RPM International Inc (RPM) 2008 Q3 法說會逐字稿

Welcome to RPM International's conference call for the fiscal 2008 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, Pat. Good morning and welcome to RPM's conference call for our third quarter ended February 29, 2008. Joining me on the call is Ernie Thomas, RPM's Senior Vice President and Chief Financial Officer. I will provide a few highlights of the quarter after which Ernie will cover the quarter's financial results in more detail and following this we'll be pleased to answer your questions.

Overall we were very pleased with our operating results in the fiscal third quarter especially in light of the prevailing economic conditions in North America and with such a slow start to our quarter in December. Sales, net income and diluted earnings per share were all records for the third quarter reflecting new product introductions particularly in our consumer businesses, continued strength of our key brands across all businesses, the diversification of our end markets and our growing international presence. Cash flow from operations was also at record levels on a year-to-date basis, up nearly 21%. During the quarter we were able to strengthen our credit profile with a new $250 million senior note offering, which we completed in February, despite continued uncertainty in the U.S. capital markets. This 10-year, 6.5% bond enabled us to improve our liquidity which currently stands at more than $700 million. Perhaps equally as important, this bond lengthens our weighted average maturity of our outstanding debt.

The traditional characteristics of RPM's growth including a balance between consumer and industrial markets, internal and acquisition growth and a growing international presence in RPM's entrepreneurial operating structure, combined with a strengthened credit profile and strong liquidity will serve to provide the company with real staying power and financial flexibility during these challenging economic times as we finish this fiscal year and move into fiscal 2009. I'd now like to turn the call over to Ernie Thomas to provide you with details of our quarter.

Thank you, Frank, and good morning, everyone. Thank you for joining us on today's call. Before I begin with my more detailed comments on our operating results for the quarter, please note that my comments on the fiscal year to date will exclude the $15 million cash settlement for asbestos claims against an insurance carrier which occurred during last year's second fiscal quarter. Net sales for the fiscal third quarter for 2008 grew 7.7% to a record third quarter total of $731.8 million. The 7.7% increase in sales comprised organic growth of 3.9%, foreign exchange of 3.2%, and net acquisitions of 0.6%. Improvement in foreign exchange relates to a stronger euro and also a stronger Canadian dollar primarily.

By segment, the industrial segment net sales of $467.1 million grew 9.7% over last year's third-quarter total. The 9.7% year-over-year increase comprised organic growth of 3.4%, foreign exchange of 4.1% and net acquisitions of 2.2%. Consumer segment net sales, $264.7 million were up 4.3% versus last year's total. The 4.3% increase comprised organic growth of 4.6%, net foreign exchange of 1.7% and a decrease due to our Bondo sale of 2% for the quarter, totaling 4.3%.

While retail buying behavior in the U.S. continued to soften during the quarter reflecting weakness in the overall economy led downward by the housing sector, the combination of our new higher-end product offerings, the diversity of our end markets, which mainly include many low-dollar repair and maintenance items, resulted in net sales growth for this segment over the prior year's third quarter. Despite again the softening economic conditions, gross profit continued to improve. Our gross profit margin on a consolidated basis was 39.8% in the current quarter versus last year's 38.8%, due primarily to recent price increases and improved operating leverage related to the increase in sales volume on the year-over-year basis.

We've experienced some rising costs in certain key raw materials during this quarter due mainly to higher energy costs. Key raw material increases included plasticizers, solvents, epoxies, resins, polyols, and TDI and silicon. Lagging selling price increases are now taking hold in the marketplace and continue to improve our margins. In addition, we have seen some prices of some materials begin to decline in recent months -- for example, copper and seedlac -- in line with softer demand.

Our industrial segment gross margin improved slightly to 41% from 40% a year ago due largely again to selling price increases previously mentioned. The consumer segment gross margin of 37.7% in the current quarter was up slightly over last year's 36.8% mainly due to productivity gains associated with higher sales volume in the current period.

Our consolidated SG&A expenses increased slightly to 36.4% of sales versus 35.5% a year ago. This increase is due mainly to again the legal settlement we mentioned earlier and higher benefit and compensation costs in the current period. Corporate and other expenses were essentially unchanged at $12.7 million this year compared to $12.5 million a year ago.

Earnings before interest and taxes, EBIT, grew 11.4% for a margin of 3.4% compared with 3.3% margin a year ago. By operating segment, the industrial segment EBIT was essentially flat at $18 million versus $18.1 million a year ago. EBIT growth for this segment would have been in line with sales growth were it not for a legal settlement that impacted the current quarter. The impact of the settlement in the current period was about $1.6 million.

The consumer segment EBIT at $19.8 million grew $2.9 million from last year's total, improving about 17.6% on the increased sales growth. The increase in EBIT was due primarily to increased leverage related to the higher sales volume in the current period. The margin was 7.5% in the consumer segment versus 6.7% a year ago, a very nice gain especially considering the economic conditions. Interest expense on a net basis was down $1.6 million year-over-year, primarily due to decreased interest expense related to rate decreases on our variable rate debt. Overall rates for the quarter averaged 4.9% versus 5.5% one year ago.

Our effective tax rate for the quarter was 22.2% compared to last year's third-quarter effective tax rate of 11.6%. The increase in tax rate this year relates primarily to the absence of a $2.1 million benefit last year related to prior-year tax liabilities in the prior period. Net income for the quarter at $12.2 million represents a new record for a fiscal third quarter. Increasing $2.1 million, or 20.9%, from last year's $10.1 million total for a margin on sales of 1.7% improving from 1.5% a year ago. Diluted EPS at $0.10 for the quarter also represents a record for our fiscal third quarter, up 25% compared with last year's $0.08 per share.

