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RPM International Inc. (NYSE:RPM)

F2Q08 Earnings Call

January 8, 2008 10:00 am ET

Executives

Frank C. Sullivan – President, Chief Executive Officer, Director

Earnest P. Thomas – Chief Financial Officer, Senior Vice President

Analysts

Jeffery Zekauskas – JP Morgan Securities

Vital Aelion – Banc of America Securities

Rosemarie Morbelli – Ingalls & Synder LLC

Daniel Rizzo from Sidoti & Co.

Edward H. Yang – CIBC World Markets Corp.

Saul Ludwig – Keybanc Capital Markets

Rick Platte - Schwartz Investment Counsel

Hugh Denison – Heartland Funds

Greg Halter - Great Lakes Review

Amy Norflus - Pilot

Operator

Welcome to theRPM International conference call for the fiscal 2008 second quarter. Today’s call is being recorded. This call is also being webcast and can be accessed live or replayed on theRPM website atwww.RPMInc.com. Comments made on this call may include forward-looking statements based on current expectations that involve risk and uncertainties which could cause actual results to be materially different. For more information for 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 measures, 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 President and CEO, Mr. Frank Sullivan for opening remarks. Please go ahead sir.

Frank C. Sullivan

Good morning. We’re pleased to report another quarter of strong operating results from the RPM companies.

Our current quarter and year-to-date results are evidence of the continuing good performance in our industrial businesses, principally as a result of the maintenance and renovation nature of most of RPM product lines. Also, our strong presence in heavy industrial markets including oil and gas, power generation, and aerospace, to name a few examples of strong markets for our industrial product lines, our growing presence in marine, and finally our continuing focus on growing in international markets.

While our consumer business had strong results in the second quarter, much of this is the result of weaker comparisons to our second quarter in FY 2007, and really back to the hurricane impacted poor results of our consumer business in the second quarter of our 2006 fiscal year. Our core consumer businesses remain challenged by a difficult retail environment, a slowdown in residential new construction, and for RPM’s businesses, most importantly, a slowdown in housing turnover.

Having said that, the major portion of our consumer product lines are focused on maintenance, energy efficiency, patch and repair, and small project renovation and redecorating. These characteristics, combined with the successful introduction of a number of new products, have resulted in underlying sales growth in our consumer product lines which is flat to slightly up in an environment where comp store sales at our major retail accounts in general are down in the mid to single digit range across most of their categories.

These dynamics of RPM’s industrial and consumer businesses combined with a proven ability to complete and integrate small to medium sized company and product line acquisitions, allow us to competently forecast continuing positive sales and earnings growth for the balance of this fiscal year, even if underlying North American economic conditions continue to deteriorate.

I would now like to turn the call over to Ernie Thomas, RPM’s Senior Vice President and Chief Financial Officer, to provide you with the details of our second quarter financial performance after which we will answer your questions.

Earnest T. Thomas

Good morning everyone. I’ll begin with a review of our second quarter operating results compared with the same period a year ago. Then I will discuss our six month results, followed by highlights from our balance sheet and cash flow statement. All of my comments will exclude the $2.2 million gain on the sale of our Bondo subsidiary, and the previously disclosed $15 million settlement for asbestos related claims which occurred during last year’s second fiscal quarter.

Fiscal 2007 second quarter net sales grew 11.9% year-over-year, to a record second quarter sales level of $905.7 million. Eighth small acquisitions net of the Bondo sale represented 2.6% of the growth in net sales. Organic sales growth amounted to 9.33% or $75.6 million of the improvement in consolidated net sales including pricing of 1.6%. Net favorable foreign exchange totaled 3.6% of the growth and net sales coming principally from a stronger Euro, but also from the Canadian dollar, and to a lesser extent, from Latin American, and Asia Pacific and other currencies. The industrial segment net sales of $605.2 million grew 14.5% over last year’s second quarter total.

Six acquisitions completed during the last 12 months represented 2.9% of the industrial segment net sales growth year-over-year. Organic growth in the industrial segment represented 11.6% of the net sales improvement which included pricing of 2.1%, and the impact of net favorable foreign exchange which represented 4.5% of the industrial segment sales improvement.

Pure organic unit growth was 5% for the quarter, and was due primarily to the introduction of new products, and the traditional roofing business, renewed strength in renovation projects, and increases in polymer flooring and other industrial maintenance projects. The following industrial segment product lines all registered double digit growth for the second quarter: flooring, coatings, and roofing products and corrosion control coatings. Consumer segment net sales $300.6 million for the quarter were up 7% from last year’s second quarter total. Organic sales growth in this segment represented 5% of the consumer net sales improvement quarter-over-quarter, including 2% from net favorable foreign exchange and pricing of .6%.

While retail buying behavior was slow during the quarter mainly reflecting a slowing economy, and the continued slump in the housing sector, the combination of the consumer segments various new product offerings, and the diversity of its end markets which mainly include repair and maintenance products, resulted in solid sales growth for this segment versus the prior year. The balance of the consumer segment sales increase representing 2% of the growth in consumer net sales over last year’s second quarter resulted from two product line acquisitions net of one divestiture.

Our gross profit margin of 40.6% in the current quarter improved from last year’s second quarter margin off 40.3% or about 30 basis points due mainly to additional price increases which came into effect after last year’s second quarter, and operating leverage from the organic sales growth. There are also continued rising prices in certain key raw materials this quarter due primarily to higher energy costs. These cost increases included plasticizers, solvent, epoxies, resins, polyos, TVI, silicone, and monomers. Lagging selling price increases have begun to positively impact margins. In addition, we have seen the prices of some materials declining in recent months. Copper for example, and [seedlack].

