RPM International Inc (RPM) 2006 Q4 法說會逐字稿

Welcome to RPM International's conference call for the fiscal 2006 fourth-quarter and year-end. Today's call is being recorded. This call is also being webcast and can be accessed live or replayed on the RPM 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 directly comparable GAAP financial measures on the RPM website. 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, and good morning to all on the call. We are pleased to be reporting a very strong finish to our 2006 fiscal year. On the call today Glenn Hasman, our Vice President of Finance and Communications, will provide financial details on our fourth quarter and the fiscal year. Then I'll be providing some outlooks for our new fiscal year and then we'll take your questions and answers. Before Glenn gets started I'd like to comment on our asbestos liability, something that we've done on all our calls and also address the long-term asbestos liability reserve, which we established today with a $321 million charge.

During our third-quarter conference call, we indicated that our cash costs for 2006 would likely be in the range of $60 million to $62 million. In fact, our total cash costs for the year came in at $59.8 million, which compares favorably to our total cash costs in 2005 of $67.4 million. Year-over-year settlement costs were down for the second straight year, finishing $10.6 million below last year. Although higher defense costs offset some of this improvement in settlement costs because of our more aggressive defense posture, which is continuing. Our total cash costs for the fourth quarter were $12.9 million versus $11.1 million in last year's fourth quarter. Of the $12.9 million, $7.1 million was spent on defense and $5.8 million on settlements compared to $8.1 million on defense and $3 million on settlements in last year's fourth quarter. We secured dismissals or settlements of 106 claims in the quarter.

Now I'd like to address the establishment of a ten-year asbestos liability reserve. As we also noted in the last quarterly conference call, we retained an expert to assist us in ascertaining whether or not our future asbestos liability costs could be reasonably estimated. And if so, to work with us and in developing an appropriate exposure estimate and over an appropriate period of time. After working with CNW for the last several months, which included reviewing the population of potential claimants likely to have been exposed to asbestos by our products, historical and potential future claims rates, historical and potential future settlement and defense costs, along with various other factors, we determined that we are able to develop a ten-year estimate.

Based on this analysis, we increased our existing reserves by $321 million on an undiscounted basis to cover the costs of our claims through May 2016. This future claims reserve is in addition to our existing reserve, which up till now has covered known in-hand claims. Our reserve for existing known claims asbestos liability stood at approximately $100 million at year-end. Based on our current outlook and reserve assumptions we anticipate that the drawdown of this long-term reserve will be higher in the first few years and over time decline, which is consistent with our recent experience. While we may have to augment this reserve in the future, we believe the study reflects well on how we have managed this particular liability challenge over the past couple of years and expect continuing lower costs on a year-by-year basis. We are further heartened by an improving legal environment at the state level, as well as greater public scrutiny of the fraud and abuses inherent in asbestos litigation.

Separately, we continue to aggressively pursue legal action against our third-party insurers we believe wrongfully claimed exhaustion of their policy limits. We did not factor this into our long-term reserve analysis, though this litigation against carriers could result in certain prior costs and future costs being covered by third-party insurance. The combination of the $14 million charge taken in the fourth quarter for current cases, and the $321 million charge taken to establish a long-term estimate for asbestos liability resulted in $335 million of asbestos charge expense in the fourth quarter and approximately $380 million for the full year. We believe that this long-term asbestos liability reserve will help alleviate a cloud of uncertainty that has somewhat obscured RPM's otherwise strong fundamental performance over the last several years. This includes 2006.

We finished this year with a very strong finish, despite many challenges. We overcame hurricanes and their impact on our second quarter and, in particular, their impact on raw material price spikes and in some cases availability. While the fourth quarter finish to the year was strong, it was really a continuation of strong performance by RPM companies for the last six months. For the last half of our 2006 fiscal year, sales were up 20% and earnings increased 31% before asbestos costs, which highlights the underlying strength of our operations throughout the year. Now I'd like to turn the call over to Glenn Hasman for details on the quarter and the full year, after which I'll provide some comments on our outlook for fiscal 2007 and answer your questions. Glenn.

Thank you very much, Frank. Good morning, everyone. Since Frank's already reviewed the asbestos status and the charges we've taken this quarter and for the year, the comments that follow will refer to only our adjusted operating results before these charges. I'll begin with a review of our P&L results, followed by highlights from our balance sheet and our cash flow statements.

Beginning with the fourth quarter net sales, this year's fourth quarter sales grew 20.5%, year-over-year to a record fourth-quarter sales level of $909.2 million. Organic sales growth amounted to 12.1%, including pricing of 3.1%. illbruck sealant systems, which was acquired August 31, 2005 , plus six smaller acquisitions, net of a small divestiture, added 8.2% to net sales growth.

