RPM International Inc (RPM) 2007 Q3 法說會逐字稿

Welcome to RPM International's conference call for the fiscal 2007 third quarter. 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. [OPERATOR INSTRUCTIONS]. At this time, I would like to turn the call over to RPM's President and CEO, Mr. Frank Sullivan, for opening remarks. Please go ahead, sir.

Thank you, Towanda, and good morning. Welcome to RPM's conference call for our 2007 third quarter for the period that ended February 28th, 2007. We are pleased to report record results for the quarter, continuing on the building momentum in this fiscal year. Excluding last year's asbestos charges, and that will also apply to Bob Matejka's comments, our EBIT increased 14.4% on 11% sales growth, and combined with a lower tax rate in the quarter, net income was up 48% and EPS was up 50% to $0.09 a share.

We had good order flow in our consumer business, which drove strong EBIT growth and continued the improving momentum in our consumer segment, which we've been predicting throughout the year, starting in the first quarter. While our industrial business revenue growth remains strong and that continues today, a product mix issue related to strong sales in the quarter, particularly in corrosion control coatings, flooring products, and marine coatings, where higher zinc, epoxy and copper prices served to negatively impact the earnings leverage of this good sales growth performance, resulted in a flat EBIT on a year-over-year basis. This mix issue was particularly amplified as a result of the seasonal low period in our third quarter, and in comparison to last year's third quarter where industrial EBIT grew at 48% year-over-year.

All in all, we're pleased with the continuing strong growth in our industrial businesses and in the slow but improving momentum for our consumer businesses given the challenges that those businesses have faced throughout the year and will continue to face as we finish this fiscal year. With these introductory comments, I'd like to turn the call over to Bob Matejka, RPM's Vice President and Chief Financial Officer, to provide you with the details on the quarter. Bob?

Thank you, Frank. The performance comments that follow will compare adjusted operating results before the asbestos-related items, that is, the charge taken a year ago. And I'll begin with a review of our P&L results for our third quarter of fiscal 2007.

Third-quarter net sales grew 10.9% year-over-year to a record third-quarter sales level of $679.5 million. Eight small acquisitions, net of a small divestiture, added 2.6% to net sales. Organic sales growth amounted to 8.3%. Included herein are about 60 basis points of pricing and also 130 basis points of benefit from net favorable foreign exchange, gains, primarily from the stronger Euro, offset somewhat by a weak Canadian dollar and certain Latin American and other currencies. Industrial segment sales of $425.7 million grew 12.5% over last year's third quarter. Six acquisitions completed during the last 12 months added 2.6% to the net sales growth, and organic industrial sales growth totaled 9.9%. Here within this 9.9%, we have 1.7% related to pricing, and 190 basis points from foreign exchange. The following industrial product lines all registered double digit growth in the third quarter -- specialty pleasure marine coatings, floor coatings, corrosion control coatings, fiberglass reinforced plastic grating composites, and almost all of our international operations.

Our consumer segment net sales of $253.8 million were up 8.4% from last year's third quarter. Organic sales within consumer were up 5.8% and included 40 basis points from foreign exchange. The retail buying behavior improved quarter-over-quarter; however, declines in existing home turnover, and to a lesser extent, new housing starts have affected several lines of consumer business. The balance of the sales increase here of 2.6% was from two product line acquisitions, net of a small divestiture a year ago. Gross profit margin for this quarter was 38.8%, declining from last year's third-quarter margin of 39.7% or 90 basis points, principally due to the continuing raw material cost issues.

The industrial segment gross margin declined to 40% from 41.4% last year, reflecting higher raw material costs previously mentioned. Consumer segment gross margin was 36.8% this quarter, and it was off only 20 basis points from 37% a year ago. And the decrease came from net higher raw material and freight costs offset by productivity gains from the organic unit sales growth within this segment. SG&A expenses improved to 35.5% this year from last year's third quarter 36.5%. This improvement reflects leverage benefited as a result of the organic sales growth and certain cost-cutting measures and controls on spending.

The industrial segment SG&A improved significantly as a percent of sales to 35.7%, compared with 36.6% last year, and consumer segment SG&A improved to 30.1% from last year's 30.7%. Within corporate and other expenses, we had a decline to $12.5 million of costs this year versus $13.1 million last year, and this decrease essentially reflects decreases in certain insurance-related costs, which more than offset higher pension and compensation related accruals. When we get down to EBIT, the EBIT dollars grew 14.4% yielding a margin of 3.3% compared to 3.2% last year, and reflecting the same main drivers of SG&A margin improvement, specifically spending controls, which overcame this quarter's margin declines resulting from higher raw material costs. The industrial segment EBIT was flat compared to last year, yielding a margin of 4.3% compared to last year's 4.85. Within consumer, EBIT grew 15%, realizing a 6.7% margin on sales compared to last year's 6.3%.

