RPM International Inc (RPM) 2007 Q1 法說會逐字稿

Welcome to the RPM International conference call for the fiscal 2007 first quarter.

Today's call is being recorded. This call is also being webcast and can be accessed live or replayed on the RPM Web site at www.rpminc.com.

Comments made on this call may include forward-looking statements based on current expectations that involve risk and uncertainty 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 Web site.

Following today's presentation, there will be a question-and-answer session at which time if you wish to ask a question, you'll need to press star then one on your telephone.

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, Katina. Good morning and welcome to RPM's fiscal 2007 first quarter conference call for the quarter ended August 31, 2006.

We had a very interesting quarter. Sales hit record levels, up 13% and net income also hit record levels, but the quarter was a tale of two very different business segments in terms of results and challenges.

As anticipated in our Consumer businesses, we suffered through another swing quarter of inventory adjustments and uneven buying patterns at major accounts, particularly Home Depot. In hindsight the roller coaster swings have been both a combination of various inventory adjustments at a number of major accounts and disruptions of normal buying patterns that go back to last fall's hurricanes. We expect to get back to more normal buying patterns at our major accounts by the end of this calendar year.

While Industrial growth was strong, we experienced a number of raw material increases over the summer, particularly in two key areas: asphalt, which negatively impacted the otherwise strong results of our Tremco roofing and waterproofing business, and in epoxy resins, which impacted a number of RPM's industrial businesses.

The result of this was less leverage to our bottom line in our Industrial segment than the stronger revenue growth would have otherwise generated. Despite these challenges, we hit our plan for the quarter and remain quite comfortable with our target of 8 to 10% sales growth and 10 to 12% earnings growth for the year.

I'd now like to turn the call over to Glenn Hasman to provide you details on our first quarter results after which we'll answer your questions. Glenn?

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

The P&L performance comments that follow will compare against our adjusted first quarter 2006 operating results before the asbestos charge taken during that period. I'll begin with a review of our P&L results followed by highlights from our balance sheet and cash flow statements.

For the first quarter this year net sales grew 13% year-over-year to a record first quarter sales level of $844.2 million. illbruck Sealant Systems, which was acquired August 31, '05, plus four smaller acquisitions net of a small divestiture, added 9.3% to net sales.

Organic sales growth amounted to 3.7% of that with pricing 2.6% and with net favorable foreign exchange providing 110 basis points from the stronger Canadian dollar and the euro year-over-year, less certain weaker Latin American and other currencies.

By segment, the Industrial segment net sales of $545.3 million grew 26.6% over last year's first quarter. illbruck, plus two smaller acquisitions, added 16.1% to Industrial net sales growth.

The organic Industrial segment growth was 9.2%, including pricing of 2.7%, plus 120 basis points from foreign exchange. The following Industrial product lines all registered double-digit organic growth for this first quarter: Corrosion control coatings, flooring compounds, institutional roofing and related services, exterior insulating finishes, waterproofing products sold overseas, interlocking PVC floor tile systems, fiberglass reinforced plastic grating composites and most all of our international operations of the StonCor Business Group.

The Consumer segment net sales were $298.9 million which were off 5.6% from last year's first quarter. This segment saw an organic sales decline of 6.5% including pricing of 2.4%, plus 80 basis points from net foreign exchange.

Retail buying behavior continued to fluctuate during the quarter as Frank mentioned, and the declines in existing homes turnover and to a lesser extent, new housing starts, have affected several lines of business. The small balance of the Consumer segment sales increase came from two small product line acquisitions less the January divestiture of the small wallcovering business.

Moving to gross profit, that margin was 40.9% this first quarter off from 42.1% a year ago. This margin reduction is principally the result of a combination of factors: higher raw material costs; the illbruck acquisition with inherently lower gross margin structure; and sales mix, including increased services sales at Tremco's WTI business unit, which also generates structurally lower gross margin.

The Industrial segment gross margin declined to 41.7% from 43.9% as the result of the higher raw material costs, the illbruck acquisition and the increased services sales at Tremco. The Consumer segment gross margin of 39.4% this first quarter was off only slightly from 39.8% a year ago and really a function of the sales decline.

SG&A expenses, they declined to 28.2% of sales this year from 28.6% during last year's first quarter. This percentage decline reflects leverage benefit from the organic sales growth, including the mix factor of increased service sales with lower SG&A support requirements, coupled with spending controls.

The Industrial segment SG&A improved significantly as a percentage of sales to 28.1%. That compares with 28.8% a year ago while the Consumer segment SG&A held at 25.3% from last year's 25.2%.

Corporate other expenses declined to $8.5 million this year from $10.2 million in last year's first quarter. This reflects mainly the reduced cost for certain insurance coverage partly offset by continued higher healthcare costs for the organization's U.S. and Canadian covered employees.

Our earnings before interest and taxes, or EBIT, dollars grew 6.2%. That's a margin of 12.7% compared with 13.5% last year and that really reflects the same main causes as the gross margin decline, specifically the higher raw material costs and the illbruck acquisition.

