RPM International Inc (RPM) 2006 Q2 法說會逐字稿

Good day and welcome to the RPM International conference call for the fiscal 2006 second quarter. Today's conference is being recorded. This call is also being webcast live and can be accessed through the RPM website at www.rpminc.com. A taped telephone replay will be available two hours after this call concludes, until 11:59 p.m. Eastern time on Thursday, January 12, 2006, and can be accessed by dialing 888-286-8010 or 617-801-6888. The confirmation code is 17609922. 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 release 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 statements 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 refer 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 webcasts/presentations.

At this time, I would like to turn the call over to RPM's president and chief executive officer, Mr. Frank Sullivan, for opening remarks. Please go ahead, sir.

Thank you very much, and welcome to RPM International Inc.'s conference call for the second quarter of our 2006 fiscal year. This is for the period that ended November 30, 2005. With me today is Glenn Hasman, RPM's vice president of finance and communications. After my opening remarks, Glenn will provide with you the details of our second quarter. We will then answer any questions you have concerning our results and our outlook.

As we anticipated, our second quarter was a challenging one, principally related to the September Gulf Coast hurricanes. Specifically, we saw a slowdown in our consumer segment business as order flow into what is seasonally a strong region was disrupted. We also had a major disruption to an industrial segment business unit related to a significant New Orleans warehouse facility, a major Lake Charles, Louisiana, manufacturing facility, and a general disruption to important Gulf area industrial customers. All of these disruptions were temporary and are now behind us.

A greater impact on our second quarter resulting from these hurricanes was the impact they had on raw material prices, which, prior to the second quarter, were showing signs of stabilizing, and in some cases declining. In a number of cases we saw raw material price spikes which, fortunately, are now starting to ease back to lower levels. Despite these challenges, core revenue growth in the quarter was approximately 9%. This strong revenue growth is continuing and is expected to even increase somewhat in the second half of our fiscal year.

In addition to the operating challenges we faced in the second quarter, we also incurred approximately $10.2 million in one-time costs. These consisted basically of three areas. The first is associated with our Dryvit national residential class action settlement finalization. Many of you know we have been dealing with this for approximately five years. After a number of appeals, this class action settlement reached its final appeal and finalization in the second quarter. Accordingly, we took a look at our reserves and our available insurance and made a determination to increase our balance sheet reserves associated with this class action settlement by $10 million. Five million dollars of this is reflected in an increase in insurance receivables, and $5 million flowed through our second quarter income statement to also increase the reserves for a total of $10 million in new reserves.

The second area relates to a $2.7 million charge associated with our pending sale of Thibaut. Thibaut is approximately a $15 million producer, designer, and converter of wallpaper. This is a non-core business of RPM. As recently as five years ago, this had a much smaller revenue base and was losing money. The current management and president have done an outstanding job of turning this business around, and we will be selling it in the month of January for approximately $10 million in cash, which is a good outcome for RPM shareholders, and we think a good home for the management team of Thibaut on a going forward basis.

The last area consisted of approximately $2.5 million associated with a European pension plan adjustment and hurricane related property insurance reserve increases. In each case, these are non-recurring, non-operating items.

Glenn's comments on our operating results will be excluding our asbestos-related charges to give you a better sense of the results of our businesses. In the second quarter we took a $15 million charge to increase our asbestos reserves, which now stand at approximately $101 million on our balance sheet. As indicated in previous quarters, there has been and will continue to be some volatility in our asbestos cost on a quarter-to-quarter basis. Despite the ebb and flow of quarter-to-quarter activity, our costs continue to move in the right direction.

You will see in our upcoming 10-Q filing, which will be filed on Monday, that active cases for the quarter ended November 30, stood at 9,501 cases, versus 7,523 active cases at the same time last year. Florida, Illinois, Ohio, Mississippi, and Texas continue to account for over 80% of our active claim volume, and we are seeing both costs and dismissals increase in a number of these areas related to various state tort reform and asbestos related reform passed over the last couple of years. We continue to secure high rates of dismissals, particularly in Florida, where a significant number of our unimpaired claims have been filed, due to their lack of medical criteria, venue requirements, or other areas related to these filings.

