RPM International Inc (RPM) 2014 Q1 法說會逐字稿

Welcome to RPM International's conference call for the fiscal 2014 first quarter. Today's call is being recorded. This call is also being webcast and can be accessed live or replayed on the RPM Web site 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 section.

(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, Michelle. Good morning, and welcome to the RPM International investor call for the fiscal 2014 first quarter ended August 31, 2013. On the call with me today are Rusty Gordon, RPM's vice president and chief financial officer, and Barry Slifstein, RPM's vice president investor relations and planning. On the call today, we will provide you with highlights of our first-quarter performance as well as our outlook for the balance of our 2014 fiscal year, after which we will answer your questions.

We are pleased with the results generated by the RPM operating companies in our first quarter. Our industrial segment grew 3.5% over last year, basically all unit growth, in part generated by a return to modest growth in our European companies, and at Tremco roofing, both troubled areas last year. The balance of RPM's industrial companies are also growing at low single-digit rates in line with our expectations for the year, and quite candidly, below the levels we would expect in an economic recovery. Dysfunction in Washington and an ever-growing regulatory environment is putting a damper on industrial capital spending. It even seems to be slowing down what has been a strengthening in commercial construction activity in North America. Hopefully, these political issues impacting business investment and risk-taking will be temporary instead of building into an even greater challenge.

Our consumer segment had another extraordinary quarter, due to the success of new product introductions at higher price points than our historic averages. Along with a solid return by consumers and homeowners to more normal levels of repair, maintenance, and small project redecorating, and due to two very strong acquisitions- Synta, whose Restore product lines for wood deck and concrete restoration and beautification, are growing through broader distribution and stronger consumer takeaway under the stewardship of Rust-Oleum; and Kirker, a world leader in nail enamel, whose new colors and finishes across its broad fashion industry customer base continues to grow in its core U.S. and European markets, and with early success in other regions globally. Going forward, we will have annualized the impact of these two consumer segment acquisitions, so that our original guidance in our consumer sales for the 2014 fiscal year of 5% to 7% [corrected later in call; should be 6% to 8%] will be more likely for the remaining 9 months of our current fiscal year. I would now like to turn the call over to Barry Slifstein to provide some financial details on our first quarter.

Thanks, Frank. Good morning, everyone. Thank you for joining us on today's call. I will review the results of operations for our fiscal 2014 first quarter with prior-year figures on an as-adjusted basis, and then cover some August 31, 2013 balance sheet and cash flow items. I will then turn the call over to Rusty Gordon, RPM's vice president and chief financial officer, who will discuss the outlook for the balance of fiscal 2014. Just to remind everyone, in last year's first quarter, RPM incurred a one-time charge of $45.3 million for the partial write-down of its investment in Kemrock Industries and Exports Limited in India and an $11 million one-time charge in the roofing division, principally associated with the strategic decision to exit certain unprofitable contracts outside of North America in order to better focus on the company's successful core roofing business in the U.S. and Canada.

Using last year's as-adjusted figures, first-quarter consolidated net sales of $1.16 billion increased 11% year over year due to acquisition growth of 6.2%, and organic growth of 5.1%, which was predominantly due to higher unit volumes. Partially offsetting these increases was unfavorable foreign currency translation of 0.3%. Industrial segment sales increased 3.5% year over year to $731.2 million, due to organic growth of 3% and acquisition growth of 0.7%, which were both partially offset by unfavorable foreign currency translation of 0.2%.

Consumer segment sales increased 26.2%, to $433.4 million due to acquisition growth of 17.4%, and organic growth of 9.1%, predominantly unit volume-driven, which were both partially offset by unfavorable foreign exchange of 0.3%.

Our consolidated gross profit increased 13.6%, to $499.1 million from $439.3 million last year, principally due to better leverage on higher sales volumes, supply chain initiatives and accretive acquisitions resulting in the recovery of margin loss in prior years due to material inflation. As a percent of net sales, gross profit increased from 41.9% last year to 42.9% this year, representing an increase of 100 basis points. Consolidated SG&A increased 11.7%, to $335.5 million from $300.4 million last year due to- additional SG&A from acquisitions completed in September of 2012; higher advertising expense; unfavorable foreign exchange due to the devaluation of the Canadian dollar, euro, South African rand, and Brazilian real during the quarter; and increases in variable distribution and compensation costs attributable to higher sales volumes. These higher costs were partially offset by lower pensions and M&A expenses. Consolidated earnings before interest and taxes, EBIT, increased 17.3%, to $164.0 million from $139.8 million last year due primarily to higher unit volume sales, efficiencies gained through plant operations, and accretive acquisitions in September 2012.

At the industrial segment, EBIT increased 2.5% from last year. The lack of leverage in this segment is primarily attributable to the negative impact of a stronger dollar versus currencies in Canada, Europe, South Africa and Brazil. Consumer segment EBIT increased 40.6% from last year, driven by a higher sales volumes due to new product introductions, the continued strengthening residential market, and strong acquisition performance from Synta and Kirker. Corporate/other expenses of $18.7 million increased $2.1 million from last year, primarily due to higher compensation, benefits, and professional service expenses, which were partially offset by lower pension and acquisition expenses.

Interest expense increased from $18.4 million last year to $20.7 million this year, primarily due to the issuance of a $300 million bond in October 2012, in conjunction with the Viapol, Kirker, and Synta acquisitions. Partially offsetting the increase was a lower effective interest rate driven by the 3.45% rate on last year's $300 million bond issuance. Investment income was $3.9 million for the quarter, which was $3.1 million lower than last year, due primarily to less gains on sales of marketable securities this year.

Our income tax rate for the first quarter was 27.4% versus the prior-year first-quarter rate of 29.6%. The change in the quarterly tax rate is primarily due to lower recorded valuation allowances and the changes in the jurisdictional mix of actual and forecasted earnings. Net income increased 21.6%, to $103.1 million compared to last year's $84.8 million. Diluted EPS increased 20.3% to $0.77 per share compared to $0.64 per share last year.

