RPM International Inc (RPM) 2003 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. You're on line for this RPM Q3 2003 conference call. At this time, we are gathering additional participants, and anticipate being underway in approximately one minute. We do appreciate your patience. Please remain on line.

Good day and welcome to RPM International's conference call for the third quarter of fiscal 2003. Today's call is being recorded. This call is also being webcast live and can be accessed through the RPM website at www.RPMIMC.com.

A taped telephone replay will be available from two hours after this call concludes until 8:00 p.m. Eastern Standard Time on Friday, April 18th, and can be accessed by dialing 719-457-0820. And entering confirmation code 425632.

A webcast replay and written transcript will also be made available through our website. The webcast replay will be available approximately two hours after this call ends, and the written transcript will be available two to three business days after the 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 and uncertainties, please review RPM's quarterly earnings release and periodic reports filed with the Securities and Exchange Commission.

The information in this conference call related to 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 President and Chief Executive Officer Mr. Frank Sullivan for opening remarks.

Please go ahead, sir.

Good morning. We are pleased to report our third quarter results.

The release for those results was issued this morning at 8:00 with revenues up 6%, net income up 49% and EPS up 33%. It is important to note that this is RPM's seasonal low period, so these percentages gains have to be compared relative to the size of the net income dollars in the earnings per share game.

In our industrial segment, while our industrial revenues rose 11% in the quarter, this was mostly from the continuing growth of our Tremco services business, and industrial product sales overall were flat year over year.

In the consumer segment, as we anticipated in the last quarterly call, we had flat revenues due principally to slower retail takeaway and some temporary slowdowns at some major retail customers, most of which we feel is behind us.

The quarter would have been stronger except for some weather issues, most notably an early February snowstorm on the East Coast that shut down our DAP plant, our Zinsser plan and Dryvit plant for a couple of days. Without that, I feel that our results for the quarter would have been better relative to our market share gains in underlying relative growth. Relative to the overall economic conditions, we feel we are still gaining market share in a number of important areas.

With those introductory comments, I'd like to turn the call over to Glenn Hasman, RPM's Vice President of Finance and Communications for financial details on our third quarter and our year-to-date results for the period ended February 28th, 2003.

Thank you very much, Frank, and good morning, everyone.

To elaborate from where Frank left off, the third quarter was a (inaudible) sales growth of 6%, that did include some favorable foreign exchange in our Euro and Canadian impacted operations, and also some small acquisitions were made during the course of the past nine months that impacted the third quarter. That was about 3% of the sales growth during the quarter.

By segment, the industrial segment was ahead $23.5 million or by 11%, and as Frank mentioned a good bit of this is a mix issue where we had good growth, continue to have good solid growth and a relatively newer roofing services business, which is part of Tremco. Also flooring installation services at our Stonhard unit, both of which do carry lower margins on the gross line.

We also as Frank mentioned, have continued to see weakness in the industrial and manufacturing sectors of our economy.

The consumer segment, sales there were ahead $2.5 million or 1%, which is essentially flat. As Frank mentioned, we did experience a much softer retail climate during this quarter. We indicated that in the last conference call, as a matter of fact, back in January.

Also as Frank mentioned, we did have two to three lost shipping days particularly on the East Coast during the early part of February from winter storms, which we view as a timing issue and those sales, of course, will be recovered.

Moving to gross profit. Our gross profit dollars were improved by almost 5% or over $8 million, really attributable to the higher sales volume on the leverage costs. Gross margin did decline slightly, however, to 43.1% this quarter, from 43.8% a year ago. A good bit of that has to do with the mix issue. Industrial segment margins were down, in fact, to 43% from 44.8% a year ago by virtue, again, of those services sales that I mentioned, as that growth does carry much lower margins. On the positive side of that, though, we do get some higher product margin pull-through particularly from the roofing services sales that we mentioned.

Consumer segment margins quarter to quarter were ahead by 50 basis points to 43.3% over 42.8% a year ago. What we're seeing there is continued reduced conversion costs, usage costs were improved as well. We're continuing to see benefits from the earnings initiative of the ongoing initiatives toward class A manufacturing efficiencies, and those efforts are continuing and benefiting both of our segments.

SG&A expenses. Those were improved to 40% of sales this year from 40.7% a year ago. Mainly that's the volume leverage benefit once again. Industrial segment was improved to 39.3% of sales from 41.5%. That improve improvement amounts to almost $5 million better on the SG&A side, again by virtue of the volume and the mix issue, which really benefited the industrial segment.

We also had a year ago the Peso devaluation in Argentina for about a million and a half dollars which we don't have this year, but ongoing cost reduction initiatives are the other benefit to this segment.

Consumer 34.9% from 35.7% SG&A a year ago, which improved .8% of sales. That's approaching $2 million better. Continued cost reductions in this segment as well, and they did have part of the Argentine Peso devaluation a year ago which was not there this year.

