RPM International Inc (RPM) 2014 Q4 法說會逐字稿

Welcome to RPM International's conference call for the fiscal 2014 fourth quarter and year end. Today's call is being recorded. This call is also being webcast and can be accessed live or replayed on the RPM website at www.rpminc.com.

Comments made on this call may include forward-looking statements based on current expectations that involve risks and uncertainties, which could cause actual results to be materially different. For more information on these risks and uncertainties, please review RPM's reports filed with the SEC.

During this conference call, references may be made to non-GAAP financial measures. To assist you in understanding these non-GAAP terms, RPM has posted reconciliations to the most directly comparable GAAP financial measures to 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.

Good morning and welcome to the RPM International Inc. investor call for the fourth quarter ended May 31, 2014. With me on the call today are Rusty Gordon, RPM's vice president and chief financial officer, and Barry Slifstein, RPM's vice president, planning and investor relations.

I'd like to make a few comments prior to turning the call over to Rusty and Barry to discuss our results and provide some guidance for our 2015 fiscal year. We had a good finish to a great year.

In fact, the 2014 fiscal year was our fifth in a row of double-digit earnings growth, excluding one-time charges. And 2015 is shaping up to be our sixth consecutive year of double-digit earnings growth. More details on our current results and our outlook will come from Barry and Rusty shortly.

This morning, we disclosed an SEC investigation into the timing of our GSA settlement disclosure. As you'll recall, in the spring of 2013, we took a charge related to the settlement of a GSA investigation of our Tremco roofing division.

Over the last few weeks, the SEC has raised questions about the timing of our accrual and disclosure for the settlement. We are fully cooperating with the investigation, and our audit committee has engaged an outside law firm to complete an independent review of this matter.

The outcome of this investigation will likely result in one of two scenarios. One, that RPM's timing of the accrual and disclosure in the 2013 third quarter was correct, a position that management, even in hindsight, still firmly believes. Or that a portion of the final $61.9 million GSA settlement amount should be moved from the third quarter of 2013 to the second quarter of 2013.

This would result in a reduction of pretax earnings in one quarter, with the corresponding increase in pretax earnings in the third quarter with zero impact on the full year. We are working to resolve this issue as quickly as possible.

This morning, we announced that we have reached an agreement to resolve our Bondex SPHC asbestos liability situation. Over the weekend, we and the representatives of current and future claimants signed a binding term sheet, the details of which include an upfront payment upon confirmation and completion of $450 million; a second payment on the second anniversary of $102.5 million in cash, stock, or a combination thereof, entirely at the discretion of RPM; a third payment of $120 million in cash, stock or a combination thereof on the third anniversary; and a fourth payment on the fourth anniversary of $125 million, also in cash, stock or a combination thereof at our discretion.

These contributions to the trust total $797.5 million and are tax deductible. We estimate the after-tax net present value of these to be approximately $485 million.

This agreement puts us 90% of the way towards a final court-approved transaction. We estimate that it will take six to nine months to complete the process of bankruptcy court and district court approval necessary to confirm and finalize this transaction.

We are of two minds regarding this transaction. On the one hand, we find the $797.5 million value extraordinarily high in light of the Bondex product characteristics, a small hardware store product line with total historic sales of less than $6 million and a product that was discontinued more than 37 years ago.

On the other hand, as we have communicated to investors over the last four years, the likely outcome of a 524(g) negotiated resolution would come in a manner more driven by an acquisition-like valuation in relationship to the SPHC business. In that regard, we could not be more excited to complete this transaction in a manner that brings great companies with great brands, great people and a great strategic fit back into the RPM family.

When completed, this transaction will be treated for accounting purposes much like an acquisition, with a transaction value consistent with M&A values in today's market when looked at on an after-tax net present value basis. And will finally and permanently extinguish a major contingent liability. It will be cash flow positive and earnings accretive from day one.

Most importantly, this transaction allows us certainty on the final cost of resolving the Bondex asbestos liability issue and a date certain after which 100% of the strong cash flow generated by the RPM companies can be fully deployed towards accelerating growth and more aggressively returning capital to our shareholders.

I'd now like to turn the call over to Barry Slifstein, to provide you details on our fourth quarter and 2014 fiscal year.

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 fourth quarter with prior-year figures on an as-adjusted basis and then cover some May 31, 2014 balance sheet and cash flow items. I will 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 fourth quarter, RPM incurred one-time pretax charges of $42.7 million, which included a $22.5 million write down of RPM's remaining financial investments in Kemrock Industries and Exports Limited in India; a $3.7 million reversal of a fiscal 2013 third-quarter accrual for the General Services Administration, GSA, settlement; a $4.5 million restructuring charge at the former Building Solutions Group relating to the GSA investigation; and a $19.4 million restructuring charge resulting from two plant closings within the Rust-Oleum Group to better align production capacity with demand and eliminate overhead in its hobby and European businesses.

Using last year's as-adjusted figures, fourth-quarter consolidated net sales of $1.28 billion increased 9.1% year over year, due to organic growth of 8.5%, and acquisition growth of 0.6%. Included in organic growth was unfavorable foreign currency translation of 0.3%.

