RPM International Inc (RPM) 2009 Q2 法說會逐字稿

Welcome to RPM International's conference call for the fiscal 2009 second 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 Chairman and CEO, Mr. Frank Sullivan, for opening remarks. Please go ahead sir.

Thank you and good morning and welcome to RPM's second-quarter conference call for the period ended November 30, 2008. Before I turn the call over to Kelly Tompkins, RPM's Executive Vice President and Chief Financial Officer, to provide details on the second quarter, I would like to comment on a couple of things that we experienced in the quarter. My first comment relates to the period in which we are comparing. As you may recall, last year's second quarter was an all-time record for RPM with sales up 12% year-over-year, and adjusted for a 2007 fiscal year asbestos-related income. Actual net income for the second quarter of last year was up 27.4%. So, we are comparing to an all-time record and a quarter in which we had pretty extraordinary results. The second comment relates to current market conditions, which as everybody knows and can see and read every day are incredibly volatile and quite deteriorating. When Kelly is finished, I'll highlight some of the one-time or extraordinary items that impacted the quarter and which we feel should be looked at or adjusted out, to get a better sense of our normalized results from our industrial and our consumer businesses.

But just to give you a sense of what these are, for instance, interest expense was up quite dramatically, really for a couple of reasons. Number one, as everybody knows, interest rates have dropped precipitously, but in the September/October time period, our floating rates, which are based on LIBOR, were extraordinarily high because of extraordinarily high LIBOR rates. We were borrowing, over that period of time, on a floating rate basis at around 6%. Today our LIBOR rates are less than 2%. And while LIBOR remains very volatile, the volatility is in the range of 50 basis points to 150 basis points, dramatically down from where it was in the fall. We also took some hits in the marketable securities account of our captive insurance company as it relates to either write downs of existing investments, or losses that we realized versus gain in the prior year. And then finally, raw materials have had extraordinary volatility, such that in our consumer segment, within the same quarter, we had extreme negative PPV, basically costs in excess of our standard costs as set for the year, at the beginning of the quarter. And then with significant declines in raw materials at the end of the quarter, an actual negative hit through cost of goods sold as a result of an inventory revaluation reflecting lower inventory costs, which will benefit us in future quarters, but was a one-time extraordinary revaluation hit in the second quarter.

I'll go through some of those details just to give you all a sense of the volatility that we're all aware of, and how it's hit RPM. When you make those adjustments, which we'll detail, actually our consumer EBIT was off about 30% year-over-year, our industrial EBIT was flat, and RPM's pretax income was off about -- depending on how you look at interest expense on a go-forward basis, was 10% to 12%. With those opening comments, I would like to turn the call over to Kelly Tompkins, RPM's Executive Vice President and Chief Financial Officer, to provide you details on the quarter, after which we'll provide you our outlook comments and answer your questions. Kelly?

Thanks, Frank, good morning everyone. I'm going to review the quarter. I will not review the full year-to-date results so that we have ample time for questions about the quarter.

Starting with consolidated net sales year-over-year, down 1.7%, with foreign exchange accounting for 3.8% of the overall decline due to the significant strengthening of the dollar, particularly relative to the Euro and the Canadian dollar during the quarter. Unit volume declined 4.1%. Partially offsetting these declines was acquisition related growth of 2.9%, which was principally in our industrial segment, net of the divestiture of our Bondo subsidiary in last year's second quarter, and price increases, which accounted for 3.3% on a consolidated basis.

We'll now take a look at the segments, starting with industrial, which comprises about 70.3% of our total sales. Industrial grew 3.3% over last year. Acquisitions accounted for 6.2% of that growth, while price increases contributed another 3.3%, with volume declines down about 1.9%, and foreign exchange 4.3% contributing on the negative side. Looking at consumer net sales of $264 million, we're down 11.8%, as unit volume declined about 8.6%. The Bondo divestiture during the second quarter last year accounted for 3.8% of the decline, while foreign exchange accounted for another 2.7%, with an offset of price increases of about 3.3%. Sales to home centers, mass retailers and distributors were sluggish during the quarter, reflecting the ongoing weakness in the overall economy and the sustained domestic housing downturn. Rust-Oleum's Universal and DAP's 3.0 product lines have experienced good market acceptance, especially given the overall macroenvironment, and the difficult housing market as I alluded to earlier.

Turning now to gross profit margins on a consolidated basis. Gross profit of 40.1% in the quarter was down from 40.6% last year, due primarily to the lag between our price increases versus realized raw material cost increases. Elevated raw material costs continued during most of the second quarter this year, resulting in upward pressure on many of our raw materials, despite the dramatic decrease in oil prices since mid-summer. Looking at industrial gross profit margins, actually increased to 42.3% from 42% last year, reflecting industrial's quick implementation of price increases, tight spending controls, coupled with some leveling off of raw material costs midway through the quarter. On the consumer side, gross profit margins of 34.9%, declined from the 37.8% last year, due again in part to the lag of effected price increase implementation, higher raw material costs, and the inability to cover fixed manufacturing costs due to significant volume declines in the consumer segment.

