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RPM International, Inc. (NYSE:RPM)
Q2 2018 Earnings Conference Call
January 04, 2018, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

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 may be 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 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.

Frank Sullivan -- Chairman and Chief Executive Officer

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, our Vice President of Investor Relations. Today, we'll discuss our second quarter results, then provide guidance for the balance of our 2018 fiscal year, and answer your questions.

We were 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 on 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 $0.09 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, to those businesses providing polymer flooring to commercial and industrial markets. We also saw a slight rebound in our companies 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 reflect a combination of higher raw material costs, unfavorable foreign 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 decline 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 the solid organic growth of 2.8%, after overcoming a 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 costs 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 due to 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, and 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.

Barry Slifstein -- Vice President of Investor Relations

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%. 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 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 predominantly 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. Common 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, total 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, the prefunding 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 debts of 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 of 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.

Russell Gordon -- Vice President and Chief Financial Officer

Thank you, Barry. 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.

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 as exceeded our expectations as our tax team has realized more discreet 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 are a couple of drags we've talked about a lot over the last three years that are preparing to turn the corner. First of all, our industrial segment sales to energy markets have turned the quarter (sic) in 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 U.S. dollar results.

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. We're also looking ahead to overall improvement in the global economy. We're optimistic in regard 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.

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 53% of its business outside of the U.S. 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. 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 '17 acquisitions. Last year, you might remember the bulk of these were done by January. You'll hear this theme again as we discuss 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.

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, we do see a positive future for home improvement spending. As a result, we plan to invest in stepped up advertising and promotional activity during the upcoming spring. 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 specialty 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've been the highest if sales are factored out of the prior year from a European business that we closed last winter.

Another note on specialty is that they're generating this good performance despite of the drag on sales from a U.S. patent that expired prior to the second quarter. As we mentioned, this impacts our edible coatings business.

As we already discussed, the negative impacts on sales have been offset so far this year by great sales in our restoration service business as well as a couple of businesses selling into OEM markets. 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.

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 were in line with expectations. We expect this to continue in the back half.

One area we mentioned we're better than anticipated is taxes. Our year-to-date effective tax rate of 19.6% is better than we expected. Barry already mentioned the discreet 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 $3.00 to $3.10 per share. 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. This one-time adjustment stems from a couple of factors. First of all, based on the new tax law, we're going to remeasure our deferred tax assets and liabilities. 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, we will be recording a one-time adjustment in the third quarter. That is not built into this guidance range of $3.00 to $3.10 per share.

...

Now, with that, we look forward to answering your questions.

Questions and Answers:

Operator

Thank you. [Operator instructions] Our first question comes from Frank Mitsch from Wells Fargo Securities.

Frank Mitsch-Wells Fargo Securities -- Analyst

Good morning. 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. Frank, you talked a lot about better organic growth sequentially -- improvement over the fiscal first quarter, looking at upper single digits in industrial. Rusty was talking about if you exclude some of the shutdown, specialty would've been better as well. I'm trying to get a handle on how much of this is hurricane related in terms of getting better fiscal second half growth relative to other initiatives that you have under way.

Frank Sullivan -- Chairman and Chief Executive Officer

Sure. 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. Quite candidly, industrial activity is picking up pretty broadly.

Geographically, this will give you a good sense of it, since most of our consumer is in North America. There is a slug of it in Europe, but across the world, we were up 10% in the U.S. and up 12% in Europe and, on a small base, up 11% in Asia. Up 18% in Canada. The only places we were down were in the Middle East with a lot of turmoil. We were modestly positive in Latin America, but it was all currency related.

If anything, our consumer businesses and industrial businesses could have been better in the second quarter. Like everybody, we got hit pretty hard at the start of the quarter with the impact of the hurricanes, particularly in consumer, where you had almost two weeks of 1,000-plus retail outlets shut down in major markets like Texas and Florida and Puerto Rico to a lesser extent. So, that hurt us.

We expect the positive trends we're showing in industrial to continue in the second half. I think specialty is managing through the challenges we've talked about very well. Consumer, I think, will continue to be challenged in the second half just like they have in the first. I would remind folks, 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 10-11% range in the most recent quarter, where we were up 3%. As far as we can tell, competitors are down anywhere from 1-3%.