Our gross costs for the second quarter were $13.4 million versus $15.4 million in last year's second quarter. They declined 13% year-over-year and costs were down 19% sequentially from our first quarter. Of the $13.4 million in costs, $5.4 million was spent on defense, and $8 million on settlements. Over the last two years our settlement costs have also been trending downward and we see that continuing. We secured dismissals or settlements of 234 claims versus 290 claims in the comparable period last year.

We'll continue to communicate with you about our case and cost activity in each quarter and any related reserve adjustments based on our most recent experience. I'd now like to turn the call over to Glenn Hasman to provide you with the details on RPM's second quarter results.

Thank you very much, Frank. Good morning, everyone. We again want to remind all of you that our reported comparative results for this second quarter and first half and the comments that will follow reflect an accounting change and one other change since last year. First is our retrospective accounting adoption of EITF 04-8 relating to our contingently convertible debt, which had the effect of reducing the fiscal 2005 second quarter diluted EPS by $0.02 to an adjusted $0.31 from the originally reported $0.33 and last year's six-month diluted EPS number by $0.04 to an adjusted $0.75 from the originally reported $0.79, both before asbestos charges. All prior periods affected have now been adjusted for this accounting change.

The second and more recent change since a year ago is prospective only in the way certain consumer merchandising services are now being treated, which began toward the end of last fiscal year. The income statement effect of this change is a reduction of net sales along with gross profit and a related reduction of SG&A expenses. Also since Frank has further reviewed the asbestos charges we've taken this quarter and year-to–date, the comments that will follow refer to only our adjusted operating results before these charges.

I'll begin with the review of our P&L results followed by highlights from our balance sheet and cash flow statements, beginning with the income statement for the second quarter. Net sales grew 18.6% year-over-year to a record second-quarter sales level of $739.4 million. Organic sales growth amounted to 8.7%. Pricing was 3.3%. illbruck Sealant Systems, acquired August 31, '05 plus four product line acquisitions added 9.7% to this net sales growth, and net favorable foreign exchange contributed the remaining 20 basis points, mainly against the Canadian dollar and Latin-American currencies, partly offset by the euro.

Our industrial segment net sales reached $465.6 million, growing 27.6% over last year's second quarter. The organic industrial segment growth was 10.9%. Pricing was 3.2% of that, plus fractional growth of 20 basis points from foreign exchange. The following major industrial product lines all registered double-digit organic growth for the second quarter: concrete admixtures and related construction chemicals, fiberglass reinforced plastic grating composites or FRP, corrosion control coatings, powder coatings, exterior insulating finishes, and roofing services, as well as many industrial segment international operations. The balance of the industrial segment growth came from illbruck plus three small product line acquisitions, which overall added 16.5% to our industrial net sales growth.

The consumer segment net sales reached $273.8 million this second quarter, which grew 5.9% over last year's second quarter. This consumer growth was essentially all organic. Pricing was 3.4%. In fact, when you consider this year's merchandising credits, our consumer segment organic growth was actually stronger year-over-year. The following consumer product lines all registered 5% or stronger organic growth during the quarter: small project paints and coatings, confectionery and pharmaceutical coatings and glazes, automotive restorative products and finishes, wood care products, and caulks and sealants. The balance of our consumer growth came from one small product line acquisition, which contributed 20 basis points of growth.

The gross profit margin of 40.5% this second quarter is off from 43.4% a year ago. This margin reduction is the result of higher material costs in both segments. The reduction resulted from illbruck and other acquisitions, which inherently carry lower gross margin structures; the merchandising services credits in the consumer segment; and differences in sales mix, including increased services sales, which carry lower gross margins as well. Higher material costs continue to affect our year-over-year results. As Frank mentioned many of our materials are petrochemical-based and some of them spiked higher this quarter due to the hurricanes. For example, solvents saw three separate price increases during the month of October alone. Our own previously issued price increases are having an increasingly mitigating effect. Additional price increases have been initiated which will continue to phase in over the coming months to help compensate or recover these higher costs, some of which as Frank mentioned, are beginning to level off.

