RPM International Inc (RPM) 2004 Q3 法說會逐字稿

Good day and welcome to RPM International's conference call for the fiscal 2004 third quarter. Today's call is being recorded. My name is David and I will be your coordinator for today. At this time all participants are in listen-only mode. We will be conducting a question-and-answer session toward the end of today's conference. (OPERATOR INSTRUCTIONS) This call is also being webcast live and can be accessed through the RPM website at www.RPMinc.com. A taped telephone replay will be available two hours after this call concludes until 8:00 PM Eastern Standard Time. On Thursday April 15, it can be accessed by dialing 888-286-8610. The confirmation code is 5411-6040. A webcast replay and written transcript will also be made available through the RPM website. The webcast replay will be available approximately two hours after this call ends. The written transcript will be available within 24 hours after this call concludes.

Comments made on this call may include forward-looking statements based on current expectations that involve risks and uncertainties which 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 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.

During this conference call, RPM spokespersons may reference non-GAAP financial measures. To assist you in understanding such non-GAAP terms as well as to comply with SEC requirements, RPM has posted reconciliations to the most directly comparable GAAP financial measures. Included in the disclosure on the reasons for the use of non-GAAP measures on the Company website in the Investor Relations section under webcast/presentations. Following today's presentation there will be a question-and-answer session, at which time (OPERATOR INSTRUCTIONS)

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.

Thank you, David, and good morning. Welcome to RPM International Inc. conference call for our third quarter ended February 29, 2004. We're pleased with the strong results of operations for the third-quarter with sales up 11 percent, net income up 23, and earnings per share and up 25 percent. Our consumer business segment continues to grow at steady record levels and our industrial businesses are continuing to build the positive momentum begun in the fall of last year. I would like to turn it over to Glenn Hasman to provide you details of the quarter; then I will provide some comments and our outlook for the balance of the year and answer your questions.

Thank you very much, Frank. And good morning, everyone. Frank mentioned we had a good performance in the third quarter. I'm going to review third-quarter results in fair detail going through the income statement. Then we will hit some highlights of the nine-months results; I will talk to you about some of the balance sheet highlights and cash flow highlights as well. Then I will turn the call back over to Frank.

Beginning with net sales for the third-quarter; this year's third-quarter sales grew 11 percent as Frank mentioned, or $47 million over last year to a record third-quarter sales level of $480.8 million. The organic sales growth was four percent or $19 million, plus another three percent or $12 million from net favorable foreign exchange differences, mainly against the euro and the Canadian dollar.

We had six Bolt-on product line acquisitions during the past 12 months, which added the remaining $17 million or four percent of the net sales growth. The industrial segments net sales of $264.8 million were ahead 13 percent or $30 million year-over-year. The organic industrial segment growth was three percent or $7 million, plus another four percent or $9 million from net favorable foreign exchange.

Our industrial growth was mixed this quarter. Roofing services continued to lead the segment in growth. They were ahead 18 percent. We did have signs of strength among the specialty businesses and in construction sealants and chemicals as well. The balance of the industrial growth came from four bolt-on productline acquisitions which added $13 million or six percent of the net sales growth.

Consumer segment net sales were $216 million. They grew 9 percent or $18 million year-over-year. The organic consumer growth was six percent or $11 million plus another two percent or $3 million from net favorable foreign exchange. Rust-Oleum, DAP, and our wood finishes group all displayed solid year-over-year growth during the quarter. The balance of the consumer growth came from two bolt-on productline acquisitions which added a total of $3 million or one percent of net sales growth.

Moving to gross profit; our gross profit margin was 43.8 percent this year, up from 42.7 percent last year. This net strengthening is the result of the leveraged benefits from the higher product sales volume, margin improvements in the form of productivity gains, and make versus buy strategies. We had certain procurement benefits from the weaker dollar, mainly in Canada, and we had higher margin influence from our acquisitions. These benefits were more than offset by higher -- more than offset higher raw material and packaging costs this quarter, which negatively impacted our gross margin by 50 basis points. We expected certain higher oil and natural gas based material costs including acetones, plastics, certain polymers and solvents; that those would continue to impact our results this quarter.

The industrial segment gross margins improved quarter-over-quarter to 43.5 percent from last year's 42.3 percent for the reasons mentioned including a money saving elimination of an outside tolling arrangement in Europe and even though we've had continued growth in the roofing services businesses, which carries lower gross margins.

Consumer segments gross margins quarter-over-quarter also improved to 44.2 percent from 43.3 percent. Positive leverage from continued growth of our organic sales volume, some procurement benefits from the weaker dollar, and significant productivity gains account for this margin improvement which includes offsets for higher raw material and packaging costs that mainly affected this segment, by 85 basis points, and planned for growth in certain strategic but lower margin product lines.

With the continued higher cost of feedstocks such as oil and gas, higher material costs will undoubtedly persist. The question remains how long. In the meantime, we have managed and will continue to manage through these higher costs as best we can.

Moving to SG&A expenses, those increased 60 basis points on sales to 40.2 percent this year from 39.6 percent last year. That primarily reflects additional marketing and other growth related investments made this year in both segments, both operating segments, which have helped fuel our growth. We've had increased delivery costs related to the higher cost of fuel and we have had higher insurance and other costs related to corporate governance issues.

