RPM International Inc (RPM) 2003 Q4 法說會逐字稿

Good day and welcome to RPM International's year-end conference call. Today's call is being recorded. This call is also being web cast live and can be accessed through the RPM web site at www.RPM.Int.com. A taped telephone replay will be available from two hours after this call concludes until 8 PM Eastern Standard Time on Friday August 1st and can be accessed by dialing 719-457-0820 and entering confirmation code 419 262. A web cast reply and written transcript will also be available through the RPM web site. The web cast replay will be available approximately two hours after this call ends. A 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 on these risks and uncertainties, please review RPM's quarterly earnings, releases, and periodic reports filed with the Securities and Exchange Commission. The information in this conference call will be 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 web site.

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.

Thank you, Audra. Good morning and welcome to RPM's year end conference call. We're at the New York Stock Exchange where we will hold our traditional year-end luncheon. We earnings -- year-end earnings results from New York for 30 years and it's a tradition we're proud to continue.

We're pleased to report the RPM international results for the 2003 fiscal year, which ended May 31, 2003. Glenn Hasman will provide you with the details of our performance -- the highlights of which include a 5 percent increase in revenues to a record $2.1 billion, a 21 percent increase in that income before our asbestos charge to $122.8 million, an EPS of $1.06 -- up 9 percent also before our asbestos charge. Following Glenn's comments we will be pleased to answer your questions. Before we get started on the financial results I'd like to address our asbestos charge.

As we indicated throughout last year, the insurance available to our subsidiary to cover our asbestos claims is likely to be exhausted. In fact, remaining insurance will be depleted in this first quarter of our 2004 fiscal year.

We do have a number of what we believe to be strong facts refuting a number of insurance carrier claims of exhaustion, and have accordingly filed suit against these carriers in federal court. The ultimate resolution of these lawsuits will likely take months or years. Because of the dramatic increase in asbestos claims against Bondex over the last 15 months, the expectation of insurance exhaustion, we hired an internationally recognized consulting firm with broad experience in estimating claims resolution costs associated with mass tort litigation, including asbestos.

To assist us in analyzing data to evaluate the possibility of accurately estimating the costs of pending claims and to assist in determining whether future asbestos related claims against Bondex could be reasonable estimated.

During our assessment and estimation process, a number of significant and -- we believe -- positive events took place.

First and most meaningfully, the number of state tort law changes were enacted during the first seven months of calendar 2003. New state liability laws been enacted in three states -- Ohio, Mississippi and Texas where approximately 80 percent of the historic claims against Bondex representing 35 to 40 percent of our costs are pending.

These tort law changes generally provide for liability to be determined on a proportional cause basis. This should be very good news for low exposure asbestos Bondex and significantly changes the situation relative to strict joint and liability applied to all defendants prior to these law changes.

The ultimate impacts in these changes are difficult to predict, given the limited time frame following enactment -- for instance, the new law change in Ohio was effective April 8, 2003, and for Texas, most recently, the enactment date is July 1.

Also the fact that it takes 6 to 12 months for a newly filed claim to become active which makes this difficult and will cause a 6 to 12 month period before we will have a real feel for the changes these laws will make. Based on these new state laws it is reasonable to expect fundamental changes in a number of claims, claim profiles and cost going forward.

Secondly, the Hatch Bill or FAIR Act was introduced into the U.S. Senate and voted out at the judiciary committee in July. We believe this bill which is expected to be brought to the full Senate in September has a 50-50 chance of becoming law.

Accordingly, we have concluded that it is not possible at this time to estimate the costs of disposing potential future asbestos related claims beyond that covered by the charge taken at year end at 2003. From a trend perspective, this has been a difficult year, but going forward, this is the first good news for Bondex's asbestos exposure in probably 20 years.

Now I'd like to turn the call over to Glenn Hasman to provide you with the highlights of our performance in the 2000 fiscal year after which we will answer your questions.

Thank you very much, Frank. Good morning, everyone. As Frank mentioned earlier this year, we're very pleased net sales were able to grow $97 million over the prior year. We reached $2.083 billion and that's up 5 percent year-over-year. Of that 5 percent increase organic growth was 4 percent. And that includes favorable foreign exchange FX primarily from the euro, the Canadian dollar and there was some offset through Latin American currencies.

Eight small acquisitions this year contributed to the remaining sales growth of about $19 million or 1 percent.

By segments. Industrial segment net sales reached $118 billion. That represented 54 percent of our total. And that was up 6 percent year-over-year. Of that 6 percent growth organic growth for the industrial segment was approached 5 percent -- including favorable foreign exchange as mentioned.

Of the organic growth, our roof and maintenance services revenues were nicely increased -- in fact, they doubled year-over-year and we've been talking about that in the conference calls all through this year. And they represented the majority of the growth in the industrial segment. There are also increased flooring installation services revenues and both of these increases were in product lines that do have lower margins than the RPM average and we'll talk about that a little later.

