Frank Sullivan - Chairman and Chief Executive Officer Russell Gordon - Vice President and Chief Financial Officer Barry Slifstein - Vice President, Investor Relations

Frank Mitsch - Wells Fargo Securities Rosemarie Morbelli - Gabelli & Company Vincent Andrews - Morgan Stanley Ghansham Panjabi - Robert W. Baird Arun Viswanathan - RBC Capital Markets Kevin McCarthy - Vertical Research Jason Rogers - Great Lakes Review Mike Harrison - Seaport Global Securities Mike Sison - KeyBanc Capital Markets Steve Byrne - Bank of America Silke Kueck - J. P. Morgan

Welcome to RPM International’s Conference Call for the Fiscal 2018 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 maybe forward-looking statements based on current expectations that involve certain 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 maybe made to non-GAAP financial measures. To assist you in understanding these non-GAAP terms, RPM posted reconciliations to the most directly comparable GAAP financial measures on the RPM website. Following today’s presentation, there will be a question-and-answer session. [Operator Instructions] 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, Jason. Good morning, and welcome to the RPM International Inc. Investor Call for our fiscal 2018 second quarter ended November 30, 2017. On the call with me today are Rusty Gordon, RPM’s Vice President and Chief Financial Officer; and Barry Slifstein, Vice President of Investor Relations. Today, we’ll discuss our second quarter results, then provide detailed guidance for the balance of fiscal 2018 and of answer your questions. We are pleased with our performance during the second quarter. Our strategically balanced business model is alive and well and we continue to see the benefit of last year's product line acquisitions and cost reduction actions and improved leverage which more than offset higher raw material costs that have negatively impacted gross margins across most all of our businesses. Earnings per share of $0.70 improved 34.6% from last year's adjusted results of $0.52 per share and increased 17.3% excluding a $0.9 per share benefit based on a lower tax rate recognized in the quarter relative to last year's tax rate. Sales in our Industrial segment increased 11% in the quarter driven by strong organic growth of 5.4% and acquisition growth of 3.3%. We saw solid organic growth in our North American roofing businesses and those businesses providing polymer flooring to commercial and industrial markets. We also saw a slight rebound in our company serving the oil and gas sector with positive organic sales growth for the first time in three years. We continue to see mixed results in Europe and continued poor performance in Latin America particularly Brazil. EBIT results for the Industrial segment reflected combination of higher raw material costs, unfavorable foreign and transactional foreign exchange and continued disappointing results in struggling Latin America, partially offset by price increases and better SG&A leverage from fiscal 2017 expense initiatives. Sales in the Consumer segment increased 11.1% in the quarter driven by last year's acquisition of Touch ‘N Foam in the U.S. and SPS in Europe, as well as a return to solid organic growth of 3%. Consumer segment EBIT declined due to higher raw material costs, unfavorable manufacturing overhead absorption, and product mix. Sales in the Specialty segment increased 7.4% driven by recent acquisitions and a solid organic growth of 2.8% after overcoming 3% loss of sales associated with the fiscal 2017 closure of an unprofitable European business and further reduced by the impact of the recent patent expiration in our edible coatings business. Sales were particularly robust in our restoration services business due to the severe hurricane season and strong growth in our powder coatings and wood finishes business. We saw strong EBIT leverage in specialty as we were able to more than offset higher raw material cost and the negative impact of the recent patent expiration with good cost control. We also recognized $11.1 million in cost savings in our Corporate/Other segment, lower pension healthcare, acquisition and other professional fee reductions. Lastly, the strong results in our second quarter could have been better in relationship to the two weeks at the beginning of the quarter that were impacted by the devastating hurricanes, particularly in strong markets like Florida, Texas, as well as in Puerto Rico. I would now like to turn the call over to Barry Slifstein to provide you with more detail on our second quarter results.

