RPM International Inc (RPM) 2009 Q4 法說會逐字稿

Welcome to the RPM International conference call for the fiscal 2009 year end and fourth quarter. Today's call is being recorded. This call is also being webcast and can be accessed live or replayed on the RPM web site at www.rpminc.com.

Comments made 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 web site. (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, Louisa. Good morning. Welcome to RPM's conference call for the fiscal year ended May 31, 2009. This morning we will provide details on our 2009 fiscal year end and the fourth quarter ended May 31, 2009. We also will provide commentary on our outlook for our new fiscal year, 2010, which began on June 1 and then take your questions.

When my grandfather started RPM in 1947 he chose a June 1 start to his business year, realizing that with a very seasonal business if he had a strong summer and early fall he could confidently invest in growth initiatives and capital expansion for the rest of the year, also knowing he would finish the fiscal year in the spring just as the seasonal business was picking up. The thought behind the timing of RPM's fiscal year, combined with a deliberate balance between consumer and industrial companies and internal and acquisition growth, allowed RPM to achieve 61 straight years of growth.

Obviously, with the results we've released today that track record has now come to an end. While we expected 2009 to be a sluggish year, like many companies, nothing prepared us for the breadth and depth of the economic downturn experienced last fall. After operating at record levels through September of 2008, we were shocked by the dramatic slowdown in most of our businesses in October and November.

As a result, for the first time in my 20-year career at RPM we basically abandoned our operating plan at most RPM companies, suspended our earnings guidance, and focused all RPM businesses on appropriate expense reduction and cash flow generation. At the same time at the corporate level we focused our attention at enhancing our capital structure and maximizing liquidity.

The successful achievement of these recession-driven adjustments to our 2009 goals and objectives have now positioned RPM to perform better in 2010 despite the continuing economic challenges. Before commenting on our 2010 outlook, I would like to turn the call over to Kelly Tompkins, RPM's executive vice president and chief financial officer, to review our fourth quarter and 2009 results. Kelly?

Thanks, Frank, and good morning, everyone. Thanks for joining us on today's call. I will start with a review of the fourth quarter in some detail and then offer a few brief comments about our full-year results so we have ample time for your questions.

Please note, as well, as I review the income statement for the fourth quarter, the comments exclude the impact of impairment charges of $15.5 million incurred during the quarter, as well as the prior-year asbestos charge of $288 million. Looking at consolidated sales, were down 20.3% quarter-over-quarter to $857.3 million. Foreign exchange accounted for 5.7% of the decrease, due to the ongoing strength of the U.S. dollar during the quarter compared to a year ago, most notably against the euro and Canadian dollar. Significantly, unit volume declined 18.6%. Partially offsetting these declines were acquisition growth of 1%, and the benefit of prior-period price increases. Looking at our industrial segment, net sales of $536.1 million, accounted for approximately 63% of consolidated sales, declined 21.9% from last year largely driven by volume declines of 18.5% and unfavorable foreign exchange of 7.2%. Partially offsetting these declines were acquisitions, which contributed 1.6% to sales growth in the quarter. Consumer segment sales in the quarter of $321.2 million, or 37% of consolidated net sales, declined 17.6%. Unit volume was down by 18.8%, with unfavorable foreign exchange accounting for 3.2% of the decline, with these declines partially offset by prior period price increases.

Looking at gross margins for the quarter, on a consolidated basis, gross margins were 41.8%, down 60 basis points from the 42.4% level last year, due primarily to higher raw material costs, mix, and unfavorable overhead absorption due to sales declines, all of which was only partially offset by prior-period price increases.

In the industrial segment, quarter-over-quarter gross profit margin of 42.9% decreased 60 basis points from 43.5% last year, due primarily to volume declines and mix, which generally offset lower raw material costs year-over-year and prior-period price increases. The consumer segment gross profit margin of 39.9% decreased 40 basis points from 40.3% last year, due primarily to volume, mix and unfavorable raw material costs, which were only partially offset by prior-period price increases.