Moving to corporate other, which also falls into our SG&A, those expenses this year were $11.6 million. A year ago, $8.2 million. And that difference really comes down to two main areas. As we've been talking about during the course of this year, we have a change in federal tax legislation which affects our exports, or our foreign sales corporation. That change went into effect the beginning of this year, and that's about a million dollar shift between corporate other and our operating segments. Corporately, this has no effect to the bottom line, but it does affect the segment results.

The other difference at corporate other was really the increased product liability costs of about $2.4 million, which is basically the amount that we've been having each quarter through this year.

Moving then to earnings before interest and taxes or EBIT, were improved by $1 million. That's a margin improvement of 8% on the 6.4% increase in sales. The industrial segment was at $8.6 million versus a year ago $7 million. That's ahead 23% on the 11% sales growth, so clearly there's margin improvement here. And that amounts to 3.6% of sales from last year's 3.3% of sales.

The consumer segment EBIT reached 16.7 million, that's ahead 20% on 1% sales growth. That's at 8.4% of sales compared to last year's $13.9 million or just over 7% of sales.

The EBIT improvement generally could be summarized as the growth in industrial services sales combined with ongoing cost reduction and cost containment efforts across the operating segments.

The interest expense net was down $1.6 million quarter over quarter. A good bit of that is lower interest rates, keeping in mind we do still have a 70% variable debt structure. That amounted to about a half million dollars of savings and the interest rates during the quarter averaged 3.7% compared to last year's 4%.

The other bigger benefit during the quarter was lower debt levels, which averaged $217.4 million lower during the course of the quarter, which amounted to about $2.2 million of interest savings.

Last year, interestingly and notably, their/our interest expense a year ago was offset with marketable securities gains that approached a million dollars, which were not realized this year.

The tax rate this year at 35% compare with last year's 34%, which is right on target. And as we've indicated, our effective rate will tend to increase as earnings grow, and the one-time benefit from last year's adoption of FAS 142 for goodwill amortization becomes less and less of a significance.

Our net earnings were ahead $1.6 million or by 49% to $4.9 million. That margin has improved 30 basis points, just over 1% compared to last year's .8%, and diluted earnings per share of 4 cents were up a penny or by 33%, and of note, the share issuance this past March of 11.5 million shares had no dilutive effect on the quarter.

I'd like to now move to the nine-month results and hit some of those highlights. This year's sales of $1.494 million -- billion, pardon me, improved over last year by 4.6% or by $65 million. That does include a half dozen small acquisitions this year, and again favorable foreign exchange, mainly the Euro actually notably had worsening from foreign exchange in Latin America so far this year, but the net effect has been positive.

The combination of the two- acquisitions and fx only contributed about 1% to total growth so far in nine months.

Industrial segment sales reached $813.8 million. That's 54% of RPM's total. That's up $42.2 million or by 5.5% year over year. A good bit of that again is the services that we mentioned for roofing and flooring at the lower margins. Commercial construction has been down so far this year, which we've been mentioning. That did impact particularly our Dryvit division, and the industrial manufacturing sectors throughout the nine months have remained weak, but we continue to view this as pent-up demand versus any loss of business or market share.

Consumer sales of $680.2 million were ahead by $23 million or by 4-1/2%. A good bit of that is organic, and particularly our main operations within consumer were ahead during the course of the first nine months -(inaudible).

Gross profit dollars increased $29 million this nine months over a year ago mostly attributable to the higher sales volume. Our margin, gross profit margin on the other hand of 45-1/2% this year is nearly flat against 45.6% a year ago. That does have to do with the lower margin sales mix offsetting the volume cost leverage, and some lower raw material costs.

By segment, the differences are much like they were in the third quarter. Industrial segment margins year over year declined to 45.8% from 46.7% a year ago. Again, to do with the mix issues. We did have a number of favorable raw material costs, but cost pressures are seeming to be building at a number of our suppliers, and Frank will touch on that in his comments afterwards.

Consumer segment margins year-over-year have improved to 45.2% this year from 44.3% a year ago. Positive volume effects here as well and a number of favorable raw material costs in this segment also. On top of that, we do continue to have lower conversion costs due to the class A efforts that are ongoing.

SG&A expenses were improved at 36.1% of sales from 36-1/2%, mainly the volume leverage which had a positive effect through the nine months here as well.

Industrial segment SG&A percent of 35% versus 36.7% a year ago, mix issues there as well. The volume benefit is clearly evident in SG&A expenses, as many of the costs did not ride along with those increased sales. We did have that Argentine Peso devaluation a year ago of about $1.5 million, and generally good cost reduction initiatives taken a year ago and continuing on into this year to benefit this segment.

Consumer SG&A at 32.7% this year compares favorably against 33.3% a year ago. Higher sales volume benefit in this segment as well, and ongoing cost reduction and containment efforts have benefited this segment. We did also have some reduced freight and distribution costs, and the avoidance of the peso devaluation in Argentina of about $.6 million taken a year ago.

