RPM International Inc (RPM) 2002 Q3 法說會逐字稿

Good day, and welcome to this RPM conference call. Today's call is being recorded. This call is also being Webcast live and can be accessed through the RPM Web site at www.rpminc.com. A taped telephone replay will be available two hours after this call concludes until 8:00 p.m. Eastern Standard Time on Monday April 8th and can be accessed by dialing 719-457-0820 and entering confirmation code 745977. A Webcast replay and written transcript will also be made available through our Web site. The Webcast replay will be available about two hours after this call ends, and the written transcript will be available approximately 36 hours after this call concludes.

Comments made on this call may include forward-looking statements based on current expectations that involve risks and uncertainties that could cause the results of RPM to differ materially from management's current expectations. For more information regarding these risks, please review the factors listed in the MD&A discussions contained in RPM's Securities and Exchange Commission filings, including, but not limited to, the annual report on Form 10-K for the year ended May 31st, 2001, and the quarterly report on Form 10-Q for the quarter ended November 30th, 2001.

The information in this conference call related to the projections or other forward-looking statements may be relied upon subject to the previous Safe Harbor Statement and may continue to be used while this call remains on the active portion of the RPM website. At this time I would like to turn the call over to RPM's Chairman and CEO, Mr. Tom Sullivan. Please go ahead.

Thank you and welcome all to the RPM conference call.

With me is Frank Sullivan, President and Chief Operating Officer of RPM, and Bob Matejka, Vice President and Chief Financial Officer of RPM. Also joining us by phone Glenn Hasman, Vice President and Chief Communications Officer from Hawaii, and Jim Karman, our Vice Chairman for West Palm.

What we'd like to do today is start with Bob giving you the specific details concerning the third quarter and nine months, followed by some general comments of myself, and then turn the conference call over to Frank Sullivan to answer your questions. At this time, Bob, if you'd talk about the third quarter, nine months results.

All right. Thank you Tom.

For the third quarter just ended, you all have seen the news release. We've had sales of 407.5, which is a half-percent increase over the quarter for fiscal third quarter '01. One thing we point out there is that last year we did have sales included for the Durabond business at DAP Products, and the sales included in last year's number for Durabond were about 7.2 million.

Additionally, we've had some negative foreign exchange effects, which cost us about one percent on the revenue line. When you wash out the impact of the Durabond issue, and the foreign exchange issue, our pro forma sales would have increased 3.4 percent. The gross profit, 178.6 for this year's quarter, is up 4.3 percent from a year ago. The SG&A, 166.0, matches as a percent of sales last year's number, with a 40.7 cost relative to sales.

As we reported previously, we adopted the accounting for goodwill and other intangibles under newly enacted FAS 142 at the beginning of this fiscal year. The impact of this new accounting pronouncement is reflected in this SG&A, and had FAS been in effect during last year's third quarter, the SG&A last year would have been $7 million lower.

There's one other non-comparable cost issue in SG&A year over year, that is the non-cash charge taken this year relative to the devaluation of the Australian -- sorry the Argentinean peso, which we pointed out in our news release yesterday. This before tax loss was $2.1 million reported this year in SG&A. When the impact of these two events are removed, you see a year over year pro forma movement in SG&A cost percentage, from 39 percent last year to 40.2 in this recently completed third quarter. The absolute pro forma dollar increase in SG&A would be 3.7 percent.

Moving onto interest expense, the cost decreased seven point -- sorry -- 9.7 million, quarter over quarter. While principally driven by lower rates, the average debt outstanding, year over year, was down approximately $85 million or some eight plus percent. With our debt structure being 75 percent variable, this is highly influential. For the quarter, our interest rates averaged 3.9 percent, which is down 340 basis points from last year's quarter, where -- wherein the rates were 7.1 percent.

The income tax rate was 34 percent this quarter versus 38 a year ago. And as mentioned, in the previous two quarters this year, the reduction results almost entirely to the adoption of FAS-142 accounting. Last year, before 142, almost all of the $7 million of amortization reported was non-tax deductible, which drives up the rates.

Net earnings were up 10.3 million, as a result of the we just described, putting operating results in perspective. Income before tax was up $16.3 million. This increase came from a 9.8 million reduction in interest expense and the seven million FAS-142 benefit, offset by the $2.1 million Argentinean peso devaluation.

But more importantly, when you look to what's left, our income from our business, absent these three unique items was up 1.4 million on a sales increase of 2.1 mil. That's a 65 percent profit conversion. The 1.4 million increase is about 9.2 percent over last year's operating income level.

Third quarter diluted earnings per share were three cents, up 10 cents from fiscal 2001. Absent the Argentinean peso non-cash charge, this year's diluted EPS were four cents. And, on a FAS pro forma basis, relative to last year, earnings would have been a loss of one cent.

I'll talk for a moment now about segments. Within our industrial segment, this quarter, we had revenue of 211.7. A year ago, we had 220.8. Our EBIT was $6.9 million this year. A year ago it was 9.4.

Talking about margins. Gross margins for industrial this year -- 44.8. A year ago, they were 45.4, and the SG&A spend level was 41.5 this year, and a year ago, it was 41.1. If you were to adjust the prior year numbers to remove the FAS impact where the cost is included in there and make it comparable to fiscal '02, the SG&A percentage for the prior year would have been 39.5.