Industrial segment of gross margin remains steady at 42%, largely reflecting the price increases previously mentioned. Consumer segment gross margin of 37.8% in the current quarter up 70 basis points from 37.1% a year ago practically reflecting productivity gains from the increased sales activity and selling price increases, and to a lesser degree favorable product mix.

SG&A expenses decreased to 30.6% of sales this year from 30.9% last year. Corporate and other expenses decreased from $11.8 million down from $15.2 million last year. This decrease essentially reflects reduction in certain loss contingencies combined with net foreign exchange gains which more than offset higher employee benefit costs. The industrial segment SG&A remains steady as a percent of sales at 29.8%, while consumer segment SG&A increased to 28.3% from last year’s 27.4%.

Earnings before interest and taxes or EBIT grew to $14.4 or 18.9% for margin on sales of 10% compared with a margin on sales of 9.4% last year. Again reflecting the aforementioned selling price increases and the effect of operating leverage. Interest expense net up $.8 million quarter-on-quarter reflects higher average borrowings partially offset by additional investment income this year, and slight decreases in our overall interest rates on our variable debt. Overall rates averaged 5.4% in the current quarter compared with 5.5% last year.

Our effective tax rate for the second quarter of 32.2% compares to 33.9% last year. The lower effective tax rate to the current period is due to lower tax rates on foreign sourced income, tax credits, and to a higher domestic manufacturing deduction in the current period.

Net income of $53.5 million represents record earnings for our second fiscal quarter increasing 24.3% from last year’s adjusted $43.1 million with a net margin on sales of 5.9% compared to 5.3% a year ago. Diluted EPS $0.42 this year also represents a record for our fiscal second quarter up 23.5% compared with last year’s adjusted $0.34 per share.

A few comments on the six months. Net sales year-to-date grew 11% versus last year to a record sales level of $1.84 million. Our gross profit margin of 40.9% this fiscal year up 30 basis points from 40.6% a year ago, again reflecting price increases and the effect of sales volume on operating leverage which more than offset higher material costs. Net income for the six month period $121.8 million represents a record earnings for the first half increasing 16.6% from last year’s adjusted total $104.4 million, resulting in a net margin on sales of 6.6% compared with 6.3% a year ago.

A few comments on our balance sheet. Our net receivables were up $60.3 million versus last year. Acquisitions net of a Bondo sale caused a slight decrease of $2.1 million. Foreign exchange accounted for $20.6 million of the increase and the balance $41.8 million was due to higher sales activity in the current period.

Inventories were up $27 million versus last year. Acquisitions added $2.8 of this increase. Foreign exchange accounted for $13.9 million, the balance of the increase again due to higher activity $10.3 million.

Total debt $942 million versus slight down actually 7.7 versus last year, and the composition of our debt at November 30, 2007, about 53% fixed rate, 47% floating rate. Our available liquidity including cash stood at $557.8 million. Our 37.9% net debt to capital ratio improved from 43.3% at May 31, 2007.

Liabilities related to asbestos are reflected in two balance sheet areas. Our current liability $57.5 million represents the estimated pre-tax payment that may be required during the next 12 months. Under long term liabilities, $247.9 million reflects estimated pre-tax payments required beyond the next 12 months. The total of $305.4 million compares with $354.3 million at May 31, 2007 reflecting the $48.9 million in pre-tax payments made during the first half of fiscal 2008, which compares with payments of $30.2 million from a year ago.

As noted during our first quarter conference call, we have been making several changes to how we manage our asbestos claims and these actions have increased our current cash outlays. During the second fiscal quarter we completed these various changes and in so doing marked the peak of these extra transitional costs.

During the second quarter we spent $26.1 million of which $12.3 million was due for settlement costs compared with $7.2 million settlement costs last year. We spent $13.8 million on defense in the current quarter versus $6.6 million on defense last year. It’s important to note however that of the $13.8 million in defense costs this quarter $9.1 million was due to the extra payments related to transitional costs referred to earlier. Without these $9.1 million transitional costs our total pre-tax cash payments for asbestos for the quarter would have been approximately $17 million.

We secured dismissals and or settlements of 292 claims versus 324 claims in the second quarter of last year. During the current quarter we continue to secure settlements on terms that were favorable relative to our liability reserve assumption which did however result in higher cash outlays during the period. The total number of active cases at the end of the second quarter stood at 11,117 essentially flat from the May 31, 2007 total active cash load of 10,824 and last year’s second quarter case load of 11,021. The average number of new cases filed monthly this year-to-date is approximately 5% below new filings during the first six months of last year.

On a year-to-date basis we have spent a total of $48.9 million of which $26.3 million has been for settlement costs compared to $17 million for settlement costs last year. For defense costs year-to-date we have spent $22.6 million versus $13.2 million in the same periods last year. Without the extra transitional costs spent in the first and second quarters of this year which have amounted to approximately $12 million our defense costs year-to-date would have been approximately $10.6 million versus $13.2 million last year.

These recent higher cash outlays are not indicative of any adverse changes in the underlying litigation. We continue to track our key reserve assumptions for the 10 year estimate of our liability and in so doing review the adequacy of our existing accruals on a regular basis. As we have said previously we will make any appropriate adjustments to our balance sheet when necessary consistent with our existing valuation criteria and liability estimation process.

We expect quarterly cash outlays for asbestos to moderate for the balance of this fiscal year and to see our fiscal 09 cash outlays return to levels more consistent with our experience in prior years although it is difficult to predict with certainty. We would anticipate lower cash outlays in the second half of this year resulting in full year cash outlays in the range of $75 million. As we have noted in the past there can always be some quarter-to-quarter volatility in our total cash outlays for asbestos.

