RPM International Inc. (RPM) Q2 2008 Earnings Report, Transcript and Summary

Welcome to theRPM International conferencecall for the fiscal2008 second quarter. Today’s call isbeing recorded. This call is also beingwebcast and can beaccessed live or replayed on theRPM website atwww.RPMInc.com. Comments made on this call may include forward-lookingstatements based on current expectations that involve risk and uncertaintieswhich could cause actual results to bematerially different. For moreinformation for these risks and uncertainties, please review RPM’s reportsfiled with theSEC. During this conference call, references may be made to Non GAAPfinancial measures. To assist you inunderstanding these Non GAAP measures, RPM has posted reconciliations to themost directly comparable GAAP financial measures on the RPM website. Following today’s presentation there will bea question and answer session. (OperatorInstructions) At this time I would liketo turn the call over to RPM’s President and CEO, Mr. Frank Sullivan foropening remarks. Please go ahead sir.

Good morning. We’repleased to report another quarter of strong operating results from the RPMcompanies. Our current quarter and year-to-date results are evidence ofthe continuing good performance in our industrial businesses, principally as aresult of the maintenance and renovation nature of most of RPM productlines. Also, our strong presence inheavy industrial markets including oil and gas, power generation, andaerospace, to name a few examples of strong markets for our industrial productlines, our growing presence in marine, and finally our continuing focus ongrowing in international markets. While our consumer business had strong results in the secondquarter, much of this is the result of weaker comparisons to our second quarterin FY 2007, and really back to the hurricane impacted poor results of ourconsumer business in the second quarter of our 2006 fiscal year. Our core consumer businesses remainchallenged by a difficult retail environment, a slowdown in residential newconstruction, and for RPM’s businesses, most importantly, a slowdown in housingturnover. Having said that, the major portion of our consumer productlines are focused on maintenance, energy efficiency, patch and repair, andsmall project renovation and redecorating. These characteristics, combined with the successful introduction of anumber of new products, have resulted in underlying sales growth in ourconsumer product lines which is flat to slightly up in an environment wherecomp store sales at our major retail accounts in general are down in the mid tosingle digit range across most of their categories. These dynamics of RPM’s industrial and consumer businessescombined with a proven ability to complete and integrate small to medium sizedcompany and product line acquisitions, allow us to competently forecastcontinuing positive sales and earnings growth for the balance of this fiscalyear, even if underlying North American economic conditions continue todeteriorate. I would now like to turn the call over to Ernie Thomas,RPM’s Senior Vice President and Chief Financial Officer, to provide you withthe details of our second quarter financial performance after which we willanswer your questions.

Good morning everyone. I’ll begin with a review of our second quarter operating resultscompared with the same period a year ago. Then I will discuss our six month results, followed by highlights fromour balance sheet and cash flow statement. All of my comments will exclude the $2.2 million gain on the sale of ourBondo subsidiary, and the previously disclosed $15 million settlement forasbestos related claims which occurred during last year’s second fiscalquarter. 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 Bondosale 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 of1.6%. Net favorable foreign exchangetotaled 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. Theindustrial segment net sales of $605.2 million grew 14.5% over last year’ssecond quarter total. Six acquisitions completed during the last 12 monthsrepresented 2.9% of the industrial segment net sales growth year-over-year. Organic growth in the industrial segmentrepresented 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 theindustrial segment sales improvement. Pure organic unit growth was 5% for the quarter, and was dueprimarily to the introduction of new products, and the traditional roofingbusiness, renewed strength in renovation projects, and increases in polymerflooring and other industrial maintenance projects. The following industrial segment productlines 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 forthe quarter were up 7% from last year’s second quarter total. Organic sales growth in…

