RPM International Inc (RPM) 2004 Q4 法說會逐字稿

Good day and welcome to RPM International's conference call for the fiscal 2004 fourth-quarter and year-end. Today's call is being recorded. This call is also being webcast live and can be accessed through RPM's website at www.RPMinc.com. A taped telephone replay will be available 2 hours after this call concludes until 8 PM Eastern Daylight Savings Time on Monday August 2, and can be accessed by dialing 888-286-8010. The confirmation code is 899-42-115. A webcast replay and written transcript will also be made available through the RPM website. The webcast replay will be available approximately 2 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 the 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, including disclosure on the reasons for the use of non-GAAP measures, on the company web site in the Investor Relations section under Webcasts/Presentations.

At this time I would like to turn the call over to RPM's President and Chief Executive Officer, Mr. Frank Sullivan, for opening remarks. Please go ahead, sir.

Good morning; we apologize for the delay. We had a problem with our service provider. We are real excited to be here in New York releasing our earnings. We are pleased to welcome you to the RPM year-end conference call. For more than 30 years we've released our year-end results in New York. We are pleased to continue that tradition.

We initiated this morning's meeting and call from the New York Stock Exchange, where we will also host our traditional year-end luncheon for analysts and investors to review the details of the results discussed on the call this morning. At that luncheon we will have presentations by Jeff Korach President of our Tremco group, and Mike Tellor, President of Rust-Oleum, which will give investors a chance to meet the leaders of the largest business units of each of our operating segments.

2004 was another year of record results generated by the people of RPM. Glenn Hasman, RPM's Vice President of Finance and Communications and lead Investor Relations Officer will comment on the financial highlights of the year and the fourth quarter. Following Glenn's comments we will discuss our outlook and expectations for the 2005 fiscal year and answer your questions. I would now like to turn the call over to Glenn Hasman.

Thank you very much, Frank. Good morning, everyone. I will begin by talking about the fourth-quarter results. I will give some highlights for the full year, then we will talk to some highlights about the balance sheet and our cash flows.

Our fourth quarter net sales grew 15.5 percent or $91 million over last year to a record fourth-quarter sales level of $680.9 million. Organic sales growth was 11 percent or $67 million. Net favorable foreign exchange added another 2 percent or $10 million, mainly against the euro and the Canadian dollar; and 5 bolt-on product line acquisitions during their first year added the remaining $15 million or 2.5 percent of net sales growth.

Our industrial segment net sales were $361.5 million, which grew 19 percent or $57 million year-over-year. Organic industrial segment growth was 12 percent or $37 million, plus another 2 percent or $7 million from net favorable foreign exchange. Our industrial growth was strong across the board this quarter. All three industrial business platforms and nearly every business unit produced double-digit growth.

Roofing services led the way with 59 percent growth this quarter, but the following product lines all experienced robust growth.pleasure marine coatings, lumber treatment products, powder coatings, exterior insulating finishes and construction sealants and chemicals, partly due to increased U.S. commercial construction, and flooring. The balance of the industrial growth came from 4 acquisitions including 2 businesses in Europe, which added $13 million or 5 percent to net sales growth.

Our consumer segment net sales reached $319.3 million, which were ahead 12 percent or $34 million year-over-year. The organic consumer segment growth was 10 percent or $30 million, plus another 1 percent or $3 million from net favorable foreign exchange. Zinsser, Rust-Oleum, DAP, and our wood finishes group all reported solid year-over-year organic growth during the quarter. The balance of consumer growth came from a bolt-on productline acquisition made last fall, which added 1 percent to net sales growth.

Moving to gross profit, our gross profit margin of 45.9 percent this fourth quarter was off from 46.3 percent a year ago. This 40 basis points net margin reduction was principally the result of the much higher roofing services sales, which do carry a lower gross margin, and continued higher material costs, this combination overcoming significant benefits from the leverage of the higher product sales volume. We had other margin improvements in the form of productivity gains. We had some procurement benefits from the weaker dollar, mainly in Canada, and we had higher margin influence from our acquisitions.

The higher raw material and packaging cost this quarter negatively impacted our gross margin by 100 basis points. We did expect higher oil and natural gas based material costs, such as asphalts, acetones, plastics, steel pails, certain polymers and solvents, would continue to impact our results this quarter; and these higher costs are continuing.

The industrial segment gross margin declined quarter-over-quarter to 46.2 percent from 46.7 percent. This was primarily because of sales mix, mainly the exceptional growth of the lower margin roofing services business.

Our consumer segment gross margin quarter-over-quarter also declined slightly to 45.6 percent from 45.9 percent. There were higher raw material and packaging costs that mainly impacted this segment by 100 basis points during the quarter; and there were also very favorable offsets that came from the positive leverage of our solid organic sales growth, significant productivity gains, some pricing, supplier rebates, and procurement benefits from the weaker dollar.