The industrial segment gross margin declined quarter over quarter to 42% from 44.7%. This is mainly the result of raw material cost increases plus illbruck and other acquisitions and the somewhat lower margin mix of sales among industrial product lines. The consumer segment gross margin declined to 37.9% from 41.6%. This margin decline is mainly due to net higher raw material costs and packaging costs, as well as the merchandising services credits.

Moving to SG&A expenses, these increased to 33.4% of sales this year from 32.4% last year in the second quarter. This percentage increase is mainly reflecting the one-time nonoperating costs of $10.2 million, which Frank outlined, less the favorable impacts from inherently lower SG&A expense structures of illbruck and other acquisitions. Both operating segments’ SG&A improved as a percentage of sales, with industrial moving down to 31.1% compared with 32.1% a year ago, reflecting primarily illbruck, and consumer to 28.4% versus last year's 29.5%, reflecting primarily the higher pricing effect and the revised merchandising services arrangements.

Corporate/other segment expenses increased to $24.5 million this year from $8.5 million last year, reflecting again the $10.2 million of one-time added costs and other higher costs year-over-year, mainly in corporate benefits, compensation, and incentive.

On the EBIT line, earnings before interest and taxes—our adjusted total EBIT declined 23.6% this quarter reflecting principally the $10.2 million of one-time corporate/other non-operating costs just described, plus the adverse effects of the temporary business disruptions and higher material costs caused by the hurricanes. Similarly, the EBIT margin decline to 7.1% primarily reflects these same factors, plus initial acquisition-related costs from illbruck this quarter. The industrial segment EBIT rose 10.8% and the consumer segment EBIT declined 16.8% year-over-year.

Interest expense net was up $900,000 quarter-over-quarter. This reflects acquisition-related debt and Fed-driven net rate increases year-over-year on our variable debt. Average rates for this year's second quarter were 4.9%, compared to last year's second quarter of 4.8%. Interest was saved, year-over-year, approximating $1 million from lower rate debt that had been added September a year ago to prefund the June, 2005 maturity of 7% notes. Plus, there was additional investment income this year over last year.

The tax rate as adjusted is 33.5%, comparing with last year's 35.6% effective rate, which mainly reflects adjustments in forecasted differences between income recognized for financial versus tax purposes and also includes certain tax implications resulting from the illbruck acquisition.

Net income, as adjusted, of $28.3 million this year decreased 26.4% from last year and diluted earnings per share, as adjusted, reached $0.23 this year, which were down 25.8% compared with last year's $0.31. Further adjusting for the one-time costs this second quarter, earnings per share would have been approximately $0.28, or down 10% year-over-year, along with EBIT and net income.

Some first half comments. First of all, this year's six-month net sales grew 15.7% year-over-year to a record $1.487 billion. The organic sales growth amounted to 10.4% and pricing was 3.3% of that. illbruck Sealant Systems plus five product line acquisitions added 5.4% to net sales growth and net favorable foreign exchange contributed the remaining 50 basis points.

Our industrial segment first half net sales grew 22.7% to $896.4 million. The organic part of that was up 12.7%, pricing being 3.2%, plus 60 basis points of growth from foreign exchange. The following industrial product lines have all registered double-digit organic growth this first half: exterior insulating finishes, concrete admixtures and related construction chemicals, corrosion control coatings, roofing services, powder coatings, and fiberglass reinforced plastic grating composites (FRP) as well, again, as most of the industrial segment international operations.

The balance of industrial segment growth came from illbruck plus four small product line acquisitions, which added 9.4% to the net sales growth. Consumer segment net sales for six months of $590.3 million, grew 6.4%, and again essentially all of this growth through six months has been organic; pricing was 3.4%. When you again consider this year's merchandising credits, the consumer segment organic growth has actually been stronger year-over-year.

The following consumer product lines all registered 5% or stronger organic growth during the first half: caulks and sealants, wood care products, confectionery and pharmaceutical coatings and glazes, automotive restorative products and finishes, small project paints and coatings, and primer sealers, as well as mold and mildew prevention products. The balance of the consumer segment growth came from a small product line acquisition.

