RPM International Inc (RPM) 2014 Q3 法說會逐字稿

Welcome to the RPM International conference call for the FY14 third 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.

(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, Kim. And good morning. Thank you for joining the RPM International Inc. investor call for the third quarter ended February 28, 2014.

We are pleased with our operating companies' performance during the third quarter, particularly in light of the negative impact of the severe winter weather experienced throughout North America on our businesses. Our industrial segment businesses have continued to show momentum over the last couple of years which, despite weather conditions, continued in the third quarter, with a modest improvement in revenue growth and excellent leverage to the bottom line.

This improved industrial segment performance was particularly true of our international businesses, as we saw stronger sales and earnings growth in Europe, in part due to prior-year restructuring and cost reduction initiatives, Latin America, and Asia, where we continue to invest for growth, all of which regionally grew at faster rates than our core North American business. We expect this steady improvement in sales growth and operating profit leverage in our industrial segment to continue in the coming quarters.

Our consumer segment businesses, whose revenues are roughly 90% in North America, were severely impacted by the extended winter weather. Having said that, the dynamics that have been generating strong sales and earnings growth across our consumer businesses for many quarters remain.

While one month does not make a quarter, we are off to a good start in our fourth quarter, and expect much of the reduced income from the weather impact in the third quarter to be made up in the coming spring and summer months. All in all, this was a good quarter, with only a temporary halt to our consumer segment's strong performance and a continuation of the building momentum in our industrial segment businesses.

I would now like to turn the call over to Barry Slifstein, RPM's vice president investor relations & planning, to provide you some of the financial details on our third quarter.

Thanks, Frank. And good morning, everyone. Thank you for joining us on today's call. I'll review the results of operations for our fiscal 2014 third quarter, with prior-year figures on an as-adjusted basis, and then cover some February 28, 2014 balance sheet and cash flow items. I'll then turn the call over to Rusty Gordon, who will discuss the outlook for the balance of fiscal 2014.

Just to remind everyone, in last year's third quarter RPM incurred one-time charges of $68.8 million for an accrual relating to the investigation of Tremco roofing contracts with the U.S. General Services Administration, and a $6.1 million charge associated with the strategic repositioning of an existing flooring business in Brazil, resulting from the Viapol acquisition. Using last year's as-adjusted figures, third-quarter consolidated net sales of $863.4 million increased 2.3% year over year, due to organic growth of 1.9%, and acquisition growth of 0.4%. Included in organic growth was unfavorable foreign currency translation of 1.9%.

Industrial segment sales increased 5.3% year over year to $560.5 million, due to organic growth of 4.9% and acquisition growth of 0.4%. Included in organic growth was unfavorable foreign currency translation of 2.5%.

Consumer segment sales decreased 2.7% to $302.9 million, due to organic sales decline of 3.1%, partially offset by acquisition growth of 0.4%. Foreign currency translation was unfavorable 0.8%.

Our consolidated gross profit increased 4.2% to $358 million, from $343.5 million last year, principally due to restructuring activities in fiscal 2013, supply chain initiatives, and continued strong performance from prior-year acquisitions, all of which have resulted in the recovery of margin lost in prior years due to material inflation. As a percent of net sales, gross profit increased from 40.7% last year to 41.5% this year, representing an increase of 80 basis points.

Consolidated SG&A increased 1.1% to $322.2 million, from $318.6 million last year. As a percent of net sales, SG&A decreased from 37.8% last year to 37.3% this year, representing an improvement of 50 basis points. Consolidated earnings before interest and taxes, EBIT, increased 41.4% to $37.2 million, from $26.3 million last year, due primarily to efficiencies gained through plant operations and better leverage of SG&A expenses in the industrial segment.

At the industrial segment, EBIT increased 162.4% from last year, primarily due to cost reductions implemented last year and better leverage of SG&A expenses on higher volume sales. Consumer segment EBIT declined 11.4% from last year, due to lower than expected top-line sales. Corporate other expenses of $16.3 million decreased $0.8 million from last year.

Interest expense decreased from $20.5 million last year to $19.7 million this year, primarily due to the retirement of a 6.25%, $200 million bond in December 2013, upon the issuance of a 2.25%, $205 million convertible bond and the resulting lower effective interest rate. Investment income was $7.7 million for the quarter, compared to $6.3 million last year, due primarily to larger gains on sales of marketable securities this year versus last year.