Industrial segment SG&A was at 39.7 percent of sales this year. That compares to 38.7 percent last year. The benefits from higher organic sales volume in this segment and ongoing cost savings programs were more than offset by growth related investments, increased delivery costs, and higher liability reserves associated with Dryvit's EIFS, exterior insulating finishing systems which have been previously discussed.

Consumer segment SG&A was 36 percent of sales this year compared with 34.9 percent last year. This segment also benefited from higher organic sales volume, but was offset by growth related investments, including Epoxy Shield advertisements, plus additional sales and marketing personnel to again help fuel the growth and increased delivery costs.

Corporate/other expenses decreased to $10.5 million this year from $11.6 million last year. Asbestos related product liability costs were being accrued for last year verses none this year as the charge was taken this past fiscal year-end which was estimated to cover three years of related costs. This reduction in expense year-over-year was offset by higher insurance and other costs related to corporate governance issues affecting essentially all U.S. publicly held companies that includes Sarbanes-Oxley compliance and we also this year have established our European development office.

Moving to EBIT or earnings before interest and taxes; those were $17.1 million this year in total, ahead 25.6 percent; $3.5 million from last year's $13.6 million. That is a margin improvement of 3.6 percent of sales from 3.1 last year. The industrial segment was 9.9 million of that, which was ahead 1.4 million or 15.9 percent, a margin of 3.8 percent of sales compared with last year's 3.6 percent of sales.

Consumer segment EBIT, $17.7 million, ahead $1 million or 6.1 percent, a margin 8.2 percent of sales compared with last year's 8.4 percent of sales. This combined operating EBIT growth which totaled $2.4 million or ahead 9.4 percent is generally result of the growth in sales this quarter including the accretive results of our recent acquisitions, partly offset by the 50 basis points margin impact from higher material costs and growth related investments.

Moving to interest expense net. We're up $1.7 million quarter-over-quarter. That essentially reflects higher interest rate costs year-over-year as a result of floating to fixed-rate refinancing including the $200 million, 6.25 percent notes just sold in December, which costs us an extra penny a share this quarter.

Average rates this year were 4.7 percent compared with last year's 3.7 percent. Year-over-year additional financing costs or acquisitions were offset by more investment income this year and some savings from debt paydowns.

Moving to the tax rates, we're at 35.5 percent this year versus last year's 35 percent. Generally that difference reflects slight changes in our geographic mix of earnings. Net income reached $6 million, increasing 1.1 million or 23 percent over last year. The margin of sales also improved to 1.3 percent from 1.1 percent a year ago; again despite the impact from higher material costs.

Diluted earnings per share of five cents compares with last year's four cents or ahead 25 percent.

I will now touch on some highlights for the nine months. Through the first nine months of the year, net sales reached a record $1.66 billion. That is ahead 11 percent over last year's nine month's sales level. The organic sales growth through nine months has been five percent, plus another three percent of growth from net favorable foreign exchange, mainly against the euro and the Canadian dollar.

Bolt-on product line acquisitions during the past 12 months have added the remaining three percent of net sales growth. Industrial segments net sales were $911.3 million, ahead 12 percent year-over-year. Organic industrial growth was three percent plus another four percent from net favorable foreign exchange. Roofing services revenues in this segment have grown rapidly year-over-year, ahead 32 percent. The rest of the industrial segment has shown strength during the second quarter and was more mixed this third quarter. The balance of the industrial growth comes from product line acquisitions, which added five percent of net sales growth.

Consumer segment net sales through nine months at $749.4 million. They grew 10 percent year-over-year. The organic part of that was seven percent plus another two percent from net favorable foreign exchange. The main consumer product lines in the consumer segment, those being Rust-Oleum, Zinsser and DAP, all showed solid growth year-over-year. The balance of consumer growth comes from product line acquisitions, which added one percent to that growth.

The gross profit margin through nine months has held constant at 45.3 percent. Higher raw material and packaging costs these first nine months have negatively impacted that margin by 60 basis points. In addition, growth has continued at certain strategic but lower margin product lines and services, but favorable assets have come from many of the same sources outlined for the third quarter.

Industrial segment gross margins improved slightly year-over-year to 45.5 percent from 45.3 percent; again for the reasons already mentioned, including a money saving elimination of an outside tolling arrangement in Europe and even though we have had continued growth in our roofing services business, which carries lower gross margin.

Consumer segment gross margins are essentially flat year-over-year at 45.1 versus 45.2 percent of sales. Generally higher raw material and packaging costs that have mainly affected this segment, by 105 basis points year-to-date, have been offset by factors already mentioned plus some plant rationalization savings.

Moving to SG&A expenses through nine months; those also remained constant year-over-year at 35.8 percent of net sales. Generally reflects positive leverage from higher sales volume including the continued growth in our industrial services sales that again require much lower SG&A support, and lower-cost influence from acquisitions offset, by the higher costs similar to those affecting the third quarter.

The industrial segment SG&A was 35 percent of sales this year, compared with 34.5 percent last year for the same factors as the third quarter plus an insurance recovery that we had last year to the tune of $1.6 million.

Consumer segment SG&A of 32.9 percent of sales this year compares to 32.7 percent last year and corporate other expenses decreased to $29.1 million from $31.9 million a year ago. Both of those segment differences are from factors similar to those affecting each in the third quarter.