Our SG&A expenses decreased 90 basis points on sales, to 33 percent this year from 33.9 percent last year in the fourth quarter. This improvement mainly reflects the other side of the much higher roofing services sales, where related support costs are much lower along with leverage benefits from the general strength of sales this quarter.

Our industrial segment SG&A of 33.9 percent of sales this year was much lower than 35.5 percent last year, from the growth in roofing services sales during the quarter; but it also reflects benefits from the broadly higher organic sales volume, and ongoing cost containment and savings programs which more than offset higher liability reserves associated with Dryvit EIFS.

Our consumer segment SG&A was 29.6 percent of sales this year, which compared with 29.7 percent last year. This segment also benefited from higher organic sales volume, which was partly offset by growth-related investments including Epoxy Shield and other advertising.

Our corporate/other expenses increased to $7.5 million this quarter from $7.2 million last year. This includes this year's establishment of our European development office and higher insurance and various other costs related to corporate governance, including Sarbanes-Oxley compliance.

Our EBIT, excluding the $140 million pretax charge taken in the fourth quarter of 2003, was 20 percent ahead and represents a very positive result of our 15.5 percent higher sales volume, and productivity gains, which more than overcame the 100 basis points margin impact from higher material costs.

Our industrial segment EBIT was $44.6 million, which was up 30.6 percent, a margin of 12.3 percent of sales compared to last year's 11.2 percent of sales. Our consumer segment EBIT was $50.9 million or up 10 percent, which was a margin of 15.9 percent of sales compared to last year's 16.2 percent. Combined, our operating EBIT growth totaled $15.1 million or 18.7 percent.

Interest expense net was up $1.8 million quarter-over-quarter. This reflects higher interest rate costs year-over-year, as a result of our floating to fixed-rate refinancing including the $200 million 6.25 percent notes sold last December. Our average rates this year were 4.82 percent before acquisitions compared with 3.5 percent last year. Plus, year-over-year there were additional financing costs for acquisitions, offset by savings from debt paydowns and additional investment income this year.

Our tax rate during the quarter was 33.6 percent versus 40.8 percent benefit rate on last year's fourth quarter net loss, which included the $140 million charge. Excluding last year's charge, our pro forma rate would have been 33.9 percent. That difference generally reflects slight changes in our geographic mix of earnings.

Our net income reached a record $53 million, which increased $96 million over last year's net loss. If you exclude last year's charge, this year's net grew 20 percent over last year's pro forma net income of $44 million. The margin on sales improved to 7.8 percent, from last year's pro forma 7.5 percent, despite the 100 basis points pretax impact from higher material costs during the quarter.

Our diluted earnings per share reached a record 45 cents per share this year, versus last year's loss per share of 38 cents. If you exclude last year's charge, this year's earnings per share grew 7 cents or 18 percent over last year's pro forma 38 cents per share.

For the full year now, net sales reached a record $2.3 billion or ahead 12 percent over last year's sales. The organic sales growth was 7 percent. Net favorable foreign exchange added another 2 percent to sales growth; again, mainly against the euro and the Canadian dollar. And 11 acquisitions during their first year added the remaining 3 percent to net sales growth.

Our industrial segment net sales were $1.3 billion, which grew 14 percent year-over-year. The organic industrial segment growth was 6 percent plus another 3 percent from net favorable foreign exchange. Again, roofing services revenues have grown rapidly year-over-year which were ahead 40 percent for the year. The rest of our industrial segment showed strength during the second half of the year. The balance of our industrial growth came from 7 acquisitions, which added 5 percent to net sales growth.

Consumer segment net sales reached $1.1 billion, which grew 11 percent year-over-year. The organic consumer growth was 8 percent; another 2 percent was from foreign exchange. The main consumer product lines all produced solid growth year-over-year. The balance of consumer growth came from four productline acquisitions, which added the remaining 1 percent.

Gross profit margin for the year was 45.5 percent, which compared to last year's 45.6 percent. This slight net margin reduction was the result of the much higher roofing services sales, which carry a lower gross margin, and continued higher material and packaging costs, which negatively impacted our gross margin by 80 basis points during the year.

The industrial segment gross margins were flat year-over-year at 45.7 percent. Our consumer segment gross margins were 45.2 percent this year, compared with 45.4 percent a year ago, which reflects higher raw material and packaging costs, which had a 140 basis points impact on this segment.

Our SG&A expenses for the year improved to 35 percent of net sales from last year's 35.3 percent. As in the fourth quarter, this reflects continued growth in roofing services sales that require much lower SG&A support, plus positive leverage from our higher sales volume. The industrial segment SG&A was at 34.7 percent, which compared to 34.8 percent a year ago. The consumer segment was also comparable to a year ago at 31.9 percent.