Interest expense for this quarter was up $1.2 million, reflecting acquisition-related debt service plus Fed-driven net rate increases on our variable debt, partially offset by additional investment income year-over-year. Overall interest rates during the quarter were 5.5%, and last year we had a 5.2% interest rate average. The tax rate for the quarter ended at 10.2% compared to last year's 28.9%. The year-over-year change reflects differences in projected U.S. state and local income taxes, the effective tax rates on foreign earnings, valuation allowances associated with our foreign net operating losses and U.S. foreign tax credit carry forwards. Additionally, this year's tax rate includes a one-time benefit related to the resolution of various prior years' tax liabilities.

Net income ended the quarter at $10.2 million and represents a record for our third quarter, increasing 48% from last year's $6.9 million before the asbestos charge, with a margin on sales of 1.5% compared to 1.1% a year ago. Diluted EPS of $0.09 a share this year also represent a record for our third quarter. And it's 50% up from last year's reported $0.06 a share.

I'll now talk to the nine-month results, year-to-date. Year-to-date sales grew 11.1% year-over-year to a record first nine-month sales level of $2.333 billion. Nine acquisitions, including illbruck, net of a small divestiture, added 4.7% to net sales and organic sales growth amounted to 6.4%. Within this 6.4%, we have 2% of pricing, and net favorable foreign exchange results of about 120 basis points. Here it's from the stronger Canadian dollar and Euro offset by certain weaker Latin American and other currencies.

Industrial segment net sales of $1.499 billion grew 17.6% over last year's first nine months. Seven acquisitions during the 12-month period added 7.0% to industrial net sales growth. Organic industrial segment growth was 10.6%, and it included 2.5% on pricing and 160 basis points favorable from foreign exchange. Consumer segment sales were $833.6 million, up 1.1% from last year's first nine-month period. Organic sales growth in this segment was 20 basis points; within that was 1.1% of additional pricing and a 60-basis-point benefit from foreign exchange. Here, retail buying behavior continued to fluctuate throughout our first nine months, and declines in existing home sale turnover and, to a lesser extent, new housing starts have affected several product lines within this business. The balance of the consumer segment sales increase of 1.3% came from two product line acquisitions net of a divestiture in the prior year.

Gross profit margin was 40.1% for our first nine months, and it was off from 40.8% a year ago. This margin reduction principally is the result of a combination of two factors. Higher raw material costs, and sales mix, and the sales mix includes increased services from our sales at Tremco's WTI business, which generates structurally lower margins. Within industrial, the gross profit margin declined to 41.3% from last year's 42.5%. And it results from higher raw material costs and the mix-related issues coming from Tremco's WTI business along with the illbruck acquisition within the Tremco world. Consumer segment gross margin of 37.8% for the first nine months was off from 38.3% a year ago.

SG&A expenses improved to 31.3% of sales this year from 32.6% for last year's first nine months. This improvement reflects the leverage benefit of the organic sales growth, last year's first nine-month one-time cost of $10.2 million and our vigorous spending controls. The industrial segment SG&A improved significantly as a percent of sales to 30.9%, compared to 31.9% a year ago, and consumer segment SG&A improved to 27.5% from last year's 27.7%. The corporate and other expenses also declined to $36.2 million for the nine-month period from $47.7 million a year ago. And the decline essentially reflects last year's $10.2 million of one-time cost issues, plus certain favorable benefit-related cost reductions partially offset by higher compensation-related costs.

EBIT dollars grew 19.0%, yielding a margin of 8.8% compared to 8.2% a year ago and they reflect the same improvements noted in my quarterly comments on EBIT. Industrial EBIT grew 16.7% and yielded a margin of 10.4% on sales compared to last year's 10.5%. Consumer segment EBIT declined 1.0% and resulted in a margin of 10.3% on sales compared to last year's 10.6%. Interest expense was up $7.3 million over last year's first nine months, and it reflects the acquisition-related debt service and additional borrowings, plus Fed-driven net rate increases on our variable debt partially offset by additional investment income. And you'll recall that we did have in our first quarter this year, $1.1 million paid out for the early retirement of our private placement senior notes. Overall rates averaged 5.4% during our first nine months compared to 5.1% last year.