Now, a quick look at the balance sheet and cash flows. Cash from operating activities was a negative $129.5 million, representing a decrease of $147.2 million from last year's $17.7 million. The decrease was driven by higher working capital needed to support higher sales volumes and the $61.9 million settlement payment to the General Services Administration, which was accrued for in fiscal 2013. Depreciation and amortization expense was $22.3 million compared to $20.1 million last year. CapEx of $10.7 million this year compared to $12.7 million last year. Our accounts receivable DSO increased 1 day to 63 days compared to last year of 62 days. Days of inventory was flat to last year at 77 days.

Finally, a few comments on our capital structure and overall liquidity. As of August 31, 2013, total debt was $1.42 billion compared to last year at $1.2 billion. Our net-debt-to-capital ratio was 49.1% at August 31, 2013 compared to 43.5% at August 31, 2012. The increase was attributable to additional borrowings in October, 2012 of $300 million. Our long-term liquidity at August 31, 2013 was $896 million with $205 million in cash, and $691 million available through our bank revolver and AR securitization facilities. With that, I will turn the call over to Rusty Gordon.

Thank you, Barry. We are encouraged by our performance in the first quarter. Our recent acquisitions continue to exceed our expectations. Margins continue to improve. New product introductions are very successful. And, we are benefiting from the restructuring actions taken in FY '13. While we are confident in our operating performance as we look forward, our outlook is tempered by the uncertainty in macroeconomic factors, including global foreign exchange markets, U.S. Federal Reserve policy, and the current impasse regarding the debt ceiling and U.S. government shutdown. I should remind everyone that the first quarter's boost provided by the Kirker, Viapol, and Synta acquisitions will not be so pronounced in the second quarter when we will only have Synta for an additional month, and we will have already lapped the anniversaries of the Kirker and Viapol acquisitions.

We are encouraged by the positive sales gains and good earnings leverage from Europe and Tremco roofing in the first quarter, especially since they were a drag on last year's performance. As a result of Q1's over performance versus plan, we are now increasing our original guidance of 9% to 13% EPS growth and $1.98 to $2.05 per diluted share to 10% to 14% EPS growth, and $2.00 to $2.07 per diluted share. This concludes our formal remarks. We are now pleased to answer your questions.

(Operator Instructions)

The first question we have comes from the line of Ghansham Panjabi from Robert W. Baird & Company. Please proceed, sir.

Hi, good morning. It is actually Mehul Dalia sitting in for Ghansham. How are you doing?

Good.

First, working capital jumped quite a bit in first quarter fiscal 2014 even after adjusting for the settlement payment. So, is it just increase in sales that's driving that? And, should we expect working capital to normalize over the remainder of fiscal year 2014?

The simple answer is yes to both. Almost all of our non-acquisition growth in the quarter was unit volume, and so we had significant unit volume growth. When you look at our days of inventory versus last year and our days receivables, they're relatively flat. So, while we didn't have any improvement in there, it is not an issue of working capital performance. It is strictly sales volume growth. We would expect to see working capital more normalized throughout the rest of the year. But, unlike the past year, it will be a net user of cash in the year if we hit our growth goals for fiscal 2014.

Great. And, what is your current outlook for raw material costs across the company?

Our current outlook is relatively flat. We have had no impact of pricing in the quarter. Gross margin improvement was entirely based on higher sales volumes, greater operating efficiency, and better mix -- both from some of our recent acquisitions, as well as from our recently introduced product lines.

I think longer term, there are two dynamics. One is the addition of chemical industry capacity in Asia, which has been building up for the last decade. And so, the commodity cycle seems to be changing a little bit there. On the flip side is a significant mix change in the U.S. from oil cracking to gas cracking. Oil cracking produces polypropylene, which is a primary driver of most of the chemical raw materials around resins that we purchase, whereas gas spits out ethylene, which is not. So, that is one area that seems to be moving in the wrong direction, and we're paying a lot of attention to it.

Great. Thank you.

Thank you for your question. The next question we have comes from the line of Jeff Zekauskas from JPMorgan. Please go ahead.

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

Good morning, Silke.

I was wondering how much the mix effect was in the consumer segment from the introduction of new products?

The new products that we have introduced this summer have benefited both from broad retail distribution -- and so sell-in -- as well as initial good consumer takeaway. Consumer takeaway on LeakSeal, which was introduced last year, continues to be very strong as we introduce some new product ranges there in terms of colors. And, our new products across DAP and Rust-Oleum generally carry with them higher than historic average margins. They also carry with them, and this is one driver of our revenue growth, higher than traditionally average selling price points. So, traditionally, for instance, in the spray paint area, our products would sell in the $4 to maybe $7 range. LeakSeal sells just under $10. And, the NeverWet product sells just under $20. We also have some Transformation kits that sell for hundreds of dollars. So, a lot of the new products that have been introduced over the last year -- DAP has introduced a couple new products, a unique technology on a sub-floor adhesive just got rolled out -- tend to be at higher price points and better margins than our average.

And, is there any way to quantify this? Like a third of contribution to your organic unit growth, or is it too hard to sort it out?

I don't know that we would disclose the specific performance of any product lines.

In general, when we listen to other companies who sell through big box retail chains -- when we listen to their commentary -- it seems that the sell-through has been stronger this quarter than maybe in previous quarters. I was wondering whether you have had the same experience, and I was wondering how -- whether the trend since September and October are better or worse than what you've seen in your first fiscal quarter?

I think they've continued. We had a pretty good fourth quarter in our consumer segment. And, we are continuing to see good consumer takeaway. I think that as we have been seeing building, probably for the last five or six quarters, it feels like, despite some challenges in the economy, consumers -- and for us, most importantly, homeowners -- are feeling comfortable in their jobs, and comfortable in their homes. And so, there is a return to normal levels of patch and repair and maintenance and small project redecorating, and so, absolutely. I think there is a pretty solid takeaway, and I think when you look at retailers across the board, the hardware, and home building areas are outperforming some other categories of retailing that don't impact us. But, I think those are areas where consumers are making investments, as opposed to discretionary spending on temporary goods.

