RPM International Inc (RPM) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the RPM International conference call for the fiscal 2009 third quarter. Today's call is being recorded. This call is also being webcast and can be accessed live or replayed on the RPM website at www.RPMInc.com. Comments made on this call may include forward-looking statements based on current expectations that involve risks and uncertainties which could cause actual results to be materially different. For more information on these risks and uncertainties, please review RPM's reports filed with the SEC. During this conference call, references may be made to non-GAAP financial measures. To assist you in understanding these non-GAAP terms, RPM has posted reconciliations to the most directly comparable GAAP financial measures on the RPM website. 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, Ann. Good morning, and welcome to RPM's investor call for our third quarter ended February 28th, 2009. With me on the call this morning are Kelly Tompkins, Executive Vice President and Chief Financial Officer, as well as Barry Slifstein, Vice President and Controller. I'd like to turn the call over to Kelly to provide details on our third-quarter results as well as some capital structure and balance sheet comments. After which, I'll provide some color on our outlook for the finish of our 2009 fiscal year, as well as some preliminary comments on our 2010 fiscal year, after which we'll answer your questions. Kelly?

Thanks, Frank, and good morning, everyone. Appreciate you joining us today on our call. I'll review the quarter. I'm not going to review the nine-month year-to-date results, so we have ample time for your questions. Looking at the third quarter, consolidated sales decreased 13.2% quarter-over-quarter to $635.4 million. Foreign exchange accounted for 6.7% of the overall decline, due to the continued strength of the U.S. dollar during the quarter, most notably against the Euro and the Canadian dollar. Unit volume declined 13.1%, partially offset by acquisition growth of 3%, which was principally in our industrial segment.

Looking at the two segments, net sales of $406.7 million in industrial, which is about 64% of our consolidated sales, declined 13% from last year, largely driven by volume declines of 12.3% and unfavorable foreign exchange of 8.4%, offset partially by acquisition growth, which contributed about 4.7%. Consumer segment net sales of $228.7 million declined 13.4%, with unit volume down 14.4% and unfavorable foreign exchange another 3.6% of the decline.

Looking at consolidated gross profit of 36.9% in the quarter, was down 290 basis points from the 39.8% last year due primarily to lower overhead absorption on lower unit volume of approximately 280 basis points combined with higher year over year raw material costs of 280 basis points. Prior period price increases of 270 basis points only partially offset these volume and raw material pressures. The benefit of lower raw material costs is, however, expected to have a favorable impact on gross profit margins during our fourth quarter, which is one of our seasonally stronger quarters.

Industrial segment gross margins of 38.6% decreased 240 basis points from 41% last year, due primarily to low overhead absorption on low unit volume of approximately 340 basis points, combined with higher year-over-year raw material costs of 130 basis points, which was partially offset by prior period price increases of 230 basis points.

On the consumer side, gross profit margins of 34% declined 370 basis points from the 37.7% last year. The primary driver of the decline, again, was lower unit volume, driving 190 basis points and higher year-over-year raw material costs of 550 basis points, all of which was not sufficiently offset by prior-period price increases of 370 basis points.

Turning to SG&A, looking at SG&A as a percent of sales, increased to 41.8% of sales from 36.4% last year, principally due to the significant unit volume sales decline. In absolute dollars, SG&A was slightly down from last year and did include $14.5 million in severance charges. Excluding these severance charges, SG&A dollars would have decreased by about $15.1 million or 5.7% and as a percent of net sales, SG&A would have been 39.5%. Industrial SG&A as a percent of sales increased to 43.8% from 37.1% last year due to lower unit volume, coupled with severance costs and higher warranty expenses during the quarter. Consumer segment SG&A as a percent of sales increased to 32.4% from 30.2% last year, reflecting volume declines and severance charges. In absolute dollars, however, consumer SG&A declined $5.6 million or 7% year-over-year.

Looking at corporate/other expense was up $1.1 million or 8.3% to $13.7 million from $12.7 million last year, primarily due to unfavorable foreign exchange, which was offset by reduced compensation expense.

Turning to EBIT, consolidated EBIT decreased from $25.1 million or a 3.4% of net sales last year, to a loss of $31 million or 4.9% of net sales this year, due principally, again, to volume declines across both segments, raw material cost pressures, severance charges and the unrealized investment losses at our captive insurance companies.

Industrial segment EBIT decreased from $18 million or 3.9% of net sales to a loss of $21 million or 5.2% of net sales, principally due to lower unit volume and higher SG&A expense, which included severance, warranty and bad debt expenses during the quarter.

Consumer segment EBIT decreased from $19.9 million or 7.5% of net sales to $3.7 million or 1.6% of net sales due, again, to volume declines and higher raw material costs.

Looking at interest expense net, net interest expense increased $4.1 million from last year, driven by unrealized investment losses at our captive insurance portfolios and lower investment income. Excluding these particular items, gross interest expense declined year-over-year by about $1.2 million or 9% from last year. Average interest rates for the quarter were 4.7%, compared to 4.9% last year.

Our effective tax rate for the quarter was 30.5%, compared to last year's 22.2% effective rate. The year-over-year change reflecting the usual differences in projected U.S., state, local income taxes, lower effective tax rates on our foreign sourced income, incremental utilization of foreign tax credits and the overall jurisdictional mix of income in the quarter.