Finally, there are no new developments to report in our insurance coverage case as we await the judge’s ruling on the key liability issues in the case. The timing of a ruling is unknown at this time although we continue to expect a decision during this fiscal year.

A few comments on our cash flows for the period. Operating activities generated cash flow of $104.1 million during the six month period compared to [$94.14] million cash flow generated during the same six month period of fiscal 2007 for a net increase of $12.7 million. Factoring out the after tax asbestos payment for the first six months of fiscal 2008 and for fiscal 2007 of $31.4 million and $19.3 million respectively operating activities generated cash flow of $135.5 million during the first half of fiscal 2008 compared with $10.7 million a year ago up $24.7 million.

Changes in operating working capital resulted in a use of cash for this year’s first six months of $54.6 million versus $44.6 million last year for an increase of $10 million period-over-period. Decreases in trade receivables provided $120.3 million of cash during the current period versus $106.2 million for a $14.1 million favorable change in cash flow period-over-period. Increased inventories required a $29.1 million use of cash during the current six months versus a third of a million cash last year.

In addition, reductions in accounts payable required $85.4 million use of cash during the current period versus $74.6 million last year or $10.8 million in additional cash period-over-period. All other changes related to working capital items had a net unfavorable impact on cash of $14.2 million on the year-over-year basis.

I’ll now turn the call back over to Frank Sullivan.

Frank C. Sullivan

We expect to finish this fiscal year with which will end May 31, 2008 with earnings up in the 8% to 10% range. While we will not get back into the quarterly earnings guidance gain you will recall that during the last conference call we made comments about our third quarter given the wide disparities in the market place for expectations for this year’s third quarter. You will also recall that last year’s third quarter had a $0.02 per share one time gain related to an extraordinary tax item. Depending on how different analyst calculated that difference last year’s third quarter on a core basis came in at $0.05 to $0.06 per share.

Our internal plan set in June of last year for this year’s third quarter calls for $0.05 per share. Given the challenging weather conditions in December as well as the beginning of January particularly in light of very mild weather at this same time last year we will work hard to achieve this internal plan goal. Keep in mind that given the seasonality of RPM’s businesses and product lines our third quarter earnings add up generally to only about 3% or less of our total year earnings. So, while the percentage gains or losses in one third quarter period from another may seem big the impact in the full year results are relatively inconsequential.

More importantly we remain bullish about the underlying strength in our industrial end markets and our ability based on the characteristics of our consumer product lines in a number of successful new product introductions that we will finish the 2008 fiscal year with a strong fourth quarter in terms of sales and earnings growth which will put us in the 8% to 10% range for earnings growth for the full year ended May 31, 2008 and that’s on last year’s adjusted EPS of $1.57 per share.

This forecast for the full year earnings growth is despite the fact that we will lose $0.015 to $0.02 per share from the divestiture of Bondo. Having said that Bondo is a cash neutral operation as part of RPM so the $45 million of proceeds for the divestiture of this business certainly is a very strong cash flow return on investment. This transaction was made possible by the great strategic fit of Bondo with 3M given their international distribution capabilities and the international auto body market place which is synergy which we did not have.

Lastly, from an acquisition perspective we have a number of small to medium size transactions in the hopper which we would expect to be completed before the end of this fiscal year.

This concludes our prepared remarks and we would now be happy to answer your questions.

Questions-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Jeff Zekauskas from JP Morgan. Please proceed.

Jeffery Zekauskas – JP Morgan Securities

Can you explain what the transitional costs are in the asbestos liability?

Frank C. Sullivan

Sure. We talked about them actually at year end and the last call. Two things: we had a national defense counsel that had been acting for many years as essentially our asbestos actuary and paying lawyers to do actuarial work is quite expensive. So, this past year we moved from a law firm who had been doing that work very capably for us for probably a decade but, had become quite expensive to [Navagant] which is probably the world’s if not the nation’s, if not the world’s most sophisticated actuarial contingent liability firm. And, our annual costs went from millions to hundreds of thousands.

Secondly, in a number of jurisdictions given some of the changes in the underlying dynamics of asbestos cases and how they’re defended we made changes in defense counsel which also had resulted in significant savings. The combination of which on an annual basis ought to be in the $8 to $10 million range. But, in that process we were working over a six to eight month period with two firms transitioning from an old firm to a new firm and then some of the settlement issues that raised in the transition. Those are the result of the transitions – cost us about $12 million and that transition is now complete.

Jeffery Zekauskas – JP Morgan Securities

So, if I understand what you’re saying you’ve got two law firms that you’re working with instead of one.

Frank C. Sullivan

We have dozen of law firms that we are working with across the United States. But, the two significant changes were moving from a law firm doing actuarial work and again, paying lawyers to do actuarial work is expensive, the database management to a much more sophisticated and substantially cheaper firm who does that for a living. And, in a number of jurisdictions we were working with two firms as we transitioned from a historical defense counsel to a new defense counsel in a couple of jurisdictions.

Jeffery Zekauskas – JP Morgan Securities

Can you remind me as to what your percentage of offshore revenues are now versus onshore? And, when you look at the volume growth that you experienced in the quarter is it the case that offshore grew and domestic shrank? Or, is that not the way to think about it?

Frank C. Sullivan

I don’t think that’s the way to think about it. First of all our consumer businesses are principally North American. We have grown with our Rustoleum group in the UK market place via acquisition over the last 12 to 18 months so that’s becoming a little less true. But, when you look at our growth we’ve had real strong growth in our industrial businesses and you’ve seen it both domestically as well as internationally. We’re about 23% outside of North America in terms of our total revenues which is bigger than say five years ago when we were only about 15%. And, we would expect that to continue to improve as we focus growth in places like India, Eastern Europe, Russia. And also, as our numbers certainly show we’ve certainly benefited in our recorded results from a weakening dollar versus principally the Euro.