Nine-month year-to-date basis fiscal 2008 net sales grew 10.1% over last year to a record sales total of $2.6 billion. The increase year-over-year in the 10.1% change comprises organic growth of 5%, foreign exchange of 2.9% and 2.2% from net acquisition growth. Net income on a year-to-date basis was $135.3 million, again a new record for the company for the first nine months of any fiscal year, increasing 18% from last year's adjusted total of $114.6 million. Again, the $15 million gain for asbestos is excluded from that $114 million total for a net margin on sales of 5.3% compared to 4.9% a year ago. EPS is $1.06 per share this year, also a record for nine months of fiscal 2008 up 16.5% compared to last year's $0.91.

A few comments on the balance sheet. Net receivables were up $73 million on a year-over-year basis. Most of this increase relates to increased sales activity, $50 million due to that. Foreign exchange translation accounted for 23.5% of the balance of the increase. Inventories on a year-to-date basis were up $32 million versus last year. Net acquisitions accounted for $3.4 million of that increase. Foreign exchange effect was $18.5 million on a year-over-year basis and the balance was due to increased business activity overall. Total debt stood at $1.1 billion, up just under $200 million over last year. This mainly reflects, of course, the new bond deal that we completed in February, $250 million and the balance was also due to increased acquisition outlays during the current period. Available liquidity at the end of February stood at $820 million, which is an outstanding total for us. I should also note that in early March, we repaid $100 million of senior notes due in March 1, 2008. Our net debt at the end of February stood at 37.7%, improved from 43.3% at May 31, 2007.

Our total asbestos liability of $286.7 million at the end of February compares with $354.3 million at May 31, 2007, reflecting $67.6 million in pre-tax payments made during the first nine months of fiscal 2008, which compares to payments of $48.4 million made in the same time period a year ago. For the third quarter, we spent $18.7 million of which $9.3 million was for settlement costs compared to $11 million spent for settlement costs a year ago. We spent $9.4 million on defense versus $7.2 million we spent last year on defense. We secured the dismissals and/or settlements of 225 claims versus 736 claims in the third quarter last year. The total number of active cases at the end of the third quarter stood at 11,350, up slightly from the May 31, 2007, active caseload of 10,824 and a 2/28/07 caseload of 10,846. Consistent with prior recent quarters, the number of new cases filed year-to-date in fiscal 2008 is about 9.6% below new filings received in the nine-month period of fiscal 2007.

On a year-to-date basis, we have spent a total of $67.6 million of which $35.6 million has been for settlement cost compared with $48.4 million in total payments last year for settlements, of which $28 was for settlements. For defense payments year-to-date we have spent $32 million versus $20.4 million in the same period last year. Without the extra transitional expenditures this year, which have been about $12.1 million, our defense payments on a year-to-date basis would have been in line with or slightly below last year's total. We continue to evaluate our key liability assumptions for our 10-year asbestos estimate and in so doing review the adequacy of our existing accruals on a regular basis. As we have mentioned previously, we will make appropriate adjustments to our balance sheet for asbestos, when it is necessary to do so. Although difficult to predict with certainty, it would anticipate that our fourth quarter cash outlays for asbestos will be below prior-year levels. As we've 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 to you in our insurance coverage case, as we await the judge's ruling on the key liability issues in the case. Operating cash flows on a year-to-date basis were $161.8 million compared to $133.8 million generated during the same nine-month period of fiscal 2007 for a net increase of $28 million. Changes in working capital resulted in the use of cash on a year-to-date basis of $18.7 million versus the use of cash of $13.6 million a year ago. Net decreases in trade accounts receivable provided $181.2 million of cash during the current period versus $177 million provided last year. Increased inventories required $51.9 million use of cash in the current period versus the $49 million use of cash in the prior period. Additionally, reductions in the accounts payable required $103.2 million use of cash during the current period versus an $88.5 million use of cash last year, for a $14.7 million additional use of cash period-over-period mainly as a result of increased overall activity levels and changes in the timing of certain payments. All other changes in working capital items had a net positive impact on cash flow of $8.3 million for the period.

I'll now turn the call back over to our CEO, Frank Sullivan. Frank?

Thank you, Ernie. Subsequent to quarter end, we completed two acquisitions. On March 5, our German based Tremco illbruck subsidiary of our Tremco Group acquired Prosytec SAS in France, a $40 million producer of sealants for the construction and window assembly markets in Southern and Eastern Europe. On March 11, our Euclid Chemical subsidiary acquired the $15 million Increte Systems a leading producer in the U.S. for decorative concrete.

We currently have one pending acquisition which is European-based and roughly about $80 million in sales that we expect to be completed in this fourth quarter. These acquisitions will actually be slight dilutive to earnings during the fourth quarter, principally as a result of transaction costs and required inventory step-up costs. However they should be accretive to earnings during fiscal 2009.