We are going to end up with a year 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. That's part of the revised guidance that we provided.

Frank Mitsch-Wells Fargo Securities -- Analyst

That's very helpful. 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?

Frank Sullivan -- Chairman and Chief Executive Officer

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 we've had a slowdown with flat to moderately negative organic growth. So, we've had some absorption issues there along with some significant major customer inventory cutbacks. With 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 either flat or down modestly. Even there, the takeaway has been better than what our sales have been in because of inventory adjustments.

For our entire industry, and it's certainly impacted us, the raw materials situation has been broader, bigger, and more persistent than anybody anticipated in the middle of the year.

Frank Mitsch-Wells Fargo Securities -- Analyst

To that end, how is your pricing relative to that? I know there was an expectation three months ago that you'd faced some margin pressures due to higher ROS 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?

Frank Sullivan -- Chairman and Chief Executive Officer

Yes. We are seeing pretty broad and persistent raw material price increases in some categories and regions like silicones in Europe, MMA resins, and different odds and ends. We have seen some shortages in allocation. Again, it's been a 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.

Frank Mitsch-Wells Fargo Securities -- Analyst

Thank you.

Operator

Thank you. Next, we have Rosemarie Morbelli from Gabelli & Company.

Rosemarie Morbelli -- Gabelli & Company -- Analyst

Good morning. Congratulations on a good quarter. Frank, when we look at your change in guidance, it's $0.15 above the previous guidance, $0.10 of which is going to come from the benefit of the new tax law if I understood properly, and then $0.05 from operations. When we look at that $0.05, is that mostly from the hurricane benefits that you are going to see offsetting the hit in the second quarter?

Frank Sullivan -- Chairman and Chief Executive Officer

No. Most of our change in guidance is tax related. 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 we increased our guidance. The second reason is in anticipation with a May 31 fiscal year end of five months of benefit of a new tax reform, that we would add an additional $0.10 for Fiscal '18. So, that's what gets you to the $3.00 to $3.10.

To add a little bit to the comments I made earlier, I think we're comfortable with our guidance and we'll certainly do well this year despite the 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.

Rosemarie Morbelli -- Gabelli & Company -- Analyst

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

Frank Sullivan -- Chairman and Chief Executive Officer

Yes.

Rosemarie Morbelli -- Gabelli & Company -- Analyst

Or, are you looking at the $0.70?

Frank Sullivan -- Chairman and Chief Executive Officer

No, I think the right way, on an apples-to-apples basis for the quarter, is to look at revenue growth that was up 10% with a solid almost 5% organic growth, and EBIT growth that was up 15%. So, despite big raw material issues, we were able to leverage that growth to our bottom EBIT line. And then, an adjusted EPS, which is equalized for last year's tax rate, of +17% or $0.61.

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 +17%. That's how we think about it in terms of the operating performance.

Rosemarie Morbelli -- Gabelli & Company -- Analyst

Thanks. And, looking at the shellac, how large is that particular business? The fact that the patent expires, does it mean just more competition on pricing or are there other issues?

Frank Sullivan -- Chairman and Chief Executive Officer

No, our MBZ business -- we didn't release the size of the product line, but they were the inventors of NatureSeal, which was the product that allowed apples to be coated with NatureSeal and a water wash and not brown. That went off patent this summer. The management team was able to negotiate with all of their major customers new contracts, so we did not lose any market share. But, they were very aggressive in recognizing the patent expiration and wanting to continue to keep that customer base. So, we slashed our prices pretty aggressively.

So, you have significantly lower volume and a lower gross profit margin on what is still a very healthy business in a unique specialty products company that's involved in specialty food coatings and additives.

Rosemarie Morbelli -- Gabelli & Company -- Analyst

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?

Frank Sullivan -- Chairman and Chief Executive Officer

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 pretty robust chill. That's likely to impact business. But, I think in our Tremco Roofing business and 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.

Rosemarie Morbelli -- Gabelli & Company -- Analyst

Thank you very much.

Operator

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

Vincent Andrews -- Morgan Stanley -- Analyst

Good morning. I just want to clarify that the previous question on the EPS guidance and the $0.61 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?

