RPM International Inc (RPM) 2011 Q2 法說會逐字稿

Welcome to RPM International's conference call for the fiscal 2011 second quarter. Today's call is being recorded. This call is also being webcast, and can be accessed live or replayed on the RPM website at www.RPMINC.com. Comments made on this call may include forward-looking statements based on current expectations that involve risks and uncertainties, which could cause actual results to differ materially. 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, Regina. Good morning, and welcome to RPM's second quarter investor conference call. On the call with me today are Bob Matejka, RPM's Senior Vice President and Chief Financial Officer, and Barry Slifstein, RPM's Vice President and Controller. After my opening remarks, Bob will provide you with some of the details on the quarter, and then we will take your questions.

Despite a very challenging business environment, we are continuing to make forward progress. We are seeing steady growth in our industrial maintenance product lines due to solid and continuing increases in industrial maintenance and capital spending, and the fact that the related business units, like our Carboline business, Stonhard, Flowcrete, or Universal Sealants, also had a more global footprint.

We are also experiencing a flattening out of construction chemical products and sealant product lines versus the significant declines that we've experienced over the last 18 to 24 months, and seeing some modest pickup in business activity today, versus the depressed levels of a year ago, and we see that slowly continuing to improve as well. Our consumer product lines are flat to slightly down, in part due to comparisons to record results of sales and earnings in the first half of last year, but continuing to hold market share gains, and on a relative basis, performing well.

Lastly, as you are all aware, our industry, and many industries, are in a fierce fight within the global supply chain regarding availability and cost of many base chemicals and metals and their impact on downstream raw materials, which in the second quarter, negatively impacted our ability to leverage our sales growth to our bottom line. I'll now turn the call over to Bob Matejka, RPM's Senior Vice President and Chief Financial Officer to provide you more details on the quarter. Bob?

Thanks, Frank, and good morning, everyone. Thanks for joining us on today's call. I'll review the results of our fiscal 2011 second quarter, touch upon a few balance sheet and cash flow measures, and turn it back to Frank for closing comments before we take your questions. All income statement comments that I'm going to speak to compare fiscal 2011 actual results to fiscal 2010 pro forma results, which exclude the results of Specialty Products Holding Corp, or SPHC. As you recall, SPHC was deconsolidated from RPM International, Inc. effective May 31, 2010.

Getting to the second quarter results, consolidated net sales increased 5.3% quarter-over-quarter to $826.3 million, and this is driven by a volume increase of 2.4%, price of 1%, and acquisition growth of about 2.8%. These increases were slightly offset by unfavorable foreign exchange of 0.9%.

In the industrial segment, sales of $582.5 million, which account for approximately 70% of our total sales, they increased 8% over last year with volume up 4.1%, price up about 1.2%, and acquisition growth of 3.7%. Partially offsetting these increases was negative foreign exchange of 1%. In the consumer segment, sales were $243.8 million. They were relatively flat year-over-year with slight increases in price and acquisition growth completely offset by foreign exchange and volume.

Our consolidated gross profit increased to $339.5 million from $334.4 million last year on volume increases, but decreased 150 basis points to 41.1% of net sales, primarily due to unfavorable raw material costs.

The industrial segment gross profit increased to $249.7 million from $237.6 million, also on volume increases, but declined 120 basis points to 42.9% of net sales, primarily due to a combination of unfavorable raw material costs and product mix. The consumer segment's gross profit of 36.8% declined 270 basis points, and that was due to higher raw material costs.

Our SG&A increased 1.1% to $250.1 million, and it was due to variable costs associated with the higher sales volume. As a percent of sales, SG&A decreased to 30.3% of sales from 31.5% of sales. That's a reduction of 120 basis points. It's mostly due to better overall leverage on higher sales and lower corporate and other costs.

