RPM International Inc (RPM) 2003 Q1 法說會逐字稿

Please stand by. We're about to begin. 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 website at www 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 Friday, October 11th and can be accessed by dialing 719-457-0820. An entering confirmation code 750770. A webcast replay and written transcript will also be made available through our website.

The webcast replay will be available about two hours after this call ends. And the written transcript will be available approximately 36 hours after the call concludes. Comments made on this call may included forward-looking statements based on current expectations that involve risk 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, including but not limited to the annual report or Form 10-K for the year ended May 31, 2002.

Information in this conference call related to the projection or other forward-looking statements may be relied upon subject to the Safe Harbor Statement and may continue to be used while this call remains on the active portion of the RPM website. I'd like to turn the call over to RPM's president, Mr. Frank Sullivan.

Thank you, Denise and welcome to everybody to RPM's conference call for the three-month period ended August 31, 2002. The first quarter of our 2003 fiscal year. With me this morning is Bob Matejka, Vice President and Chief Financial Officer and Glenn Hasman, RPM's Vice President of Finance and Communications.

This morning, Glenn is going to provide you with some of the highlights of the quarter. I will make some comments on current business conditions in our outlook and then we'll be pleased to answer your questions. With that I'd like to turn the call over to Glenn Hasman for his highlight comments on the quarter.

Thank you very much, Frank and good morning, everyone. I'll begin with the net sales, this year's first quarter net sales of $5.4 million were ahead of last year. There was some foreign exchange impact again this quarter at a slight negative impact overall on consolidated sales. There was a swing aside of that. The dollar was weaker versus the Euro, but stronger against Latin American, Canadian and certain other currencies. There was essentially awash on the effect. By segment, industrial sales reached $292.2 million this quarter. Representing 54% of the sales of the company, which is up 1.1% year-over-year.

In addition, there was sequential both, which was interesting to note, from the fourth quarter to the first quarter this year versus a decline during that same period a year ago. We're also encouraged because we may be seeing some of the putoff maintenance business coming back in the industrial side of the business.

Flooring sales were up as well. As we mentioned those were at much higher margins. That business is up double digit. Consumer sales reached $250.2 million, the other 46% of RPM this quarter, which was up 2.5% year-over-year, we're still experiencing solid demand throughout the segment this quarter, although somewhat slower than we've been seeing.

The gross profit margin was improved. It reached 47.8% this year versus 47% during the first quarter a year ago. I'll talk to that by segment. Industrial margins held steady at 48.4%. We had leverage benefits from the slightly higher sales volume. There were lower raw material costs. Those are offset by lower pricing that affected certain more competitive product lines within the industrial segment. And to the lower raw material costs, those were impacted mainly in the areas of copper, certain packaging, titanium dioxide.

And the consumer margins, those were ahead 160 basis points year-over-year. They reached 47% from 45.4% last year. They experience leverage benefits from their higher sales volume and again has certain lower raw material costs in this segment as well. In addition, we were seeing additional restructure-related savings from to the last plant closure under that program. That was in Cincinnati. We're beginning to see growing efficiencies in our manufacturing operations through more progressive class A manufacturing efforts.

On our selling general and administrative expenses, those were improved to 33.9% of sales this year from 34.1% last year. Keep in mind, that SG&A, now is being consistently determined and it is now fully comparative year-over-year having adopted Task 142 regarding goodwill and other intangibles at the beginning of last fiscal year, June 1, 2002. By segment, industrial SG&A was 33% this year, comparing favorably to 33.8% last year. This segment of the ongoing cost containment efforts that were certainly paying off, plus there were cost reduction efforts initiated during this past fiscal year at those businesses especially impacted by the slower economy. Those are benefiting industrial SG&A levels.

Consumer SG&A of 31.2% compares with 31.5% a year ago. This segment also has been going through ongoing cost containment efforts and are paying off here as well. Corporate other makes up the balance of SG&A and those were at $9.5 million this quarter, versus $7.1 million a year ago.

We have increased product liability costs of about $1.3 million. That impacted this category plus there was about $1 million of impact on an intercompany or intersegment basis between corporate and the two operative segments. This is a result of a change in certain tax legislation regarding export sales. It's known as foreign sales corporation or FCS that went into effect this year. . What we have is intercompany difference, million dollars less income recognized at corporate and about $500,000 of saved expense, if you will, at each of the operating segments. Otherwise, corporate expenses were absolutely flat year-over-year.

