RPM International Inc (RPM) 2006 Q3 法說會逐字稿

Welcome to the RPM International conference call for the fiscal 2006 third quarter. Today's call is being recorded. This calm is also being webcast and can be accessed live or replayed at RPM's website at www.rpminc.com.

Comments made on this call may include forward-looking statements based on current expectations that involve risks and uncertainties which could cause actual results to be materially different. For more information on these risks and uncertainties, please review RPM's reports filed with the SEC. During this conference call, references may be made to non-GAAP financial measures. To assist you in understanding these non-GAAP terms, RPM has posted reconciliations to the most direct comparable GAAP financial measures on RPM's website.

[OPERATOR INSTRUCTIONS]. At this time, I would like to turn the call over to RPM's President and CEO, Mr. Frank Sullivan, for opening remarks. Please go ahead, sir.

Thank you. Welcome to RPM's third quarter conference call for the period ended February 28th, 2006. We are pleased to report strong sales growth of 19% in the quarter, 11% from organic growth, driving a 24% increase in EBIT and a 50% increase in net income and EPS all before asbestos costs.

Our industrial segment was particularly strong with sales growth of 29%, 14% of which was organic, driving a 48% EBIT increase. This includes the illbruck acquisition which added significantly to sales growth in the quarter, but given its seasonality after acquisition costs, it was actually a drag on earnings by $0.01 per share and has been roughly break even through the fiscal year to date.

Our consumer segment grew 6% in the quarter, all organic growth, driving a 14% EBIT gain. Margin improvement in both segments was in part as a result of the benefit of price increases combined with moderating raw material costs which is certainly good news and a trend we expect to see continuing. In the quarter we completed the sale of Thibaut for $10 million in cash, this generated a $2 million loss on sale which, as you'll recall, was incurred in our second quarter. For the balance of the year, the sale of Thibaut will also cost us about $0.01 per share versus Thibaut's contributions to earnings last year.

Our Euclid chemical company acquired Tamms Industries, a $20 million construction chemical products business which continues Euclid's aggressive internal and acquisition growth which is generating 30% plus growth for second year in a row year-over-year. DAP acquired the patch and repair products business of Custom Building Products company. This is a DIY acquisition that will be fully integrated into DAP. Both of these acquisitions are expected to be accretive to earnings in our 2007 fiscal year.

Addressing our asbestos liability, as I've indicated in past calls, there has been and will continue to be volatility in our quarterly asbestos costs over the coming years. However, our overall costs continue to move in the right direction and we expect to finish this year approximately $6 to 8 billion below last year's total cash cost, which would put us in the range of $60 million for the year on a pretax basis. You'll see in our upcoming 10-Q filings active cases for the quarter were 10,175, versus 8,259 in last year's third quarter. Up from 9,501 in our last quarter, the second quarter.

Gross cost for the third quarter were $17.1 million versus $21.9 million in last year's third quarter, a year-over-year decline of 22%. Of note, of the 17 million incurred in this quarter, 6.9 million was spent on defense, and 10.1 million on settlement costs. This compares favorably to last year's 2.9 million of defense costs and 19.2 million in indemnity payments, so that you can see that our settlement costs and indemnity incident payments on a percentage basis are actually down pretty substantially.

While asbestos remains a challenge, our defense strategy, coupled with a improving legal environment at the state level, and greater scrutiny of the abuses inherent in this litigation is continuing to lower our annual costs. Based on our most recent quarter's experience and factoring in new cases received during the quarter, we took a $15 million pretax charge in the third quarter to increase our existing reserves. This brings our total asbestos reserve to $99.1 million, which we believe adequately covers the expected settlement and defense costs associated with our current known claims.

In our 10-Q, which will be filed Monday, you will see that during the quarter we retained a consulting expert to assist us in ascertaining whether our future asbestos costs are presently estimable, and if so, to work with us in developing a range of loss estimate for any such future asbestos costs. The future of asbestos litigation and the current environment is anything but certain. Between the possibility of federal trust fund legislation, recent judicial rules, prosecutorial and congressional attention and hearings related to fraudulent asbestos claims and state-based asbestos tort reform we are in the throes of monumental, and we believe, very positive change. All of this based on past history, relatively speculative.

We anticipate completing this analysis in the coming months, and if a range of loss can be developed, we would record a charge to establish an additional reserve for our future asbestos-related claims. This futures reserve would be in addition to our existing reserves that cover known pending claims. Regardless of this process, we will continue to fully disclose our case and cost activities as we have done every quarter, and as always, we will strive to complete this process in a manner that will serve the best interests of RPM shareholders as well as the investment community at large.

With those opening comments, I'd like to turn the call over to Glenn Hasman, RPM's Vice President of Finance and Communications to provide with you the details of our third quarter. Glenn?

Thank you very much, Frank. Good morning, everyone.

We want to remind all of you our reported comparative results for this third quarter and the first nine months and the comments that will follow, reflect a change in accounting for certain consumer merchandising services since last year. And a retrospective reclassification in our balance sheet. The accounting change is really prospective only, and the way those merchandising services are now being treated, which began toward the end of last fiscal year. The income statement affected this change as a reduction of net sales along with gross profit with related reduction in SG&A expenses. The reclass on the balance sheet reflects FAS 123, specifically requiring reductions in the paid in capital component of stockholders equity versus previous classifications under certain short and long-term assets and liability categories. Also since Frank has reviewed our asbestos status and the charges we've taken the comments that will follow will refer to only our adjusted operating results before these charges.

I'll begin with review of our profit and loss results followed by highlights from our balance sheet and cash flow statements. For this third fiscal quarter, sales grew 18.6% year-over-year to a record third quarter sales level of $612.5 million. Frank mentioned the organic sales growth amounted to 10.7%. Pricing was 3.6% of that. illbruck sealant systems, which was acquired at the end of August, plus six product line acquisitions, net of the small divestiture, added 8.7% to net sales growth, and that unfavorable foreign exchange slightly offset our total growth by 80 basis points, mainly against the euro, but partly offset by year-over-year strength in mainly the Canadian dollar.

Our industrial segment net sales of 378.3 million grew 29% over last year's third quarter. And our organic industrial segment growth was 14.2% with pricing of 2.6%. Growth was really partly from the less severe winter this quarter, and they had about 110 basis points decline from foreign exchange. The following industrial product lines registered double-digit organic growth for the third quarter. Corrosion control coatings, exterior insulating finishes, fiberglass reinforced plastic grading composites, concrete add mixtures and related construction chemicals, industrial sealants, waterproofing products overseas, institutional roofing and related services, and powder coatings. The balance of our industrial segment growth came from illbruck less four relatively small product line acquisitions which added 15.9% to the industrial net sales growth this quarter.