On the consumer side, we had sales of 195.9. A year ago, those sales numbers were 184.6. EBIT percentage for the consumer segment is 7.1 this year, and last year, it was 0.5 percent. It's driven by their gross margins, which this year came in at 42.8, while a year ago they were 38.5. The SG&A spend level within consumer was 35.7 this year. Last year was 38. If you do the adjustment on SG&A a year ago, that SG&A spend level would have been 36 percent.

I'll take you now to the year-to-date numbers. Sales through nine months of $1.429 million were 2.2 percent lower than reported a year ago. We need to address and understand the Durabond impact. There's about 24 million sales of Durabond in last year's nine-month numbers, and foreign exchange impacted the nine-month numbers this year to the tune of about $11.7 million. -- So if you remove those on a pro-forma basis, we're essentially flat. We're actually a little bit up 0.2 percent on a nine-month-over-nine-month basis.

The gross profit percentages were 45.6 this year. A year ago they were 44 -- 44.9. So they've improved. The SG&A spend level, 36-and-a-half percent this year compares to 37.1 one a year ago. If you were to wash out of that the Argentinian peso devaluation impact this year and the FAS 142 effect a year ago, which was some $18 million, you would see our SG&A going to a pro-forma basis 519.7 this year compared to 524 last year, so our SG&A is down on a pro forma basis about $4-and-a-half million.

Moving down the line for the nine month numbers, interest expense decreased $19 million. Again, it's probably 80 percent lower by interest rate driven and 20 percent of it is the debt reduction. Through nine months our interest rates averaged 4.7 percent, or about 230 basis points lower than last year's comparable seven percent. The income tax mirrors the nine month numbers, 34 this year, 38 a year ago, driven by 142.

Net earnings were up this year through nine months, $25.6 million. That's a 66 percent improvement. If we do the same income reconciliation that we talked about on the nine month numbers, sorry on the three month numbers, I meant to talk to you now about the nine.

For nine months, our income before taxes up $35.1 million. 19 million of that improvement came from interest, 18.5 came from the FAS 142 impact. Going the other way we had a negative impact of 2.1 because of the pay side. What's left are basic business operating income if you will -- is flat, is actually down just some $400,000. Only 400,000 despite the fact that our revenue line was down $31.5 million. So, on a revenue drop it was 2.2 percent -- we delivered the same income from our businesses.

I will talk for a moment on cash flow, which some people might say is the real story at RPM this quarter. And it's a continuation of what you saw the first two quarters. Strong cash flow has enabled us to reduce debt. Tom will talk about that a bit. I want to talk about where the cash came from.

Cash flow from operations was $37 million for the third quarter, compares to four million a year ago. This performance brings our year-to-date cash flow from operations to $131 million, 82 million more than realized in last year's initial nine months. 67 of that 82 million year over year improvement came from working capital as receivable and inventory turn over ratios improved as a result of our operating manager's strong focus on cycle time reduction and return on assets employed.

Cap ex this quarter were $3 million compared to $16 million in last year's third quarter. Through nine months, Cap ex totaled 16 million, which is 31 million lower than a year ago. We've spoken in previous quarters this year on our planned four-year cap ex level of 40 million. Right now, after nine months, while many projects are underway right here in this fourth quarter, with us being within eight weeks, roughly, of our fiscal year-end, we probably will end up -- it could be 10 percent to 10 percent more below that planned four-year cap ex level. A lot will depend on what our suppliers do in the way of meeting their delivery base and completion of equipment installations.

Tom will talk a little bit about cash generation impact on debt cap ratios. And let me walk you through the key elements of our balance sheet working capital, which is always of interest. Within our current assets this year -- $737 million -- the components of that are 43 million in cash, 325 of receivables, 265 of inventory and 104 of prepaid expenses and other items. So, what you see, compared to -- compared to a year ago, looking at the key operating ratios or assets -- our receivables are down 12 million bucks from a year ago. And inventories are down 24 million. If you go back to the beginning of the year -- June one of 2001, our receivables are now 86 percent -- $86 million and inventories are down 13 million.

So, as a result of that, we've reduced our cash -- our debt balances and Tom's going to speak a little bit about that and carry this forward.

Thanks, Bob.

Just a couple of comments on what Bob gave you. The industrial sales have dipped four percent in the quarter. It's a continuation of the private sector flooring and roofing related maintenance project being postponed. If the economy -- when the economy comes back, we should be getting more than our share of that.

On the other hand, in the consumer segment, we're much encouraged. If you take away the -- effect of the DAP Durabond sales, consumer sales increased by better than 10 percent in the third quarter. That was led by very strong results from DAP, Rust-Oleum and Zinsser. We were also pleased with the over increase in the gross profit margins. It came in spite of the fact that our two highest margin product lines in roofing and flooring are down, as I just mentioned. And, undoubtedly, this demonstrates the cost improvement benefit of the restructuring program that we undertook.

With regards to SG&A being up slightly on a pro-forma basis, that was not at the operating level. -- All of that was at the corporate level in the corporate segment, and it's the result of the increased professional fees, product liability costs, medical, and other benefit cost increases.

We did have strong cash flow, as Bob indicated, that enabled us to reduce debt further by $29 million during the quarter, in spite of the fact that it is, seasonally, our smallest quarter. During the nine months, we've been able to reduce debt by 63 million, and over a 12-month period, we've reduced debt by 108 million from cash flow.