Our income tax rate for the quarter increased from an adjusted effective tax rate of 27.1% last year to 32.9% this year. The change in the quarterly income tax rate was due principally to comparative differences in levels of actual income, changes in the jurisdictional mix of earnings, and the relative impact of quarter-versus-quarter adjustments to income tax reserves.

Net income increased 87.1% to $16.2 million, compared to last year's $8.7 million. Diluted earnings per share increased 71.4% to $0.12 per share, compared to $0.07 per share last year.

With regard to the year-to-date results, consolidated net sales of $3.1 billion increased 6.5% year over year due to acquisition growth of 2.7% and organic growth of 3.8%. Included in organic growth was unfavorable foreign currency translation of 0.9%.

Net income increased 25.3% to $182.9 million, compared to last year's $146 million. Diluted earnings per share increased 24.5% to $1.37 per share compared to $1.10 per share last year.

Now, a quick look at the balance sheet and cash flows. Cash from operating activities was $25.9 million, compared to $170.9 million last year. The decrease was driven by higher working capital and the $63 million settlement payment to the General Services Administration during the first quarter of fiscal 2014, which was approved for in fiscal 2013.

The lower cash generated by accounts receivable this year compared to last year was attributable to the geographical mix of sales and the timing of those sales and related collections. Inventory was a greater use of cash due to adverse weather conditions across most of North America during the third quarter of fiscal 2014, which resulted in lower than expected organic sales and higher levels of inventory. Partially offsetting the decline was higher net income this year compared to last year.

Depreciation and amortization expense was $67.3 million, compared to $64.4 million last year. CapEx of $54.3 million this year compared to $45.7 million last year.

Our accounts receivable, days sales outstanding was 70 days this year compared to 65 days last year. Days of inventory increased to 113 days this year compared to 105 days last year. Inventory days are typically higher than normal during the seasonally slow third quarter.

Finally, a few comments on our capital structure and overall liquidity. As of February 28, 2014, total debt was $1.39 billion, compared to last year at $1.40 billion. Our net-debt-to-capital ratio was 47.3% at February 28, 2014, compared to 49.8% at February 2013.

Our long-term liquidity at February 28, 2014, was $927 million, with $216 million in cash and $711 million available through our bank revolver and AR securitization facilities. On December 9, 2013, RPM completed the issuance of $205 million, 2.25% convertible senior notes due 2020. Substantially all of the net proceeds from the sale were used to repay $200 million in principal amount of unsecured senior notes due December 15, 2013, which carried an interest rate of 6.25%. Following the sale of these notes, virtually all of RPM's total debt is fixed with an average interest rate approximating 5%.

With that, I'll turn the call over to Rusty Gordon.

Thank you, Barry. Much like we discussed throughout this year, our third quarter's earnings growth can be attributed to a continuation of the recovery in our gross margins, significant revenue growth and earnings leverage from our European operations, and a continuation of good performance from the businesses acquired last year. We are pleased with the improved leverage in our industrial segment, which was anticipated after our restructuring was completed last year.

We believe that the third quarter's decline in our consumer segment performance is only temporary, since some DIY activity was delayed as a result of the harsh winter. And we continue to invest in new product development and marketing programs. I would like to point out that even though we expect the recovery in residential housing to continue, the consumer segment is coming up against difficult comparisons in the fourth quarter when organic growth in Q4 of FY13 was 9.1% and total sales and EBIT were up 22% and 29%, respectively.

Based upon our fourth quarter's forecast for increased DIY and construction project activity returning with more normalized weather patterns, we are raising guidance for the third time this year. We are increasing our previous guidance of 13% to 15% EPS growth, or $2.05 to $2.10 per diluted share, to 15% to 18% EPS growth, or $2.10 to $2.15 per diluted share. Our sales outlook is unchanged.

This concludes our formal remarks. And we are now pleased to answer your questions.

(Operator Instructions)

John McNulty from Credit Suisse.

Good morning. Thanks for taking my question. A couple of quick questions. The first one is, can you quantify or try to quantify what the actual EPS impact was around the weather getting pushed out to the fourth quarter?

It's hard to say, John, and I don't know that we would be able to quantify it in the quarter. But I can tell you, when you look at the prior two quarters, new product introductions and just good momentum in the underlying dynamics were evident in our consumer businesses.