Thanks Frank, and good morning everyone. I will review the results of operations for our fiscal 2018 second quarter compared to last year's second quarter adjusted results, then cover some November 30, 2017 balance sheet and cash flow items before turning the call over to Rusty, who will provide more detail on our guidance for the balance of the fiscal year. Last year's second quarter adjusted results exclude the impact from the impairment charge and Middle East business closure. Second quarter consolidated net sales of $1.32 billion increased 10.5% from last year. Organic sales increased 4.2%, acquisition growth added 4.7%, and foreign currency translation increased sales by 1.6%. Industrial segment sales increased 11% quarter-over-quarter to $702.9 million, organic sales increased 5.4%, acquisition growth added 3.3%, and foreign currency translation increased sales by 2.3%. Consumer segment sales increased 11.1% to $415.4 million, organic sales increased 3%, acquisition growth added 7.3%, and foreign currency translation increased sales by 0.8%. Specialty segment sales increased 7.4% to $197.1 million from $183.6 million last year. Organic sales increased 2.8%, acquisition growth added 3.8%, and foreign currency translation increased sales by 0.8%. Consolidated gross profit increased 5.5% to $551 million from $522.2 million last year. As a percent of net sales, gross profit declined 200 basis points due to higher raw material costs and unfavorable manufacturing absorption and product mix. Consolidated SG&A increased 2.9% to $419.6 million from $407.7 million last year. The increase was largely due to added SG&A from acquisitions. As a percent of net sales SG&A declined 230 basis points to 31.9% from 34.2% reflecting last year's cost reduction actions and lower expenses in the Corporate and Other segment. Consolidated earnings before interest and taxes, EBIT increased 15.4% to $131.8 million from $114.2 million last year on higher organic sales and last year's product line acquisitions and cost reduction actions, partly offset by lower gross profit margins principally due to higher raw material costs. Industrial segment EBIT increased 8.9% to $70.2 million from $64.5 million last year due to higher sales and last year's cost reductions, which more than offset higher raw material costs, unfavorable transactional foreign currency exchange, and continued disappointing results in Latin America, especially Brazil. Consumer segment EBIT declined 5.3% to $45.2 million from $47.7 million last year principally due to higher raw material costs, unfavorable manufacturing absorption, and unfavorable product mix, partially offset by better SG&A leverage. Specialty segment increased 10.8% to $34.4 million from $31 million last year due to solid organic and acquisition related sales growth, especially in our restoration service businesses, combined with better SG&A leverage due to cost-cutting actions. This was partially offset by higher raw material costs and the unfavorable impact from a recent patent expiration. Corporate/Other expense of $18 million declined from $29 million last year. The decrease is predominately attributable to lower pension expense, healthcare costs, outside professional service fees, and acquisition related expenses. Income taxes; the effective income tax expense rate was 12.2% for the three months ended November 30, 2017 compared to an effective income tax rate of 24% for the three months ended November 30, 2016. The lower rate was due to favorable tax benefits recognized as a result of legal entity restructurings that were completed during the second quarter. Net income of $95.5 million increased 35.3% from last year's $70.5 million. Current quarter EPS of $0.70 per share compares to EPS last year of $0.52 per share representing a 34.6% increase. Now a quick look at the cash flows and capital structure. Cash provided by operating activities was $115.2 million this year compared to $158.7 million last year. The decrease was principally attributable to an increase in accounts receivables resulting from substantially higher sales, the timing of receivable collections this year versus last year, and the timing of payments to suppliers. Total debt. As of November 30, 2017 totaled debt was $2.1 billion compared to $1.6 billion last year. The increase is largely attributable to cash used for fiscal 2017 acquisitions of $254.2 million, the payment to the 524 (g) Trust in December 2016 of $102.5 million and the pre-funding of the December 2017 524 (g) Trust payment of $119.1 million and the 2018 pension plan contribution of $52.8 million. Included in total debt for this year is $253.7 million of short-term debt reflecting the upcoming maturity in February 2018 of our 6.5% $250 million bond. In December 2017 the company issued $300 million or 4.25% 30-year notes due 2048, the net proceeds of which will be used to retire the $250 million of 6.5% bonds due this February, thereby lowering RPM's overall interest rate. With that, I'll turn the call over to Rusty.

