Earnings Call: Q2 2019

Jan 4, 2019

Good morning, and welcome to RPM International's Conference Call for the Fiscal 2019 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. Following today's presentation, there will be a question and Please note that only financial analysts will be permitted to ask questions. 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, Brandon. Good morning. Welcome the RPM International Inc. Investor call for our fiscal 2019 second quarter ended November 30, 2018. On the call with me today are Rusty Gordon, RPM's Vice President And Chief Financial Officer and Kristine Schultze, our Senior Director of Financial Reporting. I'll kick the call off by providing some broad perspective on our 2nd quarter results. Then Kristine will run through our numbers in more detail, she'll be followed by Rusty who'll provide a progress report on our operating improvement plan and an outlook for the balance of the year, after which we'll be happy to answer your questions. In the second quarter, we generated solid top line sales of $1,360,000,000, reflecting organic increase of 3% and acquisition growth of 2.6% over last year's second quarter. Current quarter sales also include the unfavorable foreign exchange impact of 2%. Growth was fairly well balanced between our organic initiatives and acquisitions, while foreign currency translation obviously reduced sales. Organic sales growth was evenly spread across our 3 operating segments, which demonstrates the value in our approach to deliberately maintaining a strategic balance between our segments and a focus on growth as we pursue our 2020 MAP to Growth Initiative. Near record wet fall weather resulted in disappointing sales at Tremco Roofing, drive it in various consumer segment products with exterior use. Believe this weather related impact is temporary. From a geographic standpoint, we experienced disappointing international results across most all of our businesses, particularly in Europe, which was also aggravated by the unfavorable foreign exchange. Our gross profit margin was impacted by raw material costs Our businesses have been instituting price increases to combat the pressure put on margins by raw material cost increases, which have been rising now for 6 consecutive quarters. We anticipate that raw material costs will level off in the back half of our fiscal year and that our businesses will further close the gap on our margins with price increases that have been negotiated and will be instituted in the coming months. We continue to reign in expenses during the quarter better cost control led to an adjusted SG and A to sales ratio improvement of 100 basis points over the second quarter last year on an adjusted basis. Regarding our MAP to Growth operating improvement plan, we continue to make good progress. This quarter, we announced 5 additional manufacturing plant closures and eliminated another 149 positions. We began to transition to center led manufacturing and procurement, and we're moving forward on our supply chain initiatives, where we're starting to consolidate the number of vendors and negotiating more favorable terms and pricing. During the first half of our twenty nineteen fiscal year, cash from operations improved by 29%, a direct result of improved working capital management. While our bottom line results were disappointing, We were pleased with our solid top line growth, the anticipated margin improvement to come from our improving raw material cost to price ratio, and the benefits we expect to experience as we continue to implement our MAP to Growth Initiative. I'd now like to turn the call over to Kristine Schulte, RPM's Senior Director of Financial Reporting. Thanks Frank, and good morning, everyone. During our fiscal 2019 second quarter, We recorded restructuring and other one time charges, totaling $29,200,000. As further details in our earnings release, the largest component of these adjustments or nearly $23,000,000 relates to our MAP to Growth Initiative. Of these MAP to Growth charges, nearly $7,000,000 is related to severance, $6,000,000 resulted from restructuring related professional fees and ERP consolidation expenses, and the remaining amount is associated with our manufacturing consolidation initiative. I will now review results of operations for our fiscal 2019 2nd quarter on an as adjusted basis. During the second quarter, our sales were a record $1,360,000,000, up $47,100,000, which was a solid 3.6% increase over last year's second quarter. Organic sales grew 3% and acquisitions added 2.6%, which was offset by foreign currency translation of 2%. Our earnings were impacted losses resulting from a new accounting standard and the unfavorable foreign exchange impact of the strengthening US dollar. As we anticipated on with the cost of silicones, asphalt, epoxy and acrylic resins while cans and other packaging continued to rise modestly. However, we continued to successfully and institute price increases and were able to narrow the gap on our margins. We also noted that an unfavorable product mix and higher inbound freight contributed to the slide Sales in our Industrial segment increased 2.1 percent to $718,000,000, reflecting organic growth of 3.3% and acquisitions contributed an additional 1.5%. Foreign currency translation reduced sales by 2.7%. The segment benefited from solid performance in our businesses providing corrosion control coatings, North American construction sealants, and concrete admixture and repair products. This was achieved despite the impact of the 2nd wettest autumn on record in the U. S. Which affected sales, particularly in our commercial roofing business. International sales, which account for approximately half of our Industrial segment business, were soft this quarter. On the bottom line, higher raw material costs and unfavorable foreign exchange impacted results. We made good progress on our operating improvement initiatives in the segment, which included progress toward consolidating production with the announced closure of 3 plants. Adjusted EBIT in this segment increased 1 percent to 70,900,000 from last year's second quarter. In our Consumer segment, sales increased by 4.1%, which was fairly evenly split between organic sales growth of 2.8%, and acquisition growth of 2.9%. Foreign currency translation reduced sales by 1.6%. Organic