Other industrial segment sales FX for the commercial construction carrier which was down during the year that affected our Dryvit unit and generally industrial and manufacturing sectors of our economy remained weak throughout fiscal '03. We continue to view that as pent-up demand vs. any loss of market share.

Finally, the difference in the industrial net segment sales was from five small acquisitions. That included the Koch Waterproofing Solutions acquisition that we announced April 1 and that represented the remaining one percent of growth in that segment.

Consumer segment net sales reached $965.6 million -- the other 46 percent of RPM that was up 4 percent year-over-year. The organic growth for consumer was up three percent. Also that included foreign exchange benefits -- primarily they're from the Canadian dollar. The difference in consumer net sales growth was from three small acquisitions which contributed to our remaining roughly one percent of growth.

Moving to gross profit. Actual gross profit dollars increased by $42 million mainly from a higher sales volume year-over-year. In terms of gross profit margin we reached 45.8 percent this year nearly flat against last year's 45.9 percent.

That difference represents the lower margins sales mix was a slight offset to the volume cost leverage and some lower raw material costs during the year.

By segment. Industrial Segment gross margins year-over-year declined to 46.2 percent from 46.9 percent a year earlier. This is the mix effect -- again the roofing and maintenance services and the flooring installation services do carry lower margins than our RPM average and those sales brought the margins down to a greater extent than the higher volume and certain cost efficiencies and a number of some favorable raw material costs could bring margins back up.

We're noting that cost pressures did build during the course of the last part of the year and a number of suppliers which will likely impact this first quarter of our new fiscal year -- possibly beyond that.

Consumer segment gross margins year-over-year improved to 45.4 percent from 44.8 percent. You're seeing there their positive volume FX in this segment also a number of favorable raw material costs to begin those cost pressures are building and we're seeing on a continued lower conversion cost year-over-year would continue efforts for Class A manufacturing efficiencies.

SG&A expenses improved to 35.5 percent of sales this year from 36.1 percent last year. Generally, this reflects the higher sales volume leverage and ongoing cost reduction in cost containment efforts. By segment the Industrial Segment SG&A was lower at 35.2 percent from 36.8 percent the year earlier or improved 161 basis once again sales. The higher sales volume contributed about half of its improvement and we talked about that in the roofing, maintenance, flooring and installation services area.

Cost reduction initiatives in this segment that were initiated during fiscal '02 by particularly those units that were more impacted by the slower economy were benefiting this fiscal year as well as cost containment efforts initiated during fiscal '03. And a different year-over-year was some expense benefits such as the avoidance of the Argentinian peso devaluation that occurred during fiscal '02 and cost this segment about $1.5 million.

Consumer segment SG&A was at 31.8 percent this year from 32.1 percent a year ago. Improved 30 basis points year-over-year -- same year higher sales volume impact and some cost reduction and containment efforts in this segment as well. Offset partially by certain increased selling and promotional spending at our major consumer product line. The difference year-over-year was also some additional expense benefits similar to the industrial segment.

Corporate other expenses are also, again, a component of SG&A for RPM and they were at $39.1 million this year compared with $30.7 million a year ago. That's up $8.5 million. As we've talked about during the course of this fiscal year, asbestos related and other increased product liability costs ran through the Corporate other category and that was up just slightly over $5 million this year.

We also had a reduction which we again have been conveying to all of you during the course of the year -- a intersegment income which caused the Corporate other category about $4 million this year and that's from the operating segment. That's a result of the change in foreign sales corporation tax legislation, with a corresponding expense reduction at the operating segment level.

We also reincorporated into Delaware this fiscal year and that cost about $1.2 million and the difference was actually some year-over-year expense savings in Corporate other category.

The asbestos charge is shown as a separate line item and Frank covered that area very well -- the $140 million.

Moving to earnings before interest and taxes are EBIT. This year with its $74.6 million comparing with 194.6 a year ago -- a $120 million decrease, obviously, largely driven by the asbestos liability charge. Excluding that charge, this year's EBIT would've been $214.6 million ahead $20 million year-over-year. That also reflects margin improvement, which was ahead 10 percent on our 5 percent sales increase.

The higher sales were also coupled with cost reductions and cost containments that I've mentioned.

By segment, industrial segment EBIT reached $122.3 million -- up $15.3 million or 14 percent on their 6 percent sales growth to 11 percent of sales compared to last year's $107 million or 10 percent of sales.

The consumer segment EBIT reached $131.4 million, increased by 13.2 million or by 11 percent on their 4 percent sales growth to 14 percent margin on sales compared to last year's $118.2 million or 13 percent of sales so margin improvement in both segments and that really is generally the result of the growth of sales, the lower raw material costs and the ongoing cost reduction in containment efforts both operating segments.

Corporate other has been addressed as has the asbestos liability charge which make up the remaining portion of EBIT.