Industrial segment net sales were $536.9 million, which grew 28.4%, over last year's fourth quarter. The organic industrial segment growth was 13.1%, including pricing of 3.5%. The following industrial product lines all registered double digit organic growth this fourth quarter: fiberglass reinforced plastic grating deposits, interlocking PVC floor tile systems, corrosion control coatings, institutional roofing and related services, concrete admixtures and related construction chemicals, water proofing products overseas, exterior insulating finishes and most all international operations. The balance of industrial segment growth came from illbruck, plus five relatively smaller acquisitions, which added 15.2% to our industrial net sales growth.

The consumer segment saw net sales of $372.3 million, which grew 10.7% over last year's fourth quarter. And this segment's growth is essentially all organic of 11%, including pricing of 2.6%. The following consumer product lines all registered double-digit organic growth during the quarter: edible and pharmaceutical coatings and glazes, caulks and sealants, primer sealers and mold and mildew prevention products, small project paints and coatings, and automotive restorative products and finishes. The balance of our consumer segment sales difference, or about a 50 basis points net decline, came from a small product line acquisition, less the January divestiture of Thibaut.

Moving to gross profit. Our gross profit margin of 43.1% this fourth quarter is off actually from 43.7% a year ago. And this margin reduction is essentially the result of introducing illbruck and other acquisitions with inherently lower gross margin structures than the balance of RPM as our higher average selling prices offset higher raw material costs this quarter and productivity gains from 9% organic unit sales growth, excluding price, were able to compensate for certain differences in sales mix this year. Including increased services sales, such as Tremco's WTI and Rust-Oleum's at-home services, which both carry lower gross margins.

Higher material costs have continued to affect our year-over-year results, but we began to see some moderation of these costs beginning in our third quarter. Our own price increases will continue to help compensate these higher costs and gradually help recover our gross margins. Industrial segment gross margin declined to 44.2% to 45.6%, mainly as a result of illbruck and the other acquisitions, plus, a somewhat lower margin mix of sales along industrial product lines, including the increased services sales, which were partly offset, actually lifted by the productivity gains from 9.6% organic unit sales growth of this segment. Consumer segment gross margin held steady both fourth quarters at 41.5%; that's higher average selling prices, plus productivity gains from their 8.4% organic unit sales growth, offset by higher raw material costs and certain differences in their sales mix.

SG&A expenses declined to 29.3% of sales this year, from 30.4% last year during the fourth quarter. This percentage improvement reflects the benefit from the strong organic sales growth, coupled with spending controls and partly offset by mainly growth related or investment expenditures. Both operating segments’ SG&A improved significantly as a percentage of sales, industrial to 31.4%, compared with 32.7% last year, and consumer to 22.1% from last year's 24.6%. Corporate/other expenses increased to $15.7 million this fourth quarter from $10.3 million last year. And this increase reflects mainly higher health care costs for the organization's U.S. and Canadian covered employees, as well as other higher employment-related costs.

Our earnings before interest and taxes, or EBIT, in adjusted dollars grew 25.3% and the margin improved 50 basis points to 13.8% this quarter, reflecting principally the contribution margin leverage from the strength of our organic unit sales growth, which was 9% and combined with expense controls. The industrial segment EBIT improved 28.1%; that's a 12.8% margin on sales compared to last year's 12.9%. And the consumer segment EBIT was improved by 27.4%, a 19.4% margin on its sales compared to last year's 16.9%. Interest expense net was up $3.1 million, quarter-over-quarter. And that reflects primarily acquisition-related debt service, plus Fed driven net rate increases on our variable debt, less the interest saved year-over-year from lower rate debt added in September 2004 to prefund the June 2005 maturity of 7% notes. And there was some additional investment income this year over last year. Rates this year during the fourth quarter averaged 5.8%, compared to 5.2% a year ago.

The tax rate as adjusted both years was 34.6% this year, compared with last year's 36.8% effective rate. Recent tax law changes will benefit us on a net basis, and are reflected in the current-year tax rate. In addition, the strength of our profit performance this year, combined with where those profits were earned in terms of tax rate jurisdictions, resulted in lower overall effective rates. As a result, this quarter's comparatively lower rate also accommodates our final full-year performance. Net income as adjusted of $73.6 million this year increased 29% from last year's $57 million, with the margin on sales improving to 8.1% versus 7.6% last year. Diluted earnings per share as adjusted reached $0.58, up 26.1% compared with last year's $0.46.