And keeping in mind Rusty's comments about the very tough comp year over year, because we had a booming fourth quarter last year for our consumer businesses. I think we see in the fourth quarter a continuation of what we've had prior to the third quarter, which is solid single-digit revenue growth and good, solid teens earnings growth in our fourth quarter from our consumer segment. And we're off to a good start in the quarter. But given how long the winter was, I think we may see some of the recovery not only in the fourth quarter, but maybe into Q1 of the next fiscal year, as well.

Okay. That's definitely helpful. On a somewhat maybe related topic, how should we be thinking about the operating leverage or incremental margins for RPM looking out over the next few quarters, given what appears to be a lower cost structure? And we certainly saw that in industrial but also with some of this pent-up demand that you're looking at. How should we be thinking about how that leverage really kicks in?

We have been very focused over the last two or three years on improving our gross margins and it's been a very deliberate focus on supply chain. It's also been a very deliberate focus on mix. And it's actually been a very deliberate focus from an acquisition perspective.

So, I think you could see that evident in our numbers. We've had good gross margin recovery in consumer. And you could see that in our EBIT line, also through the leverage of SG&A on higher volume.

I think our consumer operating margins are sustainable. I don't think you're going to see the same type of improvement in the coming years that we've seen over the last couple of years.

On the industrial side, I think you're going to continue to see some operating margin leverage, particularly as the volumes come back. Interestingly enough, on the industrial side the lion's share of our growth was outside of the U.S. Europe was up in sales and earnings double digits. Latin America and Asia for us was up high single digit on the top line and double digit on the bottom.

And I think particularly in Latin America, particularly in Brazil and particularly in Europe, the strong results that we have indicate a couple things. Number one, I think we're taking market share because our performance in terms of sales growth is better than the underlying dynamics. And, secondly, the cost actions and restructuring that we took a little more than a year ago in Europe is paying off.

Great. That's very helpful. And then just one last question. On the asbestos front it seems like there's been some positive developments in the courts, including the Garlock ruling, among other things. Can you walk us through how you see the landscape maybe shaping up, and if it's improving in terms of some of these developments, and how that might potentially impact your ability to bring SPHC into the fold at some point?

Sure. It has always been our goal to participate in an establishment of a 524(g) trust, which would provide appropriate resources for current and future asbestos claimants, and bring the SPHC businesses, basically reconsolidate them back into RPM.

Recent developments that you're referring to, there's been some positive rulings in the bankruptcy court that have been favorable to the SPHC companies. The Garlock ruling in Charlotte, North Carolina, uncovered what appears to be a substantial amount of fraud or inappropriate manipulation of data in the tort system. And that resulted in a very favorable ruling for Garlock. That ruling does not directly impact us but certainly indirectly will help us.

And then, lastly, our estimation ruling in the bankruptcy court, which was certainly a disappointment to us, we appealed that to the district court. And as part of our appeal we asked for an expedited appeal right up to the third circuit appellate court. The district court granted that expedited appeal up to the third circuit. And I think we would expect a decision by the third circuit as to whether to push that back down to the district court or to take it directly sometime in the next two or three months.

And so lot of good, favorable action. Hopefully it will move the resolution of the SPHC bankruptcy more quickly. If not, we will continue to -- or they will continue to litigate this process and it could take as long as two to three years. But hopefully we can come to some type of resolution before then.

Great. Thanks very much and congratulations on the quarter.

Vincent Andrews from Morgan Stanley.

Thanks. Good morning. Wondering if you could just drill in a little bit more on the industrial side, and in particular what you're seeing, whether it's end markets or products or specifically in Europe, but just you noted that there was a step-up. So if you could just help us better understand that, that would be great.

Sure. In Europe, we took a number of cost-cutting measures a little more than a year ago across a lot of our industrial businesses. In our Rust-Oleum business in particular, we did some plant consolidations and took some charges last year for that. Most of that has been completed.

And we also reorganized what was formerly our Building Solutions Group and now we have a direct reporting business unit, Tremco illbruck. And they are doing extraordinarily well.

And so I think, as I said earlier, a combination of the restructuring and cost reductions, which was completed, and a pick-up in revenue growth that, quite candidly, surprises us a little bit because it's high single digits and in some areas low double digits. I think we just have good leaders and good people over there who have been very focused on positioning themselves for the recovery.

