RPM International Inc (RPM) 2009 Q1 法說會逐字稿

Welcome to RPM International's conference call for the fiscal 2009 first 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. 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.

Thank you, Becky and welcome to RPM's fiscal 2009 first quarter conference call for the quarter ended August 31, 2008. Needless to say, we are in a tough economic environment. Fortunately, RPM's long-standing deliberate strategy of balancing our businesses between those serving consumer markets and those serving industrial markets, as well as the growth strategy of combining organic growth with the pursuit of small- to medium-sized acquisitions has allowed RPM to generate positive growth, despite the economic conditions we're facing. We're pleased to be able to generate record results over the last year's first-quarter record sales and earnings. During the first quarter, we experienced a perfect storm in our consumer segment, through a combination of weak retail traffic and consumer take-away across all of our retail and consumer business channels, combined with another round of significant raw material costs, which hit RPM companies in May and June of this year, driven by the end of spring $130 oil price, which at the time was expected to continue to move higher - all of which occurred in time to negatively impact our first quarter.

Additionally, the new products, which we have been discussing since the end of the last fiscal year, were not fully sold into our retail distribution until the middle or end of the first quarter. We responded with another round of necessary price increases of our own, though most of these also were not initiated until the middle or end of the first quarter. These elements combined to result in the worst quarterly performance of RPM's consumer segment businesses in recent memory. Fortunately, continuing solid results from our industrial segment businesses, especially from those businesses serving strong global, industrial, capital-spending investment, and involved with major maintenance spending in areas of oil and gas, mining, power generation, marine, offshore and other heavy industries, generated record sales and earnings results over last year's first-quarter all-time record results for our industrial segment. With these opening comments, I'd now like to turn the call over to Kelly Tompkins, RPM's Executive Vice President - Administration and Chief Financial Officer, to provide you the details of the quarter, after which, I will provide comments on our outlook for the rest of the year, and then we'll look forward to answering your questions. Kelly?

Thanks, Frank and good morning everyone. Thank you for joining us on today's call. Looking at our first-quarter consolidated sales, we see an increase of 5.9% quarter-over-quarter to $985.5 million. Acquisitions, most of which related to our industrial segment, accounted for roughly 60% of the quarter's sales growth, net of the divestiture of our Bondo subsidiary, which was completed during our second quarter last year. Organic growth accounted for the balance, driven by price increases and foreign exchange, principally the Euro, both of which offset unit volume declines.

We'll now take a look at our segments. Industrial segment sales of $697.6 million, which is about 71% of our consolidated sales, grew 14.6% over last year. Acquisitions accounted for roughly 60% of the industrial segment quarter-over-quarter net sales growth. Unit volume in industrial was up slightly, with price and foreign exchange accounting for most of the quarter's organic growth. Looking at the consumer segment, sales of $287.9 million were down 10.5%. Excluding the impact of our sale of Bondo, net consumer segment sales were actually only down about 4.8%, the bulk of which was due to lower unit volume. Sales to home centers, mass retailers and distributors were sluggish during the quarter, reflecting weakness in the overall economy.

We are, however, maintaining market share at our key accounts in our core consumer product lines. Our new high-value-added consumer products, broadly launched in the first quarter by Rust-Oleum and DAP, specifically our Universal and 3.0 products, have experienced good initial market acceptance, but the full potential sales and margin impact of these new products has not yet been reached. Overall, both products are generally on track with our planned expectations.

Looking at consolidated gross profit, of 41% in the quarter, down from 41.3% last year, due primarily to the lag between our subsidiaries' announced price increases, versus their realized raw material cost increases. Last year's trend of high energy prices continued into the first quarter this year, resulting in upward pressure on many of our raw materials, packaging and transportation costs. Industrial segment gross profit margin of 41.8% declined slightly by 20 basis points from 42% last year, reflecting higher raw material costs which were substantially offset by price increases. Consumer segment gross profit margin of 38.8% declined 110 basis points from 39.9% last year, due, again, to the realization of higher raw material packaging and transportation costs that were not sufficiently offset by price increases and favorable product mix. Looking at consolidated SG&A, it increased to 29.7% of sales from 29.1% last year, principally due to the loss of leverage from volume declines in the consumer segment, which were somewhat offset by cost reductions.