For the full fiscal year, net sales grew 17.7% to a record $3.01 billion, organic sales growth amounted to 10.7%, with pricing of that 3.3%. illbruck Sealant Systems plus eight smaller acquisitions net of the small divestiture added 6.9% to net sales growth. The industrial segment’s, net sales for the full year grew 25.7% to $1.812 billion. The organic industrial segment’s growth was 13.1%, including pricing of 3.2%. The following industrial product lines all registered double-digit organic growth this year. Fiberglass reinforced plastic grating products, corrosion control coatings, concrete admixtures and related construction chemicals, water proofing products overseas, institutional roofing and related services, exterior insulating finishes, powder coatings, and industrial sealant,s as well as most of our industrial -- or international operations.

The balance of industrial segment growth came from illbruck plus six smaller acquisitions, which added 12.4% to net sales growth. Consumer segment net sales grew 7.4% to $1.197 billion for the full year, essentially all of that was organic growth of 7.5%, including pricing of 3.4%. The following consumer product lines all registered high single-digit organic growth during the year. Edible and pharmaceutical coatings and glazes, caulks and sealants. Automotive restorative products and finishes, primer sealers, and mold and mildew prevention products and small project paints and coatings. I will skip over further commentary regarding the gross profit and SG&A expense categories, since the changes here year-over-year are much the same as they were during the fourth quarter.

Adjusted total EBIT this year increased 7.9%, reflecting contributions from the organic sales growth while this margin's decline to 9.9% of sales reflects principally the higher raw material costs this year, as well as the seasonal timing and initial acquisition-related costs for illbruck. The industrial segment EBIT improved to 20.8%; the consumer segment EBIT improved 8.2%. Interest expense net was up $6 million for the year, which reflects acquisition-related debt service and Fed-driven net rate increases on our variable debt, but partly offset by interest saved year-over-year from the lower rate debt added in September '04 to prefund the June '05 maturity of 7% notes, mentioned earlier, plus additional investment income this year over last. For the full year, average rates were 5.2% compared to last year's 4.9%. The tax rate as adjusted was 34.7% this year compared to 36.1% a year ago. Again, the strength of our profit performance this year combined with where those profits were earned in terms of tax rate jurisdictions resulted in a lower overall effective rate. Net income as adjusted in 2006 reached a record $168.1 million, above last year's $154.5 million, by 8.8%. Diluted EPS as adjusted was a record $1.35, ahead by $0.10 or 8% over last year's $1.25.

Now, moving to the balance sheet and comparing differences year-over-year. Net accounts receivable were up $97.9 million and net acquisitions account for $38.1 million of that. Foreign exchange translation effect accounts for another $8.4 million. Sales increases account for the balance of the increase, which was $51.3 million, or 9.3%, which compares favorably with our 12.1% organic sales growth during the most recent quarter, resulting in lower days outstanding year-over-year. Inventory was up $64.6 million, net acquisitions were $22.4 million, foreign exchange translation, $5.2 million, the remaining increase of $37.1 million or 11%, above last year's inventory level also compares favorably with this quarter's 11.9% organic cost of sales increase and also as a result of lower days outstanding.

Accounts payable were up $59.1 million, net acquisitions were $16.8 million of that and foreign exchange translation was $3.7 million. The balance of the increase, or $38.6 million, 14.1%, comes from a combination of business growth and the timing of payment in both segments, offsetting the entire $37.1 million of organic inventory increase year-over-year. Total debt of May 31 was $876.5 million, including the short term and was up $38.5 million year-over-year. This mainly reflects additional indebtedness for our acquisitions this year, less the $150 million of bonds retired June 2005.

The composition of our debt at May 31 was 62% fixed, roughly, and 38% variable, following our October 2005 issuance of $150 million, 5.31% senior notes, and using those proceeds to pay down the balances drawn against our revolving credit facility. Our available liquidity at May 31, including cash, stands at $514 million. We have a net debt to capital position of 45.3% this year, which compares with 38.7% a year agomainly because of the $215.6 million ten-year asbestos charge reduction of equity. This still provides us some financial flexibility to continue to pursue small- to medium-sized acquisitions.

Cash flows. Our after-tax cash flows from operations were $185.4 million, ahead of last year's $157.4 million by $28 million or 17.8%. Highlighting the improved operating and working capital performance and efficiencies reflected in the net reduced days outstanding this year, and including $7.5 million from 11% lower pre-tax payments for asbestos claims as laid out by Frank earlier, $59.9 million this year, $67.4 million a year ago. Our free cash flow generation, and again the way we define it is cash flow from operations, reduced by our capital expenditures, and further reduced by our dividends, during 2006 amounted to $49.8 million, compared with $32.8 million a year ago, or ahead $17 million or 51.8%. I will now turn the call back over to Frank.

Thank you, Glenn. As we plan for 2007, we are forecasting sales growth in the 8% to 10% range. We expect this to be higher in the first half of the year, and we anticipate slower growth in the last half of the year or the beginning of calendar 2007, as a result of the impact of increased interest rates and higher energy and raw material costs, which we expect will slow the economy some, and therefore our growth. Our consumer business plan is to grow about 6% on the year and industrial should grow about 10% on the year.