The tax rate for the nine-month period was 32.9% this year compared to last year's 34.8%. Again, here, the rate changes reflect differences in our projected U.S. state and federal income taxes, the effective rates on foreign earnings, valuation allowances associated with our foreign net operating losses, and U.S. foreign tax credit carry forward positions. Additionally, this year, the nine-month tax rate includes the one-time benefit of 1.2% related to the resolution of several prior years' tax liabilities. Net income for the nine-month period ended at $114.6 million this year of record earnings for a nine-month period, increasing 21.2% over last year's $94.5 million, prior to asbestos charges, with a margin on sales of 4.9% compared with 4.5% a year ago. Diluted EPS was $0.91 this year; it also represents a record nine-month performance and it was up 19.7% compared to last year's $0.76 a share.

I'll talk to the major balance sheet items for a moment here. And here, when I talk to the balance sheet comparisons, I'm taking us back 12 months so that we get a seasonal comparison as we look at the various components of the balance sheet. The receivables are up year-over-year $38.3 million. Three things drive this increase, net acquisitions account for about $10.1 million of the increase. Foreign currency exchange rates caused another $9.2 million increase year-over-year. And the remainder is the result of our sales increase, which makes up the balance of $19 million. This is 4.3%, which when that's compared with our 7% organic sales growth for the quarter results in a modest increase in total DSOs for the year.

The inventory was up $56 million. Here we have acquisitions adding $6.2 million. We have foreign exchange rates adding $5 million, and the remainder of the increase essentially is related to organic business growth, as well as certain strategic inventory builds, plus the effect of the recent uneven retail buying behavior. Accounts payable were up $39.9 million year-over-year; acquisitions representing $5.6 million of this increase, translation rates $3.7 million, and the balance of the increase comes from a combination of business growth, timing of payments in both of our segments, and it partially offsets the organic inventory growth previously mentioned.

Looking at our debt, total debt at February 28th amounted to $936.5 million, an increase of $57 million year-over-year. This increase mainly reflects $86.3 million of additional indebtedness from our acquisitions during the past 12 months offset by $29.3 million of debt repayments. Our composition of debt at February 28th was 54% on a fixed rate basis and 46% on a variable interest rate basis. Our available liquidity, including cash, stands at $444.5 million. Our 43.7% net debt to capital position improved from 45.3% at May 31st, 2006, and it provides us with continual financial flexibility to pursue small to medium acquisitions.

I'll talk about the liabilities related to asbestos, which show up in two spots on our balance sheet. Our current liability at the 28th of February was $58.0 million, and represents pre-tax payments that are projected to be required over the next 12 months. Under long-term liabilities, $314.9 million reflects the remainder of our estimated pretax payments. The total $372.9 million compares with $421.3 million at May 31st of '06, and it reflects $48.4 million in pretax payments during the first nine months of fiscal 2007, which compares with $47.0 million for the comparable period a year ago. Breaking down these cash outlays, defense costs of $20.4 million this year compares to $16.9 million last year while settlement values for the current year were $28.0 million, down versus $30.1 million a year ago.

Our total cash costs during the third quarter were $18.2 million versus $17.1 million in the same period last year. Of the $18.2 million, approximately $7.2 million was spent on defense costs with $11.0 million laid out for settlements. And this compares to $7.0 million for defense and $10.1 million for settlements in last year's third quarter. During this period, we secured dismissals or settlements of 736 claims versus only 213 in the comparable third-quarter period a year ago. During this third quarter, we secured a number of settlements on favorable terms which did, however, result in higher cash outlays for the period.

Our number of active cases at the end of this quarter stood at 10,846, which is down sequentially from this year's second quarter active case load of 11,021. Significantly, the average number of new cases filed year-to-date in fiscal '07 is approximately 35% below last year's fiscal monthly rate of new case filings during the same nine-month period. As we've noted in the past and we'll continue to caution in the future, there will be some quarter-to-quarter volatility in our total outlay of cash costs.

Looking finally to the cash flow statement, and we'll focus on the operational side, cash from operations was very strong, $133.9 million through the first nine months of the year compared to last year's $111.4 million. It's a 20.1% increase year-over-year. And it's primarily driven and pushed by our higher earnings this year compared to last year. At this point, I'm going to turn the call back over to Frank Sullivan.

Bob, thank you very much. One clarification on the quarter because there had been some questions earlier this morning. Excluding asbestos cost, the EPS for the quarter was $0.09 per share and the $2.1 million item in the tax rate is really the equivalent of a $0.016 per share impact.

As it relates to the outlook for the balance of the year and our fourth quarter, first of all, keep in mind that we're comparing to the prior year's fourth quarter, when sales grew 20% year-over-year driving a 29% increase in earnings. With that in mind, we expect a strong quarter for our industrial businesses, both in revenue growth and earnings generation, and a relatively flat quarter both in revenue growth and earnings for our consumer businesses. During the quarter, we completed the Tor acquisition, which is approximately $45 million on an annualized basis at the revenue line. It will be neutral to our fourth quarter, but accretive to fiscal 2008. We have a number of similar size acquisition opportunities in the pipeline that we hope to complete in the balance of calendar year 2007.