All of this drove a net loss of $30.9 million or $0.24 per share, compared to net income of $12.2 million or $0.10 a share last year, resulting from the lower sales volumes, higher raw material costs, severance charges, and the unrealized investment losses at our captives. Excluding severance charges of $14.5 million and the $4 million of unrealized investment losses, both net of tax, EPS would have been a net loss of $0.14 per share for the quarter.

I'll close my comments with a few notes on the balance sheet and cash flow. Just starting with asbestos activity in the quarter, we secured dismissals or settlements of 228 cases and made total payments of $19.8 million in the quarter, compared to 225 cases and total payments of $18.7 million for the same period last year. I would point out that during this quarter, we had a payment of $3.6 million to satisfy a judgment from a trial that had occurred two-and-a-half years ago, which was unsuccessfully appealed. Excluding this one payment in the quarter, asbestos expense during the third quarter would have been $16.2 million, well in line with our estimates and below comparable levels from last year. In terms of total active cases at the end of the quarter, we had 10,281, which compared to a total of 11,350 cases in the same period last year with new filings in the quarter flat with last year's comparable period. Our balance sheet reflects $507.5 million of asbestos related liabilities.

Turning now to CapEx, for the first nine months CapEx of $37 million compared to $29.8 million year-to-date for the same period last year. Our estimate of CapEx for the balance of this year will put us in a range of $55 million to $60 million for the full year, down from the $71.8 million last fiscal year. We continue to evaluate our CapEx requirements, based on current business conditions. Depreciation expense for the nine months at $47.4 million compared to $46.2 million in the same period last year. Amortization expense, year-to-date, at $16.7 million compares to $16.2 million for the same period last year.

Looking at accounts receivable, our DSO increased 2.6 days year-over-year, up slightly, although we have not experienced any unusual collection issues. Days of inventory did increase five days over the comparable period last year due primarily to the significant slowdown in sales that we experienced in the industrial segment in our third quarter. A few comments in terms of cash flow for the quarter. Cash from operating activities was down from last year, due principally to the decline in net income of $55 million, partially offset by good performance in working capital. Cash from investing activities was approximately $40 million, below prior year levels due to the sale of our Bondo subsidiary which occurred in November 2007. Cash from financing activities declined by approximately $120 million due to the net issuance of debt last year, versus a net reduction in debt this year.

Finally, a few comments on our capital structure and overall liquidity. We're pleased to announce that yesterday we completed a new three-year, $150 million accounts receivable facility, which increased our accounts receivable capacity from the previous $125 million. Our five-year revolving credit facility matures in December 2011. As of the close of the quarter, our debt stood at $983.2 million, compared to $1.073 billion as of year-end for a total reduction of about $90.4 million. Our net debt-to-cap ratio stands a healthy 42.8%, compared to 37.7% at last year's third quarter. Our total long-term liquidity at quarter end stood at $504.4 million with $205.2 million in cash and $299.2 million available through our bank revolver and our old AR facility. On a pro forma basis, reflecting the added liquidity from our new accounts receivable facility, total liquidity would have been $529.4 million. Finally, our debt maturities are manageable and we see our capital structure sufficiently resilient and flexible to accommodate the growth opportunities and weather the current economy. And with that, I will turn the call back over to Frank and look forward to your questions.

Thank you, Kelly. I believe the best analogy to explain the current economic environment, RPM's results, the actions that we have taken in response as well as our outlook, is a good old Clint Eastwood spaghetti western, "The Good, The Bad and The Ugly". Let's start with the ugly. Economic conditions. The economic environment and the financial and capital markets are way beyond what anybody could have imagined just six or nine months ago.

As we began to warn as recently as last September, including in communications to investors around our first and second quarter as well as various investor conferences, the impact of the virtual meltdown of financial markets and the total lack of project funding for construction activity was likely to result in a significant hole for that portion of RPM's businesses involved in commercial new construction, approximately $300 million to $500 million of our revenue base, principally associated with our Tremco and Dryvit various product lines. We are now in that hole and are likely to remain there for at least six months as the financial markets continue to sort out their process. Additionally, industrial capital spending has been taking a nose dive and in our opinion will likely not pick up until calendar 2010.

The bad. Our results. These economic and capital markets factors were a direct result of our poor third-quarter results, both in terms of their impact on our industrial businesses, as well as the timing related to our seasonally low third quarter, which historically has been a breakeven or slightly profitable quarter versus our results during the rest of the year. From an outlook perspective, the ugly economic and financial market conditions are likely to result in a fourth quarter of our 2009 fiscal year where sales are down in the 10% range and earnings are down in the 40% range. This will lead to a 2009 full fiscal year result of somewhere at or slightly above $1 per share. Keep in mind that roughly $0.20 to $0.25 per share of this year-over-year decline will be associated with restructuring costs and write-downs of our captive insurance investment portfolio. Additionally, these results will include the negative impact on both the top and bottom lines of a significantly strengthened dollar during the fiscal year and lastly a roller coaster ride of volatile raw material costs.