EBIT, or earnings before interest and taxes, the dollars increased to $89.4 million this year from $87.1 million last year, due principally to higher sales volumes and better SG&A leverage, partially offset by higher raw material costs. Corporate and other expense was lower by approximately $7.6 million. This is due primarily to insurance recoveries of $2.9 million, ongoing expense improvements of $2.8 million, and lower acquisition-related costs of $1.8 million. On this $1.8 million reduction in acquisition costs for corporate, $1.2 million of it relates to a re-class we did in the prior year from industrial to consumer. As a percent of net sales, EBIT declined slightly from 11.1% to 10.8%.

Interest expense increased from $14.7 million last year to $16.5 million this year due to higher average borrowings. Investment income of $4.3 million this quarter improved from $2 million for the same period last year, and that's mainly due to higher interest income and gains on sales of marketable securities. The income tax rate of 30.8% for the quarter compared to last year's rate of 29.5%. This is principally due to the jurisdictional mix of actual and forecasted earnings and the impact of certain foreign operations on our U.S. taxes.

Net income attributable to RPM's shareholders increased to $48.8 million, that's $0.38 a share over the last year's earnings level when we delivered $47.7 million, which was $0.37 a share. The per share income represents a 2.7% increase.

I'll cover a few comments on the year-to-date results. Year-to-date consolidated net sales have increased 5.8% to $1.7 billion. It's driven by volume increases of 3.7%, acquisition growth of 2.7%, and price of 0.4%. These increases are partially offset by unfavorable foreign exchange of about 1%. The growth was driven by the industrial segment, which increased 8.7% year-over-year. Consumer segment was down 0.2%, and it's largely due to the lack of consumer confidence.

Consolidated gross profit for the year-to-date period increased to $714.9 million from $698.4 million last year on volume increases, but it decreased 140 basis points to 41.5% of net sales, primarily due to unfavorable raw material costs for this period. Net income attributable to RPM shareholders increased to $117.8 million, or $0.91 a share, over the same period last year, where income was $111.4 million, or $0.86 a share. The per share increase represents a 5.8% improvement.

Now I'll give you a few comments on the balance sheet and cash flow. The asbestos area, once again, just for your memory, on May 31, 2010, Bondex International, Inc. was deconsolidated with SPHC, its parent. And as a result, all of the related asbestos liabilities are no longer reflected on the balance sheet of RPM International. Additionally, no asbestos payments have been made since May 31, 2010, and no future payments are expected.

Our CapEx was $15.3 million for the first half of this year, compared to $8.3 million for the same period a year ago. Our depreciation and amortization, combined, for the first half totaled $36.7 million. That compares to $42.2 million last year, with approximately $5 million of that decrease attributable to the deconsolidation of SPHC. On the receivables side, our day sales outstanding stood at 58.6 and that compares to about 57.3 last year. While in the inventory area, we are pretty much flat year-over-year with 80 days of inventory sitting on our balance sheets.

Cash from operating activities through the second quarter were strong at $183.1 million compared to $184.7 million last year. The change from last year is comprised of the increase of $24 million resulting from no longer expending cash for asbestos indemnities or defense costs. And that is offset by $13 million in higher bonus payments in fiscal 2010 versus the minimal payment in fiscal 2009. Additionally, there's nearly $8 million of cash generation last year from SPHC, which is no longer within our cash flow, and lastly, $5 million more of cash was used for working capital.

Finally, a few comments on capital structure and overall liquidity, as of November 30, 2010, total debt was $925 million compared with $906 million, during the same period a year ago. Our net debt to capital ratio was 34.5% compared to 39.8% at May 31, 2010. Total long-term liquidity at November 30 was $808 million with $299 million in cash and $509 million available through our bank revolver and accounts receivable securitization facility.

Additionally, we are pleased to announce that yesterday, we replaced our current $400 million bank revolver, having a December 2011 maturity date, with the new four-year, $400 million credit facility, which is due in January of 2015. Significantly, the all-in spread and facility fees improved to 200 basis points from 250, and that's at our current public debt ratings. Our debt cap limitation was loosened under the new agreement to 60% from 55% on the old, fixed charge coverage ratio has been eliminated and the interest coverage ratio was held at 3.5 times.