Corporate other costs through nine months are ahead $12.2 million at $31.9 million versus 19.7 million a year ago. The increased product liability costs that we've been mentioning accounted for $5.4 million of that difference, and the reduction of inter-segment income from the change in tax legislation cost an additional $3.2 million to this segment, and the offset to that, of course, is in the industrial and consumer operating segments.

We mentioned in the second quarter that we've reincorporated the business Odelawear (ph) and the costs to do that were just over a million dollars through nine months, and beyond that, we've had rising health care and other higher employee benefit costs that accounted for about $2.4 million of additional expense.

Ratings before interest and taxes were $11.8 million ahead. That again is margin improvement being ahead 9.1% on a 4.6% sales increase. Industrial segment at $88.2 million was ahead, almost 15% at 5.5% sales growth compared to last year's $76.9 million or 10% of sales.

Consumer segment EBIT at $85.1 million was ahead nearly 18% on 3.5% sales growth, margin improvement here again at 12.5% of sales compared to last year's $72.4 million or only 11% of sales.

The nine-month EBIT improvement can generally be summed up from the growth in sales, some lower raw material costs year over year, and the ongoing cost reduction and containment efforts across both operating segments.

Interest expense through nine months is down $11.8 million. Lower interest rates accounted for $4.2 million of that savings. Average rates through nine months of 3.9% compare favorably with last year's 4.7% average. The lower debt levels have averaged over $233 million through nine months. That accounts for the remaining $8.6 million of savings, and to repeat last year we did have a marketable securities gain during the third quarter and nine months of approximately a million dollars that was not realized again this year.

Tax rates of 35% compare with 34% which we've already talked about. Net earnings then are up $14.4 million, 22% to 78.7 million. The margin is improved 80 basis points to 5.3% from last year's 4.5%, and diluted earnings per share of 68 cents are ahead by 5 cents, or by 8%. 11.5 million shares sold this past March, have had a 5-cent per share dilutive effect through nine months and we expect that to amount to about a 7 cent per share effect through the full fiscal year.

Now moving to the balance sheet, I'd like to give some helpful detail comparing to this past year end, May 31.

Net accounts receivable were at $319.2 million at February 28th. That's down $78.5 million through nine months. A good bit of that is just the seasonality of the business. Inventories are at $262.9 million or ahead $11.5 million, which again is timing differences versus year end, and accounts payable at $117 million were down $43.8 million from year end.

More interestingly, the total debt picture of February 28th is just under $700 million short term, which is down over $14 million from year end, bringing the debt-to-capital ratio to 43%, down from 45% at year-end, and down from 58% a year ago.

What I'd like to go into now is much more meaningful comparisons to those same balance sheet items a year ago or at the end of February of 2002.

Accounts receivable this year are down $6 million. Days outstanding have improved year over year by more than five days overall.

The industrial segment is down by six days. The consumer segment is down by five days, so clearly we're continuing to make good progress on the balance sheet.

Inventories also are down $1.9 million year over year. Days of inventory outstanding are down more than six overall. Also with significant improvement in both of our operating segments, with the industrial segment down seven days, consumer segment down six days.

Accounts payable are down $9.3 million year over year, but that's a reflection of the reduced inventory levels as opposed to any change in the payment of our bills.

Total debt including last year's short term debt of $85 million is down $200 million year over year. The 156 million of that coming from the March 2002 share offering, the balance of $44 million comes from our free cash flow, which is net of $22.7 million that we've invested in acquisitions during the past 12 months.

I'd like to now move to the cash flow statement, and touch on cash flow from operations through nine months of $117.3 million. It's slightly down from a year ago - its $131.4 million. The overriding difference there is really what was happening a year ago, where we were gaining from the efforts that we went through and the restructuring program which concluded May 2001. We were squeezing cash back out of our working capital areas pretty actively during this past year. Obviously not being able to repeat that this year, but what I do want to talk about is some interesting improvements about the working capitals year over year, which I just touched on the day's improvement, so we are continuing to make good progress even though this is showing on the cash flow from operations compared to a year ago.

CAPEX is at $22 million which is ahead of last year's $16.2 million but still well within a depreciation and amortization range. We should be able to hold as we've been saying at about the 40 to $50 million CAPEX level for this year and the next two or three, as our main capital spending areas are behind us, having gone through quite a bit of expansion and so forth in the past several years, we feel we have the capacity we need to meet our normal growth rates for the next three to four years.

Free cash flow then which is after our capital spending and dividends, is at $51.2 million through nine months, which has enabled the internal funding to acquire that half dozen or so small businesses and (inaudible) bolt on product lines so far this year and remaining interest in a joint venture for a total of $19.5 million and $14.9 million of debt reduction.

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

Thank you, Glenn.