Consumer segment net sales of $234.2 million grew 4.9% over last year. This segment's growth is essentially all organic. 6.1%, which included pricing of 4.9%. As I mentioned earlier, when you consider this year's new merchandising services credits, our consumer segment organic growth was actually stronger this quarter. This segment also is more subject to occasional changes in buying patterns among their larger retail customers in particular, has occurred this January.

The following consumer product lines all registered 5% or stronger organic growth during the quarter: costs and sealants, confectionary and pharmaceutical coatings and glazes, automotive restorative products and finishes, small project paints and coatings, primers, sealers, and mold and mildew prevention products, and wood care products. The balance of the consumer segment sales difference, which was 120 basis points decline, came from two small acquisitions less the January divestiture of Thibaut, which was about 90 basis points of that decline, and the remainder from net foreign exchange, mainly the euro.

On the gross profit our margin of 39.9% this third quarter is off from 40.9% a year ago. This margin reduction is primarily the result of higher material costs along with introducing illbruck and other acquisitions with inherently lower gross margin structures. The new merchandising services credits in the consumer segment increased services sales this year, which carried lower gross margins characteristically, partly offset or lifted by productivity gains from our 7.5% organic unit sales growth this quarter. Higher material costs have continued to affect our year-over-year results, but we began to see some moderation of these costs during the quarter, and the outlook is for more of the same. Our own price increases are having an increasingly mitigating effect, and we'll continue to phase in to help compensate or recover these higher costs and continue to recover our margins.

Our industrial segment gross margin decline quarter over quarter to 41.4% from 42.5%, mainly the result of raw material cost increases, plus illbruck. Offset to an extent, or lifted, by productivity gains from the 11.6% organic unit sales growth in this segment. Our consumer segment gross margin declined to 37.4% from 38.7% this quarter. This margin decline is mainly due to the higher raw material and packaging costs and the merchandising services credits unique to this year.

On SG&A expenses. These declined as a portion of sales to 36.7% from last year's 37.8% and this percentage decrease reflects disciplined spending controls. The inherently lower SG&A expense structures of illbruck and other acquisitions and the organic sales growth partly offset by mainly growth related or investment expenditures that were made.

Both operating segments SG&A improved as a percentage of sales, industrial to 36.6% compared with 38.3% last year, that reflects primarily illbruck and their sales growth, and consumer, the 31.1% from last year's 33.0%, primarily reflecting spending controls and their sales growth. Corporate other expenses, which again are included in our SG&A category, increased to 13.1 million this year from $9.3 million last year. This reflects mainly higher healthcare costs for the organization's U.S. and Canadian-covered employees and additional grants awarded under our equity incentive plan.

Our adjusted total EBIT dollars, earnings before interest and taxes, grew 24.2%, and the margin improved to 3.2% this quarter, reflecting essentially the leverage of the strength of organic unit sales growth of 7.5%, combined with expense controls. The industrial segment EBIT grew 47.7%, that's a 4.8% margin on their sales compared to last year's 4.2%. Consumer segment EBIT grew 13.9% this quarter. That's a 6.3% margin on sales compared to last year's 5.8%. We continue to see margin improvement.

Moving to interest expense net, this was up $1.4 million quarter over quarter. This reflects acquisition related debt service, plus Fed-driven net rate increases on our variable debt, less interest saved year-over-year from the lower rate debt that was added September a year ago in '04 to pre fund the June 2005 maturity of our 7% notes, and there was additional investment income this year's third quarter over last year. During the quarter, our interest rate averaged about 5.2%, and that compares with about 4.8% a year ago. Our tax rate, as adjusted, was 28.9% this third quarter. That compares with last year's 37.5% effective rate. The reason for this, certain recent tax law changes will benefit us this year on a net basis. And those are reflected in the current year tax rate.

In addition, our performance projections for this 2006 fiscal year have been strengthening in total as well as where we earn our profits in terms of lower tax rate jurisdictions, and that's resulting in lowered effective rates. This quarter's comparatively lower rate, therefore, was required to accommodate our revised year to date estimates. Our net income as adjusted of $6.9 million this year represents record earnings for our third quarter and increased 52.6% from last year's $4.5 million, with a margin on sales also improving slightly to 1.1% from 0.9% a year ago. Our diluted earnings per share as adjusted of $0.06 were up 50% compared to last year's $0.04.

I'll now make some comments about the 9-month results year over year. Net sales habe grown 16.5%, to a record $2.1 billion. Organic sales growth these first nine months has amounted to right at 10%. Pricing has been 3.3% of that. illbruck sealant systems plus seven product line acquisitions, net of the small divestiture have added 6.4% to our net sales growth and net favorable foreign exchange contributed the remaining 10 basis points.

Our industrial segment first nine months net sales have grown 24.5% to $1.275 billion. Organic industrial segment growth was 13.1% through nine months. Pricing was 3% of that. Plus 10 basis points for foreign exchange. The following industrial product lines have all registered double-digit organic growth these first nine months worth mentioning, our fiberglass reinforced plastic rating composites, corrosion control coatings, concrete add mixtures and related construction chemicals, powder coatings, exterior insulating finishes, institutional roofing and related services, and industrial sealants as well as most of our industrial international operations.

The balance of our industrial segment growth came from illbruck, plus five smaller acquisitions which added 11.3% to net sales growth. Consumer segment net sales through nine months, 824.5 million, grew 6%, that's essentially all organic. That 6% pricing is 3.8% of that, and when you again consider this year's new merchandising services arrangement, this consumer segment organic growth was actually stronger.

The following consumer product lines all registered 5% or stronger organic growth during the first nine months. Confectionary and pharmaceutical coatings and glazes, caulks and sealants, automotive restorative products and finishes, small project paints and coatings, primers sealers, and mold and mildew prevention products, as well as our wood care products. I'm going to pass over the gross profit and SG&A discussions for the nine months since the differences there are very similar to what they were for the third quarter. We certainly can answer any questions you might have on those afterwards.

Moving to EBIT, through nine months, our adjusted total EBIT declined 2%, reflecting principally the second quarter's $10.2 million in one-time corporate other costs. Similarly the margin declined to 8.3% reflects the same costs as well as higher material costs and initial acquisition-related costs for illbruck. In addition there were some other higher costs this year over last. The industrial segment EBIT growth for nine months is 17.3%, consumer segment EBIT actually declined 3.8% year-over-year, but we are beginning to see recovery already this third quarter.

