RPM International Inc (RPM) 2005 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to RPM International's conference call for the fiscal 2005 fourth quarter and year end. 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. That is www.rpminc.com. A taped telephone replay will be available two hours after this call concludes at 8 PM Eastern time on Monday August 1st and can be accessed by dialing 888-286-8010 or 617-801-6888. The confirmation code is 77574714. A webcast replay and written transcript will also be made available through the RPM website. The webcast replay will be available approximately two hours after this call ends. The written transcript will be available within 24 hours after this call concludes.

Comments made on this call may include forward-looking statements based on current expectations that involve risks and uncertainties which could cause the results of RPM to differ materially from management's current expectations. For more information on these risks and uncertainties, please review RPM's quarterly earnings releases and periodic reports filed with the Securities and Exchange Commission.

The information in this conference call related to projections or other forward-looking statements may be relied upon subject to the previous Safe Harbor statement and may continue to be used while this call remains on the active portion of the RPM website.

During this conference call RPM spokespersons may reference non-GAAP financial measures to assist you in understanding such non-GAAP terms, as well as to comply with SEC requirements. RPM has posted reconciliations to the most directly comparable GAAP financial measures, including disclosure on the reasons for the use of non-GAAP measures on the Company website in the investor relations section under webcast/presentation.

Following today's presentation, there will be a question-and-answer session. (OPERATOR INSTRUCTIONS) At this time I would like to turn the call over to RPM's President and Chief Executive Officer, Mr. Frank Sullivan, for opening remarks. Please proceed, sir.

Good morning. I'm pleased to report another year of record growth delivered by the RPM associates. We're conducting our conference call today from the New York Stock Exchange where we will also host a year-end luncheon for analysts and investors. We have been releasing our year-end results from New York for more than 30 years, and it's a tradition that RPM is proud to continue.

For our 2005 fiscal year we had great results given the challenges faced throughout the year, particularly from an EBIT perspective where consolidated EBIT increased 12.4% before asbestos charges, and our industrial segment EBIT which increased nearly 20% on a year-over-year basis, outpacing our consumer segment, whose EBIT was up 3%, which is no small accomplishment this year given the huge raw material cost increases faced throughout the year and which we are hopefully starting to overcome. The results this year once again demonstrate the importance of our very deliberate strategic balance between consumer and industrial businesses that allow for continuing record growth in spite of various and different economic environments.

While our strong EBIT performance did not translate to an equal net income or EPS growth rate, first and foremost because of our asbestos costs which I will address in a minute, there were three other reasons which will be mitigated or moderated next year. The first was our adoption of FAS 123, in conjunction with our new omnibus equity incentive plan, which cost us approximately $0.03 per share versus the prior year. Secondly, we incurred higher interest costs year-over-year which will not continue in 2006 related to our core business. And lastly, we had a higher tax rate, principally related to our inability to pick up foreign tax credits, as well as the negative impact of the tax law passed in the fall, the American Jobs Creations Act, and the elimination of the FSC (ETI) which will be made up for by a manufacturing credit, again which should make this a less impactful factor for our 2006 fiscal year.

Before Glenn reviews the details of our fiscal year results and the fourth quarter performance, I'd like to offer a few general comments on our asbestos liability challenges. Although there will continue to be quarterly volatility, we believe our annual asbestos costs are reaching a plateau and should decline over the long run. Our fiscal 2005 costs were up 6.3% over fiscal 2004, which is a much lower increase than the 16 to 17% increase- we experienced in 2004 versus 2003. Year-over-year settlement costs were actually down 15%, though this decline was offset by higher defense costs. When comparing fiscal 2005 to fiscal 2004 on a gross basis, because we still had the benefit of some insurance in 2004, total asbestos costs this year were $67 million versus $63 million in the prior year. That $67 million was made up of $47 million of indemnity and 20 million of defense costs. In the prior year the $63 million of total asbestos cash costs was made up of $55 million of indemnity and 8 million of defense costs. We expect our more aggressive defense posture to continue to mitigate, or overtime decrease, our indemnity costs as we go forward.

Overall dismissal rates have increased year-over-year and settlement costs in five key states were actually down 27% versus last year. The pace of tort reform accelerated in 2005 with Florida, Georgia, Missouri, South Carolina and West Virginia each enacting various medical criteria venue reform, more proportional liability laws, and we expect over time to see filings and costs in each of these states decline.

A ruling in federal Court in Texas will also advance investigation into asbestos and other related litigation. And just this last week it was unveiled that there was a federal prosecutor in the District of Manhattan investigating fraud against three of the most prominent asbestos plaintiff firms in the country.

Federal trust fund legislation passed on a 13 to 5 vote out of the Senate Judiciary Committee, so this faces near-term timing challenges relative to the Supreme Court nomination. We think at best the floor time for possible consideration of the Fair Act in the Senate will come this fall.

As we have indicated earlier, there has been and will continue to be some volatility in our asbestos costs on a quarter-to-quarter basis, and this quarter was no exception. Overall rates of nonmalignant filings have come down steadily this year from a year-over-year increase of 63% in the first quarter to 11% increase in the fourth quarter. Importantly, we saw cessation of new case filings in Florida where a combination of judges dismissing cases for improper venue and a new adoption of an Ohio-like medical criteria law has made Florida a far less attractive asbestos filing jurisdiction. Active cases in the fourth quarter and at year end were 8,646 versus 5,913 at the end of last year.