We expect to finish this fiscal year with which will end May31, 2008 with earnings up in the 8% to 10% range. While we will not get back into the quarterlyearnings guidance gain you will recall that during the last conference call wemade comments about our third quarter given the wide disparities in the marketplace for expectations for this year’s third quarter. You will also recall that last year’s thirdquarter had a $0.02 per share one time gain related to an extraordinary taxitem. Depending on how different analystcalculated 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’sthird quarter calls for $0.05 per share. Given the challenging weather conditions in December as well as thebeginning of January particularly in light of very mild weather at this sametime last year we will work hard to achieve this internal plan goal. Keep in mind that given the seasonality ofRPM’s businesses and product lines our third quarter earnings add up generallyto only about 3% or less of our total year earnings. So, while the percentage gains or losses inone third quarter period from another may seem big the impact in the full yearresults are relatively inconsequential. More importantly we remain bullish about the underlyingstrength in our industrial end markets and our ability based on thecharacteristics of our consumer product lines in a number of successful newproduct introductions that we will finish the 2008 fiscal year with a strongfourth quarter in terms of sales and earnings growth which will put us in the8% to 10% range for earnings growth for the full year ended May 31, 2008 andthat’s on last year’s adjusted EPS of $1.57 per share. This forecast for the full year earnings growth is despitethe fact that we will lose $0.015 to $0.02 per share from the divestiture ofBondo. Having said that Bondo is a cashneutral operation as part of RPM so the $45 million of proceeds for thedivestiture of this business certainly is a very strong cash flow return oninvestment. This transaction was madepossible by the great strategic fit of Bondo with 3M given their internationaldistribution capabilities and the international auto body market place which issynergy which we did not have. Lastly, from an acquisition perspective we have a number ofsmall to medium size transactions in the hopper which we would expect to becompleted before the end of this fiscal year. This concludes our prepared remarks and we would now behappy to answer your questions.

(Operator Instructions) Your first question comes from the line of Jeff Zekauskas from JPMorgan. Please proceed. Jeffery Zekauskas –JP Morgan Securities: Can you explain what the transitional costs are in theasbestos liability?

Sure. We talked aboutthem actually at year end and the last call. Two things: we had a national defense counsel that had been acting formany years as essentially our asbestos actuary and paying lawyers to doactuarial work is quite expensive. So,this past year we moved from a law firm who had been doing that work verycapably 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 mostsophisticated actuarial contingent liability firm. And, our annual costs went from millions tohundreds of thousands. Secondly, in a number of jurisdictions given some of thechanges in the underlying dynamics of asbestos cases and how they’re defendedwe made changes in defense counsel which also had resulted in significantsavings. The combination of which on anannual basis ought to be in the $8 to $10 million range. But, in that process we were working over asix to eight month period with two firms transitioning from an old firm to anew firm and then some of the settlement issues that raised in thetransition. Those are the result of thetransitions – 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’reworking with instead of one.

We have dozen of law firms that we are working with acrossthe United States. But, the two significant changes were movingfrom a law firm doing actuarial work and again, paying lawyers to do actuarialwork is expensive, the database management to a much more sophisticated andsubstantially cheaper firm who does that for a living. And, in a number of jurisdictions we wereworking with two firms as we transitioned from a historical defense counsel toa new defense counsel in a couple of jurisdictions. Jeffery Zekauskas –JP Morgan Securities: Can you remind me as to what your percentage of offshorerevenues are now versus onshore? And,when you look at the volume growth that you experienced in the quarter is itthe case that offshore grew and domestic shrank? Or, is that not the way tothink about it?

I don’t think that’s the way to think about it. First of all our consumer businesses areprincipally North American. We havegrown with our Rustoleum group in the UKmarket place via acquisition over the last 12 to 18 months so that’s becoming alittle less true. But, when you look atour growth we’ve had real strong growth in our industrial businesses and you’veseen 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 sayfive years ago when we were only about 15%. And, we would expect that to continue to improve as we focus growth inplaces like India, Eastern Europe, Russia.And also, as our numbers certainly show we’ve certainly benefited in ourrecorded 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 thegain on the sale of Bondo?