Before I get into some comments about our outlook and we get to your questions. I'd like to take a few minutes to update you on our asbestos litigation and our insurance coverage situation. I'm sure you'll have more questions than we can answer at this point in time, but we will let you know as well as we can where we are.

As you know from our 10-K filing last August, in a subsequent filings, our asbestos litigation insurance which has historically covered approximately 90% of our costs, is coming to an end sometime in the coming months.

Although our settlement costs for the third quarter were down as we had indicated earlier, we currently anticipate an increase in cases and associated higher costs for the balance of the year and into the summer months in part as a result of increasing demands and anticipation of potential federal and/or state legislative changes.

Based observe on the more rapid depletion of our insurance than that which we have experienced during this past fiscal year, we have begun an informal process with the assistance of an independent outside advisory firm to formally estimate out potential future asbestos liabilities.

At the end of this formal evaluation process, which necessarily involves evaluating many variables and developing many scenarios, we will in all likelihood accrue a liability reserve sufficient to cover the estimated cost of our asbestos liabilities for future periods.

Although we can't be certain of when this estimation process will be completed, our objective is to have it done if possible in conjunction with reporting of our fiscal 2003 year-end results towards the end of July. We certainly share your interest in bringing some clarity to this issue, and intend to move quickly towards that objective.

Like many companies, we remain hopeful that the recent activity in the Congress will lead to some form of federal legislation that will bring more certainty to ours and many other companies' ultimate asbestos liability outlook. In the meantime, we will be taking appropriate steps to address this liability based on a current environment.

Also by completing the estimation process, we'll be in a much better position to quickly react to any specific legislation such as a trust fund with an estimate of our potential future liabilities. Obviously, if and to the extent we take a charge for this reserve, our year-end results could be impacted accordingly.

At this time, we are not able to speculate on the exact timing nor the amount of what this charge might be. Though we are acting with all due speed to bring this matter to an appropriate conclusion over the next couple of months.

Now I'd like to make some comments about our outlook for the balance of this fiscal year.

The economy continues to be difficult, and in fact, we're not seeing any pickup in our industrial markets, while we do expect growth in our consumer segment for the balance of the year, it's likely to be slower than the 5 to 6% internal growth rate we experienced in the first half of the year.

We are also beginning to see the impact of rising raw material costs, but we're hopeful that these will be mitigated by the recent drop in oil prices. If they are sustained, we will seek price increases and pricing adjustments on all of our businesses to maintain our margins and feel that we can be able to accomplish that.

From an acquisition perspective, we continue to be active in the markets and pursuing acquisitions of moderately sized businesses or product lines that will fit nicely into RPM's existing operations and operating structure.

Subsequent to the third quarter, we completed the acquisition of Koch Waterproofing systems. It's a $30 million in revenue business, whose business is principally involved in waterproofing for residential homes. This is an excellent fit into our Tremco business and into their waterproofing section. It brings some product technology into the commercial markets of Tremco, and Tremco is excited about bringing some of their technology into the residential market served by Koch Waterproofing Systems.

With the completion of these comments. I'd be happy now to take your questions.

Thank you. Today's question and answer session will be conducted electronically. If you'd like to ask a question, please do so by pressing the star key followed by the digit 1 on your touch-tone telephone at this time.

Again that will be star 1 for questions. If you're on a speakerphone, please turn off your mute function so the signal can reach our equipment. We'll be pausing for just a moment to give everyone a chance to respond.

We'll be taking our first question today from Rosemary Marbelli (ph) at Enger Schneider (ph).

Good morning, all, and congratulations actually for a decent quarter in this environment.

Thank you, Rosemary.

Could you give us a feel -- a better understanding of the difference between the (inaudible) 3% on revenues, can you split the currency and the acquisition and can you do that for the company as a whole and then for the two different pieces of business?

I'll let Glenn handle that.

The breakdown of that, Rosemary, for the quarter, I assume you're referring to?

Yes.

About 2% of that 3% really is foreign exchange, so the balance comes from the acquisitions. And really it's about that same breakdown for the -- between the two segments.

Ok. And Frank, could you give us a feel for which kind of product lines you acquired? I'm assuming the Koch is not in those numbers since it was after the third quarter?

That's correct. We have completed a number of product line acquisitions this year. I think the total revenue impact of the product line acquisitions on an annualized basis will be in the neighborhood of 50 or $60 million. Koch is roughly half of that. The balance were product lines into our Zinsser business or into our Rust-Oleum business and Day-Glo businesses, all of which will be product lines that our integrated into our existing operational structure.

And should we assume that they will benefit the bottom line immediately?

They won't have much benefit this year just because of the timing. I think the answer is yes for next year. The valuations and prices that we're having to pay for acquisitions in this environment is back to the historic norm and certainly these businesses and acquisitions are cash-flow accretive and earnings accretive from day one. You have to put in perspective the relative size of these transactions to the whole of RPM.

