RPM International Inc (RPM) 2008 Q2 法說會逐字稿

Welcome to the RPM International conference call for the fiscal 2008 second 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 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 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 measures, RPM has posted reconciliations to the most directly comparable GAAP financial measures on the RPM website. Following today's presentation, there will be a question and answer session. (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. Good morning. We are pleased to report another quarter of strong operating results from the RPM companies. Our current quarter and year-to-date results are evidence of the continuing good performance in our industrial businesses, principally as a result of the maintenance and renovation nature of most RPM product lines; also our strong presence in heavy industrial markets, including oil and gas, power generation and aerospace, to name a few examples of strong markets for our industrial product lines; our growing presence in marine; and finally our continuing focus on growing in international markets.

While our consumer business had strong results in this second quarter, much of this is a result of weaker comparisons to our second quarter in FY 2007, and really back to the hurricane-impacted poor results of our consumer business in the second quarter of our 2006 fiscal year. Our core consumer businesses remain challenged by a difficult retail environment; a slowdown in residential new construction; and, for RPM businesses most importantly, a slowdown in housing turnover. Having said that, the major portion of our consumer product lines are focused on maintenance, energy efficiency, patch and repair, and small project renovation and redecorating. These characteristics combined with successful introduction of a number of new products resulted in underlying sales growth in our consumer product lines, which is flat to slightly up in an environment where comp store sales in our major retail accounts in general are down in the mid- to single-digit range across most of their categories. These dynamics of RPM's industrial and consumer businesses, combined with a proven ability to complete and integrate small- to medium-sized company and product line acquisitions, allow us to confidently forecast continuing positive sales and earnings growth for the balance of this fiscal year, even if underlying North American economic conditions continue to deteriorate.

I would now like to turn the call over to Ernie Thomas, RPM's Senior Vice-President and Chief Financial Officer, to provide you with the details of our second quarter financial performance, after which we will answer your questions.

Thanks, Frank. Good morning, everyone.

I will begin with a review of our second-quarter operating results compared with the same period a year ago, and then I will discuss our six-month results followed by highlights from our balance sheet and cash flow statements. All of my comments will exclude the $2.2 million gain on the sale of our Bondo subsidiary and the previously disclosed $15 million settlement for asbestos-related claims which occurred during last year's second fiscal quarter.

Fiscal 2008 second-quarter net sales grew 11.9% year-over-year to a record second-quarter sales level of $905.7 million. Eight small acquisitions net of the Bondo sale represented 2.6% of the growth in net sales. Organic sales growth amounted to 9.3% or $75.6 million of the improvement in consolidated net sales, including pricing of 1.6%. Net favorable foreign exchange totaled 3.6% of the growth in net sales, coming principally from a stronger Euro but also from the Canadian dollar and to a lesser extent from Latin American and Asia Pacific and other currencies. The industrial segment net sales of $605.2 million grew 14.5% over last year's second quarter total. Six acquisitions completed during the last 12 months represented 2.9% of the industrial segment net sales growth year-over-year.

Organic growth in the industrial segment represented 11.6% of the net sales improvement, which included pricing of 2.1%, and the impact of net favorable foreign exchange, which represented 4.5% of the industrial segment sales improvement. Pure organic unit growth was 5% for the quarter and was due primarily to the introduction of new products and the traditional roofing business, renewed strength and renovation projects, and increases in polymer flooring and other industrial maintenance projects. The following industrial segment product lines all registered double-digit growth for the second quarter - flooring, coatings, and roofing products, and corrosion control coatings.

Consumer segment net sales, $300.6 million for the quarter, were up 7% from last year's second quarter total. Organic sales growth in this segment represented 5% of the consumer net sales improvement quarter-over-quarter, including 2% from net favorable foreign exchange and pricing of 0.6%. While retail buying behavior was slow during the quarter, mainly reflecting a slowing economy and the continued slump in the house sector, the combination of the consumer segments, various new product offerings and the diversity of its end markets, which mainly include repair and maintenance products, resulted in solid sales growth for this segment versus the prior year. The balance of the consumer segment sales increase representing 2% of the growth in consumer net sales over last year's second quarter resulted from two product line acquisitions, net of one divestiture.

Our gross profit margin of 40.6% in the current quarter improved from last year's second quarter margin of 40.3%, or about 30 basis points, due mainly to additional price increases which came into effect after last year's second quarter, and operating leverage from the organic sales growth. There were also continued rising prices in certain key raw materials this quarter, due primarily to higher energy costs. These cost increases included plasticizers, solvents, epoxies, resins, polyols, TBI, silicone and monomers.

Lagging selling price increases have begun to positively impact margins. In addition, we have seen the prices of some materials declining in recent months, copper for example, and seedlac. Industrial segment gross margin remains steady at 42%, largely reflecting the price increases previously mentioned. Consumer segment gross margin of 37.8% in the current quarter is up 70 basis points from 37.1% a year ago, principally reflecting productivity gains from the increase of sales activity and selling price increases, and to a lesser degree favorable product mix.

SG&A expenses decreased to 30.6% of sales this year from 30.9% last year. Corporate and other expenses decreased from $11.8 million down from $15.2 million last year. This decrease essentially reflects reductions in certain loss contingencies, combined with net foreign exchange gains, which more than offset higher employee benefit costs. The industrial segment SG&A remains steady as a percent of sales at 29.8%, while consumer segment SG&A increased to 28.3% from last year's 27.4%. Earnings before interest and taxes, or EBIT, grew to $14.4 million or 18.9%, for a margin on sales of 10% compared with a margin on sales of 9.4% last year. Again, reflecting the aforementioned selling price increases and the effect of operating leverage.

