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From Gabelli & Company, we have Rosemarie Morbelli. Please go ahead.
Thank you. Good morning, everyone. Frank, I was wondering if, as you are going through your MAP project, if you are seeing some kind of disruption on your operations which would result or have resulted in slower growth than you anticipated outside of the weather impact. I'm assuming that it has to be disruptive.
Yes. I'm not aware that we're seeing disruption on the sales front. I think there's a couple areas where we're doing some reorganization, for instance, in Europe, where we got some work to do and some opportunities that were perhaps bigger than we realized. So we've had some leadership changes in certain areas, and tha...
We're moving to get the right leaders in the right places so that we can be properly focused. But in general, I think the enthusiasm for this program is across RPM, and we're continuing to see pretty solid revenue growth.
You are feeling most of the impact, and what are you doing to offset it? Any new steps versus those you have expressed on November 28?
I think the slowdown in Europe is pretty universal. We're seeing it across most all of our business categories. So unlike what we feel is some weather-related impact on revenues in the second quarter in the U.S. is temporary, I would expect us to see relatively flat growth in Europe for the balance of the year.
And beyond that, again, I think we'll be in a position as we get things executed and realize, to talk in hindsight in more detail. But we have a pretty intense focus in a number of areas, including Europe, in terms of some G&A consolidation and also the manufacturing and operations work that is happening across RPM.
And if I may ask one last one. As raw material costs are coming down, do you think that you can still achieve your price increases?
Raw material prices are coming down, as I said, 1% in the second quarter versus the first quarter. They're up 18% year over year. And in certain categories like silicone, which is a critical component, for instance, for our DAP business, consumer DIY in our Tremco business, those raw materials are up 61%. They are not ...
There continues to be some capacity issues there. So the raw material situation today is a real mixed bag. There are some improvement in some packaging areas, but in other packaging areas particularly related to steel and/or rigid packaging, you're continuing to see some price issues. So it's a mixed bag of volatility,...
And so there are a number of areas, and silicone is a key one, where we had been dealing with multiple price increases across a 12-month period, and we're continuing to try and manage that.
And we have Frank Mitsch on the line. Please go ahead.
Hey, good morning, Frank. And first off, congratulations on finding a franchise QB.
Yes. Thank you very much. We're happy Bronx fans in Cleveland, Ohio.
I'm just going to say we welcome you to come visit again next year.
I will definitely look at the schedule. Hey, obviously, the November 28 Investor Day, I thought, went very well. And you guys laid out a pretty good MAP to Growth. It happened late in the quarter, during -- late in the fiscal second quarter, and obviously, a bit of an earnings miss here, I was wondering, was there anyt...
No. I'll tell you two things that I think, one was a mistake in our part; and the other was something that we didn't anticipate and maybe should have. The mistake in our part was, when we're looking at the volatility of this year relative to all of the changes that were coming and all of the related charges, we decided...
The reason we decided to provide specific guidance for the third quarter was that very reason. Again, I think that simple math would suggest that there was going to be a $10 million or $12 million turnaround in tax expense year over year, and so a couple other items like that. The second item was the accounting change ...
100% of the shortfall EPS-wise from last year to this year could be attributed to what was almost a $10 million reversal where we had $3.5 million of gains last year, this is in our captive insurance portfolios, and this year, I think we took a $6-or-so million hit. And that will be a challenge that we communicate bett...
And then as most of you would know, by the end of '12 or '13, we had recovered more than had been written off in impairments in terms of the market recovery. Just to give some color on that, our captive insurance companies had been a very smart way for us to manage certain levels of insurance. Our total portfolio, it's...
Historically, you would only record realized gains or losses. In this case, you mark to market, but if it's actually not a realized gain or loss, there's no tax consequences. And so we'll hide that off and explain that and separate that from our market issues. That item alone is the EPS reason why we're below last year...
I think it was, in hindsight, for a couple of reasons, maybe a mistake not to provide guidance, we certainly would've guided people differently in the second quarter, and I think looking at us, looking at our peers, I think that makes sense. With the numbers out in the third quarter and the progress that we're making i...
That's extremely helpful. And there was a lot of commentary regarding the negative weather impact, and you'd indicated that you thought that was kind of a temporary sort of impact. So should we be thinking about kind of a recovery in that regard as a fiscal fourth quarter event when the spring comes around and we make ...
There's a couple areas of possible upside, if you will. We've been dealing with weather issues in our consumer segment for most of last year. It's not been unique to us, it's not been a very good painting year. I suspect that the wet fall will highlight that for other folks in the exterior painting categories.