Industrial segment sales increased 8.5% year over year to $769.2 million, due to organic growth of 8.2%, and acquisition growth of 0.3%. Included in organic growth was unfavorable foreign currency translation of 0.5%.

Consumer segment sales increased 10% to $507.6 million, due to organic growth of 9.0% and acquisition growth of 1.0%. Foreign currency translation was negligible in the quarter.

Our consolidated gross profit increased 11.2% to $560.7 million from $504.1 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 43.1% last year to 43.9% this year, representing an increase of 80 basis points.

Consolidated SG&A increased 11.3% to $389.4 million, from $349.9 million last year. Contributing to the increase were higher compensation distribution, bad debt, warranty, advertising and promotional expenses. Consolidated earnings before interest and taxes, EBIT, increased 10.9% to $172.1 million, from $155.2 million last year, due primarily to efficiencies gained through plant operations, recovery of margin lost in prior years due to material inflation, partially offset by higher SG&A expenses.

At the industrial segment, EBIT increased 9.1% from last year, primarily due to very strong results in Europe, Legend Brands and several other North American industrial companies. These improvements were partially offset by higher compensation, warranty, severance and bad debt expenses.

Consumer segment EBIT increased 10.3% from last year due to higher sales volumes at most consumer companies, partially offset by higher compensation, warranty, distribution and advertising expenses. Corporate/other expenses of $13.1 million was slightly below the $13.7 million from last year.

Interest expense decreased from $21.0 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 $2.1 million for the quarter, compared to $5.2 million last year, due primarily to larger gains on sales of marketable securities last year versus this year.

Our income tax rate decreased from an adjusted effective tax rate of 28.3% last year to 26.4% this year. The change in the quarterly income tax rate was due principally to a reduction in valuation allowances associated with foreign tax credit carryforwards, comparative differences in levels of actual versus forecasted income, and changes in the jurisdictional mix of earnings.

Net income increased 14.1% to $108.8 million compared to last year's $95.4 million. Diluted EPS grew at a slower pace than net income, due to $0.02 of dilution attributable to the December 2013 convertible bond issuance. EPS increased 11.1% to $0.80 per share, compared to $0.72 per share last year.

With regard to the year-to-date results, consolidated net sales of $4.38 billion increased 7.2% year over year, due to organic growth of 5.1%, including unfavorable foreign currency translation of 0.7% and acquisition growth of 2.1%. Net income increased 20.9% to $291.7 million, compared to last year's $241.3 million. Diluted EPS increased 19.8%, to $2.18 per share, compared to $1.82 per share last year.

And now a quick look at the balance sheet and cash flows. Cash from operating activities was $278.1 million, compared to $368.5 million last year.

The decrease was driven primarily by GSA and related settlement payments of $63.0 million during the first quarter of fiscal 2014, and uses of working capital required to support sales growth in the fourth quarter. In addition, the increases in accounts receivable is primarily attributable to higher year-over-year sales in our more global industrial segment, with generally longer standard payment terms, which is partially offset by higher net income year over year.

Depreciation and amortization expense was $90.1 million, compared to $86.3 million last year. CapEx of $93.8 million this year compared to $91.4 million last year. Our accounts receivable days sales outstanding was 59 days this year, compared to 58 days last year. Days of inventory increased to 77 days this year compared to 74 days last year.

Finally, a few comments on our capital structure and overall liquidity. As of May 31, 2014, total debt was $1.35 billion compared to last year's $1.37 billion. Our net debt to capital ratio was 42.4% at May 31, 2014, compared to 46.2% last year.

Our long-term liquidity at May 31, 2014, was $1.13 billion, with $330 million in cash and $798 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. Following the sale of those notes, virtually all of RPM's total debt is fixed with an average interest rate approximating 5.0%.

On May 9, 2014, we replaced our existing $150 million accounts receivable securitization facility with a new, three-year, $200 million accounts receivable securitization facility that expires on May 31, 2017.

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

Thank you, Barry.

I would like to briefly cover our outlook for the 2015 year. I should note that this outlook does not include the impact of re-consolidating SPHC.

We expect our growth to be fairly evenly distributed between our two operating segments. On the positive side, it appears that housing and industrial activity has picked up in the U.S. recently after the harsh winter. We are seeing improved consumer sentiment and employment gains.

We are hopeful that the economic recovery will promote increased public spending on construction as tax revenues increase. Based on RPM's experience in FY14 and macroeconomic data, it appears that Europe has stabilized as well.

On the negative side, we are concerned about the potential impact of rising interest rates if the Federal Reserve continues to adopt a less accommodative monetary policy, since rising interest rates may unfavorably impact housing turnover, capital investment and commercial construction.

On a consolidated basis, we expect our sales to grow by 6% to 8% in FY15. Nearly all of this growth is expected to be organic, although we will have some benefit of the recently-announced acquisitions of Betumat and Krud Kutter. We expect sales to grow by 5% to 7% in the consumer segment, where innovative new product development will lead us to continued success.

On the industrial side, we expect slightly better sales growth into the 6% to 8% range, as we expect slightly improved commercial construction activity within both the private and public sectors.