For comments on the six months I'm going to pass over the gross profit and SG&A discussion, because much of the differences there relate to the second-quarter differences, so there's no need to make further comment there. Moving down to the EBIT line for six months. Adjusted total EBIT declined 4.6% through six months, reflecting principally the second quarter's $10.2 million in one-time corporate/other costs. Similarly, the EBIT margin decline to 10.3% reflects these same costs, plus the higher material costs, the adverse effects of temporary business disruptions caused by the hurricanes, and initial acquisition-related costs related to illbruck. The industrial segment EBIT climbed 13.7% through six months, while the consumer segment EBIT declined 6.8% year-over-year.

Interest expense net through six months is up $1.5 million, reflecting acquisition-related debt and Fed-driven net rate increases on our variable debt partly offset by the interest saved year-over-year from the additional debt added a year ago to pre-fund the June 2005 maturity, plus additional investment income this year over last. So far through six months, average rates have been 4.9% comparing with 4.7% last year.

The tax rate through six months, as adjusted, of 35.2% compares very closely to last year's 35.5%.

Net income, as adjusted, of $87.6 million declined 5.7% from last year. Diluted EPS as adjusted of $0.70 was down 6.7% from last year's $0.75, but if you further exclude the one-time costs this second quarter, six-month EBIT and net income would have been approximately 1% ahead year-over-year and diluted earnings per share would have equaled last year's $0.75.

I'll now draw some comments on the balance sheet and compare back to November a year ago, due to our seasonality. Net accounts receivable were up $69.3 million. Acquisitions accounted for $33.1 million of that, foreign exchange translation effect actually reduced that comparison by $7.4 million year-over-year, and sales increases in both segments accounted for the balance of the increase of $43.6 million, or 9.8%. That compares favorably with our organic sales growth toward the end of the period, which resulted in two lower days’ sales outstanding year-over-year. Inventory year-over-year was up $50.1 million. Acquisitions accounted for about half of that, at $25.8 million, with foreign exchange translation again reducing that comparison $4.2 million. The remaining increase of $28.5 million, or 9.1%, compared with our 12.5% organic cost of sales increase during this second quarter, which meant days outstanding in inventory decreased by six days overall.

Our accounts payable were up $43.5 million, with acquisitions accounting for $17.4 million of that. Foreign exchange translation differences reduced this comparison $2.9 million. The balance of the increase of $29 million, or 15.7%, comes from a combination of business growth and our timing of payments in both segments, which more than offset the $28.5 million of organic inventory increase year-over-year. Our total debt at November 30, '05, stood at $866.4 million, including our short-term. That's up $24.3 million year-over-year. That mainly reflects additional debt for our acquisitions during the past 12 months, less $150 million of bonds retired in June, 2005. The composition of our debt at November 30, now stands at about 62% fixed and 38% variable, following our October issuance of $150 million, 5.31% senior notes. We used the proceeds of that issue to pay down balances drawn against our revolving credit facility and to bring our available liquidity, including cash to $533 million.

Our debt to capital stands at 44%, which is no change from 44% at May 31, and 44% a year ago. Cash flows from operations through six months were 5.6% ahead of last year's first half, highlighting our improved working capital performance so far this year and including $4.5 million of reduced pretax payments for asbestos claims as Frank mentioned earlier. The new businesses acquired since May 31 were AD Fire Protection on June 1, and illbruck Sealant Systems on August 31, with the related debt reflected under financing activities, along with the retirement of the $150 million 7% bonds that matured June 15. I'll now turn the call back over to Frank Sullivan.

Thank you, Glenn. From an outlook perspective we are encouraged by what we see going into the second half of our 2006 fiscal year. First and foremost, our good revenue growth is continuing, especially in our industrial businesses. Additionally, we anticipate some higher level of sales activity in certain product categories this spring related to Gulf area reconstruction. Secondly, we are seeing some areas where raw material costs are stabilizing and where hurricane-related spikes are coming down. This, in conjunction with our price increases across all of our businesses, should result in some margin recovery. Of course, this is barring any further geopolitical or natural disaster related shocks to the petrochemical industry.