During the last couple of weeks, Frank, myself, Jim Karman, Glenn Hasman, visited 16 cities in 10 days, had 58 one-on-ones and three major group presentations in what was a very successful stock underwriting of 11.5 million shares -- or what ended in a very successful stock underwriting of 11.5 million shares, which included the . And this would be a very appropriate time to welcome all of our new shareholders to this first conference call. The underwriting netted RPM 157 million in cash, which will which did, as of yesterday, reduce debt by the same amount. -- Our debt cap as of today is 47.5 versus a year ago 61.5, and we're convinced that we'll be able to get the debt cap down to the 45 to 46 range by year end.

This really completes the last of three programs, restructuring, reorganization, and fixing the balance sheet that we've had in effect in the last couple years, and as I've indicated during the road show, it puts RPM in excellent position to move forward. Clearly, we will be at, or a little higher than the forecast for the year end of 94 cents.

With these comments, I'd like to turn the conference call over to Frank Sullivan to answer questions you may -- you may have.

?

Thank you. Today's question-and-answer session will be conducted electronically. If you would like to ask a question, you may do so by pressing the star key, followed by the digit one on your touch-tone phone. Again, that is star, one if you would like to ask a question. We'll pause a moment to assemble our roster.

We'll first go to Saul Ludwig with McDonald Investments.

Good morning guys.

Good morning .

And congratulations on a very good quarter.

Thank you.

Two different topics. Could you talk about, within the consumer sector, what type of sales increases have you seen, lets say at Rust-Oleum and Zinsser, both for the quarter and for the year, give a year-to-date on the year over year basis?

Rather than get into the specific details it's been across the whole division about 10 percent, excluding the impact of the Durabond divestiture last year. And that's been pretty consistent across most of our major product lines, and we expect to see that continue for the -- at least the next quarter or so.

OK. Then on the corporate expense line, which was up sharply?

Yes.

You alluded to, you know, additional costs -- medical, product viability, professional fees -- within that, how much did you incur in asbestos settlements in the quarter -- was that part of the reason for the jump up? And if so, what were those, and what were other factors, and what about the run rate going forward on corporate expense?

I think a couple things in that . There was about a million dollars of legal liability build up reserves related to Dryvit. There was nothing -- no increases in the quarter related to asbestos. And the balance of it was just one-time type higher professional fees, the beginning of increases in various insurance programs, and probably the biggest chunk was related to healthcare costs. Like a lot of corporations, ours are self-funded, they're administered through U.S. Healthcare Aetna, and I think globally we'll see our healthcare costs this year go from about 28 million to about 32.

So what should we be thinking about the run rate going forward, you know, in corporate expense, which had $8 million this quarter, what do you think the run rate should be going forward?

I would guess four to five. But you know, of course, particularly at year end, that's subject to whatever year end changes that we might have going through our audit. I don't expect anything material, but aside from that, you would expect about four to five million bucks a quarter.

Great. Thank you very much.

Yeap.

We'll go next to Securities.

Good morning.

Good morning.

And congratulations to Glenn for getting up so early for the call, if he's in Hawaii.

That's correct.

A couple of things. One, could you just comment on general, on the consumer side, the numbers there looking pretty good -- what is your dealings though with the big-box retailers such as Home Depot? How -- just comment I guess generally as to whether they're becoming an increasingly big part of the mix. But, on the other hand, if that is that case, how are they -- how are they dealing with you as far as the margin opportunities?

We've had -- I think we've had great relationships with a lot of our big box retailers. We were, about three or four weeks ago, named vendor of the year at Lowe's. We were named vendor of the quarter this last quarter -- Rust-Oleum was -- was, at Wal-Mart. And we continue to have exceptional relationships with these folks.

I think the biggest share of our restructuring efforts were focused in our consumer businesses. And, throughout the year -- and it's been building quarter by quarter -- you can see that in our margins. In our conversion in the quarter, for our consumer businesses in total, revenues were up about 11 million bucks and income in the quarter was up about 10-and-a-half.

So, obviously, that's because of the benefits of a lot of restructuring, cost eliminations, manufacturing and distribution efficiencies that we're starting to realize, as well as the elimination of some of the hiccups we had a year ago, including some major destocking programs across all of their vendors at a lot of these big box accounts.

The -- on another subject -- the last gentlemen touched on the asbestos item. I understand how immaterial that is, but on sort of an adjacent area that had occurred to me recently, has the company ever or at any time been associated with a lead paint problem that has come up from time to time for others?

No, we do not.

OK. My last question is would you comment in the industrial area -- just say on a monthly or a quarterly basis, is there any trend of improvement? We are, pretty regularly now, I'd say, over the last few months, starting to see some general macroeconomic positive signs from government reports and so forth, of an uptrend in the economy. Have you seen sign of life there on the industrial side in recent months?

I'd have to tell you, at least from our perspective, I kind of review some of these government reports like you view some of these telco accounting of the last few years. We're not seeing it. You know, the -- what you'll get, I think, in our fourth quarter and certainly -- we're comfortable with our ability to meet or beat estimates out there for the year, including absorbing any dilution of this offering. And we are not counting on, nor at this point, are we seeing any type of robust pickup in our businesses. And that's pretty consistent across all of them. So, I'm not sure what segment all this robust economy are fitting, but they're not the manufacturing segment yet that we serve.