I think there's pent-up demand in a lot of the consumer businesses and so if we have a reasonable spring, you'll see that. I think there's continued strong growth potential in the Tremco Roofing restoration coatings. We've got a good backlog there. So it'd be nice to see that upside.
Time will tell. But there's every indication in terms of our construction products, our roofing products, the Dryvit systems and a lot of our consumer products that some of the negative impacts have been weather-related and temporary.
Very helpful. Thanks so much, Frank.
From Baird, we have Ghansham Panjabi. Please go ahead.
Hi, everyone, good morning. Happy new year to you.
Thanks, Frank. I guess, going back to Frank Mitsch's sort of question as well. On industrial, and thinking through the overseas market, what exactly are you seeing in Europe? Was Europe actually down year over year in the quarter from a volume standpoint? Can you give us a sense as to how the other regions did? And the...
Sure. So excluding acquisitions, Europe was flat, and in our industrial segment, that was disappointing. Latin America continues to be challenged as well. And so regionally, those are the two most significant areas for us outside of North America.
North America continued to be pretty solid. And as I highlighted earlier, obviously, there's some real strong elements of organic growth that helps drive organic growth through the whole segment up about 3%. We don't see a lot of strength in Europe right now, and so I don't think there's any big disaster, but it's not ...
Got it. And then just my second question, kind of going back to raw materials and pricing, did price cost -- just purely focusing on price cost, did that come in where you thought it would during the second quarter relative to your initial expectations? And then what is reasonable from our vantage point to kind of thin...
So I think we're making the headway in terms of raw material costs and price increases in our industrial segment and our specialty segment. That's not been true in our consumer segment. I mentioned silicone, that's a big part of it, but it's been a certain other packaging categories. So our consumer segment is more til...
But we're continuing to make good progress there and we would expect to make progress across the entirety of our consumer segment customer base by this spring. And that, as I mentioned earlier, in part is in relationship to some line review wins we had last year, which came along with some commitments on price that are...
But we'll also be able to provide more data because we have better and more accurate data at our fingertips today, certainly at my level, than we've had in the past.
OK. Perfect. Thank you so much, Frank, and best wishes for the year.
From RBC Capital Markets, we have Arun Viswanathan. Please go ahead.
Great. Thanks. Good morning, guys. Just wanted to understand, I guess on industrial, I guess relative to your expectations, did those results kind of come in where you guys expected them? Or was there some extra softness? And I'm also curious just on the margin front, was there some extra cost that you potentially incu...
I think the disappointment in our industrial was related to more in the revenue side, some of the weather-related items that we talked about, as well as flat results in Europe. 50% of our industrial segment is outside of North America and we did not experience growth there, and so that was a challenge for us. We are ma...
FX certainly -- FX also negatively impacted us both on translational and in certain places, transactional perspective, and again, our largest exposure internationally is in our industrial segment.
And then just two quick follow-ups. So first off, the tax rate, just wanted to understand, do you expect to see that 26% rate from here on? My apologies if I missed that.
That's correct. In the third and fourth quarter, that's about where we would see taxes.
OK, great. And then secondly, at the Investor Day, you talked about kind of maintaining a level of sales growth that's required for that 540 basis points of margin improvement. Do you still see that as relatively achievable? Or was there potentially some greater slowing that would cause you to potentially adjust that v...
For the things that we control, we see that as relatively achievable, and in fact, in the quarter, we did. I think between organic growth and acquisitions, we're in the 5.5% or 6% range. Foreign exchange negatively impacted that by two points. Who knows where that will go? The dollar seems to be weakening as we speak t...
But the direction of the dollar and the stock market are anybody's guess in the coming months and quarters. But we feel pretty good about our ability to generate, through a combination of organic growth, by keeping our nose to the grindstone and our sales and marketing people focused on the market and our customers, as...
From Vertical Research Partners, we have Kevin McCarthy. Please go ahead.
A couple of questions, as you've reinstated earnings guidance, as I look at the range for the fiscal third quarter and irrespective of the level of the guidance, I guess I'm impressed that you have a very narrow range of just $0.02 from top to bottom. Can you comment on the level of your visibility at this point as you...
So I think the -- great question, the variables will be revenues, and some of that -- people would be tired of this, but some of that will be weather-related. So far, we seem to be in pretty good shape there. And certainly, the foreign exchange will be a variable that we don't control. So we'll see where that goes, it ...
And then the third variable, which, again, I mentioned, I think we will figure out how to carve out so that it's obvious as to what the impact is, but also separate it from our core operating results as this mark to market. Last year, I think we had $3.5 million gains on a pre-tax basis in the third quarter.