Interest expense, net, up $0.8 million quarter-on-quarter, reflects higher average borrowings partially offset by additional income this year and slight decreases in our overall interest rates on our variable debt. Overall rates averaged 5.4% in the current quarter compared with 5.5% last year. Our effective tax rate for the second quarter of 32.2% compares to 33.9% last year. The lower effective tax rate in the current period is due to lower tax rates on foreign-sourced income, tax credits, and to a higher domestic manufacturing reduction in the current period.

Net income of $53.5 million represents record earnings for our second fiscal quarter, increasing 24.3% from last year's adjusted $43.1 million, with a net margin on sales of 5.9% compared to 5.3% a year ago. Diluted EPS of $0.42 this year also represents a record for our fiscal second quarter, up 23.5% compared with last year's adjusted $0.34 per share.

A few comments on the six months. Net sales year-to-date grew 11% versus last year to a record sales level of $1.84 million. Our gross profit margin of 40.9% this fiscal year was up 30 basis points from 40.6% a year ago, again reflecting price increases and the effect of sales volume on operating leverage, which more than offset higher material costs. Net income for the six-month period, $121.8 million, represents record earnings for the first half, increasing 16.6% from last year's adjusted total, $104.4 million, resulting in a net margin on sales of 6.6% compared with 6.3% a year ago.

A few comments on our balance sheet. Our net receivables were up $60.3 million versus last year. Acquisitions, net of our Bondo sale, caused a slight decrease of $2.1 million. Foreign exchange accounted for $20.6 million of the increase, and the balance, $41.8 million, was due to higher sales activity in the current period. Inventories were up $27 million versus last year. Acquisitions added $2.8 million of this increase. Foreign exchange accounted for $13.9 million, the balance of the increase again due to higher activity, $10.3 million.

Total debt, $942 million, versus - slightly down actually, $7.7 million versus last year, and the composition of our debt at November 30, 2007, was about 53% fixed rate, 47% floating rate. Our available liquidity, including cash, stood at $557.8 million. Our 37.9% net debt-to-capital ratio improved from 43.3% at May 31, 2007. Liabilities related to asbestos are reflected in two balance sheet areas. Our current liability, $57.5 million, represents the estimated pretax payment that may be required during the next 12 months. Under long term liabilities, $247.9 million, reflects estimated pretax payments required beyond the next 12 months. The total of $305.4 million compares with $354.3 million at May 31, 2007, reflecting the $48.9 million in pretax payments made during the first half of fiscal 2008, which compares with payments of $30.2 million from a year ago.

As noted during our first-quarter conference call, we have been making several changes to how we manage our asbestos claims and these actions have increased our current cash outlays. During the second fiscal quarter we completed these various changes, and in so doing marked the peak of these extra transitional costs. During the second quarter we spent $26.1 million, of which $12.3 million was due to settlement costs compared with $47.2 million spent for settlement costs last year. We spent $13.8 million on defense in the current quarter versus $6.6 million on defense last year. It is important to note, however, that of the $13.8 million in defense costs this quarter, $9.1 million was due to the extra payments related to transitional costs referred to earlier. Without these $9.1 million of transitional costs, our total pretax cash payments for asbestos for the quarter would have been approximately $17 million.

We secured dismissals and/or settlements of 292 claims versus 324 claims in the second quarter of last year. During the current quarter, we continued to secure settlements on terms that were favorable relative to our liability reserve assumptions, which did however result in higher cash outlays during the period. The total number of active cases at the end of the second quarter stood at 11,117, essentially flat from the May 31, 2007 total active case load of 10,824, and last year's second quarter case load of 11,021. The average number of new cases filed monthly this year-to-date is approximately 5% below new filings during the first six months of last year. On a year-to-date basis, we have spent $48.9 million, of which $26.3 million has been for settlement costs compared to $17 million for settlement costs last year. For defense costs year-to-date, we have spent $22.6 million versus $13.2 million in the same periods last year. Without the extra transitional costs spent in the first and second quarter of this year, which have amounted to approximately $12 million, our defense costs year-to-date would have been approximately $10.6 million versus $13.2 million last year.

These recent higher cash outlays are not indicative of any adverse changes in the underlying litigation. We continue to track our key reserve assumptions for the 10-year estimate of our liability, and in so doing review the adequacy of our existing accruals on a regular basis. As we have said previously, we will make any appropriate adjustments to our balance sheet when necessary, consistent with our existing valuation criteria and liability estimation process. We expect quarterly cash outlays for asbestos to moderate for the balance of this fiscal year, and to see our fiscal '09 cash outlays return to levels more consistent with our experience in prior years. Although it is difficult to predict with certainty, we would anticipate lower cash outlays in the second half of this year, resulting in full-year cash outlays in the range of $75 million. As we have noted in the past, there can always be some quarter-to-quarter volatility in our total cash outlays for asbestos.

Finally, there are no new developments to report in our insurance coverage case, as we await the judge's ruling on the key liability issues in the case. The timing of a ruling is unknown at this time, although we continue to expect a decision during this fiscal year.