sales growth was aided by new account penetration, which offset poor POS performance resulting from exceptionally wet weather in the United States, the segment's largest market. Adjusted EBIT was $42,900,000. Price increases instituted late in the first quarter helped to slow margin erosion in the consumer segment. However, raw material costs continued to be a challenge. Operational improvements which began during the fourth quarter of last year continued to be made in the segment and are leading to working capital improvements. Also, we announced the closure of one additional manufacturing facility during the second quarter. Specialty segment sales grew at a strong 7.6% pace. This was driven by acquisition growth of 6.1% primarily from the September acquisition of Nudura, a manufacturer of insulated concrete forms that extends our DRIVID product line offerings. Organic growth contributed 2.3% to sales, while foreign currency translation had a modestly unfavorable impact of 0.8%. Driving organic growth for our businesses providing wood coatings, powdered coatings, and fluorescent colorants. Specialty results were better than expected since the prior year comparison was a tough one. Performance by our restoration equipment business with brisk as it responded to recent natural disasters, but was below elevated sales levels that resulted from Hurricane Harvey last year. We made master growth progress in this segment as well with the announced closure of 1 manufacturing facility. Adjusted EBIT was 34,100,000 during this year's second quarter. During the quarter, our staff performance enabled us to redeem our 2.25% convertible senior notes due 2020, which was completed on November 27, 2018. By utilizing mostly cash for the redemption, Going forward, this will have the impact On a related note, we repurchased approximately $82,000,000 of our common stock through November 30, 2018, which is in line with our plan to return $1,500,000,000 in capital to our stockholders by May 31, 2021 through a combination of dividends share repurchases. I'll now turn the call over to Rusty for some details on our outlook for the remainder of fiscal 2019. Thanks, Christine. We remain focused on executing our MAP to Growth operating improvement plan targeting a 540 basis point improvement in our we intend to return $1,500,000,000 in capital to our stockholders by May 31, 2021. Through a combination of dividends and share repurchases. We have repurchased approximately $82,000,000 of our common stock through November 30, 2018. Additional actions we completed during our fiscal 2019 second quarter include the announced closure of 5 manufacturing plants, the reduction of 149 positions, and the start of our transition to center led manufacturing and procurement functions. We also began to implement to improve our manufacturing processes, optimize assets to consolidate the number Accordingly, we are maintaining In regards to our sales outlook for fiscal 2019, we expect full year fiscal 2019 Industrial segment sales to grow in the and a recovery in the oil and gas market. In our Consumer segment, we anticipate sales growth in the mid to upper single digit range resulting from recent market share gains and stepped up advertising, to support new product placements. We have additional price increases negotiated in February March 2019. From an operating perspective, revenue growth should remain in the low to mid single digit range with FX headwinds remaining certain raw material categories. It is important to note that RPM is on a FIFO basis for inventory, which means that the benefits we are beginning to see on the raw material front will typically flow into our income statement 90 days later than if we were under the LIFO method of accounting as is the case with our larger industry competitors. Due to 3 non operating items, we anticipate significantly lower reported earnings and earnings per share for the third quarter period ended February 28, 2019 These items are the following number 1, an anticipated current tax rate of approximately 26 percent versus a benefit Number 2, while gains were realized in the prior year on sales of marketable securities, we expect a different result this year. Due to the combination of declines in the equities market in December and the new accounting standard, which requires unrealized gains and losses On equity securities to now be reflected in earnings, we anticipate a year over year negative impact during this year's third quarter to be in the range of $5,000,000 to $6,000,000. An adverse comparison to last year's third quarter when we reversed approximately $3,400,000 of long term incentive compensation when it became clear that the targeted challenges, and these non operating items are likely to result in 3rd quarter EPS in the range of $0.10 to $0.12 per share. Although we are in the early innings of our restructuring efforts, we are making good progress, which has us excited about the prospects for to provide a clear Thank you, Rusty. I'd like to do a brief review of our 2020 MAP to Growth initiative, starting with our 2020 MAP to Growth timeline. Program was kicked off in the spring of 2018. In June of 2018, we reached the settlement agreement with Elliott Management. We added 2 new directors, we formed an operating improvement committee, which met three times over the summer to assess the opportunity and program design. A full report was made to the RPM board in early October, and we communicated our 2020 MAP to Growth Initiative to our global leadership team in early November, and then obviously had an investor communication on November 28. What have we accomplished? From a manufacturing perspective, including 2 planned closures in the second quarter of last year, 5 announced plant closures in the first quarter and additional 5 announced plant closures in the second quarter of fiscal 2019 We have announced and are in the process of completing the closure on 12 manufacturing plants. This is also driving the closure of 9 warehouses and 9 related offices. From a procurement perspective, as of today, we've had meeting with vendors who represent approximately $400,000,000 of what we believe is $1,500,000,000 of an addressable spend to discuss pricing and terms. By the end of February, we expect to have met with or addressed from an in sourcing or strategic