Industrial SG&A was essentially flat to last year as a percent of sales, from 28.8% to 28.7%. Consumer SG&A increased as a percent of net sales to 26.8% from 26.3% last year, due, again, principally to the loss of leverage from volume declines in the consumer segment, which were somewhat offset by expense reductions. Corporate, other expense increased $4.1 million to $15.3 million from $11.2 million last year. The primary driver was unfavorable foreign exchange due to the strengthening dollar during the first quarter, primarily relative to the Canadian dollar. Looking at EBIT on a consolidated basis, EBIT dollars declined 1.7% to 11.3% of net sales, compared to 12.2% last year, due principally to raw material costs and the loss of leverage from volume declines mentioned previously in the consumer segment.

Industrial EBIT dollars increased 13.9% from $80.4 million last year to $91.6 million this year, driven by solid organic growth and strong acquisition contribution. As a percentage of net sales, industrial EBIT remained essentially flat. Consumer segment EBIT dollars decreased 20.8% from $43.7 million last year to $34.6 million this year, from a combination of the Bondo divestiture, net raw material cost increases in excess of price increases, and unit volume declines.

Net interest expense decreased $2.1 million from last year, driven by lower interest rates and lower average borrowings during the quarter. Interest rates this quarter averaged approximately 5.4%, compared to approximately 6% in last year's first quarter.

Our effective tax rate for the quarter was 30.7%, compared to 31.8% last year. The year-over-year change reflects the differences in projected U.S., state and local income taxes, lower effective rates on foreign-sourced income, incremental utilization of foreign tax credits and the overall jurisdictional mix of income. Down to net income of $69.5 million, which represents a record for our first quarter - with an increase of $1.2 million or 1.8% from last year's net of $68.3 million. Diluted EPS of $0.54 this year represents a record first quarter, up 1.9% from last year's $0.53.

I'll wrap up with a few brief comments on the balance sheet and cash flows, starting with our asbestos accrual. At August 31, our total asbestos liabilities stood at $543.7 million, with $65 million in current and the balance reflected in long-term liabilities. Year-over-year, asbestos payments declined nearly 30% to $16 million, which included $9.3 million for settlements and $6.7 million for defense. This compares to last year's total payments of $22.8 million, which included $14 million for settlements and $8.8 million for defense. We secured dismissals and/or settlements of 201 cases this year, compared to 365 during last year's first quarter. And I would note in our 10-Qs we provide the details, including the note that the number of cases resolved in any given quarter can vary widely. In terms of total active cases at the end of the first quarter, cases stood at 11,399, sequentially up about 2% from the May 31 caseload and up about 4% from last year's first quarter. Continuing the trend that we've experienced over the last many quarters, the overall number of new case filings in the first quarter is 20% below new case filing levels during last year's comparable period. And finally, there are no new developments to report in our insurance case, as we continue to await the judge's ruling on the key liability issues in the case.

Capital expenditures for the quarter were $12.2 million, versus $5.5 million during the first quarter last year, principally due to the timing of various projects, which was anticipated fully in our overall CapEx plan. Our CapEx estimate for the full year is approximately $70 million, compared to $71.8 million of CapEx for fiscal '08, and we will continue to evaluate our CapEx requirements as business conditions dictate. Depreciation expense for the quarter was at $16.4 million, compared to $15.4 million for the first quarter last year. Amortization expense was at $5.8 million, compared to $5.4 million last year.

I'll now briefly look at our year-over-year working capital, particularly receivables and inventory. You will see that for receivables, our days sales outstanding increased about two days from the first quarter of last year. In terms of receivables, it is worth noting that we have not experienced any unusual collection issues with our customer base. Looking at inventory, days of inventory increased 1.1 days from the first quarter, all of which related to our consumer segment.

In light of current conditions in the credit markets, I'd like to wrap up my comments with a couple of remarks with respect to our capital structure, debt maturities and overall liquidity position. As many of you will recall, our senior convertible notes were converted into RPM common stock on July 14, which reduced our total debt to $972 million. Since May 31, total debt was reduced by about $100 million. The major elements of this debt reduction were the $150 million of debt converted to equity, offset by an approximately $25 million increase in debt for share repurchase activity, and about $25 million for working capital needs on our revolver. As a result, our debt-to-capital ratio, net of cash, stands at 37.9%, compared to 42.6% at May 31, and versus 43.1% at last August's quarter.

