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Executives

Frank Sullivan – Chairman & Chief Executive Officer

Rusty Gordon – Vice President & Chief Financial Officer

Barry Slifstein – Vice President, Investor Relations and Planning

Analysts

Jeffrey Zekauskas – JP Morgan

John McNulty – Credit Suisse

[Alex Hefrema] – Bank of America Merrill Lynch

Rosemarie Morbelli – Gabelli & Company

Charles Dan – Morgan Stanley

Ivan Marcuse – KeyBanc Capital Markets

Edward Yang – Oppenheimer & Co.

Jason Rogers – Great Lakes Review

Richard O’Reilly – Revere Associates

RPM International, Inc. (RPM) F2Q 2013 Earnings Call January 8, 2013 10:00 AM ET

Operator

Good day, ladies and gentlemen. Welcome to the RPM International’s Conference Call for F2Q 2013. Today’s call is being recorded. This call is also being webcast and 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 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 proceed, sir.

Frank Sullivan

Thank you, Gwen. Good morning and welcome to the RPM International, Inc. Investor Call for F2Q ended November 30, 2012. We are pleased with our performance in F2Q which was ahead of our plan and consistent with our expectations for growth for our F2013.

Our consumer segment businesses generated strong top and bottom line growth as a result of what we believe to be a return to more normal spending in home maintenance and repair and small project redecorating driven by the dynamics of an improving housing market. Gross margins improved as a result of some raw material cost relief for the first time in basically six to eight years, and particularly at Rust-Oleum as a result of positive impact of a multi-year effort to improve distribution, supply chain, and manufacturing efficiencies.

Acquisitions also contributed to the strong consumer segment sales and earnings growth. Last spring we acquired Australian-based HiChem which is continuing to show strong results under the leadership of its original owner and founder Ivan Moldovan; Synta in the fall, a deck coating product line whose results will be more impactful in the spring and summer months given the seasonality of that business; and Kirker this fall, a leader of nail polish enamel.

Our industrial segment businesses generated what we believe to be excellent results given the underlying uncertainty for many factors in our core North American and European markets and economies, with one exception.

That exception is our Building Solutions Group’s Roofing Division. You’ll recall that in F1Q we communicated a change in leadership and a refocusing of the business on its core roofing material and insulation businesses. This has led us to exit certain contracting and service revenue areas and a winding up of the Roofing Division’s international growth efforts. Additionally, from a market perspective, much of the major reroofing spending over the last few years had been driven by local, state, and federal funding for schools, institutions and various government work. Public funding levels in Canada and the US for roofing markets has been reduced over the past year. As a result of these factors we expect the BSG Roofing Division to operate at levels below last year for the balance of F2013.

Excluding the drag of the BSG Roofing Division results, our remaining industrial segment businesses collectively delivered double-digit sales and earnings growth over the prior year’s F2Q. In the quarter we experienced generally flat performance from our European business units, a performance we believe is particularly strong given the economic challenges continuing in Europe. We also benefitted from an improvement in foreign exchange translation impact versus F1Q, an improving construction market in the US, strong results from many of our high-performance coatings product lines, and a positive contribution to sales and earnings growth from the Brazilian-based Viapol acquisition we completed in F1Q.

When you look through the impact of our India-based Kemrock investment which delivered $5 million of after-tax catch up earnings in last year’s F2Q as a result of our exceeding a 20% ownership interest at that time, and the more than $10 million hit to earnings this quarter from the write-off of our remaining equity investment in Kemrock, we feel particularly good about a quarter that delivered year-over-year sales growth of 11% and earnings growth of 17%; and feel that excluding extraordinary items, these results are indicative of what we will generate for the balance of our F2013.

That completes my opening comments. I’d like to turn the call over to Barry Slifstein, RPM’s Vice President of Investor Relations and Planning, to provide additional detail on our F2Q results.

Barry Slifstein

Thanks, Frank, and good morning, everyone. Thank you for joining us on today’s call. I’ll review the results of operations for our F2Q 2013 and year-to-date on an as-adjusted basis excluding Kemrock adjustments in both the current and prior year, then cover some November 30, 2012, balance sheet and cash flow items. I’ll then turn the call over to Rusty Gordon, RPM’s Vice President and Chief Financial Officer, who will discuss the outlook for the remainder of F2013.