But you are comfortable with the analyst consensus for the fourth quarter?

Absolutely. We are assuming no pickup in the economy whatsoever to meet those. We're very comfortable with our ability to meet or beat those estimates for the quarter and the year.

OK. Thanks a lot.

We'll go next to Timothy Gerdeman, Lehman Brothers.

Good morning, Tim.

Good morning, everyone. Congratulations again on a great improvement in the -- in the consumer division. I'm curious -- not to split hairs because a couple people have asked about it already, but would you categorize that big jump-up of nearly 10 percent to share gain, new shelf space? How do you categorize that? Pipeline filling?

Yeah, I think we're -- a couple things. I think we're picking up market share. Again, we work hard at good relationships with a lot of these big retailers. And I think we've got the right brands. I also think that our segments of DIY and retail are doing better than some of the more expensive segments -- power tools or appliances. And so it's a combination of all of that. I think we're picking up some share. Our segments are doing well, and we're also benefitting obviously from the income side from a challenging couple years of restructuring principally focused in that area.

And specialty chemical stocks been pretty volatile the last few days over concerns about rising oil prices, but if I remember correctly, RPM is not like a traditional specialty -- or a traditional paint company, and you're much less exposed to oil. So can you just talk about that for a moment?

Yeah, that's correct, and I suspect that had something to do with some of the action in our stock and the whole sector yesterday. We tend not to be that exposed to the price of oil across all our businesses because of the diversity of our product lines and businesses. There are a couple exceptions to that.

Tremco roofing obviously has some exposure to asphalt and asphalt-based type products. But the last time we had a major oil spike, I think about a year-and-a-half ago, two years ago, the area that we got hit the hardest on was pretty consistent across other companies, which was in freight costs. In a lot of our businesses, we were able to add a surcharge on for those real spike in oil costs that drove up some of our freight rates.

OK. That's fair. Do you have a sense for what percent of cost of goods sold at RPM would be represented by raw -- traditional raw material costs?

You mean oil related, or just in general? ...

Well, in general, because being oil -- saying oil only is probably being a little too specific.

Eighty, 85?

Yeah, 75 to 85 percent, depending on the business. Our conversion costs run 10 to 15 percent of sales, so you're looking at 80 to 85 percent of our cost of goods sold is related to purchases of raw materials.

But again, presumably a lot of that would be also packaging costs compared to a traditional paint company, since you're doing a lot of small DIY packages?

That's correct. With nearly a billion dollars in chemical raw material sales our single largest two would be epoxy resins and at about 30 million each.

OK.

There's no consolidated exposure that would cause us a problem.

OK. Now lastly, you do reference in your press release the fact that now that you've cleaned up the balance sheet, have some ability to go out and start doing acquisitions again. Can you just categorize what the pipeline today looks like for both adhesive sealant and paint and coatings opportunities?

I think the answer -- the short answer is huge. More specifically, we have been working on a number of small product lines, we continue to do what we've always done, which is pursue discussions with medium sized and major companies in our spaces, both in the U.S. and in Europe. And obviously we can pick up those discussions today, with a renewed sense of financial flexibility, at a time when valuations are also coming back in line to what was a two-decade norm, it got kind of out-of-whack at the end of the 90's.

OK. Actually, I do have one final question. The First Call consensus right now for fiscal '03 is at a $1.06 and I'm wondering if you could comment on that please?

You know, I think depending on interest rates, the current equity offering will have a dilutive effect of somewhere in the neighborhood of six to seven percent. And -- I'm sorry, six to seven cents a share.

Right.

And, I think as we finish the fourth quarter we'll get a lot more comfortable with where we think we'll be in '03.

Fair enough, and thanks, and again congratulations on emerging from the restructuring very healthy.

Thank you, Tim.

We'll go next to , Capital.

o'conner: Good morning, congratulations on your quarter guys.

Thank you.

o'conner: Wanted to know, you had a huge up-tick in operating working capital in the third quarter -- what changes in operating working capital can we expect for the next quarter, the fourth quarter, and where might these changes come from? Thanks.

Our operating working capital, working capital for the year, and including in the quarter, has been a generator of cash, and I would expect us to continue to keep our working capital numbers in line. We had built up a pretty high level of working capital through the restructuring, as a result of having to keep some duplicate inventories in locations we were closing, and at locations we were moving to. And we also had some pickups a year ago, in our consumer area, with a lot of the major destocking across a lot of our accounts. All that is being flushed out. And, again, I think, working capital will continue to be a net generator of cash for us for the next year or two.

o'conner: OK. Frank, can you suggest, you know, what that change might be for the fourth quarter? Maybe more in line with the first and second quarters of the year.

I think that's correct. Third quarter was pretty sizeable.

o'conner: OK. Thanks. And then, secondly, wanted to know how do you see your gross profit margin trending for the next quarter or two. Or what gross profit margin might be in line with your prior comment that you can meet or beat the current EPS estimate for this quarter -- the fourth quarter? Thanks.

If you look at our gross profit in the third quarter, I think that's a great number. We're up about a margin point-and-a-half. And that's despite the loss of about $9 million in the quarter, in our industrial division, principally from our StoneCor division, which has 50 percent plus gross margins. So, it should give you some sense of the gross margin strength across all of RPM and that -- our expectations that these will continue to improve when our mix starts improving, particularly with the industrial business.

o'conner: OK, guys. Thanks, very much.