perspective, approximately $1,000,000,000 of our addressable spend. I'd like to make a with some specifics. Our top 10 raw materials 2nd quarter of the prior year were up 10% I'm sorry, 18%. A couple of these specifics include silicones, which year over year were up 61 and epoxy resins, which were up 31%. The 2nd quarter sequentially versus the 1st quarter we see our top 10 materials down 1%. Without addressing any additional specifics, the point is we have in more hands than we've ever had. And that's also a direct result of the improvements of our operating initiatives. With those comments, we would now be happy And from Bank of America, we have Steve Byrne. Please go ahead. Good morning, Steve. Good morning. I just wanted to see whether or not you're your projected cost savings from your MAP to Growth program are going to be adequate to hit that 16% EBIT margin target, given it seems like you're in a little bit of a deeper hole in your margin right now. Is that is it still on track to hit that 16% margin by the end of fiscal 2021? Sure. As Rusty commented, I think we feel pretty good about, our longer term targets in the MAP to Growth program. And also, as he mentioned, we expect starting with our April call to actually be able to provide some more detail, we want to be able to do a rearview mirror look back that provides detail, for instance, on manufacturing insights Once those have actually been completed, it's the right way to do to keep our people focused on execution and also the right way to handle communication flow. We'll be in a position to do the same thing in other categories. And so far, we're on track, in every category that we're focusing on. And just one high level question for you, Frank, on this map to growth initiative. Your investor event down in Baltimore was certainly useful at drilling into all of your businesses. But one, comment I have is that every one of them seems to be headquartered in a different city And I just wanted to hear your views on the the potential merits of, of a integration that's includes, you know, the commercial infrastructure and, and the all of the back office headquarters of all these businesses. Is that on the table as well? So as it relates to our structure from a sales and marketing perspective, as we commented, we're big believers in the on internal approach that's been successful for RPM. I think the organic growth that we're generating in this quarter and this year is reflective of that. And, we do not see any benefit long term of consolidating sales force or marketing or product development activities. On the flip side, we are keenly focused on consolidating much of the G And A And Accounting And ERP systems, into the 4 groups that we've outlined on November 28. And we're making good progress on that. We'll have more details on that again in April. I can tell you that we have been working with our internal team in terms of some new hires and some promotions and with Alex Partners on the manufacturing and operations perspective. And we are very much on target. We're very happy with the progress there. On the G and A side, we didn't seem to have the same enthusiasm in terms of the outside resources. So we have talked to a number of other, firms. And we have engaged an additional firm to help us with a combination of consolidation in the gene area and also, opportunities for outsourcing. So we are continuing to advance the ball both on the original program and in ways that we can accelerate or enhance it. From BMO Capital Markets, we have John McNulty. Please go ahead. At the Investor Day, you spoke on procurement and raw material saves. And I think one of the baskets was just the commodity cycle recovering and essentially catching up to the raw materials, whether the raws fell or the pricing went through. And if I remember, the basket was somewhere in the $65,000,000 to $80,000,000 range. I guess it looked like that was scheduled for kind of a wave 2, wave 3, which was 2021, 2022. But we've seen commodity prices fall pretty dramatically here. So I guess the question is if you kind of look at what your commodities are looking like right now in terms of raw materials, how much of that do you think you may see a couple of years earlier than originally expected? So the MAP to Growth initiative highlighted approximately $75,000,000 to $80,000,000 of savings that we believe we can get from a different approach to procurement over wave 1 and wave 2, which is really between now and the end of May 31, 2020. And there was a $65,000,000 number, which we highlighted as commodity cycle recovery and we're pretty agnostic as to how much it would be ultimately and when it would hit. I guess what I would say to that is just to refer back to the comments I made a minute ago. Year over year, we're still getting hit pretty significantly. 2nd quarter top 10 materials were up 18%. I highlighted a couple of the stream examples. Sequentially, the top 10 materials are down 1%. That's not going to, as Rusty highlighted in his outlook, we're still going to be facing a year over year significant raw material increase relative to the third quarter last year 3rd quarter we expect this year. We are seeing some softening in certain categories There are still some other categories that are going up. And the underlying dynamics, whether oil prices or propylene or other things are certainly moving in the right direction that suggests the commodity cycle improvements certainly should be coming before what we had as Wave 3. So we ought to benefit from those with the entire industry. We're also working internally on data to be able to track procurement benefit changes and what would be coming in relationship to commodity cycle improvements anyways. Got it. Thanks for the color. And then on the on the industrial side, I know there is it's a seasonally light quarter for you terms of what you're in right now. But I guess, can you give us an update as to what you may be seeing there? And I know you had indicated, I guess, on the guidance for the full year in sales that one of the areas where there was some hope was on the energy markets. And I guess with that market coming under some pressure, I guess I'm wondering what kind of demand trends you're seeing there if there's been any change at all? Yes, I think the biggest disappointment in our