If you were to factor out that effect and the tax legislation to the operative statements, both show SG&A percentage improvement year-over-year reduced by about 20 basis points.

EBIT achieved $75.1 million this quarter. That compares with $69.1 million a year ago. That's ahead $6 million. or 8.8% on a 1.7% increase in sales. By segment, industrial EBIT was $45 million, this year, $42.2 million last year, that's up $2.8 million or 6.8%. Consumer EBIT, $39.6 million this year, comparing with $34 million a year ago, up $5.6 million or 16.4%. Combined operative segments are ahead $8.4 million to $84.6 million this year, versus $76.2 million last year. Or ahead 11%.

Corporate other has already been discussed, again, those expenses this year were $9.5 million comparing with $7.1 million a year ago. EBIT growth is the result, generally, of the higher sales volume, the lower raw material costs and ongoing cost reduction and cost containment efforts throughout the segments.

Interest expense net was improved or down $5.9 million, year-over-year, that's a combination of lower interest rates on the variable debt portion of our debt, which is about 70% now. That resulted in about $2.4 million of savings this quarter. Average interest rates during the quarter were about 4% overall this year, comparing with 5.3% rates a year ago.

We also had lower debt levels averaging about $249 million on average during this quarter compared to last year which resulted in approximately $3.5 million of additional interest savings.

The tax rate was 34.9% this year compared to 34.7% last year. The effective tax rate, it's interesting to note, will tend to increase slowly if our earnings grow and the one-time benefit from the adoption in June 1 of 2002 of FAS 142, which was the elimination of non-tax deductible goodwill amortization, as that issue becomes less and less significant to our overall earnings, the tax rate will begin to grow.

Net income was increased $7.6 million or by 21% to $44.2 million, which boosted the margin on sales to 8.1% compared to last year's 6.9%. Diluted earnings per share were 38 cents, up 2 cents or 6%. I want to make mention that the 11.5 million shares issued this past march had a dilutive effect of about 4 cents per share on this year's first quarter earnings.

Now, I move to the balance sheet and give you helpful detail there. Account receivable net were $392.6 million, improved from May 31 by approximately $5 million. That's in spite of an impact on change in terms with a specific significant consumer customer.

Inventory reached $254.9 million which was up slightly from year end. That's viewed as more of a timing difference as opposed to anything in terms of a trend.

Accounts payable were $141.7 million, which was down $19 million from May 31, comparable with a drop during the same period a year ago, $11 million. Again, we view that as more of a timing issue as opposed to any kind of a trend.

Total debt was $716.3 million, including the current portion. That's up $2.5 million from May 31 but it was actually improved or down $5.1 million before making several smaller acquisitions that we'll talk to later. That brings the total debt to capital ratio to 44.6% at August 31 which compares to 58.4% a year ago. That's significantly improved. And even improved slightly from May 31, which was 45.4%.

Moving to the cashflows. Cash flow from operations was $22.0 million this first quarter comparing to $53 million a year ago. We want to mention we were in the midst of a restructuring program two years ago at this time, which caused temporary and inefficient buildups in accounts receivables and inventory at that point that were being worked down during the first quarter a year ago and became in effect a source of cash.

This year we're back to more normal type growth and working capitals as the business is growing, which is more elusive cash, but there was a much higher payout for accrued incentives during this year's first quarter as the year just ended May 2002 significantly outperformed the prior year. I also mentioned, again, that a significant consumer customer had an impact which was about $8 million on the receivable situation during this first quarter.

Capital spending was $5.3 million which was down $1.7 million versus the first quarter a year ago. And we should be able to hold as we've been mentioning, at about the $40 million to $50 million maintenance level for fiscal 2003 and perhaps a year or two thereafter since many of the larger spending needs and capital areas are really behind us. And we view our capacity levels as being adequate to meet our growth rates for the next several years. And as mentioned, we have had several minor [ Inaudible ] on product lines. The remaining interests and join the ventures that were acquired during this quarter total for an invest investment of $7.6 million.