While it is hard to forecast future acquisitions, we do continue to see good activity in the small- to medium-sized deal range and are well positioned with a strong balance sheet and good liquidity to continue our successful acquisition program. Given the strong results of our third quarter, it is likely that our full-year results for sales and earnings growth will now be in the 10% to 12% range. Keep in mind that this is based for comparison to last year on an adjusted $1.57 per share for our fiscal year ended May 31, 2007, that is our GAAP results less the impact of the one-time $15 million asbestos recovery gain we had last year. We plan on releasing the results for the fiscal year ended May 31, 2008, at our traditional year-end analyst meeting on July 21, in New York. At that time we should be able to provide more details about the European acquisition, which I referenced, and also be able to provide more detailed outlook for our 2009 fiscal year. While we will not provide much in the way of future year outlook in this call, we are comfortable in forecasting another year of record sales and earnings growth from the RPM operations.

At this time, Ernie Thomas and I would now be pleased to answer any questions you have about our third quarter or the outlook for the balance of our 2008 fiscal year.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Ivan Marcuse from KeyBanc Capital. Please proceed.

Hi, guys, nice quarter.

Hi.

Good morning. In your release you said that you're starting to see some weakness in the industrial side and some of the North American construction markets. Where are you seeing that and can you give a little more detail on it?

I think our concern is more forward-looking in terms of weakness in, or potential weakness in commercial construction activity, which is aside from heavy industrial activity. We still are doing quite well both in North America and globally in petrochemical, offshore oil, chemical, you name it, power generation, marine areas are all doing quite well for us but in particular, I think we have some concern about a slowdown in commercial new construction in North America. Having said that, I don't think that there was the over-building or the unique problems in the commercial construction market that has plagued the U.S. residential market, so if there is weakness, it will impact certain of our businesses but certainly not to the extent that the residential housing market has impacted the overall economy.

Great, thanks. Another question is a lot of your competitors are reporting that they're seeing really weak sales in their DIY market except for you guys are doing very well. What do you think is the main driver behind the success of, I guess, Rust-Oleum who would be the main product in there?

I think there are a couple reasons as to why we're doing better. Number one, the general makeup of our RPM from a strategic perspective and it's been true for 30 years, we are not directly involved in house paint, automotive coatings or big OEM, and so we have deliberately avoided some of the bigger volume, more cyclical product areas of our industry and so that's helped us. Certainly the residential housing market situation in the United States is not good and so in comparison to some competitors who have a bigger presence in direct house paint, I think you would expect our results to be better just because of our product makeup.

Secondly, and we've been talking about this since our first quarter if you go back to August, we had some higher SG&A spends in the first quarter, didn't leverage our typical sales volume to the bottom line, because we've been working on some new product introductions. We launched, with our DAP subsidiary, a sealant called 3.0. We're pretty excited about it. We just now have a full distribution across our distribution base. It is a proprietary formula. It's got silicon characteristics but it is paintable. It is not silicon. Most importantly, it cures in three hours as opposed to the typical 12 hours or more of most caulks and sealants and is so it can be applied in the morning and repainted in the afternoon. It is great for bath and kitchen areas because, again, you can apply it and then it won't wash out, as some caulks and sealants do. The outdoor aspects of it also are it can be applied in lower temperature conditions so we're very, I could go on and on. We're very excited about it. It is a higher priced product. It's a higher margin product, and it's something that we and our customers are excited about.

Likewise, at Rust-Oleum, we've been working on a new spray paint launch for the year. We just launched it last month. It will be in full distribution some time in early- to mid-July. It's a product called Universal. It is a patented spray device which is new to the spray paint market and more importantly, it is a new paint that has got great adhesion to any substrate whether it is plastic, masonry, metal, wood, you name it, also a higher ticket item, higher margin and something that we and our trade customers are very excited about and that should continue to roll out between now and the middle part of July.

Great. I know Ernie you, passed over this I just missed it. The lawsuit settlement on the industrial side what was that about and what was the cost?

That was an approximately $1.6 million impact on us in the quarter. We're under a confidentiality agreement as are all of the defendants. It was basically a major building construction lawsuit which hit a number of defendant companies who were material suppliers of various materials and it impacted one of our companies that is involved in the commercial construction business.

That's a done deal? You are not going to see that recurring?

That's a once and done deal and it was a major construction lawsuit that impacted multiple defendants and we were one of them. It's one and done and it's over.

Great. One last question, I saw on your balance sheet your allowance for doubtful accounts bumped up a little bit. Are you seeing customers of yours having a hard time paying bills in North America or is that just a result of more business?

I think it's just a function of timing and more business. I'm not aware of any particular situations that would drive that but if we find out, we can get back to you.

Great. Thanks a lot guys. Good quarter.

Thank you.

Your next question comes from the line of Kevin McCarthy with Banc of America Securities.

Yes, good morning. Frank, we've seen acquisition activity pick up here a little bit, Prosytec and Increte, and it sounds like you've got another $80 million sales deal to come. Can you comment on the valuation multiples that you're seeing in today's market versus what we might have witnessed a year ago before the credit market dislocations?

That's a great question, and I'll give you a somewhat funny answer, which is for probably 30 years, and our acquisition program was really started and built by my father, we have valued businesses pretty much the same way, and we've gotten more sophisticated perhaps in what we can do with businesses by integrating them into some of our existing companies. So, a year and a half or two years ago, especially on bigger transactions, our valuation thinking was low by maybe 20% or even 30% versus private equity values, or the values and expectations that the private equity activity was creating in the marketplace. We haven't changed our valuation thinking and so in this environment, our valuation thinking might be at the high end and so we haven't changed a lot.

