RPM International Inc (RPM) 2005 Q3 法說會逐字稿

Good day and welcome to the RPM International conference call for fiscal 2005 third quarter. Today's call is being recorded. This call is also being webcast live and can be accessed through the RPM website at www.rpminc.com. A telephone replay will be available two hours after this call has concluded until eight pm eastern time on Thursday, April 17th and can be accessed by dialing (888)286-8010. The confirmation code is 51006884. The webcast replay and written transcript will also be made available through the RPM website. The webcast replay will be available approximately two hours after the call ends. The written transcript will be available within 24 hours after the call has concluded. Comments made on this call may include forward-looking statements based on current expectations that involve risks and uncertainties which could cause results to differ of RPM materially from the management's current expectations. For more information on these risks and uncertainties please review RPM's quarterly earning 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 spokepersons may reference non-GAAP financial measures. To assist you in understanding such non-GAAP terms as well as to comply with the 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 website and Investor Relations section under webcasts and presentations. Following today's presentation there will be a question and answer session at which time if you wish to ask a question you will need to press star, one on your telephone. At this time I would like to turn the call over to RPM's President and Chief Executive Officer, Mr. Frank Sullivan, for opening remarks. Please go ahead, sir.

Thank you, Bernie. Good morning and welcome to RPM's third quarter conference call. On the call I'll provide some opening remarks. Glenn Hasman, RPM's Vice President of Finance and Communications, will provide the details on the quarter and some comments on the nine months as well as our balance sheet. We will provide some outlook and then take your questions. Excluding asbestos costs, which I will address separately, we had a good revenue growth quarter, though with decidedly mixed results between our consumer and industrial businesses principally as a result of the dramatic increases in raw material costs that we are experiencing. Sales grew nearly 9%, approximately 11% in our industrial segment and 7% in our consumer segment. The dramatically different segment EBIT results, up 23% in industrial and down 27% in consumer, reflect the timing differences and the ability of our various companies to pass on raw material costs increases.

We believe the lag, which is about three months in our industrial segment businesses and about nine months in our consumer segment businesses, will be made up certainly over the full cycle. This also highlights the importance of our strategy of balancing our business portfolio between consumer and industrial businesses. When analyzing RPM's third quarter results it's important to keep in mind the seasonally low nature of this period. While the percentage differences can be big, it's important to keep in mind that year-over-year on a consolidated basis EBIT was down $1.2 million and earnings per share was down year-over-year excluding asbestos costs by $0.01. If you adjust for the adoption of FAS 123, deliberately higher interest costs, and a higher tax rate in the quarter, on an apples-to-apples basis we would have been $0.01 or $0.02 ahead of last year as opposed to behind.

Though either way, given the seasonally low nature of our third quarter, it doesn't make a big difference on the full year. You will also note in our release, and we would be happy to answer your questions, on the impact of the EITF 04-8 accounting change for convertible securities. The effect of this accounting change will be to reduce reported full year diluted earnings per share by $0.06 per share. We will also restate last year at the diluted EPS basis comparably. While this is certainly a change from an accounting appearance perspective, the underlying economics of this security have not changed at all. This is a strong five-year issue -- with a five-year put, 2.75% fixed rate debt and it would only be dilutive in the event that RPM stock exceeds $22.41, at which time I look forward to explaining that dilution to our shareholders. Before Glenn Hasman provides the details of our third quarter, I'll address our asbestos costs for the quarter.

Our gross cost for the quarter were $21.9 million versus $12.2 million in last year's third quarter. We secured dismissals and settlements of 206 claims versus 156 in the comparable period of last year. Of the $21.9 million, the vast majority of these third quarter costs were associated with a significant number of Madison County, Illinois, meso settlements. Active cases for the quarter were 8,259 versus 4,652 cases in last year's third quarter. Consistent with the last several quarters, the vast majority of the year-over-year increase involved nonmalignancy filings in Florida in last year's fourth quarter. New filings in Florida have virtually stopped. Our overall case filing activity continues to be focused on the same five states, Florida, Illinois, Ohio, Mississippi and Texas. These states continue to account for over 80% of our active cases and nonmalignancy claims represent 90% of our filings.

As I've indicated in prior calls, there has been and will continue to be volatility in our asbestos costs on a quarter to quarter basis. This quarter was no exception. It is in our opinion important not to draw conclusions about a run rate for one quarter. In fact as we look forward at the fourth quarter it's very likely that our cost and case load will be half of the quarter that we just reported. This variability is in part why we announced last quarter that we would be evaluating and, as necessary, adjusting our asbestos reserve on a quarterly basis. Mindful of our most recent experience, our outlook for costs in upcoming quarter will be based on the review of our claims at hand. Despite the increased costs in this quarter we are confident in our underlying litigation strategy and reserve philosophy and we see no reason to change. We continue to see good underlying trends in our rates of dismissals and in terms of average settlement costs for our most severe cases. These factors are going in the right direction and will, over time, produce meaningful results in terms of lowering our overall cost and expense.

We are also seeing for the first time a slowing of the rate of new cases being filed. The year-over-year increase in active cases, while still significant, is well below the rate of the year-over-year increases in prior quarters. Based on this experience, factoring in the new cases received during the quarter and considering our outlook for the fourth quarter, including defense costs we have increased our reserves this quarter by $15 million. This adjustment will bring total asbestos reserves to 96.3 million which we believe adequately covers our existing pool of claims, which is roughly about a 24 month time cycle given the time of receipt of initial claim to its ultimate expected resolution. We will continue to openly communicate with you about our cases and cost activity each quarter and we'll adjust our reserve quarterly based on our experience. It continues to be our expectation that you will see quarterly reserve charges and the total level of reserves decline over time but we cannot say with any certainty whether we will see this relatively quickly relative to some type of Federal legislation or over a longer decline of this tail liability. Either way, we will continue to manage this issue in the best long-term interest of RPM stockholders.

With those comments, I would like to turn the call over to Glenn Hasman, RPM's Vice President Finance and Communications, to provide you the details on the quarter.

Thank you very much, Frank, and good morning. We first want to remind everyone that our reported comparative results for this third quarter and first nine months and the comments that follow reflect this year's new classification of co-op advertising expenses as a reduction of net sales, as opposed to the previous classification as a component of SG&A expense. Prior periods have similarly been reclassified for comparative purposes. The adjustment to last year's third quarter being $6.8 million. The nine-months, a year ago, $24.2 million. And we also want to remind everyone, again, that this change has no effect on our earnings measures such as our earnings before interest and taxes, our net income or our earnings per share Also, since Frank has further reviewed the asbestos charge we've taken this quarter, the comments that follow will refer to only our adjusted operating results before the asbestos charge.