In our nonoperating segment, we are expecting pension costs to increase by $4 million to $5 million in FY15 versus the prior year, due to a slight reduction in the discount rate on our pension liabilities. With our well-balanced portfolio and solid execution, we plan to leverage our 6% to 8% sales growth into EPS growth of 9% to 11%, or $2.38 to $2.42 per share.

As several of our investors already know, RPM established a goal back in 2010 to grow to $5 billion in revenues by 2015. According to our internal plan and the guidance, which I just discussed, it is now expected that we will fall slightly short of that mark.

In spite of the shortfall in revenue in 2015 however, we will be very close to the income expectations that we had when the five-year plan was established. This is the direct result of EBIT margin improvement, in which we have been more focused than ever on supply chain initiatives, launching innovative new products at higher price points, and our connections creating value strategy.

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

(Operator Instructions)

John McNulty, Credit Suisse.

Congratulations on finally getting out from underneath the asbestos umbrella. And maybe with that, a question with regard to how we should be thinking about once it's fully concluded, what the actual earnings accretion would be. I know you're running a lot of costs right now through the minority interest line. So how should we think about the incremental EBIT or whether you want to do that or post-tax income, how should we be thinking about what that brings to RPM going forward?

So we will provide some direction, but not specifics at this point. And I would make it akin to a major acquisition that we might have completed in terms of signing, but we're awaiting a 60 or 90 day government approval period. So in a circumstance like that, typically we or anyone else would announce the transaction, would tell you about the company, tell you about the revenue size but not disclose purchase price or any other details until it was finally completed. So we're in a little bit of a similar situation here, except for the fact that it's not 60 or 90 days. It's more like six months. So, I think with that caveat, for the fiscal year ended May 31, 2014, the SPHC business had approximately $385 million in revenues. That's up from the $300 million of revenues and $30 million of EBITDA that we disclosed back in May of 2010.

The vast majority of that $85 million in revenue growth is organic. And it's been levered nicely to the bottom line. On a go-forward basis, it's our expectation that over fiscal 2015, the SPHC businesses are likely to generate about $400 million in total revenues. I think that's really all the direction we can provide this point in time. This transaction could be completed as early as December or as late as April or May of next year. A lot of that depends on the timing of bankruptcy court process and the district court approval.

So, we're hesitant to provide any more details. There's no reason for anybody to put anything into a 2015 model until we get to the point of consummation, at which time we will provide a forward look on our expectations for revenues, for EBITDA, and for earning and the accretion that we expect from this transaction. The accretion will come from two places. It will come from the growth in earnings of the SPHC businesses, and will also come from the elimination of the noncontrolling interest line that you see in our income statement.

Okay. Great. No, thanks for the color on that. Maybe if we can step to the core businesses, when I look at the sales growth that we saw, it was pretty robust year over year. And yet when I look at the margins, they really didn't move all that much, actually one didn't move at all. So I guess I'm wondering first of all, why is that? Why aren't we seeing the margin leverage kick in? And how should we think about RPM's ability to deliver on some real operating leverage as we look to 2015 and beyond?

Sure. A couple things on that. Number one, I think we've shown improving margins and leverage over the year, over the last couple of years. I think you're referring to lack of leverage at the bottom line in the fourth quarter based upon some pretty strong continuing revenue growth. It's really in a couple of areas. It is in substantial commitment to higher advertising in our consumer segment, particularly in the fourth quarter. It's also in relationship to some higher warranty expense across a number of product categories. And then as you might imagine, given what we've been working on, it also relates to a higher legal expense, a lot of which will go away once this SPHC/Bondex transaction is completed.

And then lastly, in the fourth quarter in relationship to the year prior, we had some significant increases in compensation in a number of areas. For instance, in the Tremco roofing business, which actually had a nice fourth quarter versus a year ago, where there was a deterioration in results and an impact on significantly lower compensation for business leaders and also compensation in relationship to commissions. So those are the principal areas as to why there was not better leverage in the quarter, but fundamentally the businesses are doing really well. And we're pleased with the strong organic growth both in consumer and industrial.

Great. Maybe if I can ask one last question, I know you've got two big new products out there in NeverWet and Tuf-Strand. Can you give us an update on where the products are in terms of the revenue that you've been looking for, and then if you can if you're getting any better ability to size the potential for these businesses, that would be great as well.

In both cases, we're selling tens of millions of dollars of product. In the case of Tuf-Strand, which is a patented fiber material replacement for rebar in concrete, we are selling everything we can make. We're continuing to expand capacity in different regions. In the case of NeverWet, Rust-Oleum introduced a single-component product for suede, fabric, things like that. And that's selling extraordinarily well. They are continuing to pursue some OEM opportunities. So, we're seeing very solid, big double-digit growth in both of their product lines on a tens of millions of dollars of revenue base.

Great. Thanks very much for the color.

Ghansham Punjabi, Robert Baird.

Frank, you mentioned on that SPHC, you mentioned the valuation of the settlement was consistent with prior sector M&A multiples. Can you remind me first off what that range is?

I wouldn't get into, and we haven't in the past discussed M&A multiples on any transaction. I can tell you that to be acquiring roughly $400 million on a prospective basis of revenues for a price in the $485 million range is very consistent with the way we valued transactions and I think the way transactions are valued in M&A market today. So, I say that not cavalierly, but that's the way to think about this. In fact, these are payments to exhaust the contingent liability and in conjunction with establishing a 524(g) trust, although as we said the accounting is very similar to an acquisition.