SG&A as a percent of net sales increased to 30.2% from last year's 29%, principally due to significant sales volume declines. However, in absolute dollars, SG&A expense actually declined $53.3 million or 17.1% from last year. Industrial segment SG&A as a percent of net sales increased to 33.4%, from 30.5% last year, also due to significant sales volume declines. In absolute dollars, however, SG&A increased in the industrial segment $29.9 million or 14.3%.

In the consumer segment, SG&A as a percent of sales was up slightly from last year to 23.6%, but, again, declined in absolute dollars by $14.9 million, or 16.4%. Corporate other expense decreased $8.5 million to $4.4 million, decreased 66%, from the $12.9 million last year due primarily to lower compensation expenses, certain reserve adjustments at our captive insurance companies and foreign exchange.

EBIT for the quarter decreased from $143.1 million, or 13.3% of net sales to $98.9 million or 11.5% of net sales due to significantly lower sales volumes across both segments and unfavorable foreign exchange. Industrial segment EBIT decreased from $89.4 million, or 13% of net sales, to $50.7 million, or 9.5% of net sales, principally due to lower unit volume and unfavorable foreign exchange. In the consumer segment, EBIT decreased from $66.7 million, or 17.1% of net sales, to $52.6 million, or 16.4% of net sales, due to the drop in sales volume.

Interest expense decreased $3.3 million from last year, driven by the conversion of our $150 million of senior convertible notes to equity, which occurred during the first quarter of this fiscal year, combined with lower average borrowings and lower interest rates year-over-year. Interest rates this quarter averaged 4.55% compared to 5.1% last year.

Looking at interest expense/(income net), the $6.6 million of expense this year compared to net investment income last year of $2.8 million, was principally due to other-than-temporary impairment charges of $7.1 million over last year's level to write-down marketable securities at our captive insurance companies combined with lower investment income. If market conditions do not deteriorate further we do not anticipate any further OTTI adjustments in fiscal 2010.

The effective tax rate for the quarter, again, excluding the impacts of one-timers, was 31.9% compared to 25.3% last year; the year-over-year change reflecting differences in projected U.S., state and local income taxes; valuation allowances associated with foreign tax credits; and foreign net operating losses, as well as our overall jurisdictional mix of income.

Adjusted net income of $54.6 million, or $0.43 per share, compared to net income of $97.5 million or $0.75 last year. Now for a few year-end/full-year comments, consolidated sales declined 7.6% year-over-year to $3.4 billion driven by unit volume declines of 9.9%, unfavorable foreign exchange of 3.4%, partially offset by acquisitions, net of last year's Bondo divestiture of 2.6%, and price of 3.1%.

Consolidated gross profit margin of 40.2% for the year was down 90 basis points from 41.1% last year, due principally to higher raw material costs along with unfavorable overhead absorption due to volume declines. SG&A as a percent of net sales increased to 32.6% from 30.8% last year, principally due to the deleveraging effect of lower unit volume, sales, severance costs of approximately $20.3 million, and higher relative SG&A associated with acquired businesses.

In absolute dollars, SG&A expense actually decreased $27.9 million, or 2.5%, year-over-year. Adjusted net income decreased from $232.8 million to $134.9 million, or 42.1%, as a result of nearly double-digit unit volume declines, unfavorable foreign exchange, higher raw material costs, reduction in forex costs as well as the other-than-temporary impairments at our captive insurance companies.

Now for a few comments on the balance sheet and cash flow, starting with the balance sheet. A couple of comments on asbestos. For the quarter, ended May 31, 2009, dismissals and settlements were 751 cases that were resolved compared to 664 for the same period last year.

Total payments for the quarter were $17.2 million, comprised of $10.7 million for indemnity and $6.5 million for defense, which compared to $15 million last year, which was $7.3 million of indemnity and $7.7 million for defense. At May 31, we had total active cases of 10,173, down from last year's 11,202. At May 31, our asbestos-related accrual stood at $490.3 million.