We are starting the year with continuing strong industrial segment growth in excess of these planned expectations. Though we are seeing some weakening in our consumer business growth as we continued to experience the stop-and-start order flow that has been ongoing for the last six months at a number of our major accounts. As a result of the anticipated sales growth, we expect earnings for the year to increase in the 10% to 12% range. This outlook certainly could be materially impacted by changes in raw material costs associated with geopolitical events. It also does not include any acquisition activity, which is ongoing and certainly will have a positive impact for RPM in 2007.

In our fiscal 2006 we accomplished a lot. We completed a smooth transition from our former auditors, Ciulla, Smith & Dale to Ernst & Young. We completed six acquisitions, five in the industrial segment, and one in consumer for a total combined cost of $186 million. These businesses on an annualized basis generate about $250 million of sales. After-tax cash from operations, as Glenn pointed out, increased 18% year-over-year. And our operating companies completed our fifth year of record growth in sales in earnings before asbestos costs. Over that five-year period, RPM shareholders from the period of May 31, '01, our fiscal year-end, to this year's May 31 '06 have received a compounded annual rate of return of 22% versus 10% on a compounded annual basis for our peers and 2% for the S&P 500. We look forward to reporting another year of record growth in 2007 and continuing positive return for RPM shareholders. We would now be pleased to answer your questions on the fourth quarter, our 2006 fiscal year, or our outlook for 2007.

[OPERATOR INSTRUCTIONS] Your first question comes from Jeff Zekauskas with J.P. Morgan.

Good morning, Jeff.

This is Silke Kueck for Jeff. How are you.

Oh. Good morning, Silke.

A couple of questions. In the consumer business, can you talk a little bit about your big box retailer business? That is, volumes were up 8.4% this quarter and I think in the third quarter they were only up 1%. Can you discuss what happened at Wal-Mart and Home Depot and maybe you can just touch on how the service business and garage floor coatings is going at Home Depot?

The -- without getting into specific names, we had commented earlier in the third quarter a number of our major consumer business accounts have been going through some industry -- or inventory consolidation or reduction plans and a number of other programs. And as a result of that, we've been seeing in a couple major accounts order flow that is the equivalent of stepping on the gas pedal and then slamming on the brakes. And we had a very low sales growth in our third quarter, had a very good sales growth for our consumer businesses with our major accounts in the fourth quarter, which also coincides with the strong spring selling season. And now we're starting to see, again, some stepping on the brakes at a couple major accounts.

Consumer take-away has been relatively steady so we think to the extent that there is a slowdown in order flow now it will pick up by the end of the summer or early fall, but that stop-and-start order flow routine at a couple major accounts is continuing. As it relates to the Rust-Oleum service business, that business continued to grow nicely in 2006, which was really the first full fiscal year of that service business. We lost money on that. So it was a hit to earnings probably in the neighborhood of $2 million to $3 million. And we would expect that business to continue to grow from a revenue base and hopefully be break-even in 2007.

Okay. Maybe I can ask two more questions on asbestos. How many cases were pending at year-end? And in terms of the longer term reserves that you have taken, should we expect adjustments on a quarterly basis, meaning is this sort of like a ten-year rolling estimate?

Let me answer your first question, Silke. At year-end, there were 10,580 cases.

Okay.

And the rate of increase versus prior years is slowing down. and we will continue to report despite the fact that we now have this long-term asbestos reserve, we will not take quarterly charges, but we will look at it from a year-to-year basis and potentially adjust it in the future if necessary.

Yes.

We will continue to report through our 10-Qs our case load and our cash costs every quarter.

Okay. Thank you very much.

And your next question comes from Saul Ludwig with Keybanc.

Good morning, guys.

Good morning, Saul.

Just a quick book keeping issue. Glenn, were there any FX effects on the revenue in either the industrial, the consumer segments in the fourth quarter?

There was, Saul, but it was pretty minimal. That's why it didn't even deserve comment to be honest with you.

Okay.

[Multiple Speakers]--Saul, for the consolidated sales it was less than 1% in each of our segments.

Okay. And with the change in the auditor and you commented that it was a smooth transition, were there any adjustments to any of your accounts that affected your earnings as a result of the new auditor having a different perspective on conservatism or any adjustments that came about as a result of this transition?

No. There were no -- we would have adjustments at quarter-end or year-end through any normal audit process and there were no adjustments that were out of the ordinary or not consistent with what we've always done in the past. Probably the only change from Ciulla, Smith & Dale to Ernst & Young that took an adjustment this past year was there was a higher expectation of documentation related to Sarbanes-Oxley requirements, which was an adjustment we made throughout the year.