Thank you.

We'll go next to , .

Good morning, .

Good morning. Excuse me. And I will add my congratulations to all of my predecessors. This, for the good quarter. Looking at the industrial side of the business and, particularly, flooring and roofing, which have been mostly hurt by the downturn in the economy -- can you tell how much has been postponed and then how much you actually could have lost? Whatever was not done is never going to be done, manufacturing plants closing down -- could you give us a better feel for what is coming?

I think the majority of the roofing business has been postponed. Our Tremco roofing business is almost exclusively involved in reroofing and renovation, as opposed to new construction. And it tends to be towards a manufacturing base or institution or, in some cases, a governmental facility. The size of the projects are such that they hit budgets and, I think, capital spending has been wiped out in some sectors and certainly cut back dramatically across many.

So, we would expect to get all of that back. Probably 75 percent of the -- of the loss of revenues in the Stonhard flooring business is projects that have been put off and maybe 25 percent are projects that, while they may be called put off, probably won't be realized any time soon, if ever.

Did you -- the nine million -- no, actually, that was at the gross profit level. How much -- how much revenues did you miss in each of those categories versus your anticipation versus planned?

Rather than get into each of the divisions -- or companies in our industrial segment, it is about, Rosemarie, in the quarter, about $9 million of revenue lost over the prior year, and certainly, something more than that versus our original plan. The majority of that has come out of our StonCor business, and principally Stonhard flooring, and then there's pieces and parts out of every other business.

Tremo roofing has been able to maintain some of their revenue base through their service element, which is another reason why we're confident we'll get that business back, but it's got very small margins, and so we've been replacing high margin product sales on major products with lower margin service revenues. But we are continuing to be on the sites in and in front of our customer base, and we have a lot of confidence with a pickup, we'll get that business back.

OK.

The majority of it's from Stonhard flooring.

All right. And then to continue beating the consumer, you commented upon the fact that your customers had been de-stocking. Do you feel that that 10 percent growth was mostly due to restocking, and that unless we go out there and buy it -- we the consumers -- we are going to see a major drop? And following that, what is a normal -- a normalized type of growth in that particular part of your business?

I think in today's market, the takeaway out of our customers on a normalized basis is more in the six-percent range, maybe seven percent, not 10. So the de-stocking did hit us in December of last year, so that 10 percent pop in the third quarter -- a portion of it is just a much better December versus the impact of the de-stocking last year. I think a more normalized run rate in terms of customer takeaway from the shelf and what we would sell into is more in the range of six or seven percent.

Do you feel you will have this kind of a pop in one particular quarter for the industrial when things start picking up, or is it going to grow -- come back, you know, slowly?

I can't, you know, I can't answer that other than to say that we're not seeing it today. You know, we're seeing some signs. There is an Intel project that we had been specified on last spring that got put on the shelf, but it's a major project in Ireland, and we've been notified that that project may be back on, and our portion of it will go in September or October.

So I think we're seeing some inklings. In some cases we'll see things pick up nicely. It won't pick up all at once in a quarter, but it certainly could pick up over a six-month period of time, as our customer base starts spending capital budgets a little bit better in those two areas.

OK. Then just a couple of housekeeping questions. On the interest expense, is around 6.6 million, OK number for Q4 given the fact that you have paid back 157 million?

I think that's fine.

And then that brings us, assuming that rates don't change, around 28 million for -- a little less actually than 28 million -- for '03?

28 million in interest expense -- I, let me check on that . I don't have that number right off the bat, but you know, you're looking ...

And I just took an average of seven million per quarter and it should be lower than that actually if we are lower in Q4, unless you have plans to borrow more.

No I think, yeah, I think that's probably somewhere in there. Again, I'd have to get back to you on that. It's just not a number I've zeroed in on yet.

OK. And the number of shares since, fully diluted since the secondary offering -- I mean if I only take the secondary offering it should be about 115.2 million shares -- are a lot of options in the money and therefore could this number go -- be substantially higher?

No, not much. I mean there are some options that are in the money now that were not certainly a year ago, but you find those reflected in our fully diluted number, and that's why our fully diluted EPS has been creeping up. A year ago it was 102-and-a-half, and now it's over 103, and that's all been related to what you have to do to account for those in the money options, and then the balance would be the 11-and-a-half million shares on the offering.

OK. Then lastly of course, I can never ask the last question, but what would it take to get -- to cover the six to seven cents dilution in '03 from the secondary, what do you need to be able to do that?

I think, I think we expect to be able to cover some of it with current conditions, given continuing benefits of our restructuring across RPM, and also just a refocus on our customer base and growing our businesses. We're having a lot of activity behind us. So I think we'll be able to cover some of it, with current conditions, with no changes. To the extent that the economy improves at all, our ability to cover that six or seven percent should become relatively easy.

OK. And we should see that ...

Six or seven cents.

Yeah.

Yeah.

OK. Thanks.

We'll go next to , .

Good morning.

Good morning.

Quick question. Given the fact that you've completed the offering, as well as the fact that you had some difficulty selling some of your businesses due to price. Does that mean that the assets sale is kind of off the table?

That's correct.

OK. And then, you also detailed the current assets, but not the current liabilities. Could you detail those for us?