The Industrial segment EBIT was ahead 13.7%. It's a 13.6% margin on sales compared to last year's 15.1%.

Consumer segment EBIT declined 9.4%. That's a 14% margin at sales compared to last year's 14.6%.

Our interest expense net quarter-over-quarter was up $4.6 million. This reflects acquisition related debt service plus the Fed driven net rate increases on our variable debt and some up front costs associated with our July 18th prepayment of $40 million of unsecured senior notes.

These higher interest costs were partly offset by interest saved year-over-year from debt reduction and additional investment income year-over-year. Our overall interest rates average 5.4% this first quarter. That compares with average rates of 4.8% a year ago.

Our tax rate this quarter of 34.9% compares with the same rate a year ago of 36%. This year-over-year rate reduction is principally the result of lower projected U.S. state and local income taxes, the effective tax rate differential on our foreign earnings and lower valuation allowances associated with our foreign net operating losses and U.S. foreign tax credit carry forwards.

Our net income of $61.3 million this year represents record earnings for our first quarter, increasing 3.4% from last year's $59.3 million before the asbestos charge with the margin on sales of 7.3% compared with 7.9% a year ago. Our diluted earnings per share at $0.49 also represents a record for the first quarter and those were up 4.3% compared with last year's $0.47.

I'll now draw some comments on the balance sheet comparing against a year ago's position at August 31, 2005. Our net accounts receivable were up $43.6 million. Net acquisitions account for $4.2 million of that increase, foreign exchange translation affect accounts for $7.3 million, and our sales increases account for the balance of the increase.

Inventory was up $54.8 million year-over-year. Foreign exchange translation effect was $3.8 million of that. The remaining increase was essentially related to organic business growth as well as certain strategic inventory builds during the quarter, plus the uneven retail buying behavior that affected the Consumer segment during the quarter.

Our accounts payable were up $32 million year-over-year, net acquisitions were $1.9 million, foreign exchange translation, $2.4 million. The balance of the increase comes from a combination of business growth and the timing of payments in both segments and partly offsets the organic inventory increase year-over-year.

Our total debt at August 31, '06 stands at $931.6 million. That includes our short-term and that's up $61.4 million year-over-year. This mainly reflects additional indebtedness for our acquisitions during the past 12 months less debt repayments. The composition of our debt at August 31, '06 is roughly 54% fixed rate, 46% variable.

Our available liquidity including cash stands at $420 million. Our 45.8% net debt to capital position at August 31, '06 compares with 45.3% a year ago and provides continued financial flexibility to pursue small to medium size acquisitions.

Our liabilities related to asbestos are reflected in two balance sheet areas. The current liability shows $58.6 million. This represents our estimated pretax payments that may be required during the next 12 months.

Under long-term liabilities, $346.3 million reflects our estimated pretax payments that may be required beyond the next 12 months. The $404.9 million total compares with $421.3 million at May 31, '06 reflecting $16.4 million in pretax payments made during this first quarter and that compares with $16.5 million of comparable costs a year ago.

Broken down, defense costs were $6.6 million this quarter versus $4.5 million last year, while settlement costs of $9.8 million this quarter were down versus $12 million a year ago.

Our cash flows from operations through three months were $23.1 million compared with last year's $33 million, and that reflects primarily increased payments year-over-year for higher incentive compensation based on the strength of our fiscal '06 operating performance, and the increases in inventory, much of which is timing related, particularly for the Consumer segment. Our outlook for the 2007 year calls for double-digit increase in cash flow from operations.

I'll now turn the call back over to Frank Sullivan.

Thank you, Glenn.

The lower results in our Consumer business was anticipated and previously communicated. In fact, as we look to our second quarter this fall, we expect good sales and earnings growth from our Consumer business as we are back on the upswing of some of the roller coaster ride we've experienced in terms of buying patterns.

And as I indicated earlier, we expect that to even out towards the end of this calendar year or the beginning of next calendar year, but we do expect very strong results this fall in our Consumer business. We also anticipate some softening in raw material costs as we move through the balance of the fiscal year, given the decline in a number of underlying major raw materials.

Our second quarter should be very strong, both in terms of good results from our Industrial and Consumer businesses and in comparison to a weak second quarter last year. As I mentioned earlier, we are very comfortable with our full-year guidance of sales growth in the 8 to 10% range and earnings growth of 10 to 12% for the year. The direction of raw material costs for the year will be key to understanding whether or not and by how much we could beat or exceed our current outlook.

With those comments, I'd now like to turn the call over for questions.

Thank you for that presentation. [OPERATOR INSTRUCTIONS] Your first question will come from the line of Jeff Zekauskas with JPMorgan. Please proceed.

Hi, good morning. This is Silke Kueck for Jeff. How are you?

Good morning, Silke.

A couple of questions.