Clearly, from our perspective and our markets, the European markets -- we principally serve Northern Europe, so we're mostly France, Germany, Benelux, Scandinavia and UK -- those markets are generally recovering more quickly in the industrial sector than what we're seeing in the U.S., which quite candidly is a disappointment. Our revenue experience, I think, is better than the underlying economic indicators and it's leveraging to the bottom line nicely.

Just as a follow-up, do you think you're gaining share or do you think the markets are just growing faster than you anticipated, or both?

I think we're gaining share. It's disappointing to me relative to a lot of the policy issues in the U.S. that Europe, at least the Northern section of Europe and the UK, is recovering in the industrial markets that we serve more quickly than the U.S. But clearly, the surprising thing for us was clearly our companies are gaining share because their revenue growth on an organic basis in Europe is high single digits and that's pretty good.

Okay. Thanks very much. That was great. I'll pass it along.

Ghansham Panjabi from Baird.

Good morning. It's actually Mehul Dalia sitting in for Ghansham. How are you doing? For North America in commercial construction, are you seeing any sequential improvement there? And if you are, what's driving that?

We are seeing sequential improvement in areas that serve building envelope and sealants. Generally, throughout the year flooring and corrosion control product lines have been showing good improvement.

In particular, in the third quarter our Legend Brands product lines have had an extraordinary year. Those products, the Legend Brands, was an acquisition two years ago. They manufacture equipment for aggressive dehumidification, water movement and serve repair and maintenance markets.

We learned of that business because they were buyers of a lot of our Zinsser primers and other patch-and-repair and coating products. The flip side of a really bad winter meant a lot of business for them in terms of broken pipes and other cold weather-related issues, particularly in the U.S. Southeast. So that was a real strength for us in the third quarter.

Our roofing business -- which as most know, was reorganized or restructured last year along with resolving some of the GSA issues -- had a challenging third quarter. And that is just like our consumer businesses, all winter weather-related. It was a milder winter last year and nobody can get up on a roof when there's a foot of snow on it. And so hopefully that gives you some product line ideas of what worked in the third quarter and what didn't.

That's great. Do you expect the flip in performance between industrial and consumer to continue in the back half of the year and into 2015? Or will it be more balanced going forward?

I think in the next couple of quarters it will be more balanced going forward. I think we're seeing some better revenue growth and leverage in our industrial sector, and that should continue.

I think you'll see good, but more modest growth out of our consumer business because starting in the fourth quarter -- two things. Number one, they're going to both annualize some very difficult comps in the coming quarters. And, number two, all of what you're going to see from them, for the most part, will be organic growth because we've also annualized all of the acquisition activity that occurred in our consumer business over the last year and a half.

Great. Just one final question. I was just wondering if you could comment on your new product pipeline, any updates on OEM wins or commercialization of the various new products you introduced, such as NeverWet and TUF-STRAND, et cetera.

Sure. The TUF-STRAND continues to expand. We are adding capacity because the demand for that product exceeds our current capacity.

On the consumer side, in February, we just turned on a new Rust-Oleum high-speed aerosol line that, as far as we can tell, is the fastest aerosol line in the paint industry globally. It almost doubles our capacity -- not our capacity, but doubles our speed from our prior lines. And so that gives you a sense of what's happening in both those areas.

Our Stonhard flooring business through this Expanko acquisition, which was a small specialty flooring company, now is involved in cork flooring, terrazzo tile, and some other similar products. So we are making, both through their Liquid Elements, internal growth and product development efforts and in the addition of product lines like Expanko's product lines in cork and terrazzo, a much bigger push into commercial flooring, which is starting to take hold, where traditionally the Stonhard business, in particular, was almost all back room, heavy industry.

On the consumer side, the SmartBond DAP product is going to get much bigger push in terms of training and marketing. It is a unique, patented product that is going to be successful. But it's different and so we need to do a better job on that and so you're going to see more of that from DAP.

And Rust-Oleum continues to be a new product machine. They just came out with a product introduced in the last month called SpraySmart. It's a patented application device that utilizes paint in a pouch for line marking. And for heavy line marking users it's going to be pretty revolutionary.