Thank you, Barry. Now I'd like to provide some color on our fiscal 2018 guidance, which we are raising today. I'm happy to report record results for RPM today. RPM's model as Frank mentioned is built on strategic balance which is working well. So to be more specific, when we talk about strategic balance, that is the balance between acquisition and organic growth, as well as the strategic balance in our business portfolio between consumer, industrial, and specialty businesses. Originally, our fiscal 2018 guidance was built upon our accomplishments last year and brisk acquisition activity and cost reduction actions. Through six months, I'm pleased to say that we have realized the benefits of these activities from last year and operationally we have performed in line with our expectations. I'm especially pleased to say that our bottom-line has exceeded our expectations as our tax team has realized more discrete benefits through six months than we originally anticipated. As we look ahead to the back half of the year, some themes. First of all, raw materials will continue to be a challenge for us, but there's a couple of drags we talked about a lot over the last three years that are appearing to turn the corner. First of all, our industrial segment sales to energy markets have turned the quarter and the most recent quarter reported. Secondly, we're expecting the translation impact of foreign exchange to be positive. That's the impact from translating the sales and earnings of our foreign subsidiaries into the U.S. dollar results. So in general, we see more positives than negatives, which is why we are raising our guidance today. We share optimism in the U.S. economy with the new tax law. In U.S. construction we see an uptick being led by regions impacted by the recent hurricanes and we're also looking ahead to overall improvement in the global economy. We are optimistic in regards to the opportunities from the new tax law to further invest in our great businesses and brands and we'll talk a bit about that more later. So I'll start by talking about our industrial segment, which had the strongest organic growth of our three segments in the second quarter led by roofing. Our construction activity has picked up in some of the hurricane impacted regions. We expect that to continue in the second half. As I mentioned, our industrial coatings business especially has been impacted by the downturn in energy markets and we expect that to turn the corner. Also our industrial segment is the most global of our three segments with 50% of its business outside of the U.S. and we expect to see the most favorable impact of global economic improvement here which will be compounded by the strengthening of the euro, the pound and the Canadian dollar that we've seen lately and I say that should help us in terms of our translational foreign exchange impact. In terms of some of the challenges, we are lapping the anniversary of several of our fiscal 2017 acquisitions. Last year you might remember the bulk of these were done by January and you'll hear this theme again as we discussed the other two segments. Another challenge for us is Brazil, the macro economy is challenging to us, but the comps do get easier as we progress into the back half of the year. And one additional note on industrial as we mentioned before on our October earnings call, we continue to pursue additional cost savings in this segment to improve the operating leverage. So for the balance of this year we expect the industrial segment sales to grow in the upper single-digit range. Moving now to consumer, Frank and Barry already spoke to some of the margin challenges in this segment. Another near-term challenge will be the favorable acquisition impact that we've seen this year is going to end this month in January as we lap the anniversary of the SPS and Touch ‘N Foam acquisitions. In terms of looking beyond the near-term challenges however, we do see a positive future for home improvement spending and as a result we plan to invest in stepped up advertising and promotional activity during the upcoming spring. So in summary we expect our consumer segment sales to grow in the low to mid single-digit range, but we do expect the back half earnings to be flat to last year as a result of some of these stepped up investments in brand advertising and promotional activity. Moving to the specially segment, we did report nice results in the second quarter with good leverage, but their performance has been even better than the numbers indicate. For example, their organic growth of 2.8% in the quarter was the lowest of our three segments, but it actually would have been the highest if sales are factored out of the prior year from a European business that we closed last winter. And another note on specialty is that they're generating this good performance in spite of the drag on sales from a U.S. patent that expired prior to the second quarter and as we mentioned this impacts our edible coatings business. So as we already discussed, the negative impact on sales have been offset so far this year by a great sales in our restoration service business as well as a couple of businesses selling into OEM markets. So in summary, we expect our specialty segment sales to grow in the low single digit range as the acquisition impact from FY '17 is reduced as we move forward in the back half of this year. So I'll conclude with some overall comments. As we mentioned, our operations are performing in line with the expectations when we issued our original guidance in July. Sales are better. Raw materials are a bit more challenging, but overall we're in line with expectations and we expect this to continue in the back half. One area we mentioned we are better than we anticipated is taxes. Our year-to-date effective tax rate of 19.6% is better than we expected. Barry already mentioned the discrete benefits which we recognized. So even if there was no tax reform in the U.S., our fiscal 2018 effective tax rate would turn out to be better than we originally expected. Now as we move forward with the new tax law enacted in December, we're going to see a reduction in our Federal Statutory Rate from 35% to 21% which is effective for the last five months of RPM's fiscal year and that blends to a rate of 29.2% for RPM in fiscal '18. We expect this to give us a $0.10 per share benefit to EPS and allows us to increase our full-year EPS guidance now to a range of $3 to $3.10 per share. And let me make an important note here, this excludes a one-time adjustment that we expect to record in the third quarter that will result from the new tax law that has been enacted, and this one-time adjustment stems from a couple of factors. First of all, based on the new tax law we're going to re-measure our deferred tax assets and liabilities, that's one impact. The second impact is that there will be a transition tax on our deferred foreign earnings. So we still have to refine our estimates for these two different impacts. We don't have a number, but we will be recording a one-time adjustment in the third quarter and that is not built into this guidance range of $3 to $3.10 per share. Now with that, we look forward to answering your questions.

Thank you. [Operator Instructions] And our first question comes from Frank Mitsch from Wells Fargo Securities.

Good morning, Frank.

Good morning, gentlemen. How are you doing?

Good.

Hey, I think your tax team did a great job excluding the tax reform, maybe that tax team should help out the Browns, just a thought. Look, Frank you talked a lot about better growth, organic growth sequentially, improvement over the fiscal first quarter looking at upper single-digit in industrial and actually, I think Rusty was talking about if you exclude some of the shutdown specialty would have been better as well. I'm trying to get a handle on how much of this is hurricane related in terms of getting a better second half - fiscal second half growth relative to other initiatives that you have underway?

Sure, so in general I think our industrial businesses have demonstrated some good growth after three tough years particularly in the heavy industry area as rusty said. We're seeing the first positive, very modest, but first positive organic growth in product categories that serve oil and gas for instance. We're seeing the first year after three years of not having FX hurt us and quite candidly industrial activity is picking up pretty broadly. Geographically this will give you a good sense of it since most of our consumers in North America, there is a slug of it in Europe, but across the region or across the world we were up 10%, in the U.S. up 12%, Europe on a small base up 11%, in Asia up 18%, in Canada the only places where we were down were in the Middle East with a lot of turmoil and while we were modestly positive in Latin America it was all currency related. You know if anything, our specialty, I'm sorry, our consumer businesses and our industrial businesses could have been better in the second quarter. We got like everybody hit pretty hard at the start of the quarter with the impact of the hurricanes, particularly in consumer where we had almost two weeks of a thousand plus retail outlets shutdown in major markets like Texas and Florida and to a lesser extent Puerto Rico, so that hurt us. We expect positive trends that we're showing in industrial to continue in the second half. I think specialty is managing through the challenges that we've talked about very well. And consumer I think will continue to be challenged in the second half just like they have in the first. I would remind folks and we've talked about this in prior quarters, we're continuing to hold or gain share in the first half of the calendar year. A number of our direct competitors were down organically in the 10% to 11% range. In the most recent quarter where we were up 3% as far as we can tell competitors are down anywhere from 1% to 3%. And we are going to end up with a year quite candidly that's disappointing in consumer. To address that for our 2019 fiscal year, we are planning to kick in some aggressive promotion and advertising programs in the spring and that's part of the revised guidance that we provided.