Can you talk about like the magnitude of impact on sales and earnings in the Consumer segment, if you segregate the buying behavior at the big box retailers and versus what you really think [an] impact from a slowing housing market could be?

You know, I can answer this in two ways. I think consumer takeaway has been pretty solid, middle single-digits and I think that's a more appropriate level of sales growth to look at for our Consumer businesses versus the very strong 11 to 12% core growth we experienced in the fourth quarter and then the weaker results in our third quarter.

Obviously, this first quarter we had a decline year-over-year and we anticipate a strong second quarter, so I think you have to look through the swings down and the swings up and view our Consumer businesses as businesses that can grow, depending on the business unit, more in the 4 to 6% range on a core basis.

As it relates to housing or a slowdown in residential new construction, out of a $1.2 billion in Consumer business on an annual basis, very little of our products are actually used in the new construction of residences. We anticipate across all, or we would guess across all of RPM it's about $100 million of revenues that go directly into residential new construction and probably half of that is actually in our Industrial segment.

Our Tremco Barrier Systems business, it's about a $40 million business unit, and their entire business is below grade waterproofing for residential new construction, basements. And then to a lesser extent our Euclid Chemical businesses, involving concrete admixtures, most of which go into industrial and commercial construction, but some of which finds its way into concrete related to residential construction.

The other pieces would be some use of DAP in residential new construction and those are the pieces there.

What drove the strong sales growth than last year? I mean last year, more or less as you said the segment grew on an average of like 10 to 11% and I guess now it's supposed to grow at like 5%. So what has changed?

Well, that was in the fourth quarter and a lot of that is just a change in buying patterns. And as I mentioned, Silke, there's really two issues.

A number of major accounts have been going through, over the last six to nine months, some major inventory reductions or adjustments and, additionally, we've really seen a lot of these swings become more dramatic. I think in hindsight as a result of, they started with the hurricanes last year where we had very poor buying at the end of our second quarter which fed into our third quarter, very strong buying in our fourth quarter, very weak buying in our first quarter and we anticipate very strong buying in our second quarter, so the combination of those two factors has resulted in uneven buying patterns at a number of major accounts which has been atypical of our Consumer businesses.

Can you tell whether you have lost any share?

We have actually picked up share everywhere except for our Zinsser business.In the past year, Home Depot, which is our largest account, made the decision to exit the wallpaper business and Zinsser had the entire category for wallpaper sizers and strippers and basically the chemicals and some tools that go around wallpaper, so that was a business that was exited.

Over time, we think in the marketplace that business will be picked up, but as we compare year-to-year with a major account, that certainly hurt us and we lost one category of primers that we will now pick back up this fall. At Rust-Oleum, at DAP, at Bondo, we have maintained, or in a number of instances, picked up shelf space.

The last comment on that, if you look at consumer takeaway, it was somewhat weaker in the summer months but it was still positive, and we're seeing that continue in the fall, so the ups and downs in our consumer sales have not been consistent with consumer takeaway, which has been kind of middle single-digit in our product categories.

Last question.

What was the benefit of acquisitions to EBIT, if it was like 9.3% on sales and like $70 million, how much was it to your EBIT line? Did your EBIT grow outside of acquisitions?

As you know, Silke, we don't disclose the impact of profitability of acquisitions down to that level. It certainly did help our Industrial business from our illbruck acquisition, but that's pretty much over with now, and we had some smaller acquisitions in the spring, but they're not material, so on a go forward basis, you'll have some marginal positive impact.

But in the first quarter, it helped somewhat in our Industrial segment at our Tremco business but beyond that, we typically do not disclose the specific profitability of specific acquisitions.

Thanks very much. I'll get back into queue.

Thank you. Representing Ingalls & Snyder, your next question comes from the line of Rosemarie Morbelli. Please proceed.

Good morning, all.

Good morning.

Just following up on Silke's question on the acquisition, 9.3% was the contribution from both illbruck and small acquisitions. Could you split the two since we will be on an apples-to-apples basis for illbruck in the second quarter?

It's relatively minor. illbruck's a $200 million acquisition which was not part of RPM's first quarter last year, and the impact of the other acquisitions, I don't have that detail now. It's relatively small, and we would break that out on a quarterly basis in the coming quarters as we always do, but I'd be surprised if it's 2 or 3%.

Okay.

Well, actually, I thought it would have been less. I thought that illbruck would have been about 8% and then 1.3 more or less for all of the small acquisitions.

Rosemarie, that might be correct. I don't have the number in front of me but it's relatively minor.

Okay.

And then looking at your anticipation of a strong second quarter, well, of a strong year, let's forget the second quarter, I mean, I know you made some comments on that, but not only are housing starts slowing and the resale of existing homes slowing, my understanding is that the remodeling market also is expected to be down this year.

So could you give us a little more details on why you think that earnings are still going to be up 10 to 12%?

Well, we think for a couple reasons. Number one, we expect positive year-over-year results from our Consumer businesses, albeit somewhat modest, and we are still experiencing strong growth in our Industrial businesses, and we see that continuing for some period of time.