On an as-adjusted basis, consolidated net sales increased 11.1% year-over-year to $1.02 billion, principally due to volume improvement of 2.2%, price increases of 1.6% and acquisition growth of 8.4%. These increases were partially offset by unfavorable foreign exchange of 1.1% which has improved on a sequential basis from 4.3% unfavorable in F1Q. Industrial segment net sales of $691 million, which accounted for 68% of total sales, increased 7.7% over last year with volume improvement of 1.5%, price increase of 1.3% and acquisition growth contributing 6.5% - all of which were partially offset by unfavorable foreign exchange of 1.6%.

At the consumer segment, net sales of $326.4 million increased by 18.9% over the same quarter last year, with 3.9% attributable to unit volume increases, 2.4% from positive price, and 12.7% attributable to acquisition growth. Unfavorable foreign exchange of 0.1% partially offset these increases.

Our consolidated gross profit increased 15.2% to $425 million from $369 million last year, principally due to higher sales volumes and price increases which recovered margin lost in earlier quarters due to material inflation. As a percent of net sales, gross profit increased from 40.3% last year to 41.8% this year, representing an increase of 150 basis points. Consolidated SG&A increased 15.5% to $325.8 million from $282.2 million last year due to additional SG&A from acquisitions and increases in variable distribution and compensation costs as well as higher pension, professional fees, bad debt and insurance expenses.

Earnings before interest and taxes, EBIT of $100.4 million increased 1.3% from $87.8 million last year due primarily to strong consumer segment and certain industrial segment business performance, improving gross margins and contributions from recent acquisitions. At the industrial segment, EBIT increased 6.9% to $78.1 million from $73.1 million a year ago, reflecting improvement in construction-related products and the Viapol acquisition, which were partially offset by weaker results in European-based business and the Building Solutions Group’s Roofing Division.

Consumer segment EBIT increased 44.1% to $38.6 million from $26.8 million last year driven by higher sales volumes, a partial recouping of gross profit margin lost in previous quarters, and strong acquisition performance from HiChem, Synta, and Kirker. Corporate other expenses of $16.3 million increased $4.3 million from $12 million last year primarily due to higher insurance, professional fees, and pension expenses this year.

Interest expense increased from $17.9 million last year to $19.9 million this year primarily due to borrowings associated with this year’s increased acquisition activity and the issuance of a $300 million bond in October. Investment income was $1.4 million for the quarter, which was relatively flat to prior year. Our income tax rate of 30.5% compares to 31.4% last year generally due to fluctuations in our jurisdictional mix of income, changes in valuation allowances, and difference between forecasted and actual results.

Net income increased 17.4% to $52.5 million compared to last year’s $44.7 million. Diluted earnings per share increased 17.6% to $0.40 per share compared to $0.34 per share last year.

With regard to the year-to-date results, consolidated net sales increased 8.7% to $2.1 billion from $1.9 billion last year, principally due to unit volume improvements of 2.4%, price increases of 1.8% and acquisition growth of 7.2%, which were partially offset by unfavorable foreign exchange of 2.7%. Net income attributable to RPM shareholders increased 13.0% to $137.3 million compared to last year’s $121.5 million. Earnings per share increased 11.8% to $1.04 per share this year compared to $0.93 per share last year.

And now a quick look at the balance sheet and cash flows: cash from operating activities of $127.6 million increased $17.6 million from last year. The improvement was primarily driven by increases in other accrued liAvilities of $51.6 million, accrued loss reserves of $10.7 million, and a decrease in prepaid expenses and other current and long-term assets of $24.8 million which were partially offset by unfavorable net uses of working capital of $76.5 million.

Depreciation and amortization expense was $40.9 million compared to $36.9 million last year. CAPEX of $30.8 million for the first six months of this fiscal year compares to $18.4 million for the same period last year. Our accounts receivables days sales outstanding was relatively flat to last year at 61 days. Days of inventory was relatively flat to last year at 83 days.

Finally, a few comments on our capital structure and overall liquidity. As of November 30, 2012, total debt was [$1.41 billion] compared to last year at $1.10 billion. Our net debt to capital ratio was 48.1% at November 30, 2012, compared to 38.7% at November 30, 2011. The increase was attributable to additional borrowings to fund acquisitions. Our long-term liquidity at November 30, 2012, was $962 million, with $262 million in cash and $700 million available through our bank revolver and AR securitization facilities.

In October, 2012, RPM issued a ten-year $300 million bond with an interest rate of 3.45%. With that, I’ll turn the call over to Rusty Gordon.

Rusty Gordon

Thank you, Barry. Now I would like to comment upon our outlook for the remainder of this fiscal year. We are optimistic that RPM’s balanced portfolio will continue to drive successful results overall, as success in the home improvements sector and rebounding commercial construction will continue to offset our challenges in Europe and weaker BSG Roofing results.