With those comments, we are comfortable in reaffirming our ability to meet or slightly exceed our original full-year guidance on earnings of 10% to 12% growth for the year. And that excludes the impact, positive or negative, in the prior year or this year of asbestos costs. That concludes our formal comments. And I am here with Bob Matejka, RPM's Vice President and Chief Financial Officer, and Kelly Tompkins, RPM's Executive Vice President and Chief Administrative Officer, and we'd be now pleased to take your questions.

[OPERATOR INSTRUCTIONS] Your first question comes from the line of Mr. Jeff Zekauskas with JPMorgan. Please proceed.

Good morning.

Hi, good morning. In your industrial business, you spoke of some margin compression from higher raw material costs. Is it easy to recoup that cost inflation through price increase? Or does the price increase take a little bit of time?

Over time, we can recoup through price increases. And in general, we're seeing in a number of areas, flat or slightly declining raw materials. In our industrial segment, we had a mix issue, which is a combination of the low or seasonally low relative amount of revenues in general. And the fact that our revenue growth came at higher rates from our flooring, corrosion control coatings, and our marine coatings business, all good businesses, but marine coatings have a huge dose of copper, which is up pretty dramatically from a year ago. Corrosion control coatings, which is an area where we are seeing double-digit organic growth and that's continuing, has been negatively impacted by zinc prices, which zinc-rich primers are the basis of the first coat of a lot of the major projects that we're getting.

And lastly, epoxy prices have remained stubbornly high. And that is a major input for our flooring coatings. We would expect in the fourth quarter that we're going to see some margin improvements in all of those areas. And also we'll see the benefit of a very robust quarter just from a seasonal perspective across all of our industrial businesses. So I think it was just a function of the seasonal low period revenues and the mix that impacted that. And we would expect to see strong top line and bottom line growth in our industrial businesses in the fourth quarter.

I would imagine that there are all sorts of pushes and pulls on price in your consumer business. Where are your consumer prices going up and where are they going down?

Our consumer prices have been going up over the last year and a half to two years, depending on the product line. Most of those price increases have now been completed. There's still some prior-year price increases that we'll be realizing into our fourth quarter. When you look at our consumer gross margins and you look at our nine-month gross margins, they're starting to even out on a year-over-year basis.

And we're in pretty good shape to benefit from any raw material declines assuming they start coming our way, which we believe they will over the intermediate term. What they're going to do in the coming quarters is anybody's guess. We've been successful in getting price increases over the last two years at various times across all of our consumer businesses.

I guess lastly, your organic growth in consumer was very nice this quarter, but for the nine months, you're sort of flattish. And it sounds like that's what you expect for the year. Is the 12-month total or the nine-month total a better representation of the environment? Or is this quarter a better representation? Because it seems that your sales growth has accelerated a little bit.

As we talked about, Jeff, at the beginning of the year, we had a down quarter in the first quarter, in both sales and earnings. And we anticipated that we would slowly build with positive momentum and that's exactly what we've done. I think in general, the environment's improving. It's improving in a couple of our big accounts. Our hesitancy on predicting a huge or much growth in our consumer business at this stage in the fourth quarter has more to do with the fact that consumer EBIT in last year's fourth quarter was up 27%. And as you'll recall, some of that, over the last couple -- let's say, six quarters or so was real uneven buying patterns where we would have flat results and then big results and flat results.

We see a lot of that evening out. And we expect strong performance in our consumer business across most of our product lines, but not all. The one area in consumer that has been impacted by the housing, residential housing situation is our DAP business, which we've talked about, which is really the only consumer segment product line area where there is a negative impact of the slow down on the housing market. But we expect continuing strong performance.

The other comment that neither Bob nor I made, was that our third quarter in the first two months was shaping up to be gang busters. And the weather that hit pretty much across the country in February slowed us down a little bit. We were looking forward to a gang buster quarter. And February was very disappointing. We think it was weather-related. And hopefully that gives you a sense of some of the underlying momentum. We think that the December-January and the continuing build in consumer is ongoing. And February was somewhat of a weather-driven aberration, it wasn't unique to us. Nonetheless, our fourth quarter last year was a huge pickup as a result of some of the uneven buying patterns. We're hesitant to predict at this stage that we're going to have a big gain over what last year was a huge performance in our consumer segment both on the core growth side and the earnings side.

Okay. Thank you very much.

Thank you.

