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Executives

Frank Sullivan – Chairman and CEO

Bob Matejka – Senior Vice President and Chief Financial Officer

Barry Slifstein – Vice President and Controller

Analysts

Mike Sison – KeyBanc Capital Markets

Saul Ludwig – Northcoast Research

Rosemarie Morbelli – Ingalls & Snyder

Alex Ufrema – Bank of America-Merrill Lynch

Edward Yang – Oppenheimer

Greg Halter – Great Lakes Review

RPM International Inc. (RPM) Q2 2011 Earnings Call January 6, 2011 10:00 AM ET

Operator

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.

Frank Sullivan

Thank you, [Gina]. 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, Stonhard, Flowcrete, our Universal Sealants also had a more global footprint.

We are also experiencing a flattening out of construction chemical products and sealants 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, industry and many industries are in a [clear fight] within the global supply chain regarding availability of costs 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 some more details on the quarter. Bob?

Bob Matejka

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 are 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 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. The 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%.

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% 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, mostly due to better overall leverage on higher sales and lower corporate and other costs.

EBIT or earnings before interest and taxes, the dollars decreased, sorry, 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 reclass 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 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.

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 represent 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 Forex or 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 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 5.8% up.

Now, I’ll give you a few comments on the balance sheet and cash flow. The asbestos area once again just for you 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 last year, with approximately $5 million of that decrease attributable to the deconsolidation of SPHC.

On the receivables side, our day-to-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 last year. The change from last year’s combined -- is comprised of an 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 for 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 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 30th 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 loosen 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 comments -- 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.

Frank Sullivan

Thank you, Bob. We expect an improvement in our third quarter results on the topline 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 that the impact of raw material increased activity in anticipation of a challenging raw material environment that will not expected to get better, will not be meaningfully worse.

That means that while we do not expect any raw material price relief, indications are that the various material shortages have been precluded and any -- and the anywhere from 15% to 50% material price increases are now known or in many cases behind us.

And at our various product line 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 and other expenses should be down year-over-year in the second half of fiscal 2011, due to lower expense levels mentioned by Bob on our -- 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’d now be pleased to answer your questions.

Question-and-Answer Session

Operator

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

Frank Sullivan

Good morning, Mike.

Mike Sison – KeyBanc Capital Markets

Hi, guys. Nice quarter.

Frank Sullivan

Thank you.

Mike Sison – KeyBanc Capital Markets

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

Frank Sullivan

I think in relationship to our product lines and the nature of our product lines, which are small project patch repair and things like that, they have stabled 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 the first half of the year.

Mike Sison – KeyBanc Capital Markets

Okay. So the gross margin squeeze you saw in the second, I think, it was 150 basis points, which sound like was mostly raw materials. That shrinks in the third and then maybe in the fourth or even, then back to positive in the first quarter of ‘12?

Frank Sullivan

That’s our outlook now and my only hasn’t seen 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 disproportionally in the third quarter than in our other quarters.

Mike Sison – KeyBanc Capital Markets

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 sort of what you did historically mid to high single digits. Is that sort of what we need to look for?

Frank Sullivan

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 that’s 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 kind of our industry average by a couple points is a combination I think of our market position and our brand strength, as well as the downstream, if you will impact of leveraging product line acquisitions over existing sales force and distribution.

Mike Sison – KeyBanc Capital Markets

Okay. Thank you.

Frank Sullivan

Thank you.

Operator

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

Saul Ludwig – Northcoast Research

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

Bob Matejka

Yeah. The consumer growth?

Saul Ludwig – Northcoast Research

Consumer volume, price et cetera.

Bob Matejka

Yeah, yeah. We -- you know, the growth is negative 0.6. Acquisitions brought in about 0.8%. If you look at price, we think we had about half of a percent. Volume was probably down probably 1.4 and foreign exchange for industrial were about 0.6.

Saul Ludwig – Northcoast Research

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?

Bob Matejka

I think the cost increases are probably in the mid teens, cushion…

Saul Ludwig – Northcoast Research

How much?

Bob Matejka

15% and 20%.

Saul Ludwig – Northcoast Research

How much?

Frank Sullivan

15. It really depends, Saul. We have seen in the last six or nine months, you know, 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, been a very challenging environment depending on whether you’re buying 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 issues 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.

Saul Ludwig – Northcoast Research

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

Frank Sullivan

It was actually about 7.5 million year-over-year better and about 3 million of that was one-time items, insurance recovery, things that are not operational. The rest of it was really an improvement over insurance costs, lower corporate expense. So that’s a difference there on a go-forward basis.