Lastly -- and I'm excited about this because I've got a lot of outdoor furniture -- Rust-Oleum will be introducing in May a single component, NeverWet, for use on fabric. And it will be a better product for use on boots and shoes. It won't have any of the cloudiness that the original NeverWet has.

It won't be as effective on things like wood or concrete or steel that the original NeverWet is, but it will be very effective for fabric, whether it is outdoor furniture pillows or utility clothing, awnings, boots and shoes. They're very excited about that and it will be a single component product.

So, that gives you just a sense, both in the industrial and consumer side, some of the things that we're doing.

Great. Thank you.

Kevin McCarthy from Bank of America.

Yes, good morning. Frank, I wanted to come back to the subject of weather. What we hear from other companies in our coverage away from RPM is that the U.S. weather was quite atrocious but that Europe benefited from an early spring.

And so my question is, was that your experience, as well? And if so, is it still fair to say -- I assume it is -- that weather was a net headwind for you in the quarter directionally, recognizing your U.S. sales are more than double Europe?

In general, I think that weather was a net headwind. If you look at our consumer business in the quarter, we've tried to emphasize the fact that the underlying market dynamics and the strength of our new product introductions still feels really solid. And so I think the only reason we didn't have a year-over-year gain in sales and earnings in consumer was weather. And our consumer business is 90% a North American business.

Absolutely, it was a milder winter in Europe and that certainly helped our results there. But I still think the high single-digit, low double-digit revenue growth in certain product lines indicates that we're picking up market share.

Lastly, I would tell you that on the flip side in weather, as I commented earlier, it was a difficult year for the Tremco roofing business because they are entirely weather-related. And particularly when the weather -- and they're entirely a U.S. business -- and particularly when the weather impacts the Southeast and other parts of the U.S. where you might have some outdoor construction, roofing activity, and that was negatively impacted this year, as well. So net-net, weather hurt us in the quarter.

Okay. And as a second question, normally when sales mix shifts away from the U.S., tax rates seem to decline in general. Your rate rose about 580 basis points year over year. And so I was wondering if you could speak to that. What is driving that? And what is now embedded in your range for the year or what might next year look like there?

I am going to punt because I am the least understanding of our tax rate. And I'll let Rusty answer that question in terms of what's going on with taxes. But it is jurisdictional mixes. It is whether in one quarter or another we can get foreign tax credits. There's a lot of elements in there that clearly from my stumbling I don't understand.

Kevin, the third quarter being a seasonally low quarter we typically have low income and low amount of income taxes. So certain discrete items can stick out like a sore thumb sometimes in a third quarter. But nevertheless, our guidance for the year, most importantly, is unchanged on the tax rate. We're still going to be probably between 29% and 30% for the year.

Great. And then final one, if I may, just for Rusty. I think Barry had mentioned some of the working capital accounts in the prepared remarks. It sounds like maybe there's some transitory issues there. If you look out, I don't know, two to four quarters or so, would you expect the trade working capital DSO and inventory days to regress back down?

I would think so, as we get a more normalized geographic mix. I think the growth in Europe and in some of our general contracting businesses and the Performance Coatings Group, that has pushed up our DSO. But I think that will become more normalized as the consumer segment becomes a bigger share of sales when weather is less of an issue.

On the inventory days, clearly when we have frigid weather and POSs down at the end of February, it's tough to get inventory out the door. But nevertheless, we need that inventory when the weather breaks. I'm sure the parking lots at some of the big box retailers will be jammed full of cars all at once and we need the inventory. So, I think once we get more normalized weather you'll see inventory days come back down to more historical levels.

That's really helpful. Thanks a lot.

Mike Ritzenthaler from Piper Jaffray.

Good morning. I wanted to dig a bit more into the non-resi construction in European markets. In terms of the volumes that RPM has seen there over the past, say, six, nine months, is there a way to frame up where you feel like we are in the current environment versus, say, eight years ago or so when demand was more robust in that particular geography?

I think European markets are unique for us. Probably about 20% are consumer DIY, which is mostly UK and Germany, and mostly Rust-Oleum. And that business is doing really well, both as a result of their restructuring and plant consolidation and just pick-up in both of those countries.

The remaining 80% is driven by industrial maintenance. And you're starting to see, like we saw in the U.S. a few years ago, industrial companies picking back up deferred maintenance. And so that's really helping a lot of our industrial presence there.

