remarks, and we now are pleased to answer your questions.

(Operator Instructions)

Jeffrey Zekauskas, JPMorgan.

This is Silke Kueck for Jeff. On the conference call last time, I think you indicated the roofing business was roughly $400 million in size, and it's mostly North American business. What do you think the level of sales will be this year, given that you're exiting a certain piece of the business?

We don't disclose specific details of our individual business units. I can tell you, of that prior $400 million, it's about 50/50 between core roofing material sales and service and contracting. And there are elements of the servicing/contracting business that we are exiting, along with an international effort that two or three years ago got off to a good start, but was heading towards more service contracting, non-material sales at profit levels that were unacceptable. So we are in the process of winding that up and closing it.

Okay.

And on a year-over-year basis, you'll be seeing sales and earnings declines that are double-digit.

Okay.

John McNulty, Credit Suisse.

Hi, this is Abhiram Rajendran calling in for John. Just a couple of quick questions. Could you touch on any potential benefits you've started to see post-Hurricane Sandy, in terms of repair and maintenance work in your northeastern business? Or also, what you could see upcoming in the next couple of months?

In general, our waterproofing business, our sealant business, a lot of our construction chemical business, and high performance coatings are all doing quite well. If you look at the tale of the three stories of our industrial segment businesses, you've got the roofing division, which we just commented on and commented on in the first quarter. You have our European-based businesses, which are relatively flat on the top-line and modestly down in the bottom. And so that leaves about 60% of the business that's generating solid double-digit sales and earnings growth with decent leverage. And I think some of that is related to the impact of this, and some of it is related to ongoing good performance of the high performance coatings product lines in particular, and a steady recovery in construction. We are not close to where we were in 2007, in terms of revenue levels, but we hit bottom probably a year and a half ago, and are just seeing solid steady improvement in commercial construction in the U.S. in particular, which seems to be generating decent, steady, consistent sales growth.

Okay, got it. And then just a quick follow-up on raw materials. Has your outlook for raws changed meaningfully over the last three months or so for your full-year outlook, based on what you've seen recently in acrylics, epoxy, latex resins, as well as TiO2?

No, we've seen some continuing easing of raw materials, particularly in relationship to the extraordinary increases over the last six to eight years. As you know, we are on a FIFO accounting basis, so unlike most of our peers who are on LIFO, the benefit of that is showing up a little bit later. So now it's showing up in this second quarter, and will continue into the third quarter. And as I commented earlier as well, particularly at Rust-Oleum, they've had a multi-year effort in terms of distribution, supply chain, and manufacturing improvements that are starting to show results as well. And while that's not directly related to raw materials, it's certainly showing up in an improved gross margin in our consumer segment.

Okay, got it. And then, just last quick one if I may. On the corporate expense line, you've been running at about $16.5 million or so per quarter in the first half. Should we annualize that for the full year to a mid-$60 million level? Is that the right ballpark?

Yes. I originally commented back in July, when we talked about guidance, that pension would be a $10 million increase year over year for FY '13. Well it appears now, it's a -- more like a $12 million or more increase, so I believe the $15 million to $16 million range is the right one to use for corporate/other as we go forward this year.

Okay, great.

Kevin McCarthy, Bank of America Merrill Lynch.

This Aleksey Yefremov for Kevin. Frank, going back to your roofing business, could you give us an idea of what's a breakdown between the sales into commercial end markets and to government segments, state and local governments?

Yes, I don't have that in particular. It's entirely re-roofing work. I say entirely -- 95% is re-roofing, they get the odd new construction. And the government business is down, and I say government in general whether it's education, whether it's state-driven, whether it's certain areas of government work. That's also true in Canada, where we have a very strong presence in market share. And so we would anticipate, both as a result of the market dynamics and the internal changes that we are affecting, that you're going to see continued sales and earnings declines for the third and fourth quarter. But that we will have gotten through that, and certainly we'll be staring at easier comps, and so we would expect a better performance in fiscal '14.

And now turning to Europe. Can you just maybe elaborate, what are the key areas of weakness in terms of product lines? And also maybe -- I sense some optimism in terms of at least stabilization in Europe? What gives you -- basically, what's your outlook for demand for your products over the next three to six months?

Sure. When you look at Europe, when we disclose on an annualized basis our geographic presence, we have about $850 million last year in revenues in Europe, and 85%-plus of that is in our industrial segment. I think the results on a core currency basis in Europe are relatively flat, and that's a pretty remarkable result given the underlying economic challenges. And given the fact that the majority of our businesses are in the UK/Northern Europe area, we haven't been as negatively impacted as some companies who have a broader presence in Southern Europe. We do have a good presence of businesses in Italy. Fortunately, they are Italian-based specialty coatings manufactures who serve a broader European, or even global, market, so while the Italian challenges have hit them somewhat, their products are sold in a broader geography.