Non-malignancy claims still represent 90% of our filings. Our gross costs in the fourth quarter were $11.1 million versus $15.3 million in last year's fourth quarter and $22 million in the preceding third quarter.

Based on this most recent experience and factoring in new cases received during the quarter, we took a $16 million pretax charge in the fourth quarter to increase our reserves. This brings our total asbestos reserves to $101.2 million, which we believe adequately covers expected resolution costs for existing claims.

In closing, we will continue to openly communicate with you about our cases and cost activity in each quarter as we always have, and we will adjust reserves on a quarterly basis as appropriate.

Now I would like to turn the call over to Glenn Hasman to provide you the details of our fiscal year results and our results in the fourth quarter, after which I would be pleased to answer your questions.

Thank you very much, Frank, and good morning to all. We first want to remind everyone that our reported comparative results for the full year and the fourth quarter and the comments that will follow reflect several accounting changes that took place this year, two of which have been retrospectively applied and one of which has not.

First, was this year's new classification of co-op advertising expenses as a reduction of net sales as opposed to a previous classification as a component of selling, general and administrative or SG&A expenses. Prior periods have been similarly reclassified for comparative purposes, and those changes were $9.9 million in the fourth quarter of fiscal '04 and $34 million for the full year of fiscal '04. And we again want to emphasize that this change has no effect on any of our earnings measures such as our earnings before interest and taxes, or EBIT, net income or earnings per share, or our cash flow.

The second of these changes was our retrospective adoption of EITF- 04-8 relating to contingently convertible debt which had the effect of reducing full-year 2004 diluted earnings per share by $0.06 to an adjusted $1.16 from the originally reported $1.22 and fourth-quarter 2004 diluted EPS by $0.02 to an adjusted $0.43 per share.

The third and most recent change was prospective only in the way we account for certain consumer merchandising services. The income statement effect of this change is the reduction of net sales along with gross profit with a related reduction of SG&A expenses.

Also, since Frank has further reviewed the asbestos charges we've taken this quarter and fiscal year, the comments that follow will refer to only our adjusted operating results before these charges.

I will begin with a review of our P&L results, followed by highlights from our balance sheet and cash flow statements.

Beginning with the fiscal year income statement and net sales, this year's net sales grew 10.8% over a year ago to a record sales level of $2.556 billion. Organic sales growth amounted to 8.1%. Pricing was 1.9% of that. Eight acquisitions during their first year with RPM net of the small divestiture that took place during the first quarter of this year added 1.3% to net sales growth and favorable foreign exchange contributed the remaining 1.4%, and that was mainly against the euro and the Canadian dollar.

The industrial segment net sales of $1.442 billion grew, speaking of 168, $168 million, or 13.3% over last year. Organic industrial segment growth was 9.4%. Their pricing was 1.3% of that, plus another 1.9% for favorable foreign exchange.

Of note, the following industrial product lines all experienced 10% or stronger year-over-year internal growth -- construction sealants, chemicals and admixtures and exterior insulating finishes, all largely due to increased US commercial construction; powder coatings, roofing, including services, and corrosion control coatings.

The 2% balance of industrial growth came from six acquisitions, partly offset by that first quarter divestiture.

Consumer segment net sales of $1.114 billion grew 7.7% over last year. The organic consumer segment growth was 6.6%. Pricing of that was 2.6%, plus another almost 1% from net favorable foreign exchange.

The following consumer product lines all registered 5% or stronger year-over-year internal growth for the fiscal year -- wood care products, small project paints and coatings, primer sealers and caulks and sealants.

The balance of consumer growth came from two bolted-on product line acquisitions.

Moving to the gross profit line, gross profit margin was 43.3% this year, off from 44.7% a year ago. This margin reduction is principally the result of continued higher material costs during the '05 year, net of pricing initiatives, with the difference attributable to certain changes in sales mix including increased services sales which carry lower gross margins.

The industrial segment gross margin declined year-over-year to 44.8% from 45.7%, again mainly higher material costs net of pricing initiatives, plus some differences in sales mix, namely the continued growth of lower-margin services business and generally lower margin acquisitions, which were partially offset by the positive leverage of their 8% pure organic sales growth.

The consumer segment gross margin also declined year-over-year to 41.3% from 43.4%, mainly higher raw material costs and packaging costs here again, net of pricing initiatives, plus changes in sales mix and also partially offset by the positive leverage of their 4.0% pure organic sales growth.

Moving to SG&A expenses, those were improved 150 basis points on sales to 32.5% from 34% a year ago. This mainly reflects significant leverage benefits from the 8.1% organic sales growth and ongoing cost controls, in spite of higher fuel-related distribution costs, our adoption of FAS 123 this year in conjunction with the new omnibus equity incentive plan, which Frank mentioned, and certain growth-related investments. Both segment's SG&A also improved as a percentage of sales -- industrial to 33.2% of sales compared with 34.7% and consumer to 28.1% of sales from last year's from 29.7%, reflecting principally the leverage of both segment's strong organic sales growth, combined with cost containment and savings programs, partly offset by the higher distribution costs, some increased compensation and other growth-related investments.