Right. But 60 million, I mean, but still -- by the way, just confirming, do you have Koch in this, in the 50 to 60 million, or do we add the other 30?

That includes Koch. It's about 30 million which is the Koch transaction completed in the fourth quarter is in our industrial segment, and for the most part, the balance is in our consumer segment.

Ok. And you mentioned in your remarks that you were gaining market share in certain areas. Could you give us a better feel for where?

I think that's correct, and we've been hearing from that our businesses in a number of our product sales areas in the industrial markets, we're seeing flat results, and if we look at a number of our longstanding customer base and look at what's happening in some of the industrial segments we serve, we're seeing either segments or in some cases existing customers without losing share being down 10, 12, and some cases even 15%.

And we're able to pick that loss of revenue up because of the economic conditions by picking up new accounts or market share with existing accounts. So on a comparative basis, when you look through the service revenue increase in the year to be flat year over year on a revenue basis in many of our industrial businesses, I think is a pretty good indication relative to what other companies are doing that we're picking up share both through new products and more critically this year, just through new business with new companies or new accounts.

Can you tell us which areas? I mean, it is in industrial, but within industrial, where are you seeing it? Is it in roofing, is it in flooring?

I think it's in flooring where we're doing fairly well. I think our Tremco businesses are doing fairly well, particularly given the commercial and industrial construction nature of their businesses. Day-Glo, TCI, most all of our businesses, the two areas that we have been hurt in the industrial sector this year is in major maintenance contracts, which impact some of our companies, and commercial construction, which mostly impacts drive it.

Lastly for Glenn, tax rate, Glenn, do we expect it at 36% in 04, or is 35% more or less as high as we go?

Rosemary, I haven't run that. I would say that 35 is probably roughly a good number for the rate for next year as well.

Ok. Thanks. I'll get back in queue.

And we'll go next to Greg Kennison (ph) Robert W. Baird.

Good morning Craig.

Good morning and congratulations on again the strong cash flow generation from the core business.

First question is on the balance sheet, I think I may have missed this, but what was the accrued loss reserve and current liabilities at the end of the quarter?

I didn't give that. It was -- the accrued loss reserves were $63.1 million.

Sequentially, is that up from something in the neighborhood of 40 million?

That was up from year end at 52 million, and a year ago at 53 million.

Ok. And then has this asbestos issue at all impacted your ability to transact acquisitions? Are companies reluctant to take stock or are you reluctant to give stock given the valuation?

Craig, let me answer that two ways. First of all, it has not impacted our ability to do acquisitions at all. As we've been indicating for the last year, our acquisition focus has been back to small to medium sized businesses that would either fit as a free-standing reporting unit to one of our existing group companies, or for product lines that we can fund, and we've talked quite a bit in analyst presentations about our goals for growth over the next five years and how all of that we assume would be funded by cash.

We are not in a position now, given where our stock price is, to be comfortable and because of its value to be using stock as a currency in acquisitions. Generally does not affect our ability to do smaller or medium-sized transactions, and the one area that it would impact us, and we don't have plans to do this, but it does certainly take away some of our ability to pursue larger transactions very significant or meaningful acquisitions that we would necessarily want to use stock for either in a merger or as a financing vehicle, but that is not part of our long-term growth plan as we've communicated to the function community.

Ok. Thanks. And then I think in light of the Philip Morris situation in Illinois, I think I have to ask the question as to whether you have any cases in the Madison county courtroom?

We do have cases in Madison County. In fact, Illinois is one of five states that have been the states in which the lion's share of our asbestos litigation has occurred. I don't think what's happening to Philip Morris in Madison County is unique. I think Madison County, Illinois was written up in the "Wall Street Journal" as one of the -- what they refer to as litigation hellholes and it's a problem for all companies and certainly companies that have asbestos litigation.

Frank, do you know if any of those cases are involved with mesothelioma?

I believe the cases in all these jurisdictions all include meso lung cancer and unimpaireds.

Ok. And then finally any share repurchase activity in the quarter?

We did not have any share repurchase activity in the quarter for a couple reason. The first one and most important was we had a change in our 401(k) plan administrator from key bank to Wachovia, and in the process, we had about a three-week blackout period during which we were unable to sell shares either as officers or directors and also unable to transact any share repurchases in our program. That is now behind us. That was a good chunk of the February period after our announcement and into early May - - I'm sorry into early March. That blackout period is now over and you we see activity in future quarters in our repurchase program.

Great. Thanks again.

Thank you.

We'll go next to Jeff Zekauskas (ph) at J.P. Morgan.

Hi, good morning. When you look at the volumes in your consumer business, was there a difference in performance between the big box retailers and the non-big box retailers?

I don't have the specific details on that, Jeff. I know that in general, we saw slower consumer takeaway and we anticipated that going into the quarter. In addition, we saw some slow down in some of our major retail customers, which we felt at the time and feel is temporary.

