RPM International Inc (RPM) 2015 Q2 法說會逐字稿

Welcome to the RPM International's conference call for the fiscal 2015 second quarter. Today's call is being recorded. This call is also being webcast, and can be accessed live or replayed on the RPM website at www.rpminc.com.

Comments made on this call may include forward-looking statements based on current expectations that involve risks and uncertainties which could cause actual results to be materially different. For more information on these risks and uncertainties, please review RPM's reports filed with the SEC. During this conference call, references may be made to non-GAAP financial measures. To assist you in understanding these non-GAAP terms, RPM has posted reconciliations to the most directly comparable GAAP financial measures on the RPM website.

(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, Christine. Good morning. Welcome to the RPM investor call for our 2015 second quarter, for the period ended November 30, 2014. On the call with me this morning are Rusty Gordon, RPM's nice president and chief financial officer; and Barry Slifstein, our vice president, investor relations and planning.

On our call today we'll discuss our second-quarter results, including some detail by Barry and comments on the outlook for the second half of our 2015 fiscal year, as well as our 2016 fiscal year. This will include our expectations for the impact of a reconsolidated Specialty Products Holding Corp., and some longer-term comments related to the completion of the SPHC transaction.

To remind everyone, the plan of reorganization for Specialty Products Holding Corp. was consummated by the courts on December 10, 2014, and the transaction was effectively closed with the initial $450-million payment made on December 22.

We had a disappointing second-quarter performance, principally for three reasons. The first and most significant reason is the under-performance of our European businesses due to economic deterioration, particularly this fall, which began at the beginning of our fiscal year and is continuing. This is particularly pronounced in our largest country markets of Germany and France.

The strengthening of the dollar versus the euro further negatively impacted our European results. The dollar climb also had a negative impact from foreign currency translation related to our businesses in the UK, Canada, South Africa, and throughout Latin America.

Secondly, we under-performed in our core consumer product categories of small project paints, caulks and sealants, and patch and repair products, principally due to inventory adjustments by our largest customers. A year ago these customers were caught off guard by the severity of the winter, and ended up holding significantly higher inventories in what is our fiscal third-quarter period, the December through February period, than they would have liked.

Accordingly with this experience in mind and the harsh winter weather in early November, almost all of our major big box and discount store customers cut back aggressively on inventory levels. We believe that we will be the beneficiary of a return to more normal inventory levels in the late winter and early spring months, as we will comment further when we get to our outlook discussion. One example is point-of-sale data, which is much more positive over this time frame than our second-quarter sales, and is an indicator of the temporary nature of this inventory issue.

Lastly, our Kirker fingernail enamel business had another disappointing quarterly performance, including some temporary challenges in bringing new bottling capacity, which in the long run will increase both sales and earnings for the Kirker business. Kirker sales were up more than 14% during last year's second quarter, all of which has been given back this year, and with their strong margin profile, they had a significantly negative impact on our bottom line.

Anticipating some volatility in Kirker earnings, our acquisition deal structure allows for performance-related payments this year and next, which in the quarter covered a big amount of the Kirker earnings shortfall.

I'd now like to turn the call over to Barry Slifstein to provide more details on our second 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 2015 second quarter, and then cover some November 30, 2014, balance sheet and cash flow items. I'll then turn the call over to Rusty, who will discuss the outlook for the balance of fiscal 2015.

Second-quarter consolidated net sales of $1.1 billion was flat to last year, with a decline in organic sales of 0.9% offset by acquisition growth of 0.9%. Included in organic sales was unfavorable foreign currency translation of 2.5%.

Industrial segment sales increased 1.4% year over year to $718.3 million, due to an increase in both organic and acquisition growth of 0.7% each. Included in organic sales was unfavorable foreign currency translation of 3.3%.

Consumer segment sales decreased 2.8% to $352.8 million, due to a decline in organic sales of 4.2%, which was partially offset by acquisition growth of 1.4%. Foreign currency translation was unfavorable by 1.3%.

Our consolidated gross profit decreased 0.9% to $453.9 million, from $457.9 million last year. As a percent of net sales, gross profit decreased from 42.7% last year to 42.4% this year, representing a decrease of 30 basis points. Consolidated SG&A decreased 2.4% to $334.9 million from $343.0 million last year, and as a percent of net sales, decreased to 31.3% from 32.0% last year.