For the remainder of this year we are confident that our margin recovery will continue and that the acquisitions completed in F2013 will be accretive. In addition, it appears that the foreign exchange translation headwinds experienced through the first half will be less of an issue as we progress through the back half of this fiscal year. It seems that the uncertainty in Europe’s economic outlook has lessened somewhat.

Based upon our most recent outlook we are maintaining our F2013 guidance for consolidated sales growth of 8% to 10% and earnings growth of 9% to 12%. This equates to an EPS range of $1.80 to $1.85 on an as-adjusted basis. For the full year, we now expect consumer sales to come in at the higher end of the previously stated 8% to 10% range while industrial sales are now expected to come in towards the lower end of the previously stated 6% to 10% range.

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

Question-and-Answer Session

Operator

(Operator instructions.) Our first question comes from the line of Jeffrey Zekauskas with JP Morgan. Please proceed.

[Silka Ku] – JP Morgan

Good morning, this is [Silka Ku] for Jeff. On the conference call last time I think you indicated the roofing business was roughly $400 million in size and it’s mostly a North American business. What do you think the level of sales will be this year given that you’re exiting certain pieces of the business?

Frank Sullivan

We don’t disclose specific details of our individual business units. I can tell you, of that prior $400 million it’s about 50/50 between core roofing material sales and service and contracting, and there are elements of the service and contracting business that we are exiting along with an international effort that two or three years ago got off to a good start but was heading towards more service contracting, non-material sales at profit levels that were unacceptable. So we are in the process of winding that up and closing it. And on a year-over-year basis you’ll be seeing sales and earnings declines that are double-digit.

[Silka Ku] – JP Morgan

Thanks.

Operator

Our next question comes from the line of John McNulty with Credit Suisse. Please proceed.

[Avi Regina] – Credit Suisse

Hi, this is [Avi Regina] calling in for John, good morning. Just a couple quick questions: so could you touch on any potential benefits you’ve started to see post-Hurricane Sandy in terms of repair and maintenance work in your Northeastern business, also what you could see upcoming in the next couple of months?

Frank Sullivan

In general our waterproofing business, our sealant business, a lot of our construction chemical business and high-performance coatings are all doing quite well. If you look at kind of the tale of three stories of our industrial segment businesses, you’ve got the Roofing Division which we just commented on and commented on in F1Q; you have our European-based businesses which are relatively flat on the top line and modestly down in the bottom. And so that leaves about 60% of the business that’s generating solid double-digit sales and earnings growth with decent leverage.

And I think some of that is related to the impact of this and some of it is related to ongoing good performance of the high-performance coatings product lines in particular, and a steady recovery in construction. We’re not close to where we were in 2007 in terms of revenue levels but we hit bottom probably a year and a half ago and are just seeing solid steady improvement in commercial construction in the US in particular, which seems to be generating decent, steady, consistent sales growth.

[Avi Regina] – Credit Suisse

Okay, got it. And then just a quick follow-up on raw materials: has your outlook on raws changed meaningfully over the last three months or so for your full-year outlook kind of based on what you’ve seen recently in acrylics, epoxy, latex resins as well as [TIO2]?

Frank Sullivan

No. We’ve seen some continuing easing of raw materials, particularly in relationship to the extraordinary increases in the last six to eight years. As you know, we are on a FIFO accounting basis so unlike most of our peers who are on LIFO the benefit of that showing up a little bit later – so now it’s showing up in this F2Q and will continue into F3Q. And as I commented earlier as well, particularly at Rust-Oleum, they’ve had a multi-year effort in terms of distribution, supply chain and manufacturing improvements that are starting to show results as well. And while that’s not directly related to raw materials it’s certainly showing up in an improved gross margin in our consumer segment.

[Avi Regina] – Credit Suisse

Okay, got it. And just the last quick one if I may: on the corporate expense line you’ve been running at about $16.5 million or so per quarter in the first half. I guess should we annualize that for the full year to kind of like a mid-$60 million sort of level? Is that the right ballpark?

Rusty Gordon

Yes. I originally commented back in July when we talked about guidance that pension would be a $10 million increase year-over-year for F2013. Well, it appears now it’s more like a $12 million or more increase. So I believe the $15 million to $16 million range is the right one to use for corporate other as we go forward this year.

[Avi Regina] – Credit Suisse

Okay, great. Thanks very much.

Operator

Our next question comes from the line of Kevin McCarthy with Bank of America Merrill Lynch. Please proceed, sir.