Most of our Industrial businesses are involved in maintenance or renovation in industrial markets and to a lesser extent, new construction, and whether it's into oil and gas or power generation or a number of industrial areas, at this point in time, it's not slowing down. And so based on those factors, we're very comfortable with our projections for solid sales and earnings growth for the year.

As I mentioned earlier, as you know, we don't provide quarterly guidance and have not since 2003. We are on plan, and we anticipated and tried to communicate in our last couple of quarterly calls the roller coaster swings that are happening in our Consumer businesses and so what happened this quarter in our Consumer businesses was not necessarily a surprise for us and we continue to be on target for the goals that we set for the year.

And I am assuming that on the sales side, it does include the acquisitions?

It includes the acquisitions that were completed last year. It does not include acquisitions that will be completed this year and we've done one of those at this point, which is Watco, at the end of July, so it's had very little impact in the first quarter.

We acquired an approximately $20 million producer of specialty, industrial and MRO coatings that will operate as part of Rust-Oleum. It's based in the U.K. and it serves the U.K. and continental Europe markets.

It will be accretive to earnings, but given its $20 million size it will be marginal to the whole, but that was not included in the original forecast and, obviously, any other smaller acquisitions that we complete throughout the year will not be included. It will be additive to that 8 to 10%.

And the unit growth in price, if we take out foreign exchange, is 2.6% for the Company as a whole. Can you give us a feel for what volume was and what price-wise, did you actually have any price increase in the first quarter, and with raw material costs declining, are you expected to give up some of that?

We did have some price increases, as I mentioned, in the summer, particularly in asphalt and epoxy resins. We are seeing some softness now in a number of raw materials.

With the underlying input cost, we expect that to continue for the balance of the year. That will be positive to our margins and depending on how and when that improvement occurs, we would expect to -- it will be interesting to see what that means in terms of our ability to meet or beat our current estimates.

The couple areas that still remain high, epoxy resins remain high today and zinc and copper prices remain relatively high and we don't see those coming down in the near-term. Most other of our major raw materials have peaked out and are flattened out and/or even softening up a little bit as we speak, so we anticipate, finally, after two-and-a-half years of some tough battles on raw materials, seeing some permanent declines. Now, by how much and over what period of time remains to be seen.

And you don't think one thing you did not address, you don't think that you will have to give up some of your previous selling price increases?

No. I mean, we haven't gotten half of what we've needed as is reflected by a 400 basis point margin decline, and so I don't think we'll have to give it back. Historically, we haven't and we're not in commodity businesses like lumber or metals or things like that where prices typically swing up and down with costs.

Okay. Thank you.

Thank you.

Your next question comes from the line of Robert Felice representing Gabelli & Company. Please proceed.

Hi, gentlemen. Just a couple of quick questions.

If I take a more normalized view of your second quarter results from last year, which were affected by the hurricanes, and then I look at your '06 earnings versus your '07 earnings guidance, there's a noticeable slowdown in growth and I was hoping you could highlight the end markets that are perhaps posing challenges versus those that are still performing at a robust pace. And I guess more than that, those that have performed better or worse than you expected over the last three months?

Well, a couple things. Other than the annual guidance we have not provided any guidance on a quarterly basis, and so as it relates to the second quarter, I think your comment broadly is correct. Our fiscal 2005 results for the second quarter are certainly a better proxy for comparison to this upcoming second quarter than last year.

As it relates to end markets, certainly the residential markets have slowed and while that's not a huge piece for us, we did see it in the three categories that I mentioned. Industrial, maintenance spending and renovation spending and new construction to the extent we're involved in that continue to be very strong and we're seeing that in those of our Tremco and StonCor businesses that serve those markets.

Commercial construction continues strong. We're seeing double-digit growth particularly in our Dryvit business which is probably our purest play into about half of their businesses into commercial new construction and so that's continuing to be pretty good. And we are seeing, basically, low to middle single-digit takeaway in our Consumer businesses, which we think is the right way to view what those businesses will do for the full-year.

So on the full-year, when you look at our businesses by segment and look at that 8 to 10% revenue growth, on average we expect something higher than that for the year out of our Industrial businesses and something lower than that for the year out of our Consumer business segment.

So would you still expect the 5 to 6% sales growth that you had previously said on the Consumer side or has the, I guess, has the slowdown on the housing side taken you by surprise in any way and have you tempered that expectation?

You know, we haven't given specific guidance for growth by segment other than the 8 to10% growth on a consolidated basis and beyond saying that, clearly, our plan is for when you look at that 8 to 10% growth, it's going to be something less in Consumer and something more than that average in Industrial.

The 5 to 6% that we've talked about in Consumer is really to get peoples' minds on a steady state of what we can do. I can't tell you what it will be for the year by the time we swing through quarters that are down 5 or 6% versus a fourth quarter, for instance, that was up a core 11 or 12%. And so those are some of the swings that we're seeing and how that averages out for the year remains to be seen.