Looking at SG&A, Frank alluded to some items which we'll comment on during your questions, but SG&A on a consolidated basis increased to 31.4% of sales from 30.3% last year, due principally to overall volume declines in -- mainly affecting the consumer segment. SG&A increased to 31% of sales from 29.8% last year, due principally to higher employment warranty and some other expenses. Consumer segment SG&A increased as a percent of net sales to 28.8% from 27.5% last year, due again to the significant drop in volume. On the other hand, from a dollar standpoint, consumer SG&A on a dollars basis actually declined $6.3 million or 7.7% year-over-year. Corporate/other expense decreased $2.6 million, or 22%, to $9.2 million, from last year's $11.8 million, primarily due to the impact of lower compensation-related expenses.

Looking at EBIT on a consolidated basis, EBIT dollars decreased 16.4% to 8.7% of net sales compared to 10.3% last year due to principally higher net raw material costs, lower volumes, and higher SG&A expense. Looking at industrial EBIT, EBIT dollars decreased 4% from $74 million last year to $71 million this year, with consumer segment EBIT decreasing 48.5% from $30.8 million last year to $15.9 million this year. Again, the bulk of which was attributable to the volume declines and raw material cost pressures. Interest expense, which Frank commented on briefly in his introductory remarks, increased $5.3 million from last year driven by lower investment income, slightly offset by lower average borrowings this quarter. Interest rates for the quarter averaged 6% compared to 5.4% last year. Tax rate -- the effective rate for the quarter was 30.9% compared to 32.2% last year, which reflects differences in projected U.S., state, local income, lower rates on foreign sourced income, and incremental utilization of foreign tax credits, as well as the overall jurisdictional mix of income for the quarter. Net income of $41.7 million represents positive earnings for a second quarter, despite a decrease of $13.2 million, or 23.9% from last year's net income of $54.9 million which, as Frank mentioned, had some extraordinary items. On an EPS basis, $0.33 this year, represents a second-quarter decrease of approximately 23% from last year's 43% -- I'm sorry, $0.43, pardon me.

Looking at wrapping up with some comments on the balance sheet and cash flow in our capital structure and liquidity, starting with asbestos, for the quarter ended November 30, we had dismissals or settlements of 1,824 cases, total cash outlays for the quarter were $16.4 million, which compares quite favorably to last year's payments of $26.1 million and 292 cases that were settled or dismissed in last year's quarter. For the six months ended November 30, total dismissals and settlements of 2,025 cases and $32.4 million of cash outlays, compares favorably to 657 cases dismissed or settled and a total of $48.9 million of cash outlays last year. I might just point out briefly that roughly 1,400 of the 1,800 cases dismissed during the quarter occurred by virtue of a ruling in Ohio that reaffirmed the medical criteria legislation and that resulted in a significant block of cases being dropped during the quarter.

Our active caseload as over November 30, down year-over-year, now stands at 10,048 cases compared to 11,117 in the same period last year. From a balance sheet perspective, our total asbestos liability accrual stands at $527.3 million, with $65 million of that in short-term.

In terms of CapEx for the first half, $24.9 million versus $17.5 million, reflecting principally timing of projects that were completed during the first half. Our full-year estimate for CapEx is now looking closer to $50 million, which is down from our prior estimates of $70 million as we're calibrating CapEx requirements to current business conditions.

Depreciation expense for the six months at $32.2 million, compared to $31 million for the same period last year, amortization expense of $11.3 million, compared to $10.8 for the six months last year. Accounts receivable, DSO was up slightly at 0.7 days from the second quarter last year, with most of the increase in the consumer segment. That said, we have not experienced any unusual collection issues and of course are monitoring that, given current economic conditions. Days of inventory increased six days from the second quarter last year due principally to the sales slowdown experienced in the second quarter.

I'll wrap up my comments with a few capital structure comments. Total debt at November 30 stood at $962 million, compared to $1.073 billion at year end,for a total debt reduction of $111 million. Our net debt-to-capital ratio, which excludes cash, stands at 40.3% compared to 42.6% at year-end and 37.9% in last year's second quarter. Our next debt maturity is October of 2009, followed by our five-year revolver, which runs through December 2011. Overall liquidity at the end of the quarter stood at $523 million with $205 million of cash and $318 million of available committed lines of credit. During the quarter we did purchase approximately 1.2 million shares of RPM's stock at an average price of $16.62.

In sum, our capital structure is resilient and our overall liquidity position very solid and at this point, I'll turn the call over to Frank for some wrap-up comments and look forward to your questions.