Bob Matejka

Yeah. That should be recurring, that $3 million cost reduction that Frank spotted here…

Saul Ludwig – Northcoast Research

Yeah.

Bob Matejka

… but really, I think, I quoted the number 2.8, Saul.

Saul Ludwig – Northcoast Research

But its (inaudible) is ongoing and I think as you look quarterly, you probably should be expecting somewhere between let’s say 12.5 and 14 million is a normal spend rate.

Bob Matejka

Okay. The actual number was 6.6 million, to make it clear. The actual number was 6.6 million, yet it was down 7 million, that’s correct, the absolute number was 6.6.

Saul Ludwig – Northcoast Research

The 7.6 million is before the interest.

Bob Matejka

Interest, yeah. $1 million of interest in there..

Frank Sullivan

Which really is non-operational.

Saul Ludwig – Northcoast Research

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

Bob Matejka

I think you want to look more at like 12.5.

Saul Ludwig – Northcoast Research

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

Bob Matejka

Probably right.

Saul Ludwig – Northcoast Research

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

Bob Matejka

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, you know, a decade plus.

Saul Ludwig – Northcoast Research

Were they -- do you know what they were in this quarter compared to a year ago?

Bob Matejka

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.

Saul Ludwig – Northcoast Research

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

Bob Matejka

Correct.

Saul Ludwig – Northcoast Research

Gotcha. And then just finally on the whole asbestos thing, its part of SPHC, you certainly have a deep interest in the progress there. Anything you can report on -- I mean, have the committees been formed? Where do things stand in that saga?

Bob Matejka

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 to be a three or four process year process and there’s no reason to believe that’s still not true.

Saul Ludwig – Northcoast Research

Great. Thank you very much, guys.

Bob Matejka

Thank you.

Operator

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

Rosemarie Morbelli – Ingalls & Snyder

Good morning, all.

Frank Sullivan

Good morning.

Rosemarie Morbelli – Ingalls & Snyder

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

Frank Sullivan

You know, 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, you know, 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, you know, 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 installation. If we’re heavy on installation in the U.S., you’d expect a lower margin as a result and if we’re heavy in Europe or areas that they serve, they take care of the Middle East, Africa and whatnot, the margins would go up for the same kind of revenue dollar.

Rosemarie Morbelli – Ingalls & Snyder

Why wouldn’t you (inaudible) same way and have someone else do the installation in the U.S.?

Frank Sullivan

It’s really a competitive advantage for us both in the roofing business and the flooring business. Historically, where you would have a separate applicator from a material 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 predominantly North America, particularly in roofing. We take the whole contract, issues of 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.

Rosemarie Morbelli – Ingalls & Snyder

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?

Frank Sullivan

You know, I’d like to answer that, kind of a broad macroeconomic perspective. You know, 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 in marginal growth in more and more of our businesses suggests that hopefully the economic activity that we’re seeing, whether it’s a 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 kind of pre-crisis levels on a percentage basis is improving steadily.

Rosemarie Morbelli – Ingalls & Snyder

And when you look -- so you haven’t seen a slowdown in the improvement at the end -- after the end of the quarter, for example, all throughout the quarter?

Frank Sullivan

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. So -- and we would expect that to continue into the spring.

Rosemarie Morbelli – Ingalls & Snyder

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?

Frank Sullivan

I would tell you, Rosemarie, that, you know, the two areas that, you know, 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 stable -- 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 in the second half.

Rosemarie Morbelli – Ingalls & Snyder

I have a follow-up on that quickly on the raw materials side, you are seeing a stabilization that other companies are seeing continuing increasing raw materials albeit at a lower level.

Frank Sullivan

Yeah. I would go back to my comments. I think we feel as we sit here today based upon where raw materials are in terms of the, 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. 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.

Rosemarie Morbelli – Ingalls & Snyder

Okay. Thanks a lot.

Operator

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

Alex Ufrema – Bank of America-Merrill Lynch

Good morning. This is Alex Ufrema 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?

Frank Sullivan

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 pushback 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 are also -- 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, you know, 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 kind of where we are from a mix pricing perspective.

Alex Ufrema – Bank of America-Merrill Lynch

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?

Frank Sullivan

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, 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.

Alex Ufrema – Bank of America-Merrill Lynch

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

Frank Sullivan

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 peer 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, you know, silicon metals, that go into the production of silicon, 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.

You know, some of the chemical raw materials we buy, it seems that the increases and availability -- availability’s better. Increases are done and then there’s 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.