That’s very helpful and one of the one of the factors you mentioned was the manufacturing absorption issue in consumer. What exactly is that? How sustainable is that? What should we be thinking there?

Well we've been through a seven-year run in consumer that’s been in our core consumer businesses, all the Rust-Oleum product lines and DAP product lines have really done great. We've added capacity and as we have demonstrated throughout the year we've had a slowdown with flat to moderately negative organic growth. And so, we've had some absorption issues there, along with some significant major customer inventory cutbacks. At a couple of our major customers you're looking at inventory levels that are down anywhere from low to mid teens while our sales are only down either flat or down modestly. So even there the takeaway has been better than what our sales have been and because of inventory adjustments. The last comment I would make which is a little bit off this for our entire industry and it’s certainly impacted us, the raw material situation has been broader, bigger and more persistent than anybody anticipated in the middle of the year.

And to that end, now that you brought it up, I mean how is your pricing relative to that? I know there was an expectation three months ago that obviously you'd face some margin pressures due to higher raws for the fiscal second quarter, but then that would abate in the second half. Are you suggesting that those raw pressures are going to continue to persist into the fiscal second half of your year?

Yes, we are seeing as I said pretty broad and persistent raw material price increases in some categories in some regions like silicones in Europe, MMA, resins, different odds and ends we have see some shortages in allocation. And so, I think again it’s been a more bigger challenge for our whole industry than anybody anticipated in the spring or early summer and we are managing our way through that as aggressively as we can.

Thank you, Frank.

Thank you.

Thank you. Next we have Rosemarie Morbelli from Gabelli and Company.

Good morning.

Good morning and congratulation on a good quarter.

Thank you.

Frank, I was wondering if when we look at your change in guidance, it is $0.15 above previous guidance, $0.10 of which is going to come from the benefit from the new tax law if I understood properly and then $0.05 from operations. So when we look at that $0.05 assuming I am correct, is that mostly from the hurricane benefits that you're going to see affecting the hit in the second quarter?

No, most of our change in guidance is tax related. I think we're, if you go back to the beginning of the year, we are comfortable on a consolidated basis with being in the original guidance that we provided. The tax benefits that we did not anticipate but realized in the second quarter are one reason that we increased our guidance and then the second reason is in anticipation with a May 31 fiscal year end of five months of benefit of the new tax reform that we would add an additional $0.10 for fiscal ’18. So that would get you to the $3 to $3.10. I think to add just a little bit to the comments I made earlier, I think we're comfortable with our guidance and we will certainly do well this year despite raw material issues. It's likely that we will outperform our expectations in industrial and underperform our expectations at the beginning of the year in consumer.

So when you look at the second quarter and look at it versus the full year, are you looking at EPS of $0.61 which excludes the tax benefit in the second quarter which is how we are going to look at it mostly, are you looking at the $0.70? [ph]

No, we're looking at this, I mean I think the right way on an apples-to -apples basis for the quarter is to look at revenue growth it was up 10% with a solid almost 5% organic growth and EBIT growth that was up 15%. So despite big raw material issues we are able to leverage that growth to our bottom line the EBIT line. And then in adjusted EPS which is equalized for last year's tax rate of plus 17% [ph] or $0.61. So I think, if you want to eliminate the impact plus or minus of the tax issue compare our year this year to the same tax rate last year's quarter and you come up with a $0.61 quarter which is plus 17%, that's how we think about it in terms of the operating performance.

Okay, thanks for clarifying and looking at shellac how large is that particular business and the fact that the patent expires, I mean does it mean just more competition on pricing or are there other issues?

No, our MBZ [ph] business had a - we didn't release the size of the product line, but they had a, they were the inventors of Nature Seal which was the product that allowed apples to be coated with Nature Seal and water wash and not brown and that went off patent this summer. The management team there was able to negotiate with all of their major customers, new contracts and so we did not lose any market share, but they were very aggressive in recognizing the patent expiration wanting to continue to keep their customers base. So we slashed our prices pretty aggressively, so you've got significantly lower volume and a lower gross profit margin on what is still a very healthy business in a kind of a unique specialty products company that is involved in specialty food coatings and additives.

Okay and then going back to my question on the hurricane benefit, what do you think it is going to be in the second half of this year?

It's hard to say, I think it depends when the winter breaks for starters. We haven't had a very harsh winter for the last couple of years and this year's winter season seems to be getting off to a pretty robust chill and so that's likely to impact business. But I think in our Tremco roofing business, construction businesses on the consumer side probably more DAP caulks and sealants and patch and repair. We would expect to have some benefits in the spring and early summer as people do more patch and repair and/or renovation continues.