Thank you, Kelly. Just to highlight five areas that we think should be looked at as extraordinary versus our ongoing operating results, three are in our consumer area. Last year we had a $2 million gain on the sale of Bondo in the second quarter. This year we had, as I mentioned in my opening comments, a $2 million revaluation of inventory as a result of a spike at the beginning of the quarter and then a significant drop at the end, and we believe unlike volatile raw material costs or where our costs are versus our standard costs, that this revalue is an extraordinary one-time event. That was $2 million. And then we had $2 million of severance expense in our consumer segment in the quarter, for a total of $6 million of one-time items, which we would differentiate from our ongoing operating results.

In our industrial segment, we had a $3 million asset impairment write-off that was non-operational, and then the fifth area is really in trying to understand the corporate interest expense line, which was up year-over-year by about $5 million. There're three elements there that will -- that drove that, and that will be elements that we will look at in the coming quarters. The first was the volatility of interest rates, with interest rates dropping dramatically, our interest income, which is netted against interest expense, dropped year-over-year by a couple of million dollars. We had a rollover, as Kelly mentioned, in our revolving credit facility in September, which unfortunately hit the spike in LIBOR rates in September and October, where our floating rates were roughly 6%. We are currently borrowing on an all-in basis on a floating rate, borrowings at less than 2%. For the balance of the fiscal year, assuming that the volatility in LIBOR rates does not return, this should lead to about $5 to $7 million of lower interest expense for the remaining six months than what we've experienced through the first half of the year. And that's principally as a result of the volatility in LIBOR in this three- or four-month period. The last factor in the interest expense net line is a $5 million negative impact in our captive insurance businesses. As you will recall, RPM has insurance typically with $1 million to $2 million deductibles. We have fully funded, fully operational, captive insurance companies, one in Vermont and one in Ireland, and their marketable securities portfolios had a combination of marketable security write-downs or realized losses this year in excess of $5 million, versus a $1 million gain from that same line a year ago.

While we've suspended our guidance for a couple of reasons, the volatility in foreign exchange markets and the strength of the dollar, which has certainly hurt our results this year, versus prior years, volatility and raw material costs, the components of interest expense, which I just mentioned, the obvious poor economic conditions, and the damaged state of capital markets and credit markets, I would like to provide some outlook for our third quarter and on a longer-term basis. For the third quarter ended February 28, 2009, we expect to report a loss. That will be, first and foremost, as a result of the normal low seasonality of our businesses in this third-quarter period of December, January, and February. That combined with continuing expected declines in revenues in many of our businesses, will drive a deterioration versus last year's third-quarter results. We also expect to expense a significant amount of severance costs across many of our businesses in the third quarter, and that number, while not finalized, will be far in excess of the $2 million of severance expense I mentioned in the second quarter. And then lastly, the impact of business in capital market factors previously mentioned, while not something we're factoring in, should those return, those could also have a negative impact on our third-quarter results.

Longer term, we believe results will bottom out in our 2009 fiscal year. For 2010, our 2010 fiscal year, which starts June 1, 2009, we expect to see consumer business improvement for two reasons. The principal reason is that the nature of our consumer products in terms of home maintenance repair and small project redecoration will be the first product categories that pick up when the housing market stabilizes, and consumers start once again spending money on their homes. The second reason is a simple comparison to the very poor results that we have experienced month-by-month and quarter-by-quarter in our consumer segment businesses starting in June of last year.

We expect our industrial businesses for fiscal 2010 to be a mixed bag, with some of our businesses flat to up, while other businesses are expected to generate lower results throughout calendar 2009. For modeling purposes, we see, as we sit here today, fiscal 2010 as flat to the reduced results that we will generate in fiscal 2009. Lastly, we are seeing a number of good small- and medium-sized acquisitions that would be good strategic fits for RPM. The comments I made about our longer-term outlook do not include the impact of any of these. As Kelly mentioned, we have a very strong capital structure, strong liquidity, and we will maintain that, but, as capital markets free up, we are in a very good position to pursue more aggressively some of these acquisitions, also at substantially lower valuations than what we have seen historically. That concludes my formal comments, and Kelly and I look forward to answering your questions on the quarter, or our outlook for results.

(Operator Instructions) And your first question comes from the line of Jeff Zekauskas from JPMorgan.

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

Good morning, Silke Happy new year.

Happy new year. Can you talk about some of the volume pressure on the industrial side, whether this is maintenance-related business that is slow, that is related to new construction, or where the weakness came from?

The weakness in our industrial businesses is really in two areas. Construction-related products are slowing down, or declining in some cases, and to the extent that some of our businesses are involved in OEM, those revenues have also declined. The areas of remaining strength in our industrial segment businesses really relate to our performance coatings companies that are serving power generation and are involved in more international markets, and those -- that strength is continuing as we sit here. We do not have a real strong outlook beyond the comments I made.