On the non-res market, our Tremco illbruck business is our largest business. They're German-based. They sell throughout all of Europe and Eastern Europe, into the Middle East.

And they're a particularly unique company. They have a lot of patented products around tapes and foams and sealants and building envelope products that go into putting windows or doors or skylights or other building components into some residential and a lot of non-res construction.

Given the energy efficiency building code mandates that are national in Germany, and are national in Scandinavia, and are starting to grow as building permit mandates throughout more and more of Europe, our Tremco illbruck business is particularly well-positioned to take advantage of that with their various products and patented products.

And so, that's a long-winded answer of saying yes, non-res construction is picking up. But our business over there has a particularly favorable position when it comes to energy efficiency and the building mandates that exist in Europe that, for the most part, do not exist in the U.S., at least yet.

Thank you. That all makes sense. Really, the question was around the particular -- basically where we are in this upswing versus the potential earnings power for the business, particularly in non-resi in Europe.

In Europe, I think we're starting to get to where we can go. I would redirect that question to the U.S. I think we remain frustrated by low single-digit growth in our industrial businesses in the U.S.

We don't see any signs that it's dipping down or going to go negative. And we have every expectation that that momentum in U.S. industrial spending and U.S. nonresidential construction and infrastructure spending is going to build momentum. And I think there's signs that they are. But it's been frustrating to us that other parts of the world are outperforming in our industrial markets versus the very modest growth we're still seeing in the U.S.

Okay. Thank you for that. A related international follow-up. In Brazil and throughout Latin America, Frank, I think you had mentioned the good growth in fixed currencies. Are we at a place where Viapol is fully ramped up under the Euclid umbrella? Or perhaps could you give us some sense of the runway that's left, just getting Viapol's products up and running?

Two things. Number one, the Viapol business in Brazil is very well-led and executing very well. It's a great team of people and they have performed extraordinarily well under RPM.

We are, I don't think, anywhere close to the full ramp-up of other RPM products that we're introducing. They're performing exceedingly well in their own product categories with some new product introduction, and I think taking advantage or benefiting from some of the infrastructure spend in Brazil broadly. Certainly some of it's around the World Cup and the Olympics, but there's good spend and they're picking up market share.

We are selling single-millions of dollars of admixtures from a standing stop. And so we expect that momentum to keep building. We are investing, as I've said in the past, in a sales force and tech service force for concrete admixtures, and in a sales force and tech service force for polymer flooring. And all of those should be ramping up in the next, let's say, year to year and a half.

And we're being very deliberate. There are other product categories that we feel that we can introduce into the Brazilian market through the tremendous leadership and management team at Viapol. They've got a lot of good assets down there. But I think we want to do it smartly as opposed to confuse these guys who are otherwise running a business that's growing high-single, low-double digits on the top line and killing it on the bottom line in their own currency.

Okay, great. Thanks and congrats on execution this quarter.

Ivan Marcuse from KeyBanc.

Good morning. I just have a couple quick questions. One, the acquisitions have -- you're running at a pretty good rate the past couple of years and it's slowed down a little bit. What's the pipeline look like and what's your expectation looking forward over the next 12 to 18 months on the acquisition front?

As you know, we're always looking for acquisitions and -- either product lines that can complement our existing businesses and product lines. And there's reasonable pipeline of that type of activity. They tend to be smaller, but the IRRs in those are pretty good when we can really do something with them.

And we're also looking more aggressively at acquisitions that would expand our geographic presence. But the nature of acquisitions, as you know, is such that you can't predict when things will close, and you can work on deals for multiple years and not get them done, and you could bump into something that our companies would bring us and that we're not aware of today and get it done in six months.

So, our acquisition activity remains as it's always been. And the things that we're working on are complementary product lines that we can really leverage, or acquisitions, either outright or through our companies, that would help expand our geographic presence.

You've always had a conservative and targeted acquisition how you looked at it on a financial basis. Have you seen multiples within some of these companies or expectations for multiples get out of historical RPM wheelhouse, if you will?

We're in a pretty good place today. I think the only time in my 30 years of doing deals here that we saw that was really in the run-up to the financial crisis. From the early 2000s, right up until 2008, we lost a couple deals to private equity. And more likely, not losing, but what we were unable to get a number of transactions done because of private equity created value expectations. That ended with the financial crisis.