Thank you very much.

Thank you.

Thank you. Next we have Vincent Andrews from Morgan Stanley.

Good morning.

Good morning. Sorry about that. I just want to clarify that the previous question on the EPS guidance and the 61 versus the $0.70 when you talk about now doing your new guidance, does that assume that you did $0.61 in the second quarter or $0.70?

$0.70.

$0.70, okay. Thank you.

But in terms of doing apples-to-apples I think $0.61 is the right number to look at.

Understood, okay, thank you. And then I just wanted to ask about the investment spending in consumer and maybe if a little more detail, because it sounds like you are gaining share, but you're just not delighted with the overall volume performance, so is this spend designed to try to grow the category or is it designed to try to grow share or both? And then I guess my follow up to that would just be, you talked about EBIT and consumer being flat in the back half of the year as a result of this, so is that because there's going to higher raw material inflation or are you just not expecting to get immediate return on the spend?

Well, it's been a – we won't get an immediate return on the spend, but it's been a challenging year for consumer across the board, not just us, but a lot of our peers. And so we have gotten new placements in a number of major customers in wood stains and finishes. We continue to be the lead provider of small project paints. We continue to grow in the concrete and garage floor coatings category both in terms of share and increase in the market. But I think that with a very disappointing year this spring we intend to increase our promotional spending and our advertising spending in light of what's going to continue to be in the second half I think challenging results, modest growth and challenges with raw materials and that's also in our guidance. And really it's a goal to move some of our new product categories and pick up the whole market. It's interesting when you look at some of our major customers. You can slice and dice their categories in different ways. One interesting way is at a major home center. Items that are $35 or higher are up in the high teens and items that are lower than that are in the single digits and so there's been a seemingly spend on bigger renovation and different odds and ends and less on the decorating and small project paint for instance. And so to ensure that we have a return to strong sales and earnings growth in fiscal ’19 we're going to spend the dollars that we think are appropriate in the right places this spring.

Okay, thank you very much.

Thank you.

Thank you. Next we have Ghansham Panjabi from Robert W. Baird.

Good morning, Ghansham.

Hey, guys good morning. Good morning Frank. Happy New Year to you.

Happy New Year.

Thank you. First off, can you give us a better sense as to what drove the strength for polymer flooring any particular end markets that are growing faster that you can call out?

No, I think that whether it's in polymer flooring or roofing and those are two interesting categories, this also applies to our Dryvit business. We've got good opportunities and good growth and interestingly one of the challenges it’s inhibiting better growth is the availability of contractors. And so that's been for a number of reasons, immigration issues, and a pickup in construction activity with not a concurring pickup or return to that market of real qualified contractors. So that's one area where in roofing and polymer flooring, particularly in our Stonhard business where we actually do the application and our Tremco roofing business where we do the application and then to a lesser extent in Dryvit because of some shortages and some of the contracting there, that's been an impediment to us. But broadly speaking, we're doing well in North America and in Europe and then the developing world is so modest it's almost not worth talking about in those categories.

Okay, thank you for that. And then on the specialty segment how much was restoration up year-over-year during the second quarter and what margins in that segment have been down year-over-year in specialty were not for the strength in restoration given the patent expiration impact you called out?

Yes, I don't know that we've ever disclosed the particular product categories in restoration within our specialty segment. I can tell you that the revenues and earnings in that area are both up double digits and were they flat, you might very well see more modest to flat results in our specialty segment as a result of the patent expiration in the MBZ [ph] business and so I think that the leaders of those businesses are managing those businesses really well. They particularly managed the patent expiration well and I think those businesses given their special nature are managing the raw material gross margin situation better than most. And to a certain extent we'll take luck when we get it, in this case the strong restoration activity has showed up when it was needed in relationship to offsetting some of the declines in earnings in the edible coatings area.

Okay and just one final one. I know there are some nuances on the tax line specific to ’18 at least your fiscal year, so can you give us a better sense as to what the tax rate would be, it would look like for RPM post the U.S. tax law changes FY ’19 and beyond? Thanks so much.

Yes, I'll give you just a rough cut of it and then we'll have a better sense like everybody as the year unfolds and everybody starts to better understand the nuances of what's somewhat complicated bill. But I think Barry referenced that we'll have five months of the new tax law, so if you just look at statutory rates, the statutory rate for our U.S. business was 35% and with the 21% statutory rate on a blended basis we'd be at 29.2. These are just statutory rates and then obviously in our next fiscal year we'd be at 21. There are a some gives and takes, there were manufacturing credits in the old tax law that are gone, there are some different odds and ends. We estimate that for fiscal ’18 the five months impact of the new tax law will add $0.10 per share roughly give or take a penny for this fiscal year and my best guess is that in ‘19 we would pick up another $0.10 per share as a result of having a year in which the tax law is fully applicable.

And would that dropdown to cash almost equally?