Our interest expense net was up 2.9 million through nine months, again reflecting acquisition-related debt service and fed-driven net rate increases on our variable debt, partly offset by the interest saved year-over-year from the lower rate debt added in September '04 to prefund the June '05 maturity of 7% notes, plus again there's been additional investment income this year over last. Average rates through nine months of 5.1% compare with last year's 4.7%. Tax rate as adjusted through nine months, 34.8% this year compares with 35.6% a year ago. Again reflecting the net benefit of recent tax law changes and a more favorable mix of income by tax rate jurisdiction.

Our net income as adjusted through nine months, $94.5 million, that's declined 3% from last year, and our diluted EPS as adjusted, $0.76, also down 3.8%versus last year's $0.79 for the recent mentioned earlier for the EBIT difference year-over-year. If you exclude those $10.2 million of one-time costs we incurred this year's second quarter, our nine-month EBIT and net income would have been 3.8% ahead of a year ago and diluted earnings per share would have been $0.81 or up $0.02 year-over-year.

I'll now make some balance sheet comments and we'll address those versus a year ago's position at February 28th, '05, given our seasonality. Net accounts receivable are up $42.6 million, acquisitions are accounting for 39.5 million of that increase. Foreign exchange translation effect actually accounts for a $4.1 million decrease year-over-year, and sales increases in both segments account for the balance of $7.2 million in this category, or 1.8%, which compares favorably with our 10.7% organic sales growth during the recent quarter, which as you might guess, resulted in lower day sales outstanding year-over-year, which is a positive. Inventory is up $59.7 million, acquisitions accounting for $22.1 million of that.

Foreign exchange translation effect was a reduction of $1.5 million year-over-year, so the remaining increase of $39.1 million is 11.6% above last year's inventory level, which also compares favorably with this quarter's organic cost of sales increase of about 11.3% and also resulted in lower days outstanding year-over-year. Our accounts payable stood -- was up $38.8 million year-over-year, acquisitions accounting for $16 million of that, foreign exchange translation reduction of $1.5 million, and the balance of the increase in accounts payable of $24.3 million is 14.1% growth from a combination of the business activity in growth their timing of payments in both segments, and offsetting most of the $39.1 million of organic inventory increase year-over-year.

Our total debt in February 28th this year stood at $879.5 million, including our short-term. That's up $40.4 million year over year. This mainly reflects the additional debt for our acquisitions, less the $150 million bonds, 7% bonds retired this past June. Our composition of debt at February '06 is now approximately 61% fixed, 39% variable, that follows our October issuance of $150 million of 5.3% post-swap senior notes using the proceeds to pay down balances that were then outstanding against our revolving credit facility, and bringing our available liquidity at February 28th, including our cash, to $494 million.

Our adjusted capital at this time stands at 45%. No change from a year ago or this past May. On our cash flows, our after-tax cash flows from operations were almost 30%, or $25.7 million ahead of last year's first nine months, highlighting our generally improved working capital performance and net reduced days outstanding this year, and including $9.3 million of reduced pretax payments for asbestos claims, and that amount is $5.6 million improved or reduced this year after tax.

The new businesses acquired since May 31 were AD Fire Protection on June 1, illbruck Sealant Systems on August 31, Tamms Industries on January 11, and Custom's Patch and Repair Product line on February 10, with the related debt reflected under our financing activities along with the retirement of $150 million 7% bonds that mature June 15th. With that I will now turn the call back over to Frank.

Thanks, Glenn. In our fourth quarter, we expect continuing strong revenue growth across all of our businesses. A positive contribution to earnings for the first time from the illbruck acquisition and some continuing margin recovery from moderating raw material costs, all of which should result in a fourth quarter sales and earnings growth before asbestos costs of somewhere in the range of plus 15 to 20%. That concludes our prepared remarks, and we'll now be pleased to answer any questions you have on our quarter results or our outlook.

[OPERATOR INSTRUCTIONS]. Your first question comes from the line of Jeff Zekauskas.

Are your raw materials costs beginning to go down or just not going up as much?

A little of both. We are seeing decline versus where they were in the fall, and none of them are back to where they were certainly a couple of years ago, but in some instances we are seeing raw material increases stop, and in other instances we're actually seeing declines from the post gulf hurricane peaks.

What's going down?

In general, we're seeing some solvents going down, we're seeing some declines in things like TI-02. We're seeing some declines in packaging and then broadly, we're just not seeing the increases that we experienced over the past year, particularly in the fall. We are continuing to see increases in a few select areas like metals, for instance, copper, which is a significant contributor to some of our marine coatings, and zinc, which is also a critical component of some of our corrosion control coatings.

I have I guess an accounting question. In your adjusted earnings per share, I think you use 119 million as the average shares out rather than 127. Why is that?

Accounting requires that if you use a higher number of shares in calculating your diluted earnings per share and it actually improves them, that you cannot do that, and so when you're looking at the results, including asbestos costs in particular, that are negative, pure accounting does not allow to you do that because it would be antidilutive. I would point out that on a year-over-year basis there's absolutely no impact because what's driving that are the underlying shares on our contingent convertible bonds, and those underlying shares were also part of our EPS calculation in last year's third quarter.

I guess I'm just a little puzzled in that if you're stripping out the asbestos liability, I would think that the pro forma average shares you would use would still be 127 because there would be no loss, right, so --

it would still be marginally antidilutive. So again, the straight accounting says that if including the excess shares from contingent bonds or options or things hike that would, in fact, because of where you are, be antidilutive, you don't include them. Again, I would point out that in the quarter on a year-over-year basis we faced the same issue and accounted for the coco's in the same way a year ago, so on a year-over-year comparative basis, there is no difference.

I guess lastly, can you talk about why your industrial business was so strong? That is, was it residential construction? Was it nonresidential construction? What was happening in your end markets that enabled to you sell volume at such a high rate?

I think there's two aspects to that. One is the general recovery in industrial markets that's been ongoing for the last year and a half, and we are continuing to see significant bigger spends in a lot of major kind of heavy metal -- and I say heavy metal -- big industries that in the '80s and '90s were huge capital or maintenance spenders and really slowed down significantly at the end of the '90s and the early part of this decade, such as oil and gas, petrochemical, power, pulp and paper were also doing a lot in pharmaceutical.

The other element I would add to that is that from an RPM perspective, we changed our planning process about five years ago, and added what we call growth in strategy conferences to what formerly was basically a straight financial bottom line driven budget process, with the view of trying to accelerate our internal growth by looking out over roughly a three-year period as we funded internal growth programs, and it's really starting to pay off for us.

We've seen, as we talked about before, a service business tied to our Tremco roofing go from $15 or $20 million five years ago to $120 million and growing. We have service components with major retailers, now with Home Depot, that are growing, and with Lowe's, through Rustoleum. We've accelerated an internal investment in fireproofing and fire stopping products with Tremco which we started three years ago, it was a money losing proposition and has now grown to 15 to 20% organically and is making money.