So we would bring those assets in under something akin to purchase accounting. And then once this is completed, I think we will explain to people how to think about the benefits to the bottom line which should be material, but it will be in different places relative to interest expense, tax benefits and a number of other areas that we will be in a better position to explain once the transaction is consummated.

Okay. Just as a clarification, is there any other liabilities that you will be inheriting from the asset, pension or anything like that?

No. Under agreement with the asbestos creditors committee and the court throughout this whole process, the employees of the SPHC businesses have remained participants in the RPM benefit plans, so there will be no additional costs there.

Okay. Great. Just on the consumer business, how much do you estimate 4Q benefited, if at all, from deferred spending at the consumer level given the weather issues in the previous quarter?

It's really hard to say. I do think there was some benefit from that because we had a solid high single-digit organic growth in consumer. And last year, in the fourth quarter we had mid-teens growth.

So, I think to put on the solid growth we had this year, particularly in comparison to a consumer segment, fourth quarter last year where sales were up in the mid-teens and earnings were up in the high 20s, as I recall, would indicate that there's still good demand there. But I also think it would indicate that some of that organic growth in this fourth quarter is relationship to revenues or business that was pushed from the third quarter into the fourth quarter.

Okay. Thank you so much.

Vincent Andrews, Morgan Stanley.

Congratulations on the litigation settlement. You mentioned in your opening comments that when we got on the other side of this, it changed how you view your balance sheet, what you might do with it and how you might return capital to shareholders. I'm sure you will give us a more complete picture when we get on the other side of it, but can you give us some broad sense at least from a high level of what you might be thinking about or are willing to do or what your targets might evolve to?

I could just comment that one of the things that I'm very proud of, and this is really a testament to the employees of the RPM companies, is throughout this challenge, they focused on growing their business and generating good cash flow in an amount that allowed us to continue to grow sales. As I mentioned earlier, excluding one-time charges, this was our fifth year in a row of double-digit earnings growth. And of course we've grown our cash dividend to shareholders every year.

That's despite the fact that in the tort system from 2002 to 2010, we paid out about $600 million of our pretax cash flow. And now we've laid out the pretax payouts of $797 million roughly. Once we get through that, that is a substantial amount of money that could fund more aggressive future growth, or a combination of a growing dividend with share repurchases. So, that broadly is how we think about it. But I think both as we are more comfortable in outlining details of results of the cash flows, which will be positive, when we're in a position to do so on consummation of the transaction, and as we get down the road, those are the types of things that we're thinking about and discussing.

Okay. And the press release you talked about the growth in Europe next year would be more moderate than this year, but you also made some comments on the call saying that you feel like the recovery's taking hold. So just wants want to square those a bit and just make sure that you're not seeing anything specifically in your underlying business that's causing the perception of more moderate growth.

No. I think we had a really strong rebound in Europe this year, higher than what we expected. And we had high single-digit growth in the topline and very strong leverage to the bottom line because of some of the expense reduction initiatives which we took over last year-and-a-half, and I think we're seeing for us just a more moderate rate of middle single-digit growth. I think we do continue to be frustrated in our industrial segment by the fact that geographically our results are not matching the headlines. There are a lot of headlines about problems in Europe, and yet our European businesses had a good year and it looks like they're going to continue to have a solid growth in our fiscal 2015.

And there've been a lot of U.S. headlines of recovery in industrial markets, and we did not see that in fiscal 2014. And it still feels like whether it's construction activity or industrial capital spending, while in its positive and moving in the right direction, it's not as robust as we think would be happening or should be happening. So it will be interesting to see -- I think the real wildcard for us in terms of upside is, if and when we will see a stronger recovery in industrial capital spending and construction activity in North America.

Okay. That's very helpful, I will pass it along. Thanks very much.

Kevin McCarthy, Bank of America Merrill Lynch.

Frank, with regard to SPHC, I think you had referenced some interest in tax effects. With the reconsolidation to come, my question is, do you also anticipate any operational synergies as there would be with an acquisition, for example?

I don't know that we would envision any major operational synergies, but I can tell you that we have gotten much better across RPM at leveraging manufacturing and distribution, particularly in markets outside of North America across our businesses. And the SPHC businesses have not participated in that. We've been precluded from really leveraging resources and pursuing the type of cooperation with those businesses that we have in the rest of RPM, so I think there will be some synergies.

A couple other comments I will make on that though, from an acquisition perspective, what's really exciting about this -- and that's if you look forward and can get over the significant payments here -- we have never done nor will we ever do again an acquisition, if you will, of businesses where diligence is easy, we know the employees, we understand these businesses inside and out. And they will hit the ground running. To think about the opportunity in one fell swoop, if you will, to acquire Day-Glo, and Dryvit, and TCI Powder Coatings, and this collection of wood finishes business, some of the leading industrial and marine product line brands of our Kop-Coat Group, Chemspec and ValvTect. From that perspective, and an acquisition perspective, the risk is minimal and the upside is really exciting for us.