Corporate/other expenses actually decreased to $36.7 million from $39.1 million. There were lower product liability costs this year, plus we had year-over-year savings associated with management retirements. We also had the costs related to our reincorporation into Delaware the previous year, which were partly offset by higher insurance and other costs related to corporate governance, including Sarbanes-Oxley compliance.

The EBIT for the year, $246.6 million, was up 15 percent from last year's pro forma EBIT of $214.6 million, excluding the charge taken in 2003. The EBIT margin improved to 10.5 percent compared with last year's pro forma 10.3 percent, which generally reflects the positive benefits of our much higher sales volume including accretive acquisitions and some productivity gains, which were able to overcome the 80 basis points margin impact from higher material costs.

Our interest expense, net was up $2.2 million year-over-year. That primarily reflects higher average interest rates, including floating to fixed-rate refinancings, which added $2.8 million in interest cost this year. plus the additional financing cost for acquisitions, less savings from debt repayments, and slightly higher investment income.

Our tax rate for the full year at 34.8 percent compared with 26.2 percent a year ago, which was influenced by the $140 million charge. Excluding last year's charge, our pro forma rate a year ago would have been 34.6 percent. This difference again is generally the result of slight changes in our geographic mix of earnings.

Our net income reached a record $141.9 million. Excluding last year's charge, this year's net grew 15.5 percent over last year's pro forma net income of $122.8 million. The margin on sales improved to 6.1 percent from last year's pro forma 5.9 percent, despite 80 basis points pretax impact from higher material cost during this year.

Our diluted earnings per share reached a record $1.22 per share. Excluding the charge a year ago, this year's earnings per share grew 16 cents or 15 percent over last year's pro forma EPS of $1.06 per share.

We will now move to the balance sheet, hit some highlights here. Our net accounts receivable were up $45 million year-over-year. Acquisitions account for $7 million of that increase. Foreign exchange translation accounts for $4 million. Sales increases in both of our operating segments account for the balance of $34 million of increase here, or 8 percent. When you compare that with our 11 percent organic sales growth in the fourth quarter, our Days Sales Outstanding have improved, which were down 3 days overall year-over-year.

Our inventories were up $36 million. Acquisitions took up $4 million of that. Our foreign exchange translation effect was $3 million, and the remaining $29 million was attributable to growth in both segments, including timing differences with regard to certain materials purchased less frequently.

Our Days Outstanding in inventory also improved, which were about 1 day lower year-over-year. That is despite strength of sales as we closed out fiscal '04, and that reflects ongoing efforts to continually economize our inventory levels in connection with Class A and other efforts.

Our accounts payable were up $33 million. Acquisitions accounting for 3 million of that, foreign exchange another $1 million; the balance of $29 million represents the increase from the combination of business growth and the timing of payments during the year.

Total debt was $720 million at year end, which was down $6 million. We had $38 million of additional debt to pay for acquisitions during the year, less $44 million of debt repayments. Our total debt to capital improved to 42 percent at year end from 45 percent a year ago. The composition of our debt is now approximately 80 percent fixed, 20 percent variable; and our available liquidity including our cash balance stood at $644 million at the end of the year.

Moving to our cash flows, we had strong cash flow benefits from our improved operating performance this year, which were offset by asbestos-related payments net of taxes, which amounted to $33.7 million. If you set those payments aside for the moment, our cash flow from operations on a pro forma basis would have been $186.7 million, or ahead $26 million or 16 percent year-over-year, which is a much better indication of the strength of our operating cash flow this year, from the combination of improved performance and asset management.

In fact, operating cash flows would have been even stronger were it not for our temporary buildup in working capitals to accommodate the strength of sales toward the end of this year.

I will now turn call back over to Frank Sullivan.

Thank you, Glenn. RPM is a growth company, and as you know we are proud of our 57-year track record of growth. What I don't think is appreciated, and maybe we're not telling the story aggressively enough, is our track record over the last 3 years. For the 3-year period ended May 31, 2004, we have generated a compounded annual growth rate in sales of 5 percent; a compounded annual growth rate of earnings of 19 percent; and of EPS at 14 percent.

In 2004 growth accelerated from 3 areas. The benefits of a strengthening economy, which particularly helped our industrial segment in the second half of the year, and the impact of new products in new markets. Good examples of this included Epoxy Shield garage floor coating at Rust-Oleum; our Zinsser company's leadership in mold and mildew proof paints, including their WaterTite basement paint that is taking market share from what has been a strong incumbent; our Stonhard RTZ flooring which was introduced during the downcycle in the industrial markets. This is Stonhard's first real entry into the commercial flooring market, and initial results have been hugely successful. And Tremco's expansion into the fireproofing market.

These are just a few examples of the new products and new markets that we have been pursuing on an internal basis over the last couple of years that are now coming to fruition in our results.