Corporate/other expenses increased to $38.1 million this year from $36.7 million a year ago. This is mainly FAS 123 related, as well as higher costs related to corporate governance, principally the ramp-up costs surrounding Sarbanes-Oxley Section 404 compliance, which were largely offset by lower insurance costs and other expense reductions in the corporate/other category.

Moving to EBIT, 12.4% adjusted EBIT growth this year represents the net positive result of our 8.1% organic sales growth, pricing initiatives and cost controls more than compensating for nearly 300 basis points of combined margin impact from higher material and distribution costs, resulting in a slight but notable EBIT margin gain to 10.8% of sales.

Again, speaking of 168, the industrial segment achieved EBIT of $168 million, which is up 19.6% for a margin on sales of 11.7% compared with last year's 11%. And the consumer segment EBIT grew 3.1% for a margin on sales of 13.2% compared to last year's 13.8%.

Moving to interest expense, net, these expenses were up $6.4 million year-over-year. This reflects mainly higher interest rate costs year-over-year on average, partly the result of debt refinancing through our December 2003 sale of $200 million, 6.25% notes and the September 2004 sale of $200 million 4.45% notes, this latter issue earmarked principally to prefund our $150 million 7% senior notes that matured June 15, 2005. On average, the rates this year were 4.9% compared with 4.1% last year. The balance of the increase in interest expense year-over-year is from temporarily higher debt levels since that September 2004 issue to prefund the maturing 7% notes.

Our tax rate was 36.1% this year compared with 34.8% a year ago. As Frank had mentioned, this reflects changes in our international mix of earnings, resulting in certain valuation allowance requirements based on limitations on our being able to fully utilize our foreign tax credits, as well as the loss of certain benefits under the American Jobs Creation Act.

Net income as adjusted reached a record $154.5 million, which increased $12.6 million or 8.9% over a year ago. Diluted earnings per share as adjusted reached a record $1.25 per share compared to $1.16 a year ago, up 7.8%.

It's important to note first that the COCOs, or the contingently convertible debt change, was $0.06 dilutive for both years; and second, that this year's EPS results would have been approximately $0.03 higher before our early adoption of FAS 123.

Now I'd like to make some comments on the fourth-quarter results. Net sales here grew 12.4% year-over-year to a record fourth-quarter sales level of $754.4 million. The organic sales growth this fourth quarter amounted to 10.3%. Pricing was 3.2% of that. Five acquisitions net of the small divestiture added 0.6% to net sales growth, and favorable foreign exchange contributed the remaining 1.5%, mainly against the euro again and the Canadian dollar.

Industrial segment net sales grew 15.6% over last year's fourth quarter. The organic part of that was 12.5%. Pricing in the industrial segment for the fourth quarter was 2.7% of that, plus 2% growth from favorable foreign exchange. Of note, the following industrial product lines all registered 10% or stronger internal growth this fourth quarter -- construction sealants, exterior insulating finishes, and admixtures and related chemical products, all again largely due to increased US commercial construction and certain market share gains; corrosion control coatings, roofing, powder coatings and fiberglass reinforced plastic grating, or FRP. The balance of industrial growth came from four acquisitions, partially offset by that small divestiture.

Consumer segment net sales reached $336.4 million, which grew 8.7% over the year-ago fourth quarter. The organic part of that was 7.7%. 3.7% of that was pricing, and another 0.9% came from net favorable foreign exchange. The following consumer product lines all registered 8% or stronger internal growth during the fourth quarter -- primer sealers, wood care products, caulks and sealants, and small project paints and coatings.

Moving to gross profit, the margin this fourth quarter, 43.7%, compared with 45.1% a year ago. This margin reduction is the result of continued higher material costs, net of increased pricing contributions this quarter with the balance of the margin reduction due to differences in sales mix, including increased services sales which do carry lower gross margins. Higher material costs such as epoxy, polyester and acrylic resins, acetones, plastics, asphalts, certain polymers and sealants -- and solvents rather, and steel pails, many of which are petroleum-based, continue to impact our results and these higher costs are still continuing. Our businesses continue to negotiate and implement their own price increases and more are being phased in, in the coming months, to help compensate or recover these higher costs.

The industrial segment gross margin declined quarter-over-quarter to 45.6% from 46.2, this margin declined principally as the result of a lower margin mix of sales among the industrial product lines and from net higher raw material costs.

The consumer segment gross margin quarter-over-quarter declined to 41.5% from 43.8%, mainly due again to net higher raw materials and packaging costs and a somewhat lower margin mix of sales among the consumer product lines.

SG&A expenses this fourth quarter improved 160 basis points on sales to 30.4% from 32% last year. This improvement mainly reflects the leveraged benefits from the organic sales growth, continued controls over general spending, and a change in accounting for merchandising services, which collectively more than compensated for continued higher fuel-related distribution costs and additional costs recognized due to our early adoption of FAS 123. Both segments' SG&A improved as a percentage of sales, industrial to 32.7% compared to 33.9%, and consumer down to 24.6% from 27.4% a year ago, reflecting principally the leverage of both segments' strong organic sales growth combined with spending control during the quarter.