Jeffery Zekauskas – JP Morgan Securities

How much were the net FX gains? And, what was the after tax affect of the gain on the sale of Bondo?

Frank C. Sullivan

The after tax affect of the gain on the sale of Bondo pre-tax was $2.2 million. So, it’s about $1.3 after tax. In terms of the foreign currency gains we don’t disclose the impact on our bottom line and quite honestly it’s hard to calculate. It’s relatively easy to calculate the impact on revenues as well as the impact on various balance sheet items.

Jeffery Zekauskas – JP Morgan Securities

Was it a few cents a share?

Frank C. Sullivan

Again, we don’t disclose it and we don’t calculate it.

Jeffery Zekauskas – JP Morgan Securities

Lastly, the sale proceeds from Bondo of $45 million that’s not included in consumer is it? Or, is it?

Frank C. Sullivan

The proceeds are not included in consumer. On a GAAP basis the $2.2 million gain and we in our release adjusted – in our commentary and release adjusted our results to include that $2.2 million gain. Ernie’s comments also excluded that gain so that we could really discuss the underlying results of our consumer businesses which are positive but not anything to write home about. On a relative basis they’re actually quite good versus a lot of what’s going on in the consumer markets.

Earnest P. Thomas

Jeff we really don’t do a cash flow statement by segment it’s only in total that we actually do it.

Frank C. Sullivan

Just to finish that comment the proceeds from Bondo are also not reflected in our cash from operations. That’s a below the line item.

Operator

Your next question comes from the line of Vital Aelion from Banc of America Securities. Please proceed.

Vital Aelion – Banc of America Securities

My first question relates to the pace of settled cases. I understand the volatility quarter-over-quarter but it appears that the settled cases, accounting for two quarters now in this year seems to have slowed down. Is that a fair statement?

Frank C. Sullivan

There are two things to that: number one, there’s some volatility and number two I tried to reference this when you’re transitioning from one law firm to another in a couple of major jurisdictions it has an odd impact on your settlement in terms of transitioning cases that are open from one law firm to another. But, the underlying dynamics of our base asbestos issues have not changed. If you take what is likely to be a $70 to $75 million total pre-tax cash costs in asbestos this year and exclude the $12 million in transitional expense you’re looking at a base of somewhere in the $58 to $63 range versus $67 million last year.

Vital Aelion – Banc of America Securities

My second question relates to your perception of the ability to pass through raw material costs for the balance of this year. Are you positive on this?

Frank C. Sullivan

Well, we’ve been able to do it so far. There’s a number of interesting dynamics and we’ve talked about this in the past what really drove raw material costs for the last three years was certainly the price of oil and it’s impact on downstream chemicals, supply and demand issues particularly related to China as well as the impact of hurricanes which really negatively impacted the primary production area of the US chemical manufacturing base. The hurricane issues are behind us. You’re seeing some supply and demand issues start to change. Capacity has come on that was shut down from the hurricanes. New capacity has come on in a number of chemical areas. For instance in [TI02] some of the big investments in chemical capacity in China, the Middle East and India are just beginning to come online; that’s an issue. And then the other dynamic is while the price of oil has continued to skyrocket probably a more important energy input dynamic to our chemical raw material suppliers is the price of natural gas which is down from last year and relatively flat.

So, those are the dynamics out there but they are constantly moving between supply and demand which in some areas seem weak, the price of oil which is one factor but only one factor which is certainly at record levels and the capacity issues which I think will play out over the next two or three years depending on economic conditions. As we speak we’ve had our second quarter in a row of gross margin improvement which has not happened for three years until this last first quarter.

Vital Aelion – Banc of America Securities

What dynamic prompted you to increase guidance?

Frank C. Sullivan

Two things: number one, we generally particularly in our industrial businesses have an outlook that’s about six months either based on construction projects which principally impact our Trimco business that are projects that are in the process of being completed and will be completed in the next three to six months. As well as a backlog that we see in our industrial business such as a Carboline or a Stonhard. So, as we get closer to the end of the year I think we have greater confidence in our ability to predict the future albeit in a short window. So, I think we’re comfortable there.

The second issue and this is my mistake maybe reflected in the last quarter is I’m paying entirely attention to the feedback from our companies and I have quit toning my comments by what I read in the newspaper. So, in general I think we feel pretty good about the balance of this fiscal year. What will happen after that time will tell.

Vital Aelion – Banc of America Securities

What were the sales of Bondo?

Frank C. Sullivan

We have not disclosed it in the past. I don’t have it off the top of my head but we can get it. Somewhere in the $40 to $50 million range.

Operator

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

Saul Ludwig – Keybanc Capital Markets

Going back to your change in outlook. The trends obviously based on what I read in the newspapers the same way that you do are not particularly optimistic and that I’m assuming is not going to affect your business over the next six months based on the last comments that you just made. But, since you are fiscal year May, next year could be a very difficult one. What do you hear from your customers in terms of the second half of calendar 08?

Frank C. Sullivan

The areas that we remain sensitive to are those areas where RPM product lines are impacted by commercial new construction. The impact of residential new construction on a few of our product lines has been felt as we talked about in the past. In particular the Tremco barrier solutions business which is almost exclusively in the business of providing residential insulation and waterproofing for basements. We’re directly in the line of fire of housing starts there. It’s a relatively small product line of about $40 million. We’re actually picking up market share as marginal players are going out of business there so I think we’ll be in a good position. And, I guess there’s a sense there [inaudible] is if not bottoming that the deteriorating is pretty mild compared to what was a big drop last year. We’re sensitive to commercial construction and its slowing down which we haven’t seen yet but we’re very sensitive to it because people are nervous about it.