So it's really two things, Jeff. I think it's a combination of pickup in our industrial market that we and a lot of our peers have been enjoying for the last year and a half, a little bit interrupted by the hurricanes in the fall, as well as I think a more aggressive internal investment profile at RPM that we started five years ago and really started having an impact last year, and we're seeing that this year as well.

Okay. Thank you very much.

And your next question comes from the line of John Roberts of Buckingham.

Good morning.

Good morning, guys.

Good morning.

The consultant that you've hired to review the asbestos liability, is that a move towards going to a full accounting of your asbestos, sort of an end of life accrual, like some companies have, rather than the pay as you go methodology that you've been using?

I don't know the answer to that yet, and we will work with this consultant. We expect to conclude this evaluation or analysis in the next couple of months, and if, as part of that conclusion, we can estimate some aspect of our future asbestos liability, we'll do so at that time, perhaps at year end, and the manner in which we do it will really depend on different range of estimated loss and how far out we can look. And so we expect to be in a better position probably by year end.

Do you think the hurricanes of last fall have had any material impact on your business yet or is that yet to come? I know you probably can't break it out, but do you have any qualitative thoughts on that?

Yeah, I don't think it's had much of an impact on us now other than it certainly had a significant impact, as we previously reported, in a number of our areas in the second quarter, all of which in our last call we talked about as temporary. I think we'll start to see some pickup in that this spring. We have had some benefit, for instance, in the petrochemical industry with certain of our product lines, like our fiber-grade business had significant orders that was going out into the oil platforms as they very quickly tried to ramp back up.

There's two aspects of the hurricanes that we think will be beneficial in the coming months. Number one, things like that as we get some extra business associated with some of the rebuilding, and secondly, the capacity and utilization and raw material production, which is significant for RPM companies coming out of the Gulf, still isn't back up to pre-gulf hurricane levels, and they're expecting most of that to come back on line to pre-hurricane levels by early to midsummer, and so that I think will also continue this positive trend that we're seeing in raw material costs.

[OPERATOR INSTRUCTIONS]. Your next question comes from the line of Saul Ludwig of KeyBanc Capital.

Couple questions, two related to asbestos. One, Frank as you know, yesterday there was this article in the Cleveland paper about the judge dismissing 4200 asbestos cases or something. Could you sort of elaborate on that and what maybe greater significance that that has?

That was a reaction to or -- not a reaction to but in response to the medical criteria bill that was passed in Ohio nearly two years ago, and I think that that's a pretty telling event in this sense. There has been tort reform, or asbestos-specific reform, in five states. Florida, Texas, Mississippi, Ohio, Georgia, and there is now pending asbestos-related reform in six additional states, and I think the most telling aspect of it, and we said this somewhat, and disappointingly experienced it, but now it's getting better, is it takes some time after the passage of these new laws to actually see their positive impact in the marketplace.

So now you are seeing, for instance, in Cuyahoga County, which is one of the largest centers of filing of asbestos claims, that the unimpaired claims, essentially claims of people who are not sick and fortunately probably never will be, are now being dismissed en masse. And you're going to see that in some other states. I think over time that will impact the number of cases we report, there's a lot of positive things going on, whether it's federal prosecutors in Manhattan who are investigating its three largest asbestos firms. Two weeks ago there were hearings in the United States House of Representatives in which doctors and screening companies all took the fifth.

You've got some additional state tort reform. For instance, last week, Florida went from a joint and several liability state to a proportional liability state, which is not asbestos specific, but given RPM's particular circumstances with this Bondex product line is huge for us. So all of this is good news, and this trend is continuing. I think the biggest message, Saul to your question related to Ohio, it usually takes 18 to 24 months after the passage of some of these laws to really see the positive impact in the marketplace, which we're now starting to experience. I think that's also evidenced by, if you look at our overall costs for the quarter, they were down from 21 million, roughly, to 17, but if you look at the indemnity payments they were down substantially greater percentage-weighs from about 19 million to about 10 million this quarter.

Next Question, relative to the hiring of the consultant, I'm trying to understand what the rationale is here. If you're a consultant, let's just say what if, let's say he comes up and says you should take a reserve of 500 million, or 800 or 300, whatever, and you take that charge, as long as it's not going into a defensible trust fund that really caps the liability, why go through the whole effort? What's the difference? You're still going to report on it each quarter, as you've done so appropriately. Why do it?

Let me answer that question two ways. Number one, FAS 5, from an accounting perspective, requires that if you have a contingent liability that you have to reserve amounts for an estimate of that future liability, in the event that, A, it's probable, which certainly it's probable that we're going to get new asbestos cases in the future, and B, it's measurable, or reasonably estimable. Up until now, we have looked at this, and in fact we look at it every quarter. We actually hired a consultant, as people recall, in 2003, and given all the moving pieces and parts, coming up with some long-term estimate that had any -- that fell anywhere in the realm of believability or reality was impossible. We are going through that same process again, and we may conclude yet again that it's impossible to look out three or five or seven or ten years or longer and really come up with an estimate that has any believability to it.

I do think, given the circumstances that have changed in the marketplace, that it is probably easier to narrow the range versus where we were a couple of years ago. For one simple fact, a couple of years ago, as most everybody knows now, the marketplace for asbestos claims was as much as anything driven by outright fraud. I think a lot of the aspects of House hearings, federal prosecutor investigations, federal judges now taking on asbestos cases, is starting to weed out the fraud but it certainly hasn't been weeded out entirely, but weed out some of the fraud in asbestos, which does take out, to the extent that that's happening, one of the aspects that are absolutely wildly unable to calculate. So that's a long-winded answer to your question, but we're going through this process again, and if we're able to come up with a range and a period of time over which we're comfortable in reporting increased reserves we'll do so.

The second part of your question is, we will continue to report every quarter our claims and costs. I think we've been a leader in reporting this. Our institutional investors are very sophisticated and can weed out items in cash flow statements and balance sheets and footnotes, Q's and K's. I want to make sure that individual investors who may not look into the details of a 10-K or 10-Q, also are well informed every quarter and in an ongoing basis as to where we stand with this asbestos issue.

Lastly, and I think this is good news, we are solidly of the belief that we are over the hump. I can't sit here and tell you whether our asbestos liability issue for all practical purposes will be resolved in the next three or five years. That could happen from some combination of the activities I've mentioned, federal legislation. We have this pending lawsuit against our insurance carriers for their claims of exhaustion. All of those issues will factor into our future costs, or whether or not we've got a liability that will have a 10 or 12 or 15-year tail on it, but I think for the first time, and I mentioned this in the last quarter, we look at this liability and its impact on our cash flow and are confident that it is continuing to decline.