[Alex Hefrema] – Bank of America Merrill Lynch

Good morning, this is [Alex Hefrema] for Kevin. Frank, going back to your Roofing business, can you give us an idea of what’s the breakdown between sales into commercial end markets and into government segments, state and local governments?

Frank Sullivan

Yeah, I don’t have that in particular. It’s entirely reroofing work – I say entirely, 95% is reroofing. They get the odd new construction. And you know, the government business is down, and I say government in general – whether it’s education, whether it’s state-driven, whether it’s certain areas of government work. That’s also true in Canada where we have a very strong presence and market share.

And so we would anticipate both as a result of the market dynamics and the internal changes that we are effecting that you’re going to see continued sales and earnings declines for F3Q and F4Q; but that we will have gotten through that and will certainly be staring at easier comps. And so we would expect a better performance in F2014.

[Alex Hefrema] – Bank of America Merrill Lynch

Thank you. And now turning to Europe, can you just maybe elaborate what are the key areas of weakness in terms of product lines? And also maybe I sense some optimism in terms of at least stabilization in Europe – what’s your outlook for demand for Europe products over the next three to six months?

Frank Sullivan

Sure. When you look at Europe, when we disclose on an annualized basis our geographic presence we had about $850 million last year in revenues in Europe, and 85% plus of that is in our industrial segment. I think the results on a core currency basis in Europe are relatively flat and that’s a pretty remarkable result given the underlying economic challenges.

And given the fact that the majority of our businesses are kind of in the UK, Northern Europe area we haven’t been as negatively impacted as some companies who have a broader presence in Southern Europe. We do have a good presence of businesses in Italy. Fortunately, they’re Italian-based specialty coatings manufacturers who serve a broader European or even global market. So while the Italian challenges have hit them somewhat their products are sold in a broader geography.

I guess the last comment I would make is our largest business unit there is our Tremco illbruck business and they are particularly focused on window and door penetrations. They’ve got a lot of patented products and a lot of their business is driven by continuation of energy efficiency in residential, commercial and industrial construction which continues to be a focus of European market countries in terms of building regs on much tighter basis than what we have in the US. So that has also benefited us.

I think we kind of see ourselves as being where we are and it feels like the deterioration in Europe, except for certain areas in the South, is not continuing. But obviously time will tell.

[Alex Hefrema] – Bank of America Merrill Lynch

Thanks a lot.

Operator

Our next question comes from the line of Rosemarie Morbelli with Gabelli & Company. Please proceed.

Rosemarie Morbelli – Gabelli & Company

Oh thank you, good morning all. Frank, could you talk about the trend during the quarter both in the consumer and the industrial – the areas that did better than expected, those that did not do as well as expected? Did you see a trend month-over-month of either an improvement or a decline, or was it more or less flat throughout the quarter?

Frank Sullivan

I think, Rosemarie, that the real sequential improvement was from our F1Q to our F2Q. I think first as it relates to Europe, the biggest headwind we had was foreign exchange – a real challenging comparison of the Euro to the Dollar in our F1Q. That has eased in F2Q and our expectation is that it will even be better in the second half of the year. Our businesses continued to operate pretty much at the level in F2Q as in F1Q which is flat to slightly down in Europe, challenges in roofing, and pretty solid results in the rest of our industrial businesses.

And new product introductions in consumer, particularly at Rust-Oleum – the Transformation product lines they’ve introduced over the last year and a half, from countertops to kitchen cabinets to now tub and tile. They introduced a year ago a product called Leak Seal – all of those products are doing extraordinarily well and so that’s helpful as well, and we see that continuing for the balance of the year.

Rosemarie Morbelli – Gabelli & Company

Looking at your new products, Frank, if you look at the volatility index as some companies call it, what is it as a percentage of total revenues compared to where it was last year?

Frank Sullivan

I would guess about 15% but given the diversity of our businesses and 50 independent business units it’s hard to get a good read on that. But I would bet 15% is roughly accurate.

Rosemarie Morbelli – Gabelli & Company

And last year was it lower than that or are we more or less stabile?

Frank Sullivan

I can’t really comment on that other than we did have some pretty good new product introductions going right into the recession and so the impact in 2009 and 2010 of new products was muted because we introduced them in the face of the wrong economic dynamics in the US. So we’re not facing that now and the housing market recovery, particularly as it relates to housing turnover and stability, and stability in employment, I think has gotten people back to spending on maintenance and repair and small project redecorating as they have traditionally. And that’s something that for the first and only time we saw change negatively just after the recession.