Our next debt maturity is not until October 2009, which is a $200 million bond. The next bond maturity after that is not until December 2013. The term of our five-year revolving credit facility extends through December 2011. Liquidity at August 31 stood at $548 million, with approximately $201 million in cash and $347 million available through our bank revolver and accounts receivable securitization facility. During the first quarter, we repurchased approximately 1.2 million shares of RPM stock for a total of $24.4 million at an average price per share of $20.19. Our current capital structure is appropriately resilient and should provide the flexibility to take advantage of growth opportunities as they arise.

With those comments, I'll turn the call back over to Frank for some wrap-up comments.

Thanks, Kelly. From an outlook perspective, for our existing consumer segment businesses, we would expect flat sales and earnings results for the remaining nine months of the 2009 fiscal year. We are currently seeing improved results sequentially from our weak first-quarter performance in our core product lines. This means that our second-quarter consumer segment results will be down somewhat from the prior year, as a result of the impact of the Bondo divestiture which occurred at the end of November, 2007. For the second half of the year, we would expect the consumer segment to be flat through a combination of flat to down unit volume, the impact of the price increases, which were initiated in July and August of this year, and a combination of these price increases, full distribution of new products, which we currently have, and expectations that raw material costs will remain flat, if not trend down for the balance of the year, result in this expected improvement in our consumer business product line sales and earnings for the balance of the year, versus our first-quarter results.

For the balance of the year, our industrial segment sales and earnings should be in the range of 5% to 8% in growth year-over-year. We would expect the industrial results to trend downward from the strong first quarter, as we progress throughout the year in anticipation of the negative impact of slowing U.S. commercial construction markets. This outlook assumes that raw material costs stabilize where they are today. It does not anticipate any further raw material cost increases, nor does it anticipate any significant raw material cost decreases. As we speak, it appears as if certain significant raw material costs are weakening, though there is still much volatility across all of our materials.

As a result of our first-quarter performance, and our current anticipated outlook for the balance of the year, last week we changed our guidance for the year from $1.85 per share, to a range of $1.75 to $1.85 per share. Aside from the market challenges, our tax rate for the full year, which will be above last year's tax rate of 29%, and which as you'll recall occurred mostly as a result of second-half one-time tax benefit events, and the impact of foreign exchange translation on our results, which unlike in past years, this year will likely cost us $0.02 to $0.03 per share, are the factors that have resulted in our change in guidance to a rather broad $0.10 per share range. This concludes our formal comments on the first quarter, we would now be pleased to answer your questions.

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

Hey, guys, how you doing?

Good morning, Ivan.

International market was pretty strong on your industrial side during the first quarter. Are you seeing any weakness in business in Europe, and is that implied in your guidance now, and could you tell us what your guys are telling you that they're seeing in Europe?

At this stage, with the markets that we serve, we are not seeing any real weakness in our international markets. Again, a lot of that is heavy industry, oil and gas, power generation, basic maintenance. We have also benefited from our acquisitions in Europe, both good acquisitions that fit within RPM and acquisitions that we've been able to leverage revenues with some of our existing businesses, so all of those have been strong. We are acutely aware of concerns, particularly in the UK and also in Western Europe, but to-date in the markets we serve, we're continuing to see decent strength.

Great. When do you think you'll -- do you anticipate you'll see some contribution or margin improvement from your new products? Do you think due to the lightness in the consumer you're going to have to be a little longer than expected or do you expect to see that next quarter or move going forward?

It took us longer than we thought related to the new DAP and Rust-Oleum products to get full distribution. Unfortunately, that happened by the end of the first quarter so we didn't have the impact in the first quarter that we had anticipated. The take-away, particularly for the Rust-Oleum Universal product is meeting expectations. Having said that, the weak retail environment in general and just lighter foot traffic at a lot of our major accounts is having an impact across all of our product lines. But from a product mix perspective and a distribution perspective, along with the impact of price increases that we were able to affect at the end of the first quarter, we would expect to see better results out of our core consumer product lines in the second quarter and for the balance of the year.

Thanks. And then one last question. The M&A activity, I know you guys just go after a certain size and type of business which tends to be smaller, with the credit market being as they are, have you seen even that pipeline sort of freeze up or is it pretty active still?