Yes, I think the - again this is very rough and we'll refine this, but my guess is in the coming year or so past '18 into '19 the impact of the tax reform for RPM will be an increase in after tax cash flow somewhere in the neighborhood of $30 million to $40 million.

Okay, thanks so much.

Thank you.

Thank you. Next we have Arun Viswanathan from RBC Capital Markets.

Great, thanks, good morning. Happy New Year. How are you guys are doing?

Good, happy New Year.

Right, yes so I just want to - sorry to belabor this point, but on the tax issue so it looks like you are recognizing the $0.09 benefit in FQ2 and then there's another $0.10 benefit from the impact from the lower rate for the rest of the year, so that's $0.19 and your midpoint is up $0.15. So I mean is it incorrect to think that the actual fundamental performance is down $0.04 or is that what you're trying to interpret as well with the [indiscernible]?

I guess what I'd comment on is just a repeat of what we've said. Here are the factors; number one, we are on target on a consolidated basis despite what's been a broader, persistent, and bigger raw material issue hitting us in our whole industry, factor number one. As we look into the future, our industrial businesses are performing well despite those challenges and we continue to see that happen and if anything they'll outperform our original expectations for the year. Our specialty businesses are managing well and on plan given the challenges that we've communicated. Our consumer business is underperforming. We expect that to persist and in light of looking to the strength of our businesses, their market share, their products, we plan on some increases above what we originally anticipated in promotional and advertising spending this spring. And so those are all the factors that weigh in on the operating side along with the tax issues that you've highlighted for our revised outlook up to $3 to $3.10.

So when you think about the EBIT or even top line performance for each segment, do you feel more encouraged by that post this quarter or about the same?

I think we feel good about where industrial is and where it's going. I think we're really pleased with how well the leaders of our specialty segment businesses have managed this year given the challenges we knew we’d face and I think we're disappointed in our consumer performance year-to-date. We see that persisting and we intend to take actions to make sure that’19 is a return to really solid performance and growth in the top and bottom line in our consumer segment.

Okay, that's helpful and then just on corporate, that was also a little bit below. Is that you know due to some of your focused efforts on lowering SG&A or how do you think about corporate for expense for the rest of the year?

I think it will be consistent with where we've been. We - last year as Barry and Rusty have alluded to, took a number of actions in our corporate expense area and also across our operations including probably a 240% risk [ph] in the fourth quarter, shut down some small operations and addressed some corporate area expense and all of that is helping us leverage sales to the bottom line and that should continue for the balance of the year.

And then just lastly on M&A could you just update us on what you're expecting to complete the rest of the year, if there's any particular areas that you're finding more opportunity and if there's any improvement on that post this tax reform? Thanks.

Sure. Our M&A activities remain what they have been and we're continuing to focus on kind of small to medium sized product lines that we can integrate and/or family businesses that will join RPM as freestanding entrepreneurial business. Really don't have much more to add to that other than announcing deals when they happen. The M&A environment remains the same. I think the only impact in that area of the tax reform is some limitation on the deductibility of interest expense. That will not be an issue. We don’t anticipate for RPM, but perhaps it will be an issue for some of the highly levered private equity or LBO activity which has been a competitor at RPM in kind of the mid range and we can only hope. But that's kind of the state of play in the M&A market right now.

Got it, thanks Frank.

Thank you.

Thank you and next we have Kevin McCarthy from Vertical Research Partners.

Good morning, Kevin.

Good morning and Happy New Year. Frank, in the consumer segment you referenced organic sales growth of 3% in the quarter. How would you disaggregate that between volume contribution and price contribution?

Yes, it's mostly all volume and it's mostly in caulks and sealants, patch and repair product categories and are continuing to have relatively flat results in the small project paint area. And again I point out that through the year from what we can see of our major U.S. competitors we're continuing to outperform relative to what's been a very puncky [ph] market in that space for most of calendar '17.

And as a followup was price positive at all and given your comments on raw materials, how would you characterize the prospects for an acceleration in price realization over the next several quarters?

So given 40 different business units and hundreds of different product lines, the impact of price across RPM businesses varies widely. And I would say that prices probably 25% or 30% over our organic growth and on a consolidated basis, and I would expect that to continue for the balance of the year. But it's very different in different business units, product lines, and segments of RPM and that's about all the detail we provide on that.

Okay, and then I guess a broad question, last question on SG&A and cost reductions you've done a nice job there. It sounds like you're going to be ramping some spend in consumer, but can you give us a sense for one inning of the game wherein perhaps this is a never-ending game in some respects, but how much prospective cost reduction opportunity is there still?

Yes, on the one hand it's a never-ending game in relationship to what our cost structure looks like relative to revenue and particularly revenue growth. I don't know that we have any significant expense reduction initiatives planned now per se other than how we manage our expanding base of each business unit. We continue to look at opportunities to realign RPM businesses, particularly as we think about how we're best positioned to get to be a $10 billion business and there'll be some opportunities there that when it's appropriate we'll talk about.

Okay, thank you very much.

Thank you.

Thank you, and next we have Jason Rogers from Great Lakes Review.