Great. Let me ask you one other question. You talked about this growth this strategic conference when you answered the prior question about industrial. On the consumer side, I guess a little concerned here. If you strip out the price component, first quarter your volume was 2%, second quarter your volume growth was 2%, and now in the third quarter we're probably looking again about 2%. Historically, there was the hurricanes, there was a closing of a number of stores, and when Glenn was going over the businesses that were strong, I don't think he mentioned in the third quarter Rustoleum. He talked about a lot of other products. Are you happy with your consumer volume growth given the growth in new Home Depot stores, new Lowe's stores, your new products, the garage floor products the do it for you initiatives? Are you really pleased with what's happening in the consumer front, and if the answer is no, why, and what might be done about it?

In general we're pleased with what's happening on the consumer front. Would we like to see our revenue growth higher? Yes. There's a couple things, though, that really make the quarterly reporting that we've done a little bit difficult to track the underlying strength of the businesses, as we commented in our last quarterly conference call, the hurricanes in the gulf had a significant slowdown in our second quarter, which matched the timing of those hurricanes almost perfectly, because of the closure for weeks, in some instances more than a month of, hardware stores, major home centers, major discounters, all of which are big customers of ours, and the disruption in some sales, number one.

Number two, this year in particular, in the month of January, and this did not only impact RPM, but it impacted significant numbers of vendors to a lot of the major home centers, the major home centers, a couple in particular, all -- most of these big retailers have a January 31 year end, and all had significant slow-downs in the month of January related to purchasing and inventory, in some instances dramatically significant. And once their fiscal year end came and went, we saw normal buying patterns which were meaningfully better than the quarterly percentage numbers that we reported in the months of February and as continuing in the months of March.

So the answer in general is, yes, we're happy with our consumer businesses. We believe we are not only maintaining but gaining market share in most of our categories, but there have been some unusual disruptions this year both in our second quarter and our third quarter.

Thank you very much.

Thanks, Saul.

and your next question comes from Rosemarie Morbelli of Ingalls & Snyder.

Good morning. Apologize for the squeaky voice. You just said that you saw a pickup in February and March in your consumer business. Can you give us a feel for the magnitude of that pickup and will that be representative of what you expect long term growth for consumer side?

I think what we've said in the past is that our consumer business ought to be able to grow in the mid single digits on a pretty consistent basis, and certainly we're seeing that. And that's something that's been really a hallmark of RPM. The industrial businesses are somewhat more cyclical, and I think that's why they've been a little slower in past economic challenges and why they're substantially better now. Certainly one reason.

But we would also expect and are starting to see some significant pickup in our consumer businesses both as a result of the slowdown in sales, for instance in January, which, by the way, was a slowdown in our sales to major retail customers. The POS, the point of sale movement, was still very strong, in the 6 to 8% range, and so that, combined with any pickup in a couple of categories, for instance, our Zinsser business is a real leader in mold and mildew products, so we expect to see a pickup particularly in the gulf states as reconstruction and rebuilding continues. So you're going to see substantially better growth, for instance, in the fourth quarter out of our consumer business than what we have just reported in the third quarter.

Could you talk about Dryvit and your progress in that area to the consumer area as opposed to the industrial construction?

We're just getting going with reintroducing Dryvit into the residential market. It's still sold through Dryvit distributors and applied by Dryvit contractors. We've got a -- what we believe is a more residential building friendly product and the Dryvit product, when it's applied right and particularly with a more application friendly product for residential construction, makes for a beautiful home, and we're real excited about being able to rebuild, what at one time was a $20 million and growing faster than the rest of Dryvit and the rest of RPM, residential business, and because of some of the liability issues, shrunk to about adds $5 million a year business. Interestingly enough it never went away totally. It's a great beautification, and waterproofing and insulation package, and we intend to market it more aggressively, but as you know, that really picked up this fall so we don't have much of significance to report, other than that, Rosemarie.

Still on the consumer side, you said that one or two factors which affect the results in the third quarter was what I read to be a new way of marketing to the consumer, to the big box market. What is different?

No, what I really referenced earlier was what, a change in our internal planning across all of RPM, which we really initiated five years ago, and it was a change by which we were frustrated with internal growth rates at the end of the '90s, and certainly during the recession period, that were in the 2 to 3 or 5% range, and I think we realized that if we wanted to accelerate internal growth that we would have to start looking at investing into new growth programs over a three-year cycle instead of just pounding out one-year annual budgets that we're doing a nice job of protecting margins in our bottom line, but perhaps also we're one cause of a pretty moderate and to us disappointing internal growth rates. So we initiated that program five years ago. It's taken awhile for the early three-year investments to pay off and grow. A few of them haven't work and have been stopped. But now it's a regular part of our process.

The good news is that the extra spending that we build into our budgets is now sort of an annualized thing, so the incremental hit in our SG&A of higher spending in this area isn't noticeably much. For instance, this year over last year versus where we were five years ago, and I think if you look at our internal rates of growth over the last two-and-a-half years, and certainly that's true this year, internal growth for us, excluding price, is now in the 6 to 8% range, and in our businesses, particularly in our -- some of our more mundane businesses, that's pretty good in industries and product lines that traditionally grow in the 2 to 3% range, or roughly GDP.

Lastly, on the raw material costs, as they are moderating, and in some cases declining, how can you be certain that you will be able to get through selling price increases in order to recapture your lost margins?

We have been getting price increases for the last year and a half. We had price increases as recently as this fall and winter, a lot of that associated with the continuing impact in general of tight supply, the supply and demand issues that were impacting raw material prices for the last couple of years, and then certainly, the issue of the other hurricanes this fall -- excuse me -- and we see them moderating. I think there's going to be more capacity still coming on in the gulf area.

I think over a longer term basis, some of the chemical capacity that was typically sold into the North American markets over the last few years was diverted, along with other raw materials. For instance, into Asia and the China market. There's significant capacity in the chemical area coming on in China over the next three years, and so all of that bodes well. Of course, there are geopolitical issues that, to the extent they have severe ramifications for oil prices, and or some people's belief that we're going to see continuing major hurricanes in the gulf states, those factors will certainly put a halt to what otherwise, as we see as kind of a moderating and in many areas solidly declining raw material cost situation.

In combination with the price increases we've gotten, we would expect, barring any of these unexpected items, geopolitical or weather related, that you will see a full recovery of our margins over the next year and a half or two.

So you are not expecting that your customers are going to require a break on pricing as raw material costs continue to go down?

They are going down, Rosemarie, from where they were in the fall. We aren't anywhere close to where raw material prices were two years ago. And so I suppose at some point in certain areas that might be true down the road, but we are still recovering lost margin, and I don't see that as an issue at all for the foreseeable future.