Frank Sullivan -- Chairman and Chief Executive Officer

$0.70. [Inaudible -- crosstalk], but in terms of doing apples-to-apples, I think $0.61 is the right number to look at.

Vincent Andrews -- Morgan Stanley -- Analyst

Understood. Thank you. I just wanted to ask about the investment spending in consumer. It sounds like you are gaining share, but you are just not delighted with the overall volume performance. So, is this spend designed to grow the category or to grow share or both? And, you talked about EBIT and consumer being flat in the back half of the year as a result of this. Is that because there's going to be higher raw material inflation, or are you just now expecting to get an immediate return on this spend?

Frank Sullivan -- Chairman and Chief Executive Officer

Well, we won't get an immediate return on the spend, but it's been a challenging year for consumers across the board -- not just us, but a lot of our peers. 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 flood coatings category, both in terms of share and increase in the market.

But, with a very disappointing year, this spring we intend to increase our promotionally spending and advertising spending in light of what's going to continue to be, in the second half, challenging results. Modest growth and challenges with raw materials -- that's also in our guidance. 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 way is, at a major home center, times that are $35.00 or higher are up in the high teens. And items that are lower than that are in the single-digits. So, there has been a seeming spend on bigger renovation and different odds and ends, and less on the decorating and small project paint, for instance. So, to ensure that we have a return to strong sales and earnings growth in Fiscal '19, we're going to spend the dollars we think are appropriate in the right places this spring.

Vincent Andrews -- Morgan Stanley -- Analyst

Thank you very much.

Operator

Thank you. Next, we have Ghansham Panjabi with Robert W. Baird.

Ghansham Panjabi -- Robert W. Baird & Co. -- Analyst

Good morning. Happy New Year to 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 than you can call out?

Frank Sullivan -- Chairman and Chief Executive Officer

No, whether it's in polymer flooring or roofing -- and those are two interesting categories -- this also applies to our Dryvit business. We have good opportunities and good growth, and one of the challenges that's inhibiting better growth is the availability of contractors. That's been, for a number of reasons -- immigration issues and a pick-up in construction activity with not a concurring pick-up 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 to a lesser extent in Dryvit because of some shortages in 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.

Ghansham Panjabi -- Robert W. Baird & Co. -- Analyst

Thank you. On the specialty segment, how much was restoration up year-over-year during the second quarter? Would margins in that segment have been down year-over-year in specialty were it not for the strength and restoration given the patent expiration impact you called out?

Frank Sullivan -- Chairman and Chief Executive Officer

I don't know that we've ever disclosed the particular product categories and restoration within our specialty segment. I can tell you that the revenues and earnings in that area are both up double digits. 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 business.

I think the leaders of those businesses are managing those businesses really well. They particularly managed the patent expiration well. I think those businesses, given their specialty nature, are managing the raw material gross margin situation better than most. 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.

Ghansham Panjabi -- Robert W. Baird & Co. -- Analyst

Just one final one. I know there are some nuances on the tax line specific to Fiscal '18. Can you give us a better sense as to what the tax rate would like for RPM post the U.S. tax law changes FY '19 and beyond?

Frank Sullivan -- Chairman and Chief Executive Officer

I'll give you a rough cut of it, and we'll have a better sense as the year unfolds, and everybody starts to better understand the nuances of what's a somewhat complicated bill. 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%. Obviously, in our next fiscal year, we'd be at 21%.

There are 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. 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.

Ghansham Panjabi -- Robert W. Baird & Co. -- Analyst

Would that drop down to cash almost equally?

Frank Sullivan -- Chairman and Chief Executive Officer

Yeah, this is very rough. We'll refine this, but my guess is in the coming year -- so, past '18 into '19 -- the impact of the tax reform for RPM will be an increase in after tax cashflow somewhere in the neighborhood of $30-40 dollars.

Ghansham Panjabi -- Robert W. Baird & Co. -- Analyst

Thanks so much.