The small- to medium-sized type acquisitions that have long been the bread and butter of RPM are still very much active. Valuations are trending down a little bit, keeping in mind that our valuations there were never at the crazy levels of trying to compete with private equity because we didn't compete with private equity in that space. So, there's still good activity there. It will be interesting to see in the next six to 12 months what happens in larger transactions, because you've got some highly, highly levered private equity businesses, some in our space, who, with revenues going the wrong way, are having a real challenge, and the market for larger deals is real poor right now, just because financing is either non-existent or very costly, which obviously would significantly impact valuations and deal prices.

Good luck with the next quarter. Thanks for taking my questions.

Thank you.

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

Good morning, this is Silke for Jeff. How are you?

Good morning, Silke.

A couple of questions. For fiscal 2009, why wouldn't you expect your raw material costs to -- not just only be like flat and stabilized, why shouldn't they be down? Maybe you could talk about which materials are not moving down as quickly as you would think.

Related to raw materials, you know, the impact of raw material pricing from a lot of our major raw material suppliers that hit our industry couldn't have happened at a worse time for RPM relative to our first quarter, which is a June, July, August period. As you know, our major raw material suppliers in the chemicals side, almost globally because of just this dramatic increase in oil prices in the spring and expectations that that would continue, passed through surcharges and major raw material prices, which on announcement typically take 30 to 60 days to show up in terms of our actual material cost in terms of what we're putting in our products. So that's what impacted us in the first quarter. Obviously, there's been a significant reversal in commodity prices in the market today.

We are seeing that in some areas of metals, copper, zinc, some of that. And we are seeing softness in certain areas, but the volatility of the capital markets and the commodity markets are such that we would be hesitant to predict significant raw material declines, although we're certainly hopeful that that will happen and commodity chemicals being what they are, it will happen eventually. But our outlook for the balance of the year does not anticipate, as I indicated, higher cost but it does not also anticipate significantly lower costs and we think that's the right stance to take, given the volatility of the markets today.

I would think with like some of the consolidation that may happen on the commodity chemicals side that there's like an interest to secure like sales in the first year of these merchants, which you think would be beneficial. But I guess we'll see how it shapes up.

I hope you're correct. And again, we're seeing some softness and if you look at the basic commodity prices as they're traded, it would suggest that raw materials are going to be coming down, and perhaps in certain areas significantly, but it takes some time for base commodities and their price movements to work their way into finished products.

On the -- a question on the consumer side. Given the obvious strains that the consumer will be under, is sort of like an outlook of flat consumer demand the second half of fiscal '09 too optimistic or really improved growth January of next year.

The long-term trend for our type of consumer products, which are small project, basic maintenance and repair, decorative, we feel is still bullish. There's been a massive housing build, which is obviously a part of our capital market and credit crisis now. Once things settle down, that's just a bigger inventory of homes that use our products for maintenance and repair and small project decoration purposes. As I implied, in the second quarter, we are seeing in some of our core product lines, relatively flat results, which is a combination of slight declines in unit volume, covered by the first quarter price increases. And given the nature of our products, we are outperforming same store sales in general and in our category, in our big accounts and you would expect us to have greater strength versus bigger ticket items, once housing prices settle out and it's sort of our expectations from the Barrier Solutions folks at our business, who are directly involved in residential new construction, that the residential housing market in North America will bottom out in terms of volume, movement and pricing in the spring of 2009.

And if I can ask a last question on the industrial side, so through August it seems that volumes have been flattish, outside of acquisition and currency. And what type of step-down on the core business, excluding the acquisitions, would you expect if commercial construction is beginning to dry up and if maintenance projects begin to be delayed?

Two comments on that. Number one, our industrial businesses are literally dozens of different product lines and different operating companies. So, in some of our businesses, we are still seeing strong single-digit core unit volume growth. And these would be more international markets and heavy maintenance or industrial capital spending areas. A few of our industrial businesses are involved, and not to any great extent, but are involved in specialty OEM coatings in wood and metal, and that unit volume is down. So the reality of unit volume in our industrial segment is a mixed bag, product line by product line and company by company. As it relates to anticipating challenges, during the first quarter, we took about $2.5 million or $3 million of severance expense. A portion of that was in our consumer product lines and quite honestly was maybe a little late, and another portion of that was in our industrial product lines that was related to our concerns over the commercial construction markets, which are not being materialized today, but we're pretty certain, given the lack of project financing today, that there is a hole out there in commercial construction, maybe six months from now, and so we are ahead of the curve on that in terms of addressing expense reductions, and in some cases, personnel costs.

That's helpful. I'll get back in the queue. Thanks.