A, it will be positive, but that 5 to 6% number that I've talked about in the past is really to give people a sense of what's a better number to think about on a steady state basis with our Consumer businesses versus the swings that are in one quarter down and in another quarter up 11 or 12%.

We do not have a business that will be down for the year and we don't have a business in a normal circumstance that would be down in a quarter. We also don't have a business that on core is going to grow 11 or 12%. That's not the nature of those businesses.

Okay.

Well I guess, then, I guess, looking at this quarter on the Consumer side was there anything that took you by surprise? Did the housing slowdown surprise you in any way or is this all kind of assumed and factored into your thought process?

This is basically, as I mentioned earlier, we are on plan and we anticipated this. I understand the stock's down a little bit this morning, so maybe we didn't communicate it as well as we should have, but for the last two conference calls, we have been talking about the uneven buying patterns, and I made it a point in our last conference call, when we had a fourth quarter of 11 or 12% core growth in our Consumer businesses, that that wasn't sustainable and I think the reference I used there was a number of major accounts had been stepping on the accelerator and then slamming on the brakes and we thought we'd see the same thing this summer and we have.

We are a little bit into our second quarter and we had some major accounts standing on the accelerator again. The one thing we didn't mention and we've tried to go back and analyze it better, is I think the other factor that we now begin to realize is it wasn't just inventory adjustments at a couple major accounts, but it was also the impact of the hurricanes that really screwed up buying patterns last fall and that's kind of when all of this started.

Okay. And then one last question.

Corporate expenses, I guess, during the second quarter of last year were quite high and I was wondering are you expecting that expense level to be more in line with this past quarter, this coming second quarter or is last year's second quarter expense a proxy?

I think this first quarter, you know, plus or minus a million bucks or so is a better proxy for our second quarter corporate expense. As you'll recall last year in our second quarter, aside from weak business dynamics principally related to the impact of the hurricanes, we also took about $10 million in one-time charges and the majority of those were reflected in corporate other expense when you look at our segment.

Okay. So that should give you a nice boost year-over-year.

That's correct. But our second quarter, depending on what happens with raw materials, will either be a very good quarter or a great quarter.

Okay. Thanks so much.

Representing CIBC World Markets, your next question will come from Edward Yang. Please proceed.

Good morning, Ed.

Good morning, Frank.

In the Consumer business, it's been somewhat feast or famine and these big box retailers, I would imagine, have fairly sophisticated inventory management. When do you think the lumpiness in demand is going to stabilize?

I think from the inventory adjustments, they're mostly over. Wal-Mart, for instance, completed their programs this summer. I think Home Depot has worked through a number of major product categories, not just ours in terms of inventory adjustments, and so those were the two largest accounts of ours that over the last six months or so were going through some inventory adjustments and it wasn't just in our categories, it was across a number of major product categories, and so I think most of that's behind us.

The only other factor which might carry us into the end of this calendar year, early next year, is, from a hurricane perspective, we had slow buying at the end of the second quarter which continued into the third quarter and then by the end of the third quarter we had very strong buying which carried into the fourth quarter, so I think some of that was hurricane related.

The other factor that you had at the end of the second quarter and into the third quarter were some raw material spikes related to, again, the hurricanes, which on a year-over-year basis, this year comparatively should be positive for us.

And second question, how full is the acquisition pipeline? With all of the moving parts with demand, raw material costs, the economy, philosophically, how aggressive do you want to be in terms of making new acquisitions or at this point would you rather just pull back on the throttle a bit and integrate your existing purchases?

First of all, on the last part of your question, the illbruck transaction is going very well. The integration there is very good and that will, to an earlier question, be accretive to earnings this year, certainly to the tune of 2, 3, 4, 5 cents depending on how the year works out, but that's been a good transaction.

Our pipeline is okay. Most of what we're focusing on is small and medium businesses or product lines and at the higher end which for us is $100 million, $200 million-type transactions. The advent of financial sponsors and the prices that they are paying have gotten to the point on certainly billion dollar transactions, which is not our space, but it's moving into the $100 million transactions. They're basically at prices where strategics don't play, and we've always held our pricing discipline and we're not going to break that.

When you look at a number of transactions in the financial equity markets where senior debt is leveraged 6, 6.5 times EBITDA, I don't think that the valuations that are currently in the financial sponsor markets are sustainable for the long-term.

So that's a long winded answer of saying our pipeline for some smaller transactions is okay and I would expect to see a handful of smaller transactions done for the year, but even down to the $100 million, $200 million range, we're seeing some price expectations that don't meet our discipline.

And you mentioned your price discipline. At this point, would you rather be a little bit more aggressive in terms of stock buybacks versus acquisitions?

We don't have a share repurchase program authorized by our Board at this point in time, but that's something that we certainly discuss with our Board at our regular Board meetings and we have had, the last share repurchase program we had it was about four or five years ago.