During the quarter, a $17-million earn-out accrual relating to Kirker was reversed into income, as a result of a shortfall to performance objectives established at the time of acquisition. Partially offsetting this reversal was $2.8 million of higher professional and legal fees associated with the ongoing SEC investigation, SPHC settlement, and voluntary self-disclosure agreement with the state of Delaware for unclaimed property reviews. In addition, we experienced higher distribution, long-term non-cash compensation, and transactional foreign-currency expenses.

Consolidated earnings before interest and taxes, EBIT, increased 3.2% to $120.1 million, from $116.4 million last year. At the industrial segment, EBIT decreased 5.9% to $79.0 million, from $83.9 million last year. Consumer segment EBIT increased 19.1% to $61.6 million, from $51.7 million last year, due principally to the Kirker earn-out reversal. Corporate/other expenses of $20.5 million were above last year's amount of $19.2 million, due to higher accruals for long-term non-cash compensation.

Interest expense decreased from $20.8 million last year to $19.4 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 of $5.1 million for the quarter increased $3 million over last year due to higher gains on sales of marketable securities.

Our income tax rate for the second quarter was 30.2%, compared to 29.9% last year. Net income increased 9.8% to $69.8 million, from $63.6 million last year. Diluted earnings per share of $0.52 per share was $0.04 per share or 8.3% above last year's EPS of $0.48 per share. Excluding the dilution attributable to the convertible bond issued last year, EPS for the second quarter of fiscal 2015 would have increased $0.01 to $0.53 per share.

Now a quick look at the cash flows and balance sheet. Cash provided by operating activities was $55.3 million for the six-month period ended November 30, 2014, compared to $21.8 million for the same period last year. The improvement was driven primarily by the contingent payment to the GSA in fiscal 2014 of $61.9 million, roughly $45 million after tax, partially offset by the decrease in accrued compensation and benefits.

Depreciation and amortization expense was $46.1 million, compared to $44.9 million last year. CapEx of $26.5 million this year compared to $34.6 million last year. Our accounts receivable DSO was 64 days this year, compared to 61 days last year. Days of inventory increased to 93 days this year, compared to 88 days last year.

Finally, a few comments on our capital structure and overall liquidity. As of November 30, 2014, total debt was $1.43 billion, compared to last year at $1.37 billion. Our net debt to capital ratio was 44.8% at November 30, 2014, compared to 46.4% last year. Our long-term liquidity at November 30, 2014, was $1 billion, with $297 million in cash, and $718 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 proceeds from the sale we 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%.

On May 9, 2014, we replaced our existing $150-million accounts receivable securitization facility with a three-year, $200-million accounts receivable securitization facility that expires on May 8, 2017. On December 5, 2014, we replaced our existing $600 million revolving credit facility with a new five-year, $800-million facility, which can be expanded upon request to $1 billion. The new facility contains customary covenants, including a leverage ratio not to exceed 65%, and an interest coverage ratio not to be below 3.5% to 1.0%. With that, I'll turn the call over to Rusty.

Thank you, Barry. I would like to briefly cover our outlook for the rest of fiscal 2015. As discussed earlier, there were three major areas that impacted our second-quarter performance: Kirker, Europe, and inventory reduction at our retail customers. We believe that the slow-down in our core consumer products areas is temporary, and that we will benefit from the return to more normal inventory levels at our major customers, as well as the sell-in on a number of new product areas in the second half of the fiscal year.

Consumer take-away continued to be solid, and the negative year-over-year decline at Kirker is expected to be less severe in the back half of this fiscal year. All in all, we expect sales in our consumer segment for the back half of fiscal 2015 to generate growth of approximately 6%, with EBIT growth of 10% to 12%.

While we are experiencing good growth in U.S. construction markets, our industrial segment has nearly half its sales outside the U.S. We do not see a near-term turnaround in the European economies, and expect continued strengthening of the U.S. dollar to continue negatively, impacting these results on translation. Accordingly, we expect our industrial segment to generate sales growth of approximately 2% to 3% for the second half of our 2015 fiscal year, with 4% to 5% EBIT growth.