I guess the last comment I would make is, our largest business unit there is our Tremco-illbruck business, and they are particularly focused on window and door penetrations. They have got a lot of patented products, and a lot of their business is driven by continuation of energy efficiency and residential, commercial and industrial construction, which continues to be a focus of European market countries in terms of building regs on a much tighter basis than what we have in the U.S. So that has also benefited us. I think we see ourselves being where we are, and it feels like the deterioration in Europe, except for certain areas in the South, is not continuing, but obviously time will tell.

Rosemarie Morbelli, Gabelli & Company.

Frank, could you talk about the trend during the quarter, both in the consumer and in industrial, the area that did better than expected, those that did not as well as expected? Did you see a change month-over-month of either an improvement or a decline, or was it more or less flat throughout the quarter?

I think, Rosemarie, the real sequential improvement was from our first quarter to our second quarter. I think first, as it relates to Europe, the biggest headwind we had was foreign exchange, real challenging comparison of the euro to the dollar in our first quarter. That has eased in the second quarter, and our expectation is that it will even be better in the second half of the year. Our businesses continued to operate pretty much at the level in the second quarter as in the first quarter, which is flat to slightly down in Europe, challenges in roofing, and pretty solid results in the rest of our industrial businesses. And new product introductions in consumer, particularly at Rust-Oleum, the Transformation product lines they've introduced over the last year and a half, from countertops to kitchen cabinets, to now tub and tile. They introduced a year ago a product called LeakSeal. All of those products are doing extraordinarily well, and so that's helpful as well. And we see that continuing for the balance of the year.

Looking at your new products, Frank, if you look at the volatility index as some companies call it, what is it as a percentage of total revenues compared to where it was last year?

I would guess about 15%, but it's -- given the diversity of our businesses and 50 independent business units, it's hard to get a good read on that. But I would bet 15% is roughly accurate.

And last year, was it lower than that, or are we more or less stable?

I can't really comment on that, other than we did have some pretty good new product introductions going right into the recession, and so the impact in 2008 and -- I'm sorry, 2009 and 2010 of new products was muted, because we introduced them in the face of the wrong economic dynamics in the U.S. So we're not facing that now, and the housing market recovery, particularly as it relates to housing turnover and stability in employment, I think has gotten people back to spending on maintenance and repair and small project redecorating as they have traditionally. And that's something that, for the first and only time, we saw a change negatively just after the recession.

Okay, that is helpful. And I was wondering if we could go back to the raw material cost. How much of a benefit did you get in the second quarter, and do you expect it to continue? We hear some raw material costs stay -- having stabilized, and staying there. Others, on the other hand, are expected to go up, while some are coming down. So if you look at your whole basket, and the pricing trend that is following the trends in raw material, if they come down, how quickly do you have to give it back, particularly on the consumer side?

Traditionally, we have not given back price across any of our businesses. We have been in a cyclical six- to eight-year increase of significant magnitude in raw materials, so we are still considerably behind in a number of our businesses from where we were at the gross margin level, say six or eight years ago. We are seeing a mixed bag, but our expectations, through a combination of some easing of certain raw materials, the leverage of higher sales volume, and some very focused manufacturing and supply chain improvements, will result in continued gross margin improvement on a consolidated basis for the balance of this fiscal year. It's about 150 basis points improvement in the second quarter, and I would expect to see something comparable for the balance of the year.

And so when we look at that, if I may ask one last question on the gross margin side, what are we looking at in the third quarter? The third quarter is usually a very weak quarter in terms of top line. It has a big impact on the bottom line and on the gross margin. Do you think that you can have the same performance as last year, or is it coming down?

Yes. As you know, we don't provide quarterly guidance. As it relates to the second quarter, while we missed consensus, we are ahead of our plan, and more than on track for the guidance that we provided for the year. And in my prepared remarks, I indicated that the 11% sales growth and 17% earnings growth is something that we would expect to see in the second half of the year. And I think that's true of the third quarter in general. We're seeing continued improvement in all of the areas that we talked about -- less impact from FX translation, some moderating impact in Europe, continued growth in certain of our industrial businesses and consumer businesses, and of course, the positive benefit of the acquisitions we completed over the last year. So we will have a likely stronger third quarter than we had in the prior year on an operating basis. But keep in mind it's a seasonal low, and so the percentages can look impressive, but I think last year we did $0.05 earnings per share in the second quarter. So -- I'm sorry, in the third quarter, and an additional penny on a percentage gain looks awfully impressive.