But suffice it to say that in larger transactions, valuations are not where we would be. They're not, quite honestly, they aren't where any strategics are. You're at the point where deals that are getting done are now being bought by their second or third financial sponsor and, certainly, from my perspective having exercised some options in the last year, RPM stock's a pretty good value and unfortunately, I understand it's a better value this morning.

Okay. Thank you very much.

Thank you.

With Goldman Sachs, the next question comes from the line of Bob Koort. Please proceed.

Thank you. Good morning.

Can you talk a little bit about, you mentioned in the consumer channel there'd been some accelerated buying and then, obviously, some reduced buying. Do you think any of that had to do with pricing in trying to get ahead of price hikes or do you attribute it all to the retailers just trying to pare down inventory?

I think it's mostly disruptions that go back last fall and the hurricanes and you had a number, thousands of retail outlets that were out and you had order flows disrupted and then the inventory adjustments.

The negotiations, we see some -- it doesn't have an impact on the year. We see some accelerated buying in certain Industrial product categories when we announce a price increase and sometimes you'll get some order flow in front of it but in our Consumer businesses, the price negotiations are very thorough, very challenging, and when they are agreed to, they're at a specific date and for a specific price and you just go on.

So our experience has not been that major retailers gear any of their buying in conjunction with price increases. It does happen in our Industrial businesses to a certain extent.

You commented, I think, that you thought the sell-through at the consumer channel is still very strong. Do you get that directly from your customers or do you get some, is there some scan data that you look at or how do you arrive at that conclusion?

First of all, it was a little bit weaker this summer but it was still positive, but we're the category manager for small project paint at a number of major accounts and so we get the scan data. Accounts like Wal-Mart share their retail link information with most all their vendors, so whether it's through publicly published information or information that vendors get to see either in our capacity as category manager or through systems like the Wal-Mart retail link, vendors have some pretty good insight into retail takeaway and in our categories, it's been good.

When you look at the broad numbers, some of those are driven by high-ticket items at a lot of these major retailers who are selling, for instance, like good appliances. A slowdown in the economy might impact somebody's decision to spend $300 or $400 or $600 on an appliance, it tends not to impact people's thinking on a $2.50 can of spray paint or the types of patch repair products that DAP sells or particularly in the fall, the types of weatherproofing products that people buy seasonally as they go into the winter monthsl, which are maintenance and repair- type things and small ticket items.

And last question. I appreciate your time.

What would be the sort of the approximate residence time between seeing a decline in some of these energy prices and actually showing up on a cost of goods and an earnings report?

That's a great question and I'm not being wise about it, it's a question that we're asking internally, and so I can't answer that very well other than, for instance, contrary to where oil prices were going we saw some pretty significant increases in asphalt prices this summer and it's a combination of a longer paving season, some government buying, and the fact that Venezuela, who's not the biggest friend of the United States, is one of the principal suppliers of asphalt or asphalt grade petroleum.

So when you -- that gives you some insight into some of the questions that we're asking our businesses as it relates to when and by how much we're going to benefit from some raw material price improvements given where oil prices are, given where natural gas prices are, and given some slowing in the economy particularly on the residential construction side.

That's not a very good answer, but we will experience it and the best I can tell you, and I mentioned it earlier, is we're comfortable with our current guidance. If we experience raw material benefits meaningfully in the coming quarters, then if anything, it will make it easier to beat the guidance that we have out there now.

Thank you.

Your next question comes as a follow-up from Rosemarie Morbelli with Ingalls & Snyder. Please proceed.

You talked, Frank, about your inventory being up because you did some strategic inventory build up. Could you give us a better feel as to what it is that you are piling in your warehouses?

I'll give you a few examples without being too specific. Number one is, we had a slower sell-in in our Consumer businesses but back to an earlier question, we can see the consumer takeaway so we had some build up in inventory in part because we didn't have the sales we anticipated at the end of the quarter and we're realizing those now.

Secondly, I mentioned just as one example, and I want to stay away from specific examples, but we had lost some shelf space with some of our Zinsser primer products and we have a new program that will be going in this fall that will be a replacement for that lost shelf space, so we're in essence getting it back, and so we had an inventory build at the end of the summer in that category. And then there's some specific raw materials that were starting to move in the right direction that we did some pretty strategic buying on, again, towards the end of the summer.

Okay.

We haven't talked about asbestos. You were trying, if my memory serves me right, you were talking to your insurance providers and taking them to court, I believe, trying to get them to continue insuring your asbestos liability. But could you give us an update on that and then the number of new cases as well as the number of total cases?

As it relates to the insurance carrier lawsuit, we reserved our rights under our contracts, insurance contracts in 2003 when our insurance carriers claimed exhaustion, subsequently filed suit. It's been going on for two years.

We have completed discovery, which is a good thing, and that's been extended. Summary judgment motions are due at the end of this year and we have a trial date set for some time spring next year. It is proceeding well.