Industrial business was weather related. Our Tremco roofing business, which has been very strong. Drive it, which is again all exterior cladding. Both had weak second quarter results. A lot of that was weather related in terms of a very wet fall. I think weather also negatively impacted, as I said, the, kind of exterior related products of our Consumer segment. We think that's temporary The more challenging area for us in terms of revenue disappointment was international. In particular, Europe, which seems to be slowing down. And I'm not too sure that that is temporary. But when you put all that together, We had real solid organic growth in a lot of our construction categories in corrosion control coatings and floor coatings which obviously exceeded the industrial segment average based on the challenges that we saw weather in some categories. And some international weakness. So we feel pretty good about that. We feel pretty good about the progress we're making between raw material cost increases and price as the subsequent quarters are executed. Great. And then just one last question, just on the Home Depot rollout, I guess, can you give us an update as to how that's progressing again? I know it's a seasonally relatively weak period, but be curious how that's moving along? Sure. Consumer takeaway across most of the categories we're in. It's been has been relatively flat all year. I think there's a lot of belief that some of that's been weather related. We continue to pick up some market share in the interior wood stains and finishes category, we are exceeding Our expectations were exceeding our customer's expectations and in a couple of regions were, well ahead of the brand that we replaced. So that program is off to a great start. As it relates to pricing across all of our categories, as folks in the call know, we had some major line reviews and some new category pickups, all of which came with some price commitments that precluded us from pursuing appropriate price increases in certain categories until those line review wins or new category pickups were annualized. That will happen this spring and those negotiations are underway. Great. Thanks very much for the color. From Great Lakes Review, we have Jason Rogers. Please go ahead. Yes. Would you be able to quantify the price increase benefit you experienced in the quarter and excuse me, in the expectation going forward? 2% about 2% on the quarter. And I think you'll see the same and a little bit growing in the coming quarters. And I was interested in your progress with the ERP consolidation and perhaps you could discuss the timeline for implementation there. Yes, I don't think we'll have that completed until the end of our MAP to Growth program. So you're looking at December of 2020 or even into the spring of 2021. So by the end of our 2021 fiscal year, we're making solid steady progress We chose the path we did because we did have 4 core systems that where we are consolidating to The people are very comfortable with those. So in our construction products categories, SAP, in Consumer SAP, And then, Microsoft D365 And Specialty And Bond LN in our Performance Coatings group. And so it's really slow progress. I think the tailors will be smaller international operations. We should be substantially completed by theendofDecember2020 with what will represent somewhere in the neighborhood of 80% to 90% of our revenues. All right. That's very helpful. And it may be too early to ask this. But I wondered if you were getting any early feedback on the daily performance standards you're implementing at the plant? Absolutely. We are aside from the plant closures that I talked about, we are instituting the operating improvement and continuous improvement program across our plants. In the second quarter, we had 3, what we call, fit events, which are focused manufacturing events. And we are instituting metrics that are consistent across our businesses. And we are measuring month by month the performance to those metrics. And we will be in, the next 12 of our largest plants in the current quarter. And we are marching through our plants and we are measuring and we are seeing progress that makes us comfortable, that we will meet or exceed the operating improvement targets that we laid out in November 28, both as it relates to consolidation and as it relates to plan for improvement. And I the last thing I'd mention is that We one of the real benefits of what we're doing is we have access to, data on the procurement side and the plant side more leadership hands. It's more timely and more accurate than we've ever had. And that's incredibly helpful. All right. If I could just squeeze in a numbers question, if you have an estimate for CapEx for fiscal 2019 as well as a target amount of share repurchase for fiscal 2019. So I think for fiscal 2019, we'll be flat to slightly up over last year. In terms of share repurchases, I'd be hesitant to put out a target, but we certainly were a repurchase of our stock in the middle of 60s, and I would expect this to be a repurchase of our stock. Where it is today. We are very much committed to the return of capital targets that we put forth in November 28. From Gabelli And Company, we have Rosemarie Morbelli. Please go ahead. Thank you. Good morning, everyone. Frank, I was wondering if, as you are going through your math 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 of areas where we're doing some reorganization, for instance, in Europe. Where we've got, some work to do and some opportunities that were perhaps, bigger than we realized. And so we've had some leadership changes in certain areas and that can certainly be disruptive and we're moving 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. Okay. And looking at Europe slowing down, can you give us a better feel for which areas, are feeling, you know, most of the impact and, what you are doing to affect 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 2nd quarter in the U. S. 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 realized 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 And A consolidation and also the manufacturing and operations work that is happening across RPM. Thank you. 