RPM International Inc. F4Q09 (Qtr End 05/31/09) Earnings Call Transcript

| About: RPM International (RPM)

RPM International Inc. (NYSE:RPM)

F4Q09 Earnings Call

July 27, 2009 10:00 am ET

Executives

Frank C. Sullivan – Chairman and Chief Executive Officer

P. Kelly Tompkins – Executive Vice President and Chief Financial Officer

Analysts

[Silka Koopf] for Jeffrey Zekauskas - J.P. Morgan

Kevin McCarthy - BAS-ML

Rosemarie Morbelli - Ingalls & Snyder

Saul Ludwig - Keybanc Capital Markets

Edward Yang - Oppenheimer & Co.

Operator

Welcome to 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 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 report 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.

(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.

Frank C. Sullivan

Thank you [Louisa]. Good morning and 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 will also 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 that 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 the 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 on 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’d like to turn the call over to Kelly Tompkins, RPMs Executive Vice President and Chief Financial Officer to review our fourth quarter and 2009 results. Kelly?

P. Kelly Tompkins

Thanks Frank and good morning everyone. Thanks for joining us on today’s call. I’ll 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 at $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 accounting 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, principally due to other than temporary impairment charges of $7.1 million over last year’s level to write-down marketable securities and 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 ’10.

Effective tax rate for the quarter, again excluding the impact 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, the 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 de-leveraging 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 force costs as well as the other than temporary impairments at our captive insurance companies.

Now for a few comments on the balance sheet in 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 a 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 or 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.

And 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 the 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.

Frank C. Sullivan

Thank you Kelly. As we finished 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. And in the movie, one of the participants was an Italian racecar driver in a souped up Convertible sports car, who at the beginning of the race rips off the rearview mirror and throws it away. And his shocked companion looks at the driver and says, “What are you doing?” And he says, “What’s behind me doesn’t matter.”

I suspect RPM will not be the only company who will be eager to put 2009 behind them, as varied 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 for 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 project, 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 high 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 pose 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 of 2009, charges which totaled about $35 million pretax. 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 about $12 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, 2009, 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’d now be pleased to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Jeffrey Zekauskas - J.P. Morgan.

[Silka Koopf] for Jeffrey Zekauskas - J.P. Morgan

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 I can see much larger than I would have expected given, you know, what other companies selling through the same do-it-yourself channels and big bucks retailers have reported.

Frank C. Sullivan

No, we in the fourth quarter last year were operating at record levels. And you know 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 the expense reduction actions we took last year.

[Silka Koopf] for Jeffrey Zekauskas - J.P. Morgan

In terms of raw material costs, it seems that raw materials move slower in the Industrial space and they’re a little bit higher on the Consumer side. Are those on the Consumer side packaging or tinplate related costs or, you know, 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?

Frank C. Sullivan

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 tinplate which you’re 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.

[Silka Koopf] for Jeffrey Zekauskas - J.P. Morgan

And then should we also see the gross margin improve in the coming quarters? Or is it too difficult given the overall volume decline that one may see on the Industrial side?

Frank C. Sullivan

Yes, it’s hard to say. I would expect to see 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.

[Silka Koopf] for Jeffrey Zekauskas - J.P. Morgan

On the Industrial side, how are the trends in June and July versus what you’ve seen in the fourth quarter? Are there any weaker? Are they better? Are they the same?

Frank C. Sullivan

Without getting too much into the results of our first quarter, which we will provide and 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.

Operator

Your next question comes from Kevin McCarthy - BAS-ML.

Kevin McCarthy - BAS-ML

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 ones you would expect residual pressure persisting in 2010.

Frank C. Sullivan

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 Tremco sealants related product lines, our Dryvit product lines and so 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’re 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 it’s in the 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 area. So we’re seeing a better performance out of those businesses, and I think that’s the reason why.

And 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.

Kevin McCarthy - BAS-ML

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’re seeing in the markets as well as raw material trends?

Frank C. Sullivan

I don’t see a lot of contribution to pricing this year. What contributions we will have 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’ve been dealing with for the last five years and like, in particular on a spike basis we dealt with last summer.

Kevin McCarthy - BAS-ML

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?

Frank C. Sullivan

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

Operator

Your next question comes from Rosemarie Morbelli - Ingalls & Snyder.

Rosemarie Morbelli - Ingalls & Snyder

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?

Frank C. Sullivan

Other than product mix, you know, we think that pricing will be relatively stable. You know again we’ve been dealing with it as everybody in our industry, a five or six year cyclical uptrend in raw material costs and, you know, 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’ve received over that period. We do think that we will see some margin improvement, particularly given the fact that we are down from what were very high spike last summer, and so our expectations for the year. Are we getting pressure? Sure we’re getting pressure. We do every year from all of our customers. And in this environment there’s 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.

Rosemarie Morbelli - Ingalls & Snyder

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

Frank C. Sullivan

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’s a lot more room for inventory cutbacks or reductions. And furthermore, if the last two or three months are any indication, with Consumer pick up and takeaway in those categories improving somewhat as well as some market share gains, you know, we think that if anything there’ll 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 sales 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’ll be back in a position where any uptick in business will require pretty good restocking relative to what’s been going on for the last three months and we expect to continue for at least the next two or three months.

Rosemarie Morbelli - Ingalls & Snyder

And you will deal with stocking as well or is this a new inventory level at which you can operate even if revenues pick up?

Frank C. Sullivan

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’ll see another very strong cash flow generation from RPM.

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

Rosemarie Morbelli - Ingalls & Snyder

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?