Conversely, in our major industrial areas we continue in a number of product lines to grow with double digit into power generation, into petrochemical, the chemical industry, into aerospace, into a number of major areas which have – feel like both domestically and internationally have real strength behind them. The last comment I would make is that the characteristic of our consumer products you’re talking about $3 and $5 and $6 cans of spray paint or tins of paint or $2 or $5 tubes of caulk or such that they’re not going to be and have not been as negatively impacted as architectural coatings or OEM coatings that have been negatively impacted by some of the economic conditions today.

Saul Ludwig – Keybanc Capital Markets

However you did make the comment on the consumer side that things were not moving a lot and there was an impact from the lack of turnover housing and therefore lack of maintenance, renovation, remodeling, whatever one wants to call it. Are you seeing or hearing any change in terms of the remodeling of existing homes? The rationale use to be in the past, “Okay we can’t buy a new house so we are going to paint this one and add a wing and do all sorts of projects,” which would have held benefit for RPM. It doesn’t seem to have happened this time. Are you seeing a change in that particular trend? Are people beginning to do something in terms of the do-it-yourself small jobs?

Frank C. Sullivan

I think the answer to that is yes and you have to separate the difference between RPM products which are really used for home maintenance and repair. A lot of bath products are used for energy efficiency and redecorating which is a much different thing than what the industry has become better at tracking which is major renovations which impact countertops and kitchen cabinets and things like that. So, certainly those benefit us as well but minor redecorating is something that we benefit from that does not necessarily mean that people are going to be selling thousands of dollars of kitchen cabinets or countertops or appliances. So, the answer so far is yes. I just wanted to tone down a little bit what I think are strong results for our consumer business in this second quarter so that people realize our expectations are flat or slightly up as opposed to draw the wrong conclusions from what was a very strong quarter relative to a continued challenge market.

Saul Ludwig – Keybanc Capital Markets

And when you say you are looking at a mostly flat, are you talking about consumer for the full year?

Frank C. Sullivan

Correct.

Saul Ludwig – Keybanc Capital Markets

Okay. Then you said that major industrial areas growing at 10% in to power plants, petrol chemicals and so on, how large is that particular chunk of your business, covering those areas?

Frank C. Sullivan

I will have to get back to you on that. Off the top of my head if I gave you a specific number I mean it’s $500 to $600 million roughly. But we’d have to get back to you on that with more specifics.

Operator

Your next question comes from Daniel Rizzo from Sidoti & Co.

Daniel Rizzo – Sidoti & Co.

Just in regards to the acquisitions you said you had a few small to medium size in the pipeline. Do you have a dollar amount on the range like $50 million acquisitions? What are you exactly looking at?

Frank C. Sullivan

I think of all of them happened that we currently had under a letter of intent we’d be looking at roughly $100 million. The nature of acquisitions are such that it’s not likely that all of them will happen. The point that I want to make is that we’ve got a pretty robust pipeline of small product line and medium sized company acquisition opportunities out there that’s consistent with what we’ve done over the last 3-5 years. And, that’s become an important part of continuing to drive internal growth. Particularly if we can take product lines, integrate them into an existing sales force or distribution strength, and then benefit from accelerating that growth in the follow up year.

Daniel Rizzo – Sidoti & Co.

You said by the end of this year? This fiscal year or next year?

Frank C. Sullivan

By the end of this fiscal year. And again, it’s more directional. The nature of these is that they can all happen or none of them can happen, but there is a number of transactions that we have under a letter of intent, and there is a good pipeline for the types of acquisitions that we’ve proven we can do.

Daniel Rizzo – Sidoti & Co.

Finally, is there like a particular area you are looking at geographically or in terms of your business segments? Or is it spread out?

Frank C. Sullivan

They tend to be more in the industrial markets and they tend to be more outside of North America. But again, we’re looking at transactions throughout the Americas. We closed a small transaction with our Euclid Chemical operation in Chile last month, and so they’ll be throughout the Americas, throughout the European marketplace. We continue to look at opportunities in other developing markets and we’re very excited about them. Typically these transactions are not additive to earnings in the first year, or at least the first couple of quarters in which they are done. But once we get into integrating them they become, from an IRR perspective, very positive, albeit on a small basis.

Operator

Your next question comes from the line of Edward Yang from CIBC.

Edward H. Yang – CIBC World Markets Corp.

Frank you spoke about the maintenance and repair aspects of a good deal of your portfolio, but you also spoke about some of the benefits you’re seeing from increased marketing. Could you talk a little bit about the demand, elasticity for some of these maintenance and repair products? I would think that actually it would be fairly inelastic, but maybe you could talk about what you’re seeing on the marketing spend and the returns there.

Frank C. Sullivan

I can get at some of the marketing questions. In terms of price elasticity, just in general, RPM product lines tend to be the high priced, high performing product lines and, I think that there are periods of time when major projects are only about price. In the infrastructure market I think there is a refocus on high quality, high performing life cycle products, which is very good for our Carboline and our Stonhard, and our Fibergrate businesses, as well as our Tremco businesses in terms of construction. And, so we’re in a great place for infrastructure and Department of Transportation spends on bridgework and civic infrastructure work.

The same is true with a lot of our major customers. Again, we talked about this in the past. Our Stonhard business is in microelectronics and in aerospace with major accounts who have had success with our Stonhard floors, for instance, everywhere in the world. And we just got a major project that we lost on price to a competitor that six months later came up, so we got the business back. So I think the dynamics out there are such that we’re selling life cycle and premium products. So I hope that answers your question there.