As we think about our 2010 fiscal year, which begins on June 1st, and looking forward, we believe our consumer businesses will be flat to slightly up, while our industrial businesses will continue to be challenged, particularly during the first half of the year, as a result of challenging comparison to the prior year's record results, in light of the impact of the continuing broken financial markets impact on commercial construction activity, and the broad continuing declines in industrial capital spending. The net result of which, on a consolidated basis, will likely be sales in the first half of our next fiscal year down in the 10% to 15% range and earnings down around 30%.

The good. As a result of the difficult but necessary restructuring and resizing actions we have taken year-to-date, which have totaled approximately $20 million from an expense perspective, we have permanently reduced our cost base by nearly $50 million on an annualized basis. Additionally, the benefits of lower raw material costs will begin to actually show up in our fourth quarter. We should benefit from these two factors throughout fiscal 2010. We are hopeful that we are nearing the bottom of our consumer business declines. As of March, we had our first year-over-year sales and profit improvements across our consumer product lines in more than nine months.

From an economic recovery perspective, RPM is in better shape than most to take advantage of stimulus spending and the infrastructure area and the focus on energy efficient building practices and products. As a result, we expect the second half of our 2010 fiscal year to show recovery across all of our businesses, in part because of much easier comparisons, and an expected modest stimulus package economic recovery, the benefits of lower raw material costs and a permanently lower expense base; and not expecting to repeat the restructuring cost, investment portfolio write-offs, or level of foreign exchange translation hits that we experienced in fiscal 2009.

For the full 2010 fiscal year, based on many of these assumptions, obviously those will change over time, but our current view is this will roughly add up to results in a range of around $1.25. Most importantly with the continuing strong cash flow from operations, excellent liquidity currently in excess of $500 million, and a strong capital structure further improved with this week's renewal of a three-year accounts receivable securitization program, RPM is in good shape to weather this economic storm, gain market share from less stable competition and to continue to pursue small- and medium-sized acquisitions like the three transactions we announced during the third quarter. That concludes our prepared comments in the quarter as well as our outlook for the balance of this year and our preliminary view of 2010. We would now be pleased to answer your questions.

(Operator Instructions) And our first question comes from the line of Jeff Zekauskas with JPMorgan. Please proceed.

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

Good morning, Silke.

A couple of questions. In terms of raw material costs, should raw material costs have been like a benefit this quarter already, or say like an inventory revaluation expense that was embedded in cost of goods sold this quarter?

It's a combination, Silke, of inventory revaluations as well as just a slowdown in sales in a number of our businesses, where we were still bleeding off inventory associated with raw material costs, September, October. We didn't start seeing raw material costs coming down very dramatically until the end of October and November. We are now in a circumstance where we are seeing the benefits of those in March and they will finally show up when we report our fourth-quarter results.

How much was the inventory re-evaluation expense in the quarter?

I don't have that number in front of me, but it was a combination of that, as well as just lower overhead absorption with the lower sales revenue, and year-to-date through nine months, raw material costs were still up, as we were suffering through peak raw material cost into the early fall of last year and really it wasn't until January or February that we were able to work all of that cost through our P&L through product sales.

And over the next 12 months, what magnitude of raw material cost decreases would you expect and which materials are moving lower more significantly?

We're seeing resins down pretty dramatically. We're seeing solvents down pretty dramatically. Obviously, freight costs have dropped versus where they were at their peak last summer. Packaging's a mixed bag. We're seeing plastics-related packaging in pretty good shape. There are some issues with steel cans. So, but in general, we're seeing raw material cost declines which we are now benefiting from across almost all of our chemical raw materials, as well as a lot of our packaging other than steel cans.

And do you think these decreases for the next 12 months would be more like single-digit, double-digit, or just order of magnitude?

They've been double-digit now and until the economy really starts turning and the supply/demand situation changes, we should benefit from that throughout the year.

If I could ask a second question. What indications have you seen that the consumer business has bottomed or which -- I guess which specific product lines may have seen like an uptick in March or I guess --

Across all of our consumer product lines, our major consumer product lines, Rust-Oleum's principal product lines, DAP product lines, Zinsser. We saw in the month of March for the first time in nine months slightly positive sales and earnings performance year-over-year. Whether that is a one-month aberration, one month is certainly not a trend, but the nature of our consumer businesses, if you look at the history of RPM versus our industrial businesses, is they have been impacted earlier, if at all, in recessionary periods. They tend to be more recession proof and that certainly did not prove to be true in this recession and they would come out earlier, or pick up sooner than our industrial businesses, which are more late stage. And so we're a little bit hopeful that in terms of some of the bottoming out of the housing market, as it relates to some pickups in the movement of home sales, as well as just the results in the month of March, which were pretty much across all our consumer product categories. But again, one month doesn't make a trend but we're looking forward to hoping to build a trend in terms of positive momentum on the sales and earnings line there.

And my last question is can you identify where the one-time cost reductions sit on the segment income statement, what's in industrial, what is in consumer, how much in corporate?

Yes, they're in SG&A and year-to-date out of $20 million, probably approximately $6 million to $8 million is in our consumer segment and the balance is in our industrial segment.