Okay. Thanks very much for the clarification. I will get back into queue.

Sure.

Thank you for your question. The next question we have comes from the line of Mike Ritzenthaler from Piper Jaffray. Please proceed.

Good morning.

Your line is open. Please proceed.

Sorry about that. Good morning. So, on consumer, I'm just trying to parse out a little bit more of what Silke was talking about -- but, on the share gain side. I was wondering if you could talk about the relative importance of increased shelf space versus more share of the consumer wallet from the same shelf space.

I think with the new products, we have increased presence. Some of it has been shelf space. Some of it has been end caps. Particularly with products like LeakSeal or NeverWet, they lend themselves to good end cap programs. So, we have seen more space and are gaining share in terms of new products. So they're not necessarily at the expense of competitors. They're basically expanding the market for consumer problem-solving. And so, that's -- for any companies, but certainly our DAP and Rust-Oleum businesses, when you're bringing out new products that are solving new problems or actually expanding shelf space or presence, I think that is when you're at your best. And those product lines have benefited both from wide distribution sell-in, but in every case, so far, good consumer takeaway as well.

Okay. So, if I was to kind of interpret what you just said, it seems like it is clearly both share gains and wallet share, but maybe a little bit toward the share gains? Would that be fair?

Well, I think it is more wallet spend because the NeverWet product, the LeakSeal product, its principal competitor is a TV infomercial, mailed product, not a competitive product. This new sub-floor product that DAP just introduced. They're relatively innovative, and so they're not necessarily displacing a competitive product on the shelf. They're finding new shelf space or new end caps.

All right. That helps. Thanks. And then, just a quick clarification question about Europe and roofing. When you say that the results reflect the bottom line leverage on the restructuring efforts, are the results and outlook still reflective of softening? Or, I guess stagnant end markets, but execution improved? Or, are the end markets actually showing signs of life here in the results?

I think particularly as it relates to Europe, it feels like over the last three quarters, and I think the outlook maybe for the coming few months, as if the economic challenges there have bottomed out. We're experiencing low single-digit growth. One quarter doesn't make a year. But, it was pretty consistent across each of the months of the quarter, and as we get into the second quarter. And then, the leverage to the bottom line is really a result of greater efficiency, both in terms of eliminating some costs through restructurings that we talked about last year, as well as just being smart about spending through what has been a challenging period.

The roofing business has had a nice start to the new fiscal year, and we're hopeful that they found their bottom. Some of that has been driven by governmental spending at local levels and schools and state and federal, so I suspect it is too early to really call that a full-blown recovery, depending on what happens in relationship to a lot of the governmental fiscal issues that are hitting the headlines.

All right. That makes sense. Thanks a lot.

Thank you for your question. The next question we have comes from the line of Kevin McCarthy from Bank of America Merrill Lynch. Please proceed, sir.

Good morning, Kevin.

Yes, good morning. Frank, how would you characterize your contribution margins in both Europe and North American roofing?

Better than they were last year.

If I look at the segment average for -- let's say for fiscal 2013. I guess your segment was 10.4% on industrial in our model. Are contribution margins in those businesses -- I don't know -- high teens, or mid-20%? Do you have a sense of what they would be like in absolute terms?

Yes, historically, I will tell you that our margins in Europe have tended to be a little bit less than margins in places like North America or Latin America. And, historically, our margins in roofing have tended to be a little bit higher than our industrial margins. So, if that gives you any sense of where they fit within our industrial segment.

Okay. Maybe I will follow up on that. And then, second question, Frank, on the government shutdown, I think you had some comments in your release about that. Is it the case that your concern would be macro in nature? In other words, potential for a slower GDP? Or, are you seeing specific impacts already in recent days and weeks in your roofing business, or perhaps Carboline?

No, it is not necessarily in roofing. It is across issues. Highway bridgework -- there has not been a renewed highway funding bill for some time, and that is shocking. That was one of those few areas of great bipartisan support. Everybody likes to paint bridges and build bridges.

But, more broadly, I sense and you can see this in industrial operating company results, which tend to be generally -- there is some higher, and some lower, but generally in the low single-digit range on a revenue base. And, I think that the uncertainty is hampering industrial capital spending. It seems to be now temporarily slowing down, what felt like for the last 8 or 10 quarters a slowly but surely building investment in commercial construction, particularly North America, so the hope is that it is temporary. And, we will see. I suspect it is temporary. I mean this gets into the realm of political, but the consequences of this thing going on for months and months and months, I think would be challenging for our industrial businesses and our North American construction businesses as it relates to generating solid growth if people aren't willing to invest.

Understood. And, last question I had was for Rusty on taxes. I think you mentioned a valuation allowance adjustment. Can you tell us what that was? And, I guess more importantly, what your expectation would be for the tax rate for the balance of the fiscal year, please?

Sure. The second question -- our expectation would be 31% for the tax rate. And, on the other part of your question, we were able to recognize a deferred tax asset as a result of a merger of two companies in Brazil. That led to some of the favorable impact you saw in the tax rate.

Okay. Thank you very much.

Thank you for your question. The next question we have comes from the line of John McNulty from Credit Suisse. Please proceed.

Yes, good morning.

Good morning, John.

Just a couple of quick questions. With regard to the acquisitions, I understand that they have annualized at this point but in terms of the leverage or synergies that you get from them, are we largely through that? Or, is there more to come as we kind of look out over the next 6 to 12 months?

I think we largely are through that. As I commented earlier, in each case, the acquisitions bring margins that are somewhat higher than RPM's average, and each of these businesses are growing nicely. So, they will continue to be contributors to sales and earnings growth in the coming months, but, obviously, nothing to the extent that we saw in the first quarter.