The illbruck acquisition is on target. While it has been dilutive in the second quarter and will also negatively impact our third quarter, the illbruck results will be accretive to our fourth quarter and for our full 2007 fiscal year. We are also pursuing a number of smaller business unit and product line acquisitions, a few of which will likely be completed in our third quarter. While relatively small, all will be immediately accretive.

Lastly, while far from over, our asbestos liability costs appear to be declining. Our average settlement costs are down and the quality of new claims coming in is weakening. State and federal legislative action continues and we are encouraged by the activity in Federal court and by Federal prosecutors related to fraudulent activity in many asbestos lawsuit filings. With business activity remaining strong, raw material costs starting to move down, asbestos costs going in the right direction and acquisition activity remaining high, we feel bullish about the prospects for the rest of this year and how things are shaping up for our 2007 fiscal year. We now look forward to answering your questions.

[OPERATOR INSTRUCTIONS] And your first question comes from Jeff Zekauskas from JP Morgan. You may go ahead.

Good morning.

This is Silke Kueck for Jeff. How are you?

Good Silke.

Can you tell us how much of the gross margin decline was due to higher raw material costs, how much due to the illbruck acquisition and how much due to the lower margin revenues from services sales?

It really depends on our segment. In our consumer businesses, the decline in gross margins was almost entirely due to the difference between higher raw material costs and what we're trying to do on the pricing side. In our industrial segment, raw material costs were a slight negative in the quarter. We're actually starting to see the impact of pricing increases, and you'll see that pick up even more in terms of some margin improvement we hope in the second half. The larger difference in the industrial segment was the impact of illbruck and our lower margin services business, which grew at a somewhat higher rate than our product sales.

By how much have raw material costs decreased since the end of your fiscal second quarter?

It's really hard to say with any specificity. I guess I could give you some examples as it relates to some of the things that we're seeing. For instance, plastic packaging was up greater than 50% in the second quarter as a result of the hurricanes, principally because of shortages of feedstocks. We're seeing some of those spikes now mitigate. We're still at relatively high levels, where we were before the hurricanes, but some of those spikes are coming down. There's some softening in solvent prices which, as Glenn mentioned, we saw multiple price increases inside of 30 or 45 days. Freight's been a big issue for us. Before the end of the summer diesel costs were at or below $2 a gallon. By October, November, diesel costs were $3 a gallon, and they're now down to $2.50.

Probably the biggest area that makes us feel comfortable is that we're starting to see some raw material prices moving in the right direction. A) Some of the examples I gave you, and there's obviously a lot more of that, in terms of actually experiencing some lower prices today versus what we experienced over the last couple of months. And, B) the fact that the Gulf region’s petrochemical production is still at or slightly above 50% of where it was prior to the hurricanes. Depending on what reports you read, there's expectations that that production will be back up to about 100% level of where it was before the hurricanes sometime between April and July of this year. So to some extent, you're just looking at a simple supply and demand equation that's been out of whack and it's starting to get into a more normal realm.

And your next question comes from Saul Ludwig of KeyBanc.

Did you say the active cases were 9501 or 9051?

Active cases were 9501.

Question on raw materials, just following up on Silke's line of thinking. You said you had this big spike in October, post the hurricane in the raw material costs. Being on FIFO, is that spike going to hit you more in your third quarter than was the case in the second quarter. Also talk about the lag in terms of recovering based on your accounting system.

I think in today's world, the difference between LIFO and FIFO, in terms of how inventories move, is a matter of 30 days or so. So I don't anticipate seeing this drag on. It really depends on particular business units, and we have some business units where inventory is standing at 90 or 100 days. We have other business units where inventory is flushed out in 30 days or less, and then within each business unit or company, it really depends on what product lines you're talking about. A lot of the raw material price spikes we saw started right at the end of September, flowed through October, and so we anticipate what we're seeing in today's prices, as well as the price increases that we've initiated, some margin improvement versus what we experienced over the last three months.