Sure. OK. On the liability side, we've got 386 in total. Notes and accounts payable would be about 130 million. Our current portion of long-term debt -- 81 mil. Comp and benefits -- 66. Our loss reserves -- 55 million. Fifty-two for other accrued liabilities and three million for income taxes.

OK. Great. Appreciate it.

Thank you.

Our next question comes from , .

Good morning.

Good morning.

Just a follow up on one of the prior questions regarding acquisitions going forward. You say the potential is fairly large. From a timing standpoint, are there things that are front burner? Or should we expect to see something over the course of the next two, three, four months? Or are these likely to be later?

I would be very disappointed if we weren't able to accomplish some of these smaller product line acquisitions over the next 12 months. There's nothing pending that's going to impact this fiscal year, which ends in a matter of six or seven weeks. But, certainly, in our fiscal '03, you will see acquisition activity positively impact RPM.

OK. And, presumably, going back to that dilution question, some of -- some of those acquisitions can help offset that six to seven cents, as well.

Absolutely. We have never done a diluted transaction and we're not about to start. And I think we're in an environment where evaluations are a lot more reasonable.

Yeah. And would you focus more on the consumer or the industrial side? Do you have a preference as to what you're going to build?

No. I think our acquisition program will continue to be opportunistic. You're likely to see more product line acquisitions in the consumer area that we quickly integrate into one of our existing consumer companies. And our freestanding entities are more likely to be in our industrial segment. But other than that, I think we'll continue to be opportunistic and get the ones that -- done that fit our strategy and can be done at the right price.

Yeah. OK. Thanks.

We'll go next to , J.P. Morgan.

Good morning.

Hi. Good morning. In the -- you talked about the two large components of your cost of goods sold being raw materials and conversion costs.

Yeah.

Can you talk about the change in your average raw material costs and your average conversion costs year over year during the quarter?

I don't think they've changed much, and I don't have that data in front of me. So I can get that to you later. The raw material costs are down slightly as a percent of sales. Our conversion costs have not improved as much as you would expect, given our restructuring, but they're relatively flat because of the loss of revenues. But I can give you more detail as a follow up.

OK. Good. I'll follow up on that. On the consumer side, if you divide the business into the revenues that go the big boxes and to all the other places you sell to ...

Yep.

... how fast did the big boxes grow, and how fast did everything else grow?

I think we're seeing that, you know, the big box grow -- growth certainly faster than everything else, and it's a combination of their taking market share from other segments -- independent paint stores and hardware stores and small regionals -- as well as a function of their continuing to open new stores, which certainly happens and will continue to happen for the next five or seven years, we believe, across Home Depot, Wal-Mart, and Lowe's.

Maybe to put it a different way, did the all other category in consumer -- all other distribution channels -- shrink?

I don't have a good sense for that by each company. I think in general, we are seeing that segment flat, in some cases, slightly up; in some cases, slightly down, but they are not growing, you know, nearly the extent of our major customers.

I guess lastly, you know, sometimes RPM sort of sells various small operations during the quarter. Are there any net gains or net losses from sales of assets on the income statement?

None. The only extraordinary item operating-wise in the quarter was a $2.1 million hit related to the devaluation of the Argentine peso that Bob talked about. But there were no sales or acquisitions of assets or businesses in the quarter.

OK. Thank you very much.

Thank you.

We'll go next to , Miller Anderson.

Good morning. I want to follow up on the question asked on the raw material cost. Last quarter, on the conference call you said there was no benefit, and in the current quarter you said there was a modest decline year over year. Do you expect the benefit of declining raw material cost to accelerate over the next two to three quarters?

No. I think, particularly given where oil prices are, and again, it's not that oil prices impact us so much directly, but they certainly set the stage for folks to try and firm up pricing. So I don't know that you would see raw materials meaningfully impacting us one way or another over the next couple of quarters. You know, the positive change that we expect at some point, that you will see in our gross profit margins, is a mix change, as we start to see some pick up in revenue based on our industrial division.

OK. What's the company's dividend policy at this point?

Our dividend has been maintained for this quarter, and I think we will continue to look to increase our cash dividend at a rate less than our earnings increases. And try and get that dividend payout ratio, which this year will end up somewhere around 52 percent, somewhere around there, low 50s, down into the 40s, and at some point down in the 30s. You will continue to see us marginally increasing our dividend as our earnings increase, and at the same time bring that payout ratio down.

OK. There's been a lot of discussions on the call today about acquisitions, and you -- the company clearly made a decision not to sell assets because of unfavorable prices. Could you talk about the metrics by which you make a decision to acquire companies, whether in the industrial or consumer area product lines, bolt-on companies, whether -- you know, talk about the pricing metrics?

I don't think that we want to talk about the pricing metrics, we ask about that a lot, and we're not eager to talk about our pricing methodology or metrics broadly, certainly on a broad conference call. You know, I can say that valuations for two decades in our markets, in private transactions or M&A transactions, were below the valuations of -- or multiples of publicly traded companies. And at the end of the 90s, that changed.

And now, we are back to the point where you should expect to see us doing acquisitions, certainly at valuations that are less than the multiples of publicly traded companies out there. The exception to that, occasionally, is when we can acquire a product line and pretty much quickly integrate it. So, ...

Right.

... while the -- you know, the cost versus earnings or cash flow might not look great, the payback on those types of businesses or acquisitions, if we do them right, is usually in the range of two to three years.

Can you talk today what your acquisition capacity is in terms of how much sales you could add, given the balance sheet structure today?