Your next question comes from the line of Ms. Rosemarie Morbelli with Ingalls & Snyder. Please proceed.

Morning.

Good morning, all. Could you give us some details on the new products and your market share gains in both categories?

I don't have a lot of details to give you in terms of new product areas. We've got some new products in Rust-Oleum at most of our big accounts. We have some new products with DAP that are going to be introduced this spring and early summer. We have not lost any market share. The only place in our consumer businesses that we have had some disappointing results has been in our DAP business given the impact of the housing market on DAP. That's the one product area where building contractors would go into a major account and buy cases of caulk to use on a new home. And there are a fewer new homes being built for those products.

We see the same thing in our Tremco TBS business. The Tremco Barrier Solutions, where we have the leading market share in residential basement, waterproofing, and installation, and there have been a lot fewer basements, substantially fewer basements dug, as you know. So those are the two areas where we've been hit. Geographically, the area where we're really seeing exceptional growth is in Eastern Europe. Europe in general is showing some middle single digit growth this year across most our product lines, which is better growth than we've seen in Europe for a long time. And we have established a nice presence in Eastern Europe. In fact, our illbruck business opened up distribution in Moscow this past year and in less than a year we're doing $1 million a month just out of that distribution in that major Russian city. So geographically, that should give you a sense of where we're seeing, some better growth and some new initiatives that have less to do with product than they do with distribution and geographic expansion.

In addition to the housing slowdown in terms of turnover of old home and building of new homes, quite a few companies are beginning to see a slowdown in the overall general industrial. Are you lacking the impact for a slow down there? Is that something that could hit in the fourth quarter? Can you comment on what to expect and what you see at the moment?

From a revenue growth perspective, the three areas that are impacted by residential new construction for us are really some of DAP, some of our Tremco Barrier Solutions, the below grade residential waterproofing. And some in our Euco chemical businesses related to admixtures that go into concrete for residential homes. We figure it's about $100 million combined across RPM that goes into residential new construction. On the industrial side, as we sit here today, we've seen some mix issues that I talked about that negatively impacted margin in the third quarter. But we are seeing very strong continuing growth as we enter the spring. And some of our principal industrial areas like roofing, we've got a very strong backlog right now.

So in the institutional and industrial markets, we are not really seeing any slow down yet. The only place where we play meaningfully in commercial construction is Dryvit and some Tremco. Most of our other businesses are involved in institutional or industrial, and whether it's power generation, oil and gas or even industrial capital spending. And I know there are some folks that are seeing that go down, slow down. We are full steam ahead, at least as we sit here today.

And then lastly, if I may, on the operating margin side for the consumer, in the fourth quarter of last year, it was 19.4%. So you don't expect as strong a fourth quarter on a comparison basis. But are you talking about lower operating income, or just lower operating margin which could still result in a higher operating income on a dollar basis?

I think the best that we can tell you for the finish of the year, particularly in comparison to last year's fourth quarter, is that we expect good revenue growth in the industrial side and good earnings growth in the industrial side, which is also on top of what was a very strong quarter. But that we expect flat performance, both sales and earnings-wise, in consumer, because the consumer business is a relatively steady-state, single-digit growing business.

And because of some of the order flow issues that we faced after the Gulf Coast hurricanes that went on for four or five quarters, we just had an extraordinarily big quarter last year in the fourth quarter and we thought and certainly in hindsight robbed a little bit of first quarter results and then we saw a pick up in the second quarter. So I think it's going to be a difficult comparison. And so we're projecting flat results, which in the grand scheme of things is a real solid quarter for our consumer businesses. Because that fourth quarter was the biggest quarter we'd ever had by far.

Okay. And just sort of one small clarification. You are talking about $0.09 in the third quarter, but when you plug in the numbers, it is actually $0.08. And in your press release you talk about $0.09 and $0.08 to which we take out the $0.02 from the tax benefit. So in effect, you reported $0.06 versus the same clean $0.06 last year. Am I looking at this the right way?

I'll tell you, it's $0.09 and $0.07. But I'll tell you a better thing to look at. Most companies don't get credit when their tax rates go down. And they get whacked when their tax rates go up. In a challenging quarter for us because of a slow down in February and a mix issue in industrial, I think that we were able to deliver a 14% plus year-over-year increase in EBIT and what was a record quarter a year ago was the best indication of how good the quarter was. And so we're real pleased with the quarter.

We weren't happy with the mix issues in our industrial, but A, that's how our business came in and, B, it was accentuated by the seasonal low period that would more accentuate or highlight those mix differences versus a fourth quarter, which is seasonally a much bigger quarter for us. So the way we look at it is $0.09 with a $0.016 benefit from the $2.1 million tax pick up. But I understand that the tax situation is somewhat confusing between the $0.08, including asbestos and the $0.09 without it. So from that perspective, the right way to look at this, I think, is EBIT. And the EBIT level we delivered was a 14% increase over a record year last year. And I think we've got good momentum in both our businesses going into the finish of this year.