As a follow-up, Frank, would you be willing to comment on the level of SPHC margins at least directionally compared to RPM corporate EBITDA margins? And would you also expect D&A to step up upon reconsolidation as it usually does with purchase accounting?

I think there would be some step up in D&A, which would be modest. It will probably be a one-time inventory step up. And then when this is done, we will provide more details around earnings and cash flow than we typically would on an acquisition. As it relates to margins, I think I just repeat my comments before directionally.

We disclosed at the time of the business was deconsolidated, as of May 31, 2010, what we called a reduced revenue base of $300 million and EBITDA of $30 million. For this fiscal year, they expect to operate on a run rate of about $400 million in revenues. And their EBITDA has grown nicely because all of that, let's call it a year from now, $100 million of growth has been internal growth that has been levered nicely to their bottom line. We will provide the details on consummation and obviously, its impact on whatever fiscal year is appropriate relative to timing.

Thanks for that, Frank. Last one if I may, perhaps a clarification, if for some reason, RPM is not able to finalize the transaction as planned over the next six to nine months, is there interest that would accrue on the settlement amount, and if so, how much?

I don't know the answer to that question. But we're going to be targeting the specifics of getting this through the bankruptcy court and getting this approved by the district court and getting it completed. The binding term sheet will be filed in an 8-K Form by the end of this week, so I can't answer that specifically.

Okay. Thanks very much.

Mike Ritzenthaler, Piper Jaffray.

I know you don't generally discuss individual product line performance, but I'm wondering if there's anything in the consumer segment mix that provides some insight around the relative size of projects that homeowners are undertaking given the strong year-over-year revenue growth on difficult comps, or whether we're just seeing consumers increasing their discretionary wallet share on things like improvement projects?

Our take on that is a little bit of both. So, the NeverWet product line, both for our retail partners and us, is at higher price points and at higher margins. But we're also seeing just more significant spending by consumers and really what impacts our consumer products, which is small project redecorating. We're really not driven in the consumer segment businesses much by new construction. But it has appeared for at least the last year-and-a-half that homeowners are comfortable in their jobs and comfortable that they're going to keep their homes.

So, they are spending really in our sweet spot. The $50 million and $100,000 kitchen and bath remodeling I don't think have come back in any huge way. But repainting, redecorating, refinishing, has come back in a pretty meaningful way, and that's right in our sweet spot. And we are selling a number of product lines, whether it's NeverWet or LeakSeal, or some of our specialty decorative small project paint products at higher price points than what we might have been three or four years ago.

That makes sense. Frank, you've been quite bullish in the past about opportunities in Brazil and also in Latin America. And my question is, has your outlook for Viapol opportunities in the new products introduced from RPM and some of the cross-pollination there changed at all now that the World Cup is behind us and as the country looks for preparations for the Olympics? Particularly considering the public sentiment around the infrastructure spending?

Sure. The Viapol businesses have been, first of all they're extraordinarily well-managed. The results of that business were up double-digits in their currency. The impact on our results were disrupted because of the real versus the dollar. The revenue growth is slowing a bit now, but still very positive. Some of the SG&A spend in response to a question I answered earlier is related to, for instance, Viapol, where we are spending dollars to introduce Euclid admixture product lines, some of our polymer flooring product lines, even in partnership with Carboline to set up manufacturing for corrosion control coatings in Brazil, to serve the oil and gas industry and Petrobras specifications. So we are leveraging the management team and resources of Viapol as aggressively or more so than we've ever leveraged an acquisition.

In the near-term that's going to drive some higher SG&A spend. Long-term, that's going to be an easier and cheaper avenue to entry in the Brazilian market for some of our businesses than either doing it greenfield on their own or spending the capital to do an acquisition. The last comment I will make is that we announced a few weeks ago the acquisition of Betumat, which is another waterproofing business in the north of Brazil. Great synergies with Viapol, gives them a stronger presence in the one region of Brazil where they didn't have much of a presence. A lot of synergies in that acquisition, so altogether, that commitment and investment in the Brazilian marketplace and the leaders of Viapol has been a very, very good one for us.

Okay. Interesting. One last one if I could, on corporate expense looking out to 2015, they were lower year over year in the fourth quarter, but obviously a little bit higher for the full year. And as we look at the changes in the pension and things like that as we are looking to 2015, is corporate cost growth in fiscal 2015 that's a few points lower than revenue growth, is that a reasonable assumption basis?

A couple things are going on with corporate expense in general. I would think that our corporate expense at its core will be trending down year over year, and you should see that in the coming years. There are two factors that are, in my opinion, temporarily moving in the wrong direction. One is pension costs. You fixed pension costs based on rates that are fixed at your fiscal year end. So, unfortunately, the May 31, 2014, discount rate is applied to our pension plan calculation, was higher than the May 31 -- I'm sorry, lower than the May 31, 2013. In general, it's our expectation, and I think the market sees this, that interest rates will be trending up. So it's fully our expectation that the impact of higher interest rates on our discount rate and pension calculation in the coming years will be positive. Unfortunately, in the new fiscal year because of the fixed rate at May 31, 2014, pension expense year over year will be up about $5 million, maybe a little more.