Okay. And then finally, if you look at the number of cases that you settled in the first quarter it was just under 400, in the second quarter it was 230, in the third quarter it was 200 and in the fourth quarter it was 100. While the number of unsettled cases rose from the first to the second to the third to the fourth. Could you sort of comment on why there's that apparent trend, if you will, with fewer numbers of cases being settled and the backlog increasing?

There's a couple of reasons for that, Saul, to the extent we can comment on them. Number one, over the last year and a half, a substantial portion of our increase has been in non-malignant claims, particularly in Florida. We expect those claims to continue to be dismissed and they are. As it relates to dismissals, our dismissal rate on malignancy claims is actually improving, which is good news. Beyond that, I really don't have the detail as to what drove fewer settlements this quarter versus other quarters.

Yes. Okay. And on this reserve that you're taking, you talk about it being non-discounted. Explain that a little bit. Is that going to have to -- are you going to have an interest factor on that each year or how's that going to show up?

No. Some companies have taken a longer term reserve on a discounted basis and then they would have to factor in either quarterly or annually some type of adjustment related to the various interest rates or discount rates that they've used. This is entirely a non-discounted reserve charge. And so what we did is we worked with CNW, which is a well-known independent contingent liability actuarial firm since December. This has been reviewed by our Board as well as Ernst & Young. And basically they took a look at our experience, our claims rate, by state, by disease, and also matched it up with pretty accurate, so far, studies on the incidence of mesothelioma, which apparently peaked two years ago and is now in decline. And when we added all those various factors together, you end up making some assumptions about the number of cases that we'll be involved with and those cases that we would have to settle on. And then that drove eventually a year-by-year estimate of what our costs would be. And that is totally undiscounted. The biggest factor in all of this -- and it does not include any assumptions of our insurance coverage case, it does not include any assumptions related to some of the fraud investigations -- the biggest factor is the declining incidence of mesothelioma.

Great. And then just finally, what should we be using for interest expense assumption this year? You had the big increase in the fourth quarter. Glenn, do you have any thought on that?

I would take the fourth quarter's. It’s a pretty good complement of the expense going forward, Saul.

Yes, today, Saul, we're about 65% fixed rate. So a lot of the recent interest rates will not affect us that greatly. And any acquisition activity obviously would take into account our interest costs and our total capital costs at the time the transaction was done.

Great. Thank you very much.

Your next question is from Edward Yang with CIBC World Markets.

Good morning, Ed.

Good morning, Frank. Thank you for taking the question and congratulations on a strong quarter.

Thank you.

A couple of questions. First on the consumer segment growth doubling to 11%, was this all inventory and order patterns or were there any other drivers that're leading to the acceleration such as Gulf Coast rebuilding or any other demand drivers.

I'm sure it had something to do with Gulf Coast rebuilding. As you know, RPM businesses, both industrial are consumer, seasonal. So it was a combination of pretty good consumer take-away, some of which is driven by some of the Gulf Coast hurricanes and also some continuing rebuilding in Florida, from hurricane activity. And some of it was this stop-and-start, at major accounts where we did not have very strong order flow in our third quarter despite decent consumer takeaway and so there was a need to appropriately stock stores and shelves going into our heavy spring selling season. And so it was a combination of the two. As we indicated in '07, our outlook for our consumer segment growth is about 6%. And I think that's probably in the 5% to 6% range a better number to focus on in terms of what's a steady state growth for those businesses.

Okay. That's helpful. And, second, both the timing and magnitude of your asbestos reserve was substantially better than expected. Given the confidence in your legal outlook, how does this affect your use of cash in terms of dividends, stock buybacks, and, also, when you were making acquisitions in the past, was this a hindrance from their perspective in terms of selling to RPM? Does this make it easier for you to acquire other companies?

Let me answer your acquisition comment first and I'll give you some comments I received from some analysts in the past on that. We have not been hindered at all by doing small to medium acquisitions. And given the nature of our structure today, that's mostly what you will see. Whether it was illbruck, which was pretty sizeable, but is part of our Tremco business. So, we are adding some value there both by some plant consolidation in Europe and some benefits in the raw material area or smaller acquisitions that were more complete tuck-ins to existing businesses. The strong cash flow nature of RPM's businesses allowed us to continue to do that and I think, also, a credit to our legal team. The way we've been able to manage the asbestos situation has certainly begun to minimize the impact of asbestos on our cash.

So, our goal overall was to continue to grow the business and to try and minimize or box in the impact to this asbestos liability. And so far our operating teams and our legal teams have done a good job of that. It has hindered our ability were we looking to them to do major acquisitions. But as a couple of analysts noted in the last year looking at our performance over the last couple of years, they think that's a good thing and would suggest when asbestos goes away we continue to focus on buying small- to mid-sized companies and tucking them in and looking at a better return on capital than doing larger freestanding acquisitions. So we certainly hear that message. There was a second piece to your question?