In addition, as a result of the reconsolidation of the SPHC businesses, we expect their combined contribution to the second half of our fiscal year on the sales line to be approximately $170 million, ultimately adding approximately $0.05 per share to RPM's fiscal 2015 second half. All of these elements will add up to consolidated full-year performance in the $2.25 to $2.30 earnings per share range. I'll now turn the call back over to Frank.

As we look forward to our 2016 fiscal yeaer, which begins on June 1, 2015, we anticipate continued solid growth in our businesses serving U.S. commercial construction markets. Additionally, the economic drivers of our consumer businesses remain favorable, and we expect to return to sales growth and strong earnings leverage at Kirker.

The environment in Europe is a bit more difficult to project at this time. However, we would expect the economies to stabilize, leading to modest sales and earnings growth versus the very challenged results we have experienced, and expect to experience, for the rest of 2015.

From a longer-term perspective, we cannot be more excited. The return of the SPHC businesses bring a number of well-run, strong, U.S.-based businesses back into the fold of RPM. As importantly, over the last decade, we have paid out approximately $575 million in after-tax dollars to a totally non-productive purpose. Had we been able to utilize that cash in a more productive manner over that period, taking into account our average stock price, we would have been able to re-purchase nearly 15% of our outstanding shares.

Obviously this leaves us very excited about an opportunity in the coming years to utilize 100% of the cash we generate to supplement our growth investments, and to more aggressively return capital to shareholders when appropriate. Considering all of these items discussed, our consolidated EPS guidance for fiscal 2016 is in a range of $2.70 to $2.80 per share.

That concludes our prepared remarks. We'd now be pleased to answer your questions.

Thank you.

(Operator Instructions)

John McNulty, Credit Suisse.

A question on the SPHC addition back into the portfolio. You highlighted that it's about $0.05 additive in the second half of 2015. Can you give us some color as to how much of that is also being added into the 2016, $270-million to $280-million guidance?

I think on a full-year basis, we'll get somewhere in the $0.20 to $0.25 per share from SPHC. What is in the 2016 guidance is that range less the $0.05 we expect to experience for the rest of this year.

Great. Does that assume any D&A write-up, or anything like that? I know there were some questions as to whether or not you might be writing up the inventory and/or some of the assets.

Absolutely. The $0.05 is a net figure for this year. For accounting purposes, the reconsolidation is treated essentially as an acquisition, so we are looking at writing up intangibles, goodwill, inventory step-up -- all the types of items that you would typically have in an acquisition.

Okay, great. With regard to the industrial segment, when I look at the margins on it, year over year the margins slipped a bit. That's despite what looks like at least okay organic growth. I wouldn't say it was huge, but it was certainly up. What negative mix was impacting the industrial business? How should we be thinking about that going forward?

Sure. Our industrial businesses' biggest challenge is two-fold -- Europe and foreign currency translation. I'll give you some different points of reference. For instance, the SPHC businesses that were not in our consolidated results in the first half are almost exclusively industrial businesses, and they'll be reconsolidated into our industrial segment for the rest of this year. They are almost 100% U.S. Their sales were up 8% and their earnings were up -- operating earnings were up 16% in the first half of the year. We would expect that performance to continue. I think those results are a reasonable barometer of, for instance, our U.S. construction chemical product lines.

Latin America is another region that's very interesting. In Latin America, sales were up year over year 7%. In their local currencies, we were up 17% in Latin America -- a big slug of that was Brazil. But that gives you the impact of the rise of the dollar versus Latin American currencies, and in particular, the Brazilian real, which has dropped significantly.

We've got good strength there. We have good strength in the U.S. We get clobbered in Europe. What started off as chunky results in our core markets like Germany and France that were very strong the year before continued to deteriorate throughout the fall. With the drop of the euro, most of our performance issues in industrial are from both the European deterioration and economic challenges, and foreign currency translation -- not only for the euro, but for a number of other currencies. I gave you the sales results in Europe in the quarter. We were down 7% year over year in sales.

Okay, fair enough. One last question. On the accrual reversal, I'm trying to think about -- is that a one-time thing? Do we see -- is it a catch-up from the past prior quarters, or is this something we could see this kind of magnitude for the next -- it sounded like maybe a year or two, in terms of when you may have a pay-back on this?