Thanks very much. I'll get back into queue.

Thank you.

And the next question comes from the line of Rosemarie Morbelli with Ingalls, Snyder. Please proceed.

Good morning, all. Frank, could you give us a little more color on the actions you have taken in the third quarter and when you expect to start benefiting from the $50 million of savings?

We will start benefiting from the $50 million of savings in our first quarter pretty directly. A fair amount of the activity was related to downsizing and its impact on employment and so we would have severance costs associated with that that impacts the third quarter, certainly. But we will see some of that in the fourth quarter and you'll see all of that in fiscal 2010 on a full-year basis.

So by the end of 2010, you will be at the $50 million annually?

We have currently reduced our expense base on an annualized basis by $50 million and most all of that will show up in fiscal 2010. We'll start to get some of that in the fourth quarter, but the vast majority of it will impact in its entirety 2010. We'll start to see that here in the next month or two, but its impact will be most pronounced next year.

Okay. And more details on what you did? I mean, all right, you have obviously downsized the number of employees at the Company. Did you shut down any capacity? Did you eliminate some small non-efficient plants? Can you give us a better feel for what else you did?

We've minimized production in a few places. We've taken a hard look at SG&A expenses and eliminated a lot of that, personnel or otherwise related, and that's pretty much it. Again, our focus has been, what actions can we take that will permanently reduce, in a real dollar basis, our expense base, and to the extent there's anything else, we would report that at the time that -- if and when we complete that.

Okay. So nothing at all out of cost of goods, which are going -- which is going to help you improve gross margins in the quarters to come, other than the outside help from lower cost of raw materials?

We have reduced some shifts here and there, but the vast majority of the gross margin improvement that you'll start to see in the fourth quarter is associated with raw material costs. When you think about RPM's cost of goods sold, about 10% to 15% is in overhead, which is plant overhead or direct labor. The balance is material.

Okay. Could you also give us a little more color on that asbestos settlement? Obviously you lost and had to pay more than you anticipated. Are there a lot of those cases pending?

The answer to your last question is no and we didn't pay more than we anticipated. It was a case that was tried three years ago and it's been pending on appeal and the appeal was not successful. We were one of about 10 defendant companies in that case and it's relatively old news.

Okay. And if I may, in answer to one of Silke's questions regarding where the one-time costs are hitting, you used annual expenses. If you look only at the third quarter and look at that $14.5 million in severance, how do you split it? It is all SG&A, I understand.

Correct.

How do you split it between industrial and consumer?

About $11 million consumer and the balance was in industrial, roughly, for -- I'm sorry, $11 million in industrial, $11million in industrial and $4 million in consumer.

Okay. And the $4 million is all in SG&A and then it is all in corporate expense?

Most of it is in SG&A. Again, there's a little bit in cost of goods sold, but not much.

Okay.

And it is basically in the segment SG&A, not in corporate.

Oh, so in which segment, then?

$11 million in industrial and $4 million in consumer.

I'm sorry, I was referring to the $4 million from the write-down of the insurance.

Oh, that's a net against interest expense and year-to-date that's been about $7 million.

$7.4 million, Rosemarie, year-to-date. Again, it's reflected in the net interest expense line.

Okay. And --

One other comment that I would make on that in our outlook comments in the fourth quarter, we anticipate about $10 million of additional one-time hits associated with potential write-offs or captive insurance company investment hits.

Okay. That is helpful. Thanks. I'll get back in queue.

And the next question comes from the line of Kevin McCarthy with Bank of America/Merrill Lynch. Please proceed.

Good morning, how are you?

Good morning, Kevin.

I had to jump off the call for one moment, so I apologize if this is repetitive. But, Frank, I think you had made some comments and indicated in the press release that you are somewhat confident that the consumer business may be near a bottom here. Is that confidence a result of a decline in inventories in the channel, or are you seeing other factors as you look across those businesses that inspire hope for the coming quarters?

We did comment on that, but I do think it's worth repeating. First of all, confidence is - confidence is the wrong term. Hopeful I believe is the right term. Inventory levels are -- have been cut back pretty heavily, and so that's certainly one reason that we think that the consumer business across a lot of our businesses will begin moving in the right direction. But the simple fact that we point to is that March across most of our consumer businesses was the first year-over-year, albeit marginal, sales and earnings improvement in nine months. And while one month is not a trend, we're hopeful that we'll see some of that strength continue as the spring unfolds and the summer unfolds. Also, what's happening in the housing market feels a little bit like a bottoming out as new -- not new construction, but the sale of existing homes is starting to improve, and that's certainly a driver of our kind of patch and repair and maintenance consumer-type product lines.

Great. So a couple of financial questions for Kelly as well. Do you have any preliminary thoughts on where capital expenditures may be forecast for 2010? And then do you still have a $200 million maturity for October of this year? And if so, how and when would you plan to you address that?