Our interest expense net year-over-year was down $13.8 million. We had much lower debt levels during the course in this past fiscal year, averaging $202 million lower year-over-year for about $10 million of that savings. Lower interest rates made up the difference -- again keeping in mind of our approximate 70 percent variable debt structure throughout most of this year which incidentally is down to only about 50 percent at May 31, 2003, after our convertible bond issuance in May.

That lower rate year-over-year effect was about $4.8 million. In fact, average rates overall this year were about 3.8 percent compared with 4.5 percent during fiscal '02.

Last year fiscal '02 we also had offsetting marketable security gains of about $1 million that were not realized again this year.

Our tax rate for fiscal '03 was 26.2 percent versus last year's 34.1 percent -- the lower rate represents the results of the weight of the full tax benefit of about 37.5 percent on the $140 million pretax asbestos liability charge. (indiscernible) this year of 26 percent is obviously not sustainable and excluding the charge our tax rate this year would have been 34.6 percent or up about 1/2 percent from '02 and that's the earnings growth as we move forward, reducing the one time tax rate benefit from our fiscal '02 adoption of FAS 142 for the amortization of goodwill.

Net income this year of $35.3 million compares with $101.6 million a year ago -- a $66 million decrease. Obviously, the $140 million pretax asbestos charge equated to $88 million after-tax. Excluding charge this year net income would've been $122.8 million ahead 21 percent, or 21 million over fiscal '02. Our margin in sales also would have been improved by 80 basis points to 5.9 percent from last year's 5.1 percent.

Diluted earnings per share this year are 30 cents compared with 97 cents a year ago. The asbestos charge has a major influence here and you are to exclude that charge. This year's diluted earnings per share as Frank mentioned earlier would've been $1.06 or a head nine cents or 9 percent over '02.

The 11.5 million shares that RPM sold in March 2002 had a 1 percent share diluted effect on this year reported 30 cents diluted earnings per share. To exclude that impact from the asbestos charge and this year's earnings same 11.5 million shares sold in March '02 would have had a seven cent per share diluted effect fiscal 03 pro forma diluted earnings per share of $.106 and I believe that's what we been indicating to all of you throughout this year.

Moving now to our fourth-quarter most recent results, net sales -- as we rounded out fiscal '03 -- grew $32 million or ahead by 6 percent to almost $590 million. That's ahead over last year nicely. Organic growth represented 4 percent which again included the foreign exchange effect, primarily in euro and with the euro in Canada and there was some influence we will talk about from the war with Iraq during the course of the fourth-quarter and some weather-related effects. And there were eight small acquisitions that took place during the course of fiscal '03 that contributed the remaining 2 percent of growth during our fourth quarter.

By segment. Industrial segment net sales of $304.1 million represented 50 percent -- 52 percent of RPM in the fourth-quarter. That's ahead just over $22 million or 8 percent quarter over quarter. Organic portion of that 6 percent -- 8 percent growth, rather, was 5 percent which again improves favorable foreign exchange effects for the industrial segment, and the balance of the organic growth continued to represent the roofing services sales and flooring installation services sales. Both again with the lower margins.

The difference in the industrial net sales growth was from the five small acquisitions in this segment, during the course of the year, including Koch which added 3 percent to quarter over quarter growth.

Consumer segment net sales were $285.4 million in our fourth-quarter -- that's for the other 48 percent of RPM, up $10.1 million or by 4 percent and the organic portion of that was about half or 2 percent which included foreign exchange effect -- the retail climate continued slower during the fourth-quarter as it had been during the third quarter of this fiscal year, again influenced by the war with Iraq and some weather related factors.

The difference in consumer net sales fourth-quarter over fourth-quarter came from three small acquisitions which added a remaining almost 2 percent to their net sales growth. Gross profit in the fourth-quarter grew by 5 percent on the higher sales volume. Gross profit margin declined slightly, however, to 46.5 percent from 46.8 percent during the fourth-quarter of '02 and that's entirely mix of sales driven that decline in margin.

By segment industrial segment, gross margins declined to 47.1 percent from 47.6 in the year earlier quarter. Again, the mix effect is highlighted here from the growth in the lower margins services sales.

Consumers segment margins quarter over quarter were nearly flat at 45.9 percent from 46 percent a year ago.

SG&A expenses improved as a percentage of sales to 34.1 percent by 100 basis points improved over 35.1 percent a year ago the higher sales volume leverage benefit again year-over-year coupled with cost reductions and containments benefits that we talked about. By segment in the industrial segment SG&A 35.9 percent this quarter against 36.9 percent a year ago. The volume and mix benefit effect is showing here again and, again, cost reduction mix initiative that we talked about and containment efforts during the course of this year.

Consumer SG&A was at 29.7 percent this year compared with 29.4 percent a year ago. They did have the increased spring advertising and promotions this fourth-quarter that I mentioned and that made up the majority of that difference year-over-year. Corporate other during this fourth-quarter was at $7.2 million, which is $3.8 million lower than the year earlier period at $11 million. Here we're seeing quite a few timing differences quarter over quarter particularly in our insurance, certain legal areas, even compensation areas year-over-year.