Thank you.

And your next question comes from the line of Kevin McCarthy of Banc of America Securities. You may proceed.

Yes, good morning.

Good morning.

Going through the process of revising your range to $1.75 to $1.85 recently, I was wondering if you could comment on the assumptions that you're using for macro growth, either in terms of GDP or industrial production, however you tend to build it up.

Let me address that two ways. Number one, the way we come to our outlook is really bottom up, company by company, and so we get on the phone or go out in person and meet with each of our operating company presidents or as many of them as possible and really understand the dynamics in their business, the impact of new products in the markets they serve and so we build our outlook from the bottom up, not from some macroeconomic forecast. The second area that really drove us to change our guidance was the fact that there were some analysts that still had expectations, despite dramatic changes in economic conditions, of us growing 8, 10, 12% year-over-year. Our original guidance of $1.85 -- and I'll be real emphatic about this -- was versus last year's results of $1.81, ex the asbestos charges. That's $0.04 per share over the whole year and we had a number of analysts as recently as a few weeks ago who had that or more expectation in their first quarter and it's not going to happen.

For the reasons that we outlined today, we believe we can meet, or slightly beat, our performance last year. The two areas that are kind of toss-ups in terms of how we finish the year are what does our tax rate -- and I think the right tax rate to use as we speak today is about 31% -- what does our tax rate look like at year-end versus the 29% we had last year, because of some extraordinary one-time tax benefits. And what does the impact of foreign exchange do with a larger international presence and a strengthening dollar. And so those were the factors that really caused us, along with just the deteriorating economic environment to change our guidance to a broader range of $1.75 to $1.85 and that market deterioration is really what keeps us in a good touch with our operations to do kind of a bottom up check of where they feel they are and where they feel they're going.

The last comment I'll make is that particularly in a number of our industrial businesses, we've got backlogs or outlooks that are pretty good, ranging anywhere from three to six months and so that also gives us some comfort. The commercial construction product lines are a good example. We're showing some decent growth and some decent profitability in those as we speak, but we see with the cancellation of some projects and the anticipation of other projects not getting funding, that there will be weakness there, starting in the spring of next year.

Okay. Fair enough. Perhaps a question for Kelly. You repurchased $25 million in shares last quarter, obviously there's been tremendous volatility in both the credit markets and the equity markets. What are your most updated thoughts on use of free cash flow and should we expect activity of repurchases to trend at a similar rate or are you inclined to get more aggressive or less aggressive in this market.

I'm going to jump in front of your question to Kelly in this sense. Certainly, our stock is a compelling investment today. We've got -- you know, we're trading at below nine times earnings and that assumes the low end of the range we just talked about with a dividend yield of nearly 5%. Having said that, we're also seeing some good values in acquisitions. We have a regularly scheduled Board meeting on Friday, in conjunction with our annual meeting which will be Friday afternoon. And your question will be at the heart of an interesting debate with our Board of Directors as to how aggressively or prudently we want to utilize that $500 million of liquidity in the coming months.

Great. And then a final one, if I may. Is there any update, Frank, on your case against the insurers, any news or milestones we should keep in mind, out of Judge Aldrich's chambers.

Exercising CEO prerogative to take the easy questions and defer on the tough one, I'll let Kelly answer that question.

Well, I can answer it with a simple no, there are no new developments, Kevin. We continue to explore every option we can to make it known to the judge that we would greatly appreciate an expedited ruling and we'll continue to do that but at this point there's no new development to report.

Okay. Thank you very much.

And your next question comes from the line of Rosemarie Morbelli of Ingalls & Snyder. You may proceed.

Good morning, Rosemarie.

Good morning. Hold on a second. Hello?

Hello.

Yes. Hold on a second. I am sorry. I was wondering about some news which has popped up in the last couple of days or yesterday, actually, regarding the increasing sales of existing homes in California, those are either due to lower prices or foreclosures. But if some of those existing homes are selling, are you beginning to see some pickup in your product lines in that particular area, going to either contractors, the contractor market or the do-it-yourself market? And if not yet, how long does it take before you actually see a change?

I'll answer that in two areas. Number one, just to reemphasize, we had a terrible quarter in consumer in the first quarter. We are seeing improvement sequentially and what that means is that unit volume declines are less and in combination with price increases, you know, we're hopeful to be flat. On the industrial side, and I referenced this earlier, our pure play business, which is a relatively small piece of Tremco, is our Tremco Barrier Solutions business, which is the leading producer of below grade insulation and waterproofing for residential home new construction.