And lastly, we would say that the affirmative and negative covenants for the new agreement are usual and customary for facilities of this nature and they are substantially consistent with the existing credit agreement that we replaced yesterday. With that, I'll turn the call back to Frank.

Thank you, Bob. We expect an improvement in our third-quarter results on the top line and bottom line versus last year. However, given the low seasonal nature of our third quarter and the fact that we generally have a slight bottom line loss because of that seasonality, our outlook for the spring economic environment and our fourth quarter performance will really drive our full year results. We are seeing and expect continuing improvement across more of our industrial segment businesses this spring, and with the impact of raw material, increased activity in anticipation of a challenging raw material environment, that while not expected to get better, will not be meaningfully worse.

That means while we do not expect any raw material price relief, indications are that the various material shortages have been concluded and the anywhere from 15% to 50% material price increases are now known or in many cases behind us. And at our various product lines, price increases will start to catch up to what up until now has been a behind the curve situation on the cost/price battle in the marketplace for the first half of fiscal 2011. These elements should result in a strong second-half performance, in particular from our industrial segment.

Our consumer segment businesses' second-half sales and earnings are expected to be roughly flat to slightly up in comparison to the strong results experienced last spring across these product lines, and in light of the raw material challenges we've discussed. Corporate/other expenses should be down year-over-year in the second half of fiscal 2011, due to lower expense levels mentioned by Bob in his comments, and our expectation of not incurring some of the one-time expense items related to extraordinary product warranty and an environmental charge that impacted last year's fourth quarter.

Despite this challenging environment, these expectations at this point make us comfortable in reaffirming our original target of $1.35 to $1.40 diluted earnings per share for RPM for the fiscal year ending May 31, 2011. That concludes our prepared remarks. We would now be pleased to answer your questions.

(Operator Instructions). Your first question today comes from the line of Mike Sison with KeyBanc Capital Markets.

Good morning, Mike.

Hi, guys. Nice quarter.

Thank you.

In terms of the consumer side, Frank, do you feel that things are stable at this point, and for the rest of the year maybe a little bit of an improvement here or there?

I think in relationship to our product lines and the nature of our product lines, which are small project, patch and repair, and things like that, they have flattened out versus a pretty strong recovery a year ago. Additionally, as we get deeper into calendar 2011, we will begin to have somewhat easier comparisons on the raw material side, as a year ago in the winter of 2010 and the fall of 2009, we and our whole industry saw some significant raw material price relief, and very quickly that turned around in the spring of last year and throughout this year. So, I think on the sales side, we would expect to see a slightly better sales performance in the second half in our consumer businesses than we've experienced in the first half of this year, and also a somewhat less impact of the price raw material situation that's obviously impacted us in the first half of the year.

Okay. So, the gross margin squeeze you saw in the second, I think it was 150 basis points, which it sounded like it was mostly raw materials. That shrinks in the third, and then maybe in the fourth you're even, then back to positive in the first quarter of 2012?

That's our outlook now. And my only hesitancy is the third quarter is a hard one to predict because it is a very seasonal low quarter for us, and we usually are marginally at a loss. And so it really depends on volume. If we have a better volume third quarter than we thought, we'll do better, because given the low seasonal nature of it, the absorption and overhead absorption of higher revenues help us a lot, and disproportionately in the third quarter than our other quarters.

Okay. Then, just a longer term question. When you think about heading into 2012, hoping things continue to improve, the growth potential in your sales basis should improve to what you did historically, mid to high single digits. Is that sort of what we need to look for?

That's our expectation, and it's really based on two things. Number one, just the core growth of our product lines and our competitive positioning, and the underlying growth of the markets that we serve. But secondly, our geographic presence is accelerating more quickly, and what has been a very small base is starting to grow, and our acquisition pipeline, relative to the kind of small and medium type of transactions that we do is in pretty good shape.

And so when you look historically, getting a good acquisition pipeline to where we can do four or five deals a year also serves to improve our internal growth because once we have annualized those product lines or small acquisitions, our ability to continue to accelerate their growth by leveraging those over our existing distribution or sales force is pretty powerful. So historically, our ability to outperform our industry average by a couple of points is a combination, I think, of our market positioning and our brand strength, as well as the downstream, if you will, impact of leveraging product line acquisitions over existing sales force and distribution.