Yes, thanks, Kevin. In terms of CapEx, our preliminary look at fiscal 2010 would show CapEx in the range of $40 million. So significantly down from the $55 million to $60 million range that we expected to finish this year. And in terms of our October maturity, it's about $167 million. You may recall that we bought back some of those bonds in the second quarter. We're obviously, with the new accounts receivable facility in place and our current revolver, we've got some flexibility to handle that maturity. We're obviously also monitoring the capital markets, and if there's an opportune window to do something, we will. But we're comfortable, given our current liquidity position, to handle that maturity. And our next maturity after that, other than the revolver in December 2011, is not until 2013, so our maturity schedule is pretty staggered and we think quite manageable under the current circumstances.

Okay. And then finally, if I may, to follow up on raw materials, it sounds like that was nearly flat, if I net out the selling price impact in the quarter, maybe a 10 basis point drag there. As you move into the seasonally stronger 4Q, how positive do you think that might become?

I think we're hesitant to give specific numbers, other than the early parts of the fourth quarter are indicating some nice pickups in gross margin that we expect to see in our consumer businesses and across a lot of our industrial businesses. Particularly in some of our more construction-oriented industrial businesses like Tremco and Dryvit, the gross margin improvement will not be nearly enough to make up for what we anticipate as some rough revenue periods here, not only for the fourth quarter but for most of the remainder of calendar 2009.

Understood. Thank you very much.

Thank you.

And the next question comes from the line of Saul Ludwig with KeyBanc. Please proceed.

Hi. Good morning. The $10 million in special charges that you talked about for the fourth quarter, what exactly is that? Is that more equity markdowns in the insurance company or what else is included in there?

Yes, for the most part that's in anticipation of equity markdowns. They're non-cash hits and write-downs of unrealized losses in that portfolio and then there's $2 million to $3 million of other restructuring type items that we anticipate in the fourth quarter.

That's part of the $10 million?

That's correct.

What's the size of the equity portfolio in the insurance company? And remind us again, what's the purpose of this insurance company?

It's $65 million, and the captive insurance companies were set up some time ago to provide basically dollar-one coverage underneath product liability or general liability coverage that we have with third parties that would have $1 million or a $2 million deductible to them, and they've been in place for quite a long time. They've actually been -- they're fully functioning insurance companies, one is registered in Ireland, one's registered in Vermont. And it's been a smart move right up until we found ourselves in the equivalent of the mark-to-market for a captive insurance company investment portfolio that we have in the last couple of quarters and we anticipate some more hits, given where the markets are in our fourth quarter.

Next question. Did you ever re-file the case against the insurance companies, Frank?

Yes.

Or the appeal on that case that you lost here in Cleveland?

Yes, Saul, we have filed a notice of appeal on that case and are preparing the appeal as we speak. At this point it's premature to even think about the outcome or the the timing of the outcome, but we are well on our way toward prosecuting the appeal.

Okay. With the severance, $14.5 million in severance cost, how many employees are affected by that?

We did not disclose that number.

Okay. Back on the raw material question that I think a lot of people have asked about, it's a little complicated in your company because you're on FIFO accounting and what's happening in current raw material costs, there could be a three to six month delay between the time you actually realize those savings in your P&L, whereas now as you alluded to, you're still working off higher cost inventories. In the third quarter, do you know what the percentage increase you have, let's say in your unit raw material costs, was it up 5%, 6%, 7%, 8%, 10%, versus the prior year, based on the way you do your accounting for your inventory cost?

Saul, we commented on it really in the context of our gross profit margin comments and the significant increase in raw materials, it was not covered entirely by prices in the consumer area and we had raw material basis points in the quarter up 550 basis points in consumer.

How about in industrial?

In industrial, it was about 280, if I recall correctly.

130.

Volume was down Saul and raw material about 130 and price only offset about 230 basis points of that.

That's pretty much worked its way through our P&L at this point, Saul and we're starting to see, across most of our businesses, the benefits now of raw material costs in our P&L, our FIFO accounting notwithstanding. And it took us a longer period of time to get through that than we would have liked, in part because of how quickly raw materials went from a peak to significant declines and also in part in the third quarter because of the lower revenue volume.

And you would expect then rather than having a negative unit raw material cost impact, it should be neutral or positive, even with your FIFO accounting in the fourth quarter?

Yes.

Okay. And then finally a question on the dividend. RPM's had this long history of dividend increases and you did raise it in October of last year. Granted, this is certainly a topic that the board will consider, but how do you feel about being able to maintain that trend, Frank, as we look at the economic environment and your capital needs looking out?

If you -- you certainly look at our dividend. It's been an important part of total return to our shareholders. We're very cognizant of that and we would like to be in a position to continue that. With $530 million practically of current liquidity, and as Kelly alluded to, we're certainly ready to tap the capital markets when they're favorable, so a lot of work has been done on that. With strong cash flow from our businesses even in this difficult time, I think we're in pretty good shape to ride through and maintain our current dividend. That is very dependent upon the economic outlook that we outlined today. And so if expectations for a 10% drop in sales and a 30% drop in earnings for the balance of this calendar year and recovery across most of our businesses, albeit modest to next year, in the beginning of 2010, calendar year, if that's how things unfold, I think we'll be in pretty good shape. And certainly we have our eye on that. Our board looks at our dividend each quarter and if there's any period of time where we start to feel like the outlook that we outlined today seems to be too rosy and this global economic mess has a newer lower level that it's going to take everybody to, then we'll have to take that into consideration at the appropriate time and take appropriate action.