Capital expenditures for the year were $55 million, which compared to $71.8 million during the same period last year. Depreciation expense of $62.4 million was essentially flat to last year's $62.2 million. Likewise, amortization expense for the year was relatively flat at $22.8 million compared to $23.1 million last year. DSO for the quarter...rather for the full year, increased 1.1 days year-over-year, although we have not experienced any significant or unusual collection issues.

Days of inventory were up slightly by 2.5 days year-over-year primarily due to significant sales declines during the year. Finally, with some comments on our cash flow, operating cash flow was a record $267 million, up from last year's very strong operating cash flow of $234.7 million, primarily due to the excellent management of working capital at our operating units.

As a result of this effort, changes in working capital were a significant source of cash this year at $137.3 million versus a use of cash last year of $72.8 million. Cash from investing activities was $87.7 million better than last year due to lower acquisition activity this year, which was partially offset with cash generated from the sale of Bondo last year. Cash from financing activities declined $127 million due to stock repurchases this year and net additions to debt last year.

And finally, a few comments on our capital structure and overall liquidity, at May 31, total debt stood at $930.8 million compared with $1.07 billion of debt last year for a total reduction in debt of $142.8 million. Our net debt-to-cap ratio stood at 37.2% compared to 42.6% last year, with total long-term liquidity at $622 million, including $253 million of cash, $369 million through our bank revolver, which matures in December 2011, and our new three-year accounts receivable facility, which expires April 2012.

With that financial review, I'll turn the call back to Frank for a few closing comments and look forward to your questions.

Thank you, Kelly. As we finish 2009, which was clearly one of the more challenging years in the history of RPM, and think about a better outlook for 2010, I'm reminded of a 1981 movie called the "Cannonball Run," which was about a rally race across the United States.

In the movie, one of the participants was an Italian race car driver in a "suped-up" convertible sports car, who, at the beginning of the race, rips off the rear view mirror and throws it away. And his shocked companion looks at the driver and says, "What are you doing?" And he says, "What is behind me doesn't matter."

I suspect RPM will not be the only company who will be eager to put 2009 behind them as various fiscal years end in 2009. Having reduced the breakeven point of every RPM business, we are now poised to perform much better than we have over the last six months.

This is particularly true in our consumer businesses, which started to feel the impact of the recession as early as last June, and are now starting to see some recovery due to a pick-up in housing turnover, the movement of foreclosed homes, and some slight improvement on a region-by-region basis in home construction, all of which seems to be generating higher turnover in small projects, redecorating, maintenance and repair.

Our industrial businesses are still in the teeth of the recession, especially those businesses and product lines exposed to commercial construction and industrial capital spending. Having said that, we will see somewhat of a lesser bottom-line impact of sales declines due to the aggressive expense reduction actions taken in fiscal 2009, and due to some relief from the prior-year record highs of raw material costs.

As a result, we see for the first half of our 2010 fiscal year, the period from June 1 through November 30, 2009, our consumer segment sales up slightly driving a mid-teens earnings growth. Our industrial segment sales are expected to decline over this six-month period by about 10% to 15%, which will result in earnings in the industrial segment being down for the first six months in the 15% to 20% range.

On a consolidated basis, this means we expect RPM's first-half sales to be down around 10%, and first half earnings to be down in the 5% to 10% range. For the second half of our 2010 fiscal year, we see a significant percentage gain in earnings as our consumer businesses continue to post positive sales and earnings gains and as our industrial businesses begin to recover in the spring of 2010.

We will, however, only benefit slightly in the second half of the year from the non-recurrence of the severance charges and captive insurance company subsidiary investment portfolio write downs in 2009, charges which totaled about $35 million pre-tax.