Dividends and stock buybacks.

Yes. We've increased our dividends for 32 straight years and while that is a decision made by our Board each October, I think it's highly likely that we'll increase our dividend for our 33rd consecutive year. And while it may be a little too soon to tell, as we get more and more comfortable with where the cost on asbestos is going, that certainly opens up the opportunity, particularly if we focus on small- to medium-sized acquisitions, to either consider more aggressive increases in our dividend or, in particular, associated with a positive outcome either from some of these fraud investigations, or from our coverage case, the possibility of reinstituting a share repurchase program, although that's not something that we contemplate today.

Thank you, Frank.

And your next question is from Rosemarie Morbelli from Ingalls & Snyder.

Good morning all.

Good morning, Rosemarie.

And congratulations on a very good quarter.

Thank you.

When you look at the volatility in the order pattern from your large consumer accounts, is there any chance that it is going to stabilize? Is looking at the consumer beginning to hurt with all of the higher costs and buying less and you will not have a large pickup and it is going to more or less be the 5% to 6% you are talking about throughout the year as opposed to one quarter, 10%, another quarter 2%. Do you have a feel for whether they are adjusting to the environment?

I think, as it relates to some of the adjustments in major accounts, at some point this year they should be finished with some of the inventory adjustments. And they are adjustments that are hitting other competitors of ours. And, quite honestly, other vendors. They have nothing to do with our categories. And I suspect that most of that will be smoothed out before this calendar year is over.

As it relates to the ongoing growth rates for our consumer businesses. As you know, the nature of our businesses, whether it's Rust-Oleum or DAP, Zinsser or Bondo is such that we tend to be more focused on home maintenance and repair and/or renovation as opposed to new construction. So we remain bullish about the growth potential for our businesses because you've got this huge housing stock of the housing boom that's been built up over the last decade, all of which, as somebody pointed out to me, the way they think about our products, there are more garage shelves to hold our stuff today than there used to be, and that's a good thing. Going forward, our growth rates will be greater or lower strictly based upon our ability to maintain or increase market share and/or continue to successfully introduce new products.

Are you taking away some of your competitors' similar products, or when you get more shelf space in one of the big box accounts, it is mostly for a new type of product which is not necessarily replacing someone else?

It's a little bit of both. I mean, in major accounts there are always challenges across major competitors. And I think our major customers are pretty adept at maintaining the key brands that we have and utilizing the competitive nature out there in the marketplace to keep everybody on their toes in terms of prices. On the other hand, we have been successful in creating some new product areas. For instance, the garage floor coating product that Rust-Oleum introduced five years ago, which is not new to people on this phone. But we've gone from a $2 million product line to a $30 million plus product line over the last five years. We've created at retail a $60 million category that's continuing to grow very nicely. So after having proved out that category, a number of our competitors have come in with me-too products and that category continues to grow. And so, again, it's incumbent on our businesses to continue to come up with new ideas and new product categories.

As I commented earlier, we are working on a service component with a major account which is growing nicely. In our space we are the only ones that are doing it. But as we've been talking about for the last two or three years -- and I think this is part of our stronger internal growth rates -- we have gotten better at funding longer term internal growth initiatives. And I think we're more deliberate and more accepting of an initiative like this Rust-Oleum service initiative which is losing $3 million and was planned to lose $3 million. And five years ago I can tell you that we didn't have too many internal growth programs that plan to lose money and so it stymied our growth. We'll make some mistakes in that process, but in the long run I think it's one of our key factors that's helping to accelerate our internal growth rates and we plan to continue that.

You talked about many of your product lines growing at double-digit growth. Which areas were not growing at all or barely moving or actually declining? Any one of those that you can share with us?

Again, I'd have to look at the particular details. But for the most part we've had real robust growth in our consumer businesses. In the fourth quarter that was for the reasons we talked about. And we've had very strong growth across all of our industrial businesses. Glenn highlighted in the industrial segment those businesses that were growing double digit. There were a couple businesses that were growing single digit, but we didn't have any business categories that were down.

Okay. Thanks.

Thank you.

Your next question is from John Roberts with Buckingham. Please proceed.

Good morning, John.

Good morning, guys. If you were to discount the undiscounted asbestos liability using say the same assumptions you make in your health care postretirement plan, the same inflation and same discount rate, do you know what the discounted amount would be?