Operator

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

Arun Viswanathan -- RBC Capital Markets -- Analyst

Good morning. Happy New Year. On the tax issue, 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, is it incorrect to think that the actual fundamental performance is down $0.04? Is that what you're trying to interpret as well, what the guidance --

Frank Sullivan -- Chairman and Chief Executive Officer

No. I'll comment with 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 hitting us and our whole industry. As we look into the future, our industrial businesses are preforming well despite those challenges and we continue to see that happen. If anything, they'll outperform our original expectations for the year. Our specialty businesses are managing well and on plan given the challenges we've communicated.

Our consumer business is underperforming. We expect that to persist. 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. Those are all of the factors that weight in on the operating side, along with the tax issues you've highlighted, or our revised outlook up to $3.00 to $3.10.

Arun Viswanathan -- RBC Capital Markets -- Analyst

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

Frank Sullivan -- Chairman and Chief Executive Officer

I think we feel good about where industrial is and where it's going. We're pleased with how well the leaders of our specialty segment businesses have managed this year given the challenges we knew we'd face. 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.

Arun Viswanathan -- RBC Capital Markets -- Analyst

On corporate, that was also a little bit below us. Is that due to some of your focused efforts on lowering SG&A? How do you think about corporate for expense for the rest of the year?

Frank Sullivan -- Chairman and Chief Executive Officer

I think it'll be consistent with where we've been. Last year, we took a number of actions in our corporate expense area, and also across our operations, including a 240-person riff in the fourth quarter. We shut down some small operations and addressed some corporate area expense. All of that is helping us leverage sales to the bottom line. That should continue for the balance of the year.

Arun Viswanathan -- RBC Capital Markets -- Analyst

Lastly, on M&A, could you update us on what you're expecting to complete the rest of the year, if there are any particular areas that you're finding more opportunity? And, if there is any improvement on that post this tax reform?

Frank Sullivan -- Chairman and Chief Executive Officer

Sure. Our M&A activities remain what they have been. We're continuing to focus on small to medium sized product lines that we can integrate and/or family businesses that will join RPM as a freestanding entrepreneurial business. I 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 anticipate for RPM. But, perhaps it'll be an issue for some of the highly levered private equity or LBO activity, which has been a competitor to RPM in the midrange. We can only hope. But, that's the state of play in the M&A market right now.

Arun Viswanathan -- RBC Capital Markets -- Analyst

Got it. Thanks, Frank.

Operator

Thank you. Next, we have Kevin McCarthy from Vertical Research Partners.

Kevin McCarthy -- Vertical Research Partners -- Analyst

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

Frank Sullivan -- Chairman and Chief Executive Officer

It's mostly all volume and it's mostly in caulks, sealants, and patch and repair product categories. We're continuing to have relatively flat results in the small project paint area. 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 punky market in that space for most of calendar '17.

Kevin McCarthy -- Vertical Research Partners -- Analyst

Was price positive at all? Given your comments on raw materials, how would you characterize the prospects for an acceleration in price realization over the next several quarters?

Frank Sullivan -- Chairman and Chief Executive Officer

Given 40 different business units and hundreds of different product lines, the impact of price across RPM businesses varies widely. I would say that price is probably 25-30% of our organic growth on a consolidated basis. 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. That's about all the detail we provide on that.

Kevin McCarthy -- Vertical Research Partners -- Analyst

Okay. A broad 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 spending consumer, but can you give us a sense for what inning of the game we're in? Perhaps it's a never-ending game in some respects, but how much prospective cost reduction opportunity is there still?

Frank Sullivan -- Chairman and Chief Executive Officer

One 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 issues planned now per se, other than how we manage our spending base in 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. There will be some opportunities there that, when it's appropriate, we'll talk about.

Kevin McCarthy -- Vertical Research Partners -- Analyst

Okay. Thank you very much.

Operator

Thank you. Next, we have Jason Rodgers from Great Lakes Review.

Jason Rodgers -- Great Lakes Review -- Analyst

Just a follow-up 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 implementing price increases to offset that?

Frank Sullivan -- Chairman and Chief Executive Officer

A little bit. In certain categories, we're seeing raw material prices that went up 8-10% in the late spring or early summer. Some of those are going up again. In certain categories that I commented on -- silicones, particularly in Europe, are one -- you're seeing not only significant price increases, but some availability issues. So, it really is across the board. We're seeing raws that are petroleum based go up modestly, resins going up more aggressively, and then certain categories like the ones I mentioned that have been going up with two or three price increases.