A few comments on our cash flow for the period. Operating activities generated cash flow of $104.1 million during the six-month period, compared to $91.4 million of cash flow during the same six-month period of fiscal 2007, for a net increase of $12.7 million. Factoring out the after-tax asbestos payments for the first six months of fiscal 2008 and for fiscal 2007, of $31.4 million and $19.3 million respectively, operating activities generated cash flow of $135.5 million during the first half of fiscal 2008 compared with $110.7 million a year ago, Up $24.7 million. Changes in operating working capital resulted in a use of cash for this year's first six months of $54.6 million versus $44.6 million last year, for an increase of $10 million period-over-period.

Decreases in trade receivables provided $120.3 million of cash during the current period versus $106.2 million last year, for a $14.1 million favorable change in cash flow period-over-period. Increased inventories required a $29.1 million use of cash during the current six months versus a $30 million use of cash last year. In addition, reductions in accounts payable required $85.4 million use of cash during the current period versus $74.6 million last year, for $10.8 million in additional cash period-over-period. All other changes related to working capital items had a net unfavorable impact on cash of $14.2 million on a year-over-year basis.

I will now turn the call back over to Frank Sullivan. Thank you.

Thank you, Ernie.

We expect to finish this fiscal year, which will end May 31, 2008, with earnings up in the 8% to 10% range. While we will not get back into the quarterly earnings guidance game, you will recall during the last conference call that we made comments about our third quarter, given the wide disparities in the marketplace of expectations for this year's third quarter. You will also recall that last year's third quarter had a $0.02 per share one-time gain related to an extraordinary tax item. Depending on how different analysts calculated that difference, last year's third quarter on a core basis came in at $0.05 to $0.06 per share.

Our internal plans set in June of last year for this year's third quarter calls for $0.05 per share. Given the challenging weather conditions in December, as well as in the beginning of January, particularly in light of very mild weather during this same time last year, we will work hard to achieve this internal plan goal. Keep in mind that given the seasonality of RPM's businesses and product lines, our third-quarter earnings add up generally to only about 3% or less of our total year earnings. So, while the percentage gains or losses in one-third quarter period from another may seem big, the impacts on the full-year results are relatively inconsequential.

More importantly, we remain bullish about the underlying strength in our industrial end markets, and our ability, based on the characteristics of our consumer product lines in a number of successful new product introductions, that we will finish the 2008 fiscal year with a strong fourth quarter in terms of sales and earnings growth. This will put us in the 8% to 10% range for earnings growth for the full year ended May 31, 2008, and that's on last year's adjusted EPS of $1.57 per share. This forecast for the full year-over-year earnings growth is despite the fact that we will lose a $0.015 to $0.02 per share from the divestiture of Bondo. Having said that, Bondo was a cash-neutral operation as part of RPM, so the $45 million of proceeds for the divestiture of this business certainly is a very strong cash flow return on investment. This transaction was made possible by the great strategic fit of Bondo with 3M, given their international distribution capabilities in the international auto body marketplace, which is a synergy which we did not have. Lastly, from an acquisition perspective, we have a number of small- to medium-sized transactions in the hopper, which we would expect to be completed before the end of this fiscal year.

This concludes our prepared remarks and we would now be happy to answer your questions.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Jeff Zekauskas from JP Morgan. Please proceed.

Hi, good morning.

Morning Jeff.

Morning, Jeff.

Can you explain what the transitional costs are in the asbestos liability?

Sure. We talked about them in the last - actually at year end and the last call. Two things, we had a national defense counsel that had been acting for many years as essentially our asbestos database manager, and paying lawyers to do database work is quite expensive. So in this past year we moved from a law firm who had been doing that work very capably for us for probably a decade but had become quite expensive to Navigant, which is probably the nation's if not the world's most sophisticated contingent liability claims-handling firm, and our annual costs went from millions to hundreds of thousands.

Secondly, in a number of jurisdictions, given some of the changes in the underlying dynamics of asbestos cases and how they're defended, we made changes in defense counsel which also has resulted in significant savings, the combination of which on an annual basis ought to be in the $8 to $10 million range. But in that process we were working over a six- to eight-month period with two firms, transitioning from an old to a new firm, and - on some of the settlement issues that that raised in the transition, those are the result of the transitions, cost us about $12 million, and that transition is now complete.

So if I understand what you are saying, you have got two law firms that you are working with instead of one.

We have dozens of law firms that we are working with across the United States. But the two significant changes were moving from a law firm doing database work, and again paying lawyers to do database work is expensive, the database management, to a more sophisticated and, you know, substantially cheaper firm who does that for a living, and in a number of jurisdictions we were working with two firms as we transitioned from a historical defense counsel to a new defense counsel in a couple of jurisdictions.

Can you remind me as to what your percentage of offshore revenues are now versus onshore, and when you look at the volume growth that you experienced in the quarter, is it the case that offshore grew and domestic shrank, or is that not the way to think about it?

I don't think that's the way to think about it. First of all, our consumer businesses are principally North American. We have grown with our Rust-Oleum group in the UK marketplace via acquisitions for - over the last 12 to 18 months, so that's becoming a little less true. But when you look at our growth, we've had real strong growth in our industrial businesses and you have seen it both domestically as well as internationally. We are about 23% outside of North America in terms of our total revenues, which is bigger than say five years ago when we were only about 15%, and we would expect that to continue to improve as we focus growth in places like India, Eastern Europe, Russia, and also as our numbers show we have certainly benefited in our reported results from a weakening dollar versus, principally, the Euro.