Great, thank you.

Your next question comes from the line of Saul Ludwig with Northcoast Research.

Good morning. Bob, could you give us the consumer walk with volume, price? You just glazed over generalization. Do you have the specific numbers?

Yes, the consumer growth?

Consumer volume, price, et cetera.

Yes. The growth was negative 0.6%. Acquisitions brought in about 0.8%. If you look at price, we think we had about 0.5%. Volume was probably down about 1.4%, and foreign exchange burned us for about 0.6%.

Okay, good. Thank you. With regard to raw materials, do you have any idea as to, let's say on a unit basis, in the consumer sector and in the industrial sector, what was the raw material cost increase on a year-over-year basis? And what do you think about that in the back end of the year?

I think the cost increases, Saul, probably are in the mid teens, pushing -- .

How much?

15% to 20%.

How much?

It really depends, Saul. We have seen in the last six or nine months, some raw material costs go up 15%, some selective raw materials go up 50%. We've seen some allocation issues, which seem to be behind us, but it's been a very challenging raw material environment. It's really hard to get a handle. We have a sense of what the basis point impact was on the gross margins, which Bob or Barry would have.

But on a percentage basis across our 50 different business units, it's really hard to say because it's been a very challenging environment depending on whether you're buying seedlac for shellac, or zinc, for instance, for corrosion control coatings, and zinc prices have gone through the roof, copper for any marine-related coatings, let alone acrylic resins, epoxy resins, TiO2. So it's been a very challenging raw material environment. But we think that some of the allocations or availability issue is behind us, some of which seem pretty manufactured to us, and the price increase levels that have come, and what we're doing with pricing, we're going to start to catch up on what obviously has been a behind the curve raw material cost, and then our product pricing mix.

Okay. On the corporate expense, which was $6 million, $6.6 million in the quarter, what do you think that number looks like as we move in the third and fourth quarters?

It was actually about $7.5 million year-over-year better, and about $3 million of that was one-time items -- insurance recoveries, things that are non-operational. The rest of it was really an improvement, lower insurance costs, lower corporate expense. So that's a difference there, on a go-forward basis.

Yes, that should be recurring, that $3 million cost reduction that Frank spotted here, I think I quoted the number $2.8 million, Saul. That focus is ongoing, and I think as you look quarterly, you probably should be expecting somewhere between let's say $12.5 million and $14 million is a normal spend rate.

Okay. The actual number was $6.6 million, to make it clear. The actual number was $6.6 million, yes, it was down $7 million, that's correct, but the absolute number was $6.6 million.

The $7.6 million is before the interest.

Interest, yes. There's $1 million of interest in there.

Which really is non-operational.

Do you think this number going forward should be the $6.6 million, plus add the absence of the insurance recovery, gets you up to around $10 million?

I think you want to look more at like $12.5 million or so.

$10 million to $12 million, okay. Because I know in last year, in the third quarter -- .

Probably right.

Last year in the third quarter, it was $11 million, but then in the fourth quarter, it was only $7 million. Okay. Do you know what the -- is the warranty expense charged to corporate, or does that get back into the segment, which incurred the warranty costs?

Vast majority of our warranty expense is in our industrial sector. It's principally associated with our roofing and flooring product lines, where we're involved in both material supply and application, and where we are issuing warranties that last anywhere from a year out to a decade plus.

Do you know what they were in this quarter compared to a year ago?

They were down year-over-year from last year, and we would expect them to, as I commented on, to be down pretty meaningfully in the second half of the year.

Okay. And then finally, interest expense going forward, Bob, about the same level as we saw this quarter?

Correct.

Okay. And then just finally, on the whole asbestos thing, while you're -- it's part of SPHC, you certainly have a deep interest in the progress there. Anything you can report on -- have the committees been formed? Where do things stand in that saga?