Rosemarie Morbelli – Gabelli & Company

Okay, that is helpful. And I was wondering if we could go back to the raw materials costs: how much of a benefit did you get in F2Q and do you expect it to continue? I mean we hear some raw material costs of having stabilized and staying there; others on the other hand are expected to go up, while some are coming down. So if you look at your whole basket and the pricing trends that are following the trends in raw materials – I mean if they come down how quickly do you have to give it back, particularly on the consumer side?

Frank Sullivan

Traditionally we have not given back price across any of our businesses. We have been in a cyclical six- to eight-year increase of significant magnitude in raw materials so we are still considerably behind in a number of our businesses from where we were at the gross margin level say six or eight years ago. We are seeing a mixed bag but our expectations through a combination of some easing in certain raw materials, the leverage of higher sales volume and some very focused manufacturing and supply chain improvements will result in continued gross margin improvement on a consolidated basis for the balance of this fiscal year – about 150 basis points of improvement in F2Q and I would expect to see something comparable for the balance of the year.

Rosemarie Morbelli – Gabelli & Company

And so when we look at that, if I may ask one last question on the gross margin side, what are we looking at in F3Q? I mean F3Q is usually a very weak quarter in terms of top line. It has a big impact on the bottom line and on the gross margin. Do you think that you can have the same performance as last year or is it coming down?

Frank Sullivan

Yeah, as you know we don’t provide quarterly guidance. As it relates to F2Q, while we missed consensus we are ahead of our plan and more than on track for the guidance that we provided for the year. And in my prepared remarks I indicated that the 11% sales growth and 17% earnings growth is something that we would expect to see in the second half of the year, and I think that’s true of F3Q in general. We’re seeing continued improvement in all the areas that we talked about – less impact from FX translation, some moderating impact in Europe, continued growth in certain of our industrial business and consumer businesses, and of course the positive benefit of the acquisitions we completed over the last year.

So we will have a likely stronger F3Q than we had in the prior year on an operating basis, but keep in mind it’s a seasonal low and so the percentages can look impressive but I think last year we did $0.05 earnings per share in F3Q and an additional penny on a percentage gain looks awfully impressive.

Rosemarie Morbelli – Gabelli & Company

Right. Actually having a flat quarter would be impressive because usually there’s not a run (inaudible) at a break-even level.

Frank Sullivan

I think that’s correct but you’ll recall last year we had a particularly strong F3Q because of a very mild winter and very little snow. So we had a stronger-than-usual F3Q in our consumer segment. Having said that, I do think the contribution of the acquisitions we’ve completed this year, it’s summertime in Brazil in our F3Q; Kirker, which is reported in our consumer segment is less seasonal than some of our other businesses. These can serve to offset what was an extraordinarily strong F3Q last year. I don’t think we’ll repeat that but on a net consolidated basis I think we’ll have a F3Q in which sales and earnings post positive growth over the prior year.

Rosemarie Morbelli – Gabelli & Company

Thanks, that’s very helpful. Thank you.

Operator

Our next question comes from the line of Charles Dan with Morgan Stanley. Please proceed, sir.

Charles Dan – Morgan Stanley

Good morning. I just wanted to clarify something that you said in the prepared remarks about the non-roofing businesses in the industrial segment. It sounds like those were growing perhaps ahead of your expectations so I just want to check if that’s the case.

Frank Sullivan

I think that’s correct. We anticipated… There’s been a lot of people sitting on hands in relationship to industrial capital spending but we were able to perform better in both top line and bottom line on most of our.. Basically if you carve out our comments on Europe, and Europe is what it is and I think people understand that, and kind of the restructuring efforts and refocusing efforts we have in our BSG Roofing Division, the remaining 60% of our industrial segments are showing modest double-digit growth in the top line and better leverage than what you see on a consolidated basis in the segment on the bottom line.

And we would hope to see that continue. Hopefully issues around the fiscal cliff and other things provide enough clarity that industrial capital spending continues at pace. Construction markets are picking up again, not close to where they were at record levels but when you get down as low as we were post-2008, post-2009 we’re seeing steady improvement particularly in the US commercial construction markets. And we see that continuing.

Charles Dan – Morgan Stanley

Thank you.

Operator

Our next question comes from the line of Ivan Marcuse with KeyBanc Capital Markets. Please proceed.

Ivan Marcuse – KeyBanc Capital Markets

Hi, thanks for taking my questions. Real quick on the industrial segment, operating margins were actually down year-over-year. This is the first time that’s happened in a while, even with raw materials sort of moderating. Is that all driven by acquisitions and were there inventory step-ups?