And then last question, if I may, are you seeing any kinds of slowdown in any specific markets that you serve?

Right now, in terms of business, we're hitting pretty much on all cylinders. With 30-plus operating units, we have some that are doing better than others. but generally, as I mentioned earlier, we would expect higher rates of growth out of our consumer businesses, in the fourth quarter and going into the summer, than we certainly experienced in the first half of the year. We expect a continuation of the strong industrial segment internal growth.

Obviously illbruck will be positive to us in the fourth quarter. It will be annualized after August 31, but we also get some benefit from some of the acquisition-related restructuring we're doing there, and one other thing I haven't mentioned is that we still after pretty decent pipeline of medium size and small product line acquisitions that we are getting better and better at in terms of integrating into our existing businesses.

Thank you.

Thank you.

And your next question comes from the line of [Andy Karita of Kettle Hill.]

I had a question about gross margins. If you look back -- if your margins were in the 5 and 4% range, adjusting acquisitions with margin baseline think about returning your margin structure to? And then, you mentioned returning your margins to that level over a year and a half to two years, I'm just curious as to why it should take that long, because theoretically if raw materials stay flat and you're able to take a 2 to 3% price increase, which isn't unreasonable, given the environment, why wouldn't that just immediately start to flow down to the bottom line?

I think back to the first part of your question, you broke up a little bit, but to the first part of your question, our gross margins probably peaked -- if you go back to the mid '90s we were in the low 40s. We got our gross margins up to the mid -- the 45, 46% range, then have really seen in the last two years a pretty steady decline, more pronounced in our consumer segment than our industrial segment, as a result of our inability to stay ahead of the game with rising raw material costs and price increases that weren't soon enough and in hindsight weren't big enough.

I think we have gotten to the point where price increases by themselves would not have covered all of the margin deterioration, but certainly we knew, and I think the market knows, that some of the raw material instances, particularly following the hurricanes, were unsustainable spike levels. Barring geopolitical issues that move oil back up on a sustained basis or barring other weather-related problems, we see a steady sustained maintenance or in some areas decrease of raw material prices, and with price increases we've gotten, would expect to see recovery of the margins, as we indicated. It could come more quickly, although I think it wouldn't be real prudent for to us expect to the come quicker than the next year or two.

Right. Okay. Is the 45 to 46% gross margin range, is that reasonable to expect to get back to, or is that -- has that changed because of the mix of some acquisitions? If so, what's like the range we should think about getting back to?

Yeah, I don't, off the top of my head, know a rate that we'd get back to. There's two aspects that are making that on a historic basis, if it were just apples and apples lower. One is an acquisition like illbruck that carries a mid 30s gross. The other is service revenues that are tied, for instance, to our flooring installation services, our roofing installation services, or even some of the stuff that we're doing with Rustoleum on a do it for you basis, those gross margins are in the mid 20 to 30%, and it's just the nature of the service business, because most of your personnel costs are actually a cost of delivering the sale.

Having said that, we said a year ago, and I believe today, and you're going to see it, that through the cycle, our EBIT margins will be higher than they were before this raw material cycle started two years ago, for a couple of reasons. One, we will recover most, if not all of our gross margin that was lost. Secondly we're leveraging our SG&A base on a higher sales rate, and lastly, because we have become a lot more efficient, both at the SG&A level, at the plant level, and in our ability to acquire product lines, which ten years ago we didn't know how to do, five years ago we really didn't know how to do, and completely integrate them into an existing RPM company such that while they're not big, the IRR in payback is big and quick. And so we would expect, barring some of these unforeseen items that would impact everybody that through this cycle you're going to see EBIT margins that are higher than they were where we started.

So it's reasonable to think that maybe 200 to 300 basis points of improvement in gross margin is possible over next couple of years?

I think that's possible over the next couple of years.

okay. Thank you very much.

Thank you.

Your next question comes from the line of [Craig Stone. ]

Good morning. Good morning. I was struck by your comment of new asbestos cases being above 10,000 versus roughly 8,000. That's a big percentage increase. Would you talk about why you believe we're seeing such large numbers of increases in filings so late in the game? Would you compare the filings that you're seeing today to the filings you were seeing a couple of years ago in terms of potential eventual monetary damages, and do you see any thoughts on when the number of new cases will roll over?

To your question about the increase in claims year-over-year, the most significant increase in claims that we've seen are non-malignancy claims, and I think what you're seeing is a huge rush to the courthouse in anticipation of state law changes or all the publicity that this federal legislation has received, and so just for one example, and this is a year old, but a little more than a year ago, our biggest increase was in the state of Florida from one firm who ultimately filed 4,000 claims against Bondex, all of which had been previously filed in the year or two prior, none of which initially named Bondex, none of which really represents people with any illness, and all of which are now being dismissed by the scores.

Similarly, we're seeing other attempts, and it's not impacting only us, it's impacting other people, of kind of filing the last bunches and or taking old inventory that didn't name certain defendants like us and just including us. For instance, in the Florida cases, we haven't paid a dollar in settlement. We don't anticipate a dollar in settlement. It's cost us some thousands of dollars in defense costs to get these dismissed, but it's not really high. Mesothelioma cases account for 90% plus of our costs. In many of those instances the claims of including bondex are also fraudulent, in my opinion.

We are named in meso cases where the exposure is clearly industrial, where it is clear that somebody add long-term chronic exposure to asbestos from a product or numerous product or settings that we had nothing to do with, and I think some combination of the focus by federal judges and house hearings on fraud in general is making filings of those cases that do cost us money, people are a little -- lawyers are a little more circumspect. Secondly, changes in joint and several liability, or asbestos laws, are having a significant impact on us in a positive manner. So I think in the coming years, you're going to start to see the actual numbers of cases decline, although we can't control that. There's no reason why a lawyer, unfortunately, in certain states, couldn't turn around and name bondex to 2,000 more cases of cases that were filed two years ago and that we did'n't happen to be named in. The quality of the cases is substantially lower. Our dismissal rate today is upwards of 85% of all the cases that we get.

And, again, the jurisdiction, even in Madison County, Illinois, which historically has been probably the worst venue for any defendant, the new judge is actually decided to invoke Illinois law, which always had venue provisions, and is dismissing any cases of people who filed in Madison that either can't prove they were harmed in the state or are not residents of the state, and that's dropping the number of cases that we're seeing there. So all of the trend lines of the types of cases that actually cost us settlement dollars are moving in the right direction.