We did not do that work so if I threw out a number there, it would be a wild guess. We did look at discounting when -- we looked at all kinds of things and other options. We looked at companies out there that have five-year reserves and we looked at companies that have 40-year reserves. We looked at a handful of companies that still don't have any long-term reserves, which was the position that we were in. And we looked at a few folks that do discount. And it's just not something we decided to do because we weren't comfortable with making adjustments to the reserve that relate to the impact of the activities and asbestos cases and settlements and then, further, making adjustments related to the whole discount situation. We thought it would be confusing. And so that's why we chose very deliberately to do this on an undiscounted basis. But, John, if I threw out -- we could do the work for you, but if I threw out a number today, it would be wildly guessing.

As you mentioned, some companies do a longer term. You've done ten years here, but some do an end-of-life kind of assumption here. Could you comment maybe in the year 2016, the last year of your ten year assumption, what the expense is in that year as a percent of what it was in fiscal '06?

I don't want to get into the year-by-year stuff, but if you look at where we are today at about $60 million, that's a level that's consistent with the first couple of years of our long-term liability. And then you see a downward trend, out to 2016. And so it's substantially more numbers. And, again, there are a lot of things that are likely to impact this long-term liability over the next couple of years. If we get comfortable where we can be on an end-of-life situation we'd certainly go there. But I think whether it's the outcome of some of these fraud investigations, which we know are continuing, or the resolution of our insurance coverage case, which is set for trial in February of 2007, all of those will have some positive impact. If the insurance coverage case is not resolved favorably, it does not impact these assumptions whatsoever.

Sure. The average here is $32 million, right, or the $321 divided by ten years, so--?

That's correct. And so if you make some swags--.

Right.

Starting this year at -- somewhere around $60 million and going out at the end, you can make some guesses as to where this is.

And, lastly, did weather have a material impact on the quarter? I know the northeast experienced unusually wet weather during the quarter, it may come back. Did it help you with water proofing later on? Did it have any drag to the business or was it not regionally significant enough?

I learned in the five years of doing this that every time I use weather as an excuse for poor performance, I have analysts and investors whack me over the head. So, as items like that flow downhill, now every time our operating people use weather as an excuse for poor performance we whack them over the head, too. We have weather every year. And I don't mean to be flip. We literally have -- except in extreme cases, certainly like the Gulf Coast hurricanes, which had a huge impact on us both operationally and cost-wise -- one month of bad weather and one month of good weather. Unless it's something that's hurricane related or major fires or something that go on for months, there’s not really an impact that I'm aware of. And as I have been trained not to use that excuse, so have our operating people been trained not to use that excuse. So when it comes up, we'll let you know and we'll give you the real reasons why it had meaningful impact.

And lastly, PPG commented about their raw material and coatings business being essentially flat. I think Sherwin said they are expecting things to be up modestly. It sounds like you're expecting a little bit more inflation maybe than the other comments. Maybe you could characterize, versus architectural coatings alone, which is really where their focus is, is there any particular materials you need to call out here in your raw material mix?

No. As you look at our fourth quarter and on the segment information which Glenn provided and which is also included in our release and more details of which will be included in our 10-K MD&A, you'll see that material costs in our consumer division year-over-year are about flat. Now, of course, a year ago, our gross margins in consumer were down from where they were a couple years prior. But we have seen this spring, actually softening in raw materials, flattening out in raw materials. And it's a combination of, I think some cooling demand in Asia and China, also continuing throughout the late winter and spring of more capacity in the Gulf region coming back on-line. And so that's been our experience. And barring watching the news, our outlook for raw materials for the balance of the year would be good, but I think we're hesitant to make that call staring at $80 oil prices and all the geopolitical events that could impact that.

Having said that, we had a good experience in the fourth quarter. You can see it in our consumer division, in particular. And we experienced it in our industrial division as well. It doesn't show up quite as pronounced because some of that industrial gross margin difference is mix, and then of course some of the industrial gross margin growth is acquisition related, so the bottom line impact also has acquisition costs. But it's a long-winded answer to your question. Raw materials are behaving in the last three or so months better than they have in the last 18. We're just not sure where it's going.

Okay. Thank you.

And your next question is from Jason Rodgers with Great Lakes Review.

Hi.

Good morning, Jason.

illbruck, was that accretive in the quarter?

Yes, it was.

Okay. And what's your expectation for earnings per share accretion from illbruck in fiscal '07.

From all the acquisitions that I talked about, we spent about $186 million in fiscal '06 and that will drive on an annualized basis about $250 million sales, illbruck's about $190 million of that. I think those are annualized numbers. We see about $0.03 to $0.05 of accretion in '07 from the '06 acquisition activity.

Okay. And do you have an estimate for capital expenditures and D&A for fiscal '07?

Capital expenditures are anticipated to be about $75 million for 2007.

And D&A is about a $70 million number.

And how much of the CapEx is maintenance versus expansion projects?