I think the broad answer to your question though in the marketplace is there has been a significant drop in valuation thinking. The 9, 10, 12 times EBITDA values are gone. I think that they're going to be gone for a long time. They never made sense for strategic buyers and they only made sense for financial sponsors in an environment where they could get very low cost of capital debt with virtually no covenants, and that era is over, at least for so many years. The other element that we see coming is that there's still a -- on larger deals -- a gap between seller expectations and buyer valuation thinking or in some cases even buyer ability to finance transactions and I think that that gap will be bridged ultimately by capitulation, because some of these bigger transactions out there are either not going to get done or they are they're going to get done at lower valuations.

The last comment I'll make on that is we are seeing some private equity firms looking to offload some assets at decent values to generate liquidity and so we think that the M&A market for the next couple of years should be favorable to companies like RPM and with the recent financing we did, we think we're in a pretty good position to take advantage of that when it's right.

Just a quick clarification on the pending $80 million deal in Europe. Is that on the consumer side or industrial?

It's on the industrial side, and we'll provide more details in July. The due diligence is essentially done and we would expect to close it the next couple weeks, but as anybody that works acquisition knows, deals aren't done until the money flows.

Sure. And then Frank, at the very top of your opening remarks, you mentioned you saw or posted good results despite a slow start to the quarter in December. Where did you see that slow start and what changed in January and February and why do you feel it might have changed?

A couple things. As you'll recall, on our January conference call, we were trying to tamp down expectations for our third quarter and it turns out it wasn't necessary but our original plan for the third quarter was a $0.05 quarter, and we've got a pretty good planning process. December started off quite slowly in a number of our industrial businesses. We had not yet launched some of the new products that we had talked about and those have been launched now and some of that's just a function of timing. To the extent that they were launched at the end of February it helped our third quarter and had they not made it in February, they would have made it in March and there's still more to come on the Rust-Oleum side so I think those were the factors but December was a poor month kind of across-the-board, and the last time we went through a recession, kind of a post 9/11, post dot com bust, in our consumer businesses and in a couple of our industrial businesses it was not uncommon to see choppiness from one month to the next where activity would slow down and then it would pick back up so I would expect that in the next year that we will see a month or so that doesn't look very good and we'll keep fighting through it.

And finally, maybe a bit difficult to comment on, but I was wondering if you have any updated thoughts on the timing of the judge's ruling in the insurance coverage case?

I don't other than I pray that she makes a timely decision and a good one.

Okay thanks and good luck to the Tar Heels this weekend.

Thank you very much.

Your next question comes from the line of Jeff Zekauskas of JPMorgan.

Hi, good morning.

Hi, Jeff.

A few short answer questions. Of your 3.9% in organic growth how much was price and how much was volume?

Volume was 1.2%, pure volume. In the industrial segment. You asking overall or just the industrial?

Well, actually I'd love to hear it overall and then by segment, both industrial and consumer.

Okay, well, overall, we had pricing of 1.1% actually for pricing.

And for the individual segments?

And the industrial segment, the pure organic volume growth was 1.2%.

Okay, and how about consumer for the volume growth?

In consumer it was higher overall. We had 4.6% organic growth and we actually had price discounts in the consumer segment.

Really?

1% overall.

And you still made such progress on your gross margin.

As Frank mentioned, we had the new product launches. We're very strong on the maintenance and repair aspect of what we sell.

How much floating rate debt do you have?

Floating rate debt, it's about a third of the total debt is floating rate.

So $300 million?

Yes, 381.

381.

Let me correct something there, Jeff. In the consumer segment, organic growth is 4.6%. In terms of where we are, it was actually 6% if you adjust out the Bondo divestiture, and we had positive price growth in the consumer segment. We're getting price increases across-the-board. The challenge that we have continues to be getting price increases sufficient to cover our cost increases. So I think Ernie's comment there was the differential in our consumer segment between pricing we're getting and the raw material costs, so we saw at that level, at the prime margin level, about a 1% deterioration, which again we are continuing in all of our product lines to battle the raw material price increases versus our own price increases. Hopefully that's helpful. We had a very strong quarter, again, ex-Bondo, we had 6% organic growth for the consumer segment in the quarter.

Right, so of the 6% organic growth, excluding Bondo, what was price and what was volume?

It was about 1% price and the balance was volume.

1% price and the balance was volume.

That's correct.

That's helpful.

And the differential that Ernie mentioned was really the differential at the prime margin level which we pay a lot of attention to between raw material prices coming in and what we can get going out.

So, your sequential interest expense really dropped down quite a lot and dropped down a lot relative to your floating rate debt. Is sort of $9.5 million your ongoing quarterly number for interest expense now? Or is there something unusual about the third quarter number?

I think it will be a little bit higher going forward. We replaced floating rate debt with a 6.5% coupon fixed-rate debt and so you'll see for the fourth quarter as well as for fiscal '09 a slight increase in our interest rate. We were up until the bond deal about 50/50 between fixed and floating, and we are certainly much different than that post this $250 million bond transaction. Certainly we hope over time we've got plenty of liquidity that we are likely to keep funding, on a short floating rate basis, any acquisition activity that we have in fiscal '09, including this pending $80 million transaction. So depending on acquisition activity, that mix will change as an average percent of interest expense.

So does your average cost-of-debt go back up to about I don't know, 5.5% in the fourth quarter?

We can get back to you on that. We don't have that exact number right now.

Rates could come down further also on the variable piece, Jeff.

But if you take a look at our balance sheet and that information is available in our Q's and K's and our last annual report, you can see the pieces and parts, and then you'll have to adjust on about $1 billion, it will be about $1.1 billion in debt post this acquisition for the $250 million 6.5% bond.