Earnings before interest and taxes or EBIT through nine months, $158.6 million this year, ahead 12.2 percent from last year's $141 million. Margins held steady at 9.5 percent both years.

Industrial segment EBIT of $95.9 million is ahead 8.8 percent. That is a margin on sales of 10.5 percent compared with last year's 10.8 percent of sales.

Consumer segment EBIT of $91.8 million is ahead 7.9 percent, a margin on sales of 12.3 percent of sales compared with last year's 12.5 percent. This combined operating EBIT growth, which totaled $14.5 million, was ahead 8.4 percent and generally reflects the result of our solid sales growth including accretive results of our recent acquisitions, offset by the 60 basis points of margin impact year-to-date from higher material costs this year, and growth-related investments.

Through nine months interest expense net is ahead $.5 million year-over-year. That reflects additional financing costs for acquisitions, less some savings from debt repayments, which have averaged about $22 million year-over-year.

Tax rates are similar to the third quarter at 35.5 percent this year versus 35 percent last year for the same reasons; those being geographic mix. Net income reached a nine-month record of $88.9 million, which increased 13 percent over the prior year. The margin on sales has improved to 5.4 percent this year from last year's 5.3 percent despite the loss and the impact from higher material costs through nine months.

Diluted earnings per share reached a record 76 cents compared to last year's 68 cents. That is ahead 12 percent.

I will now give some comments on the balance sheet and as I have done before, given our seasonality, it is probably most pertinent to compare back to last February a year ago.

Net Accounts Receivable were up $35.9 million year-over-year. Acquisitions have accounted for almost $8 million of that. Foreign exchange translation affect accounts for another $11 million. That means the difference of $17 million is representing the sales increases in both segments so far this year.

Inventories year-over-year were ahead $29 million. Acquisitions accounting for $3.7 million of that. Foreign exchange translation accounts for about $8 million of that. The remaining $17.4 million was attributable again to growth in both segments and that includes some timing differences with regard to certain materials that are purchased less frequently.

Prepaid expenses were ahead $15.1 million. That mostly represents year-over-year increases in marketable securities related to our captive insurance program. On the liability side, Accounts Payable were up $25.7 million year-over-year. Acquisitions accounting for $3 million of that. Foreign exchange translation accounting for another 4 million of that difference. The balance of $18 million represents the increase from the combination of business growth and some timing of payments in both segments.

Total debt at February 29 this year, $711.8 million is up $12.3 million over a year ago; $66.7 million of that is from acquisitions during the past 12 months, less the difference of $54 million of debt repayments during that period of time. Total debt to capital ratio stands at 43 percent. That compares with 43.2 percent a year ago and it is down from 45.3 percent this past May 31.

Our composition of debt has now changed due to some refinancings. We are now roughly at 80 percent fixed, 20 percent variable and our available liquidity including our cash balance stands at $722 million at February, 29.

I would like to review the liabilities related to our asbestos and those are reflected in two areas of the balance sheet. The current liability stands at $49.2 million. That represents again estimated pretax payments -- estimated to be required during the next 12 months related to our asbestos liability. Then you have under long-term liabilities, $56.7 million, which compares with $103 million at May 31. That difference reflects a reclass of 8 million, up to current liabilities, and pretax payments these first nine months of $38.6 million, and that is net of the insurance that remained at May 31. This $57 million long-term liability again represents those estimated payments that may be required beyond the next 12 months.

Cash flows. Our year-over-year business growth toward the end of our second-quarter caused a temporary build up in working capital, especially in accounts receivable. Our cash flows were correspondingly stronger this third quarter as a result, generating cash flow from operations of $42.9 million, which brings our nine-month cash flow from operations to $108.8 million this year or off $8.5 million compared with last year's $117.3 million.

Asbestos-related payments net of insurance and net of taxes have accounted for $24.2 million of cash flow reduction this year, partly offset by the improved operating performance so far this year of just over $15 million. That is the sum of growth in net income and depreciation and amortization.

Our CAPEX at $26.2 million is slightly ahead of last year, but still well within depreciation of $35.3 million through nine months. Free cash flow generation for our first nine months -- and we define free cash flow as our cash flow from operations, less capital expenditures and less dividends -- amounted to $35.2 million or off $16 million from $51.2 million a year ago, but we do remain on target to achieve free cash flow generation this full fiscal year in the range of 50 to $60 million. That will compare closely to last year's free cash flow even after the much higher asbestos-related payments we are required to make this year without that insurance subsidy.

You are welcome to visit our website for further clarification on how we derive free cash flow. I will now turn the call back over to Frank Sullivan.

Thank you, Glenn. I would like to comment on our earnings release, which as you will note provides more detail than we have in the past particularly related to our segments. And this is in response to some good suggestions from a number of folks and the work that Bob Matejka, our CFO, and Glenn Hasman have done. And we will continue to advance by providing more detailed information as we go forward.

Before taking your questions, I would like to comment on our asbestos liability and the outlook for our business. The third quarter asbestos costs were generally consistent with the assumptions underlying our existing asbestos reserve. As we have done regularly, all of our case and cost data will be fully disclosed in our upcoming 10-Q filing, which should be filed after the close of market today. In our 10-Q you will see that gross settlement and defense costs were $12.2 million for the third quarter ending February 29, 2004. Our settlement and defense costs are sequentially down from the second-quarter, which was $18.6 million. We resolved approximately 156 cases during the third quarter.