There's another year left on those types of performance-related payments. But again, to put that in perspective, last year in the first half, our consumer segment EBIT was up 40%. Half of that was Kirker. It was a volatile earnings flow, very good margins but volatile earnings flow. That's why we had this structure in place, and that will continue through next year. We are in the middle of -- which actually adds expense for us -- in terms of expanding some of their capabilities, and then also adding capital in terms of expanded bottling capabilities, which will help them both in sales and earnings in the future. But that's in process at this point in time.

Okay, but if we saw Kirker stay at this level of profitability, would we see another roughly mid-teens-million benefit in terms of an accrual reversal for say next quarter and the quarter after, or is it more modest than that?

No, the reversal we took this quarter is for this fiscal year. If Kirker stayed at the level of earnings that they are at and that we expect for fiscal 2015 and fiscal 2016, you'll see another mid-teens reversal next year. Our expectation in relationship to their business and their profitability, as well as some of the CapEx we're doing, and our hope is, that they'll have a significant recovery.

Okay, great.

In any event, we would benefit from those higher earnings, or another year of the performance-based payment reversal.

Got it. Thanks very much.

Vincent Andrews, Morgan Stanley.

This is Matt Gingrich on behalf of Vincent. I was wondering if you could speak to the inventory adjustments made in early November. Has that normalized at all since, or do you anticipate leaner inventories for some time going forward?

I think it will remain that way likely through the fiscal year end, which typically are in January of our big retail customers. But as we look forward, consumer is not our challenge. There are a number of A and B category products that are just out of stock. That won't continue. We have excellent programs for sell-in at a number of major customers in deck coatings, in wood stains and finishes, and a number of new categories. We will have a strong second half in our consumer segment.

If you look at the POS, both in our specific categories and then the overall results of some of our big public retailers, the retail take-away and the results were much stronger than our sell-in in the second quarter. That's simply reflective of the inventory adjustments, not consumer sentiment or what we think are the underlying results. When you combine that with some new product introductions that are set for the spring, we're pretty confident that our outlook for consumer is something we can meet or beat.

Great, thanks. On raw materials, I was wondering if you had started to see a tail wind so far, and then your expectations for that going forward. Is it baked in at all in your guidance ranges?

The gross margins in the quarter were down slightly, really for a couple of reasons. Number one is the results in Europe, less leverage on some lower sales there. The impact of foreign exchange on various cross-country raw material purchases and mix. We expect to see improvement in our gross margins in the coming quarters. Not much of that is baked into our outlook, and so we'll see where that goes.

The other category, where it's been disappointingly stuck this fall, but we think we'll get some benefit in the coming quarters, is in freight. Diesel costs are down significantly. We'll begin to benefit from that. Freight in and out is about 5% of our P&L, so that's a big category. Some of the hesitancy to benefit from that has more to do with regulations and what's happening with rail, but we would expect that to improve and positively impact our bottom line, as well.

Great. Thanks, guys.

Mike Ritzenthaler, Piper Jaffray.

I was wondering Frank if you could take us through the next say six months, six to 12 months, on the new product slate that's out there. I know that RPM has been investing in the new product slate. I'd be curious about where some of those pockets could come?

They'll continue to come from areas that we've talked about over the last I'd say six or 12 months. We have a number of new sets coming in into wood stains and finishes this spring, some expansion of what currently exists for us. We have a number of new product categories in the small project paint. While it will show up in our consumer segment, we will be introducing the first meaningful NeverWet OEM sales this spring. That's really in the consumer products area.

One other area there, we have a revamped Synta line. That's going in with a number of different product categories that are in addition to the core product line from a year ago. We're pretty excited about that. All that's good news.

In our roofing area, we have a new line of coatings at Tremco, which is selling briskly. We're adding capacity for that. It's a product category called AlphaGuard. Lastly, we continue to see both good market share gains and product expansion, particularly in the fiber area for Euclid Chemical, and we're expanding capacity in that, as well.

Okay, great. Thanks for that overview. I think it would be helpful for us to get an update from you on the M&A pipeline. I know RPM is always kicking the tires on a few opportunities, but just your opinions on where valuations might be, and your overview on that market?