I'll now turn the call back over to Frank Sullivan.

Thank you, Glenn. I'd like to make a couple of comments before we take questions. First of all, our first quarter results I believe are an extension of how we finished the 2002 fiscal year as a result of our restructuring program, we have excellent operating leverage.

A 1.7% revenue increase generated nearly 9% EBIT increase and we would expect to see that type of operating leverage for the balance of the year, assuming we can continue to have revenue growth at or perhaps higher than what we experienced in the first quarter.

The economy is still tough for our industrial sector. The positive growth year-over-year, I believe, is more a result of our focus. A number of our businesses feel that their core is actually down somewhat year-over-year, but we've had good market share pickup and good revenue increases from a number of new product introductions. From a consumer perspective, we still see solid revenue growth. In fact, the lower revenue growth in the first quarter of 2.2% for consumer was principally a result of an aberration in August. We saw a solid 6% to 7% revenue growth in June and July. And we're seeing similar results in September and anticipate similar results for October.

For whatever reason, across most of the industry, August was down year-over-year and that impacted the quarter's results. We are back pursuing acquisition acquisitions. What you will see is mostly smaller acquisitions of free-standing entrepreneurial companies or product lines that will be fit into existing RPM companies. We completed a number of acquisitions in the first quarter. We acquired the remaining 50% of our Euclid Ad mixture Canada business. Those results were previously consolidated into rpm's results over the last couple of years. We also acquired a small product line with Day-Glo. It's a great example of the synergistic product lines that we can acquire and are pursuing. It's a $4 million product line. We acquired it for a net asset value of $1.8 million. And we anticipate a 25% EBIT margin out of that business once it gets integrated into Day-Glo into the next 9 to 12 months. We're also able to acquire the powder coatings business of Jones blare and earned the process of integrating that into our TCI business. All of these transactions happened at the end of the quarter. Their impact on the first quarter results were negligible, about $500,000 in terms of revenues. Their impact on the full year will be somewhere in the neighborhood of $6 million or $7 million of revenues - on an annualized basis.

We are executing our strategy. We've got good operating leverage. And I think we're very focused black on growing our businesses. That's why we're able to pick up market share and show some positive year-over-year revenue gains in what continues to be a tough market for our industrial businesses. With that, we would like to open up the call to any questions you have.

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 it one. That is star one if you would like to ask a question. We'll go first to Craig Kennison from Robert W. Baird.

Congratulations on a solid quarter. Question on Dryvit, can you provide any commentary there? We're looking for the timing of resolution and what the terms might be.

We had a fairness hearing in front of the judge. The first week of October. And I think we're in pretty good shape in terms of the proposed settlement. The judge will take a period of time to consider the different issues before him and should approve the settlement sometime in the next couple of months. And we don't anticipate any hiccups there.

The settlement cost is substantially covered by insurance. It is a program that would pay out over a three-to-five-year period. And the anticipated cost to RPM net of insurance is not material.

And so should we assume then that the opt-out rate which was a key to the deal was satisfactory to you?

Yes. I don't have the numbers in front of me exactly, but the opt-out period ended with the fairness hearing.

Okay. Terrific. Thank you. Good quarter.

Thank you.

Next is Timothy Gerdman from Lehman Brothers.

Good morning, Tim.

Good morning.

I was pleasantly surprised at Glenn's comments on how strong flooring sales were. He specifically said double digit. Can you provide more color? If indeed that was double digit sales growth, that would imply that the remaining industrial business had a negative year-over-year number?

The double digit sales growth that Glenn referred to in our Stonhard operation is the result of smaller maintenance projects as well as a new effort they've been pursuing for the last year into the commercial market, where Stonhard's business has been traditionally into industrial markets. That is moving along pretty well particularly given the fact it is not a result of a pickup in large-type projects that fueled their growth in the late '90s.

The majority of our industrial businesses are flat or slightly up. The one exception to that this year has been our Carboline operation. They continue to see pricing pressure. They continue to see a real lack of ordering in the Gulf States area. I think it's hitting the entire high performance coatings area. We anticipate that will continue for a couple of months.

Okay. And also when he talk about commercial, are you specifically eluding to this new product to be used in individual garages or is that a whole different scenario?