And then just housekeeping items. How much were the net foreign exchange gains and what was after-tax effect of the gain on the sale of Bondo?

The after-tax effect on the gain of the sale of Bondo - I'm sorry, the pretax was $2.2 million. So it's about a $1.3 million after tax. In terms of the foreign currency gains, we don't disclose the impact on our bottom line, and quite honestly it is hard to calculate. It is relatively easy to calculate the impact on revenues as well as the impact on various balance sheet items.

Was it a few cents a share?

We don't disclose it and we don't calculate it.

Okay. Lastly, the sale proceeds from Bondo of $45 million, that's not included in consumer, is it? Or is it?

The proceeds are not included in consumer on a GAAP basis. The $2.2 million gain is, and we have, in our commentary on the release, adjusted our results to exclude that $2.2 million gain, and Ernie's comments also excluded that gain so that we could really discuss the underlying results of our consumer businesses, which are positive but not anything to write home about. On a relative basis they're actually quite good versus a lot of what's going on in the consumer market.

Jeff, we don't really do a cash flow statement by segment. It is only in total that we actually do it.

Yeah, and the proceeds - just to finish that comment, the proceeds from Bondo are also not reflected in our cash from operations. That's a below-the-line item.

Thank you very much. I will get back in the queue.

Your next question comes from the line of Vital Aelion from Banc of America Securities. Please proceed.

Good morning and congratulations on your results.

Good morning, Vital, thank you.

Morning, Vital.

My first question relates to the pace of settled cases. I understand the volatility quarter-over-quarter, but it appears that the settled cases, accounting for two quarters now in this year, seems to have slowed down. Is that a fair statement?

There are two things to that. Number one, there's volatility and number two, I tried to reference this, when you are transitioning from one law firm to another, in a couple of major jurisdictions, it has an odd impact on your settlement in terms of transitioning cases that are open from one law firm to the other. But the underlying dynamics of our base asbestos issues have not changed. If you take what is likely to be a $70 to $75 million total pretax cash cost on asbestos this year, and exclude the $12 million of transitional expense, you are looking at a base of somewhere in the $58 to $63 million range versus our $67 million last year.

Okay. My second question relates to your perception of the ability to pass through raw material costs for the balance of this year. Are you positive on this?

We have been able to do it so far, and you know, there's a number of interesting dynamics. We have talked about this in the past. What really drove raw material costs for the last three years was certainly the price of oil and its impact on downstream chemicals, supply and demand issues, particularly related to China, as well as the impact of the hurricanes, which really negatively impacted the primary production area of the U.S. chemical manufacturing base. The hurricane issues are behind us. You are seeing supply and demand issues start to change. Capacity has come on that was shut down from the hurricanes. New capacity has come on in a number of chemical areas, for instance in TiO2. Some of the big investments in chemical capacity in China, the Middle East and India are just beginning to come on line, so that's an issue. And then the other dynamic is while the price of oil has continued to skyrocket, probably a more important energy input dynamic to our chemical raw material suppliers is the price of natural gas, which is down from last year and relatively flat.

So, those are the dynamics out there. But they are constantly moving between supply and demand, which in some areas seems weak. The price of oil, which is one factor but only one factor, which is certainly at record levels, and the capacity issues, which I think will play out over the next two or three years, depending on economic conditions. As we speak, we have had our second quarter in a row of gross margin improvement, which had not happened for three years until this last first quarter.

What dynamic prompted you to increase guidance?

Well, two things. Number one, we generally, particularly in our industrial businesses, have an outlook that is about six months, either based on construction projects, which principally impact our Tremco business, that are projects that are in the process of being completed and will be completed in the next three to six months, as well as the backlog that we saw in a number of our industrial businesses such as Carboline or Stonhard. So, as we get closer to the end of the year, I think we have greater confidence in our ability to predict the future, albeit in a short window. And so I think we are comfortable there.

The second issue, and this is my mistake, maybe reflected in the second quarter, is I am paying entirely attention to the feedback from our companies and I am - I have quit toning my comments by what I read in the newspaper. So in general I think we feel pretty good about the balance of this fiscal year. What happens after that, time will tell.

Final one, what were the sales of Bondo?

I don't know that we - yeah, we have not disclosed it in the past, but generally, I don't have it off the top of my head, we can get it, somewhere in the $40 to $50 million range.

All right, gentlemen, thank you very much. Congratulations again.

Thank you.

Thank you.

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

Good morning, all.

Morning, Rosemarie.

Going back to your change in outlook, the trends obviously based on what I read in the newspapers, the same way you do, are not particularly optimistic, and that I am assuming is not going to affect your business over the next six months based on the last comments that you just made. But, it - since you are fiscal year May, next year could be a very difficult one. What do you hear from your customers in terms of, you know, the second half of calendar '08?