Alex Ufrema – Bank of America-Merrill Lynch

Great. Thanks a lot.

Frank Sullivan

Sure.

Operator

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

Edward Yang – 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 we 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 raw materials?

Frank Sullivan

First of all, we have not shifted our outlook or our guidance for the 2011 fiscal year. That $1.35 to $1.40, we’re still comfortable with that as we sit here today. As I mentioned earlier, Ed, you know, I think that the positive was we’re seeing a better and now as we sit here, slowly broadening pickup 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 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, you know, there’s been some interesting availability issues around plant closures and plant fires and, you know, 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.

Edward Yang – Oppenheimer

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

Frank Sullivan

About 4.5%.

Edward Yang – Oppenheimer

Yeah. I mean, 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.

Frank Sullivan

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

Edward Yang – Oppenheimer

Okay.

Frank Sullivan

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 and 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. You know, some are just stemming the tide of deterioration and some of them are experiencing actually double-digit, low double-digit volume growth.

Edward Yang – Oppenheimer

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

Frank Sullivan

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

Bob Matejka

Yeah. The industrial gross margin was 42.9.

Edward Yang – Oppenheimer

Okay.

Bob Matejka

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

Edward Yang – Oppenheimer

Yeah.

Bob Matejka

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

Edward Yang – Oppenheimer

Okay. So if it was 5.5 in the first quarter and about four or five this quarter 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. What 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 realtime basis in terms of raw material pressures?

Frank Sullivan

I would answer that in really three areas. Number one, keeping up pace with raw materials in certain categories that jump at 50% is hard, if not impossible. And so 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 rain 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 insulation revenues, whether in our roofing or flooring businesses, the insulation 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 order our ability to -- really based on whether we wanted to take the project at a certain price.

Edward Yang – Oppenheimer

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

Frank Sullivan

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 in some of our businesses. And on a steady as you go basis, I would expect our costs to remain in good shape and we’re appropriately continue to come down across a number of our businesses.

Edward Yang – Oppenheimer

You took out $2.8 million in expenses. I mean that seems like a big chunk, especially versus corporate and other, which is kind of range in the midteens the year before?

Bob Matejka

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

Frank Sullivan

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

Edward Yang – Oppenheimer

A little less on the head count or operating side, more on the insurance, insurance side or assumptions?

Frank Sullivan

Our insurance loss and premiums are down somewhat for the year. You know, you are 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 head count reduction activities going on a selected basis where it’s appropriate.

Edward Yang – Oppenheimer

Okay. Thank you very much.

Operator

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

Greg Halter – Great Lakes Review

Good morning.

Frank Sullivan

Good morning, Greg.

Greg Halter – Great Lakes Review

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.

Frank Sullivan

I can tell you in the consumer area, we have introduced just this last year a countertop kit, which is a couple hundred dollar 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 with 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 black top coating which is a unique formula that’s guaranteed for a longer period of time and perform substantially better in 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 we’re paying a higher price point for a better product. It’s also really the first presence for our Rust-Oleum division in the construction area of the major customers, which hopefully will open up some new opportunities for us in that category as well.

Greg Halter – Great Lakes Review

Okay. And your balance sheet with the net debt, I think 34%, is historic low, as you point out in the release, any changes in the foot there in terms of the structure on the balance sheet on what you may doing or if you have a preference to have higher debt or whatever…

Frank Sullivan

No, our debt levels right now are about 90%, 95% fixed. And so I think we’ve got 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 debt revolver for acquisition activity in the next couple of years. You know, 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’ve got the acquisition pipeline that if we can get things done, we’ll put that to use.

Greg Halter – Great Lakes Review

Okay. And in the quarter or six months, however you want to frame it, what percentage is the international and 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?

Frank Sullivan

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, you know, much of Europe is in the same shape as the U.S. or in some cases worse, the German economy has improved more quick, 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 continue to do well.

Greg Halter – Great Lakes Review

Okay. I think in the past, you have come in at 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?

Bob Matejka

You know, basically the share repurchase this quarter was about the same as last quarter. We did about 9 or 10 million in the first quarter, another 9 or 10 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 we have 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 17.5.

Greg Halter – Great Lakes Review

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?

Frank Sullivan

We -- as we indicated, we’ll initiate a CFO search here in the next month or two and that process, you know, can 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.

Greg Halter – Great Lakes Review

Okay. Great. Thanks.

Operator

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.

Frank Sullivan

Thank you, [Gina] 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.

Operator

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

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