The last comment I'll make on that is, if you look at a lot of the statistical data that we're starting to look at now with this consultant, just the raw instance of mesothelioma from all the actuaries that looked at it peaked a couple years ago, so you're also, for all defendants seeing an expectation of declining incidence of disease over the coming 10 to 15 years, virtually down to nothing. And that's good news in general, with the small product line it had less than 1% what the broad meso population, less than 1% market share. What the broad meso population is doing shouldn't impact us. So I think the scrutiny of fraud unclaiming practices as well as state law changes, all of which are permanent, are really the biggest factors in our declining costs.

Thank you. I always think of you as a maintenance oriented company, rather than a new construction oriented company.

Yes.

the products do get into new construction, and after we've seen a bulge of new construction, then there is, of course, maintenance that comes down the line. Would you talk about how your business relates to the housing and commercial building cycle and what we should expect with the rollover of housing starts?

First, on the housing side, very little of our consumer products are used in new construction. In our primers, sealers, mold and mildew products are all very high end, high performance, and the type of paint that's used, particularly on the interior, new construction, tends not to be ours. Nobody buys rustoleum products in new construction. Our DAP business is involved a little but tends to be predominantly home repair and maintenance.

So the reason we're so confident that we're going to be able to maintain a steady mid to upper single-digit growth rate as long as we're doing the job with our customers and certainly with new product ideas, in our consumer businesses, is because while we have not been involved in new construction, this huge housing boom has not really generated sales growth for our consumer businesses, there is this huge inventory of homes today, and if somebody put to the me in trying to explain their view of it, there's a lot more garage shelves and basement shelves to hold our stuff than there used to be. So we're pretty excited about our ability to maintain a solid level of growth in that area.

In our industrial businesses, we are, out of $1.5 billion, let's say, billion and a half plus, probably about $300 to 400 million that are in some way tied to construction markets. Probably half of our Dryvit business is involved in new construction, principally commercial. Some of our Tremco sealants and waterproofing business is tied into new construction although the roofing and waterproofing business is almost exclusively maintenance and renovation.

Our TBS, which is part of tremco, we have the number one market share in residential basement waterproofing. And so that's the one area where new construction and housing would impact us, having said that, only 25% of basements historically have gotten anything better than just a cut back asphalt waterproofing, and as builders start to use basement space on either a finished or semi finished basement, we remain excited about the fact that they're going to utilize this very heavy-duty waterproofing and insulation package that's part of our tremco barrier system. So that's an area that despite an expected downturn in new housing construction, we expect to grow.

Then the last area that we're involved in new construction is in our euclid chemical business, a producer of add mixtures and concrete products construction chemicals. Almost exclusively industrial. And that's the one area that industrial construction, particularly in North America, which is the heart of our strength, was really slower down at the end of the '90s and beginning of this decade, and in a lot of significant industries we're starting to see major expansions or industrial construction continue, so that's kind of the outlook. But in general, about 300 to 400 million of our total revenues, roughly 10 to 12%, would be impacted by the economic new construction cycle.

Thank you very much.

Thank you.

And your next question is a follow-up from the line of Jeff Zekauskas of JPMorgan.

just quickly how many asbestos cases were settled in the quarter?

213.

And in general, of your debt, how much of your debt is floating rate?

Our debt right now is about 65% fixed, 35% floating.

And if the asbestos environment is improving, why is it that you increased your reserve by 15 million?

Well, we currently have a strategy that we utilize our existing experience basically to project out what the value of our claims will be that walk in the door in the new quarter, okay. One of the reasons that we're again trying to undertake an estimate of long-term -- of the long-term liability is because it's probably wrong, and wrong in the sense of being conservative, to value a claim that comes in today based on a claim that came in two years ago that we just settled in the last quarter, in this sense. Texas used to be a very difficult jurisdiction for us, because it was a joint and several liability state, very favorable venue for asbestos filings, and in an area that was fraught with fraud, evidenced by this federal judge in Texas who has really kind of blown open the whole fraudulent claim game associated with asbestos and silicosis. Texas passed tort reform, including liability and asbestos reform in general.

So, for instance, a case that was failed two or three years ago would be difficult for us to settle because even though we probably had little or no exposure in a joint and several liability setting, if all the other defendants were bankrupt, we could really be hung out for a big settlement. We just tried a cains Texas, and out of a -- it was an asbestos case, a mesothelioma case, the first case tried in Texas turned new proportion natural liability law, and the jury verdict was $2.9 million, and RPM's proportion was $8,000. That's a dramatically different environment than where we were two years ago. One case doesn't make a trend, but quite honestly, two or three years ago we would have never gotten in front of a jury because of the likelihood or risk that it would be a problem for us.

Well, maybe if I can state at different way, so why is it that the reserve went up $15 million?

Again, the reserve went up $15 million because our most recent experience suggests to us that we -- this last quarter we had a $17 million cost. The biggest thing that's driving our cost now is part of what will drive our cost in the future down. If you separate our cost last year in the third quarter, 21 million was the total. 19 million of that was settlement payments. This quarter, we have $17 million costs. Only 10 million was settlement payments. And so what's really driving a maintenance of our higher experience now is a decision a year and a half ago to be very aggressive from a defense perspective. We've got new state laws.

We also are now in a situation where the notion of fraud and asbestos claiming is generally in the marketplace, but if you're not willing to defend yourself, new state laws aren't going to help you. Okay, if you're not willing to get in front of juries, which in the prior 18 years of our experience we never did once, and in the last 18 months we've done on 12 different occasions, you're never going to change the settlement demands or the experience that you have.

So that's, Jeff, really what's -- it's been a changing mix of higher defense costs, which three years ago was $8 million, and today is 20, driving down lower settlement payments and in combination with the other factors I mentioned, we would expect these to be the reasons why over time, in our case, you're going to see a declining permanently asbestos costs and hopefully more quickly than what at this stage we're comfortable with expressing, but time will tell. I don't know if that answered your question. That's the best I can do with that. But I will say that, if we are able to take a longer view of this, certainly to the extent that we're continuing any type of quarterly or annual increase, at that point it will be related to some future period, not our current experience.

I guess I'll just try for the last time. That is, does the $15 million reflect sort of expenses that you envision two years out that you didn't previously account for because they were outside of your general two-year reserve forecast?

Our current philosophy has been, and continues to be, that it is very difficult to value even current claims that come in the door. As we talked about before, you get a claim that walks in the door today, it's not likely to be resolved for a period of 18 or 24 months, and, the best we can do was value that claim based on our history, based on the disease, based on the state in which it was brought, and based upon the law firm that brought it. I mean, all these different issues.

And so all we could really do was value our existing claims. When we looked to try and value future claims in the past, the possible outcome, based on an 18-year history, where our costs were -- gross costs, forget about insurance, were $200,000 a year, and then we had from the summer of '02 into the summer of '03, a year and a half ramp-up of 10 million to 20 million to 54 million, there was nothing about a year and a half or two years experience that looked like a rocket ship, and an 18-year experience that reflected our one half of 1% market share that, according to assistance of an outside consultant, would allow to us measure anything into the future.