On the income statement for net sales for the third quarter, net sales grew 8.9%, or $42.4 million year-over-year, to a record third quarter sales level of $516.3 million. The organic sales growth amounted to $29 million of that, or 6.1%. Three acquisitions during their first year, net of a small divestiture during this year's first quarter, added $7.3 million or 1.5% to net sales growth. And net favorable foreign exchange contributed the remaining 1.3%, or $6.1 million, mainly against the Euro and the Canadian dollar. Our industrial segment net sales of $293.1 million grew $28.4 million or 10.7% over last year's third quarter. The organic industrial segment growth was $16.3 million or 6.2%., plus $4.7 million or 1.8% growth from net favorable foreign exchange. The balance of the industrial growth came from three acquisitions including two standalone businesses in Europe, which added $8.4 million to this net sales growth., offset by $1.1 million from the small divestiture this year during the first quarter. The consumer segment net sales were $223.2 million, which grew 6.7% or $14 million over last year's third quarter. The organic consumer segment growth was 6% or $12.6 million, plus an additional 0.7% or $1.4 million from net favorable foreign exchange.

Moving to the gross profit line. Our gross profit margin was 40.9% this third quarter, off from 43% a year ago. This 210 basis points net margin reduction is the result of continued higher material costs, as Frank mentioned, which impacted this margin by approximately 340 basis points and which more than overcame increased contribution from price increases again this quarter and benefits derived from the leverage of the higher product sales volume.

Higher petroleum based material costs such as epoxy and polyester resins, acetones, plastics, asphalt, certain polymers and solvents, and steel pails, continue to impact our results and these higher cost are continuing. Although more of our own price increases took effect this quarter and we anticipated the possibility of further reducing our year-over-year gross margin decline, our higher selling prices were outpaced by the material cost increases, causing the year-over-year gross margin decline to, unfortunately, widen a bit further this quarter. Our businesses continue to negotiate and implement their own price increases and these will continue to phase in to help compensate or recover these higher costs, in order to preserve margins.

The industrial segment gross margin declined quarter over quarter to 42.5% from 43.5%. This 100 basis points margin decline is principally the result of a lower margin mix of sales among the industrial product lines, such as lower roofing product sales, along with net higher raw material costs.

The consumer segment gross margin quarter over quarter also declined, to 38.7% from 42.4%. The 370 basis points margin decline was principally due to higher raw material and packaging costs which impacted this segment by 570 basis points during the quarter, along with a slightly lower margin mix of sales among the consumer product lines which were partly offset by price increases.

On SG&A expenses, these were improved on sales by 160 basis points to 37.8% this year from 39.4% a year ago. This improvement mainly reflects the leverage benefits from the organic sales growth and continued controls over general spending which more than compensated for continued higher fuel-related distribution costs, and additional costs recognized due to our early adoption of FAS 123 this year and our new omnibus equity incentive plan. Industrial segment SG&A at 38.3% of sales this year, was lower than last year's 39.7%. That 140 basis points of improvement essentially reflects the leverage of this segment's solid organic sales growth combined with spending controls. Consumer segment SG&A at 33% of sales this year, also was lower than their 33.9% last year, 90 basis points of improvement, which reflects also the leverage of this segment's solid organic sales growth, combined with spending controls, partly offset by certain growth related investments. The corporate/other piece decreased to $9.3 million in this year's third quarter from $10.5 million a year ago. Higher corporate governance costs, principally Sarbanes-Oxley section 404 compliance in and additional costs related to this year's adoption of FAS 123 plus our new omnibus equity incentive plan, were more than offset by reduced insurance costs this year and lower spending levels.

Moving to our EBIT or earnings before interest and taxes. Total EBIT declined this quarter by 7.3%, or 50 basis points on sales, reflecting the impact of that 340 basis points from higher material costs, largely offset by the additional earnings from the 8.9% higher sales volume, increased pricing benefits, and cost reductions. The industrial segment EBIT was up $2.3 million or 23%, a margin of 4.2% of sales compared to last year's 3.8%. The consumer segment EBIT was down $4.8 million or 27.1%, a margin of 5.8% on sales compared to last year's 8.5%. Combined, our operating EBIT declined a total of $2.5 million, or by 9.1%.

Our interest expense, net this third quarter was up $0.8 million year-over-year. This reflects essentially higher interest rate costs, the result of deliberate floating to fixed rate refinancing through our December, 2003 sale of $200 million 6.25% notes and the September, 2004 sale of $200 million 4.45% notes,which were concurrently swapped back the floating rates, to pre-fund our $150 million 7% Senior Notes coming due June 15th of this year. Our average rates this year in the third quarter were 4.9% overall compared to last year's 4.5%.

The tax rate from the third quarter increased to 37.5% compared to last year's 35.5%, which mainly reflects certain changes in the geographic mix of earnings year-over-year. Our net income reached $4.5 million or declined $1.5 million or 24.8% from last year,. The margin on sales declined to 0.9% versus 1.3% last year, reflecting the much higher material cost. Our diluted earnings per share reached $0.04 per share versus last year's $0.05, or down 20%.

Now, as Frank mentioned, I will give some highlights of the nine months results, then we'll move to the balance sheet and the cash flow statement. For the nine months. net sales grew 10.1%, $164.8 million over a year ago, to a record first nine month sales level of $1.8 billion. The organic part of that growth was $118.5 million or 7.2%. Five acquisitions during their first year, net of the small divestiture this year, added $24.1 million or 1.5% to that growth. And net favorable foreign exchange contributed the remaining 1.4%, mainly, again, against the Euro and the Canadian dollar. The industrial segment net sales was $1.024 billion, which grew $112 million or 12.3% over last year's first nine months., the organic part of that being $73.5 million or 8.1%, plus another 1.8%, or nearly $17 million from net favorable foreign exchange, with the balance of their growth coming from four acquisitions including the two standalone businesses in Europe, which had the remaining almost $26 million, offset by $4 million from the first quarter divestiture. Consumer segment net sales of nearly $778 million grew 7.2% or $52.5 million over last year's first nine months, the organic part of that being 6.2% growth, plus another 0.7% or $5 million from net favorable foreign exchange. The balance of the consumer growth came from a bolt-on product line acquisition made last fall.

Gross profit through nine months. The margin of 43.1%, compares to 44.5% a year ago. This 140 basis points net margin reduction is principally, again, the result of continued higher material costs which have impacted this margin year-to-date by 210 basis points, partly offset by mainly additional price increases and the leverage of the 7.2% higher organic sales volume.

SG&A expenses through nine months are improved 150 basis points to 33.3% from 34.8% a year ago. This mainly reflects the leverage benefits from that strong organic sales growth and ongoing cost controls with higher fuel related distribution costs, our adoption of FAS 123, in combination with our new omnibus equity incentive plan and certain growth related investments, partly offsetting these percentage of sales gains.

EBIT through nine months shows 11.6% growth representing the net positive results of the 7.2% higher organic sales volume, pricing benefits and cost controls more than compensating for the nearly 300 basis points of margin reduction from the higher material costs, distribution costs and increased compensation and other growth related investments resulting in an EBIT margin through nine months of 9.8% of sales compared with 9.7% a year ago. The industrial segment EBIT through nine months is ahead $18.4 million or 19.2%. That's a margin on sales of 11.2% compared to a year ago's 10.5%. The consumer segment, on the other hand, was down $1.4 million through nine months or 1.5%, a margin of 11.6% of sales compared to a year ago's 12.7%. Combined, our operating EBIT growth totaled $17 million or up 9%.

Interest expense, net through nine months is up $4.7 million year-over-year. Again, this reflects essentially the higher interest rate cost from the deliberate floating to fixed rate refinancings I mentioned., and also to pre-fund the $150 million notes coming due in June at 7%. The average rates overall through nine months are 4.7% this year compared with 3.9% a year ago.