Okay. Secondly, on raw materials, so what you said is that there has been a $2 million inventory revaluation that mainly impacted the consumer business. Now that that's sort of like, in the numbers for the next two quarters, would you expect the gross margins to improve given that cost -- you know, if costs stay where they are currently?

Yes, as you can see, related to raw material costs, improvement is beginning to show up in our industrial businesses, and we would expect to continue to see that improvement. By the end of the year, you will also see the improvement in our consumer businesses, but the extraordinary place we found ourselves this Fall, with peak raw material prices hitting us at the beginning of the quarter as a result of $140-plus oil in May and June and the response to principal raw material suppliers and the challenges that we have in our consumer businesses in passing on price, was then reversed at the end of the quarter by the first significant benefits of dropped raw material costs. And that's what drove -- probably the first time I've ever seen anything like it, which was a severe negative PPV versus our standards at the beginning of the quarter, and raw material cost drops in certain areas so quickly that we ended up having a hit to earnings on an inventory revaluation. The good news of that is that we will see, in the coming quarters, improvement in our raw material costs, because there is a different pricing environment today than there was just three or four months ago.

Uh-huh. When you said you expect the consumer margin to improve at year-end, is that at fiscal year-end, or at calendar year-end?

Fiscal year-end. And, again, I believe that most of the revaluation impact is over, but I'm not sure of that, so to the extent it's not, it will be flushed out in the next couple of months. And -- but certainly you're already seeing the improvement in our industrial businesses, and we are seeing the improvement in terms of our actual prices in our consumer businesses as we speak. So, the trend answer to that is absolutely yes across all of our businesses.

Okay, that's helpful. I'll get back into queue.

Your next question comes from the line of Saul Ludwig with KeyBanc Capital Markets.

Good morning, everybody.

Good morning, Saul.

Given the precipitous drop in oil and other raw materials, what pressures are you beginning to see from your customers to lower your selling prices, and if that's occurring, how are you going to respond, and what should we expect in terms of your price changes like which averaged 3% in the second quarter, what might we look for in the third and fourth quarters relative to pricing, or is there pressure to move in a negative direction?

We're pretty comfortable with our pricing in our consumer businesses relative to the huge deterioration that we've seen in margins and the run up in prices, and we're pretty well set there. I do not expect to see deterioration in our current pricing, but I think that the price increase period is over, so you ought to see stability there. I can tell you, while we expect to improve our margins in our industrial businesses, we are aggressively pursuing revenue. And so if there are major projects, or major customer accounts or opportunities, and there will be many of them, and there will be some good opportunities, particularly related to the stimulus package in terms infrastructure and some of the sustainable building practices, both of which play right into RPM's strengths, this is a period of time in which we will aggressively maintain share, gain share, and pursue projects on a global basis.

So, there we might see some price give up in contrast to consumer?

But not, Saul, to the extent that it would negatively impact our margins.

Got you, secondly, you had this asset write-down that you told us about in industrial. What was the nature of that and do you expect, with lower volume, any opportunity to further reduce assets in addition to the severance costs that you talked about?

The answer to your first question is, is we had a sizable insurance receivable associated with a claim against insurance carriers from an old claim at Dryvit, and we wrote that receivable down by $3 million. So, that's a one-time hit. And then could you repeat the second part of your question?

Do you see any opportunity to consolidate facilities, or reduce other fixed costs that would have an up-front cost, in addition to the severance, which is really people reduction? Do you see any other asset write-offs that could benefit you in future years by taking them now?

I don't see any big restructuring. When you look at our income statement and our cost of goods sold, plant overhead and direct labor run anywhere from 6%, 8% where we're very efficient to 12% or 15%. The big driver of cost of goods sold for us, which is a percent of our total revenues, ranges anywhere from 40% to 50%, is raw material costs. And we have been managing through a, you know, cyclical rise in raw material costs, which has now ended, and so that's the biggest factor that will drive things there. The severance expense and impact that we took in the second quarter, obviously is principally in SG&A, although some of that will be at the plant level, and we would expect that the savings of the severance expense that we complete in the next couple of months will be in the nature of -- these are the saving, not the expense -- in the nature of tens of millions of dollars, principally in the SG&A line.

Do you thank think the severance cost in the third quarter, while you can't quantify it, would be in the $5 to $10 million range, or in the $3 to $6 million range? What planet are we talking about? I realize you can't be as specific as the $2 million number was in the second quarter.

Yes. It will be substantially higher than the $2 million, but to really venture a guess at this point without having everything put in place and communicated, I wouldn't want to do.

Okay. What's your current mix between fixed-rate debt and floating-rate debt?

Saul, fixed is about 66%, and floating is about 34% roughly.

As I mentioned earlier, Saul, versus the first half of the year and particularly the second quarter, if you're using that as a benchmark, we would expect to see $5 million to $7 million of lower interest expense, which is principally related to the lower floating rate costs that we'll experience in the last half of the year.

The $5 million to $7 million versus what?