Active cases for the quarter ended February 29, 2004 increased by 1922 cases to 4659 at quarter end. Virtually all of this increase of volume of new case filings during the quarter were unimpaired cases filed by one firm in Florida, which we expect will ultimately be dismissed. Florida case law is strong and works in our favor, and historically we have an 85 percent dismissal rate without cost of unimpaired claims. In addition, these claims are not newly filed claims but a revision of claims which have been filed over the last one to two years, and thus we don't feel that they will carry any cost for RPM.

As we discussed during our last conference call, the full impact of state tort reform measures will not be evident until the next fiscal year, especially given the relatively recent enactment dates of certain of these measures. But we do have some observations thus far. Those states which have enacted tort reform measures, principally Ohio, Texas, and Mississippi; we have seen a significant decline in new case filings and as an overall percentage of our claims and costs. However, much of our higher costs experienced this year is associated with resolving old law cases, particularly in Texas.

We are encouraged by the Senate Majority Leader Frist's commitment to move forward with a trust fund based asbestos reform legislation which was introduced to the Senate in a revised form last night.

In summary, the 1900 unimpaired filings by one firm in Florida is not a particular concern. In fact, we are encouraged by trends in key states where revised tort laws are having a significant and positive effect, but we continue to monitor activity in Illinois, which is the most challenging state for all asbestos defendants, including Bondex.

We believe that the FAIR Act has a 50-50 chance of favorable Senate action and would expect to vote at the end of this month and we continue to urge all investors to communicate to their senators support for the FAIR Act. It's your money. This challenge has not impacted our business or growth plans, as evidenced by a record growth in building momentum. Challenges to our business have probably been in the area of rising raw material prices, so as you can see in gross margin performance, we have been able to manage or pass on these costs evidenced by flat gross margin year-over-year and actually improved gross margin in the third-quarter.

We expect to see raw material pricing pressure for some time, which might have a negative impact on a particular quarter, though we believe that we will be able to maintain our strong gross margin profitability through a combination of productivity improvement, product mix, and price increases.

On the expense side, while we have been investing in a number of growth initiatives, principally marketing and advertising in our consumer segment, and growing our industrial salesforces in light of an economic recovery, we have experienced three years of margin improvement and we expect that trend to continue for the balance of this year and into our 2005 fiscal year.

Glenn commented on our balance sheet. I would just like to point out that we refinanced $200 million of previously floating-rate bank debt in December of this quarter. Today, our balance sheet is 75 percent fixed, which is a substantial change from where our balance sheet was a year ago at almost 75 percent floating; and we are real pleased with both the duration of our various debt securities as well as this change from floating to fixed, particularly in light of economic conditions.

On the acquisition front, we recently announced the completion of two European transactions. Both of these are relatively small but had very good growth potential, and they were funded entirely from European cash. We continue to pursue a number of smaller product line acquisitions as well as bringing privately held companies into the family of RPM businesses. And our Tremco group is particularly capable in adding strategic business units for integrating acquired product lines to its businesses; accelerating what is a good and building internal growth story as well.

Revenue growth seems to be accelerating as we enter our spring selling season, particularly in our industrial segment. Having just finished a strong March, we now have seen five out of the last six months of positive revenue gains spread fairly broadly across our industrial businesses. With this good momentum, we are confident in our ability to meet or exceed our original goals for the 2004 fiscal year. With those comments, we will now take your questions.

Thank you, sir. (OPERATOR INSTRUCTIONS) Rosemarie Morbelli with Ingalls & Snyder.

Congratulations on a good quarter. Frank, you said that for the past five months you have seen business accelerating, however, with the situation deteriorating in Iraq there is a major question mark as to whether this will continue. Could you give us a sense as to whether you have seen anything yet in the last week -- and I understand that this is pretty short -- but how long will it take if and when things deteriorate economic-wise, how quickly will you see the signs?

I think that we're starting to gain some confidence that the industrial sector turnaround that we have been experiencing for the last few months is going to be sustained for some time. We had a very good finish to the calendar year and in the fall. January was a little bit of a blip, but February was a strong month and as I indicated, we had good performance in March, though we won't reveal the details of that part of our fourth quarter until year-end. We are seeing pretty good momentum out there. I think we anticipate some improvement in capital spending in the industrial sector and the manufacturing sector. We're starting to see in a customer bases some employment growth. So I think it is pretty sustained.

From my perspective, the situation in Iraq, unless it escalates beyond where it is now and it is already certainly troubling -- is not having any noticeable impact on an economic recovery here in the United States. And I don't anticipate assuming it continues among the same lines that it is, that that would be an issue. It certainly is a political issue, but from an economic standpoint, we see things shaping up pretty well. And at least for the foreseeable future, our outlook can be two, three months with some confidence. I think we have good momentum and are building some good backlogs in those businesses of ours that track a backlog.

Even if you don't see an impact in terms of slowing down the economic recovery, it will have an impact on the raw material costs and you touched on that. But could give us a feel as to how much of those raw material costs you were able to get through price increases, if any?