Okay. Thank you.

Your next question comes from the line of Mr. Steve Schwartz with KeyBanc. Please proceed.

Morning.

Good morning. Can you give us an update on the cases against your insurance carriers with respect to asbestos?

The case against the insurance carriers has gotten to the point of summary judgment. All the summary judgment filings both from us and the defending carriers have now been completed and they are sitting in the hands of a federal judge. The next step is for her ruling on summary judgment, which could come in the next couple of months or could take six or seven months. It's really a subject of the judge's case load and her work schedule. But summary judgment's been completed, the depositions are done and the determination in this area is very meaningful.

We fully expect to prevail in summary judgment. And when we do, the next step is a trial. And so far after 2.5 years, this case is proceeding very well. And despite the typical attempts by the insurance carriers to delay, and that's why we are still talking about this today, we are now past depositions and all the time that's led up to the summary judgment motions here that's going to come sometime most likely in the next six or seven months, could be sooner. And the outcome there is something that we feel pretty good about. I'll remind the folks on the call, we feel that the decisions by the insurance carriers were, A, wrong, and B, deliberate.

While we had one carrier who had a very small exposure settle out last quarter for $15 million, my expectations and challenge to our attorneys is that this turn into hundreds of millions of dollars of settlement for RPM, the reinstatement of our insurance, or some combination thereof, or we're going to get in front of a jury and find out what they think. So I think in the grand scheme of things, it's hard to put this in your numbers, but this is going to be significant, positive in terms of future asbestos cash costs. Or it's going to be zero. Because we're not likely to have small settlements at this point.

Okay. The case count for the quarter, I think you guys gave year-to-date numbers in the 35% drop. But new cases, is it like 542? If my math is correct?

That I don't know. I don't think that's right. I can tell you that the case load this quarter is in excess of 10,000 cases. This is the first sequential drop in our case load in the last three or four years. And I think that's a good sign. This is one of those quarters in which we resolve substantially more cases than walked in the door. And the 35% was indication of our overall new cases on a monthly basis are down, 35% over the nine months. And we see those trends continuing. The number of new cases that are coming in are fewer, the dismissal rate on cases in particular mesothelioma, are going higher, and there continues to be good activity in the court system.

Most recently a determination by a judge in Cuyahoga County here in Ohio to throw out a number of instances related to fraudulent multiple claiming and double dipping. And that issue, if it continues to build momentum goes directly to the cost associated with RPM and the claims against our Bondex subsidiary. All that's good news in terms of trends. When you look at the nine-month year-over-year increase in after tax cash from operations of plus 20%, as we've indicated to investors over the last year, last year cash flow was up 18%. We think RPM will be able to deliver a better than industry after tax cash flow for some time as we continue to grow our business and as asbestos over time becomes a less and less of a call on our cash, totally ignoring any impact of the insurance coverage case.

Okay. And then one last one. Consumer top line. What component of that growth was price? I don't recall you giving a number out.

I think it was -- on the quarter, Steve?

Yes.

On the quarter the price was essentially about a flat number. For consumer.

Okay. That 5.8% was mostly in volume?

Right. There's a little bit of 4X in there, 40 or 50 basis points of it in there.

Okay. Sounds good. Thank you.

Thank you.

Your next question comes from the line of Mr. Edward Yang with CIBC World Markets. Please proceed.

Morning.

Morning, Frank. Just some follow-up questions on the court case against the asbestos insurers. Speaking qualitatively, are you still in discussions with some of these insurers? Have they shown a willingness, a greater willingness to settle? Or are both sides basically waiting for the judge to come out with summary judgment?

I think at this point in time while we have had some discussions with a few carriers, at this point in time, both sides are going to wait and see what the ruling is from the federal judge. And after which, we will see what happens.

And you were looking for in your current comments, you're looking for about six to nine months for the next step, anyway. And that seems like it got pushed out a little bit. Is it possible that this could drag on a little bit longer as well?

I don't know if it'll drag on beyond that. It could happen next month. At this stage the case is totally in the hands of a federal judge who has many cases to manage. And depending on the judge's work load, both of existing cases and new cases, she will rule when she feels it's appropriate, and has a chance to review all these summary judgment filings. So it could happen as early as a month or two. It's more likely to, in our opinion, occur sometime over the next six or seven months.

Okay. And just following up on Jeff's question, how much of a year-over-year decline in an industrial margin was due to the mix issue versus an overall rise in raw materials? If you had a normal mix this quarter, how much would gross margins have declined?