No. That's a Rust-Oleum product. I can talk about that in a money the. As it relates to Stonhard, they pretty much were focused on heavy industrial applications. Clean rooms, fab-plants, petrochemical, pulp and paper, they had been out of the showroom-type of commercial projects for the most part. Automobile showrooms. The pedestrian areas of airports or shopping malls or grocery stores. And they have developed a product range over the last year to pursue more aggressively the commercial end of flooring.

The margins are still above the RPM margins. They're not quite at the margins that Stonhard enjoys in its industrial business, but it's a good market segment they had not previously served to any great extent.

Timothy Gerdman Okay. On the Rust-Oleum products, I have seen you are getting pretty good advertising in mainstream magazines.

On Rust-Oleum, I think it's a good example of the type of product lines acquisitions that you'll see more out of RPM. We acquired a business three years ago called Epoxytek. It was a $2 million apoxy based coating. We have worked to refine the formula. And today we have distribution in Home Depot and Lowe's.

It's an exciting product for us and, I think, for the industry. That $2 million of revenue three years ago, this year will be $8 million or $9 million of revenue. There is a huge opportunity for consumer garage floors.

Everyone -- not everyone, but most everyone that has a home has a garage. And very few of them are painted. It's starting to be picked up, for instance, on the West Coast by a number of builders as a builder add-on to your home.

We are doing spot advertising with that product as well. We're pretty excited about it.

Okay. A couple final things, would you be ill willing to take a cut at fiscal '03 EPS guidance.

Not at this time.

Ok, on the consumer side, net wins or losses? Any new shelf space won or lost in mass merchandisers or home centers?

We have not lost any shelf space with any of our major customers. We continue to incrementally pick up shelf space with new products like this Epoxytek. We continue to pursue opportunities with a number of retailers in some categories where we don't have a presence, but we feel like we have a chance at gaining shelf space.

Okay. Thanks. And congratulations as you prepare to move up the ranks, I think, at the annual shareholder meeting.

Thank you very much, Tim.

Next is Karen Gilsenan from Merrill Lynch.

Good morning, Karen.

Good morning. How are you Frank?

Good. Thank you.

Can you give us more color on the consumer side of the business, how DAP, Rust-Oleum, Zinsser, some of the businesses individually performed in the quarter?

We won't provide specific detail on the companies. We'll stick with the segment reporting. But I can tell you as a segment, we grew in the 6% to 7% range in June and July. And we are again experiencing that kind of growth here in the early months of the fall. August was actually down year-over-year for some timing issues. And it turns out at least at this stage, that that's an aberration. All three of those product lines are doing pretty well.

There's not a lot of difference shags?

That's correct. The only product line in our consumer area that had a decline in sales year-over-year was Bondo.

Okay.

Some of that is intentional as we clean up some of the SKU counts and focus on improving their bottom line.

OK, Then this corporate other that Glenn spoke about, we have increased product liabilities of 1.3 million. Could you help us out with that? Then you have this intersegment issue related to taxes and exports. Is that an ongoing thing? What should we think about in terms of how big this corporate expense number should be in upcoming quarters?

The answer to this question is, yes, it's an ongoing thing. I'll let Glenn give you an idea of what that will be for the year. It's awash on our bottom line. So that the impact on our bottom line is zero. It will impact the segment difference between what previously was part of our operating results and now will be reflected in corporate. Glenn, if you want to provide some sense as it what it will be for the year.

Karen, that's a good question. Basically what it is elimination of the FSC. I'll refer you to our tax footnote. You can see the actual foreign sales corporation impact on our tax rate. That's that 35% of the total. It's about 1.3 or $1.4 million benefit. Which translates, before tax, to just over $4 million per year. So the answer to your question is, yes, this will be ongoing through this fiscal year at the rate of somewhere just north of $1 million each quarter.

Karen Gilsenan So your corporate expense was $9.5 million this quarter?

That's correct.

Yes.

But it included this $1.3 million which presumably isn't ongoing? You'd say about $8 million, give or take, per quarter?

No. The $1.3 million will be ongoing. You will see our product liability reserves related to Bondex and Dryvit to a lesser extent increase by about a million to 1.5 million per quarter.

So, this is a good run rate going forward then?

I think that's correct.