The president of that business unit for the last two years has been consistently more bearish on new housing starts and what was happening in the housing market than the economists that you read in the paper and unfortunately he was correct. His current view, and he's been pretty accurate, is that new home starts, and this is new construction and most importantly housing values related to new homes and resale will hit bottom and begin to flatten out and then grow from there in the spring of next year. And so - we're not any financial experts- and so other than what we read in the newspaper, including the feedback from people that are very close to that market, tells us that it will be probably spring of next year until you start to see a bottoming out and, therefore, a pickup in home values, home turnover and a new residential construction base to grow from as opposed to one that will keep shrinking.

So, I was mostly looking at the existing homes where price has come down and, therefore, some buyers are now back into the market. So when this occurs, as they said it did in August on the news, how long before your do-it-yourself market at the big boxes actually sees some movement?

I can't answer that question, other than repeating what I said earlier, which is especially primers and sealants, patch and repair products, decorative paint are the types of products that people use to spruce up their house when they're going to sell it. And I would expect, given the low ticket items of our products, that those are the types of touch-up, repair and remodeling that people will do and spend their money on before they start spending their money on $200 faucets or thousands and thousands of dollars of kitchen makeovers or bathroom makeovers. So I think the nature of our products are such that we should benefit from that. But I can't tell you, having just reviewed our first quarter, that we're seeing it yet.

Okay. And can you give us a better feel as to why it took longer to get your new products out to the distribution channels. Is it just because of the weak demand in those particular areas or is something else behind it?

I can't really answer that question, other than account by account. You know, we got distribution in some accounts slower than we anticipated. You know, we didn't anticipate a full distribution until the end of July. Some of that didn't hit retail shelves until August. Those are the facts. The stories as to why - is really a customer by customer story.

Okay. And then lastly, you said that larger deals were becoming a little more affordable since they're -- because of the credit crunch. If you were to find a larger deal at your price level, is that something that you would be interested in before the end of this fiscal year or do you feel that you should stay away from those kinds of things for another couple of years?

I think that our capital allocation of free cash flow and liquidity will be focused on a combination of small- to medium-sized acquisitions like we've done in the last couple of years, and repurchases of RPM stock, particularly at the levels that we've seen in the last couple of days. So it's unlikely that we would pursue or do a major acquisition in the next nine months. Having said that, there are some real chinks in the armor of major private equity deals that were done particularly in the last 12 to 24 months where they've got highly, highly levered structures and to the extent they're in our space and volume is coming down, they're probably bumping into some cash flow problems, so I think that once the capital markets free up to strategic buyers like us, there are going to be some interesting transactions that you will see down the road that come out of some of the more recent highly levered private equity deals.

And then lastly, linked to that particular question, how much are you willing to get your leverage back up to for one of those deals?

Again, between now and the end of this fiscal year, I would be willing to bet that our acquisition activity looks like it does the last couple of years, which is somewhere between $100 million to $150 million of small- to medium-sized product lines or businesses, and share repurchases to the extent they're warranted, that at best would be in that same range. As Kelly commented, we spent about $25 million on share repurchases in the first quarter. We have been active in repurchasing our stock through today and we will report as we're required to do, the share repurchase activity for the second quarter when we report second quarter results.

And then beyond -- I'm sorry, Frank. I meant beyond fiscal '09, if just a direct question to your recent answer regarding larger deals further down the road, how much would you be willing to leverage for one of those?

Beyond fiscal '09, Rosemarie, historically we've been able to stretch our debt cap ratio between 40% and 60% and maintain our investment grade rating. So we would structure a transaction in order to do that, maintain an investment grade rating. We think a middle BBB or low BBB is the right space to be and given the right opportunities and the right deal structure, I can certainly envision us in 2010 or 2011 taking a hard look at larger transactions.

Okay. Thank you.

Thank you.

And your next question comes from the line of Brian Geiger of Merrill Lynch. You may proceed.

You guys talked about debt a little bit today. I was just curious if you had a target level for leverage ratio, say debt to EBITDA or how you target what kind of debt ratios you would like.