One clarification. We had a very strong 26% sales growth in the quarter in consumer, the largest slug of which was from the acquisitions because we did not complete either Kirker or Synta until September. So, we had three full months of very good performance there. And, they will annualize. Our consumer segment original guidance was 6% to 8%, and I think clearly with the strong first quarter and continued expectations for good growth, both in our core businesses and in the Kirker and Synta businesses, we will be at the higher end of that - somewhere in the neighborhood of 8%, plus or minus 1 point.

That's helpful. On the new product launches, is there any lumpiness in terms of how you recognize the sales as you start kind of filling the shelves at some of your customers? Or, should it be relatively smooth other than just kind of the seasonality of the businesses?

Over a quarter, it is relatively smooth. They typically roll out over a three- or four-month period. You hit certain parts of your distribution, and then roll it out slowly in other parts. And so, we are fully sold in across most of our distribution. And then, it is really just driven by consumer takeaway. And so, in the long run, it will even out. But, obviously, there was some -- a pretty good load-in in the first quarter, for instance on NeverWet. And, whether that impacts next year or not will depend really on the growth of the NeverWet product line driven by consumer takeaway, for instance, with just one product line as an example.

Got it. Thanks very much for the clarity.

Thank you.

Thank you for your question. The next question we have comes from the line of Rosemarie Morbelli from Gabelli & Company. Please proceed.

Good morning all. Just following up on John's question -- if you take out the initial sale in the first quarter for the new products in consumer, what would have been the volume growth?

I don't have a good sense of that, and again, I don't know that we would be willing to provide specific volume numbers on product lines.

Even if you bunch them all together, Frank?

No, and I don't have that. We're always introducing new products. New colors. New textures. New adhesives. Or, sealants at DAP. New flooring products. And so, it is really hard.

We talked a lot about the consumer products. Our Liquid Elements product line at our Stonhard business is Stonhard's first attempt. It has been launched in the last year, and it is starting to pick up a little bit of steam to get into the front of the house and showrooms and retail, as opposed to the industrial back of the house. Our Carboline business has been working for three years or more on a proprietary technology with a fire-proofing product. A jet fire-proofing certified coating called Pyroclad X1, and that product was introduced this summer. It is a high-performing, better-performing direct competitor to the industry leader out there. A very specialty business with very high margins. So, across 50 business units, we're constantly introducing new products. So, that is hard to say.

And, new product introduction has been pretty good. It will be no surprise that we have been focusing on our gross margins. We went through a decade of just getting clobbered by raw material costs. Our industry is still dealing with raw material costs that -- while they've mitigated over the last year or two, are substantially higher than they were a half a dozen years ago or so. And so, our goal is to, both through acquisitions and new product introductions, as well as plant efficiency, begin to focus on improving that margin profitability. And, new product is the key to that.

Okay. And then, on the consumer side, that EBIT margin of 19.1%, in the first quarter, is that kind of the low end for the year given the new products with higher margin and all of the steps that you are taking?

Typically, with our seasonality, the first quarter would carry the higher margins. As you know, seasonally, our second quarter is a lower revenue quarter, and of course our third quarter, we don't make a lot of pennies per share. I forget last year, we made -- I don't know -- was it $0.08 last year in the quarter -- something? Relatively slow. So, volume and seasonality impacts that. I don't know if that answers your question?

Then looking at the fourth quarter, which is also a strong one, or if you look at next year, is there -- I guess the question is, is there an upside to that 19.1% if you eliminate the seasonality going forward? I mean, next year if you want to compare it to next year, but then to a margin.

I would -- there is nothing special in this year's first quarter with the exception of the tax write item that Rusty talked about, which was unique and not repeatable, and the great volume. And, a big part of that was acquisition-driven. But, the core operations are operating well, and I think the margin profile we're putting up are things that are sustainable, but will be higher or lower based on revenue.

Okay. And, since you mentioned M&A, if I may, do you anticipate a slower level of activity as you had last year in 2014?

Probably not. We're always looking for good acquisitions, and we've got a lot of irons in the fire as usual. We completed our first acquisition this year, a specialty flooring business that will operate in partnership with our Stonhard business, a company called Expanko, that makes specialty polymer terrazzo tile, cork, and rubberized flooring for a lot of different areas. So, we're excited about that, and how, in partnership with Stonhard, maybe we can help accelerate those specialty products into other markets that they might not have been able to get to. So, I think you will see more of those small- to medium-sized acquisitions. But, as we've said in the past, while it is a critical part of our growth strategy -- legal issues, value issues, the timing of predicting acquisitions is awfully difficult.

Thank you. I will get back in the queue.

Thank you, Rosemarie.

Thank you for your question. The next question we have comes from the line of Andrew Dunn from KeyBanc Capital Markets. Please proceed.

Good morning,guys. I was hoping you could just help me with two points of clarification. First, looking at consumer, I believe you said that the majority of that organic growth was on the volume side, but obviously, you talked a lot about the price gains in your new products. So, is that just because the volume in new products is still relatively low? And then, connected with that, would it be fair to assume then that as you get better penetration of those over the next couple of quarters, you are going to see kind of that price mix start to be a bigger part of the organic picture?

No, I mean we had good sales of new products in the first quarter, both through sell-in and good takeaway, and as I indicated they are at higher price points. So, while price actions were virtually nonexistent across most of our businesses in the quarter, and particularly in consumer -- so that whole 9% organic growth is unit volume. It is both a combination of higher margins on new products, as well as higher selling points. When somebody goes to a store and buys a can of LeakSeal at $10, that is a nice revenue pickup for the retailer and for us, versus buying a different product line that sits on the shelf that might traditionally sell at $4 or $5 a can.

Okay. That's helpful. And then, looking at your roofing business, you did mention that -- I think in your release that the commercial construction market was getting better. Did that help at all there? Or, is that starting to be a more maybe important aspect of that business a little bit? Or, is it still very, very heavily weighted toward that government side?