Frank C. Sullivan

There’s three things that are really helping us. Number one is some pick up in consumer takeaway, and I think we attribute that to the fact that, you know, our products aren’t used very much in new home construction but they are driven by housing turnover. And so 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 maintenance activity that we believe we’re starting to benefit from. Number one.

Number two is on a product line by product line basis related to inventory, because we do feel we’re at inventory levels and most of our major product lines where there needs to be, you know, reordering to maintain an 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 [2 x], 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 and 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 its 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 takeaway, inventory levels, as well as some market share gains that are helping our Consumer businesses. And we expect those trends to continue for the year.

Operator

Your next question comes from Saul Ludwig - Keybanc Capital Markets.

Saul Ludwig - Keybanc Capital Markets

Just to make sure we’re 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 ’09 in the adjusted column?

P. Kelly Tompkins

That’s generally correct.

Saul Ludwig - Keybanc Capital Markets

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

P. Kelly Tompkins

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

Saul Ludwig - Keybanc Capital Markets

What’s the assumption in the $12 million as to when and rate? We acknowledge it may not come to pass, but what’s the base assumption that’s in the $12 million?

P. Kelly Tompkins

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, there’s really two factors there. One is an assumed higher pension expense that could be somewhere in the $6 to $8 million range relative to what’s 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. You know we were accruing at normal levels through September 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 restrictive 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 restrictive 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’s kind of a hodge podge of $1 million here and $2 million there.

Saul Ludwig - Keybanc Capital Markets

But the real reason for the reduction in the corporate expense in the 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?

Frank C. Sullivan

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 severance was probably lost but it showed up more in the fourth quarter. Did not pay out cash incentive comp. Did not pay out [fers] and we were in the middle of a three year strategic planned 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.

Saul Ludwig - Keybanc Capital Markets

Kelly, what was the thing on the captive insurance?

P. Kelly Tompkins

Saul, that was diminumous. Really as Frank said the comp expense adjustment was the single biggest item. A number of other small items, but that was really the driver.

Saul Ludwig - Keybanc Capital Markets

Hey, Frank, about a year ago you guys made some meaningful acquisitions. I remember Flowcrete was one and then [Prositek] I guess was another one and [Star Mauling], 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 economy to a greater extent than you thought when those deals were, you know, originally approved?

Frank C. Sullivan

We have. I’ll 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 and in fact Flowcrete has performed better than that. And so that business is doing better than we would expect.

The [Prositek] business is part of the Tremco illbruck business and we’ve done some restructuring there, and so we continue to perform as expected. And 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 EUCO chemical company. They’re 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’re principally a U.S. business on commercial and residential construction.

Saul Ludwig - Keybanc Capital Markets

And finally, what’s the CapEx and the D&A numbers expected for this year, Kelly?

P. Kelly Tompkins

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

Saul Ludwig - Keybanc Capital Markets

$25 versus $55?

P. Kelly Tompkins

Yes. And, you know, depreciation and amortization aren’t going to be materially different than fiscal ’09 levels. But CapEx will be down significantly from the $55 million this year.

Saul Ludwig - Keybanc Capital Markets

Frank, when you gave guidance on the third quarter call you were talking about fiscal ’10 and I don’t have it in front of me but I [saw] 10% of a single point number like $1.25 and now you’re sort of putting a bracket around that. Am I understanding it correctly?

Frank C. Sullivan

Well I think we had, Saul, more data. As you’ll recall I said $1.25, but I also said that the first half of the year would be one in which sales would decline 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. And that’s comparing to record levels of sales and earnings, not in the second quarter but 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 over state the turnaround but when you’ve 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 given what we’ve done with breakeven 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 on that is that a portion of that $50 million in expense savings from the severance costs 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’re 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.

Operator

Your next question comes from Edward Yang - Oppenheimer & Co.

Edward Yang - Oppenheimer & Co.

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 and 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 revenues to be up slightly, you know, how much visibility do you have in that?

Frank C. Sullivan

Well I think a couple of things have changed. In March my comments were that we were starting to see some volatility, you know, 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 were hopeful after 10 months of deteriorating performance that this is 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, you know, 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. I mean 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 for sales people are relatively leveraged to incentive in a year when we were not going to come close to making plan almost anywhere.

Edward Yang - Oppenheimer & Co.

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

Frank C. Sullivan

No, I think it was an inventory issue.

Edward Yang - Oppenheimer & Co.

What’s the likelihood that some of the positive signs you’re seeing now in Consumer and you’re extrapolating out into the first half, I mean, could that also be an inventory issue as well?

Frank C. Sullivan

It could be an inventory issue, but again we’re starting to see. I say it could be an inventory issue. In part it’s 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. And, you know, like in 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 an example.

So some of it was inventory related but as the summer moves on, you know, we think that what we’re seeing here is for real. It’s not 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’re also anniversaring some easier counts for our Consumer businesses throughout the year. We ought to be able to drive earnings up pretty nicely as long as we don’t fall back into a second round of demand destruction on a global economic basis.

Edward Yang - Oppenheimer & Co.

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

P. Kelly Tompkins

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

Edward Yang - Oppenheimer & Co.

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

P. Kelly Tompkins

It’s roughly $80, $85 million, 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 I indicated in my review of the quarter, we do not anticipate any further other than temporary impairment charges. Whether or not there’ll be any gains it’s hard to say.

Edward Yang - Oppenheimer & Co.

And what were the impetus behind the asset impairment charges?

P. Kelly Tompkins

Well we do our goodwill and intangible impairment testing, Ed, in the fourth quarter every year and we had, you know, 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, you know, a relatively small amount of impairment for the quarter.

Operator

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?

Frank C. Sullivan

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’ve 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, and 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.

Operator

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

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