The other area is legal expense. While much of the legal expense or most of legal expense for the SPHC bankruptcy process was born by SPHC, we've incurred some significant legal expense around settlement negotiations in moving this forward. So, while we might be experiencing higher legal expense in the coming months, the trend in the future years is positive not negative.

Okay. Thank you, guys.

Frank Mitsch, Wells Fargo.

I know that some of the folks are congratulating you on the settlement in the quarter, but I'd like to congratulate you on something really important, getting LeBron back. Congrats on that. I'm sure everybody's excited at RPM.

We are. Good things are happening in Cleveland, Ohio. That's probably one of the biggest ones.

Yes. That and Johnny Football. I don't want to congratulate you yet on doing the deal. Obviously things are going in the right direction, but you're telling it's going us to be six months-plus to finalize. What are the hurdles that need to be overcome in terms of this getting to the finish line, and what would you assign the probabilities or the percentages of getting it to the finish line?

That's a great question. I will start by saying what was negotiated and signed over the weekend is a binding term sheet. So the parties are committed on the vast majority of the terms and conditions towards a transaction. The next steps are submitting a formal bankruptcy plan to the bankruptcy court, and the bankruptcy court has to approve that. You have hearings, they can ask questions. You might have to tweak a few things, and then that plan is submitted to a vote of the claimants. 100% of the creditors committee has signed onto this term sheet. So we don't anticipate an issue there, but it is a formality that must be completed.

And then once you have that final plan approved by the bankruptcy court, it needs to go to a district court for its stamp of approval before you have a final consummation of a plan. Then, at that point, our first payment of $450 million will be required. The channeling injunction would be part of that. It would permanently resolve the Bondex asbestos liabilities, essentially against any RPM entity. And we would then immediately commence reconsolidating all of the SPHC businesses. So I think we are 90% of the way there. I suspect that there is some uncertainty in that last 10%, but versus prior subsidiary asbestos bankruptcies, they all got completed.

In some instances where they got dragged out, they got dragged out by objections by insurance companies that were party to the funding formula, and for better or for worse, there are no insurance companies involved. In terms of completion, that's for the better because there are no insurance companies to object to anything here. And in the past, similar circumstances, they've been involved, and in some cases, have slowed things down through objections. So that's really the best we can give you, but I think we feel really good about the fact that we are 90% of the way there. This is a transaction that is considered binding, and it's voted on by all the creditors committee unanimously. It was reviewed earlier this week and approved by our board of directors -- or not this week, just at the end of last week. So, we would fully expect to consummate this in the next six months, and it would be highly unusual for it not to be completed.

All right. Terrific. Am I mistaken or are you guys dealing with a new bankruptcy judge as well?

We have a new bankruptcy judge for the last year or so. The judge that is sitting on this now is not the judge that was the judge for the estimation trial.

Terrific. Thank you. And coming back to the company itself, you gave us some pretty good guidance in terms of your sales expectations by the two segments. As we sit here seven, eight weeks into the fiscal first quarter, how are the trends growing in both of those businesses relative to what your expeditions are for the full year fiscal 2015?

I think in our first quarter, in part with relationship to tough comparisons last year, it's going okay. Our plan for the year is to really build into stronger performance around what we anticipate. Some perk up in our industrial businesses in North America. So, it's more of the same of what we've experienced. Europe's doing well. Our consumer businesses are doing pretty well. And we have positive momentum in all of our businesses, but we are planning for the year to see some more significant revenue growth as the year builds, particularly in our North American industrial businesses.

Terrific. Thanks so much.

Jeff Zekauskas, JPMorgan.

It's Silke Kueck for Jeff. A few organic growth on the industrial side, is it the case that North America was more or less flattish and rest of the businesses or Europe grew double-digits? Is that the way right way to think about it?

I think the right way to think about revenue growth geographically in our industrial segment was low double-digits, so forward momentum, but not by much. Very strong. I think on average, high single-, very high single-digit European. And then very strong double-digit in other regions of the world for us, but as you know, those are relatively smaller bases of revenues. But we had pretty solid industrial segment performance everywhere but the U.S. And the U.S. was positive both in sales and earnings, but it was just disappointingly meager.

Okay. And on the consumer side, do you have a feel for how much of the growth was good store traffic versus new products versus share gains?

I think it's a combination of all of those. And I say that, new products are selling very well, so those are certainly part of what's driving our organic growth. But we are also in a space not only our results, but those of our competitors, that seems to be an area, whether it's for our big box customers or even hardware store distribution, that is performing pretty well at this point in the economic cycle.

Okay. On the raw material side, are raw materials mostly trending downwards for you? Or are there -- did you see any inflation anywhere?

Little bit of inflation here and there, but raw materials are relatively stable. So, we were the beneficiary of some lower raw material costs a year ago, year-and-a-half ago. Raw materials have stabilized. We think it's our expectation that they're going to stay there in relationship to supply and demand dynamics. And an interesting switch from a decade ago where there's opportunities to import some chemical raw materials from the Asia region where a decade ago, U.S. production was being exported to Asia in terms of raw materials. So that's a trend that's changed and should be beneficial for us in our industry for the next few years.

Okay. And lastly, also have one question on the agreement that you reached in bankruptcy court. So it's the case that three parties have to agree to the settlement: the claimant, the SPHC and the judge. Has the judge looked at the settlement at all as -- or has he given any indication as to what the expectations are or what hurdle has to be met?