Versus the first half of the year, and in particular versus the spike that we saw in the second quarter on a sequential basis. So, you're looking at maybe $12 million a quarter, versus the $17 million that you saw. Now, the bogey in that will be if volatility returns to the LIBOR rates, because that's the basis on which our floating rates are set, and/or further impacts to our captive insurance marketable securities accounts, which the good news is, is that, you know, we saw some recovery in December, but, again, the volatility in the equity markets and the capital markets and interest rates and foreign exchange, all are such that, you know, it's anybody's guess. But --

And just finally --

Based on what we see today, you're looking at something more like $12 million a quarter on that line, instead of $17 million.

And Saul, I want to just correct a misstatement. Our fixed at the end of November is 62%, and 38% on a variable basis. I think I slurred and said 66%. My apology.

Thank you. No problem. You know, you show on your flow of funds statement that your cash was negatively impacted by $43 million, due to exchange rates. Does this mean that all of your cash is overseas? I mean, that's a pretty big whack from the change in exchange rates, for $43 million, and with this maturity that you have coming up in October, how much is that, and is the cash here, or is the cash abroad?

Cash is -- a substantial amount of the cash, $100 million plus is in Europe. We have a substantial amount of cash in Canada, all of which is accessible under current, kind of, temporary laws to repatriate cash over a -- I think it's a 180-day basis, and then there's also cash in the US. So, we would have the ability to meet that maturity in cash --

That's $200 million?

Pardon me? It's over $200 million.

The maturity -- Saul, the October '09 maturity is $163 million.

And that -- you know what we've been doing is actually -- you know, I think our cash flow has been stronger on a net basis than you see. We've actually been able to buy back some of those bonds this year at a discount, and so to the extent that those bonds are available to purchase in the market at something less than par, we'll continue to do that.

That would help your earnings a little bit.

Less than $1 million, and that was part of the whole interest expense net that $12 to $17 million interest expense net line.

Okay. Thank you very much.

Thank you.

And your next question comes from the line of Edward Yang from Oppenheimer.

Hello, good morning Frank, good morning, Kelly.

Good morning, Ed.

Going back to the consumer segment, I was a bit surprised by the drop there. You did mention some of the one-time items, but I think you've been excluding those items, you said that operating income was down by about a third, and it seems like most of it was margin-related. It hasn't exactly been copasetic on the consumer side for a while, so to see a big drop like that, what's going on there? You've also had some significant new product introduction. Is it on the consumer side? On the competitor's side? Would just like some additional clarification.

Yes, market share we've held. In fact we pick up some market share in some of our businesses in the automotive channel and a few other places. The fact of the matter is, and this is a pretty scary economic statement, that retail is dead. Traffic in major accounts is down dramatically, and when you think about the fact that relatively historically recession resistant $2.50 cans of spray paint, or $2 tubes of caulk, weatherization products aren't moving, it makes me scratch my head and begin to realize what's happening in consumer electronics, or kitchen cabinets, or much more high-ticket items, but it's really at a function of consumer traffic and retail take away, across the entire channel. Big boxes, discount, hardware stores. It was bad in October, and it was worse in November, and, you know, the good news and bad news about December is the deterioration has stopped, the pickup has, you know, yet to be seen, and so that's the best answer I can tell you. There is no market share loss. In fact, we picked up some market share in automotive retail chains, and it's just shocking retail take away, which is, if you go into some of our big accounts, you can throw bowling balls down the alleys and not hit anybody.

And the drop in the margin, Frank, is that just all fixed costs leverage then?

That is fixed cost leverage and the fact that because of the flow-through of dramatic increases in the Spring and early Summer of last year of oil prices and its impact on our major raw material suppliers, really hit us at the end of the first quarter and into the second quarter. Our raw material costs, particularly in our consumer businesses, where people know that our pricing leverage is less than our industrial businesses, peaked in September of this year. And, you know, that was flowing through our business units in October, and we actually stopped buying a number of raw materials, and then when we resumed buying a number of raw materials in our consumer businesses in November, at -- the long term story is in many instances dramatically lower prices, what we ended up with is something I've never seen before, which is an extraordinarily high negative PPV, versus our standard costs at the beginning of the quarter, and then an inventory revaluation hit because of the rapid decline in raw material costs at the end of the quarter. And so the gross margins for the consumer segment are not -- and that's about $2 million in consumer, but I think the gross margins in consumer segment are understated because of that in this quarter, and in any event will be improving in subsequent quarters.

Okay. And just your guidance for the third quarter expected loss. I still have a hard time backing into a loss for the third quarter, particularly if your interest expense is going to decline sequentially from $17.5 million, to let's call it around $12 million or so. Is that -- would you have been profitable -- do you think you would be profitable in the third quarter without the severance? And I understand you're not giving us the size, but, I mean, basically, is that it?