Sounds like, when you usually consider the yearly dividend in October, depending on what the -- that's six months from now, what your view is, that will have an influence on whether you're able to increase it again?

I think that's correct. But one of the principal reasons, just to reiterate, that we thought it important to outline our view not only of fiscal year-end 2009, but our preliminary view of 2010, is to let folks know that with our current capital structure and liquidity and cash flow and the outlook that we provided today, we feel like we'll be able to maintain the dividend. If at any point in the coming 12 months that outlook appears to be too rosy, and I don't think I have ever painted a less rosy outlook in all my years being at RPM, but if it appears to be too rosy then we'll have to take appropriate action, and that's something that our board will look at each and every quarter.

And then just finally, you talked about increase in bad debts and increase in warranty expense. The bad debts I think I understand, that goes with the territory in these tough times. Maybe how much was that? But the increase in warranty, what's -- is there any problem with certain product lines that are resulting in higher warranty costs?

No, Saul, and really the warranty expense and the bad debt expense was all in the industrial segment. And the bad debt expense really was associated primarily with one particular account. As I commented in my review of the quarter, we have not experienced any unusual collection issues. Obviously we're monitoring receivables in this economy as anyone would and should. In terms of the warranty, we're in the construction business and from time to time you have issues in the field. But there's no particular thing to highlight in that regard.

How much was it up?

For the quarter, couple million bucks.

That's between bad debt and warranty or just warranty?

Just warranty.

Okay. Great. Thank you very much, guys.

Thank you.

And the next question comes from the line of Edward Yang with Oppenheimer. Please proceed.

Hi, good morning.

Good morning, Ed.

Just a follow-up question on the captive insurance company again. The $10 million hit that you're expecting, I guess it's closer to $7 million or $8 million, excluding some of the other charges and so on. Given the rally that we saw in the equity markets in March, I'm surprised by that amount. How does this work? Are these losses that you've already had in the portfolio and haven't recognized yet, prior losses, or how quickly are those losses recognized?

Well, Ed, two things. One, we provide a lot of that detail in the Q, but in general, in our captive insurance companies, we have, if the security is held for six months and it's under water as it were by 15% or more, then we have to flow those losses through. The positive is we would not expect at this point any further captive write-downs as we go into fiscal 2010, and it -- but we would have to see a significantly higher uptick in the market to really offset what we anticipate for these added write-downs in the fourth quarter.

Is there any possibility of gains in the future?

Absolutely. I mean, the vast majority of what for the year will be somewhere in the neighborhood of let's say $15 million of write-downs have been unrealized losses.

Okay. Thank you. And regarding the guidance, there was a lot of guidance out there and I'm having some of the numbers I'm having them not mesh up correctly, probably heard them wrong. The sales down 10% and the EPS down 40%, was that just for the fourth quarter?

Yes.

Okay. And the annual EPS, you expect for fiscal 2009 to be about $1?

Somewhere there, plus a few more, and it really depends on how the fourth quarter finishes up. But that -- what I want to make sure people realize the impact of what's happening in our industrial businesses, and we think that the first and second quarter of next year, for the reasons that we explained, facing record levels of results in the prior year, and so what's happening in the construction markets still will negatively impact our industrial businesses, essentially for the balance of calendar 2009.

Okay. But fourth quarter 2008 EPS was $0.75, so down 40% from that, will be something more like $0.45 and that gets you an annual 2009 EPS number that's I think about $1.07 or so. So that $1 EPS range is sort of a wider range?

Yes, I think you're looking at a $0.40 to $0.45 fourth quarter and $1 to $1.10 for the year. But as you've heard on many conference calls and investor conference from us and probably everybody else you've talked to, the predictability of results from one month to the next, let alone quarters and years, has been more difficult than it's ever been in my career. It's just hard to understand what's happening here, and, again, I'd just point to the positive results we had in our consumer business in March. It's great news as far as we can tell, but one month isn't a trend. We're anxious to see a couple more months go by and really feel like that part of our business is now permanently moving in the right direction.

And just on the fiscal 2010 guidance, again, the sales down 10% to 15%, EPS down 30%, that was just for the first half alone, correct?

That is correct. And between segments, we expect our consumer product lines to be up in sales and earnings modestly throughout the whole year, and we would expect our consumer -- or, I'm sorry, our industrial businesses to begin showing positive and sales earnings again in the second half of our 2010 fiscal year.

Given the -- given all the -- some of the more non-recurring charges and hits you took and restructuring charges you took in fiscal year 2009, if you excluded all of that, what do you think the fiscal year 2009 guidance would have been versus the $1 to $1.07 or so that you're -

I really don't have a good read on that. As you know, normally we wouldn't be providing 2010 guidance until we got through our planning process and we released our results in July. We'll release our year-end results on July 27th and have an investor call there, and we'll be in a position to provide a lot more detail on our 2010 outlook.

Okay. And finally, just on the issue of SG&A, even if you exclude the restructuring charges, you mentioned that SG&A was down about 6% and your revenues were down roughly double that. Embedded in your outlook for 2010, are you expecting more movement on the SG&A? And you also gave some helpful commentary in the components of your costs of goods sold. Could you provide that for SG&A as well? I'd like to broadly understand which percentage is fixed versus variable for SG&A.