Okay. Why was your tax rate 22%, or what was different about the third quarter from the second quarter where your rate was 1,000 basis points higher?

It's primarily a smaller quarter on an income basis, so the discrete tax benefit items have a bigger impact.

We had a one-time event again with a refund at the state level in this third quarter. It was not as big as the tax item that we had last year in the third quarter and it is just a pure coincidence that we ended up with what I think this year was a state-level refund versus a larger refund last year, and that's the principal reason it was one-time and as Ernie indicated, it's a smaller quarter and so it has a disproportionate impact. For the full year I think the right way to think about our tax rate is in the 31.5% to 32% range.

So how much was the tax item?

I don't know off the top of my head. It was a state-level item, and yes I don't know what it was, it was less than last year. Last year it was $2.1 million.

I believe it was around 2 million, Jeff, but I'll verify that.

2 million. That's helpful. What's the CapEx for the year?

We haven't changed guidance for CapEx, it's still around $75 million.

You're going to hit that? You only have one quarter to go.

We expect to have a lot of backend loaded expenditures, so we'll maintain that same guidance.

I'd be surprised if you get all the way there. Also, what about year-over-year, what was your depreciation charges, last year and this year exclusive of amortization if you have that? I'm sorry to be so detailed.

Depreciation excluding amortization?

Yes.

Let me get back to you on that one. I don't think we have our break out.

Okay, and then lastly, can you talk about what's happening to raw material cost inflation for you? Is it more of an issue than it was before? Do you feel you need to go to your customers for more price, or are you pretty content with your raw material conditions as they are right now?

It's a challenging market, Jeff, and I think you're seeing that from everybody. It is a different dynamic than three years ago. Three years ago you were looking at a combination of global demand that was increasing dramatically, and also the impact in North America of the hurricanes, the combination of which allowed raw material suppliers to drive through significant price increases and absolutely with the attitude of if you're not going to pay them, they aren't going to ship because they were capacity constrained. It's a different environment today. There are obviously renewed underlying input costs that have continued to rise and in some cases dramatically, but the impact of supply and demand has also changed pretty differently from three years ago. So we are seeing some instances where there have been announced raw material price increases of 10% or 12% and what's getting passed through is two or three. We're seeing a few instances where there are strong pass-throughs of raw material price and we're actually seeing instances in some raw materials where they're remaining flat or actually going down related to supply and demand issues, capacity issues as opposed to underlying input costs. So it's a choppy time in terms of what's happening with raw materials, but it's a different dynamic than existed three years ago, principally because the demand side is not what it was three years ago.

Jeff, depreciation was $46.2 million.

Is that for the nine months?

Correct.

And what was that in the year ago period?

We'll get back to you on that.

And then lastly, like when I look at your consumer sales growth, it's just so strong relative to everybody else's and I know you were modestly saying that your markets are a little bit more stable, but are you taking share, and if you are taking share, in which areas?

I'll kind of reiterate the comment is that first and foremost, the makeup of our products is different from a lot of our peers that we get compared to. We aren't in house paint and a lot of our peers that have a very strong presence there, are being impacted by that dynamic, specifically of new residential housing construction and of housing turnover. Certainly that impacts us but nowhere to the extent that it impacts people that have more of a pure play there.

Secondly, a lot of our product lines are patch-and-repair related, and so if you followed RPM for as long as I know you have, whether it was in '90, '91, '92, 2001, a number of those products tend to ride through recessionary periods quite well. They tend to be small ticket items and they tend to be items that people buy, perhaps even more of, when they're maintaining or fixing their home, and then the last area which I also referenced was new product introductions. We've been talking since the first quarter about some ad-spend and developmental cost for some new product introductions. They came out, started over the third quarter and they will extend through the fourth quarter, and so we've got a nice sell-in.

We are picking up some market share in the caulks and sealants and patch-and-repair area. I think that we are maintaining what is a very strong market share in small project paint and spray paint and that the increased sales that we have there is really about these new products, which is pretty exciting for us and they're higher ticket items in both cases. So I think it's been a combination of the makeup of our products as well as some new product introductions, which should be significant for us. The issue there is just going to be POS. We're excited about these and in the long run they're going to be great but the fact of the matter is what's impacting us most directly in our consumer business isn't new home construction. It's the fact that there are fewer people walking into hardware stores and home centers, which impacts across all product lines in those categories.

Thank you very much. It's very helpful.

Thank you.

Your next question comes from the line of Edward Yang from Oppenheimer.

Hi, good morning, Frank.

Good morning.

You spoke a little bit about Universal and 3.0. That sounds like it's more in the consumer side and product introductions were pretty accretive to growth this year. Looking into next year on the industrial side, do you have any initiatives for new products maybe on the energy efficiency side or anything else that you could talk about?

We're constantly introducing new products across all our businesses. I mentioned the consumer ones in particular because they had been part of the reason that we're showing some strength, although it's not great, in a consumer market which isn't, in sharp comparison to some of our peers, and again it's product makeup and some new product introductions. In our industrial segment, I think we're doing quite well in a lot of areas, we've made a real push in the last two years in what we call dirty-water marine, which is harbor areas, Mississippi River type stuff, barges, and we've introduced new products. We've expanded our sales team and that is going quite well. Our international push across most of our industrial businesses is continuing to grow and it's been timely. Obviously both the stronger economy of certain international markets as well as the positive impact of the foreign exchange has helped as well there. So I think we've been lucky in terms of the timing on a very deliberate expansion over the last five years into more globalizing some of our businesses.