The third area is our ability to more effectively integrate productline acquisitions. Far more than we could years ago, today our businesses can acquire a productline and quickly integrate it into its business, generating quicker and higher returns, better margins, and enhancing future internal growth as we take on productlines and, post-integration, generally seeing acceleration in their revenue growth.

From a cash flow and balance sheet perspective, we also accomplished a lot in 2004. Our after-tax asbestos costs were approximately $34 million; excluded, as Glenn mentioned, we generated $187 million in cash from operations, up 16 percent year-over-year. We used that to fund internal growth acquisitions.

RPM's cash dividend currently yielding 4 percent was increased for the 30th consecutive year by 8 percent, while the payout ratio dropped to 45 percent. You should expect to continue to see RPM's cash dividend increase with our earnings increases, but also continue to see our payout ratio drop over time, as we keep more of our cash from operations to fund our internal growth and acquisition opportunities.

Debt-to-cap was reduced during the year from 45 percent of 42 percent. And more importantly, we significantly reduced our interest rate exposure with a debt profile that was 70 percent floating a little more than a year ago, and is now 75 percent fixed. All in all, 2004 was a very good year for RPM companies.

For our 2005 fiscal year, we anticipate revenue growth in the high single digit range, generating earnings growth in the neighborhood of 10 to 12 percent. Our biggest challenge in 2005 will be managing/cost/price mix, relative to a continuing rising raw material environment and the associated impact on our margins.

In 2004, our operations generated more than 100 basis points of margin improvement, and we yet gave back three-quarters of this due to higher raw material costs. In 2005, we are pursuing price increases in nearly every business unit. Subject to the amounts of these increases and the timing of their implementation, we anticipate at this point that price increases will add on an annualized basis about 2.5 to 3 percent to revenue growth in 2005, but we will certainly update that outlook each quarter.

We started 2004 with a solid first quarter and continued to build momentum throughout the year, culminating with an outstanding fourth-quarter finish to our fiscal year. Sitting here today we see that momentum continuing as we start our 2005 fiscal year, and look forward to updating you throughout the year on our progress. With that, I would be happy to answer any questions you have.

(OPERATOR INSTRUCTIONS) John Roberts, Buckingham Research. Robert Koort (ph), Goldman Sachs.

I was intrigued by the last comment about an expectation for 250 to 300 basis points of price improvement. Given your cost structure, how much year-on-year raw material increase would that cover?

We would anticipate at this point that it would cover substantially all of our price increase. So that to the extent that we continue to generate productivity improvements or get some benefits from higher revenues, that we can realize that on our bottom line. I think the real challenge for us will not be revenue growth. In fact, the opportunity for us to beat our revenue growth goals for the year I think are pretty good.

The challenge will be whether or not we can meet our gross margin and prime margin profit goals relative to what is happening in the raw material environment. If we do, we will certainly have another strong year. But it will be a challenge. At this point, we plan on being able to cover substantially all of the price increases that we see today, and we will have to play it by ear and see what happens as the year unfolds.

Can you give me some sense, if we had a starting line of today, which specific raw materials give you the most concern going forward?

I think resins and solvents have gone up pretty significantly as a direct result of increase in oil prices. And those could continue to climb in certain areas. We've seen some specific resins -- and I won't get into too many examples -- but one example in particular is polyester resins at our Bondo subsidiary have gone up dramatically. So, those are the types of things that we're seeing that we hope to cover. But it also continue to be an issue terms of getting more costs throughout the year.

The types of price increases that we have seen on materials that we think we can cover up front and don't anticipate a significantly higher impact would be things like packaging, where we have seen some significant increases in steel containers and/or plastic pails or cartridges, some of which we do not anticipate will continue to accelerate at the rate they have in the first half of the calendar year.

The last question, I appreciate your time. When you go through price hikes through the big boxes, is it some sort of consultation with the retailer on what they think the market can bear? How do you make sure you don't create too much disruption with the retailer?

That is a very delicate balance and certainly something that our operating people are pursuing. Making sure that we can make the case for raw material prices going up, and the impact on us, and the permanency of some of those is important as it relates to trying to get some price relief at some of the big box retailers.

There are instances where some of the big box retailers in certain categories have already taken price increases, and we have already announced some price increases to some of our consumer products companies. Again, I think that the impact of those on the year will depend on how much of the price increases that we have announced we will get and the actual timing of when they will be effective.

Great. Thank you.

Jeff Zekauskas, J.P. Morgan.

This is actually Silke sitting in for Jeff this morning. A couple of questions. The first thing is, can you talk about your product performance currently at the big box retailers? How did aerosol products do at Wal-Mart? And how are things at Home Depot? Can you give us a little bit more detail as to what led to the 59 percent increase in the roofing business?

As it relates to the big box retailers, our internal growth in our consumer division was 8 percent for the year, and 10 or 11 percent in the fourth quarter. So we have seen real strong results pretty much across the board through the big boxes. We have had a good spring, and we have had a good start to the summer. So, we anticipate that continuing to be pretty strong.