Yes, I don't have that in front of me right now, but as it relates to any other activity, as I mentioned earlier, if and when we would take any other action, then we would report that at the time.

Okay. Thank you very much.

Good. Thank you.

And the next question comes from the line of Greg Halter with Great Lakes Review. Please proceed.

Hello. Good morning.

Good morning.

Relative to the asbestos costs, can you break down the defense and settlement costs for the quarter?

Sure, Greg. The settlement costs in the quarter were $12.9 million, but recall that does include the $3.6 million kind of one-time settlement that we alluded to earlier. And defense was $6.9 million. So excluding that settlement you're about $16.2 million for the quarter.

Okay. And would you have available how much of your debt is currently at variable rates?

Yes. In terms of our overall debt, we're at about 40% variable. Hold on, Greg. Variable, yes, about 39 -- 39% variable and 61% fixed.

Okay. And I think on the last call you had indicated that of your cash position, about $100 million or so was in Europe and there was some other amounts in Canada. Can you break that down currently of the $205 million and also what kind of impact if any you had from foreign exchange rates in the quarter on your cash --

The breakdown, Greg, on cash for the quarter is roughly comparable to what it was for the previous quarter between Canada and Europe.

Okay.

And in terms of -- we reflect -- in terms of cash flow, you see there's a foreign exchange impact year-to-date, about $48 million in terms of just the foreign exchange impact on cash flow.

Okay. In terms of negative $48 million.

Yes, yes. So variance of $67 million.

Yes. Okay. And that leads me into your thoughts on acquisitions and what you see going forward. I know you've done some smaller ones. Just what your appetite is there currently for small as well as maybe medium or larger deals and what kind of pricing that you're seeing out there currently?

In terms of transactions, as I mentioned, we completed three deals in the quarter, actually two in the quarter and one after, and they're highly synergistic. Our Tremco illbruck business acquired Karochemie in Europe. We announced a joint venture in China with our Carboline Company, and then after the quarter Tremco acquired a business called Canam Building Envelope Specialists and those are all the types of deals that you'll see. They kind of range from $20 million down to $5 million in terms of size and roughly deal value, and that's kind of what we've got teed up. Pricing's good. To the extent that they're very synergistic, it's actually a lot of fun to be doing $10 million and $20 million transactions that can add $0.01 per share or a little bit more to the whole nut.

As far as larger transactions, we are keeping our irons in a lot of -- our irons hot in a lot of different fires, but we have no intent of challenging our capital structure at this point in time. We've been very deliberate about maintaining the flexibility that we've got, about the basically outsized, at least on historic basis, liquidity that we've had, and are going to be very deliberate about that until such time as the capital markets improve, and until we start seeing positive momentum out of our businesses. And a lot of that is in light of our ability to generate positive cash to fund our internal initiatives, continue to essentially purchase out of cash flow, a lot of these small- to medium-sized deals, and maintain the appropriate cash flow relative to our earnings to keep our dividend.

Okay. Very helpful. And relative to the different stimulus packages that are going around in the U.S. as well internationally, can you give any specific examples of stimulus impacts where RPM would benefit?

I'll give you a couple examples, but I think we'll be in a better position to talk about stimulus and its impact on us in our July year-end meeting. Our Carboline business is one of the leading providers, for instance, of corrosion control coatings into the highway bridge market. And so certainly we're well-positioned to be a beneficiary of increased spending in the highway area. Our Stonhard business has some specialty line striping products as well, and so those are some areas where we'll see some benefits. From an energy efficiency perspective, there are few companies out there on the building envelope that have the ability to provide a complete building envelope package from roofing to siding to sealants. RPM has that.

We have put together a team that's been in place for about two months now that is working on a number of significant private, government and military projects. And the potential there for us is to be able to provide the building envelope insulation from the siding to the sealants to the roof on a warranted basis, which is one of the key elements that allow all the Johnson Controls or Honeywell improvements in controls and HVAC systems to actually be realized is pretty exciting. By July, we should have some specific projects that we will be able to point to that will be driving real sales and earnings. So it's an exciting area for us. The whole energy efficiency focus in buildings falls right into decades of product know-how, construction practices and services that RPM's been part of. But I'd rather be able to point to deals that are done and projects that are underway and there is some bidding on literally hundreds of millions of dollars of opportunities right now.

Okay. And back to the guidance, just to be clear, that $1 to $1.10 range, if you will, I believe you had indicated that that does include $0.20 to $0.25 from restructuring and insurance, so forth, write-downs, is that correct?

That's correct. So on a go-forward basis, excluding the restructuring cost and the captive insurance investment portfolio write-downs, you're looking at $1.25 or higher as you think about a base for 2010. That does not incorporate any further restructuring costs or any further write-offs.

Okay. And do you expect any in 2010?

It's hard to say at this point in time. And again, we could provide details in July. As we sit here today, the answer to that is no. But we will respond as the economic conditions dictate.

Okay. And one last one for you. Obviously in the U.S. there's a lot of foreclosed properties and so forth. What kind of impact could that, or would that be, or is that you're presently seeing on the consumer business in terms of DAP and some of the other products that you may have?