Sure. Our M&A pipeline is as full as it's been in a long time -- a lot of good opportunities out there. I'd be disappointed if we didn't add $100 million plus over the next 12 months. There's good activity out there. Secondly, as it relates to SPHC and my earlier comments, we're looking at what was $575 million of capital that went to asbestos payments over the last 10 years. That's an after-tax figure. It was almost $1 billion pre-tax. The opportunity to apply that to acquisitions or more aggressively to share repurchases is something that we're happy to have and pretty excited about.

Okay, excellent. Thank you.

Ghansham Panjabi, Baird.

Frank, can you expand on what you're seeing in U.S. commercial construction as per your comments? Are you seeing any improving trend line versus maybe the last couple of quarters? Also, can you remind us what percentage of your industrial portfolio has exposure as per your estimates on that market?

About 40%, I would say. It's continuing to show good, solid mid-to-high single-digit growth. Caulks and sealants, waterproofing products, the fiber business, the concrete repair products -- admixtures are growing. Interestingly enough, we're starting to see some improvement in residential. Most of what was happening was in new home sales and housing turnover. We're seeing some improvement there with the residential waterproofing, basement waterproofing business that we have. All of that business is pretty good.

Obviously the different product lines have different dynamics, and so the best barometer that I think I could give is the comments I made earlier. I think SPHC, while it wasn't part of our results, 100% U.S., 100% industrial, a little more OEM in the construction; but revenues there were up 8% in the first half of our fiscal year, driving a mid-teens earnings growth. I think that's indicative of what we're seeing in our U.S. construction businesses. I think we expect to see that continue for the balance of the year.

Okay. I'm sorry if I missed this, but what was the estimate for the write-ups that could impact SPHC for the back half of the year? I'm asking because I'm trying to bridge 2015 versus 2016 from an earnings standpoint.

We didn't provide that. Quite candidly we don't know exactly, and we'll provide that along with a review of the moving pieces and parts on our balance sheet when we report our third-quarter results, because it is a third-quarter transaction. But our best guess is that net of any of the inventory write-ups and any of the other write-ups, SPHC will deliver about $0.05 to this year. On a full-year basis, excluding one-time costs, transaction costs, SPHC should contribute somewhere in the $0.20 to $0.25 per share range. I would just, as you think about 2016, take that $0.05 off that $0.20 to $0.25 range, and that's what SPHC should contribute to our 2016 results.

Finally, on your guidance for 2016, what sort of macro scenario are you baking into that? Is it continuation of what you're seeing right now? Any improvement in Europe?

No, what -- I think the only wild card factor there is what happens in Europe. Our 2016 expectations for Europe is that we will have slightly positive sales and earnings growth. That will be off dramatically lower comparisons, as I said, through -- in the second quarter, sales were off 7%. We've seen the euro go from $1.32 to $1.18 and we anticipate it to continue to deteriorate. Our 2016 forecast doesn't assume some big recovery, but it also does not assume an economic disaster. I think the low of the euro was $0.85. If we're heading that direction, than we're going to have a hard time hitting that $2.70 to $2.80.

Okay, thanks so much.

Frank Mitch, Wells Fargo.

It's Sabina Chatterjee in for Frank. Most of my questions have been answered, but quickly on the Kirker business -- and thanks for that elaboration on the earn-out, what exactly is driving the under-performance there relative to your expectations? Because it seems -- it's a high-margin business. I'm curious why it's been under-performing.

Sure. It is a high-margin business. Their revenues, as I indicated last year in the second quarter, were up 14%. We've given all that back this quarter on a comparative basis. An incremental dollar of revenue hits the bottom line very nicely, and incremental loss of revenue hurts the bottom line. Last year they had a major retail chain where they did a full nationwide sell-in over about a four-month period, June through into October. That was not repeated this year. That, and the fact that the underlying fingernail enamel business was growing in the 8% to 10% range for a couple of years, and this year is flat.

Most of the impact of Kirker will have hit us in the first half of the year. We do not anticipate any positive results for the balance of the year on Kirker, but they'll be staring at significantly easier comps. They won't have the comparison of a four-month huge nationwide sell-in that was not repeated this year.