There also is the final phase of the reduction of intersegment income of almost $1 million from the operating segments that we talked about earlier which washes out from the operating segments. The asbestos charge was all taken again in fourth-quarter, the $140 million pretax charge.

Moving to EBIT for the fourth-quarter, a loss of $66.8 million this year, down $131.8 million year-over-year, obviously, driven by the asbestos charge $140 million pretax. Excluding that charge, this year's EBIT would've been $73.2 million or ahead $8.2 million year-over-year. That again represents margin improvement by being ahead 13 percent on our 6 percent fourth-quarter increase in sales.

That represents the higher sales volume effect coupled with the cost reductions in cost containment. By segment -- industrial segment -- EBIT, at $34.2 million, was improved 13 percent on their 8 percent sales growth in the quarter to 11.2 percent of sales compared to last year's $30.2 million of EBIT or 10.7 percent of sales.

Consumer segment EBIT was at $46.3 million during this fourth-quarter, ahead one percent on their 4 percent sales growth, 16.2 percent of sales compared to last year's $45.8 million or 16.6 percent of sales.

Corporate other has already been discussed and you really could summarize the fourth quarter EBIT growth before the asbestos charge as the result of growth in industrial services sales combined with ongoing cost reductions and containment efforts across the segment.

And then, of course, we had the $140 million charge that we talked about.

Interest expense net after the quarter was down $2 million dollars. Again, we have a combination of the benefits from low interest rates during the quarter it averaged about 65 percent variable debt. That saved us about $1.2 million of that 2 million during the quarter. Average rates during the quarter were about 3.5 percent overall versus last year's 4.2 percent. We also had the benefit of lower debt levels on average of about $35.6 million lower this year making up the difference in savings of almost another million dollars.

Tax rate during the fourth quarter was actually at 40.8 percent benefit versus last year's 34.3 percent rate. That higher benefit rate is, again, on a reported loss quarter and the results of the weight of the full tax benefit on the $140 million pretax asbestos liability charge. Again, that rate is also not sustainable and excluding the charge our tax rate would've been 33.9 percent compared with last year's 34.3 percent.

Net earnings or loss during the fourth-quarter was at a loss of $43.4 million, compared with last year's $37.2 million. The $140 million pretax asbestos charge again equated to $88 million after-tax. To exclude that charge this year's net would've been $44.1 million or ahead 19 percent to -- or by $6.9 million. The margin on sales result was also improved at 7.45 percent from last year's 6.7 percent.

Diluted earnings per share were actually a loss of 38 cents this year compared with 33 cents last year. Excluding a charge, EPS would have been a positive 38 cents -- ahead by 5 cents per share or by 15 percent over the fourth-quarter of '02. The 11.5 million shares sold a year ago in March had a 1 cent per share accretive effect on this year's reported 38 cents loss per share. Excluding the impact from the asbestos charge on this year's earnings the same 11.5 million shares sold a year ago in March would have had a 1 percent share diluted effect on the fourth-quarter 2003 pro forma diluted and basic earnings per share of 39 cents.

Now moving to the balance sheet with some helpful details all of you comparing to May 31, '02 -- Net Accounts Receivable were at $439.6 million -- or up $41.9 million year-over-year. That represents sales increases that we've had throughout this year but especially stronger May sales year-over-year being up over $24 million which again is with AR is a timing difference versus any other substantive change. Inventory with that $253.2 million, which is up $1.8 million that's up less than 1 percent of the 5 percent increase for sales. That's after foreign exchange translation effect which actually had a little boost for the inventory category as well as the receivable category year-over-year.

That inventory improvement actually was from efforts to continually economize our inventory levels in connection with ongoing Class A efforts throughout both operating segments. And this served as a partial offset to the AR increase we just talked about from the strength of the May sales.

Accounts payable were at $172 million or up $11.2 million year-over-year. That is really a combination of the business growth -- that's from timing and payments during the course of the year. Total debt for RPM stood at $726.1 million at year end. That includes our short-term portion and that's up $12.3 million year-over-year but our debt to capital ratio remains at 45 percent in both year end period. You'll also note when you see our full balance sheet, there are now separately listed liabilities related to asbestos that are shown.

On current liabilities you'll see $41.6 million representing the amount of our estimated payments that will be required during the next twelve months related to our asbestos liability related insurance as Frank mentioned earlier will exhaust during our first-quarter of fiscal '04. That same $41.6 million really represents about $27 million after-tax in terms of the cash requirements.

Under long-term liabilities, you'll see another $103 million, which represents both estimated payment requirements that will extend beyond the next twelve months or beyond fiscal 2004.

Moving to the cash flow statements, you'll see cash flow from operations at $160.6 million this year, slightly off from last year's $191.4 million. Again, to reiterate, last year really had a significant onetime benefit coming off the restructuring period for RPM. That concluded at May 2001.