These will be mostly offset in 2010 by higher corporate expense of approximately $20 million from estimated higher pension costs, higher incentive compensation and a collection of other items, as well as expected higher interest expense of $12 million to $13 million associated with a planned bond offering at the end of the first quarter or in the second quarter of this fiscal year.

When our year ends on May 31, 2010, we expect sales to be slightly up over the prior year and that earnings per share will be up somewhere in the 5% to 25% range on the adjusted 2009 EPS we reported today of $1.05. That concludes our prepared remarks. We will now be pleased to take your questions.

(Operator Instructions) Your 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. How are you?

Doing well. A couple of questions. Was there anything unusual in the consumer business in the fiscal fourth quarter last year, and that is the organic growth contraction seemed larger than I would have expected given what other companies dialing through the same do-it-yourself channels and big box retailers have reported?

No, in the fourth quarter of last year, we were operating at record levels. We started to feel a slowdown in our consumer businesses pretty much in June of last year, and have experienced that throughout the year. We started to see some positive bumpiness, if you will, this spring and that seems to be a very good trend here in the summer months in terms of slightly positive year-over-year sales growth and, obviously, significantly better earnings growth, mostly based upon expense-reduction actions we took last year.

Okay. In terms of raw material costs, it seems that raw materials moved lower in the industrial space and they are a little bit higher on the consumer side. On the consumer side, are those packaging or tin plate-related costs? Which things are higher, which things are lower? And what you expect that overall raw material costs should trend, for the Company as a whole, should trend lower or should trend higher going forward?

Raw material costs, as a whole, are below their peak prices of last summer when we were dealing with $140 oil and its implications on chemical raw materials and have come back to about where they were 15 months ago, which is certainly some relief, but, obviously, at historically high levels over the last five years. We did experience some packaging issues including tin plate, which you are aware of.

But the trend in the early part of 2010 is for a slight improvement both in our industrial businesses and our consumer businesses as it relates to raw material costs.

Okay. Then should we also see the gross margin improve in the coming quarters or is it too difficult given the order of volume decline that one may see on the industrial side?

Yes, it's hard to say. I would expect to see a gross margin improvement in our consumer businesses as a result of improvement in some raw material costs as well as a return to sales growth. I would expect our prime margin industrial businesses to trend more positively. But as for the gross margin it really depends on absorption issues relative to our conversion costs and where revenues come out.

And if I can ask the last question and then get back into queue, the, on the industrial side, how are the trends in June and July versus what you seen in the fourth quarter? Are they weaker or better, or are they the same?

Without getting too much in to the results of our first quarter, which we will provide when we release those results in the fall, we are tracking along the guidance that I talked about in my prepared remarks with consumer sales slightly up driving mid-teens earnings increase, and with our industrial businesses having sales declines that are not insignificant, certainly in the teens level, but because of the aggressive expense reduction actions we took last year, and some raw material relief, it looks like earnings declines will more closely mirror sales declines in our industrial segment, which is certainly not what we experienced in the last six months.

Okay. Thanks very much.

Thank you.

Our next question comes from the line of Kevin McCarthy with Banc of America Securities-Merrill Lynch. Please proceed.

Yes, good morning.

Good morning, Kevin.

Frank, I was wondering if you could walk us through your major product lines within industrial and comment on which ones you think are close to a bottom here or showing early signs of improvement and which areas you would expect residual pressure persisting in 2010?

I think in general the product lines that we have that are associated with commercial new construction have been challenged very aggressively in the late winter and throughout the spring months, and that continues. And we expect that to continue for another six to nine months.

That's principally our Tremco sealants-related product lines, our Dryvit product lines, and some businesses like that. Our businesses that are involved in major capital spending, principally in power generation, the product lines of Carboline, to a lesser extent Stonhard, are faring better in this environment.

And I think they are faring better for a principal reason that, versus the last recession we went through, many of our major product lines that serve industrial capital spending whether infrastructure, or power generation, are both benefiting from spending globally in those businesses and from the fact that they are more diversified both in terms of end markets and geographies today than they were back in the 2001, 2002 era. Se we're seeing a better performance out of those businesses and I think that's the reason why.