Okay. I know you gave your outlook on 2016 and you talked a little bit about U.S. construction. But with another month of results under your belt since reporting, what are you seeing currently as far as demand? I know Europe looks worrisome to you. What areas in particular are particularly weak in Europe? Is there any other improvement in the U.S.? Commercial construction you said was better, but is there anything that is presenting more upside or down side then you had originally expected?

No, I think pretty much in line with the outlook we provided. Despite some weakness in the second quarter, our consumer segment should be pretty strong in the second half of the year. We are excited about that. A lot of that is in relationship to the inventory adjustments, but also commitments on a number of new product sell-ins, so that will be real strong. Commercial construction continues to be good in the U.S.

The biggest problem that surprised us in the quarter versus where we were is Germany and France. As you'll recall a year ago, we actually had real -- two years ago, we took some aggressive cost-cutting action in Europe. A year ago we had some pretty solid, not big, but 4% or 5% revenue growth in Europe. Given what we had done with our expense base that leveraged the bottom line very nicely.

It was particularly driven by Germany and France that -- Germany's our largest country market in Europe, where we do about $1 billion in total sales across all of Europe, and Germany's the largest piece of that. Germany and France both went into the tank this fall. You're looking at negative sales exacerbated by a falling euro. That is not improving.

That is why -- that's the principle reason why we have reduced our guidance for the balance of the year so much. I think that a much more modest outlook for industrial in the 2% to 3% revenue growth range, driving a 4% to 5% EBIT growth for the back half of the year, is really a mix of mid-to-high single-digit U.S. construction markets and good leverage to the bottom line, and a continued expectation that Europe's going to be a problem, and the dollar's going to continue to strengthen.

Great, thank you. Appreciate it.

Ivan Marcuse, KeyBanc Capital Markets.

First one I have is for your-- the Tuf-Strand, I believe. The fiber business with Euclid. How big of a business is that? What do you see as, if you continue this market share gain that you've had, a sales potential if you will, looking out the next one, two, three years for this business?

Yes, I -- from a standing start of technology that we developed, and some technology that we acquired, we've gone from not singles and millions of dollars a couple years ago, to mid-teens. Our problem right now is capacity. We're continuing to add capacity. I suspect long term, and this is long term, that could be a $100-million market, particularly as people get more comfortable in replacing rebar, particularly in horizontal surfaces. There's opportunities to introduce it into light industrial and perhaps even into some of our more big box consumer markets.

There's a lot to do there, but the capacity issue is a function of both spending in dollars, but also making sure that we've got the right output, because it's a little bit of a tricky manufacturing process. That's where we are. But any product lines for us that go from a standing start of under $1 million to mid-teens with a prospect of something substantially bigger over the next three to five years is pretty exciting.

Great. Thanks for that detail. I appreciate it. My next question is on SPHC, and this is more of a cash flow question. How is that going to flow through your cash flow? Is this going to come through like in an acquisition? The other aspect of this question is you get a tax benefit. Does that impact your overall tax rate, or is that like a tax return that you'll receive in your cash flow over a certain period, or is it a lump sum that's -- how does the cash move?

Yes, Ivan, it's really almost like a tax receivable. It wouldn't affect the income tax rate, the effective tax rate. But it would be a benefit that we would get through reduced withholding taxes, as well as getting cash refunds from the government.

Great.

(inaudible, multiple speakers) -- NLI, or net loss carry-forward, that we'll be able to go back and capture.

Got you. On the debt that you're adding on to the revolver for this, is your intention to term this out at one point or to pay it down?

The intention is to pay it down. Over the next 12 to 18 months you'll see some pretty good cash flow benefits from the tax shield that Rusty talked about.

Okay, thank you.

Rosemarie Morbelli, Gabelli.

Frank, when you said that you expected Europe to stabilize in the second half, did I misunderstand that, or are you saying second half of calendar 2015?

No. We're saying that we would expect Europe to stabilize in our 2016 fiscal year. Our reduced guidance and outlook, particularly in industrial, is reflective of our belief that Europe will continue to be a problem for us in the third quarter and the fourth quarter, and that the dollar will continue to strengthen. As I said earlier, the change in our guidance for the industrial segment and its impact on our full-year results is really a function of strong North American business and continued expectations for deterioration in the European markets and strengthening of the dollar.

Okay, just wanted to make sure I understood properly, which obviously I did not. Could you -- when you look at your 2016 guidance, can you share with us how much of a share count decline you are anticipating, or you don't have any in that number?