And then the last comment is your comment on -- on environmentally friendly or better building products. We're there. We are the leader in alternative roofing, vegetative roofing, photovoltaic roofing, the War Memorial Museum in Canada was done by our Tremco Roofing business, the new Clinton Library in Arkansas has a vegetative roof that was done by our Tremco Roofing business. They are still very small markets. The markets for photovoltaic roofing or vegetative roofing, tend to be showcase projects because they're also expensive. We have heavy, between illbruck and Tremco, in building envelopes which as issues around global warming become more of an issue should help us and our number one product in terms of building envelope is Dryvit. EIFS is still the most energy efficient building wrap or siding out there of all of them and so that should help us as well.

And when you try to sell some of these products on the environmental merits, do your operating businesses go about it separately or do you try to bundle it together and have the Dryvit people and the Tremco people come together, and put forward proposals together?

The nature of RPM, and it has served us well, is relatively entrepreneurial and independent autonomous units. So, while we operate with five groups, we have 40 plus independent operating companies and for the most part they approach the market independently. We are actually cooperating on a couple of major projects across some of our businesses like some of our Tremco product lines and our Dryvit product line. So, I would expect us to see more opportunities like that, but those are synergies that are developed between the businesses. There's nobody at the corporate headquarters who is responsible for driving that type of synergy. It really kind of goes against the grain of our culture.

Okay, and you mentioned the SG&A leverage and since 2002, you've made pretty significant strides in getting the SG&A as a percentage of revenue down from about 36%, down to about 31% in 2007. Since 2007, 2008, the SG&A as a percentage of revenue has crept back up. Looking forward into 2009 and on, should we expect to see more progress on that longer term trend line of reducing some of those SG&A expenses and getting some more leverage?

I think down the road, you'll be able to see some more leverage and down the road might be a trend over a three- to five-year period. As I commented at the beginning of this year, we've been very deliberate in spending this year in our consumer area in particular with the belief that we could, with some new products and some good marketing and the characteristics of our products continue to positively impact our top line, and that has worked. You will note in the third quarter even, we have some higher, even excluding the $1.6 million one-time legal settlement, had some higher SG&A and we're continuing to invest in different initiatives and that will continue. So, I don't expect to see a lot of leverage in our SG&A for the balance of this year or quite honestly for fiscal 2009. As the economy picks up, and we can accelerate our growth more effectively in a stronger economy and as we grow more international, I do think the long term trend will allow us to incrementally and permanently reduce that SG&A level as a percent of sales.

Okay, thank you very much.

Thank you.

Your next question comes from the line of Rosemarie Morbelli from Ingalls and Snyder.

Good morning all and congratulations.

Thank you.

Frank, you just made a comment, which kind of stopped me in my train of thought. You said that you were not really aggressively working on synergies between the different businesses, and my understanding has always been that actually, in the past, you had someone at corporate, right now that you had the three major groups; you actually had more, put more emphasis on making sure that one division could benefit from another and they would be working on projects. Has something changed in that?

No, nothing has really changed, Rosemarie. We do get more synergy at the group level. We have five different groups. At the point in time some years ago when we started reporting in our two segments, our industrial and consumer segments, I think there was a misperception that we were going to reorganize into effectively two operating groups. That was never our strategy, it was never our intent and it was never done. We still very much believe in independent sales, marketing, product development, customer service, tech service -- all at the individual operating company level so that's in 40 or 50 places throughout the world, and that will not change.

Paul Hoogenboom, who is our Senior Vice President of Manufacturing and Operations, does drive our purchasing initiatives across all our businesses. He also helps coordinate some manufacturing and distribution. He's our CIO, so to the extent that we've migrated to fewer ERP or computer systems he's led that charge. Then the other area that we've strived to do for 30 years is to get our salespeople together or get our research directors together. We just had a global research director meeting last week with the belief that if we get these operating company people together the natural synergies will come out. What we don't believe in is corporate-level, top-down forcing of these types of things because we don't believe it works, period and it certainly doesn't work in our culture.

And just as a follow-up, have you seen an increase as you get to all of those people together? Have you seen an increase in the level of let's call it cooperation, for lack of a better word?

Absolutely. We've seen a tremendous increase over the last five years in cooperative ideas and different areas.

Okay. Then when you give us the new outlook of 10% to 12% for the growth rate for the year, are you including the impact of that pending acquisition or is that going to be taking away from the earnings side?

The two acquisitions that we just completed, they're relatively small and the acquisition I referenced that we hope to complete this month, all three of those will actually hurt earnings in the fourth quarter. From an accounting perspective, while we can capitalize some transaction costs, some have to be expensed and there's also an inventory write-up that you have to do with an acquisition when it's first completed and that is a hit to earnings and so those will not help us and at the margin will hurt us in the quarter, but they should be accretive to earnings in fiscal '09.

Okay, so if I understand, the 10% to 12% increase in revenues that you are expecting for the full fiscal '08 includes the revenues, the contribution, the revenue side of those acquisitions that we may not see an increase of 10% to 12% in the earnings side because of what you just referred to, a different cost in the fourth quarter?

That's correct. Our results in the fourth quarter will be driven by the business that existed at February 29. Some of which is some, for instance we acquired Tor, I believe in last June, so we'll have the benefits of Tor, which is part of our Rust-Oleum business, it's their first entree into the UK DIY markets and we're very excited about that. That will be a positive contributor to sales and earnings growth in the fourth quarter. On the sales side obviously acquisitions in the fourth quarter will help sales but they will hurt on a net basis our results at the bottom line.