Again, if we had a normal mix this quarter, I think you'd see flat gross margins year-over-year. It'll be our expectations for something like that in the fourth quarter. The issue in the third quarter, keep in mind, this is a quarter in which we deliver -- if you take away the tax benefit - $0.07 per share on a year in which we're certainly going to deliver a lot more than that. You look at the seasonality, both the revenue line and the earnings line, for instance in our fourth quarter and our first quarter. So with that comment, it truly was, and this is as specific as we can get, a big part of the driver of the revenue growth was our corrosion control coatings, which is very strong, it's continuing, it's a great business, marine coatings, and flooring. And probably the three most stubborn areas in raw materials for us are epoxy resins and metals, zinc and copper. And so that's what happened in the third quarter.

And you're expecting a more normal mix in the fourth quarter?

Absolutely.

Okay. Great. And just finally in consumer. You mentioned housing affecting the numbers, which you've been talking about for three quarters now. So it's no surprise there. Have the parts exposed to housing, have they weakened? Or are we basically more flattish at fairly sluggish levels?

I think they've weakened. And our best indication is our TBS business and product lines. Whether it's our Bulldog or our Tuff-n-Dry products, we have the biggest market share by far of residential high grade waterproofing and insulation. And those guys have seen a continuing deterioration through the winter months. And so that's our one look at it, but it's a pretty pure look because it's related to basements that are dug. And I can't sit here and tell you that at least from our small slice of the world that the housing market has flattened out or is improving.

Okay. I appreciate the candor there. And the portion of consumer revenue, that's U.S. versus international. Can you remind us what that is? I would think that the international portion would be smaller but also less exposed to housing.

That's correct. I'll tell you I don't have the U.S. number right off the top of my head. But the North American number, which is the U.S. and Canada on consumer is probably about 90%.

Okay.

And versus roughly 80% for all of RPM.

And just on Tor really quickly. It's been a while since we've seen a sizable consumer acquisition. Should we expect more in that space? Or should we continue to see consumer revenue continue to decline as a percentage of your overall revenue?

Well, we did acquire Watco this year, which is also part of Rust-Oleum, that's in the UK. We acquired Tor, which will be part of Rust-Oleum, and so we actually have under the Rust-Oleum brand a decent presence in kind of an MRO industrial maintenance market for small packaged paints and spray paints. These acquisitions are really giving us our first entree into the DIY markets in the UK, and to a lesser extent continental Europe. And so we're pretty excited about what the combination of Watco and Tor can be over the next year and beyond. We've got some manufacturing consolidation to do there. And it gives us an avenue to start talking with UK retailers and, again, to a lesser extent continental Europe retailers about a lot of the category management ideas and product ideas or product categories that have been very successful in North America.

Okay. Thank you very much.

Thank you.

Your next question comes from the line of Mr. John McNulty with Credit Suisse. Please proceed.

Morning, John.

Morning, morning. Just a couple quick questions. I know in your second quarter you had talked about seeing industrial really starting to decelerate a bit. Didn't really see it much in the third quarter numbers. I'm wondering what may have changed there? If you can shed some light on that?

Part of the deceleration was the negative impact of this housing market on the residential basement business and to a lesser extent on the admixture side of our Euco business. And so that, as I indicated a minute ago, we don't see that at this stage picking up yet. And certainly, there is as an earlier comment that was made, there is a little bit of softness in commercial construction, which fortunately for us is a lesser part of our industrial business. The core industrial piece of renovation, new construction, expansion, we see continuing. Again, the businesses of ours that are selling into institutional markets, like roofing or into chemical and to offshore oil into power generation are all doing very well.

And the lion's share of our international businesses are our industrial businesses. And we are seeing better growth rates in Europe in general than we've seen for probably a decade. And we're also expanding and developing countries whether it's in Eastern Europe, Russia, or India. All on a small base, certainly. So that if we would break out, which we won't and it wouldn't meet anybody's big excitement numbers, but the real growth rates there are solid double digits as a function of both the higher growth rates in those economies and the relatively low, but growing base of business that we have there.

Okay. That's helpful. With regard to the consumer business, you've said things looked like they were going pretty well until the crummy weather in February hit.

That was true across -- John, that was true across all our businesses.

Okay.

Our industrial businesses and a number of our consumer businesses. We were getting excited about a gang buster third quarter. And I can tell you, we're still real pleased with the third quarter in which EBIT's up 14%. But February slowed things down pretty dramatically for a couple of weeks.

Do you have any color as to whether you saw a decent rebound in March because it was a little bit more of a normal weather pattern? Just trying to figure out going forward what to be thinking about.