Edward H. Yang – CIBC World Markets Corp.

Frank, my question was actually geared more towards the consumer part of the business. For instance, if you were spending increased promotional or ad dollars, do you see volumes increase at some of your big box retailers? Because I seem to recall that you do have some new initiatives on [inaudible] and some of your other consumer products.

Frank C. Sullivan

We do. That’s correct. We have a new product line introduced by Dap which is a fast drying caulk. It’s a first to market. It’s a product that can be used in wet areas, whether it’s in bathrooms or showers or things like that, in kitchens, that actually dries to be paintable, I believe, I’m not a chemist but inside of an hour. And that’s doing quite well. That’s been introduced to major accounts.

We are in the process of introducing a new spray paint line to major accounts which will come out this spring. So we have continued to focus on introducing and rolling out new product categories with a number of our major accounts and major consumer businesses. Again, they tend to be higher end, higher performing products. And we are doing the types of promotional things that we think are necessary to try and drive in a challenging environment, the use of energy efficient products to make your home more efficient. The use of products for maintenance and repair. And I think it’s having a positive impact.

The reality is, it’s probably just the nature of our business, because it is small project work, which people tend to do in an environment like we have now, which is tough for the housing environment. I think it’s evidenced by positive single digit core growth in our consumer businesses when in general, a lot of our major accounts where you can see the statistics, are having mid to high single digit negative comps.

Edward H. Yang – CIBC World Markets Corp.

My last question is just historically you’ve had a good track record of meeting and beating your expectations and as you mentioned, there is some concern about the economy. I was wondering what your Plan B would be, if we see a significant step down in the economy, what kind of leverage you could pull to make sure that you continue to generate strong growth.

Frank C. Sullivan

I think we have – I know we have a very disciplined planning process, and while we don’t provide quarterly guidance, we work hard every week and every month to meet our internal plans, and we have relatively strong in place Plan B’s on the shelf at a number of our operations to pare back spending or expenses in the event that we see slow downs on the revenue side. So we haven’t missed a plan in the last five years internally. We rarely missed a plan in the last 30 years. I think I inarticulately tried to make that point in the last quarterly conference call and didn’t do it very well. So we have ample room I think to continue to support growth, which is our principal goal. But if necessary, when you’ve got 30% of SG&A, obviously there’s room to cut it if the growth is not coming. The trick is to get in front of it.

Operator

Your next question comes from the line of Saul Ludwig with Keybanc Capital Markets

.

Saul Ludwig – Keybanc Capital Markets

One question is, in the consumer sector, what I’ll call the SG&A creep. You know you went along for several years where the SG&A kept coming down as a percentage of sales. That was true in ’05 versus ’04, ’06 versus ’05, ’07 versus ’06. But then this year, both in the first quarter and again is there any report into the second quarter SG&A was up almost 100 basis points. What is going on with regard to this additional spending or is it really under as good a control as it should be?

Frank C. Sullivan

That relates somewhat to the question earlier by Ed Yang and as you will recall comments that we made in July at our year end earnings release and our first outlook for the year and also in the first quarter – our plan this year was to do some heavier than normal promotional spending in our consumer businesses for a couple of reasons. Number one, we had some new products that we wanted to move out and make sure they were successful. Number two, we wanted to try and influence our belief that our products would sell into this difficult economic environment. The last piece was we had a very challenged, very challenged year last year in our [gap business] and we were going to redouble our – having cut some of our expenses a year ago redouble some of our efforts in the sales and marketing area to both continue to drive positive sales which is the trick to all good businesses. When sales are growing good things happen and when sales are shrinking everything that happens from that is generally bad.

Secondly, to position ourselves for instance in this TBS business, this Tremco barrier solutions – we are picking up market share in a terrible residential construction environment. And, interestingly enough we got a great management team there and we’re going to be much stronger when we get out of this cycle than when we entered it and we had better than 50% market share there. So, that was a deliberate plan that we communicated at year end and in the first quarter and the reality is we are spending those dollars and you’re seeing it particularly in our consumer SG&A

Saul Ludwig – Keybanc Capital Markets

On the asbestos, again the trend had been I guess for the last three years that each quarter you had a lower number of new cases filed than in the same quarter a year earlier. And, some of that was because of the tort reform laws that were passed in a number of states and also your aggressive defense posture or combining to send a message to be careful about filing new cases. It looked like in this quarter there was a good up kick in the number of new cases versus the same quarter a year ago and this is the first time that’s happened in a long time. Was there anything we should read into that?

Frank C. Sullivan

No. I’m very pleased with the team that has managed this very difficult environment for us for the last five years. I think they’ve done a good job. Keep in mind that 99.9% of the cases against RPM in my opinion are somehow involved with a fraudulent product ID. But, when you look at the average new cases received three years ago we were receiving 300 new cases a month. In 06 it was 240. For this current fiscal year we’re down to about 140 to 150 new cases a month. But, the rate of new cases is consistently decline. Our dismissal continue to be good and having said how pleased and proud I am with the team that have done this I think one of the underlying dynamics here that impacted us and you can see this in other asbestos defendants that are public that disclose this information is that with greater scrutiny by federal and state courts and some tort reform what we’re dealing with is a [inaudible] situation which is just declining. The average age of our claimant is about 72 years old. So, you’re seeing fortunately, in a lot of ways a declining incidence of this disease and overtime a declining filing of cases. That’s probably the biggest factor as anything.

Saul Ludwig – Keybanc Capital Markets

Finally, just to make sure we’re all on the same page you said the base number from which the 8 to 10% earnings per share growth is currently expected is $1.57 for last year?