Price increases have been a little bit spotty, but we have been starting to get them in select areas. Specifically related to oil-related raw material or derivative-type products. And we have a number of price increases which are just coming on in April and May in a couple of our industrial businesses, and we have on unselected product lines actually been able to get some price relief in a couple consumer areas. So we are seeing for the first time the ability here over the last couple of months -- for the first time in certainly three or four years to get some price increasing that will stick. And I think that, in combination with product mix as well as the continuing productivity improvements that our managements have been able to generate over the last three years, will allow us on an annual basis to continue to maintain our strong gross margin profitability.

Clearly, we are seeing and anticipate seeing continued raw material pressure.

If I look at the core growth for both the industrial and the consumer areas in the third quarter, of the three percent in industrial, any price in that?

None. Although we have a couple of price increases in a few areas that will go into effect in our fourth-quarter.

And does that apply also to consumer?

In a very few select product areas, that is correct.

Okay, I will get back on queue. Thanks.

Jeffrey Zekauskas with J.P. Morgan.

This is Silke Kueck for Jeff Zekauskas. How are you? I have a handful of questions. The first one is, your industrial margins improved this quarter, even though most of your organic volume growth seems to stem from the lower roofing services business? So what are the overall margins on the acquired businesses? Are those somewhat higher and where do they stand roughly?

The overall margins on the acquired businesses are somewhat higher than the industrial segment average. And we also saw in the quarter, particularly in December and February, some increasing in our core product areas. The service revenue growth, which does have a higher gross margin -- I'm sorry, a lower gross margin was negatively impacting margins from a mix perspective, had continued to grow; but they have fortunately started to be matched by growth in our core product areas, which carry much higher gross margins.

Secondly, what products have you seen so far in growth in the new epoxy flooring business? Has that taken off at all or it still in the beginning steps?

The new epoxy flooring business for Rust-Oleum has been a real success for us. It is Epoxy Shield. We acquired that business a little more than four years go. It was a $2 million breakeven business. We acquired it for about one-time sales. We really worked with the product to get it into distribution and we launched a national ad campaign at the end last summer. We will relaunch that ad campaign this spring -- in May and June. And as a result of a good product line and being able to leverage Rust-Oleum's excellent distribution, and we also think the impact the ad campaign, that $2 million productline of four years ago will do somewhere in the neighborhood of 17 or $18 million of revenue this year. And the takeaway at retail is very strong, and so we anticipate continuing good growth out of that product line. I wish all of our acquisitions were that good, but it is a great example of when we can find a productline that we can fit into a Rust-Oleum or a DAP or a Zinsser and really leverage their strong customer relations, good distribution and marketing expertise. So that has been a nice plus for us.

And in that context, can you talk about the size of the Ecoloc and the Compakta acquisition in Europe?

Combined, their revenues are about $20 million. And they are relatively small. The Ecoloc business is the smaller of the two, although we are real excited about that business because it was run by an entrepreneur and his wife for 20 years. And the growth potential in that business is absolutely tremendous, and we're real excited about that. The entrepreneur, Patrick Stoop, who built that business is going to continue on with that, but we have taken a sales and marketing executive out of one of our European companies and put him in Ecoloc.

The Compakta technology business, we bought in Germany. They have two broad product areas. One is construction chemical products, not dissimilar to our Tremco products, that are principally sold in Germany and a few other places in Europe. And that has been relatively slow growth and we hope our product technologies and presence in those markets can continue that growth.

The other part of their growth is a patented OEM silicone product that is sold in OEM, and we are real excited about that. They have already some presence in the United States although they are looking for some help in leveraging their presence here. That is sold into glass, automotive, appliance, a very new area for us. We are not in the OEM sealants or adhesives in any significant way, and the potential to grow that business is pretty exciting for us. So that is a little bit of color on those two businesses.

We would expect over the next twelve months or so to continue adding businesses in the European market and acquisition sizes anywhere in the range of $10 million to $100 million.

Okay. Lastly, if I may ask, two housekeeping questions, both related to the litigation. The first one is in terms of asbestos how many more old law cases do you have that carry a higher settlement cost? And how many cases are exactly an Illinois?

I don't know the exact number in Illinois. I know we had about 30 new cases in the quarter filed in Illinois. And I think that's the right answer -- not the right answer, the right question. Illinois continues to be the state where a combination of very open venue provisions and strict joint and several liability makes it the most challenging venue for asbestos defendants. We are continuing to clean out Ohio, Texas, and Mississippi cases. Texas formerly was the largest venue for filings against Bondex and so as we clean those out, it has driven up a lot of costs because there is some pretty high expectations of old law cases, in fact we have not seen much in the way of new filings in either of these states, which is very good news. We have in Illinois approximately 700.

Thanks very much. I will get back in queue.

Saul Ludwig from McDonald.

Thanks for that much expanded news release. That's very helpful.

Credit it to Bob and Glenn.

An excellent job. You have been talking for the last couple of quarters about increases in the investment spending, more salespeople in both industrial and consumer, more advertising, and have cited those as somewhat as impediments to showing more earnings in each of the last few quarters. When do we start to hear about the return on those investments? And better results and lesser of those expenses?

A couple comment on that, Saul. Number one, if you look at our second-quarter results, we had real strong leverage in the second-quarter, where we had excellent mid to high double-digit earnings growth on a mid-single digit revenue growth. The third quarter is an acceleration of that. So we think we have a pretty good balance right now between investing in a recovery and our ability to generate middle teen earnings growth. So we are slightly ahead of our internal goals for the year. As I indicated in my comments, I think we are on track to meet or exceed our goals and those expectations that are out there for our results this year. And as the industrial segment continues to increase, I think you'll see a much better leverage to the bottom line out of that chunk of our business.