The after tax affect of the gain on the sale of Bondopre-tax was $2.2 million. So, it’s about$1.3 after tax. In terms of the foreigncurrency gains we don’t disclose the impact on our bottom line and quitehonestly it’s hard to calculate. It’srelatively easy to calculate the impact on revenues as well as the impact onvarious balance sheet items. Jeffery Zekauskas –JP Morgan Securities: Was it a few cents a share?

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’snot included in consumer is it? Or, isit?

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

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

Just to finish that comment the proceeds from Bondo are alsonot reflected in our cash from operations. That’s a below the line item.

Your next question comes from the line of Vital Aelion fromBanc of America Securities. Pleaseproceed. Vital Aelion – Bancof America Securities: My first question relates to the pace of settled cases. I understand the volatility quarter-over-quarterbut it appears that the settled cases, accounting for two quarters now in thisyear seems to have slowed down. Is thata fair statement?

There are two things to that: number one, there’s somevolatility and number two I tried to reference this when you’re transitioningfrom one law firm to another in a couple of major jurisdictions it has an oddimpact on your settlement in terms of transitioning cases that are open fromone law firm to another. But, theunderlying dynamics of our base asbestos issues have not changed. If you take what is likely to be a $70 to $75million total pre-tax cash costs in asbestos this year and exclude the $12million in transitional expense you’re looking at a base of somewhere in the$58 to $63 range versus $67 million last year. Vital Aelion – Bancof America Securities: My second question relates to your perception of the abilityto pass through raw material costs for the balance of this year. Are you positive on this?

Well, we’ve been able to do it so far. There’s a number of interesting dynamics andwe’ve talked about this in the past what really drove raw material costs forthe last three years was certainly the price of oil and it’s impact ondownstream chemicals, supply and demand issues particularly related to China aswell as the impact of hurricanes which really negatively impacted the primaryproduction area of the US chemical manufacturing base. The hurricane issues are behind us. You’re seeing some supply and demand issuesstart to change. Capacity has come onthat was shut down from the hurricanes. New capacity has come on in a number of chemical areas. For instance in [TI02] some of the biginvestments in chemical capacity in China,the Middle East and Indiaare just beginning to come online; that’s an issue. And then the other dynamic is while the priceof oil has continued to skyrocket probably a more important energy inputdynamic to our chemical raw material suppliers is the price of natural gaswhich is down from last year and relatively flat. So, those are the dynamics out there but they are constantlymoving between supply and demand which in some areas seem weak, the price ofoil which is one factor but only one factor which is certainly at record levelsand the capacity issues which I think will play out over the next two or threeyears depending on economic conditions. As we speak we’ve had our second quarter in a row of gross marginimprovement which has not happened for three years until this last firstquarter. Vital Aelion – Bancof America Securities: What dynamic prompted you to increase guidance?

Two things: number one, we generally particularly in ourindustrial businesses have an outlook that’s about six months either based onconstruction projects which principally impact our Trimco business that areprojects that are in the process of being completed and will be completed inthe next three to six months. As well asa 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 Ithink we have greater confidence in our ability to predict the future albeit ina short window. So, I think we’recomfortable there. The second issue and this is my mistake maybe reflected inthe last quarter is I’m paying entirely attention to the feedback from ourcompanies and I have quit toning my comments by what I read in thenewspaper. So, in general I think wefeel pretty good about the balance of this fiscal year. What will happen after that time will tell. Vital Aelion – Bancof America Securities: What were the sales of Bondo?

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

Your next question comes from the line of Rosemarie Morbellifrom Ingalls & Synder. Pleaseproceed. Saul Ludwig – KeybancCapital Markets: Going back to your change in outlook. The trends obviously based on what I read inthe newspapers the same way that you do are not particularly optimistic andthat I’m assuming is not going to affect your business over the next six monthsbased on the last comments that you just made. But, since you are fiscal year May, next year could be a very difficultone. What do you hear from yourcustomers in terms of the second half of calendar 08?