There's very little to report, Saul. The committees have been established. We have regular monthly meetings. Not we. SPHC and Bondex have regular monthly meetings in front of the bankruptcy court. We're not party to that, and it is going as expected. And it is going as is typical, which is relatively slowly. And our original expectation is this would be a three to four year process, and there's no reason to believe that that's still not true.

Great. Thank you very much, guys.

Thank you.

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

Good morning, all.

Good morning.

Frank, you mentioned that the mix was down on the industrial side. Could you give us a feel for what it was exactly?

We're getting a little bit more installation than we had in the prior year, and that's driving the change, a portion of the change in the gross margin, Rosemarie. And with the industrial stuff, and things of a project nature, within the U.S., we do the installation. If it's a foreign, if it's a European flooring job, we don't do the installation. So, depending on where the projects happen, that mix can swing -- we can end up with the same revenue, but you'll have a swing between product margins, which are higher, and installations. If we're heavy on installation in the U.S., you would expect a lower margin as a result, and if we're heavy in Europe or areas that they serve, and they take care of the Middle East, Africa and whatnot, the margins would go up for the same kind of revenue dollar.

Why wouldn't you operate the same way, and have someone else do the installation in the U.S.?

It's been a competitive advantage for us, both in the roofing business and the flooring business. Historically, where you would have a separate applicator from a materials supplier, if there was a problem, the first thing the building owner faces is a finger-pointing game as to who is at fault. And so, particularly as a major supplier of both roofing materials and flooring materials in many regions of the world, but as Bob highlighted, certainly not all, and it's predominately North America, particularly in roofing. We take the whole contract, issue the warranty, and are responsible for the performance of the installed roof or the installed floor, and that's a real competitive advantage for us in most instances.

Okay. That is helpful. Could you give us a feel as to what you see in the housing market? I mean, there are more sales of existing homes. Is that beginning to show, to have an impact on your consumer business? And what are you seeing in terms of general new housing construction as opposed to commercial?

I would like to answer that in a broad macroeconomic perspective. We saw things pick up nicely last spring in our fourth quarter, and in hindsight, it feels like a head fake. And whether it was driven by some of the tax benefits around auto sales, or tax benefits around the housing credits or things like that, certainly things slowed back down in the summer and the fall. And slowed back down also included a deterioration in housing turnover this fall.

What we're seeing now feels a little more sustainable because the breadth of our improvement, while it's not terribly exciting in some businesses, but to see some of our construction products show some flat or even up 2% or 3% revenues versus four or six quarters of significant declines is helpful. The fact that we're seeing stability and marginal growth in more and more of our businesses suggests that hopefully the economic activity that we're seeing, whether it's at retail takeaway or impacted by housing turnover, is more solid. It's certainly not exciting, but it's more solid. The only place that we're seeing really significant growth that's continuing is related essentially to industrial capital spending, and industrial maintenance spending, which while it's not back to pre-crisis levels, on a percentage basis is improving steadily.

So you haven't seen a slowdown in the improvement after the end of the quarter, for example, or throughout the quarter?

No, as I said in my earlier comments, we are actually seeing, in our industrial segment, more stability across more of our business units as opposed to less. And we would expect that to continue into the spring.

Okay, and then lastly, if I may, did you do better than expected, or not as well as you expected in certain areas in the second quarter? Any surprises?

I would tell you, Rosemarie, that the two areas that, the plus and the minus, I think that our industrial segment sales up 8%, and what we continue to see as we sit here today is a little bit more robust, and starting to be a little bit broader than we anticipated. But the raw material situation was a little, negatively more, deeper, and hung on for longer relative to our pricing action than we had anticipated as well. So, the two kind of offset each other. Hopefully, our pricing actions and the market for raw materials and a little bit of stability at these much higher prices, combined with better growth in the second half, that we really are in a sustainable economic recovery, will have a positive impact here in the second half.

Briefly, if I may follow up on that quickly on the raw materials side, you are seeing a stabilization that other companies are seeing a continuing increase in raw materials, albeit at a lower level.