That's good to hear. Next question, when you talked about expecting record earnings for the year, which is very encouraging, glad to hear that, just to make sure that everybody is on the same page, we assume that that, A) excludes asbestos?

That's correct.

And B) does that comment include a $0.23 number for this quarter or a $0.28 number for this quarter, as you think about your comment for the full year?

It really focuses on the $0.23 number for the quarter. And I think that's a very good question. As we try and focus people on our results adjusted for the asbestos costs, we don't want to get too cute and adjust for everything else. If you just do the math in that $0.23 per share and where we will be in the second half, without getting into the game of forecasting full-year growth relative to where our original estimates were, or our guidance was, I think you'll come out with a number that is somewhere in the 15 to 20% earnings growth range for the second half. It could be better than that, depending on whether or not raw materials and our related price increases move in the right direction.

So I think that's a good question, and certainly you need to look at that $0.05 per share of one-time costs in the quarter, the majority of which are very positive things. Dryvit is growing at significant double digits. They're the first major EIFS company to reenter the residential market and are excited about growth prospects there with a more consumer housing friendly product and with all of the bad publicity behind them. The sale of Thibaut is a good thing for us and the management team there. That's $10 million of cash from a business that hasn't generated $10 million in cash for us in the last ten years. So if you except out those one-time events, I think we still have prospects of having a pretty decent full year, relative to our original expectations.

And even with your third quarter, which is sort of a punk quarter.

Yes, our third quarter, as you know, is a seasonal low for us. Last year we had $0.04 a share. So the percentage gains in a third quarter could look big, but as you know, the third quarter in terms of revenue growth, and particularly earnings and earnings per share, is not a real meaningful quarter on the full year. But we anticipate a really strong fourth quarter, and you will also see some accretive help out of illbruck in the fourth quarter as well.

My final question relates to corporate expense, which was $24.5 million in the quarter, and, of course, if you take off the $10.2 million special, you're down to $14.3 million. And that would compare with $8.5 million and just going back for years and years and years, never had that amount of corporate expense in a quarter. What is sort of happening here, and what are the implications going forward? It certainly seems very, very unusual out of the trend line.

Some of it is various insurance increases, including property casualty, product line insurance. A big piece of it is compensation and benefits costs related to FAS 123 and a change that we've had more focused on our long-term incentive plans towards restricted stock versus options. Those are the best answers I can give you, in terms of where they are, and I think you'll see, for future quarters that we will have for those reasons some higher corporate expense year-over-year than what we experienced last year.

And your next question comes from Rosemarie Morbelli from Ingalls & Snyder. You may go ahead.

Good morning, all. Can you hear me?

Yes. Good morning.

Looking back at that one-time charge, when you gave us the release, Frank, you gave us the $10.2 million and then we had Thibaut at $2.7 million, and then another $2.5 million European pension. So that is $15.4 or $0.6 million, not $10.2. Could you give us the numbers on a pretax basis, on an after-tax basis, and is it all in SG&A, or is there some of it in the cost of goods?

It's all in SG&A, Rosemarie, and I think, without providing a lot more detail, I don't have the after-tax numbers. Those numbers I gave you are pretax. The big difference is your understanding of the Dryvit issue. When we got this final settlement, we looked with our legal folks and the folks at Dryvit to figure out where we are. Let's square this thing up now that we got the final settlement. There were some slight adjustments based on the appeal, and we came to the conclusion that our reserves were below where they needed to be by about $10 million. We have available to us at least another $5 million of insurance toward that. So what we did is increase the balance sheet reserve by $10 million. We increased our insurance receivables by $5 million. And so we had to flow an additional $5 million through our P&L in the quarter.

Okay.

So that's the difference between the $10.2 million we highlighted for you and the $15 million that you came up with.

Okay. All right. So this is just that adjustment. Going back on the raw material costs, leveling off and possibly coming down, what is your position in terms of getting the selling price increases you have already announced in lieu of raw material costs coming down? Can you still get what you have pushed and what you have announced, and can you get enough to get the gross margin improvement, and following up, related to that, when you are talking about gross margin improvement, are you talking sequentially or versus 2005?