Historically our debt cap ratio has ranged from 40% to 60% which has allowed us to maintain an investment grade rating and so we like the middle BBB, lower BBB space in terms of the flexibility it allows us to use our cash flow and balance sheet and historically, at least, the relative modest premium you have to pay versus a much stronger credit rating. Also, historically there's been a significantly bigger cost of being non-investment grade. That cost today is astronomical. I think if you look at our track record over the last 30 years, particularly as it relates to larger acquisitions, in every instance, where necessary, we have utilized equity or some equity like piece of the capital structure to fund a large acquisition to maintain an investment grade rating and that would not change in the future. Obviously, the cost of debt and any additional shares would be factored into the price of an acquisition, because we have also never done a deal that was immediately dilutive and we're not likely to do that either. In the interim, I think over the next six to nine months, we are going to be relatively prudent by focusing on the types of acquisitions we have over the last couple of years and modestly continuing share repurchases. In our view, this is not the time to overstretch your capital structure, and with $547 million of current liquidity, I think we're pretty good shape to take advantage of good-priced acquisitions of moderate size and at these levels repurchase our stock.

Great. Thank you very much, guys.

Thank you.

And your next question comes from the line of Daniel Rizzo of Sidoti & Company. You may proceed.

Good morning, Dan.

Good morning, guys. With your acquisitions, is there a geographic region you're focusing on, like more in Europe than the U.S.

It's a little bit of a mixed bag but we're seeing more opportunities overseas because we're looking harder overseas. The European marketplace is still much more fragmented, looking kind of like the U.S. did 10 or 20 years ago in our space - a lot of family businesses, and we're seeing more and more opportunities that are driven by the Euro-ization of Europe which is relatively old news. It's also driven by the huge consolidation in our industry with Akzo buying ICI and PPG buying Sigma. It's really the interest of well-run, traditionally leading-branded construction chemical or sealant or paint and coatings companies that are family owned. And that's really good news for RPM because nobody can buy and work with particularly solid family-owned businesses like we can. So that's part of why we're seeing more European opportunities. We're also looking more aggressively in Europe, in India and in Latin America than we have in the past. Opportunities that pop up in the U.S. are things that we would continue to pursue, to the extent that they're a good strategic fit at the right price.

Okay. Thanks. And just one other question. I know you don't know what's going to happen with raw materials but if there was a significant decline in raw materials costs would there be a situation where you have to give back some of your price increases?

Not likely. I mean, if you look at the brands that we have and the strength of those brands, we have not had to do it in the past. We've got about 300 to 400 basis points of deteriorated gross profit margin in some of our core brands, including consumer, so we've got a long way to go to fight back to get to where we were some time ago. And given the nature of our products, which in almost every instance are the high priced, high value product, there's less pressure on us in that regard than there are on kind of non-branded commodity areas. And so that's been our history and that certainly would be our expectation. I think the challenge in all of our operating people are acutely focused on it, is we need to maintain our revenue base and our forward momentum on growth where we have it, because that's the environment where if we see significant declines in raw materials, you will see our bottom line improve. If the raw material environment deteriorates so rapidly that it's reflective of a rapid and really deep deterioration in economic environment way beyond where we are, then our challenge will be to maintain a revenue base. Chasing a down revenue base, you know, chasing down, crashing raw material costs with declining revenues is not where we want to be.

All right. Thanks, guys.

Thank you.

And your next question comes from the line of Robert Felice of Gabelli & Company. You may proceed.

Good morning. Most of my questions have been answered. Just a couple more. How much were raw material costs up during the quarter and what was the delta between pricing and cost inflation?

We'll take a look for that. I don't have that, Robert, off the top of my head. But in our consumer segment, it was relatively significant and in our industrial segment price increases basically covered cost increases. Kelly, do you have anything anything to add?

Robert, as Frank indicated, in consumer raw material cost increases cost us about 300 basis points. We offset about a third of that with price increases as Frank said, a little better coverage on the industrial side where price and mix covered most of the raw material cost declines.

Some of that's also just a function of timing and one of the reasons that we feel better about our ability sequentially to improve our performance is we were chasing particularly in consumer significant raw material price increases that hit us in May and June with our own product price increases that really weren't implemented until the end of July or August or in one instance in September in terms of its actual implementation date. Part of your optimism as we look out through the remainder of the year is your ability to close that price cost gap in consumer.