The tax rate through nine months is nearly flat with last year at 35.6% compared with 35.5. Net income of $97.5 million, increased 9.7% over last year. Notably, the margin on sales was flat at 5.4% despite the much higher material cost situation we are faced with. Diluted EPS reached $0.79 per share versus last year's $0.73 or up 8.2% and the contingently convertible securities accounting change, that Frank mentioned, had a $0.03 per share dilutive effect to both nine-month periods.

Now I will move to the balance sheet and again, as we've been doing given our seasonality, I will give you some meaningful comparisons back to last February. Our net accounts receivable are up $41.8 million. Acquisitions account for $2.2 million of that, foreign exchange translation another $5.9 million, the difference of $33.7 million, or 9.5%, is from sales increases in both segments. That compares with 8.3% organic sales growth these past 12 months. So,as a result, days sales outstanding have increased slightly, by about two days overall, year-over-year. Our inventories are up $45.7 million. Acquisitions, net of the divestiture, accounting for $1 million of that.increase. Foreign exchange translation another $5 million. The remaining increase of $39.7 million is attributable to organic growth in both segments, as well as the higher valuation costs given the higher costs we are going through., plus certain strategic inventory builds in light of the higher cost environment and to address certain commodity allocations, which resulted in a days outstanding in inventory increase of also about two days higher overall. Accounts payable were up $29.3 million year-over-year. Acquisitions account for a small fraction of that, foreign exchange translation differences about $2.3 million, the balance of about $27 million is up 18.8% from the combination of business growth and the timing of payments in both segments. And this obviously serves as a partial offset to the $45.7 million inventory increase year-over-year.

Our total debt at February 28th stands at $839 million including our short- term piece, or up $127 million year-over-year. During the second quarter on September 27, '04, we sold $200 million of 4.45% Senior Notes due 2009. Portions of the net proceeds were used to repay outstanding borrowings including our commercial paper program, about $61 million, and $15 million of private placement debt that came due in November. The balance of those proceeds are being held in cash and/or short-term investments until, again, the $150 million 7% Senior Notes come due this June. So for the time being, our total debt to capital ratio is best viewed as a net debt to capital ratio, the net being the reduction of our debt position by the cash position on our balance sheet. As of February 28, '05, our net debt to capital ratio has strengthened to 39.2% from 41.2% a year ago and from 41.1% this past year-end, May 31.

On the cash flow statements, our cash flows from operations were behind those of a year ago, both for the third quarter and nine months, reflecting increased payouts for the asbestos claims, that Frank reviewed, that difference being $6 million after tax in the third quarter, $11 million after tax through nine months, and increased inventory as discussed, as we continue to manage through the much higher cost environment and certain commodity allocations. I will now turn the call back over to Frank Sullivan.

Thank you, Glenn. I’d like to provide some outlook for our fourth quarter and our 2006 fiscal year which begins June 1, 2005. We expect strong revenue growth in the fourth quarter, though we also expect continuing raw material cost challenges. That makes us believe at this point in time that the full year earnings will be up in the neighborhood of 8 to 10%, excluding asbestos costs. We are getting price increases across all of our businesses and expect to see some gross margin recovery in the fourth quarter and certainly in our 2006 fiscal year. For the 2006 fiscal year and beyond we remain excited about our continuing growth prospects, aside from the underlying core growth which we've been reporting throughout this year, there are a number of new areas. These include, from an organizational perspective, some opportunities between our Zinsser and Rust-Oleum business. The president of our Zinsser business retired and we have placed our Zinsser business under the leadership of Mike Tellor, who is also president of Rust-Oleum, and would expect some market synergies and opportunities as a result of this organizational change to start showing up in 2006 and beyond. Also, addressing Rust-Oleum, our Epoxy Shield garage floor coating product line is moving well and in a new area, we are rolling out an installed garage floor coating program in conjunction with Home Depot At Home Services, and are very excited about the prospects for excellent growth in this new category of services at Rust-Oleum in 2006 and beyond.

And the last area that I will touch on is Dryvit, where we are relaunching a residential market program. This is a program that had exciting potential and, as many know, bumped into some problems over some installation issues. Those have principally been resolved. We have a new product marketed directly to the residential market and we are excited about what could be dramatic growth over the coming years in that market segment. These are the few of the new growth opportunities that we are excited about and lead us to believe that we will continue to have robust growth at the end of this year and our fourth quarter and rolling into 2006.

We are now pleased to answer your questions on our quarter or our outlook.

[OPERATOR INSTRUCTIONS] Your first question comes from Silke Kueck of JP Morgan.

Just a couple of questions. How much of your organic growth rate this quarter was price improvements?

I think on the full year, as well as this quarter, it's about 2%.

So your gross margin declined 140 basis points in the first quarter and I think then 90 in the second quarter and now 210 this quarter. What is your outlook in the fourth quarter and what sort of raw materials, what shortages have you seen in terms of raw materials and to what extent have they led to pre-buying of materials? And what's the magnitude on your inventory.

I don't know all of the different raw material areas that we have. A couple areas where we've seen some shortages in terms of allocation would include acetone, which we are now buying in bulk for the first time. And that's in tanker load bulk. And in some cases barge. And shellac which impacts our Zinsser business. Those are the two areas that I am aware of. Beyond that, obviously, we are continuing to experience pretty dramatic price increases. We are -- we have effectively passed on price increases in a number of our industrial businesses for the second time and in a number of our consumer business for the first time effective in January of this year. So we expect to recover some of the margin deterioration in the fourth quarter and certainly as we go into 2006.

We are planning as if oil prices remain in the 50s range and that raw material capacities in a number of areas will continue to be tight. Obviously, it's our belief and it's been our experience that over a full cycle we will recover all the gross margin that we've lost both in consumer and industrial. Although conversely, if we see a dramatic increase in oil prices, as at least one analyst has indicated as possible, then we will continue to address that through price increases. Although it's important to keep in mind that in the industrial segment our lag is about three months, which we can recover pretty quickly, and in our consumer segment our experience is now it's more along the lines of nine months.

I think I have a last one on asbestos. So the $15 million additional asbestos reserves would affectively extend your reserve through the third quarter of fiscal '07. Is that correct?

It's really hard to say. I mean it really covers what we have in hand and our outlook over the next couple of years. But if our current trends hold true you are going to see a fourth quarter that's half of the third quarter we just reported. And as we've indicated for the last couple of conference calls, the good news is with the number of state reforms and for better or for worse some of the different action by participants related to anticipation or possibility of Federal legislation, we are starting to see some volatility. But the level of new case filings is dropping for the first time, really in the history of this liability for us. And that's not only true for us, it's true in a number of other more public areas. So I think the long-term trend is good. The near-term trend for any number of reasons that we've articulated is going to be relatively volatile. So, I think you are going to find some quarters, if you multiply times four, look really, really good and some quarters that if you multiply times four are going to look really, really bad.

Do you have any data like how much of the $22 million pretax costs this quarter were related to settlement costs and what was due to defense costs?

I don't have that data now but it will be -- we disclose that data in our 10(Q) and the 10(Q) will be filed this afternoon.