The areas that we remain sensitive to are those areas where RPM product lines are impacted by commercial new construction. The impact of residential new construction on a few of our product lines has been felt, as we talked about in the past, in particular the Tremco barrier solutions business, which is almost exclusively in the business of providing residential insulation and waterproofing for basements. We are directly in the line of fire of housing starts there. It is a relatively small product line of about $40 million. We are actually picking up market share as marginal players are going out of business there, so I think we will be in good position. I get the sense there, or in DAP, that some of that is, if not bottoming out, the deterioration is pretty mild compared to what was a big drop last year. We are sensitive to commercial construction and it's slowing down, which we haven't seen yet, but we are very sensitive to it because people are nervous about it. Conversely, in our major industrial areas we continue in a number of product lines to grow at double digits, into power generation, into petrochemical, the chemical industry, into aerospace, into a number of major areas which have - feel like, both domestically and internationally, have real strength behind them. The last comment I would make is that the characteristics of our consumer products, you know you're talking about $3 and $5 and $6 cans of spray paint or tins of paint, or $2 or $5 tubes of caulk or such, that they're not going to be and have not been as negatively impacted as architectural coatings or OEM that have been negatively impacted by some of the economic conditions today.

However, you did make the comment on the consumer side that - I mean things were not moving a lot, and there was an impact from the lack of turnover housing and therefore a lack of maintenance, renovation, remodeling, whatever one wants to call it. Are you seeing or hearing any trends in terms of the remodeling of existing homes? You know, the rationale in the past used to be, "Okay, we can't buy a new house so we are going to paint this one and add a wing and do all sorts of projects", which would have helped or benefited RPM. It doesn't seem to have happened this time. Are you seeing a change in that particular trend? Are people beginning to do something in terms of the do-it-yourself small jobs?

I think the answer to that is yes. You have to separate the difference between RPM products which are really used for home maintenance and repair, a lot of DAP products are used for energy efficiency and redecorating, which is a much different thing than what the industry has become better at tracking, which is major renovations, which impact countertops and kitchen cabinets and things like that, so certainly those benefit us as well. But minor redecorating is something that we benefit from that does not necessarily mean that people are going to be selling thousands of dollars of cabinets or countertops or appliances. So, the answer so far is yes. I just wanted to tone down a little bit what I think were strong results for our consumer business in this quarter, so that people realize our expectations are flat or slightly up, as opposed to draw the wrong conclusions from what was a very strong quarter relative to a continuing challenged market.

When you say you are looking at mostly flat, are you talking about consumer for the full year?

Correct.

Okay. And then you said that major industrial area is growing at 10% into power plants, petrochemicals and so on. How large is that particular chunk of your business, you know, covering those areas?

We will have to get back to you on that. Off the top of my head, if I gave you a specific number, I mean it is $500 or $600 million roughly. But we would have to get back to you on that with more specifics.

Okay. I'll get back in the queue, thank you.

Your next question comes from the line of Daniel Rizzo from Sidoti & Company. Please proceed.

Good morning, guys. Just in regards to the acquisitions, you said you had a few small- to medium-sized in the pipeline. Could you give us a dollar amount of a range, like say a $50 million acquisition? What are you guys exactly looking at?

I think if all of them happened that we currently had under a letter of intent, we would be looking at roughly $100 million. The nature of acquisitions are such that it is not likely that all of them will happen. The point that I want to make is that we have got a pretty robust pipeline of small product line and medium-sized company acquisition opportunities out there that is consistent with what we have done over the last three to five years. That's become an important part of continuing to drive internal growth, particularly if we can take product lines, integrate them into an existing sales force or distribution strength, and then benefit from accelerating that growth in the follow-up year.

Okay. I am sorry, you said by the end of this year or - this fiscal year or next year?

By the end of this fiscal year. Again, it is more directional. The nature of these is that they could all happen or none of them could happen, but there are a number of transactions that we have under a letter of intent, and there's a good pipeline for the types of acquisitions that we've proven we can do.

Finally, is there a particular area geographically or in terms of your business segments, or is it spread out?

They tend to be more in the industrial markets and they tend to be more outside of North America. But again we are looking at transactions throughout the Americas. We closed a small transaction with our Euclid Chemical operation in Chile last month. So they'll be throughout the Americas, throughout the European marketplace. We continue to look at opportunities in other developing markets. We are very excited about them. Typically these transactions are not additive to earnings in the first year, or at least the first couple of quarters, in which they're done. But once we get into integrating them, they become from an IRR perspective very positive, albeit on a small basis.

Okay. Thanks, guys.

Your next question comes from the line of Edward Yang from CIBC. Please proceed.

Okay. Thanks for taking my questions. Morning, Frank, morning Ernie.

Morning.

My first question is just on - Frank, you spoke about the maintenance and repair aspects of a good deal of your portfolio, but you also spoke about some of the benefits you're seeing from the increased marketing. Could you talk a little bit about the demand elasticity for some of these maintenance and repair products? I would think that actually it would be fairly inelastic, but maybe you can talk about what you are seeing on the marketing spend and the returns there.

I could get at some of the marketing questions. In terms of price elasticity, just in general, RPM product lines tend to be the high-priced, high-performing product lines. And you know, I think that there are periods of time when major projects are only about price. In the infrastructure market I think there is a refocus on high-quality, high-performing life cycle products, which is very good for our Carboline and our Stonhard and our Fibergrate businesses, as well as our Tremco businesses in terms of construction. And so we are in a great place for infrastructure and Department of Transportation spends on bridge work and civic infrastructure work. The same is true with a lot of our major customers. Again, we talked about this in the past, our Stonhard business is in micro-electronics and in aerospace, and with major accounts we have had success with our Stonhard floors, for instance, everywhere in the world. And we just got a major project that we lost on price to a competitor that six months later came up, so we got the business back. So I think the dynamics out there are such that we are selling life cycle and premium products. So I hope that answers your question there.