We don't have anything in the number.

Okay.

But again, as I indicated earlier, we are back on an equal footing in terms of being able to utilize the cash we generate to purposes that make sense for us and our shareholders.

Okay. So one could assume that this is a rather conservative number?

Rosemarie, it really depends on Europe. Again, I think if Europe stabilizes, these are numbers that we can hit. As I indicated earlier, if Europe continues to deteriorate over the next 12 or 18 months and the dollar continues its remarkably rapid strengthening, then that could challenge those results. That's the only thing we see that's a wild card in terms of our ability to meet or beat that $2.70 for 2016.

Okay. But you could offset some of the continuing deterioration, which you don't expect at the moment, by buying back more stock, and therefore get within the number even with deterioration, or not?

It's nice to be in a position to have what is the equivalent of $70 million to $90 million of our cash flow to use in a productive purpose. That is most certainly possible.

Okay, thanks. I was wondering if you are seeing any pick up in the U.S. infrastructure? Are you getting any help from that side, or not yet?

Not really. Most of the construction pick-up is in the private sector. We're seeing improvement through distribution networks and on private sector construction, commercial construction, and improvement in residential. Infrastructure has been challenged. You've got a highway bill that's about to expire and it's been pretty modest. You don't have much agreement at government levels on big spending. There's a lot of talk about infrastructure, but it's not a big -- public infrastructure is not a big driver of our results right now.

All right. Looking back and Kirker, you said that you were expanding capabilities. Is that -- so is the decline -- I know you said you had a big order last year, which is not coming through this year, as well; but yet you are expanding those operations and you are adding to bottling.

That's correct.

So what is the real issue? Is it just the comparison and underlying demand is still there? Or the demand is not there and yet you are expanding? Can you help me understand what is going on there?

Sure. The core business itself is flat versus what was pretty solid growth for a number of years. We did not repeat a huge sell-in to a major retail chain. As it relates to bottling, we have the capability of mixing manufacturing, formulating the fingernail enamel products in Europe, and also bottling in Europe. We do not have much in the way of robust bottling capacity in our largest market in the U.S., and that's in the process of being changed.

All right. Lastly, if I may, can you quantify what could be a positive impact from the lower price of oil on your raw materials?

Hard to do at this point in time. One of the things that we've reminded folks on the calls before is that we are on a FIFO inventory method, versus most of our peers that are LIFO. You'll typically see the benefit of lower raw material costs show up in our results 60 to 90 days later than it might had we been on a LIFO inventory accounting method. But it most certainly -- we would expect our gross margins to be improving in the next couple of quarters. I think we would also expect to see some significant improvement in the coming quarters or next six months or so in freight.

All right. Is that enough to help also your working capital -- lower cost of inventory and such?

I think so. The two biggest issues in working capital, as we sit here in the second quarter, are reduction in sales in Europe, and so lower sales base, and the inventory adjustments at our major retailers. Most of it will, we believe, be adjusted positively in the late winter, early spring months.

Okay, thank you.

Jason Rogers, Great Lakes Review.

I wonder if you could talk about pricing, and if you've seen any pressure on either the industrial or the consumer side to give up some pricing, given lower oil?

Typically that's not an issue on most of our product categories. I don't know that we've had, anyway -- there's not much in the way of price in these numbers, but there's not much in the way of reductions. There's one exception, and that was the previously mentioned infrastructure. There's not a lot of infrastructure spending out there. So what little projects are out there, whether it's highway bridgework or other public projects, there's a lot of competition for those. There's pricing pressure on those types of products. But for the most part in the other categories, it's not an issue for us. Our challenge in terms of gross margins has really been reduction revenues, product mix, and the currency impact on raw materials.

What is the estimate for both CapEx and tax rate for fiscal 2015?

Sure. Capital spending should be close to $90 million, and the effective tax rate should be below 30% -- a little below that.

Thank you very much.

Christopher Perrella, Bloomberg Intelligence.

In your guidance for the second half of the year, what are you forecasting for currency? Are you expecting euro-dollar to stay at the current exchange levels, and plotting that out for the back half of the year?