Corporate/other expenses increased in the fourth quarter to $10.3 million from $7.6 million, again reflecting this year's adoption of FAS 123 and higher corporate governance costs, principally those ramp-up costs again surrounding Section 404 compliance.

Adjusted total EBIT grew this quarter by 13.9%. That's up 20 basis points on sales, reflecting leveraged earnings from the 12.4% higher sales volume, increased pricing benefit and cost reductions, collectively more than offsetting 320 basis points of margin impact, mainly from higher material costs, which resulted in improved EBIT margin of 13.3% of sales from 13.1% last year. The industrial segment EBIT grew 20.5%. That's a 12.9% margin on sales compared to last years 12.3%. And the consumer segment grew 11.5%. That's a 16.9% margin on sales compared to last year's 16.4%.

Interest expense net this fourth quarter was up $1.7 million for essentially the same reasons as mentioned for the full fiscal year, with 5.1% average rates overall this year in the fourth quarter compared to 4.6% a year ago.

The tax rate this fourth quarter of 36.8% compares with 33.6% last year, also higher for the same reasons mentioned for the full fiscal year.

Net income as adjusted reached a record $57 million, increasing 7.7% from last year. Diluted earnings per share as adjusted reached a record $0.46 per share compared to last year's $0.43, or up 7%. Important to note again, first that the COCOs accounting change was $0.02 dilutive to both fourth quarters; and second, that the fourth-quarter EPS results this year would have been approximately $0.01 higher before early adoption of FAS 123.

I'd like to make some comments now on the balance sheet. Our net accounts receivable were up $64.9 million compared to a year ago. Acquisitions accounted for $1.3 million of that. Foreign exchange translation accounts for $4.5 million of that difference. And sales increases in both segments account for the balance of the increase, or 12.1%. That compares with 10.3% organic sales growth during the fourth quarter, which resulted in days sales outstanding remaining nearly flat year-over-year.

Inventory was higher by $45 million. The acquisitions net of the divestiture were $0.7 million of that. Foreign exchange translation effect was $2.8 million, and the remaining increase was attributable to organic growth in both segments and the inflated costs of raw and packaging materials year-over-year as the days outstanding in inventory also remained nearly flat year-over-year.

Accounts payable trade up $69.5 million. Acquisitions net had a negligible effect here. Foreign exchange translation differences were $1.6 million. The balance of the increase, or the bulk of the increase, really from a combination of business growth and the timing of payments in both segments, and more than offset the inventory increase year-over-year.

Total debt stood at $838 million at year end, including short-term. That's up $118 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 those net proceeds were used to repay then outstanding borrowings, which included $61 million under our commercial paper program and $15 million of private placement debt that came due in November. The balance of the proceeds were being held in cash and/or short-term investments, until the $150 million 7% senior notes came due June 15. Until that maturity and debt retirement then, our total debt to capital ratio was 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. At May 31, '05, our net debt to capital ratio strengthened to 38.5% from 41.3% at year end '04. Our available liquidity, including the $184 million cash balance stood at $638 million at May 31.

Moving to the cash flow statement, our cash flows from operations were 2% ahead of those during fiscal '04, reflecting the improved operating performance, less $9 million of additional after-tax payments for asbestos claims this year. And the additional debt that shows on that statement reflects the temporarily higher prefunding debt from the September '04 issuance described earlier.

I will now turn the call back over to Frank Sullivan.

Thank you very much. As Glenn noted, our fourth-quarter revenue growth remained strong and our EBIT generation accelerated. As we look toward our 2006 fiscal year, we anticipate revenue growth in the 7 to 8% range with continuing strong growth through the fall of 2005 and somewhat slower growth in the last half of our fiscal year. This should produce core income growth in the 8 to 10% range, which still anticipates continuing raw material cost challenges throughout the year. This income growth expectation is before the impact of the future asbestos costs and the benefit of any acquisition activity.

You'll note we announced the acquisition of Illbruck Sealants this morning. We signed a definitive purchase agreement last week on Friday to acquire this €160 million pan-European sealant manufacturer. We do not expect any impact on 2006 income as a result of the timing of the closing which is expected at the end of August or September, due to the seasonality of the business and some reorganization costs, some of which we will be able to capitalize and some of which we won't, associated with integrating the Illbruck Sealants business with our Tremco European sealants operations. On a full-year basis, for 2007 we should do more than €160 million of revenue, and expect at least $0.03 to $0.05 of accretion in the first full year of the impact of Illbruck on RPM's consolidated results.

Lastly, I'd like to comment on the Sarbanes-Oxley 404 compliance and audit we completed this year with an unqualified opinion, this being our first year of requirements of being in compliance with these new regulatory issues associated with the Sarbanes-Oxley law.

We would now be pleased to answer any questions you have about our year end, fourth quarter or our outlook for 2006.

(OPERATOR INSTRUCTIONS)

Saul Ludwig, KeyBank.

The closing of the gap in the gross margin in the consumer business made good progress in the fourth quarter compared to the 400 or so basis point detriment in the third quarter. Is this a segment where you expect to see further closing of the gap? And would you expect your gross margins to begin to be at least comparable to what they were in fiscal '05, or will there be further detriment in the first half of this year?