The areas that we remain sensitive to are those areas whereRPM product lines are impacted by commercial new construction. The impact of residential new construction ona few of our product lines has been felt as we talked about in the past. In particular the Tremco barrier solutionsbusiness which is almost exclusively in the business of providing residentialinsulation 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 upmarket share as marginal players are going out of business there so I think we’llbe in a good position. And, I guessthere’s a sense there [inaudible] is if not bottoming that the deteriorating ispretty mild compared to what was a big drop last year. We’re sensitive to commercial constructionand its slowing down which we haven’t seen yet but we’re very sensitive to itbecause people are nervous about it. Conversely, in our major industrial areas we continue in anumber of product lines to grow with double digit into power generation, intopetrochemical, the chemical industry, into aerospace, into a number of majorareas which have – feel like both domestically and internationally have realstrength behind them. The last comment Iwould make is that the characteristic of our consumer products you’re talkingabout $3 and $5 and $6 cans of spray paint or tins of paint or $2 or $5 tubesof caulk or such that they’re not going to be and have not been as negativelyimpacted as architectural coatings or OEM coatings that have been negativelyimpacted by some of the economic conditions today. Saul Ludwig – KeybancCapital Markets: However you did make the comment on the consumer side thatthings were not moving a lot and there was an impact from the lack of turnoverhousing and therefore lack of maintenance, renovation, remodeling, whatever onewants to call it. Are you seeing orhearing any change in terms of the remodeling of existing homes? The rationale use to be in the past, “Okay wecan’t buy a new house so we are going to paint this one and add a wing and doall sorts of projects,” which would have held benefit for RPM. It doesn’t seem to have happened thistime. Are you seeing a change in thatparticular trend? Are people beginningto do something in terms of the do-it-yourself small jobs?

I think the answer to that is yes and you have to separatethe difference between RPM products which are really used for home maintenanceand repair. A lot of bath products areused for energy efficiency and redecorating which is a much different thingthan what the industry has become better at tracking which is major renovationswhich impact countertops and kitchen cabinets and things like that. So, certainly those benefit us as well butminor redecorating is something that we benefit from that does not necessarilymean that people are going to be selling thousands of dollars of kitchencabinets or countertops or appliances. So, the answer so far is yes. Ijust wanted to tone down a little bit what I think are strong results for ourconsumer business in this second quarter so that people realize ourexpectations are flat or slightly up as opposed to draw the wrong conclusionsfrom what was a very strong quarter relative to a continued challenge market. Saul Ludwig – KeybancCapital Markets: And when you say you are looking at a mostly flat, are youtalking about consumer for the full year?

Correct. Saul Ludwig – KeybancCapital Markets: Okay. Then you said that major industrial areas growing at10% in to power plants, petrol chemicals and so on, how large is thatparticular chunk of your business, covering those areas?

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

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 fewsmall to medium size in the pipeline. Doyou have a dollar amount on the range like $50 million acquisitions? What are you exactly looking at?

I think of all of them happened that we currently had undera letter of intent we’d be looking at roughly $100 million. The nature of acquisitions are such that it’snot likely that all of them will happen. The point that I want to make is that we’ve got a pretty robust pipelineof small product line and medium sized company acquisition opportunities outthere that’s consistent with what we’ve done over the last 3-5 years. And, that’s become an important part ofcontinuing to drive internal growth. Particularly if we can take product lines, integrate them into anexisting sales force or distribution strength, and then benefit from acceleratingthat growth in the follow up year. Daniel Rizzo – Sidoti& Co.: You said by the end of this year? This fiscal year or next year?

By the end of this fiscal year. And again, it’s more directional. The nature of these is that they can allhappen or none of them can happen, but there is a number of transactions thatwe have under a letter of intent, and there is a good pipeline for the types ofacquisitions that we’ve proven we can do. Daniel Rizzo – Sidoti& Co.: Finally, is there like a particular area you are looking atgeographically or in terms of your business segments? Or is it spread out?