Yes, I would go back to my comments. We feel, as we sit here today, based upon where raw materials are in terms of what we've experienced, and also what we know. And what we know are related to some chemical raw materials, some packaging materials of recent price increase announcements, some of which have yet to impact us. So, it's really a function of where we've been and where raw material prices have been, also what we anticipate because there are some recent price increases. And also in relationship to availability, which over the last 12 months, there was actually some shortages or some availability issues, most of which have been cleaned up.

Okay. Thanks a lot.

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

Good morning. This is Alex Ufremma for Kevin. Frank, could you talk about your pricing efforts on the consumer side? Have you been able to raise prices so far? If not, are you expecting any step change in the next months or so?

We have had some price increase activity, probably a year and a half ago, maybe a little less than that, and then had some real push-back when raw material prices improved. And just now are back to getting some pricing increases across our consumer product lines that should positively impact the first half of -- well, all of calendar 2011, relative to where we sit today. And we have been and are continuing to impact price increases in our industrial segment.

The two offsets to that are really the mix issue that Bob talked about, and in some areas, the last year has been very competitive to the detriment of gross margins on major projects. Highway bridge projects, things like that, infrastructure projects to the extent that they have been out there in a weaker demand environment, the competition and number of bids have been extraordinary. So that's where we are from a mix pricing perspective.

On the consumer side, do you feel that you pass through your cost increases, or there's still margin compression after you implement those price increases?

I think that you will slowly see it into the fourth quarter stem the tide on the gross margin deterioration, but we have been behind the curve, particularly in consumer as is evident in our results, is evident quite honestly across our whole industry, between the raw material cost increases and availability issues, and our ability to pass on sufficient price to protect our margins.

It is our expectation from the comments that we've prepared that with what's happened and what we know and where we are, that we should be able to stem the tide on further compression. Our goal would be to regain a significant portion of that lost gross margin. That's going to take a lot of time, and it's going to be a real challenge.

And finally, Frank, could you give us some more color on your individual raw material categories? What are the top categories, maybe by pigments, resins, solids, et cetera?

We're probably not the best company -- first of all, we wouldn't disclose that by a particular category, but we don't have the same concentrations as some of our bigger peers who have more pure plays in architectural coatings or OEM coatings. I could tell you that resins, TiO2, aluminum cans, copper, zinc, it's been pretty extraordinary in terms of, I think the impact of China on the base metals globally, and so whether it's silicone metals that go into the production of silicone, whether it's zinc that goes into corrosion control coatings, whether it's copper that goes into some marine bottom paints, all of those have seen extraordinary increases.

Some of the chemical raw materials we buy, it seems that the increases and availability -- availability's better. Increases are done. And then there are other things like TiO2 where there continue to be efforts to raise the prices. But we don't have the concentrations. We probably have a broader exposure to a broader base of raw materials than most of our big peers, but not the same concentrations that most of them have.

Great. Thanks a lot.

Sure.

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

Hi, I have a couple of questions. First, on the raw materials side, it seemed like it was worse than expected, because last quarter I think you were expecting those pressures to have peaked, and now you expect those pressures to continue throughout the rest of the year. But you've kept your EPS guidance unchanged. So, what was the offset to keep the outlook constant? Was it pricing, expense reductions, one-timers, or have you shifted your outlook within that $1.35 to $1.40 range due to the raw materials?

First of all, we have not shifted our outlook or our guidance for the 2011 fiscal year from that $1.35 to $1.40, we're still comfortable with that as we sit here today. As I mentioned earlier, Ed, I think that the positive was, we're seeing a better, and now as we sit here, slowly broadening pick up on the revenue side in our industrial businesses. The negative was, the raw material situation was somewhat worse and longer lasting than we thought.

We think with what we know and where we sit and what our pricing action is, is that deterioration is going to be stemmed somewhat in the second half, and so that's the basis for maintaining our guidance. And I think we're very comfortable with that as we sit here today. Obviously, if there's some dramatic changes in availability, there's been some interesting availability issues around plant closures and plant fires, and how that all shakes out is hard to know, and how it all happened and whether it was organized or incidental, who knows. But as we sit here today, we're comfortable with our guidance. And I think we're also comfortable that the worst part of the gross margin raw material price challenge is behind us.