If raw material prices stay flat, which we're pretty confident they will, then you'll see some of that picked up in the second quarter, just as a function of the timing difference between when the last raw material costs hit us and when our price increases went into effect. I can't tell you there's still volatility out there but fortunately it's the type of volatility of ups and down spikes that suggest that maybe the trend isn't -- you know, when you hit volatile charts, sometimes they indicate that the more solid trend line is going up. Hopefully this indicates that the more solid trend line is going down.

If I remember correctly, you had anticipated that raw material costs would be up in the high single-digit, low double-digit range for fiscal '09. It seems as though you've tapered that a bit.

We got whacked really hard by chemical raw material price increases at the end of spring and early summer. But what's changed our outlook is that we think, given the underlying economic dynamics and some of the supply and demand issues, as well as some of the capacity that we've been talking about in places like China, which is now coming on stream, that we will not see further raw material price increases, with some exceptions. And again, as we speak, there are a couple areas where material costs are defying logic and there are a couple areas where we're actually seeing some softening in pricing for the first time in years.

And then I guess lastly, you had alluded to the fact that you're seeing dynamics in the credit market hamper customers' abilities to finance projects. And that perhaps we're starting to see the credit crisis spill over to Main Street so I'm wondering to what extent you've seen that, to what extent you anticipate that dynamic accelerating in the current environment and to what extent it's baked into your guidance.

We're not seeing that in our normal customer base. My reference was really to what we're seeing in the total lack of current funding, principally in North America, for commercial construction projects. The good news is that the dynamics, at least in North America, which we have a better view on, the statistics of commercial building look nothing like the way out of whack overblown statistics in residential. But if we suffer through a period of three to six months where there's relatively little financing available for new projects, at some point in the future there's going to be a period of three to six months where our activity and anybody's activity that serves that commercial new construction market is going to be down and that is baked into our numbers, anticipating after the first of the calendar year that we will see that slow down significantly. And as I mentioned also earlier, we are taking some action now in what we anticipate to be some of the more affected product lines in terms of expense reductions and unfortunately in some areas personnel reductions as well. That's ahead of the curve versus kind of where we've been in our consumer businesses, which is responding to the raw material challenges that we got hit with at the end of the spring.

So it's fair to say that you're putting plans in place to deal with it but you haven't yet seen it?

That's correct. We're seeing some slowing, but -- and just anecdotal, AIG was a not insignificant funder of commercial construction projects. We're aware of a couple projects that we were specified on that were cancelled because AIG funding was cancelled. And that's just two anecdotes, but if you look at that and kind of take a hard guess at what's happening in the credit markets and its impact on commercial construction, that's what's got us anticipating a slowdown.

That's helpful. Thanks for taking my questions.

Thank you.

(OPERATOR INSTRUCTIONS). And your next question comes from the line of Amy Zhang of Goldman Sachs. You may proceed.

Good morning.

Good morning.

Thanks for taking my question. Actually, I only have one question. I think that yesterday I saw a press release saying PPG believes the U.S. housing market is bouncing along the bottom. I'm wondering - what's your view of that, and also have you seen demand trends in the home improvement channel or the market hit the bottom or will the demand trend hit the bottom soon? Do you expect some underlying demand improvement heading to the second half of calendar year '09?

As I mentioned earlier, Amy, we think that -- and again, we're not the experts, but the few people that are experts within RPM feel that residential construction and turnover and related house price, which is -- you know, it's the decline in home prices, I guess the critical element that's hurting the economy, will bottom out in the spring of next year. I hope that PPG's analysis of -- sounds like a bottoming out as we speak is correct. Because if it is, it will result in better performance for our core consumer products and also better performance in a couple of our industrial segment businesses that serve residential new construction. But our outlook and what's baked into our outlook for the year is that we won't really see any growth from a solid base until at least the spring of 2009.

Okay. Okay. Thank you.

Thank you.

I'm showing that you have no further questions at this time.

Thank you, Becky. With an outlook for a flat to slightly up year, on top of all-time record results, which we generated in 2008, if you look at RPM's stock price today, just at the low end of our current 2009 guidance we are trading at less than nine times earnings and provide a solid 5% cash dividend yield. Additionally, we have substantial liquidity to continue to pursue the disciplined small- to medium-sized acquisition activity that's been the hallmark of RPM but in this environment, perhaps at lower values than we've had to pay in the last couple of years. There has never been a better time to buy RPM stock and we are putting our money where our mouth is. Thank you for your time on our call today and for your interest in investment in RPM and have a great day.

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