I can't answer that, but we will see, you know. Our third quarter is a seasonal low period, and back to your comment about fixed overhead costs, whether they're manufacturing costs, or SG&A expenses, revenue is always low. And so our third quarter historically has generated $5 million, $6 million, $10 million of after tax earnings, and it doesn't take a lot of deterioration in revenues at some of our high margin businesses, just in terms of the underlying business to eat up those results. So, you know, without the severance, maybe, and this is just a maybe, maybe our results are break-even, and then the other two factors will be, you know, any crazy stuff at the interest expense line, which we don't see, but we didn't see it in the second quarter until it happened. It's capital markets related. And/or the size of the severance hit, which will be substantially greater than the $2 million. And I don't have a fixed number on it yet, but I can tell you, you know, we will see tens of millions of dollars of savings, in terms of the actions we're taking, and so it's going to be, you know, a factor of four or five or six or eight, and again, I don't know if it's going to be four times bigger or eight times bigger than our severance costs, but it's going to be sizable.

Then my final question is on the new CapEx guidance of around $50 million. In the past, your CapEx had been pretty stable as a percentage of revenue, around 2% or so, I think at $50 million, it would be significantly below the 2% CapEx as a percentage of revenue. Is that a number that you could sustain for a while? Is that the new norm?

Yes. Ed, this is Kelly. I think that's a fair assessment. I think we'll be generally trailing depreciation expense for at least the next couple of years. You know, we felt that we've had good investment, and growth-related capacity that will handily carry us through what we think the next couple of years' business conditions would indicate.

Okay. Thank you very much.

Uh-huh.

Thank you.

(Operator Instructions) And your next question comes from the line of Rosemarie Morbelli from Ingalls & Snyder.

Good morning.

Good morning.

I would say happy new year, but with such an enormous grain of salt, based on your conversation, that maybe I will abstain. You talked, Frank, about the steps you are taking currently resulting in tens of millions of savings. Are we talking 20? Are we talking 70? I mean, that would be between $10 and $90 million. Can you give us a better feel? Could you narrow it down to more or less what you expect the savings to be?

I cannot, Rosemarie, because, as I mentioned earlier, we have not pinned down exactly where all of those are coming from, and so I don't have a detailed feel that would make me comfortable in addressing that. We'll report that when we report our third quarter results in early April, if not before.

Alright.

The main purpose of that, though, is it will be a factor and a significant factor in our statement related to the outlook for the third quarter that will be a loss.

Alright. Which will be considered as a one-time item anyway...

That's right.

..the tranche that you will take. So, then going to the steps you are taking. I mean, you had $2 million of severance expense, as Saul pointed out, those are people out -- out of existing facilities, are you going to end the year with a smaller number of facilities? It sounded as though you said no, so, where are the other costs coming from? Are you taking capacity out? And if you are not eliminating facilities, how are you going about doing that and becoming more efficient?

I think the costs are coming out of expense reductions in a number of categories, which we -- when you look at our SG&A of roughly 30%, there's a number of areas where we can eliminate expense, or cut out certain expenditures that, you know, in appropriate markets can be reinstated, and it will come from appropriately right-sizing certain businesses in terms of their P&L and expense base relative to their lower revenue base.

As it relates to facilities, again, we are not capital intensive. You know, we actually, from a revenue perspective, in our industrial business, when you look, compared to last year, we had an industrial segment sales growth of almost 15%, driving an industrial segment EBIT growth of 15%. If you back out the $3 million asset impairment, which is one-time, we've had marginal -- basically flat results both on the sales and EBIT line.

So, the combination of the fact that we are not capital intensive, unlike chemical companies, who are very capital intensive and need to take capacity out, or more commodities businesses, that's not a big driver for us. And secondly, we see a number of our industrial businesses, unfortunately not as many as we'd like, still growing, and we also anticipate in a number of our businesses some good opportunities if the stimulus package is targeted in the areas that we hope it is, that plays into our strength, whether it's coatings for infrastructure, whether it's building materials, and on a more global basis in the power generation and a few other places.

So, that's a long-winded answer to your question, but, again, we don't see any significant restructuring, we're just addressing our expense base and adjusting the expense portion of the P&Ls of the businesses that have seen revenue hits.

Could you go through the same exercise for the consumer business? Because given the drop in income there, is there more room to -- to adjust more than SG&A for that particular business?

Yes, there is.

But you are not ready to talk about it?

No, we're not.

Okay. And I guess you are planning, at this particular new low price, in buying more shares during the third quarter?

We have not, as you noted, we acquired shares obviously at the beginning of the quarter, at an average price of $16 and change, but we, like many other companies, I suppose, in one sense, are part of the problem. We have record levels of liquidity, you know, aside from the cash, which we addressed in Saul Ludwig's question, we've got $300 million plus of long-term committed unused credit. And we've got very strong cash flow, which through six months is equal to record cash-flow of last year, so we've got a strong capital structure, we've got strong cash flow. We've got a very big dividend yield, and a dividend which is safe, and that includes some pretty aggressive modeling of what-ifs, if things deteriorate further. And so we like that position. We believe our investors like that position, and for the time being, we have suspended our share repurchase plan, even at these very attractive prices.