Going forward, we had about a close to 6% internal growth rate in the first half of the year in consumer. It was relatively flat in the third quarter, and we certainly anticipate revenue growth in the fourth quarter, although I don't think it will reach the 5 or 6% internal rate of the first half.

Secondly, in terms of raw materials, how much are your raw materials up now, and how do you see them moving over the next few quarters on a percentage basis insofar as you can forecast that?

On a global basis, there's been a relatively fair amount of raw material pressure going into the end of calendar '02, and certainly the beginning of this year. We've had the ability to manage that such that really has not impacted our results through nine months.

We are now seeing the impact of rising raw materials across a number of our businesses. It principally is the result of what's happened or what happened to oil prices in anticipation of the war with Iraq. Those issues are going to be battled out in our industry and certainly with RPM over the coming months, and we're hopeful that some of the raw material pricing pressure that we're starting to see and is starting to impact some of our businesses will be mitigated by what's a decrease in oil prices and hopefully one that will be sustained.

And so answer the second half of your question, I think we'll have a much better sense when we report our fourth quarter and year-end as to how raw materials will look for the balance of the year because some of the pressure is starting to come out of what was a pretty intense effort by chemical raw material suppliers of getting price relief in the face of rising raw material feed stocks and yet the challenge of lack of demand.

I guess finally on the asbestos side, when do you expect your insurance coverage to run out? And secondly, I think you used to talk about there being sort of a $30 million a year ahead gross claims liability in asbestos?

Right.

Has that number gone up or down or stayed the same?

I think at this point, that number is our best estimate. As we start to look at what happens in the coming months, we will continue to develop our thinking on that, and we will do what we've always done, which is continue to report our results of our cases, our dismissals and our costs every quarter.

It's hard to tell what's driving some of the increases that we're seeing, and we anticipate. I think part of it is by all parties, anticipation of what does it mean if there is some type of federal legislation. For instance, in Mississippi, across a number of legislative -- or litigation areas, not just asbestos, there was a significant increase in case filings before the December 31, 2002 deadline of enactment of new tort reform there.

Right.

So we think that's what we're seeing, so we'll be in a better position, I think, in July to see -- or to give you an indication of that. As it relates to our insurance, we haven't disclosed -- and the fact is we don't really know, it depends on our month by month caseload and our month by month costs as to how long our remaining insurance will last.

The significant issue that the market has certainly anticipated is providing some clarity to what we expect our future potential liability will be and we're in the process of doing that.

Ok. Thank you very much.

We'll go next to Saul Ludwig (ph) at McDonald Investments.

Good morning guys.

On the corporate expense number, in the first quarter, it was $9.5 million. In the second quarter, it was 10.8, and then we have 11.6 in the third quarter. Is this a trend that's going to continue moving in an upward direction? I wonder if you could provide some color on that line item.

The most significant part of that increase year over year and in each quarter, Saul, is an increase in our liability reserves.

Mm-hmm.

Aside from that, we would anticipate that those numbers will come down a little bit next year. A couple things that may impact that one way or another are insurance renewals, which we're in the middle of, and we're seeing insurance for some areas like DNO and general liability continuing to go up. We're seeing insurance in other areas like property and casualty starting to trend down for the first time in a couple of years, so that will have some impact there in terms of the piece of that that our corporation or the corporate other piece takes. Health care is also included in that.

But the most significant aspect of our increases year over year has been the increase in our product liability reserves, and how that will change will really depend on the outcome of this process that we are undertaking now in terms of what's the best and most appropriate manner in which to address our future potential liability costs.

It sounds like those product liability reserves that you charge income for are actually greater than what your quarterly product liability settlements were in such a manner, you would be building your reserve account.

We have to take into account certainly our current estimate of our existing caseload, not just what's happening in one quarter or another, and those reserves are also addressing defense costs and certain other efforts that we have undertaken associated with both defense as well as legislative areas.

Another question on insurance. Does RPM have any -- I don't know if you call it terrorist insurance, not only if there were damage to your facilities as a result of terrorist activities, but if such damage resulted in injury to local residents or other parties, is there any insurance that's available for that, or where do you stand in that regard?

As it relates to specific terrorist insurance, I can't answer that. I don't know. I know that in areas of property and casualty, and those types of risks including global risks, we have been a much easier insured than other people, and so I think you see that in both the breadth of our coverage as well as our costs. It's principally because our diversified or decentralized organizational structure and the fact that we don't have high profile buildings or facilities or high profile businesses as it relates to governments overseas.

So you have general insurance for property damage and product liability but nothing that specifically is tied to terrorist activity?

Again, I don't know the answer to that. I mean, we have business interruption insurance. We have the appropriate types of insurance that would protect us in the bottom line. I really don't know. The question is whether it's been excluded from some of our coverages, and I don't know the answer to that, other than it's not a significant issue for RPM given our organizational structure and our decentralized nature of our businesses.