No, I think we expect that the euro to be in the low to mid-teens, which would forecast some further deterioration. If it accelerates to parity or something like that, then I think that will happen as a result of even further deterioration in the economies. That could pose problematic for us in terms of our industrial businesses.

Okay. In terms of the improving or potential improvement in freight costs and raw material costs, is there any of that in your second half guidance as well, or would that be a benefit or potential upside to the range you've outlined?

There's very little of that in there. It's a potential upside. Given my comments on FIFO inventory, I would expect to see it in the fourth quarter.

All right. Thank you very much.

Kevin Hocevar, Northcoast Research.

This is Clay Ruffner calling on behalf of Kevin Hocevar. Thanks for taking my question. It looks like guidance was lowered by about $0.13 for fiscal 2015. Just curious if you guys could break out how much of this change is due to Europe, FX, Kirker -- any other factors, if possible?

I think the categories that have really driven it are four. Kirker and Synta both had huge first-quarter and first-half results a year ago in our consumer segment, and those were not repeated. We commented on that in the first quarter, and particularly with Kirker it proved to be true again in the second quarter.

The second issue is absolutely particularly pronounced in the second quarter -- deterioration in the European economies and FX. It's not just versus the euro. I commented on the significant deterioration. In local currencies we had 17% revenue growth in Latin America, and that was reduced by a currency impact of 7%, so that's the biggest factor.

The final area is really just the inventory adjustment impact in the second quarter on our core consumer businesses, which we think is temporary. All the signs are relative to new programs and where inventory levels are relative to consumer takeaway, we think we're going to be in good shape there.

Okay. Great, thank you. One last question, if I may. The sales guidance for the second half of the year for consumer and industrial implies acceleration from what we saw this quarter; but I would imagine FX should become a bigger headwind going forward. Outside of some of the restocking benefits in consumer, just curious on what you guys see as driving this acceleration in sales growth to offset -- more than offset -- these FX headwinds?

Sure. Well, 90% of our consumer business is North American. While the FX headwinds can impact consumer, particularly in the UK and Canada, it won't be nearly as pronounced as industrial. In our industrial segment, about 50% of our revenues are outside of the United States. That's really the area where we anticipate continued strengthening of the dollar, continued weakness in Europe.

This is a repeat of comments earlier, but it's really a tale of two geographies. We're seeing some good solid growth and nice leverage to the bottom line in our U.S. industrial segment, construction products categories, OEM categories. SPHC will be part of that. We are anticipating continuing strengthening of the dollar and deterioration in Europe for the rest of the year.

Okay, great. Thank you so much.

Kevin McCarthy, Bank of America.

Hi, this is Wei Zhang calling on behalf of Kevin. I just had a quick question on SPHC sales. You indicated that you're expecting $170 million for the second half of the year. I'm comparing that to roughly $400 million on an annualized run rate. I'm wondering if there's any seasonality in that $170-million figure, or are you lowering sales expectation for next year?

No, it's five months of results. Really, it's effectively January 1 through May 31. There is a little bit of seasonality in their business, like the rest of our businesses, in the third quarter. Their December, January, February period is a somewhat -- they're not as seasonal as some of our businesses, but seasonally lower than for instance our fourth quarter or our first quarter would be with the SPHC businesses. Those are the two factors, but that business on an annualized basis is at or better than a $400-million run rate.

Okay, great. In terms of reconsolidation, are there synergies that you anticipate, either in terms of cross-selling or lower costs?

I think those are things that we will look at as we get into the end of 2015 and 2016 in terms of what, if anything, we can do relative to some cost savings or business combinations. But none of that will impact 2015.

Okay, great. Thank you.

Thank you. We have no further questions. I will now turn the call back over to Frank Sullivan.

Thank you for your participation in our call this morning. While our second-quarter results are disappointing, as I indicated earlier, it's actually a very exciting time here. After a 10-year fight, and a diversion of a significant chunk of our capital, we're happy to have the SPHC businesses rejoin RPM. We're happy to have available to us and our shareholders 100% of the capital that we generate to put towards productive purposes, whether it's investments in growth or return of capital to shareholders. We look forward to reporting sales and earnings growth in the next couple of quarters, and to answering your questions throughout the balance of the year. Thank you. Happy new year, and have a great day.

Thank you, and thank you ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.