More like $5.5 million. And this year, we'll end up certainly with some level of millions of dollars of losses if the market stays where it is. So there could be a material swing there. That's a non-operating item that we will be sure to specifically address.
Those are the variables. You separate that and I think the variables are really revenues, and weather makes a difference in the third quarter, particularly in our consumer segment. If you get an early spring, a lot of times, we'll get strong shipments particularly after the January year end, so a lot of our big account...
So that's the biggest variable I would see in revenues and where it might come from, and then the other's FX. I think we have expenses pinned down very well, and I think we're continuing to generate a growing level of restructuring savings that we're pretty confident in.
That's really helpful. And with regard to the weather impact, have you quantified or attempted to quantify the aggregate impact in the fiscal second quarter? And how that might have split between industrial and consumer?
I don't have that off the top of my head, Kevin, other than knowing that we had disappointing results in the three businesses I mentioned: Tremco Roofing, Dryvit and some of our consumer product categories that are exterior-use products. And we believe those shortfalls to our internal plan were related to weather.
And then last one, if I may, just coming back to guidance. Do you feel as though, looking ahead to the May quarter, that you would be in a position to compare positively on a year-over-year basis on the bottom line?
From Morgan Stanley, we have Vincent Andrews. Please go ahead.
Thanks. I'd actually just like to follow up on that fourth-quarter question, just in terms of -- and I appreciate the comments you had, Frank, about guidance and obviously, we were all, including myself, ahead of things for 2Q and now probably 3Q. Does that extend to 4Q? It would seem logical if we got 2Q wrong and 3Q ...
Yes. I don't think we're in a position to provide guidance for the fourth quarter now. I think on the April call, we will provide the same type of specific guidance then on the fourth quarter that we have provided in the third quarter. And then I think we will be in a better position as we look into next year to provid...
As I mentioned, in hindsight, it seems like the right thing to do, given all the variabilities and all the restructuring charges that we would have and not knowing the timing of that. But certainly, in hindsight, it did not help us to not be providing some high level of guidance. And so I think it was as much a communi...
Fair enough. And I appreciate the candor on that. Just a couple of other follow-ups. The wet weather, was that primarily a September issue with the hurricanes or was that actually an October and November issue as well?
It was the wettest record on fall -- or fall on record -- or the second wettest fall on record, and it was a great frustration relative to -- we've mentioned Tremco Roofing a number of times, we've got good backlog and good order flow and a lot of projects that were delayed or put off or interrupted specifically. And i...
OK. And maybe just one last quick one. If you could just tell us roughly what you think the FX headwind will be in the third quarter and fourth quarter that would be helpful.
Yes. It's hard to say. It was two percentage points of sales in Q2. I would hope it would be a little bit less than that, but I think that's probably a number at this point you can count on.
That's what I would stick in a model. I'd say that the dollar's starting to weaken a little bit relative to the fed easing off on further rate increases, and so -- but 2% is probably what I would expect, and depending on where things go, maybe it won't be quite as negative.
OK. Thanks very much. Appreciate all the comments.
From KeyBanc, we have Mike Sison. Please go ahead.
Hey, guys, happy new year.
Happy new year, Mike. Thank you.
Frank, when you think about the fourth quarter, I know you don't want to give specific guidance, but can you maybe talk about some of the year-over-year positives that you'll see as tailwinds for the fourth quarter in terms of earnings growth?
Sure. So I think the fourth quarter will be the first period where some meaningful MAP to Growth savings will start to be realized. We announced five plant closures in this quarter, and as I commented on earlier, in some cases, we have WARN Act requirements, in other cases, it's just an internal announcement that, obvi...
But in many instances, the operations aren't ceased for 60 or 90 days, and at that point, you're starting to save the dollars. The negotiations that we have been having with a lot of our key vendors in terms of volume consolidation and some improvements in pricing in terms, have trigger dates of the end of January, end...
I think secondly, last year was a very disappointing quarter in our consumer segment for a number of reasons. There was a lot of competitive activity and some different changes in the marketplace. That all shook out positively for us in terms of market share gains as we got into the early summer months. And so I think ...
I think those are the principal categories that we see us driving what will be a year-over-year positive fourth quarter.
Great. And then just one quick follow-up. You talked about acquisitions as still a core focus for RPM. Any update on the environment? Any areas that you think you're going to be particularly focused on in acquiring over the next couple of quarters?
We completed in this last quarter another cleaning category product for Rust-Oleum, Mold Control, and that's a pretty exciting category for Rust-Oleum in terms of growth. We completed this year a relatively small product line focused on railcar called Strathmore with Carboline, and that's turning into a real nice acqui...