Then lastly, product areas like our Tremco roofing business and then also some product lines of Carboline, Fibergrate and Stonhard are performing pretty consistently given the fact that they serve more maintenance and repair markets as opposed to new construction or capital spending markets.

Okay. That's helpful. As a follow-up on the subject of pricing, what sort of contribution from price might you expect for the company as a whole in 2010 given what you are seeing in the markets as well as raw material trends?

I don't see a lot of contribution to pricing this year. What contributions we will have will relate -- will probably benefit us in the first three or four months of the year. Our last price increases were pretty much over the summer months or early fall of last year.

And so from a price perspective I would not expect a lot at this stage in the way of price increases. We certainly will look at that again if we face raw material issues like we have been dealing with for the last five years and like, in particular, on a spike basis we dealt with last summer.

Okay. And then finally, a couple of financial questions. What is your expected tax rate for 2010 and would you anticipate any material adjustments to the asbestos reserve this year?

We don't expect any material adjustments to the asbestos reserve, and our effective tax rate for the year will be about 32%.

Thank you very much.

Thank you.

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

Good morning, all.

Good morning.

Good morning, Rosemarie.

Frank, following up on Kevin's question regarding pricing, you don't expect any price increases. How about price declines as raw material costs are lower are you feeling the pressure to give some back?

Other than product mix, we think that pricing will be relatively stable. Again, we have been dealing with this as everybody in our industry, a five- or six-year cyclical up-trend in raw material costs and I've been working hard to try and catch up with some of that.

Our gross margin deterioration, unfortunately, I think makes it apparent that we have not been able to pass on in price the full extent of the raw material costs that we have received over that period. We do think that we will see some margin improvement particularly given the fact that we are down from what was a very high spike last summer.

And so our expectations for the year, are we getting pressure? Sure we are getting pressure. We do every year from all of our customers. And in this environment there is plenty of pressure in industrial markets where there are bid-type prospects and people are fighting for shrinking revenue pie. But in general we would expect the year from a pricing perspective to be neutral.

Okay. On the inventory reduction, it looks as though this is the major item that helped your cash flow generation, where do you stand in terms of being satisfied to the new, the level of inventories and what do you see in terms of inventory correction, or lack thereof, at this stage from your customers?

The inventory situation in the marketplace, first in our consumer businesses, has been cut back pretty aggressively to the point that we don't believe there is a lot more room for inventory cutbacks or reductions. Furthermore, if the last two or three months are any indication, with consumer pick-up or take-away in those categories improving somewhat, as well as some market share gains, we think that if anything there will be some pluses there.

The same is beginning to happen in our industrial businesses. A number of our industrial product lines are sold through distributors and there has been a very aggressive destocking this spring at the distribution level. That in part has been part of the reason why we had the disappointing sales results in terms of the percentage decline.

And we would expect that to basically shake out in the coming months as well, so that from a distribution inventory perspective in industrial, we will be back in a position where any uptick in business will require pretty good restocking relative to what has been going on for the last three months and we expect to continue for at least the next two or three months.

And you will be restocking as well or is this a new inventory level at which you can operate even if revenues pick up if (inaudible)?

I think the right way to think about inventory or working capital this year is our expectations for a very broad range of after-tax cash from operations that we would deliver in fiscal 2010. Somewhere in the neighborhood of $200 million to $250 million of after-tax cash from operations and while that's a pretty broad range, it really depends on the timing of any recovery in our industrial businesses.

Quite candidly, I hope we're at the lower end of that range because that will indicate some nice business recovery and the related working capital build in the spring of next year, without which you will see another very strong cash flow generation from RPM.

That $200 million to $250 million range really gets to your question, and so it's the second half of next year, and in particular the fourth quarter and where business activity is, particularly in our industrial businesses, that will determine the levels of both inventory specifically and working capital in general and its impact on our cash flow.