The group in our industrial segment that has seen the best performance this year is our Tremco Group. We have really not seen a significant turn out of all of our StoneCor group of companies, which are very high margin, big project stuff, and when those start hitting, you will really see our industrial segment humming. So I think we've got the balance but we are very cognizant of the need to continue to show productivity in our bottom line. Also in my comments, we have had three years of margin improvement at the EBITDA or EBIT level and you will see that again for the full year this year and we fully expect to deliver another year of margin improvement in '05.

Thank you. Relative to this leverage situation; if we look in the third quarter for instance in industrial where your revenues were up $29.6 million and your EBIT was up $1.4 million, that would calculate that you had five percent of the revenue increase was captured in EBIT. And in the consumer side, using the same calculation, up $17.6 million in revenue and a million in EBIT showed that only 6 percent of the incremental revenue fell to the bottom line -- and that 5 and 6 percent respectively, is kind of the lowest incremental contribution you have had in the last ten quarters or so?

Yes. A couple in that, Saul. Number one, our third quarter is our seasonally lowest period. And so you look at those dollars and those numbers and it is still a low time for us with the seasonality of our business. I think the second issue there is as we indicated in our January conference call; we had a pretty rocky January. December was strong, and February was strong. We had a poor January across the board, and when you have poor results in our seasonally low period, very often results in a net operating loss position, which interesting enough we have actually improved our seasonality over the last 20 or 30 years. RPM used to operate its third quarter regularly at a loss. So, that negatively impacted us, but we saw a nice recovery in February and you are seeing that in the results, and that is continuing in March. And as I indicated, on a four-year basis, I think you're going to see nice margin improvement.

Final question. Two other questions. On the asbestos in the second-quarter you mentioned that a big chunk of that was something like 800 and some in new cases there -- that a bunch of those were cases that you thought would be dismissed. What sort of timeline between getting these -- and now in the third quarter, there's a big chunk of new cases that you think will largely be dismissed. What is the typical timeline and when should we see these 2000 cases settled or dismissed or something like that?

As we have indicated in the past, it usually takes 6 to 18 months for newly filed cases to become active. The twelve or eighteen month range tends to be cases that end up going to trial, and the shorter end of that range is typically where cases would be dismissed on some rejudgment or for other reasons. So somewhere on the six to twelve-month timeframe after these cases are filed, they would be dismissed. And in these particular cases, it is one firm, it is an amendment of cases that were filed a year or two ago, and interesting enough, Bondex wasn't named in them a year or two ago, and I think that in this case it is probably a firm throwing as many new defendants in on old cases as they can before potential enactment of any type of federal legislation.

Finally, in the flow of funds statement, which line item gets the asbestos settlement? Is it in the working capital number?

No, it is in the items not affecting cash and other, which for the nine months is a negative $12.5 million.

So if asbestos was $24 million or something?

Through nine months -- about $24 million.

So something else had to be a positive there for 12 million, right?

That is correct

From the net earnings. From the net income increase, the offset. You are talking about cash from operations?

Items not affecting cash and other was the 12 million negative in the nine months. But includes $24 million negative of asbestos so something else had to be 12 million positive.

Saul, that is generally foreign exchange issues that is down in the equity section. Other comprehensive losses.

Okay, thank you.

As you recall, Glenn said we had some pickups in the receivable and inventory impacts of forex, Saul. The offset of that is in the AOCL in the equity section.

Thank you.

Greg Halter from LJR Great Lakes Review.

Nice results. I would like to get your comment on the diluted shares outstanding up about a million on a sequential basis and what we can expect going forward?

I think that is principally the result of options. We have had good stockprice performance relative to where we were over the last couple of years, in part as overreaction to some of the asbestos news a year ago. And so we have seen good option exercises. A lot of which is people exercising options and holding them, which I think should be -- while it is small -- because it is actually a lot of operating people, it is a good sign. A, the performance is improving, and B; people have confidence in our future and are investing their money in RPM. But that is principally what it is.

Would you expect a similar increase going into the fourth quarter or settling down somewhat?

I think it will settle down a little bit, although I think we will se a steady exercise of options from our operating people. We have about 200 key managers across RPM, 200 to 250 out of our 8000 employees who are participants in our option program.

Okay, and do you have the figure on what the asbestos costs were included in last year's corporate expenses?

I do not. But that will be disclosed in the 10-Q.

Okay. And do you have anything outstanding presently on the revolver or your assets -- sorry, your securitization?

Minimal. Not much.

The revolver is zero.

The revolver is zero and --

On the securitization -- securitization would be about 55 million bucks.

$55 million in the AR securitization facility.

Which is up from zero the previous quarter, correct?

I think we have been right about $50 million this year. We've gotten all of our -- we had a commercial paper program that has been repaid. We have the $500 million revolver which is now totally unused. We have had about $50 million outstanding on the Accounts Receivable securitization program. The balance is various capital market securities.

Okay. And final question, Glenn, you made a comment on the EIFS cost. Do you have a figure on what that was in the quarter? I presume included in SG&A of the industrial segment?