Thanks very much.

Sure.

Your next question comes Saul Ludwig of KeyBanc.

Good morning, everyone.

Good morning, Saul.

First about the consumer business. Do you have any idea as to, let's say as you went through this year, first quarter, second quarter, third quarter, what your raw material cost increase was in those quarters? Let's say if you look at your raw material bucket?

I don't have an idea as it relates quarter by quarter by quarter. They certainly increased more than we -- than we expected. In the consumer business we had an increase, Glenn, of what?

We had an increase in terms of margin basis points through nine months of 340 basis points.

Through nine months. And we've recovered -- is that on a net basis?

That's just the material cost difference.

And we hope to pick up some of that in the fourth quarter because we do havepricing going into place across all our businesses. The timing has been different, some hit at the end of last year, some is just now being implemented, price increases in our consumer businesses and in many of our industrial businesses a second round of price increases. And I would be mistaken if I said we believe that this run up in raw material prices is over. We don't know, but we will continue to pursue margin recovery across all of our businesses if these raw material prices continue to go up.

What I'm sort of getting at is that since you guys are on FIFO accounting, your raw material cost bill for your fourth quarter is already in place. You kind of know what that is because of your accounting technique. And it looks as though that raw material costs is escalating at a pretty fast rate. What type of price increase -- in otherwards, you gave us some guidance back door for the fourth quarter that you would make around $0.46 a share, what have you. To achieve your full year -- your fourth quarter numbers, what type of price increase do you need in your consumer lines to get to where you want to get to, profit wise.

Saul, it's Company by Company. I think that our expectations for fourth quarter results are based upon what we currently have done. And what we currently have achieved. If we are able get some more price relief, we will have a better fourth quarter and a better '06. If we see another significant round of raw material increases beyond what we've already experienced, starting last year and then again at the beginning of this calendar year, that will be a challenge. But, our expectations for our fourth quarter are based upon exactly where we sit today, both in terms of raw material costs and what we anticipate those will be in the coming months and realized price increases.

Have a question on asbestos. Given your guidance for the fourth quarter of half the third quarter, that would bring the total asbestos cost for the year to $67 million. Do you think directionally next year that should be a lot less or -- . Looking at $67 million relative to your reserves of $90 some odd million, it looks like there's about a year and a half's worth if the $67 million number for this year is repeated.

Yes, our -- I suspect that's right, somewhere in the $65 to $70 million range for the full year. The thing that surprised us this year was the big ramp up in our defense costs. As you are aware we have been taking a number of cases to trial. We have won each one of those cases and will continue to look to do that. But that has really ramped up our defense cost. On a year-over-year basis our indemnity costs should be down and I think that's a good trend. And we would expect to see that trend continue in the coming years. It's been frustratingly slow and part of it has been our fault in terms, and a lot of defendant companies faults, in terms of starting to actually defend in jury trial cases, which has really slowed down the resolution.

But the net effect of these state law changes will have a very positive impact on us in the future. There is now pending in Florida, Georgia and Texas asbestos specific tort reform. It's already been passed in Ohio and Mississippi. So the trend in that regard is good. The one state that remains very problematic and was the most significant contributor to our third quarter cost was, it's not even a state, it's a location, Madison County, Illinois.

You’ve got a new judge there.

We do and we had, in the fall of last year, our first ever Madison County cases dismissed on a venue basis. So even that, on a long-term basis, is positive if in fact the judge in Madison County, Illinois, the new judge, will begin enforcing Illinois state laws that relates to venue.

Thank you.

Thank you.

Your next question comes from Rosemarie Morbelli of Ingalls & Snyder.

Good morning, Rosemarie.

Good morning, all. Could you touch on the trend in demand? We hear from companies that demand is actually picking up in Europe and is still okay in North America. And then yesterday, Shulman announced that they were actual seeing demand slowing down everywhere. What is your experience?

Our experience is demand continues to be good. We had, as I indicated in my opening comments, I think we had a pretty good third quarter in terms of revenue growth, particularly when you look at our industrial businesses, we were up about 11% and it drove 23% improvement in EBIT. I would expect that we would have a comparable fourth quarter and I would hope -- I think year-over-year we are going to be positive on the bottom line in our consumer business although you are still going to see the raw material impact at the gross margin level in consumer. And we've got a lot of new areas that I highlighted just a few of that we are excited about in '06. So, I think we don't see anything changing in the underlying core demand out there and we are hopeful that some of these new areas that we've been investigating and investing in will continue our very strong growth, if not accelerate it in a few areas.

So the challenge that we see for the next year, let's say, is really continuing the challenge of raw material cost recovery. And time will tell. Interestingly enough just here in Cleveland ISG, which is the big steel company, idled a portion of their plant, which was the first time that that happened. And it's related to a slight slow down in some of their demand. So, I don't think that impacts our business so much as I hope that it's one sign that some of the raw material issues that we are facing will be mitigating over the coming months, but time will tell.

You don't think that with the automotive slowing, which obviously that steel company idling a portion of the plant is directly related to, probably, that means in time, means more people out of work. You don't think that eventually it will trickle actually to your paint sales, even roof repairs, as those people don't really have any money to do anything?

Well, we - Rosemarie, we don't serve the automotive OEM directly.

No, but I am talking about the people working there and now out of job, not doing the jobs in the house that they would have done using your do-it-yourself products, fixing the garage, that sort of thing.

I'm not an expert in automotive but I don't know whether there's a real automotive problem in the United States or it's more of a GM problem and again we don't see that impact. Our most cyclical businesses tend to be businesses like Dryvit, TCI, which is in OEM industrial powder coatings, and Day-Glo, all three of those businesses are growing at double-digit rates.

Okay, that is very good. As you expect for material costs to continue to increase, what else can you do within your own operations in order to lower your cost besides counting solely on selling price increases, which are not always accepted very cheerfully, let's say, by your customers.

Well, on a year-over-year basis we still expect to have flat or slightly up EBIT margins despite a significant negative impact at the gross margin level. And we have continued to improve at the plant level. That's really been through the leadership of Paul Hoogenboom from this office and the outstanding work of a lot of our operations' officers and managers at the companies. We've continued to get better, particularly as our revenues continue to grow in the SG&A area, both in terms of reducing costs and focusing our investments on new growth areas. And I'm excited about how that's working out for us and what it means for continuing growth in the coming years. And there are a number of other areas.

For instance, the retirement of our Zinsser president provided us an opportunity to combine our Zinsser and Rust-Oleum businesses, and whether it's taking advantage of the industry leading category management at Rust-Oleum and really applying that to the Zinsser businesses, or taking advantage of the Zinsser sales force, which is truly outstanding, as it relates to serving paint stores and independent distribution with Rust-Oleum products as well. There are a number of areas where we see some cost synergies and a lot of market synergies that will continue to address the questions you're asking.

Do you have a feel for how much you could save or benefit from synergies in the combination of those two businesses?

No.

None at all?

No.

One last question before I go back on queue. When you talk about the end of the year, the full 2005, and look at 8 to 10% above 2004, you are excluding asbestos. Are you also excluding the $0.06 adjustment? In other words, you reported last year $1.21, are we looking at that $1.21 or are we looking at $1.15 once adjusted for FAS 126, whatever the number is.