So we could very well see the 10% to 12%, I'm sorry to be pushing this but I want to make sure I understand what you're saying that we will see the 10% to 12%, the new growth rate that you advertise on your press release, we will see that 10% to 12% on the top line that we will not see it on the bottom line? I was very confused--?

That's not correct. If you use a base of $1.57 for last year which was the results of RPM excluding the one-time asbestos benefit of $15 million pre-tax, use that $1.57 base and we believe our full year results on the bottom line, that's the right one to focus on, will fall in the 10 to 12% earnings growth for the year.

Okay. Well, so that is pretty good if it includes the cost of all of those new acquisitions, including the pending one.

Yes, we expect to see decent growth, both top and bottom line, in the fourth quarter, but obviously, not terrific because we are subject to the same economic conditions and raw material price conditions that are out there.

Sure. And then if I may ask one last question. Regarding the valuation that you look at in terms of the acquisitions, you say that when everybody was willing to pay through the roof for acquisitions you were at the low end of the valuation spectrum and now you are at the high end, so considering that obviously the cost of acquisitions is coming down, would you -- are you actually lowering what you are willing to pay in order to not be at the high end of what people are willing to pay? Or are you still saying this is just because what you have always done?

Yes, I think that we've always valued businesses based upon what they're worth to us and what they can do as part of RPM in the future, and fortunately, we haven't found reasons to break away from our valuation discipline when markets are frothy like the last couple of years and there's no reason to get cheap. If we find a good acquisition that's a good fit that will be accretive in the first year, then we're going to be out there and be getting it done in the same valuation basis that we always have. The difference today is, is that we're much better situated to buy product lines or businesses that we can integrate into an existing business, and so while these tend to be small, the IRRs on them are huge and the bottom line bang is terrific. When you can do a couple product lines or small businesses that might total a $50 million investment and in one year it can add $0.01 to the whole $3.5 billion nut, that's pretty good.

Okay. And then actually I do have one other question. Are you more likely to look at large deals or is that still not part of what you are looking at?

Our focus tends to be on small to medium sized transactions. I do think that larger transactions which for us would be 200 million, $300 million, we saw either competition from private equity firms or expectations created by private equity valuations that limited us and I think other strategic buyers from being competitive in that space, so I think to the extent that we have an opportunity to do larger deals it will be in that low, 200 million, $300 million range and I think at that point, we will be able to get them done and we'll get them done accretively, cash flow positive and competitively.

Okay. Thank you so much.

Thank you.

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

Hi, guys.

Good morning.

One quick question. In terms you have $300 million cash on your balance sheet?

Yes.

Is that in treasuries? What is that in? Auction rate securities?

We'll get back to you, I don't know the answer to that. It is very conservative and very short-term. It is not in auction rate securities and it's not in subprime mortgages. It's in cash. A chunk of it we should quite honestly get at better. We have given our structure a relatively unsophisticated cash management system in Europe and we now have the size to get at that more aggressively and so there's probably $50 million to $70 million of that cash that's tied up in an in efficient cash management system in Europe that we intend to free up in the next three to four months with some things that we're doing there. The balance of it is, of all that liquidity is available to fund acquisition opportunities if we can find good ones that fit at the right price.

Okay. That's it, guys. Thanks a lot.

Thank you.

Your next question comes from the line of Amy Zhang from Goldman Sachs.

Good morning. Thanks for taking my questions.

Good morning.

My first question is related to the overall material trends. I was wondering have you seen much changes with ongoing raw material cost trends versus what impacted this three or four months ago?

Amy, as I talked about a minute ago, we continue to see significant raw material price increase pressure, but the dynamics today are a little bit different because there are certainly underlying input costs rising to raw material suppliers but in a number of areas the demand is weakening, and so while we're seeing some raw material price increases, they tend to be half of what suppliers are trying to get, but it's a real mixed bag. There are some key raw materials in where we're seeing flat pricing or actually some declines and there are some raw materials that are getting significant price increases, so it's a choppy market out there but it's a different dynamic than it was three years ago when a combination of very strong global demand and tight capacity in part related to the hurricane impact on the U.S. chemical industry really allowed raw material suppliers to need and to get huge price increases without which they just wouldn't ship because they didn't have the capacity. That is not true today.

And the reason why I asked this question is one of your major competitors pre-announced I think one or two weeks ago and then they've revised their raw material cost outlook for the whole year, so or at least for the quarter. So I'm not sure, have you done so or are you going to update your raw material cost outlook?

We will update our raw material outlook as well as provide an outlook for our new fiscal year which starts June 1, in much more detail on July 21, in New York when we release our year-end earnings and have our traditional analyst call.

Okay so far, and then your raw material costs stay the same?

Well, they, again, they've been very volatile but we've been in a battle between our ability to get price increases sufficient to cover the raw material price increases that we've been dealing with.

Got you.

And part of it also is a product mix issue.

Okay. And then my second question is I think at the beginning of the Q&A, you noted some softness in the commercial construction market. I was wondering if the growth trends for that business or for that market are still positive or really see some natural trends there?