Frank C. Sullivan

That’s correct and I say that because last year we reported $1.64 on a GAAP basis but that included a $15 million pre-tax gain on the insurance settlement on asbestos. You can also take out of that if you’d like the $0.02 in the third quarter one time tax gain that we talked about which would make these numbers better. The reason I emphasize that is that the analyst reports that came out today and looked at our new guidance are generally correct and they are in different ranges. There was an AP report that calculated that 8 to 10% on our GAAP $1.64 and actually said that this is management’s signal that earnings per share for the year will be $1.77 to $1.80. I hope that they have better vision than we do but that was based on their taking the 8 to 10% on top of our GAAP $1.64 last year and that’s not the basis for our estimate and it’s also not the basis for the analyst that follow us. I just wanted to make that clear.

Saul Ludwig – Keybanc Capital Markets

The $15 million was $0.10 a share, right?

Frank C. Sullivan

It was more like $0.08, $0.07 or $0.08. And again, the base for last year depending on which analyst follow us and excluding the $0.02 on one time tax – the base that people are using are anywhere from $1.54 to $1.57.

Saul Ludwig – Keybanc Capital Markets

Okay. Then you also stated that the third quarter last year was $0.05 and I’m looking at your third quarter last year where you had a reported and then as adjusted number. The as adjusted number that you reported last year was $0.09 a share. So, I don’t know how we get from $0.09 down to $0.05?

Frank C. Sullivan

No. Last year we reported I believe $0.08 and we highlighted a $0.02 per share, again the numbers are in front of me. We reported $0.08.

Saul Ludwig – Keybanc Capital Markets

Then you have an adjusted number was $0.09.

Frank C. Sullivan

We had $0.02 of a one time tax gain. So, our adjusted number in the release last year was $0.06. Some analyst calculated the number differently and actually rounded the number down to $0.05. I think the important point is with confusion this year and a wide disparity of estimates for our third quarter that we recognized in our last quarterly call – I didn’t know any better way to let people know what we expect and just to say, “Hey our plan for the year which was set in June last year was for $0.05 this year.” And the reality of our third quarter it’s seasonal because our products are weather sensitive. So, great weather in third quarter helps us. Bad weather in the third quarter hurts us. It’s 3% plus or minus of our total year earnings so its inconsequential. So, in future years you might plug $0.05 a share into our third quarter and work backwards from that.

Saul Ludwig – Keybanc Capital Markets

I just wanted to ask to make sure everybody was on the same page here because it was confusing from what you actually reported in your third quarter release last year.

Frank C. Sullivan

Again, I share that confusion. That’s what we’re trying to do here. There’s also some confusion as to the base of the full fiscal year. The only items we had last year that were extraordinary one time in nature was a $15 million gain in our second quarter pre-tax on an insurance recovery and a $0.02 per share gain in the third quarter on a one time tax item.

Saul Ludwig – Keybanc Capital Markets

The $1.57 excludes both of those items?

Frank C. Sullivan

No. The $1.57 only excludes asbestos.

Operator

Your next question comes from the line of Rick Platte with Schwartz Investment Counsel. Please proceed.

Rick Platte - Schwartz Investment Counsel

This bit of news comes as somewhat of a bright light in a rather dismal background so thank you for that. This question really goes more perhaps to Ernie. Ernie I know you’ve been focusing on getting some increased efficiency in working capital management and it looked like on a quick review that perhaps that had been achieved. But, there were so many moving parts with foreign exchange. It’s hard to know if I’m just looking at a shift change or just some statistical noise. I wonder if you could maybe just comment and maybe perhaps some more subjective terms in terms of your accomplishments in that area.

Ernest Thomas

Well our receivables and inventories are both up year over year and it is due primarily to increased activities. I think it’s still a bit early to see really a lot of the benefits that I think we can getin this area. But I think right now we’re actually up because of the exchange. Days in both cases are down slightly, but the activity and the exchange are driving the increase that you see on the balance sheet.

Rick Platte - Schwartz Investment Counsel

Actually it looked like there was some slight improvement.

Ernest Thomas

The days are actually improved.

Rick Platte - Schwartz Investment Counsel

If you relate it to sales it looks like there was some slight improvement and I was just trying to find out whether that was real or whether it was just fall out.

Ernest Thomas

It is real.

Rick Platte - Schwartz Investment Counsel

All right. I was trying to help you there in front of your boss. Soat any rate, thank you very much.

Ernest Thomas

Thank you.

Operator

Your next question comes from Hugh Denison - Heartland Funds.

Hugh Denison – Heartland Funds

Frank, I was distracted atthe beginning of the Q&A and so I’ll apologize if somebody else brought this up, but did you make any comment atall on your tête-à-tête with the insurance carriers regarding the asbestos problem?

Frank Sullivan

The situation with the insurance carriers and our insurance coverage litigation remains static. The summary judgment motions have all been in and we are waiting for the decision of a federal judge. We expect that decision to come within this fiscal year. So some time between now and the end of May, it literally could happen tomorrow or it could take another two or three months and it really depends on the judge’s docket and how she prioritizes her caseload.

But all motions are in and we are waiting for a ruling from the judge. The judge could rule one of three ways. She could rule in our favor, which we believe is appropriate and proven by the motions, which would bea very, very positive thing. She could rule that she would pass this on to a jury without ruling on any of the motions which in general would be a very positive thing for us. Or she could rule entirely in favor of the insurance carriers which would put us inthe situation of deciding to appeal or do something else. We are waiting for that decision.

We are hopeful that it will bea positive decision for RPM, I think evidenced by one insurance carrier settlement and our belief in terms of what happened and what’s the right thing to do.