The $0.06 will have to adjust any EPS estimates that analysts would have out there. On a year-over-year basis it won't make much of a difference in the growth because we will also be required to restate last year's diluted EPS for the accounting change. And that is also $0.06. So it will be $0.06 in each year. I think the -- while it's certainly an accounting appearance change, the underlying economics don't change. In all likelihood this will be a five-year 2.75% fixed rate piece of debt. And if it's not, and the 8 million shares that have been in our footnotes for more than a year, it will only result in dilution in the event that our stock is in excess of 22.41.

So what we are looking for in terms of range, based on your comments, for this year is between $1.24 and $1.26 which is 8 and 10% above 1.15 from last year?

I think generally that's right. We've tried to stick with a guidance that zeroes in on percentage growth on a year-over-year basis for revenues, earnings and earnings per share. You will have to adjust this year and last year at the diluted EPS level by $0.06.

Okay. Great, thanks.

Your next question comes from Craig Kennison of Robert W. Baird.

Good morning, Craig.

Good morning, everyone. First, could you explain further why state law reforms have not been as beneficial as you thought? Maybe just get into the legal strategy and why that is costing more?

The short answer is because,in light of state law changes,which have various effective dates, changed the old law rules that were challenging to defendant companies, as well as the up and down prospects of Federal legislation, the demands for settling cases have gone up dramatically. The good news is the number of cases where those demands can be made are plummeting because in new cases in Texas, new cases in Mississippi, new cases in Ohio under new law are such that, particularly a company like RPM with a real de minimus exposure, can defend itself very easily. Under old law, particularly joint and several liability, which no longer exists in Texas or Mississippi or Ohio, for instance, it's difficult to defend yourself. Whether you were minimally a contributor, or perhaps not even at all, kind of doesn't matter. So the demands for settlement have gone up.

Hence, we've been more willing to actually go in front of juries. We've been successful in those efforts. But as we've learned, that is also an expensive process. And the last comment I would make is that that's the important issue there. Year-over-year, because of these issues, our indemnity costs will be down and the real dramatic increase this year that we didn't anticipate was legal costs, defense dollars.

As I recall you anticipated pursuing this strategy, however, perhaps it's taking longer to fight each of these cases. Is that the incremental negative for you?

A year ago I was under the impression, which was provided by a lot of sharp legal minds, that about this time this year or last summer we would have worked through a lot of that. It turns out not to be the case because the process by which cases are settled and the cost at which cases are settled as it relates to demands changed for all the reasons I mentioned. Because in some cases, old cases are the last bite at the apple with a number of defendant companies. And the activities, the actions of a lot of the participants relative to various state law changes and the prospects of Federal legislation have changed a lot.

If I recall, Frank, you indicated earlier on the call that you thought next year your cost in aggregate may run $65 million, in that neighborhood?

I don't know where they will run next year. As I indicated earlier, we anticipate a fourth quarter that's significant improvement from the third quarter we just reported. And so I think long-term we are very confident the trend in terms of new cases, in terms of cost, is improving. In terms of what our actual experience is, I think it's going to be relatively volatile.

Do you think the $15 million accrual this quarter is appropriate going forward in subsequent quarters?

As far as we can tell. I think that's what we think is appropriate this quarter. And I think we have to go through quarter by quarter and look at our experience and look at some point on a state by state basis our outlook in certain states that have driven massive numbers, tens of millions of dollars per year is going to change to a few million dollars a year. That's our anticipation relative to the impact of these state law changes once we get through these old law cases, particularly in the state of Texas.

Are you still supportive of Federal reform as it's currently laid out?

Yes, we are, and I think the press in the last week or so is actually indicative of the fact that we are pretty close to having a piece of legislation introduced through the judiciary committee. The insurers' letter, that got a lot of play this week, was actually led by AIG who has not abandoned their support for the fair act. They have been an antireform insurer from the start. This week, a group of 200 companies signed a letter, sent to all senators, supporting the legislation. So I think you are seeing a lot of ups and downs in the press in anticipation of what's going to be a bill that's going to come out in the next couple of weeks. And I believe it will get out of the judiciary committee. Where it goes from there, time will tell.

On a different topic, what is the current mix of fixed versus floating debt.

I believe our current mix is 75% -- I'm sorry, 65% fixed and 35% variable.

That's helpful. Finally, can you just comment on the timing difference of price increases that you face in the industrial segment versus the consumer segment? It's my understanding that given your customer base in the consumer segment you are not able to raise prices as easily and maybe just talk about that dynamic?

Sure. We went through -- if you step back, we went through a period of time where there was virtually no inflation. And prior to that we were in a period of time where there wasn't the concentration of power in a lot of places. And so companies were able to pass on price on an annual basis pretty regularly that either covered their cost or improved their margins a little bit. That ability disappeared in the decade prior. So now what you have is companies, RPM included, reacting to raw material price increases. In our industrial businesses, as we get these raw material price increases, we work to pass them on. It's easy to do or easier to do in our industrial market because a lot of it's project work and so you can raise prices on a project aggressively and if you start losing projects because you were too aggressive, you can adjust..

So you can go out with aggressive price increases and then back down if you have to or not back down if you don't. And, as has been our experience this year, we went out with price increases in our industrial segment in the fall of last year. And we've seen a new round of raw material costs increases in the beginning of this calendar year and we are going out, and have gone out, with a new round of price increases in our industrial businesses. And so that's why I think on the one hand there's about a three-month lag time but on the other hand we are able to catch up. In the consumer segment it's much more difficult to get price increases through big customers and they are fiercely focused on maintaining low cost pricing to their customers and consumers, and I think that's been a very important part of overall economic growth, and that continues. Once you get through the ability of convincing these big customers that we have a real problem, we've done everything we can do internally and we are losing margin, and then lastly we are in an environment where they can pass some of the price on to the ultimate consumer, we've been able to get price increases.

If we get hit with a new round of raw material price increases three months after we conclude agreement on raising prices in the consumer area, we don't have the ability, generally, to go around -- go back three months later, like we do in industrial, and get another price increase. At that point in time there's a lag period over which you've got to build up the right information in the marketplace and what's happening and then go back and address pricing concerns on a customer by customer basis.

Is it more a semi-annual or annual as opposed to the three-month cycle in industrial?

It's really hard to say and I say that -- I think it's certainly not -- we don't have the ability to adjust every two or three months. But it will really depend. If $50 plus oil prices make their way to $70 or $80 oil prices, this is going to be a real challenging area for everybody. And then I think you will see the time period at which people try and get price increases shorten up quite a bit. Beyond that I think it is more, as I said in our case, more of a nine-month lag.

Thanks so much, Frank.

Thank you.

Your next question comes from Frank Dunau of Adage Capital.

I got just one question, after all - everything else has been asked. What do you mean by strategic inventory builds?