I don't expect our deal flow to be any bigger than what we communicated in November 28, which is somewhere in the $150 million to $200 million a year, made up of multiple deals. But the deal flow out there is still pretty solid and we're working hard to find more opportunities like that.
From Seaport Global Securities, we have Mike Harrison. Please go ahead.
Kind of sticking with the acquisition theme. You did mention Nudura is there but it looks like the contribution from Nudura was pretty solid in the quarter. I know that, that's a complement to drive it, but I'm guessing it does not have the exterior -- the weather-related impacts that drive it. So can you just talk a l...
Sure. That was a revenue base. We're very excited about Nudura. When you look at the durability, particularly as there are concerns around weather-related events and if you look at coat changes in relationship to the energy efficiency of the insulated concrete form structure that Nudura has, we're big.
We're long Nudura, we're very bullish about it. There are good synergy opportunities with Dryvit and there are also good synergy opportunities with the Tremco Sealants, part of our construction products group. And as we get into what is typically our March growth and strategy, the real challenge for us is to be -- is t...
And we just got to get out there and promote it and get it specified in greater areas, in greater amounts. But a very exciting opportunity and a great fit with multiple RPM product areas.
All right. And then you mentioned increasing the advertising spend within the consumer business. It seems like consumer had kind of the biggest margin shortfall, at least relative to my expectations. A lot of that was also raw material but just wondering how much the additional advertising spend was maybe weighing on t...
No, $200,000. So what was up in the quarter, only $200,000 year over year, and it's up a couple million dollars on the year. But it's a category that, in light of a focus on cost improvement and restructuring that we're not cutting. In fact, in certain areas, we're promoting.
And I think we have to do that, particularly in light of what's been disappointing consumer takeaway, a lot of it, we believe, is weather-related. But as we get into the spring as well, we need to continuously lead in a lot of these categories to promote the use and work with our major customers to get people in the st...
Got it. And then a quick one for Rusty. Just in terms of the diluted share count around the end of the quarter, I know you didn't redeem that convertible bond until the end of the quarter. But it looks like, for accounting purposes, that convertible was excluded from the share count for the entire quarter.
Yes. For the GAAP set of financial statements, we're on the two-class method. And the two-class method has a lower share count because we're not including unvested equity awards in the share count. And then on the non-GAAP set of numbers -- the as adjusted set of numbers, with the as adjusted EPS, it's $0.52.
We're using a higher share count because were using the treasury method for shares and that does include the shares from the convert. We're going to see the benefit of the convertible redemption in future quarters but we did not get it so much in the second quarter because we redeemed it three days before quarter end.
So maybe a better way to ask the question is what was the diluted share count at the end of the quarter that we should be using for Q3?
Yes. In terms of the share count for Q3, it will be down about 3.3 million shares for the impact of the convertible. So it would be down in the 133 million range for the quarter. And then, on an annualized basis, we should pick up $0.03 to $0.04.
From Northcoast Research, we have Kevin Hocevar. Please go ahead.
On the pricing agreements that you've -- discussions you've had, it sounds like you locked in pricing for February, March time frame. Are those -- is that across all the segments is it focused -- it sounds like maybe in consumer to some degree, just wondering if you could do some clarity on where the pricing's being re...
Sure. The pricing in our consumer and specialty products has been happening throughout the year. We did have some price increases in our consumer businesses earlier in the year, and across much of our customer base. But in certain areas where we had significant competitive line reviews a year ago and/or new product cat...
And those lock-in periods are expiring this spring.
Gotcha. And just the tended $0.12 EPS, I just want to make sure, is that a non-GAAP number that excludes all the MAP to Growth and other restructuring charges?
Yes. That is exclusive of the -- whatever the charges will be in the third quarter. And again, we'll highlight that in detail, obviously, when we report the quarter.
From JPMorgan, we have Jeff Zekauskas. Please go ahead.
Thanks very much. Your cash flow has improved for the six months by about $30 million, but your deferred tax, there was a positive change in deferred taxes of about $30 million for the six months year over year. And there was also an $11 million positive swing in realized and unrealized marketable securities cash flow....
Sure. Last year, Jeff, you're seeing a big number on the deferred tax line on the cash flow, a use of cash of $32 million, and that's really an adjustment to the net income lineup above for some nontax impact of our, what I would call our legal entity realignment project last year, which allowed us to get some big tax ...
We have proceeds from sales of marketable securities this year of $35 million. That was actually cash we've been able to move from our captive insurance companies, which Frank mentioned before, for use in our operations, because our captives were a bit overcapitalized and as a result, we were able to get a net positive...

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