It's -- first of all, almost 95% re-roofing, so we are not focused on new construction in the Tremco roofing business. So, from that perspective, it is not as cyclical as some of our construction chemicals, concrete admixtures, sealants, products that do go into commercial new construction. Institutions, hospitals, universities, there is a broad base of customers for our Tremco roofing business, but a big slug of it has been government at all levels -- schools, state universities, and certainly government buildings. And, to the extent that there is less spending in those areas, that was a big part of the negative performance that we had our Tremco roofing business last year. Quite candidly, bigger than the resolved GSA issue.

So, it feels like that's flattened out. We have got a very focused sales force. They are doing a great job out there. We had a first quarter in which we had modest growth, and because of some of the restructuring activity that we took last year, both in the first quarter and the fourth quarter, that growth was leveraged nicely to the bottom line. But, I actually feel like what we're seeing in Europe is a little more solid and sustainable, and I think we've got to get a few more quarters under our belt before we feel that we've truly turned the corner in the Tremco roofing business.

All right. Great Thanks for that.

Thank you.

Thank you for your question. The next question we have comes from the line of Greg Halter from Great Lakes Review. Please proceed.

Good morning, Greg.

Good morning. Thanks. Congrats on the consumer margin, the 19.1%. I think it is the highest by about 200 basis points in at least 10 years. Or, maybe in the entity's history. I don't know about that.

I don't think that is correct. It is certainly the highest margin in the last couple of years, but if you go back 8 or 10 years ago, we got clobbered for about 8 years in a row with various raw material issues.

Which is the basis for my question here. I think it was being asked earlier. Whether or not that type of margin, if you were to strip out the weather factor, and then so forth, if that is sustainable for a quarter like this? Do you see 19%, maybe moving into the 20% for a first quarter? And, obviously, looking at the other quarters separately, given the weather factors and so forth?

The answer to that is no. Our first quarter is seasonally our highest revenue quarter. This year in the first quarter, we had a significant impact on two acquisitions that we completed last year in September, both of which bring higher margins to RPM in our consumer business than our traditional margin profile. So, you are seeing a positive mix, and that is coming from the acquisitions, as well as new product introductions. But, it is also in relationship to a very high revenue quarter in a business that is seasonal.

So, our second quarter will have lower revenues and in both our consumer and industrial businesses, related somewhat lower margins. We're hopeful that the margin profile would be better in the second quarter this year than last year. We will see how the quarter shakes out. Again, our third quarter is very seasonal with a very low revenue period, so the margin profile is very different. And then, our fourth quarter looks more like our first quarter, but traditionally a little bit less.

I understand the question but I think having had it been asked twice, there is real seasonality to our business and there always has been. And, that is reflected in our quarterly margins. I think the right way to look at it is to look at our full-year FY 2013 fiscal margins. And then, think about what is an appropriate full-year margin improvement. Because that certainly is the things that we're focused on, both through product mix, acquisition mix, and better plant efficiency in terms of a focus -- a deliberate focus on improving our margin profile. So, the answer is we're focused on it. Those are the areas we're trying to get at it. It is working. And, we're happy with it, but you got to put a cloak of seasonality to our business when you're talking from one quarter to the next.

But again, just looking at the first quarter, is there any reason why next year and the year after that and the year after that for just the first quarter shouldn't be around the 19% level or even better, given the new products and the acquisitions that you have completed?

If the trends in polypropylene supply and pricing continue like they are, that is going to be a problem. Depending on what our mix is, or what acquisition activity we have driving growth, it could mix our margins up or down. So, it is really hard to say. Again, we deal with raw material issues, which are pretty volatile, and new product mix and acquisition mix impact that quarter. So, it is really hard to say.

Okay. And, looking at the RPM2 Group, which you commented on, had very good results. How would you define robust sales growth, and what particular units are standing out currently?

You're looking at low double-digit growth out of a couple of those units. Whether it is in nail polish business, whether it is in Legend Brands, whether it is in Dane, which is a European fluorescent pigment -- fluorescent color business, product lines that are in the food prep -- specialty food prep businesses. So, the RPM2 businesses are a real unique set of businesses, and they all seem to be doing pretty well right now. It is because they're all very niche leaders that are focusing on their markets, whether it is in food additives, like our Mantrose-Haeuser business; specialty color, like Dane. Legend Brands, quite candidly, was an acquisition we did 1.5 years ago, and it underperformed our expectations and has really focused on some new products and new channels for their products. And, that effort is paying off, and they are really having a great return to strong growth and strong profitability from what quite candidly was a disappointing first 1.5 years. So, that is more of a return to expectations, and a lot of happiness around that versus underperformance up until now. So, those are some of the business units that are driving that RPM2 Group growth.

All right. Same question -- similar question on the consumer side with new products. You've obviously talked about LeakSeal and NeverWet. Are there any other products that stand out?

There's a brand new product introduced by DAP. It is an industrial technology from illbruck. I believe it is patented. It is a sub-floor adhesive, an aerosolized adhesive, that is called SmartBond. It has literally just been introduced in the last month. And, we have great expectations for that product. It is an aerosolized adhesive product versus a gun-grade caulk. It has substantially greater coverage. It is a very exciting product for us, and it is basically taking a European-patented technology and bringing it into the U.S. markets. Great product, great performance, time saving for contractors and consumers, and again, at higher margins than our traditional consumer segment margins.

We have introduced a shellac-free primer with a proprietary resin at Zinsser, which is just rolling out. We are very excited about that. Back to the raw material issue, we have seen incredible volatility in shellac. And, while our B-I-N products are the leading high hide primer, and every painting contractor has got a can of B-I-N in the back of their truck to hit pine wood, knot bleed-throughs, or other real problems -- it is a very expensive can of primer because its underlying raw material costs have gone through the roof. So, we have worked hard to try and come up with a comparable non-shellac resin that will deliver comparable or better performance, and we're really excited about that as well.