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 2nd quarter versus the 1st 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 and consumer DIY and our Tremco business, those raw materials are up 61%. They are not softening. There continues to be some capacity issues there. So the raw material situation today is a real big spag. There's 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 it really is category by category. And so there are a number of areas in silicone is a key one where we have been dealing with multiple price increases across the 12 month period. And we're continuing to try and manage that. And we have Frank Mitsch on the line. Please go ahead. Good morning, Tim. Hey, good morning, Frank. And first off, congratulations finding a franchise QB. Yes, thank you very much. We're happy Brown's fans in Cleveland, Ohio. Sorry. I was going to say we'd welcome you to come visit a game next year. I will definitely look at the schedule. Hey, Obviously, the November 28th Investor Day, I thought went very well and you guys laid out pretty good map to growth. It happened late in the quarter, during the late in the fiscal second quarter. And, obviously a bit of a earnings miss here. I was wondering, was there anything that happened late in the quarter or after the quarter closed? That may have negatively impacted, the results, you know, such that you guys came in lighter than where consensus was? No, I will I'll tell you 2 things that I think one was a mistake in our part and the other was something that we didn't anticipate maybe should have. The mistake on our part was when we look at the volatility of this year relative to all of the changes that were coming and all the related charges, we decided not to provide guidance. And in hindsight, 2nd quarter consensus was up 17% or 18% and that's not hasn't been in the cards for us or anyone else. And it was not part of our internal plan. 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 going to be a $10,000,000 or $12,000,000 turnaround in tax expense year over year. And so a couple other items like that. The second item was the accounting change in, now a requirement that if you have a marketable securities portfolio, apparently much like banks, you have to mark to market every quarter, the equity portion of that. And it was a non event in the first quarter for us. I think it was a $1,000,000 pretax gain. 100% of the shortfall EPS wise from last year to this year can be attributed to what was almost a $10,000,000 reversal we had $3,500,000 of gains last year. This is in our captive insurance portfolios. And this year, I think we took a $6,000,000 or so And, that'll be a challenge that we communicate better in the third quarter. It is a non operating item. We went through this, in 'eight, 'nine, and had 6 quarters of impairments 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 been a very smart way for us to manage certain levels of insurance. Our total portfolio is about $130,000,000 $93,000,000 of that $93,000,000 of that is equity. This mark to market has a component to it that if 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, 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. And so hopefully that answers your question. I think it was in hindsight for a couple of reasons, maybe a mistake not to provide guidance. We certainly would have guided people differently in the second quarter. And I think looking at us and looking at our peers, I think that makes sense. And with the numbers out in the third quarter and the progress that we're making on our MAP to Growth Initiative, we're making good progress and we actually feel good about what's coming. And there's nothing that's happened in the second quarter or will happen in the third quarter that makes us change our projections as outlined in November 28. That's extremely helpful. Thank you so much for the color there. 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 up for some pent up demand. Is that how you're thinking about that? 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. 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 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. And, 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, to drive it systems and a lot of our consumer products, that some of the negative impacts have been weather related and temporary. From Baird, we have Ghansham Panjabi. Please go ahead. Good morning, Ghansham. Hi, everyone. Good morning. Happy New Year to you. Happy New Year. Thanks, Frank. I guess going back to Frank Mitch's, you know, sort of question as well. On industrial and thinking through the overseas markets. 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 then just given some of the weakness in energy prices and your exposure there, Should we expect a sequential deceleration in Industrial, or do you think that'll be offset with, with some of the recovery from weather? Thanks. Sure. So excluding acquisitions, Europe was flat. And, in our Industrial segment, that was the disappointing. Latin America continues to be a challenge as well. And And so regionally, those are the 2 most significant areas for us outside of North America. North America continue to be pretty solid. As I highlighted earlier, obviously, there's some real strong elements of organic growth, that helped drive organic growth for the whole segment up about 3%. We don't see lot of strength in Europe right now. And so I don't think there's any big disaster, but it's not going to be a driver of improved performance in the second half of the year as far as we can tell other than the things that we would drive relative to our MAP to Growth program. 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 think about year over year margin parity for your businesses on a consolidated basis? 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 in certain other packaging categories. So our consumer segment is more tilted towards categories like silicone and others that have not eased up and also are more packaging intensive because there's more units 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, it's in relationship to some line review wins we had year, which came along with some commitments on price that are now annualizing. I think that we're starting to see raw materials ease and we're starting to see the benefits of our structural changes. And we'll be in a better position in April tell you what those are. They will show up in our results, somewhat later than they will in some of our larger competitors because of the difference between FIFO and LIFO accounting. But we'll also be able to provide more data because we have a better and more accurate data at our fingertips today certainly at my level than we've had in the past. Okay, terrific. Thank you so much, Frank, and best wishes for the year. Got you. Thank you. 