If we prevail in summary judgment, which is where any defendant would seek to have the case eliminated or removed for specific legal purposes, if we succeed in summary judgment, my guess is, is that we're going to be in a pretty good position to negotiate some type of settlement of our claims against these insurance carriers.

And there are certain aspects of our insurance contracts that suggest to us that, in certain circumstances we should have unlimited insurance and it's proceeding quite well. We are not likely to take a nickel and dime approach to this, which means that the outcome of this insurance coverage will likely be either zero or very significant.

Okay. And the number of cases?

The number of cases at the end of the quarter were 10,934.

And that come compares to, I'm sorry.

That compares to 9,093 last year and not much different from the fourth quarter. So not much of a move in the last quarter and up about, you know, 1,000 cases, a little less, about 1,000 cases for the year-over-year.

We are seeing, again, as you can see this quarter, we're seeing our indemnity costs go down, our legal cost, which went from $3 million to $8 million to $20 million to last year 24 as we took over our own defense, have now peaked and I don't know how quickly they'll go down but they are not going to continue to go up.

And the filing of new claims over the last three or four quarters, again, you have to understand the claims that we're settling today that impact the cash that we communicate today, are claims that came in six, nine, in some cases 24 months ago. The filing of new claims over the last three or four quarters has declined steadily and we're continuing to see that as are other asbestos defendants.

So those new cases are mostly still cases which were already out there but had not named RPM as a defendant or are they really brand new ones?

It's a mix. I mean, it's a mix of new cases, it's a mix of old cases. As the federal prosecutors are finding out, the process by which asbestos plaintiff attorneys file asbestos claims is strange and interesting and perhaps fraudulent and we'll find out when they finish their investigation.

And then lastly, if I may, you made quite a bit of progress on the SG&A line as a percentage of revenues. Is that sustainable or was there something specific in this quarter?

No, it's sustainable. I mean, we have focused very intently on maintaining good control on our SG&A, also being more focused on where we're spending investment dollars. As I mentioned in some calls earlier, we change our planning process a little bit to be much more deliberate about where we're investing for growth and it's allowed us, I think, to accelerate our internal growth as well as be sharper in our dollar spending.

It's also the benefit, Rosemarie, of higher revenue. It's not just pure, you know, because, as you know, the absolute dollars are going up still but at a smaller rate than our revenue growth.

So if we look at SG&A as a percentage of sales for the full-year, is 28% reasonable as it compares to 31 and change last year?

I don't know. I don't have that in front of me. I think that for the full-year you're not going to see an increase in SG&A as a percent of sales, and if revenue growth continues like it is, you're likely to see as a percent of sales that number continue to move in the right direction, but to speculate or give you a specific number for the full-year at this time, I couldn't do that.

Not by that magnitude anyway.

I don't know.

Okay. Thank you.

Thank you.

Your next question comes as a follow-up from Jeff Zekauskas representing JPMorgan. Please proceed.

Yes, hi.

You said earlier that last year in over like the summer or the fall, you paid like inflated raw material prices [inaudible] the hurricane and that should be beneficial later in the year this year. So what are like the three or four largest raw material costs that should be going down?

The raw material costs that should be going down, for instance, asphalt costs, which have been really high this summer and have negatively impacted the otherwise strong leverage that you'd see out of our Tremco roofing and waterproofing business, those should improve.

Resin prices should improve. Solvent prices should improve. Ti02 we think will improve, so a broad range of raw materials, we think, we've already seen in some instances it flattened out and are softening up and we think as the year unfolds, will improve.

In some instances, we'll see some positive year-over-year like in the second quarter in particular just because there are some spikes that were related specifically to the hurricanes that have been eliminated as of, for instance, this past fourth quarter.

The couple areas that remain a little bit problematic are metals. Zinc and copper mostly because metals demand globally remains high and those are significant raw materials for a couple of our businesses, principally corrosion control products and our marine coatings businesses.

And lastly in terms of working capital management, if I remember right, I think the compensation metrics for your managers is now like a capital adjusted earnings formula that would include, you know, that would held them accountable for the asset base?

That's correct.

Should we expect large improvements in working capital through the year?

I think versus the last couple of years you'll see improvements in working capital. Keep in mind that the dollar numbers of working capital growth over the last couple years were a little bit misleading.

I mean, they're certainly part of our calculation and we tackled them pretty hard, but there was a difference between the unit hold of raw materials in our businesses, which wasn't up that much, and the dollar value of raw materials given the inflation of raw materials, and so, certainly, if we can continue to maintain good discipline on the unit basis and then benefit from some decline in raw material costs, you'll see improvement there as well.

We are, you know, our cash flow for the first quarter was down year-over-year. A lot of that's timing related to inventory builds and some other things that Glenn mentioned. We are forecasting a pretty strong increase for the full-year and after-tax cash from operations, some of which is being driven by improved working capital performance.

Thanks very much.

Thanks, Silke.

Your next question will come from the line of Amy Northos with Highland Advisors. Please proceed.

Hi. This is Saul Ludwig. I'm with Amy. Hi, Frank.