As I have indicated in the past, I think a real good barometer for our products is this huge housing boom that took place over the last decade, creating a much larger inventory of new homes, which typically use our products for maintenance or renovation, remodeling, as opposed to new construction, where our products are not typically used.

As it relates to the roofing segment, all year long we've been talking about the WTI (ph) division of our Tremco roofing business, which is a general contracting and services business. That is a business where we are getting paid to do maintenance and warranty work, waterproofing work, roofing work, and also taking the actual contract for the labor and material of reroofing projects. That opportunity for us has really exploded. That was a $30 million business not too many years ago, and this year its revenues will exceed $100 million.

If I can ask like one follow-up, and this one is related to asbestos. Your balance sheet states that you have roughly $47.5 million set aside for the next 12 months; and there is an additional I think $43 million after that. Do you think that over time you may have to adjust those numbers, given that this year you paid out roughly I think $63 million pretax? Or if I take the insurance benefit out, that may be $54 million?

On asbestos, our gross costs in 2004 were$ 63 million; and our net costs were $54 million, or after-tax about $34 million. We anticipate in 2005 about a $45 million to $50 million cost for the year. Your question as it relates to future years, clearly sometime before the end of 2006 we are likely to take an additional charge to increase the reserves for asbestos liability for those years out past the original 3-year reserve period.

Some of the good years that is happening on the asbestos front, people are aware of in terms of various state legislative impacts, and some of the discussions at the federal level. From our perspective, our outlook over the next couple of years for the first time is improving. A couple of reasons why.

For instance, this year, of that $63 million, $35 million to $40 million of that was spent in the State of Texas trying to clean up old law cases, and that will continue to be a challenge for us over the next 9 to 12 months. Once we have eliminated the unitary inventory of old law cases in Texas, our defense counsel feel our asbestos caseload and cost in Texas should drop dramatically. So there is one huge place that drove costs in 2004 that we think will start to slow down in 2005 and will be dramatically less in future years.

Do you have any of the data for this quarter, like how many cases you have settled and what the number of outstanding cases are at the end of this quarter?

I have some of that data, and as you know all of that data will be published in our 10-K, which will be out in a few weeks. For the quarter ended May 31, 2004, we had 5,913 cases. That was up from 4,652 cases. The 1,200-case increase was substantially non-malignancies.

Again 90 percent of those were associated with one law firm filing of non-malignancies in Florida. We talked about it in the last quarter. We now have 75 of those dismissed and expect to see those dismissed in larger groups. And our original contention is holding true that most of these cases were filed improperly. And they are all non-malignancies, which historically have not cost RPM anything. Those 75 cases were dismissed without cost to RPM.

Thank you very much.

Rosemarie Morbelli, Ingalls & Snyder.

Actually, congratulations for a very good quarter. Could you talk about what you see as your customers' inventory? I know you said you could see the trends, the momentum continuing. But there are signs out there that things may be slowing down. Have you talked to your customers? What do you see there? How does that compare with the level of inventory that you actually have?

In our industrial segment, we still are pretty bullish about what we see over the next couple of months. I know for instance, in some of our StonCor companies like Stonhard flooring, they have a good backlog going into the end of the summer and the early fall. I believe that there is still good activity forecasted for our Tremco units in sealants and in our Euclid admixture businesses. So for the foreseeable future, things look pretty good.

On the consumer side, I would anticipate another good year of growth. However, I don't believe that the 10 or 11 percent internal growth that we experienced in the fourth quarter is sustainable. Obviously, if we believed that, our forecast for '05 would be higher. I think you're going to see us back down into the middle single-digit range there. So, torrid pace of the spring is not something that we anticipate going forward.

When you talk about the growth rate, which was substantial in the fourth quarter, do you think there was some prebuying because of your selling price increases announcement?

I am not aware of that.

When we look at the growth, you gave us your expectation of a 2.5 percent to 3 percent selling price increases for 2005. How much was price in 2004?

Price was very little in 2004. 2005 will be the first year in probably 7 in which we can look back at year end and really count on a meaningful percentage basis 1 or 2 or 3 or maybe more as to the impact of price increases on our revenue growth.

This is because you are expecting volume growth, and therefore the demand is such that customers will accept selling price increases. But if the economy slows down at the end of your first quarter, for example, which seems to be what you can see from now, do you think that you have any chance of catching up some of those raw material cost increases, even though everyone knows that natural gas and oils are up?

We are already implementing price increases in a number of our industrial businesses. We have already announced price increases in a number of our consumer businesses. And, we have more to come. So to the extent that things slow down in the fall, which is not what we're seeing, -- we are hearing rumors if you will, of certain people seeing things slowing down. We're not seeing that yet. But certainly we will keep our ear to the ground on that.