We continue to pursue some good and interesting acquisition discussions, but, again, whether it's a return to share repurchases, or some acquisition announcements, those will come in conjunction with a freeing up of the capital markets, which will lend us some confidence that we could expand our existing liquidity and term out at reasonable rates some longer term debt associated with those things.

So, for the time being, we like the position we're in, capital structure, liquidity, and cash-flow wise, and we do not intend to deteriorate that.

And if you could specify -- I mean, give us a little more feel in terms of the level of business? November fell -- you said that October was down, when usually companies were not really concerned about October, and then November fell off a cliff, and December continues to be as bad as November. If I understood what you said properly, is that actually you did not see a continuing slowdown in December? Did I understand that properly? And why would that be the case, just for RPM, when everybody else is seeing continuing drop of business levels in December versus November?

Well, all I can do is reiterate what you did quite well. I mean, October was a bad month for us, and November was terrible, and those are in our results, and, you know, and the good news and bad news about December, the bad news is, is that the lower level of business activity that we experienced in November is consistent in December. The only good news is, is that, you know, the deterioration that we've seen from September to October to November seems to have halted. We're so seasonally low, Rosemarie, that the -- you know, the November -- the December, January, February results are not really indicative of us and the whole market. I think the more telling results will be the results that we see in our fourth quarter, which historically is a very strong period for RPM businesses and product lines.

And if I may ask one last question. Regarding the third quarter, you are expecting, let's call it break-even, after we take out the severance and whatever other one-time charges you will have. Is that solely because of lower revenues, because if -- I thought I understood you to say that the gross margin was going to improve sequentially, based on the lower costs of raw materials?

Yes, as you know, Rosemarie, we have suspended guidance. That doesn't mean we're going to talk about our outlook or what we see down the road. But all I can tell you, again, is that as a result of the seasonal low period of our third quarter, expectations that the revenue declines that we've been seeing in most of our businesses are continuing, and the severance costs, we'll operate at a loss in the third quarter.

Alright, thanks.

Thank you.

And your next question comes from the line of Greg Halter from Great Lakes Reviews.

Good morning, guys.

Good morning, Greg.

I wondered if you could expand on the receivable side of things. I know you made a comment about the quality and so forth, but just if you could elaborate a little more on what you're doing to make sure that the accounts continue to be paid on a timely basis?

So far, we have not seen deterioration in that at any of our businesses. We expect some deterioration in a number of our industrial businesses. You know, our consumer businesses tend to deal with larger, better capitalized accounts. I think in prior recessions, weaker retailers were kind of weeded out, but on the industrial side, we certainly anticipate and are preparing for some slowdown, or perhaps some higher write-offs as it relates to smaller contractors, or distributors, that may be distressed during this economic slowdown. But it has not been a significant factor year-to-date at this point in time.

And that's not yet, I presume, being reflected in your allowance at $20.5 million, which is down from the prior year?

Yes, I would have to give you the reasons that it's down for the prior year, but our normal allowance for doubtful accounts are being handled the same way they always have, or in a number of our businesses, increased. You know, one of the principal reasons that it's down is just that accounts receivable is down in terms of raw dollars. So, on a relationship basis, that hasn't changed.

Okay. And on your international business, what is that as a percentage of the total currently, and how is that business generally doing? And I know it's mostly industrial.

Probably 25% of our sales is generated outside the United States. And, you know, we're seeing weakness in Europe. We're seeing weakness pretty much globally. It's different product lines that are holding up for us. You know, we've got some Tremco related product lines in the European marketplace, where codes are different, that are related to tighter building envelope, and this notion of sustainable building, and those product lines are doing well, both on a public renovation and building basis, and, again, mostly renovation, but some new construction, to the extent it's being driven by green building, or whatever you want to call it.

We're anxious to be a player and are actively being a player in bringing something of those better building envelope and insulating qualities to building codes, and also to perhaps tax incentives here in the United States, and so those are -- you know, the places that are holding up have a unique story around them. We're still doing good stuff in our corrosion control coatings and our FRP grating into oil and gas and power generation.

In some cases there are big declines in spends. In other cases, in the power generation area, there are major accounts that see this decline as a blip, and are spending into a long-term multi-decade trend that they believe is going to ultimately result in increasing, you know, energy prices down the road. But the places where we're strong are either places we're picking up market share, or places where globally we're playing either in, you know, green building or sustainable building practices and projects, or more into areas of power generation.

Okay. You made the comment about the cash, $100 million plus in Europe, and this was a substantial amount in Canada and so forth, but that you could bring it back to the U.S. without a tax implication for -- over the next, I think you said, 180 days or something like that. Is there any impetus to do that, just so that the window doesn't close at some point?