It is not a particular cost. For the full year, and we indicated this at the beginning of the year and throughout -- we made the decision to increase our warranty reserves at Dryvit over what they had previously been by about $3 million. And so that is $3 million in addition to where our warranty reserve was a year ago that we take just on an even basis throughout the year.

Okay, all right. Great. Thank you.

Robert Kosowsky with Sidoti & Company.

Most of my questions have already been answered. I was just curious if there's any news on any reforms, state legislature reforms in Illinois or New York or Pennsylvania, some of the other states that don't have the partial liability?

There continues to be activity in number of areas. Ohio continues to pursue an asbestos specific reform that was passed by the House and is now in front of the Ohio Senate, and the hearings will be wrapped up I believe in May. Maryland and Texas are a couple states that are now drafting asbestos specific reform, so there are other states that are looking at this. I believe, although I don't know the details, that there is some new legislation being crafted in Pennsylvania relative to some recent activity there in their courts. And there is a U.S. Chamber of Commerce effort that has been launched, a marketing and advertising effort in the State of Illinois broadly on tort issues in that state.

So there continues to be a real focus on the state-by-state level in a lot of key states. I think for us as somebody had asked earlier, the real key state that drives our cost and continues to be the most troubling area is Illinois, and Illinois represents -- I think will represent this year -- probably about half of our cost. And so any activity there would certainly be helpful.

On the Federal level, there has been a ton of activity in Washington in the last couple of weeks. It is all positive news. You have a newly introduced piece of legislation that has been discussed with the staffs of Senator Frist and Senator Daschle, so you are getting the right bipartisan focus in trying to get this done. Were this not a presidential election year, I think that people would be very comfortable with the FAIR Act in both parties. I think this being a presidential election year -- again, and I think our best guess is the chances of this being enacted this year is 50-50. We anticipate floor debate the week of April 19 and on both by the end of the month.

Okay and say it is not passed this year, when do you think it would resurface on -- in front of the Senate?

I think there is good bipartisan support and there has been a lot of effort in what is a pretty complicated bill. I think it would be quickly reintroduced next year and then you can handicap however you want depending on who gets elected in November. But there has been a lot of effort on this and this is not something that is going to go away because the impact of this litigation is hitting thousands of companies. And so, I think our focus now obviously is this year. If it passes the Senate, it has a very high likelihood of becoming law before the end of the year and if not, I think there's strong belief it will be reintroduced at the beginning of the new Congress next year in January or February.

Okay, thank you. That was helpful. And also I had a question about your growth strategy in Europe. I know if we think the Epoxy Shield example in the U.S. -- you acquire a small little business; you open it to your broad manufacturing distribution capabilities and bring it nationwide. What are you looking to do with these acquisitions over in Europe? Are they still going to be country specific? Are you going to be able to bring them into other countries? Can you comment on your distribution capabilities over in Europe?

Additionally, should we expect to see some good ramp up of growth from these new products as they start to enter in some underpenetrated markets?

I think to answer your last question, we should -- we would expect as we get into these that within a 6 to 12 month period, we ought to see a ramp up of growth. They are both fine businesses with good management teams, and they both have been a little bit capital starved relative to their growth potential. So we're excited about that. We have a $180 million base of business in Europe today. And we see a very fragmented industry, much like the United States was about 20 years ago. So the opportunity for somebody to really pursue industry rollups or consolidation in our industry is pretty exciting and there are a ton of national, family-owned companies that either have the leading share or recognized dominant niche on a nationwide basis throughout in a country like Germany or Italy or France or Spain or the UK, and being able to combine these businesses, we are finding we can put them into the purchasing action group that we have and save substantially on raw materials. And also provide them with the type of growth capital to continue to grow or grow more aggressively than they had been. And then occasionally we will bump into situations like this Compakta technology that has this OEM sealant that is just making its way into the U.S. on the backs of some of their German automotive customers. And if we can lever that, either on their own or through a company like Tremco, the growth potential of something like that is pretty exciting as well.

So that is what you are going to see from us. We're continuing to kick the tires. Some of the acquisitions will be solid, steady, unexciting growth; and others of them hopefully, will turn out like an Epoxy Shield, where we can see a real acceleration from a small base to something meaningful over a couple of years.

All right, thank you very much.

Craig Kennison of Robert W. Baird.

A number of good questions already. Just two very quick asbestos-related questions to follow up. Do you have any sense for the revisions to the federal asbestos legislation since it surfaced last time?

I do not have specific comments on that. We just got a copy of the revised bill yesterday. It is 280 pages, so we are certainly digging into it and looking at it. I think in general it is not significantly different from our perspective and the impact on us than the Hatch bill. There are some very significant changes on the administrative side, which takes it out of a separate court and puts it under the Labor Department. And there continue to be some negotiations on some of the claim values particularly related to lung cancer. But to address specifically your question, we just haven't poured through the details of the bill that was introduced yesterday yet, although we certainly are.

Thanks, and with the new state laws, have you changed your litigation strategy perhaps to become more aggressive?

We have, absolutely.

Okay, thanks so much.

Rosemarie Morbelli from Ingalls and Snyder.

Still on the asbestos, have you seen one, an increase in what you are paying when you are negotiating or settling with an account? With a claim rather? And then have you seen any of the cases leaving Ohio or Texas and showing up in Illinois?