But I think in a number of instances raw material price increases that we're getting are things that we need to cover the margin erosion that we just talked about, that Glenn just talked about on the conference call. So, the price increases that have been announced will go through.

The question is the timing in some of these cases. Some of these price increases will not be effective for the full year obviously, so on an annualized basis it could be less than what the absolute price increase is.

Now, I guess my comment will be that every specialty chemical has been in a dire need to cover their cost increases in raw materials costs, which doesn't really mean that they are accepted. In some cases those selling price increases are announced and then rescinded.

That is true in some cases. But there are real chemical price increases and raw material cost increases in the marketplace. And meaningful. I don't need to tell you thereare meaningful increases in oil-related items like plastic and steel, both of which impact our packaging. So, there are real price increase issues that we are dealing with. They cost us 80 basis points last year and 100 basis points in the fourth quarter.

Excellent productivity improvement and the benefit of good volume helped us cover that. Our goal is to make sure that we don't see any more margin erosion going into 2005 and that we continue what has been a 3-year run of actually improving our EBIT and EBITDA margins. We're not yet at our 15 percent plus goal, and we're going to get there over the next 2 years.

Lastly, on that subject, how often can you increase prices on the consumer side? Is that a once a year or twice a year type of deal?

I think it is certainly selective. You can try and increase prices when it's appropriate, but we do not have the flexibility on timing or with that customer base that we do in our industrial segment, where we can announce a price increase effectively whenever we want and certainly could announce multiple price increases throughout the year.

So it is a once a year type of window of opportunity?

Rosemarie, I'm really not close enough to it to tell you that it is only once a year. But it certainly has nowhere near the flexibility in terms of process that we have in our industrial businesses.

Lastly, if I may, your number of shares, the share count is up. I'm assuming that it is option related. Since your stock price is not really going anywhere for a while longer probably, because of the asbestos hanging over your head, do you have any thought of buying back some share in order to offset at least the options?

We do not have an active share repurchase program today.

And no thought of having one instituted?

I think the opportunities for internal and external growth will continue to consume the cash we generate, and we're real excited about those opportunities both internally and from an acquisition perspective.

Okay. Thank you.

Greg Halter, LJR Great Lakes Review.

Congratulations on a good quarter and good year; and it sounds like a pretty good outlook as well. I wondered if you could comment on what you think your tax rate will be going forward?

I think in 2005, you can anticipate a rate of about 35.5 percent, slightly up from where we were for 2004.

You comment in the press releases about capital expenditures being about equal to D&A. Any particular areas of focus on that capital spending, in terms of new plants or facilities or machinery?

I think CapEx this year will be about $50 million. We're investing in some new capacity in a number of places. We've got some new filling lines going in at Rust-Oleum. We have some new capacity coming in to some of our Tremco businesses. Then beyond that, it is a combination of a number of items across all of our businesses.

You talked about the new products and so forth in the segments. Can you comment on the market environment in terms of RPM taking share, maintaining share, losing share? What you are seeing there?

I think that we have been taking share for the last 3 years. Certainly in our construction-related businesses, the Tremco group, we have seen decent growth over the last couple of years in a market that was not exactly robust.

I think we are continuing to take share particularly in the construction, waterproofing, construction sealants, and the concrete admixture area, from some of our larger competitors on the admixture side. We continue to not so much as take share as we do successfully introduce new products and productline extend at our existing major consumer businesses like Rust-Oleum or DAP or Zinsser.

Certainly on a productline by productline area. For instance Zinsser's WaterTite product is a new entree into the cement waterproofing and basement paint. It is a higher-performing product, much ease of application, and it has a mildew proof and mold proof aspect to it whereby we're taking market share from a long-standing incumbent in that space.

So, there's a number of examples like that, where we can highlight that we are actually taking share. That is continuing to happen. Our people have been working on new products and productline extensions and getting into new markets, like the fireproofing division of Tremco which was started a few years ago. We're starting to see the payoff from a number of years of investment.

I think we're learning it takes about 3 years to really see the benefits of a new product that's first introduced or to see some good results from a new market that we have entered, from an internal perspective.

That is all I have at the moment. Thanks.

Saul Ludwig, McDonald.

You know, I'm encouraged by a lot of this talk about new products. You mentioned the fireproofing and the commercial flooring and the garage floor product, waterproofing product. What do you think those products in the aggregate maybe added incrementally to your revenue? And what do we have coming down the pike for fiscal '05?

Well, off the top of my head, and that is it. It could be tens of millions of dollars. I could not tell you specifically what the combination of all of those added; could be much more than that.

I think we have more coming in those product areas. We're getting some good growth in this fireproofing division, but we’ve got time and room to grow. We have got some new fireproofing intumescent coatings, formulas that been approved through all the testing out of our Nullfire business; we should start to see the benefits of those.