Okay, and then lastly, if I may, before I get back in line, continuing on with the consumer and the inventories, do you see that the demand that you have seen in the last two to three months, do you see those going out the door of your customers' stores or are they just plainly replenishing their very low inventories?

There are three things that are really helping us. Number one is some pickup in consumer take-away. And I think we attribute that to the fact that our products aren't used very much in new home construction, but they are driven by housing turnover.

It seems like the housing market on a region-by-region basis is hitting some bottoms. And so as housing turnover improves, as the sale of foreclosed homes picks up, that really drives redecorating and repair and maintenance activity that we believe we are starting to benefit from, number one.

Number two, it is on a product-line-by-product-line basis, related to inventory, because we do feel we are at inventory levels at most of our major product lines where there needs to be reordering to maintain adequate supply. And then, lastly, in market share, we have picked up significant market share in the automotive spray and touch-up sector in multiple categories from one of our principal competitors.

We've introduced a new product at one of our major accounts called 2X, which is a spray paint product that's got two-times the coverage of the typical spray paint products out there, in particular, products versus some of our competitors. That product is moving very nicely.

We've got some new primer business, which is moving well at the big boxes. It's both market share, and in all candor, it's improved sales over some market share loss a year ago that we've regained. So those are the three factors that both some improvement in take away, inventory levels as well as some market share gains that are helping our consumer businesses. We expect those trends to continue for the year.

Thank you very much. That was very helpful.

Thank you.

(Operator Instructions) Your next question comes from the line of Saul Ludwig with KeyBanc. Please proceed.

Hey, good morning, guys.

Good morning, Saul.

Just to make sure we are on the same page here, when you talk about your corporate expense being up $20 million, that is compared to the $42 million number in 2009 in the adjusted column?

I will have to get back to you on that. I got a sheet I can look at real quick. That's generally correct.

And that the interest being up $12 million, that's off of the $54 million shown on your consolidated income statement is where we are talking about interest expense?

That is also correct. And the interest expense rising is solely dependent upon a bond offering. We can be more specific and it will be much easier to model if and when we do a transaction and at what rates.

What's the assumption in the $12 million as to when and rate? And which you acknowledge may not come to pass, but what's the base assumption that's in the $12 million?

The assumption is a $250 million bond, effective September 1. And we will see where the rates are when we hit the market. As it relates to the corporate expense, Saul, there are really two factors there. One is an assumed higher pension expense that could be somewhere in the $6 million to $8 million range relative to what has happened in the market.

And then the second item is just related to compensation. Our cash compensation, both for proxy officers and across all RPM, we were accruing at normal levels through September and because we were basically on plan and operating at record levels.

Obviously, that didn't continue, so we recovered or reversed a lot of what was expected. We have a restricted stock plan that's been in place for about five or six years, which is called a performance earned restricted stock, which is entirely performance related. We did not meet that.

And so we are assuming some level of incentive compensation as well as some level of performance earned restricted stock achievement in the current plan. But time will tell for the year. Those are the two principal pieces behind that $20 million corporate expense increase and then the rest of it is kind of hodgepodge of $1 million here and $2 million there.

But the real reason for the reduction in the corporate expense fourth quarter from $13 million down to $4 million, was a reversion of incentive comp, would that be the biggest piece of that? And then Kelly said something about reserves in the captive insurance company that influenced this corporate expense number, could you give a little more color on that?

No. I can let Kelly comment on that.

But in terms of incentive in the second half of the year, and given our seasonality and all the activity in the third quarter for severance that was probably lost, but showed up more in the fourth quarter, did not pay out cash incentive comp, did not pay out PERS and we were in the middle of a three-year strategic plan program that had a slug of equity incentive tied to it and we wrote off a substantial portion of that because it's a strategic plan that ends May 31, 2010, and it is apparent that we will earn little if any of that form of compensation as well.