We have attempted, in a number of our businesses, to institute 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 8-10% in other product categories where we have not gotten much in the way of price yet.

Jason Rodgers -- Great Lakes Review -- Analyst

Can you provide an update on Kirker and how the changes you've made there are progressing to improve results?

Frank Sullivan -- Chairman and Chief Executive Officer

Kirker is a smaller business than it was a few years ago and is relatively modest in size. It had virtually no impact RPM. I'm happy to say that, in the quarter, their sales and earnings are better than they were last year.

Jason Rodgers -- Great Lakes Review -- Analyst

Finally, would you mention any developments or milestones you're seeing in some of your major new products, like TUF-STRAND, AlphaGuard, or Nubrik? Thanks.

Frank Sullivan -- Chairman and Chief Executive Officer

Certainly. The TUF-STRAND continues to move nicely -- a little bit seasonal in North America in terms of concrete pours. It doesn't happen so much in cold weather like we're seeing now. We're looking at and continuing to execute on capacity expansion now more outside of the United States. Nubrik, which is a Dryvit product, is just getting going. The early signs in that are pretty exciting. We're looking at ramping up production on the East Coast and possibly the new tax bill might help us in terms of expensing and adding some West Coast manufacturing that would come later in calendar '18.

Our RockSolid product line at Rust-Oleum's doing extraordinarily well. It's a high performing product that outperforms all of our peers and some of Rust-Oleum's older, lower priced, versions of concrete coatings and garage floor coatings. As our numbers show, we're continuing to maintain and pick up share versus peers that have had the same or more challenges in the small project paint area.

We picked up a significant wood stain and finishes placement. We should start to see the benefits of that in the spring. Then, our AlphaGuard product line, which is a proprietary resinous base coating for roofs, continues to grow at double digits with Tremco. We're looking at add capacity there in the spring.

Jason Rodgers -- Great Lakes Review -- Analyst

Thank you.

Operator

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

Mike Harrison -- Seaport Global Securities -- Analyst

Good morning. Could you address the manufacturing absorption issues that you noted in the consumer business? It seems a little bit odd that the volume would be up year-on-year but we're having some of these absorption issues.

Frank Sullivan -- Chairman and Chief Executive Officer

The volume in our spray paint, small project paint, areas for the year is not up after an extraordinary seven-year run, both there and in caulks and sealants and 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. It's the first year after a great run of seven years of good, strong organic growth where, in the first half of the year, we actually experienced negative growth of -1% or so and relatively flat in some of these areas.

It's a very seasonal business. 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 winter months. 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 at the same time we're dealing with raw material issues. That's been one of the negative impacts in our consumer segment results.

Mike Harrison -- Seaport Global Securities -- Analyst

That makes sense now. Looking at the caulks and sealants uptick you've seen. Are we starting to see any benefit from the hurricane related rebuild? Or, should I think of that as being related more to an easier comp? If I recall correctly, you were capacity constrained in the prior year.

Frank Sullivan -- Chairman and Chief Executive Officer

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

Mike Harrison -- Seaport Global Securities -- Analyst

Got it. Can you comment on what you've experienced in the line review process as you've gone through year-on-year end? 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?

Frank Sullivan -- Chairman and Chief Executive Officer

Sure. We continue to maintain our market share across our consumer businesses -- the area where we picked up some share in some of our major accounts is with our Varathane wood stains and finishes line. The other areas that have been driving growth are in new and unique product categories like the RockSolid concrete and garage flood coating businesses. Share or market presence isn't the issue. It's just been modest or punky consumer takeaway exacerbated by big inventory issues in some of our major customers. So, once those are mostly behind us, as we get into Fiscal '19, we should be seeing easier comps in relationship to our activities and interest in being more aggressive in promoting and advertising, and not annualizing the inventory issues that we faced at a couple of major customers this year.

Mike Harrison -- Seaport Global Securities -- Analyst

Got it. Thank you very much.

Operator

Thank you. Next, we have Mike Sison with KeyBanc Capital Markets.