Well, Frank, my question was actually geared more towards the consumer part of the business. For instance, if you are spending increased promotional or ad dollars, do you see volumes increase at some of your big box retailers? Because I seem to recall that you do have some new initiatives on some of your other consumer products.

That's correct. We have a new product line introduced by DAP, which is a fast-drying caulk. It's a first to market. It's a product that can be used in wet areas, whether it's in bathrooms or showers or things like that, in kitchens, that actually dries to be paintable, I believe - I am not a chemist - but inside of an hour. That's doing quite well. That's been introduced to major accounts. We are in the process of introducing a new spray paint line to major accounts, which will come out this spring.

So we have continued to focus on introducing and rolling out new product categories with a number of our major accounts and consumer businesses. Again, they tend to be higher-end, higher-performing products, and we are doing the types of promotional things that we think are necessary to try to drive, in a challenging environment, the use of energy-efficient products to make your home more efficient, the use of products for maintenance and repair, and I think it is having a positive impact. The reality is it is probably just the nature of our business, because it is small project work, which people tend to do in an environment like we have now, which is tough for the housing environment. That is evidenced by positive single-digit core growth in our consumer businesses, when in general a lot of our major accounts, where you can see the statistics, are having mid- to high-single-digit negative comps.

Thank you. My last question is just historically you have had a good track record of meeting and beating your expectations and there's a lot - as you mentioned there's some concern about the economy. I was wondering what your plan B would be? If we do see a significant step down in the economy, what kind of leverage you could pull to make sure that you continue to generate strong growth?

I think we have, I know we have, a very disciplined planning process. While we don't provide quarterly guidance, we work hard every week and every month to meet our internal plans. We have relatively strong, in place, plan Bs on the shelf at a number of our operations to pare back spending or expenses in the event that we see slowdowns on the revenue side. And so, we haven't missed a plan in the last five years internally. We rarely missed a plan in the last 30 years. I think, inarticulately we tried to make that point in the last quarterly conference call, and didn't do it very well. So we have ample room, I think, to continue to support growth, which is our principle goal. But if necessary, when you have 30% of SG&A, obviously there's room to cut it if the growth is not coming. The trick is to get in front of it.

Thank you very much.

Thank you.

Your next question comes from the line of Saul Ludwig from Keybanc. Please proceed.

Good morning, Saul.

Good morning.

Good morning, guys. One question is in the consumers sector, the - what I will call the SG&A creep. You went along for several years where the SG&A kept coming down as a percentage of sales, that was true in '05 versus '04, '06 versus '05, '07 versus '06. But then this year, both in the first quarter and again as I think you reported in the second quarter, SG&A was up almost 100 basis points. You know, what is going on with regard to this additional spending or is it really under as good a control as it should be?

Saul, that relates somewhat to the question earlier by Ed Yang, as you will recall comments we made in July at our year-end earnings release in our first outlook for the year, and also in the first quarter, our plan this year was to do some heavier than normal promotional spending in our consumer businesses, for a couple of reasons. Number one, we had new products that we wanted to move out and make sure they were successful, and number two, we wanted to try and influence our belief that our products would sell into this difficult economic environment. And the last piece was we had a very challenged, very challenged year last year in our DAP business. And we were going to redouble our - having cut some of our expenses a year ago - redouble some of our efforts in the sales and marketing area to both continue to drive positive sales, which is the trick to all good businesses - when sales are growing, good things happen, and when sales are shrinking, everything that happens from that is generally bad. And secondly, to position ourselves, for instance in this TBS business, this Tremco Barrier Solutions, we are picking up market share in a terrible residential construction environment. Interestingly enough, we got a great management team there, and we are going to be much stronger when we get out of this cycle than when we entered it, and we had better than 50% market share there. So that was a deliberate plan that we communicated at year-end and in the first quarter, and the reality is we are spending those dollars, and you are seeing it particularly in our consumer SG&A.

Okay. Next question on the asbestos, again, the trend had been, I guess for the last three years, that each quarter you had a lower number of new cases filed than in the same quarter a year earlier and it seems like in this - and some of that was because of the tort reform laws that were passed in a number of the states, you know, and also your aggressive defense posture, were combining to send a message to be careful about filing new cases. It looked like in this quarter there was a good uptick in the number of new cases, versus the same quarter a year ago. And this is the first time that's happened in a long time. Is there anything we should read into that?

No. I am very pleased with the team that has managed this very difficult environment for us for the last five years. They have done a good job. Keep in mind that 99.9% of the cases against RPM in my opinion are somehow involved with a fraudulent product ID, but when you look at the average new cases received three years ago, we were receiving an average of 300 new cases a month. In '06 it was about 240. For this current fiscal year, we are down to about 140, 150 new cases a month. That's new cases, but the rate of new cases is consistently declining. Our dismissals continue to be good. And having said, you know, how pleased and proud I am with the team that has done this, I think one of the underlying dynamics here that impacts us, and you can see this in other asbestos defendants that are public that disclose this information, is that with greater scrutiny by federal and state courts and some tort reform, what we are dealing with is a meso situation which is just declining. The average age of our claimant is about 72 years old. So you are seeing, fortunately, in a lot of ways, a declining incidence of this disease, and over time a declining filing of cases. That is probably the biggest factor as anything.