Net-net, private equity has been more of a seller in the last couple of years than a buyer. Obviously, those dynamics will change. They tend not to play in our space which is a $5 million, $10 million to $200 million to $300 million space. But they certainly can impact expectations in the future.

Got you. And then a couple quick ones. For the organic growth, was there any pricing in there or was that pretty much all volume growth? And then the second question would be on the cost savings or the cost reductions. In dollars terms, how much do you think your costs were reduced in the industrial segment on a year-over-year basis due to your actions that you took?

Yes, we tend not to disclose in any great detail pricing action. Net-net, the price/cost mix in the quarter was slightly positive. Raw materials remain flat. And they're certainly down from where they were a few years ago but still above where they were six, eight years ago. The couple areas where we're seeing some raw material pressure is in packaging, a few other chemicals, but it's not a big pick-up.

Great. But on the top line for organic growth, that was mostly volume, correct?

Almost all volume. When you take out the effect of currency, for instance, in our industrial segment, organic growth in the industrial segment was greater than 7%. It's almost all volume.

Great. Thank you for taking my questions.

Rosemarie Morbelli from Gabelli & Company.

Good morning and congratulations on a great quarter. Which brings me to my first question. Is this level a good number going forward for third quarter? You have never gone anywhere near $0.12 in that particular quarter, which sometimes is just a breakeven level.

So could you give us a better feel for what you expect going forward in the next couple of years? And I understand industrial and consumer are going to be moving up and down. But when you look at your operations, what you have done in terms of cutting cost, that $0.12 could be in the realm of possibilities going forward?

I think we have a better seasonal balance in our industrial business with the Legend Brands business. And so in severe weather environments they'll do better. In mild weather environments they'll do worse.

Do I think that this is a good base of business for us in the third quarter going forward? As long as economies stay positive I think the answer to that is yes. We have a bigger presence in South America, which has different weather patterns than we do in North America. Legend Brands is a little bit counter-cyclical. So, as long as we have positive economic activity and momentum in the major markets that we're in, I think that the current level we're at is a solid level for third quarter.

Okay. That is very helpful. And you said you are larger in South America. We talked about Brazil but could you talk about the entire region and the size of those operations?

I think generally -- and this is off the top of my head, it will be roughly accurate -- but for the year it will be somewhere in the $250 million to $300 million range in revenues in South America. But we're growing very fast. We're taking a lot of market share.

We have a really good presence in Mexico. We have a really good presence in Colombia and Chile. A relatively small presence in Argentina but very well-run. And I think a very exceptional team in Brazil.

So we've got a real good base of business that we continue to invest in and to grow. And so there's good opportunities for there. The growth percentages are very impressive but as you note, it's on a relatively smaller revenue base.

Quite candidly, the same is true in Asia and the Middle East and Africa, where our growth percentages look impressive but they're on smaller revenue bases than even what we have in South America.

So, if we look at what you call impressive growth, are we talking top-line growth of high single digit or are we in the low to mid double digit?

Depending on the region, we're high single digits or low double digits; that's correct.

Okay. And then I was wondering, looking at NeverWet and your introduction for fabric, are we talking about only selling to the consumer? So, I buy my outdoors cushions and can spray them by myself by buying one of those things at Home Depot. But are you also selling it to OEM, to the fabric manufacturer or the pillows manufacturer or the umbrellas manufacturer?

That's a great question. And when we first -- we teamed up with the inventor of the formula, and it's a patented formula, they had been working on it for a while, and our original rights were, I think, North America only. We now have the global rights to that technology. We're working with the inventor to continue to modify the technology for different substrates.

And we have a lot of introductory meetings with OEMs. We were hesitant to push that too hard until we had global rights, because there's a lot of OEM products that are either made globally or, in some instances, produced outside of the United States but sold into the U.S.

So, there's a number of areas where we are very excited. But right now that is expense and promotions and testing, and there's no revenues associated with that.

Hopefully a year or so from now we can talk about the OEM applications for NeverWet. It's a hope and a desire and something that we are pursuing, but we don't have any revenues to talk about yet.

Okay. No, it's nice to know you are pursuing it. And one last question, if I may. If we look at government spending on bridges, highways, are you seeing any sign of life in that particular category, which will definitely help your U.S. industrial business?

Yes, we are. And for a number of years surprisingly one of the easier things for Congress to come together on historically has been a major highway bill. And that languished for a number of years.