I think the fourth quarter represents a combination of productivity gains, some expense issues that we addressed, as well as the benefit of some price increases. And we expect those to benefit us in fiscal '06. We also still expect to see some raw material issues. So I don't think you're going to see a year-over-year difference anything like we experienced in 2005. And we ought to be gaining on it throughout the year, although we still are going to see some raw material inflation as a challenge, particularly for our consumer segment.

Second question, with the selection of a new accounting firm are there going to be any unusual expenses as the new guys learn your Company? And what would you expect your accounting fees to be in fiscal '06 versus '05, if materially different?

We announced about a month ago a change in auditors as approved by our Audit Committee from Ciulla, Smith & Dale, who had audited RPM for nearly 40 years, to Ernst & Young. And we don't anticipate in that transition any issues. Certainly as we go through '06 and future years we will continue to act to address issues not only of a standard audit, but also Sarbanes-Oxley 404 compliance relative to controls and procedures.

Audit fees will be up year-over-year $1 million or so. Of course, we will have a better fix on that a year from now than we do right now. I don't think they will be up significantly different than that though on a year-over-year basis. And I think after working with Ciulla for as many years as we did, they took a very green eye shade approach to accounting and did a great job for us, but as we grow more internationally, evidenced by this Illbruck acquisition this morning, they're just not in a position to continue to support the growth of RPM, particularly outside of North America, and that's what caused the change.

And then just finally, interest expense -- you talked about this temporary bump. What do you see your interest expense being in '06 versus '05?

I think interest expense year-over-year excluding the impact of acquisitions will be flat. We had excess debt, as Glenn mentioned, associated with the fall bond offering. We did retire the $150 million bond that came due on June 15, so we're in good shape there. And we've got a good mix between fixed and floating, so I would anticipate the core interest cost year-over-year would be flat or even slightly down based on debt repayment. And again, that is before the impact of any acquisition costs. And those would be treated separately as it relates to the earnings and cash flow of the acquisition we would pick up.

Thank you very much.

Jeff Zekauskas, JPMorgan.

A couple of questions. The first is a question of clarification. I think on page seven you calculate the diluted EPS at $0.46 and the adjusted net income is $57.033 million and the shares outstanding are 126,973 million. So we get $0.449. Can you reconcile where's the missing penny?

Are you adding back the interest portion there? There's some interest add back that is called for to get that number so that might be what you're missing.

This is an interest add back on which --?

On the contingently convertible debt.

On the contingently convertible debt.

That's what's driving the EPS, the increase in shares, but you do have to add back the interest.

Okay, thank you. Second question is for your -- in current liabilities your asbestos-related liabilities are now $55 million, and I think they were $50 million last quarter, and they were $47.5 million a year ago. So, what led to the increase in liabilities for the coming year?

Principally defense costs. As we noted in the earlier comments, year-over-year our indemnity costs actually declined from $55 million to $47 million. And we anticipate seeing continued improvement. Our dismissal rates are up pretty dramatically. We have been to court now five times with great success so far. And all of that, on the other hand has driven up our defense costs pretty significantly, which year-over-year went from $8 million to $20 million. So that's what's driving that increase, as you can see, both in terms of our quarterly adjustment to the reserves and the absolute level of our reserves.

Thirdly, so what you did is you gave some guidance for next year, and the revenue growth you show is 7 to 8%. This year you guys had just wonderful revenue growth of about 10%. So what's leading to the moderation of growth next year? Is it more on the industrial side or more on the consumer side? Or is it just that you're going up against difficult comparisons?

I think it's a little bit of both. I think we're going up against difficult comparisons in the second half of the year, and at the same time we anticipate some slowing of industrial activity.

Having said that, you should expect to see in our first quarter and into the fall continued double-digit revenue growth, and then from a planning outlook perspective, both because we are expecting a little bit of slowdown in absolute growth and we will be comparing to what has been two real strong quarters on the top line, back to kind of mid-single digit revenue growth numbers in the back half of the year.

Just lastly, what did you pay for Illbruck, or what are you planning to pay for Illbruck, and why is there no dilution next year?

We have not released the sale price of Illbruck. We will provide that and other details at the time the acquisition closes, and that's at the request of the sellers. We paid less than 1 times sales for it. And again, we will provide more details, both in terms of our costs, as well as the anticipated impact on '06, which is really dependent upon the timing and the closing of the transaction, which is likely to be either at the end of August or the end of September.

It will not be accretive, we don't think, to '06 for couple reasons. It's a great fit with RPM, it is a great fit with our business. And therefore, it looks a heck of a lot like us as well, which means it's pretty seasonal. And so we will be picking up this business at a very good cash flow period but at a relatively slow seasonal period going into the winter months, and late winter, early spring. So that's one of the issues.

The second issue is the impact of some synergy here, which we're pretty excited about for the long run. This gives us an opportunity to combine the Illbruck Sealant business with our Tremco European operations. So we're looking at integrating some distribution, potentially some sales offices, and two manufacturing facilities. And to the extent that some of these are Illbruck-related adjustments, we can capitalize some of that. To the extent that they're related to existing RPM facilities, those will flow right through our P&L. We will have positive cash flow and positive earnings on this right off the bat, excluding the impact of any of that.