Then finally, just to make sure we are all on the same page, you said the base number from which the 8% to 10% earnings per share growth is currently expected is $1.57 for last year.

That's correct. And I say that because last year we reported $1.64 on a GAAP basis, but that included a $15 million pretax gain on the insurance settlement on asbestos. You can also take out of that, if you would like, the $0.02 in the third quarter one-time tax gain that we talked about, which would make these numbers better. The reason I emphasize that is that the analyst reports that came out today and looked at our new guidance are generally correct, and they're in different ranges. There was an AP report that calculated that 8% to 10% on our GAAP of $1.64, and actually said that this is management's signal that earnings per share will be $1.77 to $1.80. I hope that they have better vision than we do. But that was based on their taking the 8% to 10% on top of our GAAP of $1.64 last year, and that's not the basis for our estimate, and it is also not the basis for the analysts that follow us. I just wanted to make that clear so that -

But the $15 million was $0.10 a share, right? That was the --

It was more like 8.

More like 8.

Yeah, 7 or 8. Again, the base for last year, depending on which analysts follow us, and excluding the $0.02, a one-time tax, the base that people are using are anywhere from $1.54 to $1.57.

Okay. Then you also stated that the third quarter of last year was $0.05. I am looking at your third quarter release last year, where you had a reported and then as adjusted number. The as adjusted number you reported last year was $0.09 a share. I don't know how we get from $0.09 down to $0.05.

No, last year we reported, I believe, $0.08 and we highlighted a $0.02 per share - again, the numbers are in front of me. We reported $0.08 -

Then you have an adjusted number of $0.09.

We had $0.02 of a one-time tax gain.

Right.

So our adjusted number in the release last year was $0.06. Some analysts calculated the number differently and actually rounded down to $0.05. I think the important point is with, confusion this year in a wide disparity of estimates for our third quarter that we recognized in our last quarterly call, I didn't know any better way to let people know what we expect than just to say, "Hey our plan for the year, which was set in June of last year, was for $0.05 this year." And the reality of our third quarter, it is seasonal because our products are weather-sensitive. So great weather in the third quarter helps us, bad weather in the third quarter hurts us. It is 3% plus or minus of our total-year earnings, so it's inconsequential. So in future years you might plug $0.05 a share into our third quarter and work backwards from that.

Okay. I just wanted to ask to make sure everybody was on the same page here, because it was confusing from what you actually reported in your third quarter release last year.

Again, I -- I share that confusion. That's what we are trying to do here. There's also confusion as to the base for the full fiscal year, and the only items we had last year that were extraordinary one-time in nature was a $15 million gain in our second quarter pretax on an insurance recovery, and a $0.02 per share gain in the third quarter on a one-time tax item.

And the $1.57 excludes both of those items?

No, the $1.57 only excludes asbestos.

Gotcha. Thank you very much, Frank.

Thank you, Saul.

Your next question comes from the line of Rick Platte with Schwartz Investment Council. Please proceed.

Yes. This bit of news comes as somewhat of a bright light in a rather dismal background, so thank you for that.

Thank you.

This question goes more perhaps to Ernie. Ernie, I know you have been focusing on getting some increased efficiency in working capital management. It looked like a kind of just a quick review, like perhaps that had been achieved, but there was so many moving parts with foreign exchange and, you know, it is hard to know whether I am just looking at a shift change or just some statistical noise. I wonder if you could sort of comment in maybe perhaps more objective - or excuse me, more subjective terms in terms of your accomplishments in that area?

Our receivables are both up year-over-year, and it is due primarily to increased activities. I think it is still a bit early to see really a lot of the benefits I think we can get in this area. But I think right now we are actually up because of the exchange. Days in both cases are down slightly, but the activity and the exchange are driving the increase that you see on the balance sheet.

No. That's what I was - actually it looked like there was some slight improvement, and I was trying to -

In the days, right the days are actually improved.

If you relate it to sales, it looks like there's some slight improvement, and I was just trying to find out whether that was real or whether it was, you know, just fallout.

It is real.

All right. I was trying to help you there in front of your boss. So at any rate, thank you very much.

Thank you.

Your next question comes from the line of Hugh Denison from Heartland Funds. Please proceed.

Good morning.

Frank, good morning to you.

How are you?

I am terrific considering the Milwaukee climate, probably about the same as Cleveland. Frank, I was distracted at the beginning of the Q and A, and so I will apologize if somebody else brought this up, but did you make any comment at all on your tete-a-tete with the insurance carriers regarding the asbestos problem?

The situation with the insurance carriers in our insurance coverage litigation remains static. The summary judgment motions have all been in and we are waiting for the decision of a federal judge. We expect that decision to come within this fiscal year. So sometime between now and the end of May. It literally could happen tomorrow or it could take another two or three months. And really it depends on the judge's docket and how she prioritizes her caseload. All motions are in and we are waiting for a ruling from the judge.

The judge could rule one of three ways. She could rule in our favor, which we believe is appropriate and proven by the motions, which would be a very, very positive thing. She could rule that she would pass this on to a jury without ruling on any of the motions, which in general would be a very positive thing for us. Or she could rule entirely in favor of the insurance carriers, which would put us in the situation of deciding to appeal or do something else. We are waiting for that decision, and we are hopeful that it will be a positive decision for RPM, I think evidenced by one insurance carrier settlement and our belief in terms of what happened and what's the right thing to do.