First of all, in terms of gross margin improvement, I'm talking about halting what's been a 15-month slide between what our raw material costs are and what our pricing has done. This trend was really accelerated in the second quarter for the reasons that we talked about. We're starting to see the combination of price increases and some easing of some of these raw material costs show improvement or movement in the right direction relative to our prime margins and our gross margins. In terms of price increases, we fully expect to maintain what we've got and it's going to be probably by the end of the year, when we will have recouped most of what we've lost from a raw material perspective in our industrial businesses and somewhat longer than that in the consumer segment, where we've lost 300 basis points of margin. So I don't anticipate giving anything back. Historically we've not had to, and I don't think that its on anybody's mind, even competitively, given where raw material costs are and the types of margin deterioration that most of our peers have seen over the last 15 months.

So what you are saying is that even though your large consumer customers are usually balking at getting any kind of price increases, and are playing, really, their suppliers one against the other, you are still going to recoup that 300 basis points that you have lost in raw materials when they see that material costs are coming down? I just want to make sure that I understood that properly.

Yes, and I have to go back over the history on this. Number one, we're dealing with oil prices just as a proxy, at $60 a barrel, or wherever they are, and 15 months ago they were at $30. And, so if we get back to oil prices that, after this huge spike and going back to the '70s, when everybody thought oil prices were going to go to $100 a barrel, and somewhere in the '80s they ended up at $10 a barrel, that's a scenario where you could see some pricing competition. But a decline in oil prices, just as one proxy, from $60 a barrel to $50 a barrel is not an environment where you're going to see price give-backs. It's an environment where people are still trying to recover lost margin, number one.

Number two, the competitive environment that we face in our consumer businesses hasn't changed. We've been facing the competitive environment, which is a combination of our operational capabilities, the strength of our brands, our service to our consumer customers, and those same related issues for our competitors, and that issue is always there. There is no shortage of capacity in paint making. So unlike certain raw materials, whether prices are high or prices are low, capacity is not the issue that drives the competitive situation, and pricing is not the only issue that drives the competitive situation. That was true two years ago, and it's true today.

Back on the costs related to the hurricane. Are you going to get anything back from insurance for business interruption, or extraordinary circumstances, or anything like that, or do you have a deductible that is such that you won't really recover anything from it?

We have about a $500,000 per occurrence deductible, and then anything over that we'll have recovery, in terms of insurance. And so we will have some recovery there. I don't know, sitting here today, what that will be. I do know that the deductible costs are part of our second quarter expense.

And having had no facility really down or no 100% business interruption, are price increases spiking -- I mean, are cost increases spiking considered in any kind of business interruption, or is that totally separate?

I don't know the answer to that. I don't think so.

Okay. Then lastly, I know you talk about great expectations for the second half. Are those expectations in line with those you had at the beginning of the year? Do you see a pickup? Do you see slowdown versus your expectation? I mean the consumer is bound to be hurt by all of the higher costs they're being hit with in terms of gasoline and fuel oil.

In terms of our expectations for the second half of the year, when we looked at our first quarter, we had expectations of our revenue growth increasing a little bit more aggressively on a core basis than we experienced going into the first quarter. We still have that expectation. Obviously it was disrupted in the second quarter. Additionally, illbruck will help us in the bottom line in the fourth quarter. Then the real curve ball in terms of solid performance, or significantly better performance, will really relate to raw material costs and how quickly they recover. But, from a pricing perspective , we instituted our third price increases effective January 1 in a number of our businesses. So we are aggressively pursuing price increases where we can get them, and we need to get them. It's that simple.

[OPERATOR INSTRUCTIONS] And your next question comes from Jason Rodgers from Great Lakes Review. You may go ahead.

Hi.

Good morning.

The $10.2 million in one-time costs, do you have a breakdown between the consumer and the industrial as to where those costs are allocated?

No, it was all in the corporate expense. And if you look, as Saul Ludwig had highlighted earlier, in the segment reporting, you will see a significant year-over-year increase in corporate expense and the lion's share were these one-time items.