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 a softness? And then I'm also curious just on the margin front. Was there some extra costs that you potentially incurred that hurt those margins? I think, the disappointment in our industrial was related to more on 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 that was a challenge for us. We are making good progress in the margin side and I think that'll show up in the coming quarters. FX certainly FX also negatively impacted us both on a translational and and in certain places, transactional perspective. And again, our largest exposure internationally is in our Industrial segment. And then just 2 quick follow ups. So first off, the tax rate, just wanted to understand, do you expect it to see that 26% rate, from here on, apologies if I missed that. That's correct. In the 3rd fourth quarter, that's about where we would see taxes. Okay, 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 as relatively achievable, or was there potentially some greater slowing that would cause you to potentially adjust that, that view that, I. E. Growth maybe could be a little bit below where you thought it would be and that would result in less margin improvement. 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'll go? The dollar seems to be weakening as we speak today. 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 notes the grindstone and our sales and marketing people focused on the market and our customers. As well as the the foreign exchange swings plus or minus will be a variable that we don't control. But I think over time, we wouldn't expect them to be meaningful, but time will tell. With Kevin McCarthy. Please go ahead. Good morning, Kevin. Good morning. How are you? Good. Thank you. 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 move through the map to growth execution? And if it turns out several months from now that your earnings are materially better or materially worse than what you're laying out as guidance what are some of the key variables that might be harder to predict right now that could be a swing factor with regard to your near term earnings? So I think the, great question. The variables will be revenues, and some of that, people will 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, foreign exchange will be a variable that we don't control. So we'll see where that goes. It seems to be settling down a little bit. And then the 3rd 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, separated from our core operating results. Is this mark to market last year, I think we had $3,500,000 gains on a pretax basis in the 3rd quarter more like $5,500,000 more like $5,500,000. And this year, we'll end up, certainly with some level of 1,000,000 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. I think the variables are really revenues. And, weather makes a difference in the 3rd 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 ends of a lot of our big accounts in February and a big February consumer can make a big third quarter. A weak February consumer means this all gets pushed into the fourth quarter. So that's the biggest variable I would see in revenues and where it might come from and then the others 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 3 business, as I mentioned, Tremco Roofing Drive it and some of our, consumer products product categories that are exterior use products. And, we believe those shortfalls to our internal plan were related to weather. Great. And the 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 4 quarter question just in terms of, I appreciate the comments here, Frank, about guidance. And obviously, we were all including myself ahead of things for 2Q and now apparently 3Q. Does that extend to 4Q? It would seem logical that we've got 2Q wrong and 3Q wrong and probably 4Q wrong as well. So I'm just kind of asking more specifically about your comfort with the actual consensus number for the fourth quarter. 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 3rd quarter. And then I think we will be in a better position as we look into next year to provide some more reasonable guidance As I mentioned, in hindsight, it seemed 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 communication hiccup relative to the second quarter 3rd quarter certainly some of it's performance related, but a lot of it's math around tax issues last year versus where we'll be this year in third quarter. And, expectations on guidance that were never part of what was happening in our industry or what we saw for the for the year and that was our mistake in communications and we will improve. 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 did that was that actually in October November issue as well? It was it was the wettest record on fall or a fall on record or the 2nd wettest fall on record and it was a great frustration relative to we've mentioned Tremco roofing a number of times. We've got a good backlog and good order flow and a lot of projects that were delayed or put off or interrupted, specifically. And It was just a frustrating period of time, the same is true for our drive it business, which is all exterior work. And then it's more anecdotal in terms of measuring what we thought would happen versus consumer takeaway in certain categories that again are more exterior related. Okay. And maybe just one last quick one. If you could just tell us roughly what you think the FX headwind will be in the for Third And Fourth quarters, that'd be helpful. Yes. It's hard to say it was a 2 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 say that the dollar is 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. Okay. Thanks very much. Appreciate all the comments. Thank you. From KeyBanc, we have Mike Sison. Please go ahead. Hey, guys. Happy New Year. Hey, Mike. Thank you. 