Operator

Your next question comes from Greg Halter - Great Lakes Review.

Frank Sullivan

Morning, Greg.

Greg Halter - Great Lakes Review

Good job inat least a media-wide environment that doesn’t look so great, but that’s the papers for you. Frank, you were just commenting on the asbestos situation. I know on the last conference call that you made a comment that you were still feeling really good about the case. Is that still where you feel at this point in time?

Frank Sullivan

Yes.

Greg Halter - Great Lakes Review

Your capital spending on a six-month basis, I think is $17.5 million versus $22 million a year ago and I think you had said about $78 million for the year. Any thoughts on where you may come out for the year and where the significant increase would come from to get you to $78 million?

Ernest Thomas

Our plan this year is about $75 million and like most of the things we do around here, we usually hit plan. Some of it is just a timing issue in terms of where we are. But if there’s any difference in that we can clarify that. I’m not aware of it but if there is, we’ll clarify it for you and others.

Greg Halter - Great Lakes Review

I know you’ve had a lower tax rate for the first two quarters of the fiscal year, just wondering what your thoughts are for the full year fiscal ‘08 tax rate?

Ernest Thomas

I think if you plan around 32.5%, that’s pretty good. I think that’s what you’ve got to think of for the balance of the year.

Greg Halter - Great Lakes Review

Would that be able to be extend into ‘09 as well?

Ernest Thomas

I don’t know. The issue on taxes for us, and we didn’t communicate it very well. I think internally we were trying to be conservative because as we do more international business the impact of different jurisdiction tax rates are providing some variability in what was a pretty steady one way or another. So we’ve also benefited from some of the tax changes.

I think there was a manufacturing tax credit that we’re now benefiting from and how long that will continue, I’m not sure. So, given our greater focus on growing internationally and some of the other things that we’ve benefited from, there will be greater variability.

We’ve got great tax guys which three or four years ago we didn’t have internal tax folks and they’re working hard to dothe right thing. I think the best we can tell you right now is 32.5% for the fourth quarter and the full year.

Greg Halter - Great Lakes Review

With your stock price, although I guess earlier today it was around the level, but with the stock prices down from the $22.41 that the convertible notes work under, how does that work regarding your share count?

Ernest Thomas

We report our results based on fully diluted earnings per share. The convert that you’re referencing actually hasa conversion price at $18.40, $18.42, somewhere in that range -- I can get you the exact number. It’s a contingent convert, which means that they can’t be converted by the holders unless the stock price is above that $22 and change price.

That security was non-callable for five years and that five-year period ends late spring/early summer this year. The underlying shares are roughly 8 million and they are calculated in our fully diluted earnings per share number which arethe ones that we talked about.

Greg Halter - Great Lakes Review

Given where you are today, if it were a convertible, is that something that you would look to doat this point?

Ernest Thomas

I couldn’t tell you. I think we would look atthe capital markets and the circumstances and what’s going on. Right now it’s a 2.75% fixed rate debt security which in this environment is a pretty good security. Whether we would leave it outstanding, convert it, or try and getthe shares out, time will tell. Again, it depends on circumstances atthe time.

Greg Halter - Great Lakes Review

I know you talked about the bond gain, maybe I didn’t hear it. But was it included or excluded, I guess I should say, inthe COGS line or SG&A?

Ernest Thomas

SG&A.$2.2 million in SG&A when you look atthe GAAP results and the segment results.

Greg Halter - Great Lakes Review

I know inthe last conference call you talked about marketing initiatives and so forth, growth initiatives, which would bein the tens of millions of dollars but that you could curtail those if the economy sank, I think is the word you used. I presume that has not happened at this point in terms of curtailing any of the spending?

Frank Sullivan

Not in any huge way, but again we manage 40 independent business units and have various “plan b” plans in place for them and so in any given year, we’ve got companies that are on a roll and in any given year we have companies that are on “plan b” and this year is no exception.

My reference to the ability to cut costs is really related to the businesses that are doing quite well. We are not cutting any costs. We are continuing to spend dollars in light of the growth opportunities.

Operator

Your next question comes from the line of Amy Norflus - Pilot.

Amy Norflus - Pilot

Can you talk a little bit about the stock repurchase plan that was announced and what your thoughts are?

Frank Sullivan

We have not had a stock repurchase plan for some time and our board authorized a share repurchase plan principally targeting at initially sopping up the dilution in place which I would estimate at this stage somewhere in $1 million to $2 million shares per year. We do have in place certainly what would get us to be more aggressive in that, for instance, might be something like a favorable ruling in the asbestos litigation coverage case.

Amy Norflus - Pilot

Perfect. Implying that you would geta lot of cash and that’s how you would use the cash?

Frank Sullivan

That is our hope.

Operator

I show no further questions at this time. I’d like to turn the call back over to Mr. Frank Sullivan for closing remarks.

Frank Sullivan

We have long talked about the strength of our RPM’s brands and the maintenance and repair nature of most, but not all, of our product lines. It’s always challenging to test those great assumptions that you like to talk about, and I think in this environment and many of our product lines, we are positively testing the strength of our brand names and strong market share positions, as well as the maintenance and repair nature of many of our product categories and product lines. We are clearly benefiting from continuing strength and what we think of as heavy industrial renovation, remodeling and capital spending.

With those comments, we appreciate your participation in our second quarter conference call. We look forward to reporting our third quarter results in April and the results of our fiscal year ended May 31, 2008 which will be another year of record sales and earnings growth for RPM share holders.

Thank you very much for your participation today, for your interest in investing inRPM and Happy New Year.

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Source: RPM International Inc. F2Q08 (Quarter End 11/30/07) Earnings Call Transcript
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