So, hopefully, that and other comments on new products lets folks know that that really is a focus of RPM and our companies, and it is not just the more prominent ones at a Rust-Oleum or DAP that are more familiar to consumers because we all use them and we advertise them, particularly in the U.S. But, on the industrial side and the primer side where we tend not to do much advertising, we have got a lot of new product introductions across a lot of RPM companies, and it has been a very deliberate focus over the last couple of years. And, it is starting to have an effect.

You had a great piece on CNBC, and there was some discussion about using the NeverWet with smart phones and so forth. Any progress in that area?

I would not recommend that any consumers take their smart phones apart and use our NeverWet because while it might work, as soon as you take your smart phone apart, you void the warranty. But, we are on an exploratory mission with consumers to figure out how they're going to use this product. I personally use it on golf caps and hunting gear. You're not supposed to use it on fabric. It leaves a rough film. But, on utilitarian fabric like hunting gear and golfing stuff, it works great. But, consumers are using it in all kinds of different ways, and we are exploring with certain customers potential OEM applications as well.

And, one final one for you, relative to industrial EBIT margins, they have been kind of stuck at the 13.2% to 14.1% over the last eight years. Back in 2005 and 2004, I think they were in the mid-15%. What would stop you from -- or what does it take to get you back to those types of margin figures?

I think it takes all of the things we talked about in the call today. It takes a focus on new, better -- or new problem-solving products that we can introduce at higher margins. It takes a focus on acquisitions that bring us higher margins not lower margins, and I say that because of my comment earlier. In the last decade, we have established a very strong presence in Europe, going from about $180 million of volume to what is about $800 million in volume, and in general, our European businesses have had a somewhat lower margin profile than our typical industrial average. So, it is a matter of mixing up both in terms of product categories and geographic regions. And, it is day-to-day blocking and tackling in a competitive marketplace -- and winning.

All right. Thank you.

Thank you for your question. The next question we have comes from the line of Charles Dan from Morgan Stanley. Please proceed, sir.

Good morning, guys. I apologize if we have already covered this since I got on the call a little late. But, last quarter, you talked about extending the Rust-Oleum platform to a lot of the international markets where you haven't really been in that business before. Has there been any traction on that? Sort of what is the update? And, what is the sort of timing that we should expect to see that flow through?

Well, in the last year, we have acquired -- probably about 1.5 years ago -- a presence in Australia, and we are looking to take what was principally a company there focused on spray paints for automotive into a much broader hardware store and MRO-type of product range and distribution. And, we have a good presence in Europe, and we are continuing to expand from a core UK base of business into the continent. And then, we will continue to look in other regions of the world and are continuing to look for a suitable acquisition that would serve as a base to then grow the broader Rust-Oleum product line in other parts of the world. And, those efforts continue.

Is it fair to say that the strong growth -- the organic growth that you have seen in the consumer segment so far has not been driven predominantly by penetrating those international markets?

The organic growth has been principally driven by new product introductions that has impacted our biggest core markets, which is in the U.S. On a consolidated basis, we're about 65% North American and about 35% rest of the world. That is closer to 55% -- and this is off the top of my head, but 55% North America for industrial, 45% of the rest of the world, and maybe more like 70%-30% in consumer. And we can get those -- that data for you, but our consumer segment geographically is much more levered towards the North American marketplace. And, our industrial business is much more representative of our international presence. But, we hope to change that over time.

Great. And just a follow-up, for Rusty. (technical difficulties) the level this quarter is increasing. Should we expect that to be lower going forward?

Charlie, can you repeat the question? It got muffled out.

Sorry. The question was, your minority interest on your income statement was a little low this quarter relative to recent history. I was wondering if there was any particular reason for that? Or, whether we should expect it to remain lower going forward?

Yes, the minority interest really reflected the tax rate, and that is really what impacted minority interests.

It is really a function of both minor minority interest in terms of joint ventures, as well as essentially the way to think about it is the minority ownership interest of SPHC companies in principle European operations, and so that goes up and down both as it relates to the reported income and the tax impact based on the performances of those particular European businesses.

Great. Thank you.

Thank you for your question. The next question we have comes from the line of Edward Yang from Oppenheimer. Please proceed, sir.

Good morning, Ed.

Hi, good morning. Did you provide a breakdown for consolidated revenue for organic acquisitions and FX?

We did. Acquisition growth for the quarter was about 6.2%. Organic growth was 5.1%, and it was almost all unit volume. And, foreign currency translation only had a negative impact of 0.3%, but that was very -- that varied greatly by unit. We have a very strong South African business. Viapol is continuing to grow nicely in sales and earnings in its functional currency, but when you translate those back to U.S. dollars, given the devaluation of the real, or in South Africa case of rand, while it doesn't show up a lot on a consolidated basis, it significantly and negatively impacts the results of certain operating subs.

And, Frank, in your prepared remarks, I think you said that as you anniversary some of the acquisitions on the consumer side, you see revenue for the remainder of the year within the prior guidance range. And, I think you mentioned 5% to 7%, is that correct? I had 6% to 8% before.

No, that was a mistake. Our original guidance was 6% to 8%, and I think, given the strong first quarter, but what we see, the 8% is a better way to think about how our consumer business will end up for the year.

Okay. And, what is your updated guidance for CapEx?

Somewhere in the neighborhood of $95 million.

Okay. A lot of questions on this, but your overall exposure to government spending in general, I think you talked about roofing a bit. But, on a consolidated basis?

Yes, other than that, I don't know that we have a lot of exposure. Our Carboline company is a major producer of high-performance coatings for structural steel, so bridge and highway is a major market for them. And, in the U.S., there is shockingly no updated highway legislation, which was one of those -- as I mentioned earlier -- one of those bipartisan areas where everybody likes to spend money, and that's not happening. So, circumstantially, those are the two places where it hits. I think the thing that we're concerned about is at this time in the economic cycle, industrial economic spending should be greater than what it is, and it is disappointing to see in a lot of our core, high-performance coatings markets low single-digit growth rates. I think it is my view, and our view, that a lot of that has to do with uncertainty, particularly in the United States, around regulatory activities, around government stuff, and so people tend to be sitting on their hands. And we've gone through a cycle here over a couple of years where the year started off well. The spring looks great. The summer is fine, and for whatever reason, politics seems to be get everybody in the sidelines in the fall, and it feels like this year is another one of those years.