I'm hesitant to tell you much more than we expect a repeat of what we said, which is a real solid sales and earnings gains in our industrial businesses, and a relatively flat quarter in consumer. But I don't want people to read that flat quarter in consumer as negative. Again, we're on top of a quarter a year ago in which core growth in consumer was 10%, which was not sustainable, and EBIT growth in consumer was 27% or 28%. So if we can match the level of business in the fourth quarter, I think that's an indication that some of the earlier challenges in our consumer business and the consumer business marketplace, especially with some of our big customers is starting to improve.

Okay. And then the last question, just with regard to the -- I guess what you'd said earlier in the call where you indicated that there was a strategic inventory build. Can you give us a little color on what that actually was all about?

Fibergrate in terms of manufacturing overseas. And in relationship to a number of raw material areas. We're looking at some of the stubborn raw material areas, some of the metals, shellac, in our Zinsser business. It's a function of a number of different things, but it's the kind of stuff that you're trying to do with the choppy raw material environment. As I indicated earlier, we're seeing some flatness or even some declines in some raw material areas, and of course, depending on the direction of oil prices and all the geopolitical issues. There's a number of areas where there's choppy price issues that hopefully are the indication of a struggle for an improving pricing situation on the raw material side, which is the reverse of where we were two years ago, which was a struggle in a rising raw material environment.

So --

and so, that's a cute way of saying sometimes you manage your inventories in light of trying to make what should be some raw material situations improving improve.

Okay. That's fair enough, thanks a lot.

Your next question comes from the line of Ms. Amy Norflus with Pilot Advisors. Please proceed.

Hi, can you give us an update as to what's going on with the acquisition front and how easy it is to get acquisitions and the valuations and stuff like that?

Sure. It's never easy to get acquisitions. And at the bigger deal size, which we haven't played in much in the last five years for a number of reasons. Strategic buyers have been kind of elbowed out by private equity folks. But in general, our acquisition program is pretty robust. We've got a good pipeline of small- to medium-sized deals. And that's something that we know how to do very well. It's a space that private equity tends not to play. And this Tor example is a good example. It's a deal we worked on for a year on and off, management team is staying to run that business. In fact they'll be a very good addition to the broader strategic assets that we're building in Europe for our Rust-Oleum group. And so that we would expect more similar type of acquisitions to be coming down the pipeline in the next six to nine months.

Perfect. And then the inventory adjustments that you spoke about in the press release on the consumer business. We're past all of that?

It's hard to say that we're past all of that. Certainly the decisions of major retailers, big box customers and major discounters can change a lot of that stuff. We think the environment's improving. We think that a lot of the adjustments were a combination of inventory adjustments and perhaps swings or disruptions in order flow as a result of the hurricanes are now through. And there are decided improvements at some of our biggest customers.

Perfect. Thanks, guys.

And your final question comes from the line of Mr. Daniel Rizzo with Sidoti & Co. Please proceed.

Morning, Dan.

Good morning, guys. Just a quick question. You did a decent job of reducing SG&A expenses year-over-year. Is that going to continue? Or are they kind of going to stay where they are? Is it just an anomaly? What's the story with that?

We've been very focused on expense control and reducing SG&A. And so if you've looked over the last three years, particularly in light of two things; in light of the raw material issues, we've taken a hard look at how we can continue to be sharp on the cost side. Also, the good revenue growth over the last couple of years has helped as a percent of sales.

And so to the extent that we can deliver good revenue growth, and maintain good cost control I think you'll see similar incremental improvements. The good news is -- this day will come. Raw material cycles are cycles. And whether this one hangs on for a longer period of time than most will be seen. But I believe that we've improved our cost structure such that when we start to get some relief on the raw material side, you'll see significant improvement in our EBIT line.

Okay. That's it guys, thanks.

At this time there are no further questions in the queue. I would now like to turn the call over to management for closing remarks.

Thank you very much. We are set for a good finish to this fiscal year and I just like to reaffirm our comfort with our original guidance of earnings growth for the full year of 10% to 12% and our belief that we can meet or perhaps slightly exceed that through the finish of the year. 2008, which will start on June 1 is also setting up to be another year of record sales and earnings growth for RPM and our shareholders. We look forward to providing you with the details of our 2007 finish and more details of the outlook for our 2008 fiscal year, and beyond at our earnings release in New York on July 23rd. And with those comments, we would like to thank all the RPM employees for delivering another quarter of record results and thank all of our investors and the folks that have covered RPM for your participation on our call today. Happy holiday and happy Easter to all.

Ladies and gentlemen, that concludes the presentation. You may now disconnect and have a great day.