Actually having a flat quarter would be impressive, because usually it is not around $0.05. It is more at a breakeven level.

I think that's correct, but you'll recall last year, we had a particularly strong third quarter because of a very mild winter and very little snow, so we had a stronger than usual third quarter in our consumer segment. Having said that, I do think the contribution of the acquisitions we've completed this year -- it's summertime in Brazil in our third quarter; Kirker, which is reported in our consumer segment, is less seasonal than some of our other businesses, could serve to offset what was an extraordinarily strong third quarter last year. I don't think we'll repeat that, but on a net consolidated basis, I think we will have a third quarter in which sales and earnings post positive growth over the prior year.

That's very helpful.

Charles Dan, Morgan Stanley.

I just wanted to clarify something that you said in the prepared remarks about the non-roofing businesses in the industrial segment. It sounds like those were growing perhaps ahead of your expectation, so I just wanted to check if that's the case?

I think that's correct. We anticipated -- there's been a lot of people sitting on their hands in relationship to industrial capital spending, but we were able to perform better in both top line and bottom line, on most of our --. Basically, if you carve out our comments on Europe, and Europe is what it is and I think people understand that, and the restructuring efforts and refocusing efforts we have in our BSG roofing division, the remaining 60% of our industrial segments are showing modest double-digit growth in the top line and better leverage than what you see on a consolidated basis in the segment on the bottom line. And we would hope to see that continue. Hopefully, issues around the fiscal cliff and other things provide enough clarity that industrial capital spending continues at pace. Construction markets are picking up again, not close to where they were at record levels, but when you get down as low as we were post 2008/2009, we're seeing steady improvement particularly in the U.S. commercial construction markets, and we see that continuing.

Ivan Marcuse, KeyBanc Capital Markets.

Real quick on the industrial segment, operating margins are actually down year over year. This is the first time that's happened in a while, even with raw materials sort of moderating. Is that all driven by acquisitions, and was there inventory step ups?

There is some inventory step ups in the first quarter and in the second quarter related to our acquisitions. And certainly, by the time we get to the fourth quarter, most of the impact of the acquisition costs and step up will be behind us. But the principal reason that you see a margin deterioration in the industrial segment is related to the, again, flat results in Europe. So just to go back to my comments earlier, last year we did about $850 million of our business in total on a consolidated basis in the European marketplace. 85% of that is in our industrial segment, and that segment of Europe in general, consumer or industrial, is relatively flat to the prior year on the top line and modestly down on the bottom line. And then we've experienced double-digit sales and earnings decline in our BSG roofing business.

Got you, and the last --

Those are the principal -- those are the reasons why, on a segment basis, you see a deterioration in the operating margin. Excluding those two, the remainder of our industrial businesses are all showing margin improvement.

Okay, thanks. And then last year, you had enough acquisition costs to call out, so -- and then you've done a lot of acquisitions over the past year. Were acquisition costs about flat on a year-over-year basis, or were they a little bit less this quarter?

They were flat year over year. We had a lot of acquisition costs last year, and we have a lot of acquisition costs this year, and quite candidly I hope we continue to have a lot of acquisition costs.

Great. And then, there's been a lot of storm damage and you had that water restoration business buyout. Is there any way to quantify if you had a pick up in storm-related sales, and -- or would you expect it to flow through the remainder of the year because it takes awhile to get up and going?

The Legend Brands business we acquired about a year and a half ago. They're Washington state-based, and they are driven a lot by water and fire damage restoration, and certainly by storms. And they absolutely had a strong result at the end of our second quarter as a result of Hurricane Sandy. And they have under-performed in their first year as part of RPM, but certainly in relationship to hurricanes or tornadoes, or one of the other issues that we are not facing right now is a particularly cold winter weather and the challenges that come with that. Those are the types of factors that drive some spikiness to their results on top of their core underlying base business.

Legends Brands is about a $100 million business, right? When you acquired it?

It -- we disclosed its revenues at about $75 million at the time of acquisition.

Great. And then more of a modeling question. The Kirker acquisition, I think when you did the announcement, it was in RPM2 Group. Is it now in the consumer group?

No, we - RPM2 is really a function of businesses that don't, in terms of products and markets, fit either with the high performance coatings or construction chemical waterproofing categories, or in the consumer DIY small decorative, or patch and repair. So that's where the Day-Glo's would fit. That's where our Mantrose-Haeuser business that's in fruit coating, and confectionary coating, and shellac fits. And so that's where Kirker is. But for segment reporting purposes, we have to discern, of those RPM2 businesses, which serve consumer markets and which serve industrial markets. And as you'll recall, pre-SPHC, we had an RPM2 consumer and RPM2 industrial. Most of the RPM2 consumer businesses are part of the Bondex SPHC de-consolidation.