Okay. All right. Thank you very much.

Thank you.

We'll go next to Saul Ludwig from McDonald Investments.

Great job, guys.

Thank you.

You consumed $33 million in working capital in the first quarter. Was that according to the script or was that worse than expected?

Right on.

And what do you see happening as we move through the year and when we get to the end of the year, will we be a working capital cash consumer or cash generator? Maybe Bob has some input on that.

We are right on our plan in terms of our cashflow plan. A lot of the consumption of working capital in the first quarter was a timing difference. I think for the full year, because of the big pickup we had last year in working capital, for reasons Glenn mentioned, you'll see our cash generation this year versus last year down from operations maybe about 20 million bucks or 25 million bucks. We'll still have a strong year in terms of generation -- cashflow generation from our operations.

I would guess that our working capital for the full year will be a consumer of cash somewhere in the neighborhood of 10 million bucks. That's our budget, although we are working to try and minimize that where we can. The biggest impact of that at the beginning of the year, as Glenn mentioned, was a change across their entire vendor base by Home Depot going to terms of net 60 days. And that cost us about $8 million on the year that we didn't anticipate. That we didn't anticipate until the spring.

They were what, net 30?

That's correct.

For some of our companies they were net 30, for some of our companies, they were net 45. I think for their vendor base they were all over the place. They decided to formalize a single policy of their payment terms across their entire vendor base.

You're now expected to incur higher -- carrying that receivable for 60 days versus 30 days, there's a cost to that. Is there any compensating price? Or that's just -- you have to eat that?

I think at this stage we have to eat it. We're continuing to manage our operations, I think, very effectively, as you saw in the first quarter. We had a pickup again in our gross margin on the consumer level. And we will work hard from an operational standpoint to maintain or to try and continue to increase those margins. From an operating standpoint. But we are not getting any price relief as it relates to the higher carrying cost of receivables at Home Depot.

Does Home Depot try to treat you as one company as opposed to dealing with the individual companies on an individual basis?

No. And that's not likely to happen for us. I can give you color on that. We had a discussion with a major vendor along those lines. And we're simply not set up to do it. I think that you have to have three things to serve these big accounts well. You have to have a brand that consumers want. So you have to continue and maintain and build your brand equity. You have to have excellent service. If you can't keep your product on the shelf, they're very focused on fill rates. Our fill rates across all our businesses tend to be 98% plus. And then lastly, you have to have competitive prices. And I think it's that order. Our experience is, it's your brand first, your service second and you price competitiveness third. You've got to have all three to stay on the shelf. There's not any rebate or anything else that we could provide that would add to any of that. And it's not how we're structured. Our structure is to keep a small corporate staff. We don't charge back our company companies anything. So it's not really been an issue for us.

You also mentioned that there was higher accruals for incentive comp in the first quarter of this year than last year. What was that dealt? And is that charged back into the divisions or is that part of the corporate number as well?

It's charged back into the divisions. It was a cashflow statement. It was basically from the prior year, but we pay our bonuses for year-end performance in the first quarter. And the fiscal year 2001 was a pour year for us in terms of results in general and results to our plan. And from corporate on down, we had a pretty significant reduction in our incentive compensation. This past year, better than half of our businesses met their plan. We had good performance results. And so we had a pretty big pickup in the incentive-type comp back to what was more normal in prior years.

I mean, but did that -- that was earned. But your accrual for incentive -- I understand about the cash, but in terms of your effect on income, were you accruing at a much higher rate this year than last year?

We were accruing at a higher rate in 2002 than we were in 2001. So the expense of that, Saul, hit all in the 2002 fiscal year.

I'm talking about first quarter '03 versus first quarter '02.

No, the first quarter '03 versus first quarter '02, our incentive accruals are probably somewhat higher. But Glenn's comment was more related to the cash impact in our first quarter related to '02 compensation.

Got you. Finally, industrial, you must have had a booming September because of the problems you had last year. What was your sales increase in September? And what might that level out to in ensuing months?