I think it depends. I think that, you know, we've been able to maintain an investment grade rating with a debt cap ratio that's ranged from 40 percent to 60 percent. And, by the end of this year, if our debt cap it down in the mid-40s, that's certainly 300 million, 400 million plus. And you can do the math to see what flexibility we have that way. There are a lot of private companies that are -- you know, that are more interested in doing a transaction for stock because they like the cash deferral aspect of it and they like RPM stock and they like the fact that they get a pretty hefty income from our dividend to boot.

So, it really depends on how we would do them. I think you'll see smaller transactions, particularly if they're privately owned family businesses done for stock. In our ability today, and I think this is another part of our goal over the last couple years and this equity offering helps us as well.

I think our ability to cap the capital markets with numerous structures -- both debt or equity like -- to fund a major acquisition, is probably stronger today than it's ever been for RPM. And so, to the extent we could do a major transaction on a non-dilutive basis and fund it in a manner that allows us to maintain our financial flexibility, let's just do that.

It has been our goal and will continue to be our goal to maintain an investment grade profile.

OK. One last question. How should we measure the peak earnings power of the company at this point in time? I know there's been a fairly significant shift in the profitability of the company, if you look at the various constituents that make up the income statement. Because gross margins have gone up by roughly 400 basis points over the last five to seven years, but yet SG&A, as a percent of sales has gone up 700 to 800 basis points, more than offsetting that.

So, how should we measure the profit power of current RPM? I mean, should it -- the current nine-and-a-half, 10 percent operating profit margins go to 13 percent at the peak, and should the ROE be, you know, 13 -- or 17 to 18 percent versus 12 or 13 percent today? How should we measure that?

In the mid-'90s, our EBITDA margins were in the neighborhood of 15 to 16 percent. And I think this year they'll be 12-ish -- 12-and-a-half-ish maybe. You know, I think there's two-and- a-half to three margin points that we will get back.

You're starting to see that quarter by quarter in our -- in our consumer business, and it's coming back pretty meaningfully, and I don't think we're all the way back yet. And we're really starting to see it in our industrial business, but it's been masked by a drop in revenue. It's going to take a healthier economy, certainly, but in a -- in a more healthy economy, where people are spending some capital dollars related to a couple of our major product lines, you ought to see a margin expansion over the next couple of years in the neighborhood of two to 300 basis points.

Great. Thank you very much. Good luck.

Thank you.

We'll go next to , Merrill Lynch.

Hi. Good morning. Most of my question have been answered, but I just had a couple of small gaps I wanted to fill in. Your one percent sales increase, you mentioned that there was some currency impact from divestiture impacts. Was there anything from pricing in there?

No.

OK. And then on interest expense, I was just curious, you know, sequentially, you had a big dip. Is this just lower interest rates kicking in after some sort of lag?

No, it's a combination of the two. I think people forget, you know, our third quarter is December, January, February, and our floating rate is typically locked in on a LIBOR basis for anywhere from 30 days to three months to six months. And we were locked in on some floating rate contracts or floating rate obligations through the spring. And I think what people forget is rates were at their peak last December, and Greenspan started dropping rates dramatically in December.

So number one, it's just the fact that rates are now at their lowest level than they've been in a while, and they were at their highest level just a little more than 12 months ago.

And then secondly, our debt levels are down from last February by $108 million. The average over the period's been around 80. So it's a combination of dramatically lower interest rates as well as continuing to see lower levels of debt. And obviously, you'll see lower levels of debt in '03 through continuing cash flow generation and debt repayment, as well as the proceeds from the equity offering.

OK. And then on Argentina, assuming the currency stays kind of where it is today, would you expect any additional hit to your P&L?

No.

OK. Thank you.

Thank you.

Our next question comes from , Conseco.

Good morning.

Good morning. Question or two from a bondholder I guess, I don't know if all the other questions were from shareholders, but. Following up on your, just your bank facilities -- I don't know if this is still the case, but from your last annual report it showed they're expiring this year, is that still true?

That's not correct. We have -- our debt obligations, there's a 364 day facility that had $200 million outstanding on it last year, which we turned out, which is due in July of this year. And then we have a five year revolver which is due in '05. And then a number of other debt obligations which are due in '05, '07, '08 and '09. As a result of cash generated from our operations this year, and the recent equity offering we just completed, we have basically eliminated that $200 million 364 day, or term loan that was due in July.

OK. What is your -- you went through your current liabilities, and I know you broke out current portion of long term debt, 81 million which added to the long term debt gets us up to 900, but then you mentioned notes and accounts payable. I wonder how much of that is actually other notes payable, or other forms of debt? I mean, what was your total debt at?

There was only four million, within that 130 million of notes and accounts there's only, there's some $4 million worth of notes in there.

Our total debt, every obligation that we owe is $899.7 million pre the equity offering.

OK. And so obviously I can just basically take -- I'm just wondering -- I can back into I guess -- but your revolver balance then, since all of the 157 seems to be going to the term facility, what is the balance on your revolver, and what's the maximum you -- on that?

It's a 500, it's a $500 million facility, and I think, I think net we'll have about 25 or $30 million available on that assuming all the proceeds are paid off on this. But you know, we'll have, obviously we'll have that squared up at the May 31 year end, with additional debt reduction as well as reflecting the equity offering. But we have probably about -- and the term loan's still available to us through July. We haven't made up our mind as to whether we would refinance that or redo it. As you know, banks -- it's always been our preference to have long dated three-year or five-year bank revolvers. We borrow only for acquisitions. And I've always been a fan of trying to match your funding maturities with, you know, your investment. In this case, very long-term investments.