They tend to be more in the industrial markets and they tendto be more outside of North America. But again, we’re looking at transactionsthroughout the Americas. We closed a small transaction with our EuclidChemical operation in Chile lastmonth, and so they’ll be throughout the Americas,throughout the European marketplace. Wecontinue to look at opportunities in other developing markets and we’re veryexcited about them. Typically thesetransactions are not additive to earnings in the first year, or at least thefirst couple of quarters in which they are done. But once we get into integrating them theybecome, from an IRR perspective, very positive, albeit on a small basis.

Your next question comes from the line of Edward Yang fromCIBC. Edward H. Yang – CIBCWorld Markets Corp.: Frank you spoke about the maintenance and repair aspects ofa good deal of your portfolio, but you also spoke about some of the benefitsyou’re seeing from increased marketing. Could you talk a little bit about the demand, elasticity for some ofthese maintenance and repair products? Iwould think that actually it would be fairly inelastic, but maybe you couldtalk about what you’re seeing on the marketing spend and the returns there.

I can get at some of the marketing questions. In terms of price elasticity, just ingeneral, RPM product lines tend to be the high priced, high performing productlines and, I think that there are periods of time when major projects are onlyabout price. In the infrastructuremarket I think there is a refocus on high quality, high performing life cycleproducts, which is very good for our Carboline and our Stonhard, and ourFibergrate businesses, as well as our Tremco businesses in terms ofconstruction. And, so we’re in a greatplace for infrastructure and Department of Transportation spends on bridgeworkand 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 microelectronicsand in aerospace with major accounts who have had success with our Stonhardfloors, for instance, everywhere in the world. And we just got a major projectthat we lost on price to a competitor that six months later came up, so we gotthe business back. So I think thedynamics out there are such that we’re selling life cycle and premiumproducts. So I hope that answers yourquestion there. Edward H. Yang – CIBCWorld Markets Corp.: Frank, my question was actually geared more towards theconsumer part of the business. Forinstance, if you were spending increased promotional or ad dollars, do you seevolumes increase at some of your big box retailers? Because I seem to recall that you do havesome new initiatives on [inaudible] and some of your other consumer products.

We do. That’scorrect. We have a new product lineintroduced by Dap which is a fast drying caulk. It’s a first to market. It’s aproduct that can be used in wet areas, whether it’s in bathrooms or showers orthings 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 lineto major accounts which will come out this spring. So we have continued to focus on introducingand rolling out new product categories with a number of our major accounts andmajor consumer businesses. Again, theytend to be higher end, higher performing products. And we are doing the types of promotionalthings that we think are necessary to try and drive in a challengingenvironment, the use of energy efficient products to make your home moreefficient. The use of products formaintenance and repair. And I think it’shaving a positive impact. The reality is, it’s probably just the nature of ourbusiness, because it is small project work, which people tend to do in anenvironment like we have now, which is tough for the housing environment. I think it’s evidenced by positive singledigit core growth in our consumer businesses when in general, a lot of our majoraccounts where you can see the statistics, are having mid to high single digitnegative comps. Edward H. Yang – CIBCWorld Markets Corp.: My last question is just historically you’ve had a goodtrack 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 stepdown in the economy, what kind of leverage you could pull to make sure that youcontinue to generate strong growth.

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

Your next question comes from the line of Saul Ludwig withKeybanc Capital Markets . Saul Ludwig – KeybancCapital Markets: One question is, in the consumer sector, what I’ll call theSG&A creep. You know you went alongfor several years where the SG&A kept coming down as a percentage ofsales. That was true in ’05 versus ’04,’06 versus ’05, ’07 versus ’06. But thenthis year, both in the first quarter and again is there any report into thesecond quarter SG&A was up almost 100 basis points. What is going on with regard to thisadditional spending or is it reallyunder as good a control as it should be?