A couple of things. Our average cost in cases has gone down and I think that has been true in a lot of areas, not just for RPM. Having said that, the demands on old law cases in states that have recently enacted tort reform are going up because there is I believe an expectation that that's the last bite at the apple. We have not seen any particular migration that is meaningful. I indicated that there are about 30 new cases this quarter in Illinois, and that is not an uncommon growth in that state relative to what we would have seen prior to these state law changes in Ohio or Mississippi or Texas. So we have not seen that yet, although that is certainly possible in the future.

And back to the business side, how many people have you added on the industrial side either a number or actually a percentage and are you just about done adding people?

I don't know the exact numbers and it is company by company. I can tell you our headcount over the last three years on a consolidated basis is not up much at all. We have had some consolidation as you know in manufacturing. We have been pretty aggressive in maintaining cost control, particularly in our industrial segment. The areas where we have had increases is in the industrial segment sales force, as well as some marketing folks in our consumer businesses. And I think those are meaningful because those are the people that are going to drive your revenue growth and allow us to take our fair share of any increase in what we think is now looking like a pretty sustained industrial recovery. We are real excited about it except for a blip in January which we had talked about previously. The third quarter was pretty good and we would have done substantially better. We lost a penny to the refinancing, which in the near term hurt us in the third quarter, but I think was a smart move long-term.

January was fortunately a one-month hiccup out of what was otherwise a six-month positive trend. February was strong and March was even better. If that trend continues, we will finish the year very nicely.

And lastly, Frank, could you give us some detail on the consumer business, what is happening at Home Depot? Do you see any change in the demand there vis-à-vis higher rates and maybe less activity, slower activity on home building? Whether it is new ones or in your case more importantly, acquiring acquisitions of old homes, remodeling and so on?

I think that is a good question. New home building isn't necessarily a good indicator of business for our consumer businesses. Probably a better indicator is housing turnover. But our consumer businesses are continuing with steady, solid growth. Kind of mid to upper single digit growth. And the take away has been very good. We are always keen to learn not just the revenue growth of ours out the door, but what data we have on consumer take away because that is a good indicator of whether this growth is going to continue, and so far it is.

We are real excited about the position that our consumer products are in because of this huge housing boom. There are, I guess simply more basement and garage shelves today by far than there were ten years ago to hold our stuff. And I think that bodes well for continuing growth with RPM's consumer businesses, which are particularly targeted at home repair and maintenance and craft-type things. So that is real steady growth, consumer take away has been very good, and we see that continuing this spring. It looks good.

And do you see that Home Depot is continuing to improve? They are done with the projects they were having -- a couple of quarters ago?

I don't think Home Depot is done with all the projects. I think they are continuing to look at ways to improve their business. I think some of the turmoil that was troubling at Home Depot a year or two ago is now behind them and I think some of the big initiatives that were causing some disruption in their performance has passed. We're seeing good performance there, good growth, and I think quite honestly a more confident Home Depot sales force or employee force in terms of executing and focusing on revenue growth, which for any business is the key as opposed to just internally. So that's certainly a good sign for suppliers of that good customer like us.

And actually, I do have one last -- another question and it is regarding Lowe's. Are you aggressively pursuing them? They are coming up against Home Depot in now the larger populated areas. Do you see that a possibility (multiple speakers)?

Lowe's is a very significant customer for us, and we have continued to grow with Lowe's and take market share. I think the growth at Home Depot and Lowe's this year is relatively even. Although the last couple of years we have experienced what a lot of people in our industry did, which was somewhat higher growth at Lowe's because of some of the issues at Home Depot that we just talked about. We continue to grow at Lowe's. They are a very significant customer. We are their principal supplier of small project paint. We have an excellent position with them with DAP and Rust-Oleum. We also have Bondo products in there and we're continuing to pursue not just their growth, but also picking up market share where we can.

And you don't have any problems with both of them, Home Depot and Lowe's, selling similar products?

No, as you recall, Rosemarie, back in 1997 when we became category manager for Home Depot, Lowe's did have a problem with that and ultimately kicked Rust-Oleum back from about 12 feet of shelf space to about 3, and their category really fell apart after that, and we picked that business back up a year and a half or two later and now are the category manager at Lowe's. We have done a real nice job with these folks and it is a real testament -- not to anything we do at RPM, but to our managers at Rust-Oleum and DAP and Zinsser. We're keenly focused on the consumer and the contractor customer base. So as long as we're helping them push more product out the door, because we are focused on the end-users, it is going to really help us.

And then the other area that is helping us is we are continuing to introduce new products and the new products again are helping both us and the retailers expand their market, expand turnover, and expand their margins with some higher margin new products. I think the last issue is whether it's them or a few others, it really is a testament to strength of our brands. We've got good brands that consumers and contractors want and use, and we believe that and in some cases we have had to prove that the hard way and we have. So we've got a good presence in all the major retailers, including Wal-Mart.

Okay, thanks.

Thank you very much.

Thank you. I would like to now turn the call back to Mr. Sullivan for some closing remarks.

Thank you very much for participating in our conference call this morning. We continue to be very pleased with the acceleration of our growth from the first quarter to the second quarter to the third quarter. We anticipate a strong fourth quarter and are in the middle of our planning for our 2005 fiscal year and expect another year of good growth. And I would like to close by wishing everybody a happy holiday. Thank you very much.

Thank you, sir. Thank you, ladies and gentlemen, today for your participation. This concludes your conference call. You may now disconnect. Good day.