No, not really. The two things that we've done over the last year is, is that $100 million plus of cash in Europe was harder for us to get at in the past, because it was disbursed in a number of accounts across our businesses. With the help of a major bank, we have now created a cash pooling system that allows us to concentrate that cash, much like what we have here in the U.S. But given our excess credit capacity, and cash that we also have in Canada, I think we're comfortable in leaving it where it is for the time being.

We could bring it back. Treasury has suspended -- the treasury department has suspended the tax impact, if you temporarily bring overseas capital back into the U.S., and I think you have to rotate it on a 180-day basis. So, it's available for that. Quite candidly, we're looking at a number of acquisition opportunities, and that's readily accessible cash that does not have a call on it in the U.S., where, as you know, our cash is utilized to pay our dividend, to pay asbestos costs and other costs, and so we're anxious to put that to use with some deals that we hope might close, because they would be nice deals at decent values. And while it would eat up our cash, it would not add to our debt levels whatsoever.

So, that's our current thinking as it relates to capital allocation generally, and the cash that we now have in Europe.

Alright. And two more quick ones for you. On the fixed versus floating side, what are your thoughts there in terms of fixing rates or can you fix your rates now at maybe -- maybe or maybe not, better, lower rates?

The answer to that is that historically we've looked at a -- trying to manage our capital structure from a debt perspective at fifty-fifty between fixed and floating. As Kelly mentioned, we're about 62% fixed, which is a good place to be, and 38% floating. The ability for BBB investment-grade companies to enter the capital markets today on a fixed rate basis is very poor, and so unless you're a AAA rated government-backed entity, access to low, fixed rate capital does not exist.

When access to lower fixed-rate capital exists, and I say lower, interestingly enough in January of 2008, we issued $250 million of bonds at roughly 6.5% fixed rate for 10 years. You know, those are at very attractive levels that are not available to us, or anybody that looks like us. In fact, I think GE last week crowed about issuing GE capital 10-year fixed rate debt at 7%, and they're AAA rated.

Wow. Alright, and one last one, relative to the $16.4 million in asbestos costs, can you break that down between the settlement and the defense costs?

Yes. Greg, it was roughly a little over $10 million -- $10.3 million on settlement costs, and $6.1 million for defense.

Alright. Sounds like those numbers are coming down nicely here.

That's the goal.

That's the trend, yeah.

Thank you.

Thank you.

Your follow-up question comes from the line of Saul Ludwig from KeyBanc Capital Market.

Just needed one clarification on this impact from the captive insurance company, and its effect on interest. In other words, your interest jumped up a lot, part was due to the -- was due to the LIBOR, you know, you hit that at the wrong point, but what exactly was the implications of the captive insurance company on the interest expense line, or did it I show up some place else?

No, it's in the interest expense net line, Saul, and year-over-year, it's about a $5 million negative swing. We had a -- probably a million or so of income last year, a gain on sale, and again, that's just the ordinary course of business of the investment managers that manage those funds, and this year we had a combination of realized losses and also unrealized write-downs of approximately $3 million.

So, if you didn't have that in there, that interest expense number, instead of being $17 million, would have been $12, or would have been $13, or -?

I think that's correct. It would have been $12 or $13 million, and if you look at next couple of quarters, we would expect $12 or $13 million.

Well, why wouldn't it even be less because LIBOR is now 0.5%?

It could be less, but in there was not quite a $1 million gain on the purchase of the bonds, and a couple of other knick-knack paddy whack. I think the number that you want to look at going forward on a quarter-by-quarter basis is about $12 million. It could be slightly less. You know, a -- a further deterioration of any magnitude in the equity markets will also result perhaps in additional captive insurance company marketable security write-downs. So, again, that's a capital market factor that's out of our hands. It's non-operational, but that was a big swing year-over-year this year.

Got it. Thank you very much.

Thank you.

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

Thank you very much for your participation in our second-quarter conference call. When adjusted for a number of these one-time items, we're actually pleased by the fact that our industrial segment results were generally flat year-over-year, to what was an all-time record industrial performance in the second quarter of last year.

While we remain disappointed in the results of our consumer businesses, we are, like everybody, not able to buck the trend of dramatic drop in consumer spending and retail takeaway, although we are hopeful that that will bottom out this Spring, and that our fiscal year, which begins June 1, 2009, will actually be a good year for our consumer businesses in terms of a return to sales and earnings growth.

We look forward to providing you with the details of our third-quarter results, as well as the details of our expense reduction programs, which will be completed in the next couple of months when we report results of our third quarter in early April of 2009. We greatly appreciate your interest in RPM, as importantly as we appreciate the tremendous persistence, hard work and results of RPM employees worldwide, and we look forward to improving results as we get further into calendar 2009. Thank you, and happy new year to all.

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