So the process is to submit a formal plan to the bankruptcy court. And the bankruptcy court looks at the plan and make sure that it comports with what's required for a 524(g) trust to be established. And to say it's perfunctory would be incorrect. But it's going through the formal steps of formalizing the agreement, which we reached over the weekend. And then walking that formal agreement through a required process in bankruptcy court, a required process of claimant approval and a required process of the district court approval.

So, we will be moving into a phase of the legalistic form of approving this transaction, establishing a 524(g) trust, establishing the terms by which claims can be made to those trusts, establishing a channeling injunction that channels any and all existing or future claims related to Bondex products to the trust and releasing not only Bondex and SPHC, but any directly or indirectly related RPM affiliates. So those are the steps that we're going through and that's why it would take about six months, but the judge leads that effort -- I don't believe the judge has any part of negotiating the settlement that's been done between the parties.

Very last question on that with respect to the accounting, the payments that will be made after the upfront payment of the $450 million, will be there be a reserve taken that you will carry on your balance sheet? Or no?

I think that the payments will be reflected on our balance sheet as due obligations. And I'm not clear at this point whether there will be reflected in their pretax nature or on an after-tax NPV value, but they will be reflected on our balance sheet essentially as the equivalent of debt obligations that are due in two years, three years and four years.

And the $450 million funding, that would be in absolute terms or will it be less because there are tax implications?

No. We would initially fund a trust with a payment of $450 million. And then that payment and all the future payments are fully deductible for U.S. tax purposes. So, you will have the cash flow benefit of that tax deductibility, and that's an area that we look forward to explaining to people more clearly in terms of the benefit of the earnings per share relative to the interest expense and the payments. And then the cash yield on the tax deductibility and how that flows through our P&L.

Okay. That's helpful. Thank you very much. I appreciate it.

Rosemarie Morbelli, Gabelli and Company.

Frank, it seems as though you are expecting consumer to slow next year by lowering the top line growth. Am I reading this correctly? What is behind the slower topline growth versus this year?

There's two issues. Number one, I think that we are anticipating somewhat slower growth because we've had six or eight quarters of very, very strong organic growth in our consumer product lines. So, we're really facing difficult comps, but nonetheless expect growth in those. Secondly, there are two businesses, and this is in both our consumer segment and then the other is in our industrial segment, that we do not expect to be contributing to growth this year and were significant contributors of growth in fiscal 2014.

The first is Kirker, which is in the consumer segment and in the fingernail polish business. They've had an extraordinary growth in their markets and in their business. They have significant market share. And that market is relatively flat as we speak. It was relatively flat in the fourth quarter. So, we will be generating the growth that we're projecting despite the fact that one of the drivers of our consumer segment growth over the last two years, Kirker, will not be a contributor to sales and earnings growth this year; their markets are relatively flat.

I think the other one that we have not planned for significant growth is in the industrial segment with Legend Brands. Given the extraordinary harsh winter weather, we saw a significant increase in revenues related earnings out of Legend Brands particularly over the winter months and in our third quarter. And we are not anticipating a repeat of that. So, I mentioned those two major product categories, one in industrial and one in consumer in light of the guidance that Rusty provided on the sales growth for each of our two segments.

That is very helpful. So, Frank, if we have a heavy hurricane season, then Legend Brands could pick up or are they not really that large in the area that's going to be affected by hurricanes for example?

Whatever weather events happen, tend to pick up the Legend Brands business. I will also tell you that Legend Brands has been working with some of RPM's consumer businesses to introduce some new products and some new channels. So that's a management team and a group of employees that have been doing a great job as part of RPM. And they're looking to expand the channels they serve. But they most certainly will be spiky if you will, in terms of revenue and earnings growth around major weather events in principally the U.S.

That is great. You planning to buy back enough stock to offset the dilution from the convertible? And obviously after you are done with resolving the asbestos issue?

Yes. I don't know that we have any communications on share repurchases at this point in time. As I had commented earlier, when we are through with the payments to finally resolve and satisfy our obligations on the resolution of SPHC and Bondex, including in the tort system, over a period of about -- oh, I'd say 14 years, 15 years, we will have paid out $1.4 billion of our pretax cash flow. So what I'm really excited about is getting this behind us and then in the future, being able to take 100% of the cash flow that our companies generate and continue to support growth, continue to support a growing dividend and at that point, have cash generation available for purposes that will benefit our shareholders. Whereas in the past decade, we've added a meaningful amount of cash flow that has not really gone to that.

Okay. Could you touch on the success of the higher items, your kitchen counter -- remodeling kitchen counters for $200 -- I mean, or maybe this -- yes, $200 as opposed to renovating the entire kitchen? Are you making progress there? You did not mention it.

Sure. Those are product lines that I think have established the base. They're not growing as fast as they were when they were first introduced. But whether it is EpoxyShield kits for garage floors, whether it is kits to redo Formica kitchen tops or bathroom kitchen tops, whether it's NeverWet, a significant number of the new products introduced by Rust-Oleum in particular, but also DAP recently with their SmartBond products, are at price points significantly higher than what was traditional five years ago.