Great. Thank you very much.

Thank you, Saul.

We'll go next to John Roberts (ph) with Buckingham Research.

Good morning.

Even though it's still small, (inaudible) pretty interesting here. What's the -- of materials when you get service revenues, and when you talk about your service revenue growth, are you talking -- does that include the pull-through of materials that come along with that?

It does not include the pull-through of materials. So far it's pulled through on the nature of about 10%, but I think that's a little bit misleading because of the economic environment that we're in. The thing that we're excited about is that we're filling a real need in the marketplace where institutions and whether they're government or educational or administrative, hospitals, things like that, had cut back over the years in their maintenance departments and maintenance budgets and they're starting to wake up to the fact that they have some ongoing needs in some basic areas like waterproofing that need to be met, and we're starting to fill that and we're learning how to do it well, we're learning to how to do it profitably, and it's an exciting growth area for us.

The aspect most directly to your question is, we feel pretty good about the fact that we're on those roofs and we're talking with these different entities or buildings or companies or institutions about shaping their budgets in terms of, gee, from a roofing or waterproofing perspective, what have they got, how long will it last, where should they go? So the connections we've made there, much like what we've done in our retail markets, have presented us as kind of the expert of helping these folks manage very long-lived assets in their maintenance.

So we're pretty excited about the prospects of that pulling through black line, very profitable product sales in the future, and we're also excited about areas of continuing to expand some of these maintenance services that we're growing in.

And then Frank, you indicated that valuations were back to normal in the M and A market, is the activity level high or low relative to historical activity that you've had?

Our activity level today in terms of discussions is pretty back to traditional levels. We were out of the M and A market for about a two-year period, so we're just getting some things going again. Some of the discussions that we're having are likely to lead to transactions in our fiscal 2004. Some of the discussions we're having are likely to lead to possible transactions three or four or five years from now, but that's the flow that we're very quickly getting back into, which will not only help us find the right businesses and product lines to add to RPM in the next year, but will get us back to that regular flow that we enjoyed for probably a two-decade period of having the type of deal flow as in any business, it becomes a numbers game and having the right deal flow to make sure that you're getting enough looks to get the right businesses, the right management teams and the right product lines that meet our product and market and financial criteria so that this can again become a regular meaningful part of our growth strategy. And you're starting to see that now, and you'll see that continue.

Thank you.

Again, that's star 1 if you do have a question today . We'll go next to Craig Halter (ph) at LGR Great Lakes.

On the last call, you had talked about the Tremco services business running at about a 70 million annual run rate or sorts. Is that still the case or is that accelerated from there?

It may be a little bit higher by year end for this year, maybe a little bit higher.

And you continue to see that moving upward next year as well?

Yes.

Ok. And can you give us an update on the EIFS situation relative to the settlement?

There's not a whole lot to update on the settlement. We had a settlement that was approved by a court and approved by a judge earlier this year, and that settlement was appealed by a select group of contractors and trial lawyers, and we anticipate that that appeal will be resolved sometime in the next couple of months, and that the original settlement will go on as agreed to and approved by the Court.

We will update our Q's and K's every quarter. There is not a lot to update on that other than we anticipate this thing getting resolved in the next couple of months. In the interim, we continue to manage that situation as we have in the past, and we also continue to have substantial insurance assets available to us to manage that.

Ok. Thank you.

Thank you.

If you have a question, please press " 1". We'll take a follow-up from Rosemary Marbelli and Engler Schneider.

Hi again. Just confirming the product liability reserves, this is most vis a vis asbestos or are there other products in there such as drive Dryvit, and you see them all going up?

There are other products in there, and in general, we see some of those going up as -- some of them are associated with how our revenues grow. I think once the Dryvit settlement is resolved, that's going to be much less of an issue for us in the future than it has been in the past, and the outcome of our process related to trying to estimate our future potential asbestos liabilities will also address that going forward depending on what the ultimate resolution we come to on that issue is.

So you don't really have right now any reserves for asbestos in that particular item?

That's not correct. We are appropriately reserved for both between our remaining insurance and reserves for what we know. The issue is trying to better assess potential future liability for asbestos.

Based on your conversations with lawyers on that particular subject, considering the fact that over the period during which you manufactured and sold asbestos-containing products, if my memory serves me right, you had a grand total of maybe 20 to 30 million in revenues generated from that particular area?

I think our estimate is slightly less than 10 million.

For the entire period, the entire seven or eight years, or is that annually?

That's for the entire period that Bondex-produced the joint compound product.

So back to the beginning of the question, based on your conversations with lawyers, can they go after the entire company even though this was a very small part of your business? I am assuming liability lawyers can do whatever they want, but --

I mean, the first answer is, you know, unfortunately in America you can sue anybody for anything at any time. Our exposure here is associated with the joint compound product line manufactured by our Bondex-subsidiary, and we sold less than $10 million of that product line in our estimate in its history. There are a number of factors that defense and trial lawyers look at in assessing how to address these situation, and there will be number of factors that we look at as it relates to history and caseloads and claims and expectations of future situations here, as well as RPM's organizational structure.