Frank Sullivan

There is some inventory step-ups in F1Q and in F2Q related to our acquisitions, and certainly by the time we get to F4Q most of the impact of the acquisition costs and step-up will be behind us. But the principal reason that you see a margin deterioration in the industrial segment is related to the again flat results in Europe – so just to go back to my comments earlier, last year we did about $850 million of our business in total on a consolidated basis in the European marketplace. 85% of that is in our industrial segment, and that segment of Europe in general – consumer or industrial – is relatively flat to the prior year on the top line and modestly down on the bottom line. And then we’ve experienced double-digit sales and earnings decline in our BSG Roofing business.

Those are the reasons why on a segment basis you see a deterioration in the operating margin. Excluding those two, the remainder of our industrial businesses are all showing margin improvement.

Ivan Marcuse – KeyBanc Capital Markets

Okay, thanks. And then last year you had I guess enough acquisition costs to call out, and then you’ve done a lot of acquisitions over the past year. Are acquisition costs about flat on a year-over-year basis or were they a little bit less this quarter?

Frank Sullivan

They were flat year-over-year. We had a lot of acquisition costs last year and we have a lot of acquisition costs this year, and quite candidly I hope we continue to have a lot of acquisition costs.

Ivan Marcuse – KeyBanc Capital Markets

Great. And then there’s been a lot of storm damage and you had that water restoration business buyout. Is there any way to quantify if you had a pickup in storm I guess related sales, or would you expect that to sort of flow through the remainder of the year because it takes a little while to get up and going?

Frank Sullivan

The Legend Brands business we acquired about a year and a half ago. They’re Washington-state based and they are driven a lot by water and fire damage restoration and certainly by storms, and they absolutely had a strong result at the end of our F2Q as a result of Hurricane Sandy. And they have underperformed in their first year as part of RPM but certainly in relationship to hurricanes or tornadoes, or one of the other issues that we’re not facing right now is a particularly cold winter, weather and the challenges that come with that – those are the types of factors that drive some spikiness to their results on top of their kind of core, underlying base business.

Ivan Marcuse – KeyBanc Capital Markets

Legends Brands was about a $100 million business, right, when you acquired it?

Frank Sullivan

We disclosed its revenues at about $75 million at the time of acquisition.

Ivan Marcuse – KeyBanc Capital Markets

Great. And then more of I guess a modeling question: the Kirker acquisition, I think when you did the announcement it was in RPM2 Group. Is it now in the consumer group?

Frank Sullivan

RPM2 is really a function of businesses that don’t, in terms of products and markets, fit either with the high-performance coatings or construction chemical/waterproofing categories, or in the consumer DIY, small decorative or patch and repair. So that’s where the Day-Glos would fit, that’s where our Mantrose-Haeuser business that’s in fruit coatings and confectionary coatings, and Shellac fits. And so that’s where Kirker is. But for segment reporting purposes we have to discern, of those RPM2 businesses which serve consumer markets and which serve industrial markets.

And as you’ll recall, pre-SPHC we had an RPM2 consumer and an RPM2 industrial. Most of the RPM2 consumer businesses are part of the Bondex SPHCD consolidation. Kirker clearly is driven by consumer retail and so it is properly reflected in our consumer segment.

Ivan Marcuse – KeyBanc Capital Markets

Great. And then my last question: on the acquisition front, is it a reasonable expectation to sort of expect that you’re going to continue at this pace of doing a couple deals a quarter for the near term or would you expect it to slow down?

Frank Sullivan

I would expect over the next twelve to 18 months that we’ll continue to be doing acquisitions but they’ll tend to be somewhat smaller than the transactions that we’ve completed over the last six to nine months.

Ivan Marcuse – KeyBanc Capital Markets

Great. Keep up the good work, thanks.

Operator

Our next question comes from the line of Edward Yang. Please proceed, sir.

Edward Yang – Oppenheimer & Co.

Good morning, Frank. Just do you have an update on the SPHC? I mean it’s been a couple years now. Are there any updates on the legal front there?

Frank Sullivan

Sure. This week in fact in bankruptcy court in Pittsburgh is an estimation trial which is one part of the SPHC process. It’s an important part, something that has been a critical piece of our thinking and the SPHC Bondex team’s thinking when they were first filed with the 524-G back on May 31, 2010. It is possible that the outcome of the estimation trial, which should be concluded we’re told by the court with final arguments in mid-March and any decision by the end of May, could lead to a consensual agreement in calendar 2013 which would resolve this issue. But it is a piece of the process so it’s also possible that this process continues for another two or three years. It’s going as expected and from our perspective it’s going quite well.