Okay, thank you very much.

Rosemarie Morbelli, Ingalls & Snyder.

Good morning all. Just as a follow-up, do you have a feel for how much synergies you can get out of the Illbruck acquisition and then what will be the cost of integrating them?

Again, we will be in a better position to address this in September at the time of the closing. I think the most that we're comfortable with right now to give you a sense, and it's €160 million revenue business on an annualized basis, is that as we look at '07, having completed any of the restructuring we're looking at, this business ought to at least be accretive to the $0.03 to $0.05 range on RPM on a consolidated basis. So I think that when you look at its impact on the consolidated $2.5 billion business versus €160 million business that we're acquiring, we have pretty high hopes for our ability to see some good synergies and good, positive impact on cash flow and earnings.

What kind of growth rate do you expect at the top line level? What has it grown in the past when you look at their number? and what are the expectations?

It ought to grow kind of low- to mid-single digits. That's where it's been in the past. They have had positive growth in most of the core major markets in Europe, including Germany, France and the UK, albeit in a couple of percent range, which is bucking the market trends there the last couple of years because particularly this past year in general the economies haven't been real robust. And then, albeit on a small base, they have had very dramatic growth in the plus 20 to 30% in various Eastern European countries, which will continue to be an area of focus for continuing growth.

And then the last piece of that, we believe over time that the real benefit here is some market synergies that will allow us to take advantage of very strong distribution of this rather large business relative to what is about a $50 million to $60 million Tremco European business. So we ought to get some synergies in terms of expanded distribution in different parts of Europe that will help the top line growth; not necessarily the Illbruck products, per se, but Tremco products that are already there.

And then just to beat this to death, is the profitability of that business higher than that of Tremco?

At this point in time the answer is no. Tremco, our sealant business, is very profitable. The average profitability of this business is not higher, but it's something that we feel we can improve on over time.

Then if I look -- and if I got those numbers right -- at the contribution on pricing out of the organic growth, it looks as though you had more success increasing prices in the consumer side than in the industrial side. Can you comment on that? I would have expected the opposite. (multiple speakers) numbers.

Glenn might help me with this, but for the full year on a consolidated basis we had about 1.9% benefit from price increases and then about 3, 3.5% in the fourth quarter. And it was roughly even between industrial and consumer. And so you just saw a pickup in the fourth quarter in part because we really started our price increase activities across most of our accounts in the fall of last year. In some cases we got price increases in the fall; in other instances we didn't get price increases really instituted until after the first of the calendar year.

I'll just add to that. Some of that is that the impact of the consumer segment this year in terms of material costs has been greater. So their pricing was -- needed to be a little bit north, if you will, of the industrial segment to cover those costs.

You feel that you will be able to continue increasing prices and eventually by the end of the next fiscal year offset your raw material cost increases?

I don't know out that far. I can tell you the upside in our projections is -- the reality of how we see 2006 is more continuing raw material challenges across all of our businesses. If those raw material challenges were to mitigate and we achieve the 7 to 8% revenue growth on a core basis that we expect to achieve, then you'll see a significantly better income generation from our businesses. And so the income expectation of the 8 to 10% core income growth really is highly contingent upon our belief that we're going to continue to face raw material challenges in the coming year.

If I understood properly, if raw material costs stabilize so you don't have to give back selling prices, you would grow the net income substantially above the 10% range?

That's absolutely correct.

And then when you look, lastly, when you look at this top line growth for next year, is that the organic portion that you're looking at, or does it include foreign currency? Forget acquisitions -- we don't know about those.

It includes our core growth, which also includes some assumptions about price increases. It really doesn't have an impact from foreign currency, which obviously will help us or hurt us on a translated basis throughout the year depending on what the dollar does principally to euro and the Canadian dollar. And then we will report that as we do every quarter in terms of what impact foreign currency had on us. That's really hard to tell. We do not anticipate as we look out throughout the year much of an impact positive or negative one way or another on foreign currency for us in the coming year.

Okay. I'll get back in queue.

Keith Wiley, Goldman Sachs.

I wanted to thank you for providing more timely information on this call regarding the asbestos details. And there was only one detail that I didn't hear -- the number of dismissals and settlements that you had during the quarter. Do you have that available?

I do. Let me grab that. We secured dismissals of 305 claims versus 177 in last year's fourth quarter.

Great. And then last quarter you had provided sort of a preview to this quarter indicating that you did think payments would come down, which looks like they did. Do you have a preview for the next quarter, or the coming quarter, as to where your payments will be, or a trend? Will they be lower or higher in the next quarter?

I suspect they're going to be higher than the fourth quarter that we just reported. I think they will be somewhat lower than last year's first quarter. The thing that I don't have a good sense for until it's over now and I can give you, and this is good news in the long run, not only was our cost down to $11 million this quarter, but $8 million of that was defense costs. So our indemnity costs in the fourth quarter were down pretty dramatically from last year's fourth quarter and also from the third quarter. And that's a good, positive trend. Of course, over time we need to see those defense costs come down as well.