Okay, and I missed this, but what was the organic volume growth in industrial this quarter?

About 4% or 5%.

Yes, if I look at that, your organic volume growth in the first quarter was 7.4%, so it sounds like it's slowed a bit.

I would have to look at that. That sounds high to me, but --.

Okay.

But you have to keep in mind that in our industrial segment, the roofing business and the maintenance coatings and industrial capital spending related products are doing better, and the construction chemicals, sealant products, and a lot of the base waterproofing stuff have just stopped their deterioration. So, within our 50 different business units, it's a different story. Some are just stemming the tide of deterioration, and some of them are experiencing actually double-digit, low double-digit volume growth.

Okay, and I missed this as well, but was industrial gross margin, what was that? Did that go up or down this quarter?

Industrial gross margin went down. Bob can give you the details.

The industrial gross margin was 42.9%.

Okay.

Compared to about 44.1% a year ago. And you mentioned organic growth in the first quarter industrial.

Yes.

It was really just a little bit over 5.5%. I'm not sure where your numbers came from.

Okay. So if it was 5.5% in the first quarter, and about 4% or 5% this quarter, it was relatively stable. Okay.

On the industrial margin side, gross margin side, you had positive organic growth, and your margins declined, and it seems like that was due to the raw materials. But I always thought that at least in the industrial side of the business, you had enough pricing power where you could keep up pace almost on a real-time basis in terms of raw material pressures.

I would answer that in really three areas. Number one, keeping up pace with raw materials in certain categories that are jumping 50% is hard, if not impossible. For instance, in a portion of our corrosion control coatings, zinc is a heavy base for corrosion control primers, and the zinc prices have gone through the roof. We're involved in some marine coatings businesses, copper prices have gone through the roof, so our ability to keep up has not happened, and I don't think that's unique to us. It's been an interesting struggle, not only in our industry, but a lot of industries.

Secondly, as Bob commented, some of it's mix. So it's not an issue of price. It's an issue of product mix. And to the extent that we had some higher revenue installation, or installation revenues, whether in our roofing or flooring businesses, the installation revenues have a substantially lower gross margin than our product sales.

And then the last area I had commented on earlier is, in some categories, not a big part of what we do, but in some categories where we're bidding on major projects, some of the infrastructure projects, highway bridge work, given the economic deterioration, the competition on some of that project work was fierce. And so very often we were making choices of supplying it or not, not based on our ability to -- really based on whether we wanted to take the project at a certain price.

Okay, and lastly for me, seems like you had some good success on the expense reduction side this quarter. Was that a big initiative on your part? Is that ongoing, or are there other opportunities for you to take out further costs?

There are other opportunities. It's ongoing. It's not a big initiative. I think the big initiative that we undertook was like most companies in the midst of the financial crisis, but we have taken costs out at corporate. We've been able to reduce some costs on a selective basis at some of our businesses. And on a steady as you go basis, I would expect our costs to remain in good shape, and where appropriate, continue to come down across a number of our businesses.

You took out $2.8 million in expenses. That seems like a big chunk, especially versus corporate and other, which has ranged in the mid-teens the year before.

In cost control and risk control on the insurance side, be it workers' comp insurance, be it our product liability insurances and losses in that area, and that's -- it could seem like a small initiative, but we've been able to get roughly a couple million bucks out of that in this quarter. So -- .

But yes, I think that's ongoing. There's no big initiative, but it's ongoing, and you should expect to see that --.

A little less on the headcount or operating side, more on the insurance side or assumptions.

Insurance costs.

And premiums are down somewhat for the year, you're seeing some expense reductions in terms of SG&A areas, particularly in some of our businesses that are still challenged, and there are still some headcount reduction activities going on in a selected basis where it's appropriate.

Okay, thank you very much.

(Operator Instructions). Your next question comes from the line of Greg Halter with Great Lakes Review.

Good morning.

Good morning, Greg.