Strategic inventory build means that, just like it could happen with us, if there is a significant increase in a particular key raw material that is coming on January whatever, if we can buy a meaningful amount of that raw material, which might be 30 days or 45 days in excess of what we would normally carry, and get it at the lower price, once we are convinced that we are going to have to take the price, we will do that in some cases. In other cases, like seedlac, which is a principal raw material in shellac refining which we are the largest of in North America, there have been real shortages. So we've actually gone out, when we think the price is attractive, and bought three or six months worth of seedlac. One other example is in acetone where we are actually buying it by the barge now at dramatically better prices than when we bought it in smaller containers. But invariably you are buying it in bigger quantities.

So, if I look at your inventory on the balance sheet, do you have a dollar amount estimate as to what iconstitutes strategic inventory as opposed to just the normal level?

I couldn't tell you that, Frank. It's not huge but it's not inconsequential. This is the first time in many years that we have not been able to improve our days of inventory. It's for two reasons, principally. One is the strategic inventory buys that you are questioning and the other is just higher valuations, whether it's foreign exchange impact, the higher translated value from a Euro back to a dollar, or just the higher valuations because we are buying raw materials today at a higher price and, particularly in our consumer areas, not getting the recovery right away in selling price.

Okay, thanks.

Thank you.

Your next question comes from Robert Kosowsky, Sidoti and Company.

Good morning.

Good morning. I was just wondering if you can comment on the relative success you've had in raising prices to the non-big box consumer customers?

We try, and particularly in our consumer area across all our businesses, to approach pricing increases on a pretty monolithic basis, particularly as it relates to large customers. We would not provide any favoritism or any advantage relative to trying to get the price increases that we need. And so beyond that, there is really not a whole lot I can add other than it is different in our industrial segment where we can price our products differently based on volume, based on whether we are selling through distributors or selling direct. And so, again, you have more flexibility in industrial businesses than do you in consumer businesses.

Okay. And that's kind of broadly speaking on the consumer segment even for the non-Home Depots of the world?

I think that's correct. I think we approach our customers in the consumer segment in a manner that it relates to these price increases. We have the same challenges across a specific product line related to raw material costs, what we've done internally to mitigate costs, whether it's through greater efficiency or cost cuts, and our ability to help manage higher pricing in the marketplace to the end user.

Okay. And I was also hoping to get a comment on, what are some of the synergies you are going to be looking for Rust-Oleum and, was it Dryvit you're looking to integrate with that, or is it Zinsser?

No, it's Zinsser.

So it'd be kind of like manufacturing synergies or distribution synergies or -- ?

There are little manufacturing synergies. Down the road there could be some significant distribution synergies as it relates to freight costs, which are particularly significant costs for a Zinsser business. Rust-Oleum is the leader in the whole paint space in category management and there's a real opportunity to provide that type of category management expertise across the Zinsser primers and Zinsser wallpaper and preparation products. On the sales force side, Zinsser has an extraordinary sales force that serves the independent paint stores and independent distribution which could really be levered to the benefit of Rust-Oleum who's focus is more on the bigger customers. And so I think they match up very well. And lastly, the ability to approach some of our bigger customers in some new categories in some different areas with the combined strengths of the two businesses are pretty exciting for us.

Do you think -- when do you think we can get some more ideas on the level of synergies you guys could get?

I think as we get into 2006 and into the fall and then, more appropriately, probably the Spring of 2006, we will have a better sense of, both on the sell-side in terms of revenue opportunities and synergies,and on the expense side in terms of cost synergies,where we are.

Okay. So it's still a little ways away.

That's correct.

In terms of the $15 million charge, I think the charge in the second quarter was about two-thirds going towards legal costs with a third going towards settlement. Is it a similar proportion earmarked in this particular reserve?

I think it's about $6 million earmarked towards legal costs and the balance indemnity.

Okay. And the reason for the increase in the indemnity is just because those cases settled maybe sooner than you were presumably thinking?

No, I mean it's -- and actually to a question earlier, the process of settling cases has slowed down. Actually our settlement costs are flat or down versus prior cases. It's just the process of settlement and defending ourself and/or going to court has slowed down the resolution of cases.

Thank you.

Thank you.

Your next question comes from Thien Chew of Goldman Sachs.

I think most of my questions are answered. I just had a couple of questions on the asbestos liability. Are you seeing any trends on a couple of fronts? You mentioned about state law and I guess with the law reforms. Are you seeing some of the new cases actually having some of the trial lawyers moving their cases to other more friendly states? And the second question is are you seeing any changes in the mix between the -- either settlements of new cases between say the mesothelioma situations versus kind of asymptomatics, for example?

No, the mix is still the same. 90% of our cases are unimpaired. In our history of cost to resolve or be dismissed from unimpaired cases is favorable, relatively low. Dismissal rates, especially in meso cases, is in the 50% to 60% range. We are seeing settlement costs on a gross basis trend down, of course case by case is different. And we are actually seeing the incidence of new case filings drop for the first time in our run up of -- over the last four or five years in which we've seen this case load and cost really ramp up. So, the long-term trends are good. We are not seeing any new real -- new venues that are problematic pop up. And that's certainly -- that's the right question to ask and I ask it of our counsel related to this all the time. I think most of the most egregious venues from a defendant perspective have been addressed, Mississippi, Texas, places like that. The last area which continues to be problematic and a significant percentage of our cost is Madison County, Illinois.

Right. Okay. So -- and I guess, just to validate, in recent years the trend has been going down. Has that changed in recent months, just say on the meso side? And I don't know how significant the Owens-Corning ruling was last Friday on that?

The Owens-Corning ruling really doesn't have any bearing on current trends. That was entirely a bankruptcy related argument as to, as far as I understand it, as to the value of their claims and its impact on who controlled what aspect of the bankruptcy. It has no basis in the trends. The only macro information that we see or are privy to are filings against the Mansville Trust and those also, for the first time, are slowing down.

Okay. Thank you.

Your next question comes from Greg Halter of Great Lakes Review.

Frank, I just wanted you to clarify because I know in the past you've had an issue with this, that $65 to $70 million figure that you talked about on the asbestos cost is for this fiscal year? And you did not provide what your thought was for fiscal '06.

That's correct.

Okay.

And again, I would anticipate that it would be less, it could be dramatically less. But we will continue to publish the information and case load and cost quarter by quarter and use that information, as well as the continuing advancement in certain key state law changes, to assess our -- the value of the new cases we get. It's really the only way that we have any -- for instance, Florida. Last year in the fourth quarter we got `several thousand new cases in a few months from one firm. This quarter we got one new case in Florida. And the overall law in Florida is favorable for us and so most, not most, almost all the cases in Florida are unimpaireds and there is a Florida asbestos bill pending in their legislature today which would eliminate the ability of unimpaired cases to be filed in that state going forward and, perhaps, may even be retroactive, I don't know the details of it. Those are the dynamics of -- when we look out to the future

And the 51 decrease -- 51 count decrease in new cases certainly is good to see there.

That's correct. And again the vast majority of that, expensive but good news, was a resolution of Madison County, Illinois, mesothelioma cases.

And you've discussed Dryvit, Day-Glo and TCI being economically sensitive and all growing in the double-digits. Any other segment stars, either in industrial or consumer or companies that are showing any weakness?