In the small project paint category, garage floor kits, kitchen countertop kits, kitchen cabinet refurbishing kits, go for hundreds of dollars per kit. And those are price points that, in that category, never exist five years ago. And so those are all things that have been, I think, very helpful to consumers and areas where, for our retail partners and our businesses, we've had higher price points with typically higher margins.

If you bench them all together, can you come up with revenue line from all of those products and the margin that they generate compared to corporate?

Yes. I don't know that we would disclose that number. I can tell you that about 15% of our consumer segment business is products that have been introduced in the last three or four years. And so the new product introductions are really having a nice impact on our organic growth.

Okay. Thank you very much.

Greg Halter, Great Lakes Review.

Wondered if you could provide your thoughts on capital spending for the fiscal 2015?

Our capital spending for fiscal 2015 will be approximately $93 million or so.

Okay.

Maybe up a little bit, maybe 1% or 2% from fiscal 2014.

All right. Frank, wondered if I could get your thoughts on M&A pricing and so forth? Opportunities as well as whether or not you will be precluded because of the SPHC going on, if that's too big to chew, although I know you know them very well.

Sure. No. We don't see any negative impact on this SPHC/Bondex announcement in relationship to our M&A activities. We are continuing to focus on the kind of small- to medium-sized transactions that have been our bread and butter. We're off to a nice start this year. We've announced two acquisitions -- Betumat which I mentioned earlier, which is a waterproofing business, in Brazil, and Krud Kutter. Krud Kutter is a unique collection of organic industrial cleaner degreaser products. Rust-Oleum's really excited about that. It's a relatively small deal, but it's got a nice presence in a lot of our retail partners. It's a relatively cluttered space in terms of brands and different products. And it's an area where we hope, through Rust-Oleum's proven category management, that we can really add value to our retail partners and also in the process really grow into an entirely new category.

So those are two deals that have all been already completed in the first quarter of this new fiscal year. And I would expect us to complete maybe a couple more by year end, but that's really our focus there. We're going to continue to pursue acquisitions as we always have. And as you know, they're opportunistic, so sometimes they happen when you expect them to and sometimes they get delayed or put off.

Right. Okay. And I know we still have another year to go before your past five-year plan expires. I presume you would be out there with new thoughts once the SPHC transaction is consummated, completed?

That's a great assumption. Once we get the SPHC transaction completed, we will go through our ground-up process and work with our board to establish a new long-term plan. And we will reveal, as we have in the past, the revenue piece of that and provide some guidance both in terms of our segments and also geographies where we expect to go. But it's been hard getting here. The size of this agreement in raw dollars is hard to get your head around a little bit. But on a go-forward basis, this is a really good day for RPM and very exciting step for us for, as I indicated in my opening comments, an opportunity down the road to use all of our cash flow for more aggressive growth and for continuing good return of capital to our shareholders. So it's a good day, and we're excited about it.

For sure. One last one. I know you have a captive insurance company. I don't know if that expressly has been used for the asbestos situation or not, but just wondered what your thoughts are in terms of retaining that company going forward?

Sure. We have two captive insurance companies that have been fully licensed, one in Vermont one in Ireland. And they are in place to provide basically a low level of insurance coverage, $1 million or $2 million per occurrence for our companies in areas of general and product liability and a number of other insurance categories. Asbestos has not been and never been a part of any of the areas that they've covered. So the SPHC/Bondex situation, either before bankruptcy or in bankruptcy, has zero effect on the operations or assets of our captive insurance businesses.

Great. Thank you.

Edward Yang, Oppenheimer.

On the tax deductibility of the settlement payment, is there any timing issues involved? Your annual pretax income is about $400 million or so. Does that mean after you make your first payment you're not going to be having any tax payments for that year?

I think that's correct. This will be a significant amount of tax deductible expense. We can, I believe, carry some of it back in relationship to U.S. retained earnings. Certainly on a go-forward basis, there will be a little bit of a mismatch I think between book tax expense and actual cash tax expense. And we will be in a better position to explain the timing of that when we consummate the plan, but that's exactly the right way to think about it. It will have -- we generate a lot of earnings, and a lot of those earnings will be -- provide a shield for the tax deductibility of these payments into the 524(g) trust.

Got it. And with regards to your top line guidance for next year of 7%, could you break that out between volume and price?

I think it's mostly volume. Our expectations on raw material costs and price are relatively flat. So there's no expectation of big price movement. In some categories, we might be up a little bit, but on average, 1% in price is probably what you can plan on and the balance would be organic.

That's all the questions I have, and I will just echo some of the prior comments on congratulations on getting the settlement done. I think it's been 15 years in the making, so it must be a huge relief for you guys.

Absolutely. And I appreciate that, Ed.

Ladies and gentlemen, that concludes our question-and-answer session. I will now turn the conference back over to Mr. Frank Sullivan.

Thank you for your participation on our call today. As we have for nearly 30 years, we are doing this call from the New York Stock Exchange where we will be hosting a luncheon for analysts and investors. We look forward to communicating to you in the coming months both our continuing results for our new fiscal 2015 year and updates, when appropriate, on the progress of the SPHC/Bondex resolution. Thank you for your time today and your investment in RPM. Have a great day.

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