There was a highway bill passed last year and those dollars are making their way to states and departments of transportation. And so at least in the bridge, highway area, we would expect to see improvement.

And if you look at that, what is the percentage of your industrial operations in the U.S.?

It's not big. It principally impacts our Carboline subsidiary and their high-performance coatings and corrosion-control coatings. It impacts some of our coatings that go into concrete.

And so on a grand scheme of things, it's not huge. But obviously if you're talking single millions of tens of millions of dollars of revenues, and you can leverage it to your bottom line, that's the nature of RPM. With 50 different business units and literally thousands of markets and product lines, if a good one perks up, that helps. And that's one that is an area that's been meaningful for us and received very little funding in the last few years.

Okay. Thank you very much.

(Operator Instructions)

Richard O'Reilly from Revere Associates.

Thank you. Good morning. I wanted to ask, get back to the consumer business. Is there a way of talking about the retail point of sales for you in the quarter? Because I would think there would be some sort of normal inventory shelf build in the winter months for your products.

Normally, there is in the end of the third quarter, but with the severe winter weather we didn't see it. And I think that's reflected in two things. Number one, it's reflected in the lower or decline in our consumer revenues. And it's also reflected in the inventory build on our balance sheet, which normally would start to be relieved at the end of February, and didn't happen, from our perspective, almost exclusively from a weather perspective. And I think early indications in the fourth quarter is that assumption is correct.

Okay, fine. Second question, I want to make sure -- your North American industrial sales were up in the, I think you said low single digit. Did I get that right?

That is correct.

Okay. So, overall for North America you might have been flattish, if you could look at --?

I think that's correct. If you look at our North American industrial up modestly and consumer down in the third quarter, we probably were flattish. And we certainly don't expect that to continue.

Right. But a surprisingly good story considering the overall weather impact on your products. Okay. Thank you, then.

Thank you. And we agree.

Kevin Hocevar from Northcoast Research.

Good morning. I was wondering if you could comment on your outlook for the roofing business here in the U.S. I know you mentioned it was down and I think it's been down for a little while.

Do you expect that there's damage being caused on the roofs from this harsh winter weather? And do you expect replacement roofing to pick up as a result? What's your outlook in that business?

We would certainly hope so. We've got a great sales force, a great team. We've got new leadership at our Tremco business and there's a lot of enthusiasm there. And so I would expect to see our Tremco roofing business pick up certainly as we get into the new fiscal year. And we'll see what impact they have in the fourth quarter.

Yes, there's probably pent-up demand and some roofs that need repair, replacement. And that's a good thing for us. But the month of March was not exactly friendly across the United States for getting up on roofs. And so, of all our businesses, I think the weather negatively impacted them the most.

Okay. And then on the NeverWet side of things, I thought I saw that you do have an OEM application, there's a plunger out there. I was wondering if you could comment on that, what type of business you're seeing from that and expectations for it.

I'm not aware that we have any OEM customers yet. There's a lot of stuff on the Internet of people using NeverWet for certain applications. We welcome that.

As we had mentioned in the past, most of our products -- we, like most companies, we have a pretty good sense of the end use and the market and what we're targeting. And when we get a real home run, maybe there's a 15% or 20% use that is driving revenue growth that we didn't think of. In this case, we continue to be on an exploratory journey with consumers and OEMs in terms of how and where we can use this product.

If you go online, you'll see a lot of different ideas. Some are very intriguing to us. Some are just short of crazy of how people are trying to use NeverWet.

So, that might be online but I'm not aware that we have any OEM revenues yet. We have a lot of OEM pitches in the works.

Okay. Thank you very much.

This concludes our question-and-answer session. I will now turn the call back to Mr. Frank Sullivan.

Thank you, Kim. This concludes our investor call for our 2014 third quarter. We look forward to releasing the results of our fourth quarter and our full 2014 fiscal year on July 28, 2014, at which time we will be providing sales and earnings guidance for our new 2015 fiscal year, although we are highly confident that it will be another year of sales, earnings and dividend growth for RPM and our shareholders.

I would like to thank the RPM associates worldwide who continue to compete and win in the marketplace every day, delivering for our customers and our shareholders. And also thank you for your participation on our call today and for your investment in RPM. Have a great day.

This concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.