On an earnings per share basis, do you have the impact of -- you said illbruck was dilutive -- the impact on a per share basis?

I don't. We had to write up the inventory, as you do in an acquisition, and so that hurt us. We had some operating expense costs that weren't capitalized that hurt us. They are a seasonal business, so just the pure low nature of the revenues in our third quarter and the amortization and interest carrying costs in the third quarter will hurt us. Despite that, we still see a positive year-over-year earnings results in our third quarter, which is no small feat given the impact of illbruck and its size. But they have a strong fourth quarter, much like RPM. Any of the impact of the written up inventory will have flowed through. Again, their inventory turnover is pretty strong, so any of that will have flowed through the P&L. We'll be looking at a normalized P&L from illbruck. They are on target and actually slightly ahead of our original plan for sales. And if that holds true in the fourth quarter, then they will be positive to earnings for the quarter for the whole corporation.

Then finally, do you have the estimate for capital expenditures for fiscal '06?

I think about $60 million for the full year, give or take $1 million.

And your next question is a follow-up question from Saul Ludwig. You may go ahead.

Frank, on the Dryvit, that's done, over with? There's no opt-outs? It's completed now?

No, there were some opt-outs, which if you look in our 10-Qs and 10-Ks, we have talked about. I don't have that handy, but there are a couple hundred opt-outs, but having said that, whether it's the estimate of the opt-outs or the settlement costs, that's all squared up.

We're not going to hear any more about this going forward?

No, I mean, Dryvit is in the construction business. And whether it's Tremco or Dryvit or anybody, we're going to get lawsuits. But it's in the normal course of business. We have insurance to cover that. So it's my anticipation that what you will hear about Dryvit in the residential market will be good news. We are back out there actively promoting Dryvit for use in high-end homes. We're having some success. We're really reintroducing the product, kind of a modified product for residential use, which from a moisture drainage perspective probably ought to be the best moisture drainage cladding in the market, bar none. So we're putting SG&A dollars behind that, and the Dryvit business is growing at strong double-digit rates. So things are moving in the right direction.

And the answer to that question is, yes, you should not hear any more about the residential lawsuits reserves, any of that stuff. We continue to have insurance, and the construction business being what it's going to be, we'll have lawsuits in the future over big buildings or the types of things that are done.

Tax rate for the year? I mean, we saw a low tax rate this quarter.

About 35% for the year, 35.5% maybe.

Okay. And when Glenn was going over the products that were strong, I didn't hear, maybe he mentioned it, the garage floor product, how's that going?

We didn't highlight every little product. We just provide some different areas. It's part of our Rust-Oleum activity, and the small project paint product category, including the garage floor coating, is all doing relatively well. We actually introduced, in partnership with a major retailer an at-home services business where we're actually installing garage floors in high-end homes. That's continuing to grow well. It is not profitable yet. We need to iron out the chinks in terms of our delivery and also reach a revenue level where it will be profitable. It's an exciting category for us. I can't sit here and tell you that long term it's going to be a real winner, but if it is, it's got some very interesting prospects for other at-home services related to some of the coatings products that we have.

How is that acquisition you made, the building maintenance, how's that doing?

It's a small business. It's part of Stonhard. Revenues were about $10 million. Other than those details I can't answer that for you. I don't know.

You have a follow-up question from Jeff Zekauskas from JP Morgan.

Hello, it's Silke again. I have a question on the sale of Thibaut. Is the larger portion of the $10 million in sales proceeds a gain, and would that flow through your income statement?

No, the net worth to Thibaut is approximately $12.5 million, and we had a couple hundred thousand dollars of deal related costs. We sold it for $10 million in cash. So we took in this quarter, basically as an impairment, a $2.7 million charge in anticipation of the sale of this business which should close next week.

Okay. Thank you for clarifying.

Thank you.

At this time you have no further questions, sir.

Thank you very much. We look forward to reporting better results for the coming quarters, and we'd like to thank you for participating in today's conference call and for your interest in RPM. Best wishes to all of you and all the RPM employees and shareholders who are listening for a happy, healthy, and prosperous new year and have a great day. Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, and have a wonderful day.