We have at the end of this week in Medina an international managers meeting, and we are starting to see better penetration of developing markets with a lot of our products. So I think there is a lot of good opportunities for internal growth. It is something that we have really been focusing on for the last 3 years, and I think we are better organized to make it happen today with these larger groups, as opposed to a bunch of smaller entities that did not necessarily have the resources to pick and choose where they want to invest internally for future growth.

You know, you talked about gaining market share, and that is great. Of course your competition is not sitting around waiting to be had. Is there anything that you are seeing from the competition in new products that they surprised you with? Or that, boy, they got a pretty good thing going there? Any new competitive products emerging on the scene, which has surprised you and challenges you?

Saul, the only advertisements I am going to give are for RPM products, and we've got a lot of good ones. Rust-Oleum has a plastic primer that takes up a 1-slot SKU at Home Depot, and can be top coated with just about any coating out there; and that is doing quite well. I mentioned the WaterTite product.

DAP continues to be very good at introducing new products. They have a Side Winder product that is used in the construction market. They have taken the Phenoseal productline that we acquired that is really strong in the Northeast; and they are starting to expand that nationally. It's a very high-end adhesive caulk.

We have introduced through Rust-Oleum a wood stains and finishes program under the Varathane brand, and have displaced many of our major competitors in one big retailer, and are continuing to make inroads in that area as well.

Great. On Dryvit, were your earnings impacted this year by additional reserves relative to the Dryvit situation? That is the question.

That is correct. This year, we increased our normal warranty reserves at Dryvit by about $4.5 million. We think now we are at an appropriate level, the total level of reserving for Dryvit and the type of business they are in.

In other words, fiscal '04 incurred $4.5 million or more expense than fiscal '03 in the Dryvit sector because of it?

That is correct. We deemed that an appropriate increase on an annualized basis. Actually we reserve, obviously; we accrue those reserves every month. We think we are now at an appropriate level there, and so you will not see that concurrent onetime pick up to the extent our revenues grow.

And Dryvit is continuing to show solid performance. We had a good spring with Dryvit. They're having a real strong summer. That is a high-margin business for us. So now those types of warranty reliability reserves will only grow in conjunction with their revenue growth.

Are you saying that the '05 reserve should be commensurate with the '04? In other words that we would not see a reversion back to what you had in '03, but -- ?

But you won't see another big pick up either. I think we're at the appropriate level.

Finally, it sounds like from the tone of things, directionally -- I know you don't want to give specific first-quarter guidance -- but at least directionally do you see first quarter being better than the first quarter of a year ago? What would be the major pluses and minuses as you look at it? At least if not quantitatively but qualitatively.

I think that is correct. I think this first quarter we would anticipate, and of course it is not over, we still have a month and a half to go, but for the period that will end August 31, from a revenue perspective, I think we will be ahead of last year for sure. It is a combination of decent growth in our consumer businesses and significantly better growth in our industrial businesses this first quarter than we had last year in the first quarter.

The challenge, as I mentioned in my comments before the Q&A session, will really be on the margin side throughout the year. I think our ability to meet our goals this year will be there. The question is whether we can generate the appropriate income gains and margin improvement commensurate with the type of revenue gains we are seeing. But I think it is safe to say that we would anticipate a better first quarter this year than we had last year. And we are off to a pretty good start.

That is even with more interest expense and more shares outstanding?

That's correct.

Very good. Thank you very much.

John Roberts, Buckingham Research.

I am sorry; I had to jump off for a second. If you already addressed this stop me. But was there a significant impact of weather during the quarter? I ask that because Sherwin Williams indicated that weather was bad this past quarter, sort of equally bad to last year. It just didn't feel that way.

Our fourth quarter, which is a March-April-May period, was a gangbuster quarter for us. We had good performance in our consumer businesses and in our industrial businesses. I never like hearing a weather-related excuse, except of course when it comes from our people.

Secondly, is packaging more of a raw material cost impact to you, or is ingredients more of an impact?

It's been a little bit of both. The packaging, as it relates to impact of oil price on plastics, whether it is plastic pails, tubes for caulk, and steel containers, we have seen that hit already. We do not anticipate that that is going to get a whole lot worse.

On the ingredients side, we have seen some significant increases in certain resins and solvents, and school is really out on whether or not those cost increases have hit their peak or we're going to see some of that continue.

We had commented during the opening remarks that high raw materials cost on the year cost us about 80 basis points. And we're working hard to make sure that we do not lose any margin and that in fact we continue what has been a 3-year string of improving margins. We have a goal of getting our EBITDA margins up to and above 15 percent. We have made good headway on that.

We would have been at just over 14 percent EBITDA margins this year, but we gave back about 80 basis points raw materials costs. And we are going to do everything we can to mitigate that in 2005.

Thank you.

Greg Halter, LJR Great Lakes Review.