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 4th quarter will be the 1st period where, some meaningful MAP to Growth savings will start to be realized. We announced 5 plant closures in this quarter. As I'd commented on earlier, in some cases, we have worn act requirements. In other cases, it's just an internal announcement that Obviously, once we've announced something internally, it can quickly go external. So we feel comfortable in communicating those. 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 JanuaryendofFebruary Obviously, there's more work to do there. But so we feel good about having some meaningful benefits in the fourth quarter. 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 in 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 that will reflect positively on our results in the fourth quarter as well. I think those are the principal categories that we see as driving what will be a year over year positive fourth quarter. Great. And then just one quick follow-up. You talked about acquisitions is still a core, focus for RPM. Any update on the environment any, any, 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 rustoleum. Molt control and that's a pretty exciting category for Astellium in terms of growth. We completed this year, a relatively small product line focused on railcar called Strathmore with Carbon. And that's turning into a real nice acquisition. There are smaller deals, but particularly on the industrial side, if we can start to mirror what we've done in consumer, we picked up an product line and some good technology that's focused in a particular area. And we've expanded what was a sales force of a dozen people into the pockets of a car blind sales force of two hundred people. And that's really driving revenues. And so, we're looking for more deals like that. I don't expect our deal flow to be any bigger than what we communicated at November 28, which is somewhere in the $150,000,000 to $200,000,000. 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. Good morning. Kind of sticking with the acquisition theme, you did mention Nudura there, but it looks like the contribution from Nudura was pretty solid in the quarter. I know that that's a compliment to drive it, but I'm guessing, does not have the exterior, the weather related tax that drive it. So can you just talk a little bit about the performance of Nudura in the quarter and maybe help us understand the revenue potential relative to that $40,000,000 annual contribution you mentioned when you acquired that business? 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 as you look at code changes in relationship to the energy efficiency of the insulated concrete form structure that Nudura has we're big. We're her long Nudura. We're very bullish about it. There are, a good synergy opportunities would drive it. 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 to think about how and how much and where we can be most effective in promoting Nudura to a larger audience. It is one of the building category elements of the future that we believe in And we just got to get out there and promote it and get it specified in greater areas and greater amounts. But 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 the margin consumer on a year over year basis? Yes, I don't know that it is a big difference. It's up in the quarter, about $2,000,000 and $200,000. $200,000. No, $200,000 it was up in the quarter, only $200,000 year over year, and it's up a couple million bucks 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, the spring as well, we need to continue as the leader in a lot of these categories. To promote the use and work with our major customers to, get people in the stores and get people moving in these categories. So an area that we have deliberately not cut, are focused on. Obviously, Rusty corrected me, it was up $200,000 the quarter. So that's not a big number this quarter. 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, that convertible was excluded from the share count, for the entire quarter. Is that correct? Yes. For, the GAAP set of financial statements, we're on the 2 class method. And the 2 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 at $0.52. We're using a higher share count because we're 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 at 3 days before quarter end. And 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? In terms of the share count, for Q3, it'll be down about 3,300,000 shares for the impact of the convertible. So it would be down in the $133,000,000 range for the quarter. And then on an annualized basis, we should pick up $0.03 to 0 point 0 $4 Okay. Thanks very much. From Northcoast Research have Kevin Hocevar. Please go ahead. Good morning. Hey, good morning, everybody. Good morning. On the pricing agreements that you've discussions you've had. It sounds like you locked in pricing for February, March timeframe. Are the is that across all the segments? Is it focused? It sounds like maybe in consumer to some degree. Just wondering if you could give some clarity on where the pricing is being realized? 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 categories. As part of our commitments, we were locked in for a 12 month period. And those lock in periods are expiring this spring. Got you. And just just the $0.10 to $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 a 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. Okay, great. Thank you very much. Thank you. From JPMorgan, we have Jeff Zekauskas. Please go ahead. Your cash flows improved for the 6 months by about $30,000,000. But your deferred tax there was a positive change in deferred taxes of about $30,000,000 for the 6 months year over year. And there was also an 11,000,000 positive swing in realized and unrealized marketable securities cash flow. Can you discuss what those are for the year? Are these permanent or impermanent? And what's driving the changes in deferred taxes in particular? Sure. Last year, Jeff, you're seeing a big number on the deferred tax line on the cash flow use of cash of $32,000,000. And that's really an adjustment to the net income line up above for some non tax impact of our what I would call our legal entity realignment project last year, which allowed us to get some big tax benefits in the 2nd quarter. And our tax rate, you might remember, in the second quarter last year, was only 