The foreclosed properties issue is not something that I can really speak to. I can tell you a little bit back to the stimulus package. There are billions of dollars for residential and low-income housing weatherization. Our DAP business is involved in that. We are seeing some -- feeling pretty consistent signs that housing turnover has hit a bottom and that the level of new home sales, particularly in some of the harder hit regions of the country, is starting to improve. All of that bodes well for our consumer businesses as we tend to be heavily involved in the touch-up and repair and maintenance. And to the extent that we can point to an economic driver or indicator of that, it tends to be housing turnover as opposed to new home construction.

Okay. Thanks.

Thank you.

And the next question comes from the line of Jason Byun with Sigma Capital. Please proceed.

Good morning. I was wondering if you could give us a sense of where your cash is domiciled, domestically versus foreign jurisdictions.

Yes. We mentioned that a minute ago. $100 million plus of our cash is in Europe. And probably $50 million plus is in Canada and the balance is U.S. and elsewhere.

And what's kind of your ability like to repatriate that cash from Europe and Canada?

It depends where to. Obviously in the United States, we could get it all back here tomorrow. It would come with it a 10% to 12% haircut relative to the tax rate differentials between the current U.S. corporate tax rate and those in other foreign jurisdictions.

Got you. Okay. Thanks a lot.

Thank you.

And the next question comes from the line of Rosemarie Morbelli with Ingalls, Snyder. Please proceed.

Just a couple of quick questions. The organic sales of 13.1%, could you give us the split, this is for company overall, the split between price mix and volume?

I'm sorry. Could you ask that again, Rosemarie?

Sure. You had organic sales of 13.1%, once you exclude foreign currency and acquisitions. But that is comprised of volume on the one hand and then price, mix in the other. Could you split the two categories?

Sure, Rosemarie. Foreign exchange is down about 6.7%. Price contributed 3.6%.

Okay.

And then volume --

So of the 13.1%, price was 3.6% and the balance was a decline in volume?

That's right.

Decline in volume was 13.1%.

Right.

Okay. And when you look at the price increases of 3.6% in the third quarter, that was when your raw material costs were still high. At this stage you are looking at raw material costs coming down, demand more or less insignificant or worse, actually, demand still declining on the volume side. What do you think is the likelihood that you will not have to give back some of those selling prices, and that in the fourth quarter the benefit from lower raw material costs coming down may be somewhat offset by selling prices coming down as well?

First of all, the impact of price in the quarter was really the impact of prior-period price increases. It happened over the summer and the latest early fall. Secondly, again, if you look at the brand strength of RPM historically, we have not had to give back much price. We are not doing that now. We've been working with customers to maintain that pricing level. The only area where we have had some price competition is in certain industrial large project stuff where they're on a global basis, as some price concessions and price battles on some major projects versus just the supply and demand dynamic that are out there. But historically, again, we've been able to maintain most of our prices, in part because we occupy the high price category in every one of our categories, so we have not and do not compete on price as the principal means by which we go to market. So it's less of an impact for us than other folks.

I understand that. However, the consumer with no job going out to buy a can of paint because, or DAP caulking or whatever, in order to fix the house, with time on his hands, isn't that consumer going to go towards your competition products at lower prices than RPM at that point? Maybe he doesn't care how good the product is, and you may want to get the price down, or am I --

Rosemarie, in most of those issues where it would hurt margin and it could, it's a mix issue, not a price issue. And many retailers we provide both the premium performing product at a high price and good margin for the retailer and us and we also provide the price point competitor, whether it's under our brand or private label brand. So typically in our main categories, we will capture the retail sale, and it's less about price pressure and more about product mix. And so to the question you're asking - it's absolutely an impact on margins, if people in this environment choose to purchase a lower price, lower performing product versus the higher price, higher performing product. Fortunately in most of our categories, our products span the range from a price and performance perspective. So it's more of a mix issue.

Okay. That was very helpful. Thanks a lot, and that will be it from me. Thank you.

Thank you.

(Operator Instructions) And the next question comes from the line of Jeff Zekauskas with JPMorgan. Please proceed. Jeff, your line is open. Please proceed. Jeff, if you put yourself on mute, please unmute.

Maybe Jeff or Silke will come back, Ann. Let's try if there's any other questions.

Okay. That was the last one in the queue.

Okay. Terrific. Well, I appreciate everybody's time on the call this morning. We have completed a number of important initiatives to position RPM for a resurgence in profitability with growth as we get into 2010. As importantly, we continue to maintain a strong balance sheet and record levels of liquidity, both to help us successfully navigate the current economic climate, and also to have the flexibility as it relates to making small to medium acquisitions, maintaining our dividend, and being in a position of being able to tap the capital markets further when we find them favorable. We look forward to reporting our 2009 year-end earnings results and providing you with a more detailed outlook for our 2010 fiscal year on our investor call on July 27th, 2009. I want to conclude by thanking the RPM employees worldwide for their efforts during these challenging times to continue to serve our customers, and to thank all our investors for their participation in our call today. Thank you and have a great day.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation and you may now disconnect. Have a great day.