And then I guess last final question, changing subjects, with your acquisition today do you have a strategy going forward for acquisitions? And how I guess -- do you keep in mind -- would you like to keep an investment-grade rating or balance sheet as you do make these acquisitions?

Absolutely. We have made it clear both to the bond investing public, as well as to the rating agencies, our goal overtime of maintaining an investment-grade rating. I think if you look at the improvement in our debt ratios and cash flow ratios over the last four or five years, excluding the cash costs of asbestos, we have dramatically improved our balance sheet liquidity and cash flow coverages to the point that without asbestos we would be rated substantially higher than where we are. Even with the asbestos cash costs, the appropriate balance sheet ratios and cash flow ratios are improved from where they were four or five years ago when we were substantially covered by insurance. So that's an important factor for us.

And just to give you some direction long-term, I think we feel that the right place for us to be in terms of cost of capital is a mid BBB, and that's really our goal in terms of balancing a moderate acquisition program and maintaining an investment-grade rating. And certainly depending on your view of the long-term outlook of asbestos, which we think is getting better and I think there's a lot of reasons to believe that out there, we will get back to that middle BBB or be one notch below it.

Okay great. Thanks a lot.

Bin Laurence, SuttonBrook Capital Management.

Most of my questions actually have been answered, but just a follow-up. Do you intend to keep current dividend pay out relatively flat?

We really don't look at the particular yield in terms of our dividend program. As you know, we've increased our cash dividend for 31 consecutive years. And as long as we can continue to advance our earnings and cash flow, I think we will continue to look at increasing our dividend on an annual basis. That's an important part of our total return, particularly to RPM's more than 100,000 individual shareholders.

At the same time, we've been bringing our pay out ratio down. So I expect you will see the dividend continue to increase, but at somewhat a lesser rate than our underlying core earnings increase. And I say underlying core earnings increase -- we kind of look at it excluding the asbestos costs. So right now we've got a pay out ratio that would be in the mid-40s excluding asbestos costs and then the low-60s with asbestos costs. And either way you should expect to continue to see our cash dividend increase year-over-year, while at the same time those pay out ratios will be coming down.

Thank you.

Greg Halter, Great Lakes Review.

Congratulations on good results and accelerated growth. Looking at the acquisition, just wondering about the management. Will they be remaining with the company?

The businesses owned by the Illbruck family, and Michael and Sabina Illbruck were a brother and sister who have interests outside of the business. One is a world-class sailor and the other is a world-class horsewoman. So they've not been actively involved in management of the business. They've got a strong management team that will stay and run that business as part of RPM and our Tremco sealant business. The business will be reporting to Randy Korach who is President of Tremco Sealants. So over the next year he is going to really put together a management team that's a combination of the Illbruck managers, as well as his existing leadership at our Tremco European operations.

Okay. And looking at the business as a whole, your capital spending plans for the upcoming fiscal year?

Roughly a little bit higher than this year, in the neighborhood of $60 million. We were at $56 million this year.

Does that include anything that you may use on the Illbruck?

It does not, although we do not anticipate any significant raw material issues with Illbruck. As I indicated earlier, I think there's an opportunity to pick up some of the manufacturing business of the Illbruck business, particularly in the UK, and take advantage of real good operational and manufacturing assets that we have with our Tremco business. And there's some other plant issues that we may be looking at there.

Okay great. Thank you.

John Wlodek, Bradford & Marzec.

You made a statement earlier that cost increases faced by your consumer business were greater than the cost increases faced by the industrial business. Could you elaborate on that?

Sure. Our consumer businesses, for instance Rust-Oleum, whether it's acetone, metal cans, different plastics, solvents, resins, we just saw higher costs hit a lot of our consumer businesses versus our industrial businesses, which are really more broadly diverse in terms of the product lines and the raw materials that we use, number one.

Number two, even in a benign raw material environment, it was easier for us to either maintain or pass on raw material prices in our industrial segment, whereas we've had very little if any pricing factored into any of our consumer businesses for the last five or seven years. And so it became a bigger challenge for our consumer businesses this year, particularly in relationship to some pretty heavy customer consolidations or concentrations.

So is it primarily the retail customer -- the retail chains that inhibit your ability to raise prices freely in the consumer segment?

That's correct. We have probably about a three to four-month lag period in our industrial businesses between receiving higher raw material and our ability to pass them on. Our industrial businesses tend to be project businesses or areas where we can adjust pricing pretty easily, pretty quickly. And to the extent that we have been too aggressive, we can adjust backwards pretty easily without any consequences to our business.

With major retail customers, I think you need to do three things -- you need to demonstrate that you've got a real raw material problem that's permanent; you need to demonstrate what you've done internally to mitigate those; and then you need to work with the retail partners to make sure that you can pass on reasonable cost out in the marketplace. And that takes time, number one.

Number two -- and we've got them, but it takes some time to get there, and then you get your one bite at the apple. Your retail customers aren't going to be adjusting prices once a month. Conversely, in our industrial businesses, if we have to, we could adjust prices once a month.

Thanks.

(OPERATOR INSTRUCTIONS) Rosemarie Morbelli.

Following up on the higher costs, are you able to charge some or pass on some fuel surcharges on the distribution side?