Right.

Kirker clearly is driven by consumer retail, and so it is properly reflected in our consumer segment.

Great. And then my last question, on the acquisition front. Is it a reasonable expectation to expect that you're going to continue at this pace of doing a couple deals a quarter for the going -- for the near term, or would you expect that to slow down?

I would expect over the next 12 to 18 months that we'll continue to be doing acquisitions, but they will tend to be somewhat smaller than the transactions we've completed over the last six to nine months.

Great. Keep up the good work.

Edward Yang.

Do you have an update on the SPHC? It's been a couple years now. Are there any updates on the legal front there?

Sure. This week, in fact, in bankruptcy court in Pittsburgh, is AN estimation trial, which is one part of the SPHC process. It's an important part, something that has been a critical piece of our thinking and the SPHC/Bondex team's thinking when they were first filed with the 524(g) back on May 31, 2010. It is possible that the outcome of the estimation trial, which should be concluded we're told by the court, with final arguments in mid-March, and any decision by the end of May, could lead to a consensual agreement in calendar 2013, which would resolve this issue. But it is a piece of the process, so it's also possible that this process could continue for another two or three years. It's going as expected, and from our perspective it's going quite well.

So if it could be resolved in calendar 2013, are you still pretty confident that there won't be any recourse back to RPM, or you won't have to contribute any additional cash or capital?

No, what we've communicated in the past -- first of all, the nature of a 524(g) requires a consensual agreement, and the funding of a 524(g) trust, and a channeling injunction, the channels all existing and future claims associated with Bondex asbestos liability to the trust and away from any RPM entity. And with that, we would reconsolidate all of the deconsolidated businesses that are part of the SPHC Bondex. At the time of the deconsolidation, they were about $300 million in revenues. Those businesses have continued to grow both in the top and bottom line, and most clearly RPM will be a contributor to that trust fund. As we've indicated in the past, I think the simplest way to look at it is in the context of an acquisition in terms of what would we contribute to the trust fund in relationship to the return of those businesses' sales, earnings and cash flow. And in fact, if and when we get to that consensual agreement, accounting in terms of balance sheet items and otherwise are treated exactly like an acquisition from a purchase accounting perspective.

Okay. And a prior question asked about consumer pricing. Obviously much healthier volume growth there, along with the housing recovery, and you've had pricing run positive around 2.5% or so, and despite raw materials that have moderated for you. Are you still expecting that level of price increases for the back half of the fiscal year about 2.5% or so, or should we expect to see that moderate with the raw materials?

No. The pricing impact is really in relationship to pricing actions from last year. And so I wouldn't expect -- as we get quarter-by-quarter, you'll see less impact of pricing. Although we would continue to expect to benefit from moderating raw material costs, particularly in light of a six- or eight-year historic run-up in our core raw material costs, and from the benefit of some of the supply chain and operating efficiencies that I commented on earlier.

And finally, I just wanted to jive the more positive comments around industrial, and again, sounds like you're a bit more optimistic on Europe as well, but I think Rusty had some comments that you indicated that the revenue growth for this year will probably be at the low end of the range, the 6% to 10% for the year. So how do you reconcile those two things?

I think the issue there is really on a segment basis, but if you understand, which you do, the way RPM is organized, we've got 50 independent operating units. And so when you think about the European-based businesses that's flat, and the roofing business that is down year over year, that would indicate that there are business units whose core growth is high single digits. So there are still a number of areas where we are experiencing high single-digit core growth, whether that's driven by an improvement in the construction markets in North America or by continued market penetration in terms of different channels and different geographies by some of our high performance coatings businesses like Stonhard or Carboline.

Okay.

Jason Rodgers, Great Lakes Review.

Wonder if you could talk a little bit about performance in geographies outside of North America and Europe?

We -- our presence is principally Middle East and Africa and South America, with a smaller presence in Asia. We are continuing to see very robust double-digit growth in South America on a relatively small base, but a growing base, both core growth and acquisitions. Middle East and Africa is down principally because we have an extraordinarily strong business in South Africa. It has got a great employee base and leadership team, and they've grown extraordinarily well. But in the last couple quarters they've been particularly challenged by some of the mining strikes and underlying economic impact on that business. Otherwise, we're doing fine in the Middle East. Our Asia Pacific business, ex-India, is growing, but that's on a relatively modest base as well. And so I would say that our growth in North America, Europe, and Latin America is indicative of our performance and what's happening in those markets. We're so small in the Asia Pacific market, while we experienced double-digit growth in the second quarter, it's on such a small base it really isn't indicative of what other people who have a bigger presence might be experiencing.