The year-over-year difference beyond that really resides within working capital as during fiscal '02 we are working off abnormal buildups and receivables in inventories related to those restructuring efforts and other changes along that line. Capital expenditures were at $41.8 million this year, slightly up from last year's $39.9 million but still well within the depreciation and amortization range. As many -- and should be able to hold at that level to about $40 to $50 million for the next couple of years as, again, we've been saying many of the larger spending needs are behind us and we feel we have adequate capacity level for the next several years at our normal growth rates.

Free cash flow generation as we define it which is after capital spending and dividends with that $60 million this year. That compares with $99 million a year ago. That 60 million this year provided 90 percent of the $66 million that we invested this year to acquire several small businesses in both product lines plus the remaining interest in the joint venture.

With all of that I will now turn the call back over to Frank Sullivan.

Thank you, Glenn. I'd like to close the formal part of our comments by just reemphasizing some of the highlights.

Excluding the impact of the asbestos charge, revenues increased 5 percent to $2.1 billion. Net income increased 21 percent to $122.8 million and EPS is up 9 percent to $1.06. We strengthened our balance sheet with $150 million convertible bond offerings in the fourth-quarter. This had a fixed rate of 2.75 percent. This brings our interest rate mix which -- at the beginning of the year was 70 percent floating to 30 percent fixed -- to our target 50-50 where we now have a 50 percent fixed 50 percent floating mix of debt and our average interest rate currently is about 3.5 percent.

After a hiatus of nearly three years we restarted our acquisition program. As Glenn mentioned, we hired 8 businesses or product lines with total analyzed revenues of about $70 million for less than one time sales and we continue to see our backlog of good acquisition opportunities at reasonable prices building.

We generated strong cash flow to support internal growth -- our 29th consecutive increase in cash dividend to shareholders and our acquisition program. We did this while maintaining a 45 percent debt cap ratio which includes the impact of the asbestos charge. Without this impact debt cap would have actually declined to 43 percent from last year's 45.

We are poised to generate another year of record sales and earnings result, despite the continuing weak economy. I think that's important and what's most important is I hope that it's clear that the asbestos issue is not a distraction for RPM operations which are growing at record levels by taking market share and successfully introducing new products and services in what continues to be a challenging economic environment.

Seeing the first meaningful good news on the asbestos situation with a state tort reform that should help smaller players with asbestos liability like a Bondex and the possibility of federal legislation -- though burdensome in its cost -- would also provide us certainty and unpredictability and certainly that's what our shareholders are looking for and all of that is good news on the asbestos front and we will keep you up-to-date as we always have on a quarter by quarter basis.

We are pleased with a strong year of results from our operations. We anticipate another year of record operating results with revenues up in mid single digits and earnings up in the neighborhood of 10 to 12 percent for the new fiscal year.

With that, we would be pleased to answer any of your questions.

Thank you. The 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 touchtone telephone. If you're using a speakerphone please make sure your mute function is turned off to allow your signal to reach our equipment. (CALLER INSTRUCTIONS) and we will go first to Rosemarie Morbelli with Ingalls and Snyder.

Could you give us for a little more details on the small acquisitions you have made? for the clients you're adding and are you integrating those differences into your existing businesses?

We acquired 8 product lines or businesses and they tend to either be businesses like the Koch acquisition which Glenn referenced which will operate as part of our Tremco sealants unit or product line acquisitions like our acquisition of the Sun Chemical fluorescent business which was completely integrated into Day-Glo. So I think going forward -- certainly in 2004 -- you're likely to see smaller acquisitions that are either product lines like that that are completely integrated into an existing company where freestanding businesses that are synergistic fit into one of our existing groups. We also may also be adding some freestanding entrepreneurial and family businesses to the European marketplace where we set up a corporate office -- we've been working on that for the last year and are pretty excited about the opportunities that we see there.

Could you also give us a feel for the raw material costs? You mentioned that you are seeing some pressure which you had not seen until now. And that that translates into lower margins. Are do you think you'll be able to raise your selling prices or lower costs in order to affect them?

We began to see some selective higher raw material costs for the first time in the fourth quarter. We believe most of that was oil and Iraq war related. And it started to impact our first quarter. We're seeing those level off. Obviously, there's good news on the oil front in terms of the relatively quick resolution of the main part of what's going on in the Middle East and quite honestly, economically, there's not sufficient demand out there to really continue price increases or even support some of the ones that have been out there. So we think that is starting to mitigate as we speak.

Amazingly enough, the demand is not there but the raw mature costs seem to be really be hitting all the companies, whether or not they can pass them through. Why do you think they're going to subside?

We're starting to see them flatten out from where they were and then, again, I think it has to do with the two factors. One is anticipation and the actual price of oil and anticipation of the war with Iraq and the situation in the Middle East which is now dissipating a little bit and the fact that some of the raw material price increases just can't go through. There is not the demand out there.