We have been able to pass on some fuel surcharges in both segments of our business. That has also been an area of higher costs. And we will see. Again, on a comparable basis, as long as we don't see a significant ramp up in additional oil prices or raw material costs, comparability in the second half of the year ought to start getting better for us relative to things like fuel costs and certain raw material costs.

So you did pass on these higher fuel costs? I wasn't sure of what you said.

We passed on some of them. We did have higher year-over-year distribution costs on a relative basis, because again we were not able to pass on all of the higher costs, but we were able to pass on some of them.

In addition to the asbestos problem, can you talk a little bit, bring us up-to-date on the Dryvit situation?

Sure. As you know, we had a national class-action settlement on Dryvit that was approved probably a year and a half ago. There was an appeal on that, and that took some time to resolve. That has been completed. Our national class-action is complete and resolution costs for the national class are tracking below our original expectations and future costs associated with our litigation are substantially covered by insurance. So that is an issue, except for the occasional normal construction industry type of lawsuits and disputes that we feel is behind us. And in fact, you will see this year that Dryvit will be first of the EIFS manufacturers to really aggressively remarket back into the residential home. We've got some products that we feel are more user-friendly, if you will.

Our products were always effective, but in the residential market if they were associated with some improper flashing or roof linings, things like that, had some problems. We've got more user-friendly products for the residential market. And at one time there was a huge demand for that. We had $20 or $30 million a year of residential Dryvit business which largely went away and it's now starting to build again. So you'll see us invest in that growth opportunity pretty aggressively in the next year.

You had talked about it I think one or two quarters ago. Have you made progress on the residential side since then?

We're just ramping up our marketing efforts now to get back in that market. So I think slowly but surely we will get there. And there's so many great things you can do with this product in terms of architectural design and in terms of efficiency relative to waterproofing and insulation that once we hit some critical mass we would expect to tap back into what at one time was a pretty dynamic and growing market.

And then lastly, could you give us the expected tax rate for 2006? And then what was the cost of Sarbanes-Oxley and FAS 123 in '05 that will not repeat -- that you will not have in 2006?

The cost of Sarbanes-Oxley this year was just about $2 million on top of the cost of Sarbanes-Oxley the year before, which was starting to ramp up in our '04 year. We would expect that to be flat to slightly down year-over-year.

The FAS 123 costs will not mitigate. They're there now, and they will continue year after year after year. So while you shouldn't expect to see that -- it was about $3.8 million on the year, $0.03. That will be repeated, but any growth of it will be associated with growth in compensation or comp plans, not the adoption of 123.

Lastly, on the tax rate, we would expect the tax rate for the year to be about 36%, which will be somewhat less than where we were this year. And I think that gives me an opportunity to really highlight again what a strong year we had. If you adjust for the FAS 123 and the tax rate, which surprised us a little bit at year end, principally because of this American Jobs Creation Act, which eliminated the FSC (ETI), that and other international tax related issues hurt us by $3 million on an after-tax basis. That elimination of the FSC (ETI) will be made up for by manufacturing credits under the new tax law which we will start to benefit from in this new fiscal year. So it's really a timing difference that caught up with us at the end of our 2005 year, but which should smooth out in 2006 for us. So the EBIT results that we show in '06 should be better reflected on a net income basis as well.

Thanks.

Greg Halter, Great Lakes Review.

Thanks for taking the second part of this. Looking at your service businesses on both the industrial, as well as on the consumer side that I believe you're now in the process of ramping up, can you give us some color on how that did for '05 in the one case and how you expect it to do in '06?

Sure. There are three areas that I think are worth talking about in our service area. One is our roofing service business, which for awhile was growing at 25 or 30%. Revenues exceeded $100 million and grew virtually from nothing over the last four or five years. The gross growth rate of that business has slowed down a little bit to the normal growth rates that you would see of the balance of RPM.

Another part of our industrial business service area is this NBFS, which is a flooring services business that was acquired by our Stonhard subsidiary in our StonCor Group in the fourth quarter. And that's really an attempt to kick start a more aggressive service element in the flooring area for us. And we're hopeful over time that that will match the success that we've had in roofing and waterproofing.

On the residential -- not residential, on the consumer side, with Rust-Oleum we have entered into an at Home Services contract to do -- basically install garage floor coatings through Home Depot. We anticipate real aggressive growth in that in the next year. It will be somewhat of an experiment. We're seeing pretty good growth out of it. It is absolutely not a contributor to income. In fact, in the early months it's actually costing us income and operating at a loss as we ramp up with an investment in personnel and equipment to address what could be a very exciting services business through one of our major retail customers. And its success could be expanded over time into other areas, other product areas and other service areas in and around the home.

Great. Thank you for that overview.

Sir, we have no further questions at this time.

Thank you very much to everybody for participating in today's conference call and for your continuing interest in RPM. We are real pleased with the outstanding work of RPM associates worldwide for generating record results and for their part in what's an accelerating story in terms of profitable growth. And we look forward to communicating with and seeing many of you throughout the year and reporting on what will be another year of record growth for RPM. Thank you very much and have a great day.

Ladies and gentlemen, we thank you for your participation in today's conference. This concludes your presentation, and you may now disconnect.