No, I mean I think, across the board when you look at our consolidated results, we've had strong revenue even in this third quarter in our consumer business, and core growth is good. We've had strong revenue growth particularly in our industrial businesses. And we see that continuing in the fourth quarter. So broadly, we are doing pretty well. We are seeing a cyclical recovery in some of our more industrial sensitive businesses, like our Carboline coatings business, which is growing at healthy rates in the top and bottom-line, and that's very good to see because that was a business that we think cyclically, relative to big industrial capital spending, was challenged for a three to five-year period. So the near-term outlook is pretty healthy and we remain excited about the outlook for the next couple of years because of some of the new programs that we've been investing in,which should bear fruit on top of the core growth that we have right now.

I know you've commented about capital spending in the past but any change, significant change you see there in '06, either ramp up or ramp down?

I think we will be in the mid $50s (million) for '05. And I think you will see us at high $50s, $60 million in '06, not anything dramatically different in terms of dollars. As I've stated previously, I think we are just one example of why I think in our industrial segment we continue to expect to see good growth. I mean, our -- four years ago our capital spending was $38 million and next year it will be close to $60. While our numbers aren't big, our percentage gains have been pretty big. Fortunately, after a three to five-year period of very low, and in many markets declining, capital spending we are experiencing the benefits of continuing pick up in industrial capital spending in a lot of key areas, oil and gas, chemical, pulp and paper. A lot of basic areas are spending and we don't see that stopping for awhile. One of the raw material issues we are facing is not only the high price of oil, but it's their relative capacity constraints in a number of raw material areas after a five-year plus era of reducing capacity and real challenges in the basic chemical areas, which is now reversed dramatically.

So you won't be too excited by this, but I just see where Jim Rogers looks for higher commodity prices through 2014 or 2022.

We're not any experts, we don't have economists here, but we certainly try and gauge what we see and, I think, one of the factors that we look at is the impact of China on steel costs and chemical costs. Five or six years ago we were an importer of certain chemical raw materials like epoxy resins from Asia. Today, there are North American producers of certain chemical raw materials that are exporting to Asia and specifically China. There is a lot of basic and intermediate chemical production capacity coming up to speed in the Chinese market which will ultimately serve the Chinese market. And it's anticipated that that capacity will come on stream in '07 to '09. So in terms of, again, macro issues, I think those are one of the things that we look at and one factor that has driven our raw materials up. So, I don't -- and I guess my last comment is '07 and '09 is pretty far out there and who knows what can happen in the broad economies in terms of swings and new added capacity. So where oil prices go are just one factor along with capacity issues.

Quick one for Glenn. Do you have the available liquidity?

I can answer that. We have $450 million -- we actually have in excess of $600 million of long-term five-year, we just redid our five-year revolver, committed credit and cash. When you strip out the excess cash, which will be used for retiring the $150 million bonds, we will have in excess of $400 million of long-term committed credit or cash to continue to fund our acquisition program. Certainly our cash flow will be more than sufficient to fund internal growth, asbestos costs, dividends increases, all of that. So that pot of money is really reserved to fund our acquisition program when we find the right opportunities.

And regarding acquisitions, I haven't heard any comments on what the prospects look like there.

We continue to work on good opportunities both in North America and in Europe. And the number of discussions that are ongoing and they're, in many instances, the same ones, without getting into specifics, that we've commented on in the past to say that we've got discussions going on and I would anticipate anywhere from $100 to $200 million worth of acquisitions that might be done over the next 12 months.

That's in cost or sales?

One or the other.

Okay. When I do the calculation on the earnings per share I get $0.77 versus $0.71. You are showing $0.79 versus $0.73. Is that just the share count fluctuations on a quarter by quarter basis?

Greg, I will answer that. That's more a function of partly in the third quarter, for instance, the COCO accounting is antidilutive. So we don't have any change there. Nine months, however, it does take that into effect. And you are going to have some rounding errors and when you sum up the quarters commonly what will happen is the year-to-date versus that sum will be something slightly different due to rounding.

And, Glenn, I missed it, but you talked about some reclassifications. Could you run through those again, quickly?

I think the only reclassification I mentioned was the co-op advertising and those totals, Greg, for the third quarter last year, $6.8 million, and the nine months last year, $24.2 million.

Okay. And on a comparable basis, stripping out the asbestos from your cash flow from operations, what would those numbers be? I mean, can I just go by and take out the $3.6 million and the $24 million?

Well , here -- again, this is Glenn responding, Greg. Excluding the asbestos charge?

Right.

Okay. For the three-month period, the cash flow from operations does not change because, again, these are non-cash charges. But the composition of changes in operating working capital and asbestos related will change. If you want, Greg, I can certainly provide those to you after the call or I can give those to you now.

We'd have to pull them out of the detail.

We can do it later, that's right. That's all I have. Thanks a lot.

Thank you.

You have a follow-up question from Rosemarie Morbelli from Ingalls & Snyder.

When you gave us the 2% price increase as part of the organic growth, is that -- is the number similar for industrial and consumer or did you actually get very little in the third quarter or the nine-months for consumer and it is mostly a part of the industrial pool?

It's more industrial than consumer. And you have to keep in mind our raw material costs -- our price increases really started to take effect in the fall and then again there will be another round, both industrial and consumer, early winter, end of third quarter, fourth quarter. So you are looking at the impact, which is 2% on nine months, which really only reflects a portion of the year. The actual year-over-year price increases that we are getting are somewhat higher than that, for sure.

So we could say that it was probably 1.5% for industrial and only 0.5% for consumer and next quarter we could see 2% on industrial and maybe 1% on consumer, would that be a good way of looking at it?

I really couldn't tell you with the information I have in front of me, Rosemarie.

Okay. When you said that you were seeing no change in demand, does that apply to the same degree to both U.S. and Europe? Or is there a difference between the two areas?

I think it applies to both. I mean, our revenue growth has been more decidedly North American based than Europe. Europe has been improving. But certainly at the beginning of the year, and I think still, we are seeing continuing more robust growth out of North American markets than we are out of Europe. Europe is positive but -- and it's improving but it's not been at the same level as North America.

And you don't see them going right back into the doldrums.

No, I don't see them going right back into the doldrums at all. But they aren't at the same level of growth as we are experiencing in North America.

Okay. And then Dryvit, can you remind us of the size of the commercial business and what the potential on the residential side could be?

I think, without getting into the specifics of a particular business unit, the potential for Dryvit if they had the same market share in residential that they have in commercial, could be double or triple their commercial volume. They could be $300 to $500 million. Now that's not likely but that just gives you one barometer. If they had the same market share in residential siding that they have in commercial siding it could be a $300 to $500 million market,.

What is the market share on the commercial side?

I think in the commercial side we are the leader market share wise, probably 30% or 40%.

That's a lot.

We have the leading market share, the leading brand. We are the most innovative in this area. I think we are the first that's going to reenter formally or aggressively in the residential market and we've got a great management team there that's done a nice job despite some of these legal challenges they faced over the last three years.

And realistically, what do you think your market share could be on the residential side.

I don't know. We went from zero to $20 million in three years and we went from $20 million down to a few million dollars just because of the legal issues. It certainly could be significant. You are looking at, over time, tens of millions of dollars and maybe more.

And then lastly, I see that on the basic number of share basis it looks as though the number is going up about 500,000 shares every quarter. Is that due to your new incentive plan?

No, that's principally the exercise of options by RPM employees.