We haven't released and we don't regularly release our monthly results. I can tell that you September's sales results were a very nice pickup from the prior year. And that's for reasons that have to do with last September. I don't believe it's a barometer of any big pickup. It's going to be a big month for us, and I suspect it will be a big month for a lot of people. I could give you some reasons why. Just one example is our Tremco business, which is experiencing double digit growth in September. Last year, their largest manufacturing point -- distribution point for North America sealants was in Canada. They had 30 trucks stuck behind the Canadian border as a result of the September 11th attacks. Again, we're going to experience a year-over-year good month of September.

I think it has more to do with last September than a barometer of a big pickup in industrial activity. It will be interesting to see how October shapes up in relationship to what we're seeing trend-wise.

Finally, interest expense, which was 7.2 million in the first quarter, should we run at that rate or should that fall off as you generate more cash? What do you see happening to the interest expense?

I think that's a pretty good number for the balance of the year, unless, of course, there's any action from the fed.

Okay. Great. Thank you very much.

Thank you, sol.

We go to rose Rosemarie Morebelly, Ingers Synder. .

Good morning all and congratulations for the good quarter. On the changing terms for Home Depot, do you see that generalizing to some of your other large consumer companies.

I don't think so. I think the terms of the other accounts are set, but we can't predict the future. But at this point there are no anticipated changes in any other accounts. And Home Depot is our single largest account.

Okay. Could you talk about -- it looks as though you are beginning to make some small acquisitions so far they have been small. Should we expect something larger than that in the balance of the year?

We're pursuing a lot of acquisition opportunities. They tend to be smaller product lines or family businesses. If we accomplish what we want, I think we'll be able to add about $100 million a year to our growth through acquisitions. And we are not looking at any big transactions at this point. Obviously, if they're a good fit with RPM, we're going to take a hard look at them. We have no intention of releveraging our balance sheet by aggressively pursuing a big transactions a big price. We're seeing very good value, both in terms of price and very good opportunities in terms of integration opportunities on the acquisitions that we're currently looking at.

So, it sounds as though you are mostly concentrating on product lines and not buying any assets whatsoever and you are going to pull all of those products into your existing facilities?

No, we are looking at a number of private businesses in North America and Europe. And they range anywhere from $12-$15 million businesses to businesses as large as $100 million. Again, we'll consider bigger transactions to the extent we can buy them at the right price. And/or integrate them properly from RPM's perspective. If some of these hit, you may see some larger ones, but they're not likely to be the 200 or 300 or $500 million transactions.

RPM used to make preemptive bids. Is that what you are planning in pursuing and what price are you willing to pay?

Actually, Rosemarie, over the last 30 years, we've completed about 90 acquisitions. 14 of those -- I'm sorry, 8 of those have been preemptive bids. We participated in 14 auctions or preempts. We were successful on eight. I think what we're pursuing is the more traditional, privately negotiated purchase of product lines or purchases of privately held or family businesses as opposed to pursuing auctions. There are not a lot of auctions going on out there now, because there's a pretty good disconnect between buyer expectations on price and seller expectations on price. And I suspect eventually, the valuations are going to come down to a more traditional and much more reasonable level.

Could you tell us what you -- what is a reasonable level for you in terms of valuation?

That's probably not a question we want to answer directly.You know --

A range will do.

We have traditionally been able to buy businesses in a broad range. We focus on operating income and cashflow. And we've acquired businesses without getting into the multiples of earnings anywhere from one-time sales to 1.5 times sales. That depends on the profitability and margin of the business. But, I don't want to get into specific quantitative multiples. Suffice it to say, what we're looking at now are better values than what our industry saw at the end of the 90s.

And to finish on this subject would you consider dilution for a year or so?

No. Not on these transactions. If the right deal came along, whether it's a privately held deal or a larger transaction and we were able to do it for stock, we might take a look at the impact of that, but we have not done dilutive transactions in the past and we don't intend to start.

You touch, Frank, on the Dryvit situation, vis-a-vis liabilities. Could you bring us up to speed on Bondex?

Bondex is the subsidiary which continues to attract our asbestos claims. In the quarter, claims were about 2,000, which is up from 1,400 at this time last year. I think the trend there is good. For a period of time, because we had very few claims. We had seen our claims rates double, but we're seeing that rate slow down. We had some significant settlements in May and June of this last year. Our claims rate and our new case rate has slowed down measurably in the last couple of months. We will continue to report our actual claims and our costs as we have for the last three or four years every quarter. It continues to be an issue that we monitor and it's not a material issue to RPM today, but asbestos exposure is a problem for the manufacturing base of this country pretty much everywhere.