So then? And so back to that, so what we diligently try and do, and have communicated, I think, very clearly is we measure what's in-house, because -- and we're unable to measure future liability of claims that aren't yet asserted, although we have stated throughout that we do have future claims, and those future claims in future periods, or that future liability, could be material.

So is the meaning of the $15 million reserve that over the course of the last three months the value to RPM, or the harm to RPM, from new claims filed is, plus your expectation of defense costs, is 15 million?

Correct, based on our current methodology. And our current methodology, which is relatively sophisticated and detailed, is basically saying that we're not going to take into account necessarily all of the good factors that, we've outlined here and that you can read about in the paper. It takes into account what we experienced recently, because it's the only basis on which, back to my comment on Texas, Texas cases cost us a lot more to settle two years ago. In Madison County, Illinois, every claim that walked in the door had settlement value because the way the judge handled those claims, basically ignored certain aspects of Illinois law. Our dismissal rates today are 85%.

Okay.

Is the experience of one case under the new law in Texas enough to project out our future liability? Gee, I hope, so but we'll find out. So that's the answer. Let me answer it one other way. My expectation would be that the cases that cost -- that walk in the door today that we settle two years from now will cost us less than $15 million. That's my belief. But that's aside from the methodology by which we've stuck to, to figure out how to value these things.

Okay. Thank you very much.

thank you.

And your next question comes from the line of [Michael Shaker of Minto Partners.]

Can you give us an update of what you see what's going on in Washington? Are we going to head toward the medical criteria? What's your best guess at this point?

I think that the Fair Act -- there's one last attempt by Senator Specter and a few others to get the Fair Act going, and I think that in my opinion, is going to either happen by the Memorial Day weekend or nobody will wave the white flag but if they don't get it out of the Senate by Memorial Day weekend, at least in its current form, I don't think it's likely to happen. I think there are other attempts to look at obviously in the house the Canon Bill, Medical Criteria Bill, there's other ideas floating around out there about perhaps how to address the real issue of illness, which is really a mesothelioma issue, most of the other asbestos diseases, medically, are gone, which is a good thing, and so I think that's the current state of play.

As I mentioned earlier, there are six other states who have pending asbestos related tort reform. Some of those will pass, and some of those will not. You're not going to need meaningful asbestos tort reform, medical liability or otherwise, or medical criteria or otherwise, in too many more states before a number of the defendant companies that have been advocating for federal solution quit advocating for a federal solution.

Thanks.

Thank you.

And your last question comes from the line of Akiba Cohen of Sigma.

Thanks for taking the question. It's really two questions. Am I doing my math correctly here? You had mentioned about 90% of your costs involved meso cases. That would seem to imply, and I don't know whether you take 100% of the attorneys' fees or 80% of the attorneys fees, and relate those to meso, but it seemed that non-meso cases, non-attorney payouts are running around 4 million a year?

I don't know the answer to that. Again, between -- I can give you a rough breakout of what I think last year's was. I don't know this year. I did analysis of our 2005 costs that were in the mid 60s, and, it will tell you how badly this system is broken. In 2005, 20 million of our 65 plus, 67, was defense.

It's our estimate that somewhere in the mind of 20 to 23 million was dollars that went into the pockets as fees of trial lawyers, and, that leaves a balance of roughly what we assume about 15 million of actual net benefit that went to mesothelioma victims and somewhere in the neighborhood of $5 to 10 million of costs that are going to other circumstances, when they're lung cancer claims, almost all of which also include smoking, or nonmalignant defense or settlement costs.

Okay. So is your positive outlook partially attributable to the decline in new meso cases, and can you talk for a second about what you've seen in terms of your trend for new meso cases being filed?

Yeah, the filings against us in terms of new meso cases haven't -- they've leveled off, so we're not seeing the significant increase that we saw, but they're not declining, but the quality of those cases are declining. Our dismissal rates are higher, and our ability to defend ourselves in key states, I mean, the most challenging states for all defendants, particularly for us, were Ohio, were Texas, were Mississippi, remain Illinois, and in every one of those states I mentioned, Ohio, Mississippi, Texas, substantial tort reform that is really meaningful for us because of our small consumer DIY exposure, and in Illinois, a new judge that's applying Illinois venue law, all those aspects are having a positive outcome on our settlement amounts, our dismissal rates, and then underlying that in the whole situation is the actuarial forecast that the incidence of meso peaked a couple of years ago and is on a slow, steady decline over the next 15-year period.

Okay. Great. Then one last question. You had mentioned that in Florida other than the attorneys fees, you haven't paid out a dame. How many of the 10,000 cases are in Florida?

4,000 plus.

So it's 4,000 plus. So effectively, you are saying that it's really less than 6,000 cases where you --

Our experience so far is they've been dismissed by the dozens at a time. And we'll go through that process and pick up the dismissal rate, and, yes, that's right, so about 6,000 claims and probably 10% of those are meso claims, and the balance are unimpaired claims of one nature or another that are not likely to cost us much if anything.

So assuming no changes in trends elsewhere, you should expect the number of claims outstanding to drop as these Florida cases continue to be dismissed, is that correct?

That would be our expectation, but again, I can't -- the Florida case was telling, how a lawyer can, over a couple month period, file 3 to 4,000 cases. It's now 4,000 plus, of cases all of which were previously filed, none of which mentioned Bondex, and all of which were amended to include Bondex. It's a funny thing.

So over the long run you're going to see this trend down, and for all the reasons that we've talked about, doesn't mean that we're not going to see an odd spike here or there but the odd spikes are all going to be related to unimpaired claims, none of which are costing us or for that matter any defendants in this marketplace much. I also think you're going to see them in some cases spike down dramatically because you've got a bunch of screening companies and doctors sitting in front of U.S. House Reps taking the fifth amendment, and it's all about these unimpaired claims.

wonderful. I appreciate all the time.

Thank you.

Ladies and gentlemen, this concludes your question-and-answer session for today. I would like to turn the call over to Management for closing remarks.

Thank you. In closing, I'd like to reiterate our positive outlook for the conclusion of our 2006 fiscal year and what we expect to be a very strong start to our 2007 fiscal year, which will begin June 1, 2006. We look forward to providing you the details of our 2006 fiscal year end and the outlook for 2007 when we release year-end results in New York on July 24th.

I also want to acknowledge the outstanding performance of RPM's associates worldwide for generating our strong growth and for their flexibility and determination in delivering strong results in what's been a very challenging year. Thank you very much to all on the call, and all listening in on the Internet for your interest in RPM, and have a great day.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.