But the stock hasn't gone anywhere.

The stock hasn't gone anywhere in the last few months. We've had, principally associated with asbestos issues, a lot of volatility over the last so many years and our stock's ranged anywhere from 18 to, if you go back 18 or 24 months ago, $8 or $10

Right. But I am looking at Q1, Q2 and Q3 and the stock, unless I am mistaken, really hasn't gone -- has oscillated between $17 and $18 or thereabouts.

But, again, people could be exercising options that are ten -- our options expire after ten years, so people could be exercising options that are anywhere from a year old to 9.5 years old.

Okay. So, we should look at that particular increase in basic number of shares to continue every quarter more or less?

I think that's probably about right. I mean, I think it's actually a good sign that our employees are exercising options and in many instance sholding them. That was not what we experienced for a couple of years a few years ago.

And lastly, could you give us a feel for what your new incentive plan is, a little more details on it?

Well, our new incentive plan is a combination of restricted stock and options. As we talked about earlier, we have a longer term piece which is specifically targeted at end of '07 with a target of $200 million of net income and $1.75 of earnings per share. We also have an incentive plan every year for the presidents of our major businesses and their top managers, which involves them in either an option or restricted stock plan based upon their meeting their budget. And then those restricted shares are restricted for a period of another three years. So it's a great reward for good performance. It's a retention tool and it's a way to build a broader ownership across the key managers of RPM relative to where our shareholders are. We do not have an option program or a restricted stock program that pays anybody, including me, for showing up. Every one of our programs have some type of performance or earned requirement.

Sounds good. Good luck.

Thank you.

Thanks.

Your next question comes from Andrew Bauer of Stonebrook.

Good morning.

Thanks very much. Just to get an idea of order of magnitude looking forward with the results of all of the state reform on the asbestos cases, can you give us an idea of roughly the number of annual cases that came out of Mississippi, Ohio, Texas and sort of their cost as a percentage of the whole, both before and then what sort of the annual run rate is after the new lawscame into effect?

If you look at, excluding Florida which really wasn't on the map for us until a year ago and showed up in one fell swoop and it's all unimpaireds, and look at our historic cost and case load, between Illinois, Texas, New York and Ohio and Mississippi, you are looking at about 80%, in terms of our case load., and 80% of our total costs. That's actually changed a little bit. The case load hasn't changed but our costs have decidedly been driven over the last two years by the state of Texas and the state of Illinois. And the State of Texas has a state law that went into effect July of '03. And so as we work off old law cases, we have seen a dramatic decline in new filings and new filings of mesothelioma or cancer claims. Mississippi has been exactly the same way, dramatic, virtually nothing relative to their state law changes.

And Ohio has been pretty much the same way. And what that meant for a period of time was that more meso cases were being filed in Madison County, Illinois. Now, with the advent of a judge who will actually apply Illinois venue law, we're even seeing that change a little bit. I hope that answers your question.

Yes. So I guess a quick follow up is when would you expect the last of the grandfathered cases in those three states to be resolved in some way, shape or form?

There's two dynamics that are driving that. One dynamic is the dynamic of stretching those out as long as possible by the plaintiff's attorneys to really try and get as much money in settlements as they can out of it versus our willingness to actually go in front of a jury. And that whole process can stretch a case out for a year or two., versus the dynamics of Federal Trust Fund legislation. And in some instances where plaintiffs believe that that's a real possibility, you have just the reverse dynamic which is, hey, let's make a settlement now before any discussion of settlements is off the table because we now have a Federal Trust Fund legislation in place which removes all asbestos cases from the court system. So you have two very opposing dynamics driving very different action in different states and by different plaintiff's and different defendant's.

Okay. And one last sort of a higher level question. The Company has been very explicit in their sort of growth strategies and targets that I think sort of top-line 5% internal growth, 5% acquisition growth and 12 to 15% EPS growth. Is there anything that you are seeing that changes your views towards that.

Well, we, as we put out in the press release and I commented on this morning, I think this year it looks like our earnings growth, ex the asbestos cost, is going to be more in the range of 8% to 10%.

I meant long-term.

Long-term, absolutely not. Quite honestly, I'm -- my hat is off to our operating people. They've done a heck of a job in managing the most challenging raw material environment this country has seen since the formation of OPEC in the mid 70s. We didn't anticipate that, nor did anyone else. I think we are going to see a flat or slightly up EBIT margin on the full year, which really speaks to the opportunities and improvements we've seen operationally and in costs. And with the growth prospects that we see, some of which I've commented on here, there's nothing that will halt in the next foreseeable couple of years our ability to meet those targets with the exception of a Goldman Sachs analyst $108 a barrel oil price. We don't see that but that's obviously crazy how things there could really make a difference and who knows what would happen then.

Okay. Thank you very much for your time.

Thank you.

Your next question is a follow up from Saul Ludwig of KeyBanc.

Frank, one thing was good that you said that in Florida you had just one new case in the second quarter?

That's correct.

That's great. Was that down a lot from the number of new cases that you had in the previous quarter?

In the third quarter, Saul, not the second quarter. But, it's down a lot for a number of reasons. The cases that were filed against us last year were being dismissed, in some cases one at a time and in other cases handfuls.

These are new cases filed?

That is correct but, again, one of reasons I think that we are not seeing the increase in cases is that all the cases that were filed a year ago, before which Florida wasn't really on our radar screen, were unimpaired cases. And we made the statement then and we've stuck to it that they were, in some cases, improperly filed, they were not cases that were going to cost us a lot of money, and that they were cases we could get dismissed from and that's the case. And most of the plaintiffs' attorneys out there are very rational and when they bump into cases that there is no basis, it turns out, for the filing or they are dismissed relatively easily, they move on. And you have a court in Florida that is also discouraging the filing of frivolous, unimpaired cases or in this case particular cases that aren't properly filed from a venue perspective in Florida.

Here's where I was going with this question. You had 942 new cases filed in the third quarter that just ended. In the second quarter you had 993 cases filed. So there was a decrease of 51 cases, as someone pointed out. But if in the 993 cases in the second quarter there was a large number of Florida cases, if we excluded the Florida cases, it would appear that there was -- is it correct to deduce that non--Florida cases have seen an uptick?

I think somewhat over the last couple -- over the last couple of years that's correct. Over the last couple of quarters, I think we are relatively flat. When you strip out the difference between our indemnity costs and our legal costs, which we are now providing in our Qs, I think you will see higher legal costs, defense costs and indemnity costs that have flattened out. And we expect for the trends that we have talked about, including a more aggressive defense posture, to see those indemnity costs decline.

Great. Thank you very much.

Thank you.

Gentlemen, you have no further questions at this time.

Bernie, thank you. And thank you to everybody for participating in our third quarter conference call. We remain excited about what is a very good growth prospect across all of our businesses and what will be a significantly improved fourth quarter versus the challenges that we faced here in our third quarter. And we look forward to reporting to you the results of our fourth quarter and our year-end, which should be good both in the revenue and the earnings perspective, excluding the asbestos cost. And we will also provide any updates related to legislative activities that come out in the coming months. Thank you very much and have a great day.

Ladies and gentlemen, thank you for your participation in today's call. This concludes the call. You may now disconnect.