I think the growth trends there are still positive but we follow some of the financing markets and we tend to be a lagger in those segments of our business, typically related to our Tremco sealants business, Euclid Chemical and to a lesser extent Dryvit. We tend to be a lagger there because projects that were on the board and funded and getting done and the thing that has us a little bit nervous is really an outlook over the next six months as to what will be coming or what will not be coming relative to commercial new construction. We've taken a hard look at it and the one comforting thing as I mentioned earlier is that the dynamics of commercial construction were not as overbuilt and not as dire and so they aren't likely to lead to the type of real wipe out that's happened in the residential housing market here in the U.S. in the last 12to 18 months.

And then for the full year outlook from commercial construction, would you expect something like mixed single digits growth?

We'll provide our outlook for the full year on July 21.

Okay, thank you very much.

Thank you.

Your next question comes from John McNulty with Credit Suisse.

Good morning, guys; just one or two quick questions. With regard to a lot of the new products that you're launching in the consumer area, can you give us a rough idea of how your shelf space at the DIYs would be changing in terms of potentially going up and what kind of percentage growth in shelf space you might be seeing?

I don't know that. I just don't know that. I could get back to you on that but I don't know exactly if we're gaining shelf space in feet. I know for instance, what I can tell you is some of the new products have gone on on floor displays so it's totally new space, but how that will shake out over the next year in terms of where it fits permanently on shelf I don't know.

We'll try to get you an answer, John.

That would be great. And then the other question, with regard to inventory kind of that you're seeing at your customer levels, first of all how much insight do you have to that and then what kind of inventory levels are we looking at? Are they relatively lean at this point or are they normal or what would you say we're at?

At the consumer level we have real good insight into that and I think that they tend to be, except for these new products which we've just launched so we've got to get the pull through, they tend to be at normal levels and in some instances and some of our core small project paint areas they tend to be normal to lean, and so there isn't anything that we would anticipate that would -- there isn't anything about inventory levels we see in the consumer side that suggest that there's too much in the pipeline. If anything it's the opposite. On the industrial side it's really hard to say. We're selling through thousands and thousands of distributors, and it's really a function of project work where we have the type of a big look out for work inventory and in our industrial segment particularly in the heavy industry stuff, our outlook continues to remain strong.

Great and then just last question, just with the recent acquisitions, can you remind us what your geographic mix is by segment, by industrial and consumer?

I don't have it by industrial and consumer. I can tell you that as of last year, May 31, 75% of our revenues were in North America and 25% were elsewhere. Of that 25% elsewhere, about 15% of it was in Europe. Prosytec was a European transaction, this $80 million transaction I referenced that we hope to complete this month is European based, and so that tends to be it. Most of our business outside of the United States and Canada is industrial. The exception to that is about $150 million of MRO or now new relatively small but new consumer products that are part of our Rust-Oleum group.

Okay, great. Thanks a lot.

That's all European based, the consumer piece.

Your next question is a follow-up from the line of Jeff Zekauskas with JPMorgan.

Hi. Just a quick question. I take it that you had an extra day in the quarter?

Yes, we did.

Versus last year?

We had an extra day in the month. We would have to go back and look at where holidays fell and whether that helped us or hurt us by an extra day but like everybody, we had a leap year which is always fun.

So is that a $0.01 or $0.02 benefit?

I couldn't tell you. I honest to God, Jeff, couldn't tell you and again I--.

Well, that's what I get.

I wouldn't be surprised if we had a day less, again we would have to go back and look at holiday schedules and where Christmas and New Years fell, but if we add an extra shipping day to the extent that we had a stronger quarter, it had to do with the beginning of a rollout of new product introductions and made up for what was a rough December for us, as I talked about in January and referenced earlier in the call. We did not have a good start to the quarter, and that was the reason for my conservative outlook for the quarter when we talked to investors on our January call.

Okay, thank you very much.

We had a strong quarter and in comparison to some of our peers, I'm pretty proud of what our people have done and I think the makeup of our product lines and the small project nature, patch and repair or otherwise is really the principal reasons that we're doing better in some instances because we've got a product line makeup that's been around for 30 years that tends to do better in challenging economic times so I would attribute that to the reason that we're doing well, not a leap year extra day in February.

Okay, thank you very much.

Although it is fun to be born on February 29.

Your birthday comes every four years.

That's right.

Your next question comes from the line of Greg Halter with Great Lakes Review.

Good morning.

Good morning, guys. You just alluded to the fact that December was a slow month. We're one month into this quarter. Any indication on where you stand or stood for March?

Not really. We, other than the outlook that we've provided, which is our expectation that we will have another record quarter for this fourth quarter, but it's a mixed bag out there. We expect positive results out of our consumer businesses for the quarter and obviously positive results out of our industrial businesses although as I referenced, we're still positive on the commercial side but we're seeing that slowing down, but obviously our outlook for the quarter is pretty decent given the increase in our guidance.

All right, thank you very much.

Thank you.

There are no further questions. I would now like to turn the call back over to Mr. Frank Sullivan for closing remarks.

Thank you. Should you have any follow-up questions today, please feel free to contact Kelly Tompkins, RPM's Executive Vice President and Chief Administrative Officer, Ernie Thomas, or myself, we'll be available throughout the day and this week. I'd like to close by thanking our worldwide associates, the employees of the RPM operating companies have done a great job of performance and perseverance during a tough economic time and continuing to deliver record growth in this environment, I believe is a testament to our strategy and the makeup of our product lines but most importantly to the efforts of our employees.

Thank you for participating on our conference call today and for your interest in RPM. We look forward to delivering the results of our full year and to seeing many of you in New York for our year-end analyst meeting on July 21. Thank you very much. Have a great day and go Tar Heels.

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