Edward Yang – Oppenheimer & Co.

So if it could be resolved in calendar 2013, are you still pretty confident that there won’t be any recourse back to RPM or you won’t have to contribute any additional cash or capital?

Frank Sullivan

No, what we’ve communicated in the past… First of all, the nature of a 524-G requires a consensual agreement and the funding of a 524-G trust and a channeling injunction that channels all existing and future claims associated with Bondex asbestos liability to the trust and away from any RPM entity. And with that we would reconsolidate all of the deconsolidated businesses that are part of the SPHC Bondex. At the time of the deconsolidation they were about $300 million in revenues. Those businesses have continued to grow both in the top and bottom line, and most clearly RPM will be a contributor to that trust fund.

As we’ve indicated in the past, I think the simplest way to look at it is in the context of an acquisition in terms of what would we contribute to the trust fund in relationship to the return of those businesses’ sales, earnings and cash flow. And in fact, if and when we get to that consensual agreement, accounting in terms of balance sheet items and otherwise are treated exactly like an acquisition from a purchase accounting perspective.

Edward Yang – Oppenheimer & Co.

Okay. And a prior question asked about consumer pricing. Obviously there’s much healthier volume growth there along with the housing recovery and you’ve had pricing run positive around 2.5% or so, and despite raw materials that have moderated for you. Are you still expecting that level of price increases for the back half of the fiscal year, about 2.5% or so or should we expect to see that moderate with the raw materials?

Frank Sullivan

The pricing impact is really in relationship to pricing actions from last year and so I wouldn’t expect as we get quarter-by-quarter you’ll see a lesser impact of pricing, although we would continue to expect to benefit from moderating raw material costs particularly in light of a six- or eight-year historic run up in our core raw material costs and from the benefit of some of the supply chain and operating efficiencies that I commented on earlier.

Edward Yang – Oppenheimer & Co.

And finally, I just wanted to jibe the more positive comments around industrial and again, it sounds like you’re a bit more optimistic on Europe as well. But I think Rusty had some comments that you indicated that the revenue growth for this year will probably be at the low end of the range of the 6% to 10% for the year. So how do you reconcile those two things?

Frank Sullivan

I think the issue there is really on a segment basis, but if you understand what you do, the way RPM is organized is we’ve got 50 independent operating units. And so when you think about the European-based business that’s flat and the roofing business that is down year-over-year that would indicate that there are business units whose core growth is high single digits. So there are still a number of areas where we’re experiencing high single-digit core growth, whether that’s driven by an improvement in the construction markets in North America or by continued market penetration in terms of different channels and different geographies by some of our high-performance coatings businesses like Stonhard or Carboline.

Edward Yang – Oppenheimer & Co.

Okay, thank you.

Operator

Our next question comes from the line of Jason Rogers with Great Lakes Review. Pleas proceed.

Jason Rogers – Great Lakes Review

Good morning. I wonder if you could talk a little bit about performance in geographies outside of North America and Europe?

Frank Sullivan

Our presence is principally Middle East and Africa and South America, with a smaller presence in Asia. We are continuing to see very robust double-digit growth in South America on a relatively small base but a growing base, both core growth and acquisitions. Middle East and Africa is down principally because we have an extraordinarily strong business in South Africa. It’s got a great employee base and leadership team and they have grown extraordinarily well, but the last couple of quarters they’ve been particularly challenged by some of the mining strikes and underlying economic impact on that business. Otherwise we’re doing fine in the Middle East; our Asia-Pacific business ex India is growing but that’s on a realtively modest base as well.

And so I would say our growth in North America, Europe and Latin America is kind of indicative of our performance and what’s happening in those markets. We’re so small in the Asia-Pacific market, while we experienced double-digit growth in F2Q it’s on such a small base it’s really not indicative of what other people who have a bigger presence might be experiencing.

Jason Rogers – Great Lakes Review

Then what’s your estimate for CAPEX for F2013?

Frank Sullivan

I think we’ll be around $85 million and that may be increased slightly depending on capital spending that would come with some of the recent acquisitions that weren’t part of our original budget.

Jason Rogers – Great Lakes Review

Thank you.

Operator

Our next question comes from the line of Richard O’Reilly with Revere Associates. Please proceed.

Richard O’Reilly – Revere Associates

Good morning, gentlemen, thank you. On the Indian investment, Kemrock, is there anything left on your books from that?

Frank Sullivan

We have an investment in a convertible bond on the books as well as a note of about $5 million.