And what's your estimate for CapEx for fiscal '13?

I think we'll be around $85 million, and that may be increased slightly, depending on capital spending that would come with some of the recent acquisitions that weren't part of our original budget.

Richard O'Reilly, Revere Associates.

On the Indian investment, Kemrock, is there anything left on your books on that?

We have an investment in a convertible bond on the books, as well as a note of about $5 million.

And what are the convertible notes worth, or face at?

$14 million.

Okay, fine. Okay, great. And second, the comments you gave to Rosemarie about the Q3, now the press release has a statement that you expect to see weaker results in the third quarter --

(multiple speakers) I think the press release is just related to the seasonality of our business. Our third quarter has traditionally been a seasonal low for us, given the fact a vast majority of our industrial and consumer products are used on exteriors. And so historically, we've broken even. Last year, we made $0.05 a share. But to further my comments on this call, we would expect to see, out of our operating results, positive sales and earnings growth year over year in the third quarter.

Okay.

(multiple speakers) a combination of core growth and acquisitions, which will, we think, serve to overcome what was an extraordinary performance out of our consumer business last year that was just weather-related.

Okay. I wanted to clarify that, because from the press release alone, it would imply you were looking for a lower year-over-year comparison. Okay.

Yes, I apologize. That is not correct. We expect positive sales and earnings growth in our third and fourth quarter, excluding the extraordinary items like Kemrock.

Okay. If I can ask a last question. There was a couple of questions related to Sandy, and I just wanted to clarify something. Most of your commercial work would be new construction -- I mean would be normal maintenance versus major repair and new construction like what we're going to see in Northeast, Jersey Shore, New York City area. Is that a right way to be thinking about that?

In general, yes but there's a couple exceptions to that. To the extent we are in waterproofing or retail or commercial caulks and sealants, it's often that you see a pick up, depending on that, regionally. Our roofing division, which has had some challenges but is still a rock solid, very profitable part of RPM, could see some pick up as a result of that. That typically comes months later, if there is any roofing repair work or re-roofing work on commercial or industrial properties. They do not do any residential roofing, so they won't be impacted by that. And our Legend Brands business, which saw in -- certainly the end of the second quarter, is very much driven by repair and maintenance, damage repair, dehumidifying, things like that. So they may see some add-ons in relationship to Sandy that might relate more to refilling their distribution channel, given the impact of Sandy on their business in the second quarter.

Okay, fine. Just, so far in central New Jersey, the weather has remained dry, so you've got a real tough comparison year over year to date. Okay.

(Operator Instructions)

Rosemarie Morbelli, Gabelli & Company.

Frank, could you touch on the end markets in India? Are you seeing any improvement, and is that going to help Kemrock before the end of this calendar year, if there is any improvement?

We're seeing stabilization in that business and, while we have written off in its entirety our equity investment, we still actually own 23% of that business. And so the deterioration in their business, which was really a capital structure issue, has stabilized. They reached a mend-and-extend agreement with their bank group, and the vast majority of their debt has been bank debt driven. And so there is stabilization there and we're hopeful that that business will pick up. But with the write-off of the remaining amount of our equity investment, it will likely not have any further impact on our results this year.

Okay. And then I was wondering if you could give us a feel for the progress you are making on the building envelope? If you put all of the businesses or product lines that are going into that particular project, so to speak, could you give us a feel for how it is doing versus what it did last year, and what your expectations are?

In general, I think a lot of the building envelope expectations we had were muted by the freight train of the 2008/2009 recession on commercial construction and industrial construction. Having said that, we have seen significant benefits, as I mentioned, in Europe. I think the focus on building envelope and energy efficiency is one of the reasons that our European-based businesses are relatively flat in light of just terrible economic fundamentals over there. And so the focus on that, and in our entire Building Solutions Group on the connections and the margins and energy efficiency for commercial and industrial properties, has benefited RPM and will continue to do so. The only other comment I'd make on that is Dryvit was a big part of that and, as you know, Dryvit has been de-consolidated as part of the SPHC business.

True.

At this time, there are no other questions. I would now like to turn your call back over to your host, Mr. Sullivan.

Thank you for your participation in our call today. We remain excited about our fiscal 2013 and confident in achieving our results as communicated for the balance of this fiscal year, excluding the one-time items that we've talked about. Thank you for your investment in RPM, and best wishes for a happy new year to all.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a wonderful day.