What's the dollar amount of your roofing and Carboline coating exposure -- or percentage, I guess?

We traditionally have not disclosed the revenues of individual operating companies. Last year, we did disclose that the Tremco roofing business had annual revenues of $400 million in the prior year, and those dropped to about $325 million. So, that was a significant hit for us last year. Those businesses are moving in the right direction again. And, while it is traditionally not our [policy] -- with 50 different business units -- to talk about individual business units, the significance of the challenges of that business along with the GSA investigation and resolution were such that we felt it was appropriate to provide that level of detail.

Okay. Just a final question on your guidance. Obviously, a great first quarter. But, you only raised the full-year EPS guidance by $0.02. Is it all just on the acquisition side? Because if I look at fiscal 2013, on an organic basis, you actually come up against easier comps as the year progresses, so that would kind of lend itself to accelerating year-over-year growth outside of acquisitions.

I don't think of it that way. I think we have a pretty challenging comp for the rest of the year. Our fourth quarter last year was a really strong quarter. And so, our forecast isn't to show huge growth over what was a huge fourth quarter. Our third quarter was pretty solid as well. And, if what we're settling down to ex-acquisitions, is consumer sales growth in the 7% to 8% range, and industrial growth -- it gets stuck around 3.5%. Then, I think if you take that over the rest of the nine months of the year, it is going to spit out numbers that will -- if we don't bump into any other economic issues -- but, it will spit out numbers that will get us to the upper end of our original range as opposed to where we are. So, I think we're much more comfortable with the new range and being in the middle of it. And, as we started the year, I think we had -- it was a pretty wide range. We had more uncertainty around that. But, I think that is the way to think about the rest of the year, which is unless we see signs otherwise, the industrial segment is going to grow in the 3.5%, maybe 4% range, and the consumer segment that will be in the 8% to 9% range.

Okay. Thank you, Frank.

Thank you.

Thank you for your question. The next question we have comes from the line of Jeff Zekauskus from JPMorgan.

I just have two small questions of clarification. I think there were two small acquisitions that were made after the end of the fiscal 2013. There were some XIM products that were acquired, and then also Expanko. What were the sales tied to those acquisitions?

I don't know that -- I don't recall actually on Expanko. I don't know if we disclosed that. I know the other little acquisition was basically a primer technology business called XIM, which was relatively modest in sales, but some really unique technology that we're excited about with our Zinsser business and think we can build on that. The Expanko revenue base was $12 million. Again, that is a unique collection of products that we don't have at Stonhard. And that we are hopeful, with the expertise at Expanko and their team in a partnership at Stonhard, we can take their unique flooring solutions into other markets and channels more quickly than they would have been able to on their own.

Thanks. And lastly, if you look at raw materials, longer term -- outside of just like a 12-month period, how do you view the development in propylene derivatives? Are you more worried about it because there is more gas-based chemical production? Or, are you being more intrigued because it also seems that more propane over time will be used to derive propylene derivatives?

I had commented on that earlier, and I think that is exactly right. I think there's two long-term dynamics that will impact the commodity chemical and chemical supply base. One is, versus a decade ago, we're finally seeing a build-out of actual production in some of the Asian markets for commodity chemicals and some of the basic chemicals that go into our space. So, hopefully, over time that will mean even as China's growth resurges, that much of their chemical needs will be supplied from an Asia supply base as opposed to pulling North America supplies into the Asian market, which happened somewhat devastatingly for our industry.

And then, the second issue, which is on the flip side, is exactly what you mentioned. As cracking and refining moves much more to gas, and the by-product of that is ethylene and other related chemicals, versus oil and polypropylene, which is the kind of backbone of a lot of the commodity chemicals that go into our products. That is something we're paying a lot of attention to and trying to understand where that is going. Hopefully, there will be other sources or some new technology -- both out of the industry -- out of the chemical supply industry, and from our companies and others. But, on its face, that is a very worrisome, long-term challenge.

Okay. Thanks very much.

Thank you.

Thank you for your question. The next question we have comes from the line of Richard O'Reilly from Revere Associates. Please proceed.

Thank you, gentlemen. Thank you. Good morning.

Good morning.

I have a question on your debt to capital ratio. It has climbed up other the last few years. It is now 49%. And, to me, that is on the high side for you. At least historically. What do you see as your goal, or where do you see that going over the next year or couple of years?

Historically, we have had a debt-cap ratio that has pretty much ranged from 40% to 60%. I think our -- the high point of our debt-cap ratio was around 62%, 63% historically, and I'm talking over the last 10 or 15 years. We have always been comfortable in that range. Our stated goal, from a capital structure perspective, is to be investment grade. We like the middle space -- the middle BBB investment grade range, and it would be our goal both through debt repayment to cash flow generation. And, as it relates to future acquisitions where appropriate, whether it is outright, or in conjunction with some type of securities issuance, to make sure that we maintain an investment grade rating.

And, that is kind of the position we have taken for the 20 or so years that we have had public debt. It is how we think of our balance sheet. The flip side is, we think the sweet spot in terms of cost of capital and flexibility is in that BBB range, so you shouldn't expect us to over time slow down our acquisition program and focus on debt reduction such that we have a goal of getting an A rating. That is not how we think about growth in our balance sheet.

So, a couple of years ago, it was as low as about 35%. That was on the lower side of what you would have liked? And now, it is back to, quote, normal?

I think that is right. I mean, again, traditionally somewhere between the 40% and 60% range is where we have been very comfortable. And, our debt is entirely driven by acquisitions. So, we have an opportunity -- we have no plans at this stage to do anything about it. We're very comfortable with where we are in terms of our capital structure, our cash flow, and our liquidity. As it relates to future acquisitions, we look at those both in terms of what it takes to do the deal, and obviously, we have pretty good discipline in terms of doing deals at a value that works for our shareholders. And also, how we need to fund those in relationship to our balance sheet goals.