That relates somewhat to the question earlier by Ed Yang andas you will recall comments that we made in July at our year end earningsrelease and our first outlook for the year and also in the first quarter – ourplan this year was to do some heavier than normal promotional spending in ourconsumer businesses for a couple of reasons. Number one, we had some new products that we wanted to move out and makesure they were successful. Number two,we wanted to try and influence our belief that our products would sell intothis difficult economic environment. Thelast 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 ourexpenses a year ago redouble some of our efforts in the sales and marketingarea to both continue to drive positive sales which is the trick to all goodbusinesses. When sales are growing goodthings happen and when sales are shrinking everything that happens from that isgenerally bad. Secondly, to position ourselves for instance in this TBSbusiness, this Tremco barrier solutions – we are picking up market share in aterrible residential construction environment. And, interestingly enough we got a great management team there and we’regoing to be much stronger when we get out of this cycle than when we entered itand we had better than 50% market share there. So, that was a deliberate plan that we communicated at year end and inthe first quarter and the reality is we are spending those dollars and you’reseeing it particularly in our consumer SG&A Saul Ludwig – KeybancCapital Markets: On the asbestos, again the trend had been I guess for thelast three years that each quarter you had a lower number of new cases filedthan in the same quarter a year earlier. And, some of that was because of the tort reform laws that were passedin a number of states and also your aggressive defense posture or combining tosend a message to be careful about filing new cases. It looked like in this quarter there was agood up kick in the number of new cases versus the same quarter a year ago andthis is the first time that’s happened in a long time. Was there anything we should read intothat?

No. I’m very pleasedwith the team that has managed this very difficult environment for us for thelast five years. I think they’ve done agood job. Keep in mind that 99.9% of thecases against RPM in my opinion are somehow involved with a fraudulent productID. But, when you look at the averagenew cases received three years ago we were receiving 300 new cases amonth. In 06 it was 240. For this current fiscal year we’re down toabout 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 proudI am with the team that have done this I think one of the underlying dynamicshere that impacted us and you can see this in other asbestos defendants thatare public that disclose this information is that with greater scrutiny byfederal 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 ofways a declining incidence of this disease and overtime a declining filing ofcases. That’s probably the biggestfactor as anything. Saul Ludwig – KeybancCapital Markets: Finally, just to make sure we’re all on the same page yousaid the base number from which the 8 to 10% earnings per share growth iscurrently expected is $1.57 for last year?

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 theinsurance settlement on asbestos. Youcan also take out of that if you’d like the $0.02 in the third quarter one timetax gain that we talked about which would make these numbers better. The reason I emphasize that is that theanalyst reports that came out today and looked at our new guidance aregenerally correct and they are in different ranges. There was an AP report that calculated that 8to 10% on our GAAP $1.64 and actually said that this is management’s signalthat earnings per share for the year will be $1.77 to $1.80. I hope that they have better vision than wedo but that was based on their taking the 8 to 10% on top of our GAAP $1.64last year and that’s not the basis for our estimate and it’s also not the basisfor the analyst that follow us. I justwanted to make that clear. Saul Ludwig – KeybancCapital Markets: The $15 million was $0.10 a share, right?

It was more like $0.08, $0.07 or $0.08. And again, the base for last year dependingon which analyst follow us and excluding the $0.02 on one time tax – the basethat people are using are anywhere from $1.54 to $1.57. Saul Ludwig – KeybancCapital Markets: Okay. Then you alsostated that the third quarter last year was $0.05 and I’m looking at your thirdquarter last year where you had a reported and then as adjusted number. The as adjusted number that you reported lastyear was $0.09 a share. So, I don’t knowhow we get from $0.09 down to $0.05?

No. Last year wereported I believe $0.08 and we highlighted a $0.02 per share, again thenumbers are in front of me. We reported$0.08. Saul Ludwig – KeybancCapital Markets: Then you have an adjusted number was $0.09.