There's a lot of activity going on here. The federal legislative effort continues to move forward very significantly, which is good news. There is also a lot of efforts being tried by significantly larger companies in RPM that have significantly larger liability here, that if successful, will paint road maps for a number of companies involved in this area of litigation.

Ok. And when you talk about the consumer growth in the second half, I understand it will be smaller than the first half, but have you looked at actually your order level or the trend there, or is it wishful thinking that Home Depot, if this is the main one affecting you, is actually going to do better?

I think there's good improvement there, and I think we anticipate seeing a renewal of revenue growth in our consumer businesses in the fourth quarter. Obviously it's a big quarter for us, but it is every year, and we anticipate seeing some decent growth. It's building now. I don't think it's going to be back to the 5 or 6% internal growth level that we saw in the first half of the year, but things are improving in that area and I think also things will be improving relative to consumer takeaway in this area.

This is an area that is not necessarily -- home maintenance and repair and renovation is an area that is not necessarily negatively impacted by some of the geopolitical issues or even some of the macroeconomic issues. If the housing market slows down, that tends to be somewhat bullish for a lot of our products because they tend not to be used, and the construction of new homes, they tend to be used for remodeling or renovation.

But yet you have seen some slowdown, so it is affected to a certain degree?

We absolutely saw a slowdown in the third quarter, Rosemary, and we anticipated, as you'll recall, in the third quarter, you know, we anticipated it for some internal reasons at some big accounts that there would be some slowdowns relative to some adjustments in stores and things like that. I think our big accounts are going to have good springs, and I think we're going to help them.

Ok. And then lastly for Glenn, could you run those revenues in operating income numbers, Glenn, for the different segments? I didn't catch them.

Ok. Real quick, Rosemary for the quarter, I assume, industrial sales, 235.2 million.

Mm-hmm.

Consumer, 198.4. The EBIT numbers, industrial, 8.6 million, consumer 16.7, corporate other expenses of 11.6 million.

Ok. Thanks a lot.

Ok.

We'll take a follow-up from Greg Kennison at Robert W. Baird.

Thanks again. Glenn, could you re-cover or recall the caseload statistics that you normally provide in the 10-K? Do you have that data available yet?

Let me -- Craig, I can just read you what's out of the 10-K that will be filed today. As of February 28th, the company had total of 1,767 active asbestos cases compared to 1,490 at the end of November 30, 2002. The company had a total of 1,865 cases last February 28th, 2002. So in terms of our caseload, we're up sequentially from the last quarter, but down year over year. For the quarter ended February 28th, the company secured dismissals and/or settlements of 364 plaintiffs. The total cost of which collectively to the company net of insurer payments amounted to $630,000.

Ok. That's helpful. And my final question, isn't it some risk for you to estimate the cost of this liability in advance of any federal legislation? I would think that's a major variable in any estimate you would create.

I think that's a very good question, and your comment on it being a significant variable to the future liability is absolutely correct. Having said that, we have an obligation to try and estimate what our potential future liability is given the current environment that we operate in, which is without the benefit of federal legislation. It's a pretty challenging estimate because there's a lot of factors involved. Even without federal legislation, there is very good news in a number of key states. For instance, Mississippi and Ohio, as it relates to significant tort reform that was passed, that given RPM's Bondex subsidiary exposure, we're never lead plaintiff, we're always pulled in as a small player, but under joint and several liability laws, that could still leave us on the hook for some big settlement dollars or plaintiff verdicts.

In both those states, in a number of other states, tort reform will eliminate small players like our Bondex is up Sydri (ph), so that's good news. We can try and estimate a little bit of the positive impact of some -- impact of some state reform, but in terms of the proper accounting for this, we cannot account for a law that doesn't exist. Certainly we will adjust as appropriate any reserve figure if we come up with one for subsequent federal legislation that's passed.

Thank you.

Have nothing further questions, I'd like to turn the call back over to Mr. Sullivan for any additional or closing remarks.

Thank you very much to everybody on the call for your continuing interest in RPM. I particularly want to thank our businesses and our employees who I think have done an outstanding job this year in what's been a difficult economic environment. We look forward to our ability to provide better clarity as it relates to our potential future asbestos liability, and think that will provide clarity in a lot of areas that will be good for RPM and for our shareholders, and lastly, I'd like to thank our shareholder base and we look forward to reporting our year-end results, which excluding the impact of the potential asbestos issue that we're addressing, should be another record year of revenues and earnings increases for RPM thanks to the good work of our employee base.

Thank you very much, and have a nice day.

Thank you for your participation in today's conference, and you may disconnect at this time.