Good. Thank you then.

Thank you.

Thank you for your question. The next question we have comes from the line of Mike Ritzenthaler from Piper Jaffray. Please proceed.

Hi.

Good morning.

Just a quick follow-up that is unrelated to the operating results. But, I was just curious if you could remind us where things sit with regard to SPHC and the legal process given the news flow in other asbestos-related cases recently. I was just curious if there is any update?

Really no update. The bankruptcy process, and the ruling out of the bankruptcy is on appeal. And, we are awaiting action from the district court as well as the possible direct appeal to the third circuit -- where the Bondex/SPHC businesses are. And the best information we have is that appeal process could take the next two to three years. I think the recent announcements in other asbestos situations is favorable and highlights some of the challenges and problems in asbestos litigation and to the extent things like that are uncovered, it certainly won't hurt us.

Okay, great. Thank you.

Thank you for your question. The next question we have comes from the line of John Roberts from UBS. Please proceed.

Good morning, Frank.

Good morning, John.

I can understand your business outlook comment about the gridlock in Washington and the effect on the U.S., but I was surprised about your foreign exchange market comment. And, you noted earlier you have a lot of -- a wide range of effects across the subs. Is there anything in particular you want to call out for us that we might be exposed to?

I think the biggest challenge that we have seen, and it is a little bit of a disappointment, because it masks otherwise really good performance, is in Brazil. We acquired Viapol last summer. It is a $100 million producer of roofing felts, waterproofing sealants. We are in the process -- we are spending some money down there to bring in other RPM products. We have finalized and have in place concrete admixture production. And, they are in the final stages of filling out a concrete admixture sales force that will be part of that Viapol business.

But, in partnership with our Euclid Chemical operation, we are in the mid-stages of rolling out some of our polymer flooring technology into that market. And, their underlying core markets and growth in their functional currency, real, are continuing to do really well in the last 1.5 years -- or not the last 1.5 years, literally the last year, and most of that is coming in the last 4 or 5 months. The real is devalued by about 18%. So, that performance has been translated back into dollars as relatively flat which is a disappointment. But, nonetheless, the management team of that business, our plans for having them pull through other RPM product lines into the Brazilian market are continuing, and in then their functional currency, they are doing a great job.

So, that in particular is a challenge for us. The other one I would mention is South Africa. We have got a real strong presence down there and very well-run business. And, the rand is devalued by about 18% or 20% as well. So, that strong performance and good business results are being translated back. The other currency is just what happens with the euro, and it seems to be relatively benign in relationship to where the euro is today.

That is the one I think about more. Okay.

And, that's where we have the biggest exposure. But, we wouldn't expect the volatility there that we're seeing in some of the other developed countries.

Okay. Thank you.

The last question we have comes from the line of Rosemarie Morbelli from Gabelli & Company. Please proceed.

Thank you for taking my questions. Just a couple of quick clarifications. Rusty, when you talked about the tax rate of 31%, is that for the full year? Or, is that for the next three quarters? Therefore, the full year ending up lower?

That is meant for the full year.

So, higher than 31% next three quarters. All right. And then, if I do the math, taking your net income and your fully diluted shares, it actually adds up to $0.79 and not $0.77. So, what am I missing in between? And, I am using 103.098.

It is a lot more complicated of a calculation than just dividing those two numbers.

You have to look at assumptions for what shares and executive comps get exercised.

If you look at our 10-K, there is some disclosure on that that could help you out.

Okay. Thanks. And lastly, I presume that we will have the 39th or 40th year -- I keep losing track, of dividend increase announced in October. Are you thinking about dividend increasing in line with EPS -- or in line with EPS growth, or slightly lower?

Our board meets tomorrow, and we have our annual meeting of shareholders tomorrow afternoon. And, it is tomorrow's meeting at which the board typically visits our dividend program. As you will recall, we increased our dividend right through the recession. Our payout ratio, we have been comfortable with that, in the mid-40% range, got up into the mid-60%, which was too high. So, we had stated at that time that we would continue to grow our dividend at a rate of growth that would be less than earnings so that we can get our dividend payout ratio back into the low 40% -- the mid-40%. So, I think we're continuing on that path. While it is the decision of our board that they will consider tomorrow, it is highly, highly likely that we will have our 40th consecutive increase in cash dividend. What that would be is really determined by the board at our meeting tomorrow.

I will tell you, we have communicated the last two years -- our goal of having $1 per share of cash dividends by FY 2015, which would be this time next year. So, somewhere between the $0.90 that we're paying out today on an annualized basis and our goal of having $1 per share of dividends paid to our shareholders a year from now is an opportunity this year and next year to grow our dividend accordingly. And, at the same time, get that payout ratio back down into the low 40%, at which time we will be in a position to grow our dividend much more in line with our earnings growth.

Thank you. Very helpful.

Thank you.

That's all for me.

Thank you for your question. At this point, I would now like to turn the call over to Mr. Frank Sullivan for closing remarks.

Thank you, Michelle. And, thank you for participating on our call today. Tomorrow afternoon at 2 p.m., at the Strongsville, Ohio, Holiday Inn, we will welcome approximately 1,000 RPM shareholders to our annual meeting where we will review our fiscal 2013 results, our fiscal 2014 first quarter, and our outlook for the balance of the year. At that meeting, we will celebrate the service of Bill Papenbrock who will be stepping down from our board after 41 years. Few directors can claim to have been part of a company when they joined at $11 million in sales and retire at $4.1 [billion]. He has been a tremendous contributor to our growth success and a great representative of our shareholders.

Tomorrow, as I mentioned earlier, we will also announce the actions taken by our board related to our annual cash dividend program. Lastly, I would like to thank the RPM associates for their dedication, commitment, and for competing and winning in a challenging marketplace. Thanks again for being on the call today, and have a great day.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Thank you for joining, and enjoy the rest of your day.