We certainly wish you the best of luck. And incidentally, just a great quarter.

Thank you.

Thanks.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of Greg Halter from Great Lakes Review. Please proceed.

Morning, Greg.

Morning, guys. Good job, in a at least media-wide environment that doesn't look so great. But that's the papers, I guess, for you. Frank, you were just commenting on the asbestos situation. I know in the last conference call that you made a comment that you were still feeling really good about the case. Is that still where you feel at this point in time?

Yes.

Okay. Your capital spending on the six-month basis, I think, is $17.5 million versus $22 a year ago. I think you had said about $7 or $8 million for the year. Any thoughts on where you may come out for the year and where that significant increase would come from to get you to $78 million?

Our plan is about $75 million. Like most of the things we do around here, we usually hit plan. Some of it is just a timing issue in terms of where we are. But if there's any difference in that we can clarify that. I'm not aware of it, but if there is we will clarify that for you and others.

Okay. I know you have had a lower tax rate for the first two quarters of the fiscal year. I am just wondering what your thoughts are for the full year, fiscal '08 tax rate?

I think if you plan around 32.5%, that is pretty good. And that's, you know, what I think of - for the balance of the year.

Would that be able to be extended in '09 as well?

I don't know, and you know, the issue on taxes for us and I - you know, we didn't communicate it very well. I think internally we were trying to be conservative because, as we do more international business, the impact of different jurisdiction tax rates are providing some variability in what was pretty steady one way or another. We have also been benefited from some of the tax changes. I think there was a manufacturing tax credit that we are now benefiting from, and how long that will continue I am not sure. So, given our greater focus on growing internationally and some of the things we have benefited from, there will be greater variability. We have great tax guys, which, three or four years ago, we didn't have internal tax folks and they're working hard to do the right thing. I think the best we can tell you is 32.5% for the fourth quarter and the full year.

All right, that's great. With your stock price - although I guess earlier today it was around level, but with your stock price down from the $22.41 that the convertible notes work under, how does that work regarding your share count?

Well, we report all results based on fully diluted earnings per share. The convert that you are referencing actually has a conversion price at like $18.40, $18.42, somewhere in that range. I can get you the exact number. It is a contingent convert, which means that they can't be converted by the holders unless the stock price is above that $22 and change price. That security was non-callable for five years, and that five-year period ends late spring, early summer this year. The underlying shares are roughly 8 million. They're fully - they are calculated in our fully diluted earnings per share number, which is the ones that we talked about.

Okay. Given where you are today, if it were convertible, is that something that you would look to do at this point?

Couldn't tell you. I think, you know, we would look at the capital markets and the circumstances and what's going on. Right now, it is a 2.75% fixed rate debt security, which in this environment is a pretty good security. And whether we would leave it outstanding, convert it or, you know, try and get the shares out, time will tell. Again, it just depends on circumstances at the time.

Okay, and I know you talked about the Bondo gain, maybe I didn't hear it, but is it included, or excluded I guess I should say, in the cost of goods sold line or SG&A?

SG&A.

SG&A.

$2.2 million in SG&A, when you look at the GAAP results and the segment results.

Okay. Last question, I know in the last conference call you talked about marketing initiatives and so forth, growth initiatives which be in the tens of millions of dollars, but that you could curtail those if the economy sank, I think is the word you used. I presume that has not happened at this point, in terms of curtailing any of the spending?

Not in a huge way, but again we managed 40 independent business units and have various plan B plans in place for them, and so in any given year we have got companies that are on a roll, and in any given year we have companies that are on plan B. This year, it is no exception. But, you know, my reference to the ability to cut costs is really related to the businesses that are doing quite well, and where we are not cutting any costs, we are continuing to spend dollars in light of good growth opportunities.

Okay. Great. Thank you very much.

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

Great quarter. Can you talk a little about the stock repurchase plan that was announced and what your thoughts are?

We have not had a stock repurchase plan for some time, and our Board authorized a share repurchase plan, principally targeting at initially stopping up the dilution in place, which I would estimate at this stage is somewhere in 1 million to 2 million shares a year. We do have it in place and certainly what would get us to be more aggressive in that, for instance, might be something like a favorable ruling in the asbestos litigation coverage case.

Perfect. Implying that you would get a lot of cash and that's how you would use the cash?

That is our hope.

Perfect. Good luck and congratulations.

Thank you.

And I show no further questions at this time. I would like to turn the call back over to Mr. Frank Sullivan for closing remarks.

Thank you. A couple of closing remarks. We have long talked about the strength of RPM's brands and the maintenance and repair nature of most but not all product lines. It is always challenging to test those great assumptions that you like to talk about. And I think in this environment, in many of our product lines we are positively testing the strength of our brand names and strong market share positions, as well as the maintenance and repair nature of many of our product categories and product lines. We are clearly benefiting from continuing strength in what we think of as heavy industrial renovation, remodeling and capital spending.

With those comments, we appreciate your participation in our second-quarter conference call. We look forward to reporting our third-quarter results in April, and the results of our fiscal year ended May 31, 2008, which will be another year of record sales and earnings growth for RPM shareholders. Thank you very much for your participation today, for your interest and investment in RPM, and Happy New Year.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.