Wondered if you could detail any new products you may have on the consumer side that you might be introducing in the next year or so.

I can tell you in the consumer area, we have introduced just this last year a countertop kit, which is a $200 kit, which is pretty unique in terms of its price point in the paint aisle, that allows people to take old Formica or wood, and turn it into something that looks very much like granite. We are looking at some similar products that will be introduced this spring in touch-up and repair, but major kits. And we have also moved, which is interesting for us, Rust-Oleum in the last year into the construction aisles of some of their big customers.

There is a blacktop coating, which is a unique formula that's guaranteed for a longer period of time, and performs substantially better than kind of the asphalt products that are on the market. Its price point is substantially higher than the common products, and its initial consumer takeaway has been very good.

So we're excited about that from two perspectives. Number one, it's a new product that some of our customers are really pleased with, because it's moving. Consumers are obviously really pleased with it because they're paying a higher price point for a better product. And it's also really the first presence for our Rust-Oleum division in the construction area of their major customers, which hopefully will open up some new opportunities for us in that category as well.

Okay, and your balance sheet with a net debt, I think 34%, is a historic low, as you point out in the release. Any changes afoot there in terms of the structure of the balance sheet on what you may do, if you have a preference to have higher debt or whatever -- .

No, our debt levels right now are about 90%, 95% are fixed, and so I think we have a real strong capital structure. As Bob indicated, we just refinanced our revolver, so that is a committed facility out to January of 2015. I would expect that we would utilize that revolver for acquisition activity in the next couple of years. We've talked about our goal of achieving $5 billion in revenues by 2015, by the end of 2015, and that would suggest that we would utilize that $400 million facility pretty meaningfully over the next couple of years. And I think we have the acquisition pipeline that if we could get things done, we'll put that to use.

Okay, and in the quarter or six months, however you want to frame it, what percentage is the international of the total now, and what kind of growth have you shown there either in the quarter or the first six months on a year-over-year basis?

About 30% revenues from outside of North America, and I don't have the percent growth, although I can assure you it's higher than what we're experiencing in the U.S. Interestingly enough, we've had real strong growth in Germany, where we have our largest European presence. And while much of Europe is in the same shape as the U.S., or in some cases worse, the German economy has improved more quickly, sooner and better really than the U.S. And a lot of what we do over there is in our building solutions group related to building components and sealants and construction for energy efficiency, and those product lines have continued to do well.

Okay, and I think in the past, you've commented about option creep, something that you would like to keep neutralized through a share repurchase. Anything, any shares repurchased in the quarter? And what are your thoughts on that whole philosophy, your thought process?

Basically, the share repurchase this quarter was about the same as last quarter. We did about $9 million or $10 million in the first quarter, another $9 million or $10 million this quarter, but our repurchase really should neutralize any option program issues, but the reason we had it up to like $20 million was that, when we got down to a $16 price. At that point, it seemed appropriate that we should go in there and take some shares off the table. That's essentially come to a stop now.

In the first half of the year, we acquired about a million shares at an average price of about $17.50.

Okay. And one last one, I think you had indicated in early 2011, which we're in now, that you would be conducting a CFO search. Just wondered about the status of that effort.

As we indicated, we'll initiate a CFO search here in the next month or two, and that process could take four or six months, or it could take 12 months. Fortunately, Bob is robust and enthusiastic, and willing to continue in his role for the next year in a transitional period, or in the next two years in a transitional period, pretty much based on finding the right person to fill that role on a more permanent basis.

Okay, great. Thanks.

This concludes the question and answer portion of the call. I would like to turn the call back over to Mr. Sullivan for closing remarks.

Thank you, Regina. And thank you all for participating on our investor call this morning. We're looking forward to delivering an improving performance, and a strong finish to our 2011 fiscal year. Thank you also to the RPM employees around the globe whose commitment and dedication is keeping us moving forward in this challenging environment, and lastly, thank you for your interest and investment in RPM. Happy New Year.

Ladies and gentlemen, thank you for your participation in today's call. This concludes our presentation, and you may now disconnect. Have a wonderful day.