Maintenance is about $30 million to $35 million, typically. Maybe it's a little higher than that with illbruck. So it the difference would be related to capacity additions and so forth as needed.

Okay. Thank you.

And the next question is a follow-up from Silke Kueck.

Good morning. A quick follow-up. Can you remind me how large your European business is now? And do you have growth numbers on a regional basis? That is, can you tell what growth was North America versus Europe?

I don't have growth numbers on a regional basis. I can tell you that next year, on an annualized basis, our European sales should be around $500 million, which is more than doubled from where they were about three years ago. We had very strong industrial growth in our overseas markets. And so the percentage gains were better there, but they're on a much smaller base.

And then lastly, one more question on asbestos. Does it make sense to also break out the number of dismissals that you have, so maybe that makes it easier to monitor your success using a more aggressive defense strategy?

We'll continue to provide the detail that we have every quarter, Silke. And the answer to dismissals really relates to what type. I don't know how much detail our legal counsel would think is prudent in terms of providing more and to the extent that we can, we will. But a dismissal of a malignancy case in terms of driving future cost is much more significant than dismissals of non-malignant or unimpaired claims.

Yes.

Over the next year or two, my guess is you're going to start to see our claims rate go down and our overall case rate go down because of some of the judicial actions and state law specifically related to unimpaired claims. And so understanding the difference between malignancy claim and their dismissals and unimpaired claims, which over time should almost all be dismissed, is really the key to understanding what will drive our costs.

Okay. Thank you very much.

Thank you.

And your next question is from Robert Felice with Gabelli & Company.

Thank you, gentlemen, all my questions have been answered.

Thank you.

And you do have a follow-up question from Saul Ludwig.

A quickie, Frank. You mentioned that you're going to have accretion of $0.03 to $0.05, let's just call it $0.04 from the acquisitions. That's good. And do you recall back on the second quarter when you had the hurricane and your earnings fell $0.08 a share from the prior year? We were to just assume -- if we don't have those hurricanes you'd pick up $0.08 just from showing up. That would be $0.08, plus the $0.04 accretion, would be $0.12, which in and of itself would be 8% or 9% earnings improvement. Are you possibly being too conservative in the total accretion -- total growth of 10% to 12% when it looks like you've got the lion's share of that kind of in the bag in the absence of any unusual hurricanes?

A couple things, Saul. Number one, the second-quarter impact was $0.05, not $0.08.

Oh. Okay. Your earnings were down $0.08. Okay.

Yes. But a lot of that was just operations related. We had a slowdown in our consumer business because thousands of retail customer locations.

Right, right, right, okay.

And our Carboline business shut. So about $0.05 of that was associated with the one-time events. And all I can tell you is our plan for the year calls for sales growth in the 8% to 10% range and earnings growth in the 10% to 12% range. I think the big wild card for the year will be raw material costs. If they remain where they are or are a little bit of a challenge, I think those numbers are achievable. If for some reason things get better geopolitically, which is certainly something everybody hopes, if some of the speculation in material prices associated with assuming another year of bad hurricane incidence, et cetera, don't happen, then you can paint a scenario in which raw materials get better. And if our raw materials get better and they don't have to go to where they were two years ago, then we can certainly do better in terms of earnings.

Do you know what your percentage increase in your average unit raw material cost was in the year that just ended?

Average -- I don't know average unit. I think, -- our average raw material prices were up on a consolidated basis -- again, I -- Saul, I'd be guessing wildly. I mean, I could tell you some specifics. Our Kop-Coat marine business is a huge user of copper. Copper prices have tripled in the last year or so. We've seen large raw materials like TiO2 and major solvents. We've been through three price increases on a lot of those. We saw some major spikes after the hurricanes that are now coming down. So it's a case-by-case basis but whether it's zinc, which goes into our corrosion control coatings; copper, which goes into our marine coatings; or all the various raw materials that directly or indirectly impact oil, this has been an incredibly challenging year from a raw material perspective and we're hopeful that the recent experience of seeing price increases stop. Its what we're going to experience for the balance of the year. That's the best I can tell you.

This concludes the question-and-answer session. I would now like to turn the call back to Mr. Sullivan for any closing remarks.

Thank you very much. We are making today's call from the New York Stock Exchange, which is continuing a 30-year tradition of RPM releasing our earnings in person in New York, the financial capital of the world. And we will also be hosting a luncheon today for RPM analysts and institutional investors and we look forward to seeing a number of you there. I want to close by thanking the RPM associates worldwide for generating another year of record growth for our shareholders. It's been an incredibly challenging year. But one in which we overcame a lot of challenges and put forward really strong results. And thank you for your participation in today's call and for your continuing interest in RPM. Have a great day.

Thank you for your participation in today's conference call. This concludes the presentation. And you may now disconnect.