So we think -- even though we saw a little bit of a spike towards the end of our first-quarter and into -- sorry, our fourth quarter and into our first-quarter that, number one, they're not continuing and that they flattened out and we don't think it should be an issue for us at this point in time. If that changes we will let you know.

Last question before I get back in the queue. When you look at the first-quarter do you see results excluding asbestos which I guess have all been reserved for at this particular stage? Do you see earnings at the 10 to 12 percent growth since last year?

I think our first-quarter will probably be a little softer than what we expect for the full year. Retail takeaway was a little bit soft. We see that picking up now in the middle of the summer which is nice and the industrial markets are still tough and the gains we're picking up in industrial are a combination of increasing service revenues -- which is a nice new business for us, albeit lower margin -- and simply taking market share. So the economic outlook hasn't changed much.

I think the first-quarter should be up, but I think we will see some better strength in the balance of the year.

Saul Ludwig with McDonald Investments.

Nice to see good record results in the quarter and so address this asbestos problem. You did mention receivables were up in part because of some strength in May. And I am just wondering and then your comments just suggest that while maybe that sort of petered out a little bit -- let's talk about what really was going on in May and then into June and what your assessment of that is?

I think we finished May pretty well because we as Glenn mentioned some weather related issues. The first part of our fourth quarter -- which is March and April -- was a little bit soft and as many folks can recall, throughout the country, we had a real rainy spring and we had a terrible June in the same way. So I think some of it was weather related. I think we had a lot of pickup in our consumer in May that was stuff that would've been more evenly spread across the quarter. But if you get a flash or a big jump of revenue growth you're going to see your receivables increase. More tellingly, when you look at the inventory numbers, you're going to see our inventories flat year-over-year. When you adjust for acquisitions and impact points of change actual units were down and that is continuing to be a simplistic but good representative of what our companies are doing and what with the leadership of Paul Hoogenboom, operationally, we're able to do by being more efficient and on an increase in revenues of 5 percent I think what we're doing at the inventory level is telling that we are continuing to make progress in that area.

Next question has to do with the corporate expense number in the fourth quarter was down really sharp, I think 7.2 vs. 10.9 whereas every other quarter during this fiscal year that number was up rather sharply. What's sort of going on in corporate expense and embedded in corporate expense you, specifically, have your charge for setting up reserves for asbestos liability. Did that sort of go away now that you A., what's going on with corporate expense and what is going on with the asbestos component of corporate expense?

The principal factor is just that, Saul. We did not have a separate quarterly expense for asbestos. It's all incorporated in the charge. So you're looking at probably a penny per-share impact in the fourth quarter of those types of things.

And what does that mean when we look at the corporate expense number going forward through this year, Frank, are we going to see the corporate expense number down around this 7 million bucks a quarter?

I think, probably, somewhere the range of about 8 million bucks a quarter is a reasonable number to look at.

Thank you very much.

As a reminder (CALLER INSTRUCTIONS). Stewart Glickman with Standard & Poor's.

You mentioned in the call that organic growth in industrial was up I think 5 percent and consumer was up 4 percent?

In the quarter?

Sorry -- for the year.

For the year. (MULTIPLE SPEAKERS)

I was wondering if you could break out the foreign exchange impact of that vs. other organic growth?

Foreign exchange impact for the full year was about $19 million revenues. About 1 percent.

Okay. Thanks, guys.

Follow-up from Rosemarie Morbelli.

You are short in questions. Are you planning in fixing more debt the dates the rates and more debt considering that end-use trend going to be up?

Not at this time, Rosemarie. You know, historically, we have targeted a 50-50 mix between fixed-rate and floating-rate. And that has been a good mix for us in terms of managing our debt levels and we are there now with an average interest rate of about 3 1/2 percent. Half of our debt is fixed-rate and the other half is floating-rate. We don't have a debt maturities until '05 -- we may extend out after that. And I think we're pretty comfortable with our rates there.

Again, the bond market spreads are such that to fix rates out further we would have to give up probably 150 basis points or more above where our floating rates are and quite honestly for the foreseeable future we don't see short-term interest rates spiking up by 150 or 200 basis points even though they may up towards the end of the year.

We would absolutely welcome some higher interest rates in response to a more robust economy.

What is the average rate on the fixed debt?

I'd have to get you that -- I can give you the pieces. We have $150 million bond at 7 percent. We have $150 convertible bond at 2 3/4 percent and then we have $50 million of private placement notes and the interest rates range from -- I think -- 615 to 7, 7 1/2. (MULTIPLE SPEAKERS ) 620 to 730. Three traunches, so those are the pieces of our fixed-rate debt. It should add up to about 350 million.

Could you also give us a little more color on what is happening with your consumer products, meaning, what is going on at Home Depot and where do you see pickup?

I think we're starting to see good movement in the middle summer months at consumer and most of our big accounts are going pretty well. But in our businesses, as well as a lot of these big accounts, I think everybody's experiencing somewhat slower growth than a year ago.