We had $0.02 of a one time tax gain. So, our adjusted number in the release lastyear was $0.06. Some analyst calculatedthe number differently and actually rounded the number down to $0.05. I think the important point is with confusionthis year and a wide disparity of estimates for our third quarter that werecognized in our last quarterly call – I didn’t know any better way to letpeople know what we expect and just to say, “Hey our plan for the year whichwas set in June last year was for $0.05 this year.” And the reality of our third quarter it’sseasonal because our products are weather sensitive. So, great weather in third quarter helpsus. Bad weather in the third quarterhurts us. It’s 3% plus or minus of ourtotal year earnings so its inconsequential. So, in future years you might plug $0.05 a share into our third quarterand work backwards from that. Saul Ludwig – KeybancCapital Markets: I just wanted to ask to make sure everybody was on the samepage here because it was confusing from what you actually reported in yourthird quarter release last year.

Again, I share that confusion. That’s what we’re trying to do here. There’s also some confusion as to the base ofthe full fiscal year. The only items wehad last year that were extraordinary one time in nature was a $15 million gainin our second quarter pre-tax on an insurance recovery and a $0.02 per sharegain in the third quarter on a one time tax item. Saul Ludwig – KeybancCapital Markets: The $1.57 excludes both of those items?

No. The $1.57 onlyexcludes asbestos.

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

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

Well our receivables and inventories areboth up year over year and itis due primarily to increased activities. I think it’s still abit early to seereally a lot of thebenefits that I think we can getin this area. But Ithink right now we’re actually up because of theexchange. Days inboth cases are downslightly, but theactivity and the exchangeare driving theincrease that you seeon the balance sheet.

Actually itlooked like there was some slight improvement.

Thedays are actuallyimproved.

If you relate itto sales it looks likethere was some slight improvement and I was just trying to find out whetherthat was real or whether itwas just fall out.

Itis real.

Allright. I was trying to help you there infront of your boss. Soat any rate, thank youvery much.

Thank you.

Your next question comes from HughDenison - Heartland Funds. Hugh Denison – Heartland Funds: Frank, I was distracted atthe beginning of theQ&A and so I’llapologize if somebody else brought this up, but did you make any comment atall on yourtête-à-tête with theinsurance carriers regarding theasbestos problem?

Thesituation with theinsurance carriers and our insurance coverage litigation remains static. Thesummary judgment motions have allbeen in and we arewaiting for thedecision of a federaljudge. We expect that decision to come within this fiscal year. Sosome time between now and theend of May, itliterally could happen tomorrow or itcould take another two or three months and itreally depends on thejudge’s docket and how she prioritizes her caseload. But allmotions are inand we are waiting fora ruling from thejudge. The judge couldrule one of three ways. She could rule inour favor, which we believe is appropriate and proven by themotions, which would bea very, very positivething. She could rule that she would pass this on to ajury without ruling on any of themotions which ingeneral would be avery positive thing for us. Or she could rule entirely infavor of the insurancecarriers which would put us inthe situation ofdeciding to appeal or dosomething else. We arewaiting for that decision. We arehopeful that it will bea positive decisionfor RPM, I think evidenced by one insurance carrier settlement and our belief interms of what happened and what’s theright thing to do.

Your next question comes from Greg Halter - Great LakesReview.

Morning, Greg.

Good job inat least amedia-wide environment that doesn’t look sogreat, but that’s thepapers for you. Frank, you were just commenting on theasbestos situation. I know on thelast conference call that you made acomment that you were still feeling really good about thecase. Is that still where you feel atthis point in time?

Yes.

Your capital spending on asix-month basis, I think is $17.5 million versus $22 million ayear ago and I thinkyou had said about $78 million for theyear. Any thoughts on where you may come out for theyear and where thesignificant increase would come from to getyou to $78 million?

Our plan this year is about $75 million and like most of thethings we do aroundhere, we usually hit plan. Some of itis just a timing issuein terms of where weare. But if there’s any difference inthat we can clarify that. I’m not aware of itbut if there is, we’ll clarify itfor you and others.

I know you’ve had alower tax rate for thefirst two quarters of thefiscal year, just wondering what your thoughts arefor the full yearfiscal ‘08 tax rate?