Richard O’Reilly – Revere Associates

And what are the convertible notes worth or face at?

Frank Sullivan

$14 million.

Richard O’Reilly – Revere Associates

Okay, great. And second, the comments you gave to Rosemarie about the F3Q, now the press release has a statement that you expect to see weaker results in F3Q.

Frank Sullivan

Yeah, I think the press release is just related to the seasonality of our business. Our F3Q has traditionally been a seasonal low for us given the fact that a vast majority of our industrial and consumer products are used on exteriors. And so historically we’ve broken even. Last year we made $0.05 a share, but to further my comments on this call we would expect to see out of our operating results positive sales and earnings growth year-over-year in F3Q [with] our core growth and acquisitions, which we think serve to overcome what was an extraordinary performance out of our consumer business last year that was just weather-related.

Richard O’Reilly – Revere Associates

Okay, I wanted to clarify that because on the press release alone it would imply you were looking for a lower year-over-year comparison.

Frank Sullivan

Yeah, I apologize – that is not correct. We expect positive sales and earnings growth in our F3Q and F4Q excluding extraordinary items like Kemrock.

Richard O’Reilly – Revere Associates

Okay. If I can ask a last question, there were a couple questions related to Sandy and I just wanted to clarify something: most of your commercial work would be normal maintenance versus major repair and new construction, like what we’re going to see in the Northeast/Jersey Shore/New York City area. Is that a right way to be thinking about that?

Frank Sullivan

In general yes, but there’s a couple exceptions to that. To the extent that we are in waterproofing or retail or commercial caulks and sealants, it’s often that you see a pickup depending on that regionally. Our roofing division, which has had some challenges but which is still a rock solid, very profitable part of RPM could see some pickup as a result of that. That typically comes months later if there is any roofing repair work or reroofing work on commercial or industrial properties – they do not do residential roofing so they won’t be impacted by that. And our Legends Brands business, which we saw certainly at the end of F2Q is very much driven by repair and maintenance, damage repair, dehumidifying, things like that. So they may see some add-ons in relationship to Sandy that might relate more to refilling their distribution channel given the impact of Sandy on their business in F2Q.

Richard O’Reilly – Revere Associates

Okay, fine. Thank you. Just so far in Central New Jersey the weather has remained dry, so you’ve got a real tough comparison year-over-year to date. Thanks a lot for your help.

Frank Sullivan

My pleasure, thank you.

Operator

(Operator instructions.) Our next question is a follow-up from Rosemarie Morbelli from Gabelli & Company. Please proceed.

Rosemarie Morbelli – Gabelli & Company

Thanks for taking my question. Frank, can you touch on the end markets in India? Are you seeing any improvement and is that going to help Kemrock before the end of this calendar year if there is any improvement?

Frank Sullivan

We’re seeing stabilization in that business, and while we have written off in its entirety our equity investment we still actually own 23% of that business. And so the deterioration of their business, which was really a capital structure issue has stabilized. They reached a kind of a mend and extend agreement with their bank group and the vast majority of their debt has been bank debt-driven. And so there is stabilization there and we’re hopeful that that business will pick up, but with the write off of the remaining amount of our equity investment it will likely not have any further impact on our results this year.

Rosemarie Morbelli – Gabelli & Company

Okay. And then I was wondering if you could give us a feel for the progress you are making on the building envelope. If you put all of the businesses or product lines that are going into that particular project so to speak, could you give us a feel for how it is doing versus what it did last year and what your expectations are?

Frank Sullivan

In general, I think a lot of the building envelope expectations we had were muted by the freight train of the 2008-2009 recession on commercial construction and industrial construction.

Having said that, we have seen significant benefits as I mentioned in Europe. I think the focus on building envelope and energy efficiency is one of the reasons that our European-based businesses are relatively flat in light of just terrible economic fundamentals over there. And so the focus on that and in our entire building solutions group on the connections and the margins and energy efficiency for commercial and industrial properties has benefitted RPM and will continue to do so.

The only other comment I’d make on that is Dryvit was a big part of that, and as you know, Dryvit has been deconsolidated as part of the SPHC business.

Rosemarie Morbelli – Gabelli & Company

True, thank you.

Operator

At this time there are no other questions. I would now like to turn your call back over to your host, Mr. Sullivan.

Frank Sullivan

Gwen, thank you. Thank you for your participation in our call today. We remain excited about our F2013 and confident in achieving our results as communicated for the balance of this fiscal year excluding the one-time items that we’ve talked about. Thank you for your investment in RPM and best wishes for a happy new year to all.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a wonderful day.

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