Just a followup on the raw material cost increases. Could you quantify the magnitude of those increases you saw on a year-over-year basis in the quarter as well as the success that you're having implement price increases to offset that?

A little bit. You know, in certain categories we're seeing raw material prices that went up 8% or 10% in the late spring-early summer and some of those were going up again in certain categories that I commented on silicones in particularly in Europe are one. You're seeing now like significant price increases, but some availability issues. And so it really is across the board. We're seeing, you know, [indiscernible] that our petroleum-base go up modestly, resins going up more aggressively and in certain categories like ones I mentioned that have been going up with two or three price increases. We have attempted in a number of our businesses and steady [ph] price increases at the beginning of the year. We have new price increases some of which have gone in place in January, but it's really a mixed bag between product line price increases. In some cases it might be as much as 8% or 10% and other product categories where we have really not gotten much in the way of price yet.

And then I wonder if you could provide an update on Kirker and how the changes you've made there are progressing to improve results?

So Kirker, as those of you probably [ph] know is a smaller business than it was a few years ago and relatively modest in size and it had virtually no impact on RPM. And I'm happy to say that in the quarter their sales and earnings were better than they were last year.

All right and then finally I wonder if you'd care to mention any developments or milestones you're seeing in some of your major new products like Tuf-Strand, AlphaGuard or Newbrick [ph]? Thanks.

Certainly, so the Tuf-Strand continues to move nicely little bit seasonal in North America in terms of concrete pourers that don’t happen so much in cold weather like we're seeing now. But we are looking at and continuing to execute on capacity expansion now more outside of the United States. Newbrick [ph] his is a private product is just getting going. The early signs in that are pretty exciting and we're looking at ramping up production in the East Coast and possibly and the new tax bill might help us in terms of meeting, expensing adding some West Coast manufacturing that would come later in calendar '18. Our rock solid product line Rust-Oleum is doing extraordinarily well. It's a high-performing product that outperforms all of our peers and some of Rust-Oleum's older lower price versions of concrete coatings and their garage floor coatings. And as our numbers show, we're continuing to maintain and in some cases pick up share versus peers that have had the same or more challenges in the small project paint area. I guess the last comment I would make is that we picked up significant wood stain and finishes placement. We should start to see the benefits of that in the spring. And then our outlook our product line which is a proprietary resinous-based coating for roofs continues to grow at double-digits for Tremco and we're looking to add capacity there in the spring.

Thank you.

Thank you.

Thank you, next we have Mike Harrison from Seaport Global Securities.

Good morning.

Hi good morning. Frank I was wondering if you could address the manufacturing absorption issues that you noted in the consumer business, it just seems a little bit odd that the volume would be up year-on-year, but we're having some of these absorption issues?

So the volume in our spray paint, small project paint area is for the year is not up after an extraordinarily seven-year run both there and in costs in caulks and sealants, patch and repair products in the last year and a half we added some significant capacity. We look to continue to add capacity where it's appropriate and also optimize some of our manufacturing. But it's really the first year after a great run of seven years of good strong organic growth where in the first half of year we actually experienced negative growth minus 1% or so and relatively flat in some of these areas. And it's a very seasonal business and so when times were booming we would be manufacturing product anywhere and everywhere we could, it's where our inventory build is the biggest because of the seasonality of the business we have more capacity than we need in the late fall and in the winter months and we tend to have less capacity than we need in the peak season, so we have to build inventory into that. I think we're correcting that both in terms of capacity as well as manufacturing processes, but in those categories we are dealing with absorption issues and at the same time we're dealing with raw material issues and that's been one of the negative impacts in our consumer segment results.

Okay that makes sense now. And then looking the now and then looking at the caulks and sealants up you've seen, is that – are we starting to see any benefits from kind of hurricane related rebuild or should I think of that as being related more to kind of an easier comp? If I recall correctly, you were capacity constrained in the prior year.

That's correct and so I think that – you know, we're hopeful that we'll see some benefit from that in the construction products areas and again in the consumer side more on the DAP, caulks and sealants, patch and repair products in the spring. And some of the devastation there was such that the real rebuild and construction activity isn’t going to happen until the spring or the summer. I think the easier comps will be in industrial and consumer next year in the second quarter because we lost probably 10 days of the negative impact in some major markets like Florida and Texas.

Got it. And then can you just comments at all on what you've experienced in the line review process as you've gone through your yearend any potential gains in shelf space in some of these small project paints and wood stains and other areas particularly as there's been some consolidation in the industry? Thank you.

Sure, you know we've continued to maintain our market share across our consumer businesses. The area where we picked up some share at some of our major accounts is with our Varathane wood stains and finishes line and then the other areas that have been driving what growth we've been getting is in kind of new or unique product categories like the rock solid concrete and garage floor coatings businesses. And you know, share or market presence isn’t the issue. It's just been modest or punky consumer takeaway exacerbated by big inventory issues at some of our major customers. And so that should - once those are mostly behind us as we get into fiscal '19 we should certainly be seeing easier comps in relationship to our activities and interest and being more aggressive in promoting and advertising and not annualizing the inventory issues that we faced at a couple major customers this year.