Michael Sison -- KeyBanc Capital Markets -- Analyst

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

Frank Sullivan -- Chairman and Chief Executive Officer

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

Michael Sison -- KeyBanc Capital Markets -- Analyst

Great. As a quick follow-up on raw materials, what's the actual squeeze this year? If you get some pricing, could that be a positive for you in '19 if you catch up with the raw materials?

Frank Sullivan -- Chairman and Chief Executive Officer

Yeah, I think we, in our whole industry, are working to catch up. Typically, we're at 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 are multiple pricing increases in certain categories that have hit three or four months after the last one. So, we're playing catch up. Our industry's playing catch up. I would expect that to settle down sometime this spring, but I think our whole industry, not 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.

Michael Sison -- KeyBanc Capital Markets -- Analyst

Great. Thank you.

Operator

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

Stephen Byrne -- Bank of America -- Analyst

Good morning. This is Ben Godesteiner on for Steve. A quick follow-up 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?

Frank Sullivan -- Chairman and Chief Executive Officer

I don't have a good answer to that question as we sit here. I don't know that there are shortages in any of the petro chemical 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 of waterproofing products and flooring products, are global leaders. 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. But, we'll look into that.

Stephen Byrne -- Bank of America -- Analyst

Understood. Thank you very much.

Operator

Thank you. Next, we have Silke Kueck from JP Morgan.

Silke Kueck -- JP Morgan -- Analyst

With retailers lowering inventories in the mid-teens range, that's presumably something that effected last calendar year volumes. Can you tell what ordering patterns look like currently as the retail channels get ready to stock up for the spring season?

Frank Sullivan -- Chairman and Chief Executive Officer

The answer to that is yes, we can. The inventory issues hit us late spring and throughout the summer. They're issues that we had to manage through, and in some cases, they were good inventory management practices to a new level at major customers. In other areas, you could go into major customers and literally in four weeks be out of stock in basic colors like black and white. Most of that is 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. Inventory builds typically don't start until the February timeframe.

Silke Kueck -- JP Morgan -- Analyst

Do you have any insight as to how the big box retailers are reacting to the consolidation among the U.S. paint companies?

Frank Sullivan -- Chairman and Chief Executive Officer

We're really not in the architectural paint business. So, I do think it's interesting to see how that shakes out. 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 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 entre in a major way with a major big box customer into the building materials aisles with five-gallon pails of roof coatings. So, that's a new and exciting area for us. We've been working on that for probably a couple of years. You'll see that take off this spring as well. That's a whole new product category and a whole new aisle and area of home centers we hope to better penetrate in the future.

Silke Kueck -- JP Morgan -- Analyst

Thank you.

Operator

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

Rosemarie Morbelli -- Gabelli & Company -- Analyst

Thank you. Can you give us an update with where you are on the 524(g)? You have been prepaying. Where do we stand? How much more is there to go and when do you have a choice between putting either cash or stock into that fund?

Frank Sullivan -- Chairman and Chief Executive Officer

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

Rosemarie Morbelli -- Gabelli & Company -- Analyst

Okay. Thanks.

Operator

Thank you. We have no further questions at this time.

Frank Sullivan -- Chairman and Chief Executive Officer

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 our Fiscal 2019.

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.

...

Operator

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

Duration: 69 minutes

Call participants:

Frank Sullivan -- Chairman and Chief Executive Officer

Russell Gordon -- Vice President and Chief Financial Officer

Barry Slifstein -- Vice President of Investor Relations

Rosemarie Morbelli -- Gabelli & Company -- Analyst

Ghansham Panjabi -- Robert W. Baird & Co. -- Analyst

Vincent Andrews -- Morgan Stanley -- Analyst

Kevin McCarthy -- Vertical Research Partners -- Analyst

Silke Kueck -- JP Morgan -- Analyst

Frank Mitsch-Wells Fargo Securities -- Analyst

Stephen Byrne -- Bank of America -- Analyst

Arun Viswanathan -- RBC Capital Markets -- Analyst

Michael Sison -- KeyBanc Capital Markets -- Analyst

Mike Harrison -- Seaport Global Securities -- Analyst

Jason Rodgers -- Great Lakes Review -- Analyst

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