Jeff Zekauskas with J.P. Morgan.

This is Selka sitting in for Jeff this morning. The annual cash outflow related to the business charge, is that going to be like 46 million now for the next three years?

Obviously, we will report every quarter as we always have our caseload and cost so you can see those trends. We anticipate on an after-tax basis, that it will be somewhere in the neighborhood of $25--$30 million.

So that's comparable to what you are Frank Sullivan: Somewhere in the neighborhood of 40, 35, 50. Again somewhere in that range. I think for the full year of '03, our gross costs were about $51 million. They were up somewhat in anticipation of a lot of the state law changes. There's been a flurry of extra filings, not just in asbestos but in states like Ohio and Mississippi and Texas to meet the deadline of that some of these new laws and, again, that's not specific to asbestos. And then there's also been a flurry of activity related to people guessing as to what the impact of the federal legislation will be. So, going forward, we think that this is going to be somewhere in the neighborhood of $40 million pretax and 25 plus after-tax.

Are you going to make an annual assessment based on changes further our than the three years what your cost could be?

I don't think we're going to be making an annual assessment. A couple of things. Should the federal legislation pass which again, we view as 50-50 at best, obviously at that point, there's a specific payment schedule that we would adhere to. And we would adjust our charge accordingly.

What we need and what we've been able to get here, I think, is a period of time to really assess actual claims experience and cost in these three key states under this new law. And this new law should have a significantly positive impact but it takes anywhere from six months on the low side to 18 months at the extreme for a new claim that we would get in today to become an active claim for us to be able to assess, exactly, how -- what the impact of these new law changes will be.

So, in part, we have a three-year period we believe and, again, we will update our costs and caseload every quarter to provide us the time to better understand the impact of these new law changes.

Will you open acquisition strategy change based on quality of cost you have to pay down asbestos or do you think it will be similar to what you've spent in the past year?

I think it will be very similar to what you saw in the past year. We have -- the ability and we've been communicated this for more than a year and a half, we operate with six groups. Six groups presidents and prior to the spike in asbestos cost over the last 15 months, it's been our intent to focus on product line acquisitions or smaller acquisitions that would be either integrated into one of our companies or fall under one of our six groups. And this year is a good example. We were able to acquire about $70 million in annual revenues for less than one time sales and in a -- we feel to be a fair value in terms of cash flow and earnings. And we will continue to pursue those types of acquisitions here and in the European continent.

Craig Kennison with Robert W. Baird.

Morning. First question has to do with asbestos -- I don't know, Glenn, if you can provide some of the flow statistics or number of cases, the number of settlements and total cost for the quarter?

I don't have the -- let me give you what I have now and, obviously, we will detail in our 10-K, which will be coming out in about three weeks, more of the detail. But our active cases are 2002. That's up from a year ago 1,784 and, obviously, those are our year-end numbers and fourth quarter numbers.

Our gross settlement -- our net settlement cost were 5.1 million. Our gross settlement costs are 51 million up for the year and so that's up from about 24.9 million a year ago. And, really, this increase has come over the last 15 months and that's why we've been talking about and undertaking the actions that we have been. We think that spike is about where it is going to spike but we will see over time what the impact of these new state law changes are.

Terrific and I assume that the estimate -- the $140 million estimate -- does take into account any legislative action that's been voted in and passed -- for example, in Texas and Ohio?

Not really. Again the $140 million charge is based on our existing claim load and our estimate of what our existing experience would be for the next couple of years in terms of cash costs. We really don't -- and, again, we utilized a major international consulting firm with a lot of experience in this and given the recent changes it's going to take us 6 to 12 months which we will -- as we always have -- report quarterly to start to see what the impact of these state law changes are. I can't tell you if there's a loophole that is going to make these less than we think. We don't see that. If it's straight proportional it should have a dramatically positive impact on us, but we're going to take 6 or 12 months before new cases become active to really be able to report, accurately, what the impact of these new state law changes are.

This $140 million pretax charge does not take into account at all anything on the federal level, obviously, because it's not done but the possibility of federal legislation which is certainly more than zero further makes it difficult to kind of guess given all the legislative changes out there including some pending state law changes in other places what the future might look like.

If you could just review, I know it is a complex calculation, but review the key assumptions involved in driving that $140 million and explain why you elected just to go out three years -- I understand it is difficult to forecast but you could pick one year, five years (MULTIPLE SPEAKERS) anything special about three years? Thank you.

In terms of the key assumptions, I won't get into all the detail in how this was driven. Suffice it to say that we had a major firm -- the name of which people would recognize. We had two different legal counsels -- outside legal counsels -- involved in this process and so we looked at all kinds of factors. Basically in assessing our existing claims and our best estimate were what our cost would be over the next couple of years.