So the principal cause in the fourth quarter was compensation related.

Got you. And, Kelly, what was the thing on the captive insurance?

Saul, that was de minimis. Really, as Frank said, the comp expense adjustment was among the biggest items. There were a number of other small items but that was really the driver.

Okay. And then, Frank, about a year ago you guys made some meaningful acquisitions, I remember Flowcrete was one and then Prosytec, I guess, was another one, and Star Maling, and you've now had these in the hopper for a year or so, are they performing as expected or are they feeling the pinch of the economy to a greater extent than you thought when those deals were originally approved?

We have. I will comment on three acquisitions. Our Flowcrete acquisition, which is part of our performance coatings group, has actually performed quite well. A big chunk of their business is in the UK, they are UK based. Most of our UK businesses have been down as much or more than North America. In fact, Flowcrete has performed better than that. And so that business is doing better than we would expect.

The Prosytec business is part of the Tremco illbruck business and we've done some restructuring there. And so we've continued to perform as expected. Again, all of these businesses are somewhat down from where they were, but if you saw the details would be much better performing, for instance, than what you would expect out of UK business otherwise.

The one business that we acquired, whose timing wasn't very good, was Increte. Increte is a great strategic fit with our Euclid Chemical Company. They are one of the leaders in decorative concrete, but a big part of their market is professional application to residential or commercial patios, walkways, pool decks. And that business, from a revenue perspective, has performed very poorly for reasons that we understand related to the impact of the recession in the U.S., and they are principally a U.S. business on commercial and residential construction.

Finally, what's the CapEx and the D&A numbers expected for this year, Kelly?

Saul, we're looking at CapEx at about $25 million.

$25 million versus $55 million?

Yes.

Okay.

And depreciation and amortization aren't going to be materially different than fiscal 2009 levels. But CapEx will be down significantly from the $55 million this year.

Okay. And one other question, Frank, when you gave guidance on the third quarter call, where you were talking about fiscal 2010, I don't have it in front of me, but I saw a sort of single-point number like $1.25 --

That's correct.

Now you are sort of putting a bracket around that. Am I understanding it correctly?

Well, I think we have, Saul, more data. As you will recall, I said $1.25, but I also said that the first half of the year would be one in which sales declined by 10% on a consolidated basis and earnings would be down 30%. In fact, we think that our earnings performance will be better than that, perhaps much better than that. That's comparing to record levels of sales and earnings, not in the second quarter, but in the first half.

And so we think as a result of the expense reduction actions that we've seen and the slight turnaround, I don't want to overstate the turnaround, but when you have been fighting revenue declines or stagnation for almost 12 months, which we have in our consumer businesses, to start to see those numbers perk up, particularly with what we've done with break-even points and particularly given some marginal improvement in raw material costs, our businesses should generate significant profitability on any upturn in sales.

The other point I would make is that a portion of that $50 million in expense savings from the severance cost was a reduction of shifts.

So back to your comment on Kelly's guidance for the capital spending, we would have the ability on an uptick to meet increased demand by just adding shifts in most of our plants, which means we are in a big position or a good position to take advantage of any uptick in our businesses in our markets without having for some time to add to any capital.

Thank you very much.

Thank you.

(Operator Instructions) Your next question comes from the line of Edward Yang with Oppenheimer. Please proceed.

Hi, good morning.

Good morning, Ed.

Frank, if we look back on your comments about consumer in the last quarter's call, I think you had mentioned that March was also in terms of revenue in consumer was slightly up year-over-year and for the quarter consumer revenues were down, I guess, about 17% or so.

What changed between March, what happened in April and June to have that level decline, and related to that with your guidance for first half consumer revenues to be up slightly, how much visibility do you have in that?

Well, I think a couple of things have changed. In March, my comments were that we were starting to see some volatility, and if you follow trends volatility tends to be a point in time in which a trend gets set either up or down, and we are hopeful after 10 months of deteriorating performance, that this was maybe a sign that things were going to get better.