Okay. Then you made some comments regarding pursuing new retailers. Could you elaborate on that?

Not necessarily new retailers but we have a few areas where we're pushing line extension or new product categories that we're not in. We have completed the integration of our Flecto business into Rust-Oleum. We think we can grow into wood stains and finishes. Flecto has that mark net Canada. The garage floor coating and shop floor coating is growing. So it's not new retailers per se Rose Marie, it's new space or gaining some space in new categories that we're pretty excited about.

Okay. Thanks a lot.

We'll go next to Alex Slivka, McKinley capital.

Good morning.

Good morning.

In the current environment of corporate structure, I'm just curious, are you planning to reconsider the terms of the consulting agreements that you entered into with Tom Sullivan and Jim Karman over the next year or two?

No. Those are consulting agreements that were agreed to with both of them under contracts some time ago. I fully expect that we're going to put both of those gentlemen to good use. Jim Karman has been very involved with our investor relations and particularly with the NAIC, where we have 100,000 shareholders. His consulting agreement is roughly a year.

Tom Sullivan will continue to be a key person for RPM in our shareholders and acquisitions. He is currently the Chairman of the National Paint and Coatings Association. He has and will continue to travel internationally in terms of pursuing some acquisition opportunities. I think both of those will be put to good use. And relative to what you read about in the paper, I think both of those are certainly real money, but they're modest to what hits the headlines.

Congratulations on the quarter. I think you did a good job.

Thank you very much.

Next is Mark Pare.

Good morning.

Thanks for a good quarter. Both my questions were answered. We can keep going.

Thank you.

Next is Jeff Zekauskas at JP Morgan.

Yes, I am Silvia Laura sitting in for Jeff. Most of my questions have been answered as well. Can you specify in more detail what accounted for the higher sequential growth margin, the consumer segment despite the sequential sales decline? Is it all cost containment or lower raw materials or is there pricing in there or does it have to do with the reclassifying of the operating expenses to corporate expense?

No. The FSC reclassification was entirely in SG&A. The gross profit improvement was a combination of some lower raw material costs as well as continuing operational improvements related to the restructuring that was completed a year ago and a real focus on class A manufacturing. We have, as I mentioned before, Paul Hoogenboom, vice president of operations and systems at RPM Inc. has brought a new focus from the corporate perspective on driving operational improvement. Again, as a focus well beyond what we've had in the past, our operations are very responsive to it.

You should continue to see both operationally and logistically marginal improvements in those areas. One comment I'd like to make about the raw materials is as a chemical company or being lock with chemical companies in general in terms of the segments that are followed, people are concerned about the impact of rising oil prices or the Gulf war on chemical companies or especially chemical companies. We're further downstream. So, in fact, we are benefiting from the impact on chemical companies or a lot of -- specialty chemical companies and challenges they're having with raw materials on the cost side from one perspective, but on the demand side which is generally weak.

So we're not seeing the types of rises that are hitting chemical companies. In fact, we're see something softening of raw materials as an end-use producer. We don't see that changing for the next couple of months.

How much lower are your raw materials year-over-year?

Marginally lower. I think of the difference between -- I can't tell you specifically, because it's a broad collection. The improvement in our gross margin is roughly 50% from lower raw materials and 50% from operational improvements.

Okay. Thank you very much.

Thank you.

Once again, it is star one if you have a question. We have a follow-up from Rosemarie.

Hi.

Glenn, I didn't catch the sales number for the consumer division.

$250.2 million.

250.2. That was it. Thanks.

Thank you, Rose Marie.

It appear there's are no further questions. At this time, I'd like to turn the call back over to the speakers for additional or closing remarks.

I'd like to close by talking about my predecessors, Tom Sullivan and Jim Karman. It's been an honor to work with both of them and to follow their leadership and example. For me over the last 14 years here at RPM. For RPM and our shareholders and many of you for a lot longer than that. We greatly appreciate your support of RPM and I look forward to working with you as RPM's next CEO in the coming years. Thank you very much and have a nice day.

Thank you for joining today's conference. You may now disconnect.