Taking the follow-up, you talked about the ad spending. Any level of sense there on percentage year-over-year you're spending on the ad side?

Our total ad spending was about $71 million, up from the high 50s. It's a combination of higher marketing and advertising across our businesses; some significant increases at Rust-Oleum in TV advertising specifically related to our Epoxy Shield garage floor coating; as well as some higher co-op advertising expenses associated with revenue growth in our consumer businesses.

That 15 percent goal that you provided, that is EBITDA, correct?

That is correct.

Can you comment on what you are seeing there in acquisition opportunities?

We are continuing to see a lot of good acquisition opportunities. In fact, we just closed a small acquisition with Day-Glo about 2 weeks ago, which will be completely integrated into Day-Glo. We are continuing to pursue a number of family business type opportunities in Europe to add to the 2 acquisitions that we did this spring. So, our acquisition pipeline is pretty good.

As I commented earlier, particularly on the productline integrations, a number of our businesses -- Tremco in particular -- have developed some pretty good skills at taking good businesses and productlines that are a nice fit and integrating them into their existing business units.

Given the values that are in the marketplace today that are still a couple turns, multiple turns lower than they were the end of the '90s, and our ability to better integrate businesses, while the acquisitions we're pursuing are not significant in terms of the revenue size, their returns are very good. They are pretty quick.

In certain areas, like the Epoxy Shield area, they can help us accelerate internal growth in future years, to the extent that we have acquired a new productline or bought our way into a new market that we previously did not serve.

Thanks for that background.

You should see that continue.

Lastly, on the last call you talked about Ecoloc having I think the potential of being absolutely tremendous; as well as Compakta has the OEM silicone sealant, which has opportunities. Can you bring us up-to-date on what is happening with both of those?

Sure. The Ecoloc is a PVC tile flooring business that we acquired based in Belgium. Their products go into an industrial and commercial market. Their distribution was largely Western Europe. We're working with the management team there to expand their distribution outside of the range of where it is. So there's some nice opportunities in the upside there. Albeit, from a relatively small base.

Then, the German company that we acquired, Compact Technologies, has some specialty patented OEM silicone adhesives. We have made the first introductions of that management team to our Tremco management team. They are sharing ideas on markets and formulas. Again it is a relatively small base, but we are not a significant player in the OEM sealant business or the OEM adhesive business.

This is a $7 - $8 million productline in that area, which holds some nice potential if we can expand their markets. They sell into such markets as the European automotive market for headlights, the European appliance market for glass doors and windows on refrigerators or microwave ovens. Relatively high margins and in areas that we do not serve North American markets right now.

So, those are things that will develop over time, but there is good progress and I think good potential there.

Okay. Thank you.

Mark Altherr, CSFB.

To follow-up on your asbestos number for the year, the 45 to 50; was that gross, net, or after-tax? Secondly, you mentioned Texas. Are you seeing any other states that have had reform -- are you seeing any changes there in filings?

A couple. Just to clarify, in '04, our gross costs were $63 million; and our net costs were $54; after-tax was $34. Our anticipation for '05 is gross costs in the neighborhood of $45 to $50 million.

As it relates to the legislative impact, the State of Mississippi did a follow-up to the tort reform that was enacted a year ago. Some of this new reform that has now been signed into law had provisions specific to asbestos. The State of Ohio has passed the first specific asbestos reform bill, and there a number of other states that are looking at that. I think we are encouraged by the momentum in a number of states to try and address this issue.

Thank you.

Jeff Zekauskas, J.P. Morgan.

This is Silke again. I have like 2 short follow-ups, and I apologize if I missed something. In terms of the acquisitions, are your opportunities bigger in Europe or domestically? Where are you sort of looking?

Secondly, in terms of the earnings guidance that you gave for 2005, does that account for possible share dilution if there is a change in accounting for your Convertible Bonds?

The first question on acquisitions is related to opportunities, and we're seeing good opportunities in North America and in Europe. That is principally where our focus is. You will see them split. Beyond that, in terms of whether we do more in one region or another, it really depends on the opportunistic nature of when and how deals get done.

The earnings guidance, that 10 to 12 percent earnings increase, does not include any dilution on a fully-diluted basis from the Convertible Bonds that have the contingent payment feature. We're working with our bankers on that, at ways to amend the indenture that would eliminate the dilution. If that becomes an issue, or if there is a change that addresses that, we will certainly communicate it.

Thanks very much.

We have no more questions in the queue at this time.

Thank you very much for your participation in today's call and for your interest in RPM. We greatly appreciate the support and trust of our more than 100,000 individual and institutional shareholders, and the dedication and commitment of the RPM employees who deliver great value to our customers and great rewards for our shareholders in 2004.

We look forward to communicating with you in 2005 for what should be another record year of results delivered by the RPM companies and their employees. Thank you and have a great day.

Ladies and gentlemen, you may now disconnect. Good day.