Got it, thank you very much.

Thank you.

Thank you and next we have Mike Sison from KeyBanc Capital Markets.

Good morning, Mike.

Hi guys, Happy New Year.

Happy New Year.

The industrial segment is doing pretty well, so if they have extra time I don't think the Jets have made a playoffs in a decade, but in terms of the growth outlook for sales do you think EBIT growth in the second half will be in line with that upper single-digit growth, little bit better, little bit worse because of raw materials?

I would expect with one caveat which is look out the window almost anywhere in America and you can see snow, I would expect for the third and fourth quarter that will generate high single digit revenue growth certainly in the third quarter. The fourth quarter should be, may be a little moderate because we will annualize most of the acquisition activity from last year. And that growth despite raw material issues on a consolidated basis should generate mint upper teen income growth.

Great, and then just as a quick followup at raw material, what's the actual squeeze this year and if you get some pricing could that be, may be a positive for you in '19 as you catch-up with the raw materials?

Yes, I think we and our whole industry are working to catch-up. Typically we're a maybe a three or four month lag in our industrial and specialty businesses and as much as a year lag in our consumer businesses. The challenges we've been facing is multi- or multiple price increases in certain categories that have hit three or four months after the last one and so we're playing catch-up. Our whole industry is playing catch-up and I would expect that to settle down sometime this spring. But I think our whole industry, no matter who you talked to last spring, kind of expected things to settle down at the end of the summer and that has not happened yet.

Great, thank you.

Thank you.

Thank you, and next we have Steve Byrne from Bank of America.

Good morning.

Hi, good morning. This Ben [indiscernible] on for Steve. Just a quick followup on some of your prior raw material commentary, do you have a line of sight as to when some of these raw material shortages will be alleviated?

You know, I don’t have a good answer to that question as we sit here. I don't know that there is shortages in these petrochemical type products. I think the area that's been the biggest challenge is in silicones in terms of a broader category and then some unique raw materials that go into some of our M&A areas where RPM companies both in terms waterproofing products and flooring products are global leaders and so we've seen some easing in those shortages. It's hard to know in the silicon area how much of it is capacity and how much of it is organized, but in any event, that's the best I can tell you at this point sitting here, but we'll look into that.

I understand, that's helpful, thank you very much.

Thank you and next we have Silke Kueck from J. P. Morgan.

Good morning, Silke.

Good morning. You know with retailers lowering inventories in the mid teens range that's presumably something that affected like last calendar year volumes. Can you tell what ordering patterns look like currently as like the retail channels get ready to stock up for the spring season?

The answer to that is yes, we can. The inventory issues hit us late spring and throughout summer and there were issues that we had to manage through and in some cases they were good inventory management practices to a new level at major customers and other areas you could go into major customers and literally for weeks be out of stock in basic colors like black and white. Most of that's behind us. We do have insight into consumer takeaway on a pretty regular basis and what we think that will do for us. That's really not going to be a factor for us until the spring. Again this is a seasonal business particularly in the small project paint area and the outdoor painting area and roofing and other things. And inventory builds typically don't start until kind of February timeframe.

Okay, and secondly, do you have any insight as to how the big box retailers are reacting to the consolidation among the U.S. paint companies?

You know, we're really not in the architectural pain business and so I so think it's interesting to see how that shakes out and beyond that I really don't have much of a comment. We continue to be the leader in almost all the small project paint categories regardless of whether it's for metal or for elements of wood, for concrete, patch and repair and caulks and sealants. We're getting more into the adhesives area. One of the product categories I failed to mention for Rust-Oleum was a partnership with Tremco and their first entrée in a major way with a major big box customer into the building materials aisles with 5-gallon pails of roof coatings. And so that's a new and exciting area for us. We've been working on that for probably a couple of years and you'll see that take off this spring as well. So that's a whole new product category and a whole new isle and area of home centers that we hope to better penetrate in the future.

Thank you.

Thank you and our final question comes from Rosemarie Morbelli. Your line is open.

Thank you. Frank, I was just wondering, or Rusty if you could give us an update on what you are doing with - where you are on the 524 (g)? You have been prepaying, where do we spend how much more is there to go and when do you have a choice between putting either cash or stock in that front?

Our final payment on that is due in December of '18, so 11 months from now and there is a possibility relative to our understanding of the new tax legislation the debt could be accelerated to being paid before May 31, but we'll have a better feel for that when we talked to investors on our April conference call.

Okay, thanks.

Thank you.

Thank you and we have no further questions at this time.

Thank you to all for your participation in our investor call today. We're pleased with our second quarter results particularly in light of a lot of the major challenges that we knew we were facing at the beginning of the year exacerbated by the ongoing raw material issues. We remain excited about our ability to deliver solid sales and leverage that to mid teens or better earnings growth for the balance of the year and for positioning RPM for another year of strong growth in fiscal 2019. And we look forward to communicating to all of you throughout the year and again on our investor call for the third quarter in April. Thank you to all and Happy New Year.

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