12 percent because of this project. So that's impacted by that specific item where we basically were able to flip a large amount of our APB 23 reserve as a result of improved utilization of foreign tax credits that resulted from that. Your next question was on the marketable securities line. And, we are showing this year a, a change in that, we have proceeds from sales of marketable securities this year of $35,000,000 That was actually a 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're able to get a net positive cash flow. If you look at the prior year on the marketable securities lines, That's more normal activity each quarter, as we rebalance our investment portfolio. So the tax rate that you're now talking about of 20%, 26% for the 3rd third quarter. Like in theory, why shouldn't your tax rate be closer to 21% plus or minus a little bit? And is that a more reasonable forecast for, 2019? Your tax rate, I think, was 28% in this quarter. I don't understand why it's so high. The 21 is actually the U. S. Statutory rate. A combination of jurisdictional mix. And now for the first time ever with the U. S. Tax rate, meaningfully, favorably better than most foreign operations, the jurisdictional mix will likely quarter by quarter be higher, because of the onethree of our business or so that is un outside the States. So unlike past years for us or in other companies, where you would end up actual tax rates somewhat below the U. S. Statutory rate, which was at least in developed world, the highest in the world. Now you're likely to see a higher tax rate. And also we have state taxes too included on top of federal of 'twenty one. But the biggest part of it is jurisdictional and now we tend to, average up our tax rate because of our foreign income at higher tax rates than where the U. S. Is. So that's the benefit of tax form that I think we're all enjoying. What are your high tax rate jurisdictions? I can't answer that off the top of my head right now. But I can tell you it's almost every country in which we do business outside of the United States in the developing world. Okay, great. Thank you so much. From Great Lakes Review, we have a follow-up from Jason Rogers. Please go ahead. Had a quick one for Rusty. If the diluted share count was 131,700,000 in the 2nd quarter, and that did not include the $3,300,000 share reduction from the convertible. Then why should the share count be around $133,000,000 in the 3rd? Yes, we don't know the 3rd for sure because we could either use the 2 class method or the treasury method. It depends on earnings we picked the 1, Christine, that's most A and I dilutive, right? So that would depend on what earnings are during the quarter. So the third quarter is a bit uncertain just due to the nature of the season and we're at a low earnings point. We're not sure which method exactly will be on But we can tell you for sure we've redeemed those shares and, there's 3,300,000 shares that used to be in our diluted share count under the treasury method. And from Gabelli And Company, we have a follow-up from Rosemarie Morbelli. Please go ahead. Thank you. This is for Rusty. As long as there is so much volatility regarding the mark to market of the securities of your portfolio, Why not, is it at all possible to take it out of the adjusted numbers? So we look at operations on an apples to apples basis eliminating the volatility of that item? We will work with our auditors address that in the third quarter. And certainly that's what we aspire to. It's a non operating item and it'll be pluses and minuses. And so We need to work on how we would do that and then just make it a permanent adjustment and carve it out of our operating results. Okay, thanks. And if we look at the second quarter, what was the impact of that item on a share basis. I'm assuming that it has there is a tax impact on it, and I have no idea what the rate is. I am assuming it's not your corporate rates. It's $0.05 in the quarter. That's why I mentioned that item alone was the difference between being flat year over year. On the EPS line. And the aggravating part of that accounting reg is, again, in the past, you would only recognize a gain or a loss if they were realized as you manage your captive insurance companies to where you would have to liquidate to meet insurance needs and things like to add or offset gains and losses. Now you mark to market, but because they're not realized, their non tax deductible. And so if you have an unrealized $5,000,000 hit, it's not actually tax deductible until you effectively sell those securities and have an actually realized loss. So it's a really double whammy in terms of your bottom line. So again, we're going to work to figure out the appropriate way to address it and then carve it out of our results in future periods. So just making sure I get this properly, instead of $0.52, then you would have reported $0.57 from operations adjusted in the 2nd quarter. I think that's the simplistic way of looking at it. I think that's right. Yeah, that's simple. And And looking at the third quarter, in that $0.10 to $0.12, do you have some kind of an impact that particular item incorporated in that those numbers? Yes, we have about a $5,000,000 negative impact on a year over basis in those items between the gains we realized in the prior year and an anticipated loss this year. But we won't know the actual number until we close the quarter. And whether the stock market between now and the end of the quarter up 1000 points or down 1000 points or somewhere in between. Okay, thank you. Thank you. We will now turn it back to Frank Sullivan for closing remarks. Thank you Brandon. Thank you very much for your participation in our call today. I'd also like to thank the RPM associates around the world who are continuing to generate solid growth in challenging environment. Most importantly, we appreciate your questions and your commitment as we continue to execute our 2020 map to growth. And drive a more valuable, more competitive RPM. Thank you. Happy New Year to all and we will look forward to talk to many of you in the coming months and updating everybody in our progress on our April investor call. Thanks. Happy New Year and have a great day. Thank you. And ladies and gentlemen, this concludes today's conference. Thank you for joining. You may now disconnect.