The reason for three years is twofold. No. 1, and principally, the state law changes are so new -- again, I can repeat some of the comments we made earlier. Eighty percent of our historic cases have come in Texas, Ohio, and Mississippi. Mississippi state laws changed effective December 1, '02, Ohio changed April 8th, and Texas changed July 1. And we don't have nor does the people that work with us any basis on which to know what the impact of these will be. So it was important for us to A., address this as best we can and then, B., I believe we will have enough time under this charge to get an accurate assessment of these changes, so that we can reasonably estimate what our future liability will be.

With respect to other states that are key to your asbestos liability, I would assume Illinois is one of them, could you give a very high level view of any legislative action that is ongoing in those states?

Illinois is a key state for us in any asbestos defending companies and there is no pending state law change in Illinois. There is an effort that was announced in June -- early June -- by the U.S. Chamber of Commerce began to change some of the either administrative or state law issues in Illinois which is a difficult state on tort for any number of issues not just asbestos, so -- class actions, tobacco. You name it.

Most of the states have had, for years, proportional liability. So and the key states that have not, like Ohio and Texas and Mississippi, have since introduced it and so there's a positive trend -- there is some asbestos specific legislation pending in Ohio and Texas that would further improve the situation, specifically for companies with asbestos liability. And I think that's the best we can do now. Most states have tort laws that have proportional liability and have administrative rules that don't put such a burden on minimal players like Bondex. Illinois will continue to be an issue.

Follow-up from Saul Ludwig.

Excluding acquisitions and excluding asbestos, what would you expect your free cash flow to be this year?

Off the top of my head, Saul, I'd say somewhere in the neighborhood of -- this is after tax, after capital, and after dividends -- somewhere in the neighborhood of $60 to $80 million.

And do you see this being a year where you can kind of neutral on working capital?

I think we will consume some if we hit our growth targets this year. Again, if you look at our inventories in particular, and you adjust for acquisitions and the impact of foreign exchange, the actual dollars are flat, units are down and we're continuing to show good improvement there. So we will be a consumer of cash and working capital but nothing like we were three or four years ago. I -- $10, $15 million maybe but again that's off the top of my head as we get a better feel for it, throughout the year, we can provide a more accurate data on that.

Given say it was $70 million free cash flow and you took off 30 million for the asbestos after-tax and that leaves you $40 million -- what is your capacity for making acquisitions, given the combination of free cash flow from operations minus asbestos?

I don't know that I want to get into a discussion about our acquisition capacity per se. It depends on the deal and the cash flow it brings and how we finance it. I guess the best way to answer that is to look at the year we just finished. We completed $66 million of cost in acquiring 8 product lines and we -- our net worth took an $88 million hit from the asbestos charge, and you look at that and we were able to maintain a debt cap ratio of about 45 percent. So I think, given the cash flow we generate and certainly depending on what prices we pay for businesses, we certainly have the capabilities of continuing to do acquisitions that are -- in total -- 80, 100, 120, 70 -- you know, it depends on circumstances and the timing and acquisitions are always an opportunistic event.

But I'm very comfortable that we have the ability to continue to do that, both in terms of our balance sheet strength as well as -- and cash flow as well as deal flow that we're seeing out there.

Finally, could you give us the final tally on cases outstanding in the end of the year and number that were settled in the quarter?

I don't have the details of what was settled in the quarter. We will release all that in the 10-K that comes out in a few weeks. A year ago we had 1,784 active cases. Today we have 2002. Our gross costs, a year ago, were 24.9 million, our net costs were 2.5 and our gross costs this year were 51.6 million, the net costs were 5.1 million. Obviously going forward you will see these same type of numbers and the same type of details that you're used to seeing in our 10Qs and 10Ks with the gross cost the cost that comes out of our cash flow statement.

Stewart Glickman.

Quick follow-up on the state law changes. In Texas, Ohio, and Mississippi, do you know that if cases -- cases that were filed just before the state law change, do you know if those were grandfathered in under the old rules and if so, do you know if there was any kind of surge general cases filed at that time?

They are grandfathered in under the old rules. For instance in Texas the enactment date is July 1 and we anticipate and a lot of companies and all sorts of areas are asbestos saw an increase in a lot of claims -- we don't know the value of them, but claims that were filed against Bondex prior to July 1 will be conducted in court based upon the old law. Claims that were filed after July 1 will be conducted under new law and the same is true in Mississippi and Ohio and to an earlier question it was old law that drove this asbestos charge that we just took. Because we have no basis, yet, to understand what the impact of these new laws will be.

There are no further questions. Mr. Sullivan, I will turn the conference back over to you.

Audra, thank you very much. Thank you for everybody who listened in on the call. We look forward to giving you an update on our first quarter in October when we release those results and we are excited about the strong results generated by our operations in what's continuing to be a challenging economic environment and look forward to delivering another year of record revenue and earnings results from the RPM Companies. Thank you very much and have a nice day.

And that does conclude today's conference. Again, thank you for your participation.

(CONFERENCE CALL CONCLUDED)