Hey, Saul. How are you?

Okay, here. We wouldn't want to miss this.

It shows in your [inaudible] that you spent $39 million for acquisitions here in the quarter, yet you only made really one deal with which was a small $20 million company. It looks like you paid a lot of money for not a lot of sales. What am I missing?

We acquired two businesses. We acquired the Watco business in the quarter and then we made roughly a $5 million investment for a 15% ownership interest in an Indian company.

It's about a $20 million business that we've been a partner with for the last three years and not material to our results but an exciting opportunity that we're starting to pursue in India, and so those are the two pieces acquisition wise.

Well you spend $39 million, so if you took $5 million off for this one, that left $34 million that you paid for a $20 million business. Am I getting to the right conclusion?

You're getting to the right conclusion.

So it must be a very profitable business to warrant paying 1.7 times sales or something.

You're getting to the right conclusion.

Okay.

Next question is, I think that DAP is kind of like a $275, $300 million business and Zinsser, I don't know, $150 or $160 or $170 million. How much of that product is sold to what you would call, I don't know, wholesalers, which would be where homebuilders might buy their stuff if they're building a house versus they're going to Home Depot to buy the stuff?

Roughly, between Zinsser and DAP and this is rough, and we don't disclose the specific revenue bases of our different business units, although I will say both of those numbers are a little light, roughly about half of our Consumer businesses as a whole are sold through big box retailers and then the remaining half, including major discount companies, the remaining half would be sold through a combination of the hardware store co-ops, building supply companies, paint stores, and basically a much broader array of independent distribution.

So our top four or so, four or five accounts would represent about half of our consumer sales and the balance is much broader distributed through all of, thousands of all of those different outlets I mentioned.

I was just wondering if the big box softness that you saw was sort of inventory management and the big drop off that we've seen in new home starts, if you've yet really seen the impact of that?

Again, Saul, you look at Rust-Oleum, nobody ever bought a can of spray paint or a pint of enamel paint to build a new house.

Thinking more of DAP and Zinsser, then.

Okay. And nobody ever paid $22 a gallon for a Zinsser primer to build a new house. Basically, I mean, again, those two product categories for us have very little exposure to residential new construction.

DAP on the other hand, as I mentioned earlier, is part of what we think is $100 million across RPM that is directly involved in residential new construction and a not insignificant piece of that would be DAP products sold through exactly the type of building supply businesses that you talked about.

The two most direct areas for residential new construction would be DAP and would be our Tremco Barrier Solutions business. And then some other small pieces and parts but between the two of those it's $100 million.

Just and I know, thank you.

Finally, on the quarterly commentary, looking at your full-year, which you said you're going to be up 10, 12%, that's maybe $0.15, $0.16 a share, we got $0.02 in the first quarter, we can't count on much in the third because seasonally that's not much of a quarter for you, that's not where you're going to make hay, and your fourth quarter last year was a real boomer, so it would seem like this second quarter is just so critical that you have a very, very strong result if you're going to make the full-year because you wouldn't have a lot of opportunity to make up much in the back end of the year.

Well, as you know, we don't provide quarterly guidance, but I will tell you that our third quarter is always a seasonal low and whether we're up a penny or down a penny, it's, percentage-wise looks big but it generally doesn't mean much for the year. So our ability to meet or exceed our forecast for the year really depends on our results in the second quarter and the fourth quarter, and then also depends, particularly if there's any upside above where we are, on how much and when we benefit on the raw materials side.

Great. Thank you very much.

Thank you.

Representing Great Lakes Review, Greg Halter has the final question. Please proceed.

Good morning.

Hi. Good morning and thanks for taking the question and being so detailed here.

Had one question regarding your tax rate. The 34.9 or 35% approximately, obviously, lower on the state and local taxes, but is that a level where you would expect the tax rate to fall out for the full-year?

No, I don't think so. I think it will be somewhat higher than that. And I think for the full-year we're looking at a tax rate that's about comparable if not slightly higher than last year. Basically about the same level plus or minus a half a point.

Okay.

And I think last year you were at 34.7% for the year, ex charges and everything?

About 35%.

35 okay. So 35 plus or minus 50 basis points or maybe 50 basis points ahead of that?

I think that's about right.

Okay. All right. Thank you very much.

Thank you.

I would now like to turn the call back over to Mr. Frank Sullivan for closing remarks.

Thank you.

We will hold our annual meeting tomorrow at 2:00 p.m. and RPM management and our Board of Directors will be there. We welcome typically 1,000 plus shareholders to our annual meeting to review the year, the quarter, and answer their questions, and we will increase RPM's cash dividend for the 33rd consecutive year tomorrow and announce that at our annual meeting.

Thank you very much for participating on our conference call today and on behalf of RPM's 9,000 employees worldwide we thank you for your interest and for your investment in RPM. Have a great day.

Thank you for your participation on today's call. This concludes the presentation. You may now disconnect. Have a good day.