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

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

I don’t know. Theissue on taxes for us, and we didn’t communicate itvery well. I think internally we were trying to beconservative because as we domore international business theimpact of different jurisdiction tax rates areproviding some variability inwhat was a prettysteady one way or another. Sowe’ve also benefited from some of thetax changes. I think there was amanufacturing tax credit that we’re now benefiting from and how longthat will continue, I’m not sure. So, given our greater focus on growing internationallyand some of the otherthings that we’ve benefited from, there will begreater variability. We’ve got great tax guys which three or four years agowe didn’t have internal tax folks and they’re working hard to dothe right thing. I think thebest we can tell you right now is 32.5% for thefourth quarter and thefull year.

With your stock price, although I guess earlier today itwas around the level,but with the stockprices down from the$22.41 that the convertiblenotes work under, how does that work regarding your share count?

We report our results based on fully diluted earnings pershare. The convertthat you’re referencing actually hasa conversion price at$18.40, $18.42, somewhere inthat range -- I can getyou the exact number.It’s a contingentconvert, which means that they can’t beconverted by theholders unless thestock price is above that $22 and changeprice. That security was non-callable for five years and thatfive-year period ends late spring/early summer this year. Theunderlying shares areroughly 8 million and they arecalculated in ourfully diluted earnings pershare number which arethe ones that wetalked about.

Given where you aretoday, if it were aconvertible, is that something that you would look to doat this point?

I couldn’t tell you. I think we would look atthe capital marketsand the circumstancesand what’s going on. Right now it’s a2.75% fixed rate debtsecurity which in thisenvironment is apretty good security. Whether we would leave itoutstanding, convert it, or try and getthe shares out, timewill tell. Again, itdepends on circumstances atthe time.

I know you talked about thebond gain, maybe I didn’t hear it. But was itincluded or excluded, I guess I should say, inthe COGS line orSG&A?

SG&A.$2.2 million inSG&A when you look atthe GAAP results and thesegment results.

I know inthe last conferencecall you talked about marketing initiatives and soforth, growth initiatives, which would bein thetens of millions of dollars but that you could curtail those if theeconomy sank, I think is theword you used. I presume that hasnot happened at thispoint in terms ofcurtailing any of thespending?

Not inany huge way, but again we manage 40 independent business units and havevarious “plan b” plans inplace for them and so inany given year, we’ve got companies that areon a rolland in any given yearwe have companies that areon “plan b” and this year is no exception. My reference to theability to cut costs is really related to thebusinesses that aredoing quite well. We arenot cutting any costs. We arecontinuing to spend dollars inlight of the growthopportunities.

Your next question comes from theline of Amy Norflus - Pilot.

Can you talk alittle bit about thestock repurchase plan that was announced and what your thoughts are?

We have not had astock repurchase plan for some time and our board authorized ashare repurchase plan principally targeting atinitially sopping up thedilution in placewhich I would estimate atthis stage somewhere in$1 million to $2 million shares peryear. We do have inplace certainly what would getus to be moreaggressive in that,for instance, might besomething like afavorable ruling in theasbestos litigation coverage case.

Perfect. Implying that you would geta lot of cash andthat’s how you would use thecash?

That is our hope.

I show no further questions atthis time. I’d like to turn thecall back over to Mr. FrankSullivan for closing remarks.

We have longtalked about thestrength of our RPM’s brands and themaintenance and repair nature of most, but not all, of our product lines. It’salways challenging to test those great assumptions that you like to talk about,and I think in thisenvironment and many of our product lines, we arepositively testing thestrength of our brand names and strong market share positions, as well as themaintenance and repair nature of many of our product categories and productlines. We are clearlybenefiting from continuing strength and what we think of as heavy industrialrenovation, remodeling and capital spending. With those comments, we appreciate your participation inour second quarter conference call. We look forward to reporting our third quarterresults in April and theresults of our fiscal year ended May 31, 2008 which will beanother year of record sales and earnings growth for RPMshare holders. Thank you very much for your participation today, for yourinterest in investing inRPM and Happy NewYear.