Secondly, a year ago we were in still relatively healthy economic times. And very candidly we had businesses that had a shot at hitting their plans and the related compensation programs. It was apparent this year by the end of the winter that with one or two exceptions there were very few RPM companies that had any chance of hitting their plans. As I mentioned, we abandoned, on a consolidated basis, any focus on our plan in the December/January timeframe and really focused our companies on expense reductions and cash generation.

I think our businesses delivered on our readjusted goals. But I think that's the answer. We really focused on cash generation, and we also had zero incentive all the way down to a sales level for incentive programs that, whether it's for myself or salespeople, are relatively leveraged to incentive on a year in which we were not going to come close to making plan almost anywhere.

So in March, consumer revenues were up slightly and they ended up down pretty substantially for the entire quarter. Was that an inventory issue at some of the big box retailers or are you saying that it was more of an incentive issue?

No, I think it was an inventory issue.

What's the likelihood that some of the positive signs you are seeing now in consumer and you are extrapolating out into the first half, could that also be an inventory issue as well?

It could be an inventory issue, but, again, we are starting to see, I say it could be an inventory issue, in part it is an inventory issue because there are certain categories and certain product lines across some of our consumer businesses that were just way low. You can't sell something when it's out of stock.

Like any business, we have A categories and B categories and C categories in terms of what moves pretty quickly. Things like white and black spray paint are pretty basic. Just to give you an example. So some of it was inventory related, but as the summer moves on, we think that what we are seeing here is for real.

As I said, it's not big, this isn't any big rebound in sales. But given the actions we took last year, on flat to slight improvement in sales year-over-year, and we are also anniversarying some easier comps for our consumer businesses throughout the year, we ought to be able to drive earnings pretty nicely as long as we don't fall back into a second round of demand destruction on a global economic basis.

Okay. And the captive insurance charge, what was that for the quarter? I think you were expecting something like $10 million before?

Yes, it was $7.7 million. So it was a little less than what we anticipated, but $7.7 million for the quarter.

And, Kelly, so what's the size of the investment portfolio now, and is there any possibility, again, going forward you might actually see some gains?

It's about, roughly $85 million, is the portfolio, and really largely it's going to depend, Ed, on the performance of the equity markets and the bond markets. But overall as indicated in my review of the quarter we do not anticipate any further, other-than-temporary, impairment charges. Whether or not there will be any gains is hard to say.

Okay. And what was the impetus behind the asset impairment charges?

We do our goodwill and intangible impairment testing, Ed, in the fourth quarter every year. We had one relatively small business unit in our industrial segment that had some impairment, it was largely goodwill. And then there was a small portion, about $0.5 million that was impairment on a trade name in one of the businesses.

But considering the fact that we've got about $850 million of goodwill on the balance sheet it's a relatively small amount of impairment for the quarter, or for the year.

Okay. Thank you very much.

Yes.

Thank you.

At this time, we have no further questions in the queue. I would like to turn the call back over to Mr. Frank Sullivan for any closing remarks. Sir?

Thank you. We appreciate your time on today's call. I also want to thank RPM employees worldwide who adjusted quite quickly to the deteriorated economic situation and focused on cash flow generation with a very strong balance sheet, record levels of cash flow and record levels of liquidity.

We have been pleased to navigate these challenging economic times without changes to our employee benefit programs, including our 401(k), its match, and our pension plan. And also, most importantly, for our investors to be able to navigate through the last six to nine months by maintaining our dividend, which I believe people can see now with our balance sheet, cash flow, liquidity, and forward-looking performance is a 35-year track record that we hope at some point to continue.

We are excited about 2010 and we expect when it's over to be a year of modest sales growth and significant earnings growth over 2009. We look forward to getting back to generating a new track record of consecutive years of sales earnings, earnings per share and dividend growth for RPM shareholders. Thank you, and have a great day.

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