Banks -- over the last three years -- have been pushing borrowers to push a piece of that into the 364-day realm because they don't have to hold capital on it. I'm not sure that we will -- we haven't considered not -- whether or not we will redo that this year or not.

Well, as a fixed income investor, I would think that, in my opinion, is your company would be fairly attractive if you came with a decent size deal. You know, a couple hundred million to the -- to the investment grade market. Since you did answer one of my questions, which was your commitment to investment grade ratings. Sometimes that statement and the statement that you like to do acquisitions don't go over too well with the agencies.

Well, we've had a track record with the agencies, going back to 1992, which was our first rated debt. And we have done a ton of acquisitions. I can't -- I think we were about 400 million at that time. And a little bit more than half of our growth from that $400 million level to about two billion has been through acquisitions. And we've been able to maintain our investment grade and, more importantly for us, maintain financial flexibility to continue to grow both, internally, and through acquisitions. And I would expect you -- you should expect to continue to see that.

And then, just lastly, do you have any off balance sheet issues, receivables, facility, anything like that?

We have no off balance sheet debt whatsoever. We never have. We don't have any debt rating triggers in any of our loan or bank obligations. We are in the process of completing a receivable securitization program. It should be done by the end of April. It will be entirely on balance sheet. This has been in process for six months. And, basically, it will save us anywhere from 750 to 900,000 bucks a year in lower interest costs versus our current spreads and our bank revolvers. And so, we're doing it both as a way to save some money as well as just a further diversification of our funding sources.

OK. Thanks.

That will be reflected entirely on balance sheet.

OK. Thanks, a lot.

Thank you.

We'll go next to Elliot Schlang, LJR.

Good morning, Elliot.

Good morning to all of you. And great job. -- With the change in the company over the last year, what is a realistic earnings per share expectation over the next three to five years based on internal growth, as well as your acquisition objectives?

I think that historically, we have been able to, and certainly the expectations at RPM are to be able to continue to deliver 12 to 15 percent EPS growth year after year. I think the timing of our offering now accomplished both our long-term strategic goal of maintaining or regaining the type of financial flexibility that we want at the right time, as well as our belief -- and certainly we're going to need some help from the economy next year -- that factors are such that we ought to be able to overcome most, if not all of that dilution in the first year that we'll suffer through it.

So, you know, I firmly believe that we'll be able to kick out that 12 or 15 percent earnings growth year after year, and this year will be the restart of that. And we haven't been able to do that for two years. We did it pretty well for the 30 years prior.

And, Frank, I believe I heard you correctly that you're willing to go up to a 60 percent debt to total cap level if, at the same time, you can maintain your investment grade rating. Is that a correct assumption that you're -- that you in turn are assuming in that 12 to 15 percent growth rate?

That's correct. And our debt-cap ratio over the last five or seven years has hit a peak of about 62 percent. It's been as low as the low 40s. You know, clearly, it depends on how our earnings and cash flow are going, and the makeup of our capital structure, but that's absolutely correct. I think we've had a good track record of doing that. We had a track record of doing that before we had any rated debt. That's kind of the range in which we feel -- much above 60 percent, we start to lose our financial flexibility and we certainly don't intend to do that.

Thank you.

Thank you.

Due to time limitations, we are unable to take any more questions at this time.

I'd like -- ...

Yes?

... let's keep going.

Oh, you want to keep going? All right.

Sure.

We have one more question from Rosemarie Morbelli, Ingalls Snyder.

This will be very quick. Did we anniversary the Durabond divestiture, and, therefore, it won't affect next year's comparison?

That's correct. It was sold in April of last year, so we are anniversary-ing it this month. -- May will be the first month in which you'd have the straight-up comparison. So for next fiscal year, that's correct.

And did I understand properly, you said that there would be no additional divestiture of assets over the foreseeable future, even though Tom, if my memory serves me right, had talked about possibly another $100 million worth of revenues going out the door over the next 12 months?

No. We had commented on that. The first answer is no, there are no planned divestitures for the foreseeable future. Doesn't mean in the future beyond that, that if a product line or business doesn't fit our strategy or becomes commodity like, we won't do what we've done in the past, which is, which is sell it. Tom referenced Bondo, we've looked to sell Bondo a year ago, and just didn't get a price that we thought was the right price for it.

In the process, we were able to attract a gentleman named Pat Formica who we've known for a long time. Who was the President of the Loctite Automotive Division, he actually called us this fall and wanted us to consider him being President of Bondo, if we would give him a three year period to turn that business around and start growing it. He joined us in November, and we're real excited about his enthusiasm for the business, what he's doing over there, and the ability to get Bondo back to being a positive contributor to our revenue and our earnings growth. We were a net divestor over the last two years of about $100 million in product lines.

OK, thanks.

Thank you.

It appears there are no further questions at this time. I'd like to turn the call over to Mr. Sullivan for any additional or closing remarks.

No closing remarks, just again thanks to all of you for joining us today. We look forward to talking to you again in the immediate future. Thank you very much. thank you.

Thank you for joining today's conference, you may disconnect at this time.