RPM International Inc. (RPM) Earnings Call Transcript & Summary

Welcome to our next session. It's a pleasure for me to host Frank Sullivan, CEO of RPM. I looked at a very detailed bio of Frank for the first time. I've always just looked at summaries and never realized that he actually had worked for banks before he joined his father at REM. But Frank joined RPM in the late '80s, and it looks like he's held nearly every role at the bank, I mean at the RPM. He ascended to CEO in 2002, I believe it is, and has been leading quite the transformation of the company here in the last couple of years. So look forward to your update, Frank.

Steve, thank you. It's a pleasure to be at the Bank of America Materials Conference. And I'm going to briefly go through a slide presentation. Skip over a bunch of slides, assuming that most of you here know about RPM. This information is accessible on our website, www.rpminc.com. RPM is a $5.6 billion global producer of specialty coatings, specialty chemicals and construction products. We've raised our dividend for 46 straight years, one sign of the consistency of our performance, an important way that we've delivered pretty consistently for our shareholders. This org chart is relatively new, and I'll talk more about it later in my presentation. We report in 4 segments. We reorganized from 3 segments to 4 segments a little more than a year ago. And it is in these 4 segments that we are also conducting an operating improvement program that we call our 2020 MAP to Growth program. And as you'll see, it's having a tremendous impact on our ability to be even more competitive and also driving a significant improvement in our earnings and our cash flow. Our Construction Products Group is roughly $2 billion. We have a number of leading brands around the globe. We operate in construction chemicals, the 6 sides of the building in terms of energy efficiency and also in major construction products. Our Performance Coatings Group is one of the global leaders in high-performance coatings for concrete and steel. These are our key brands in the markets that we serve. Industrial capital spending is a big driver of our Performance Coatings group businesses and product lines, and we also serve infrastructure in this segment as well. Our Consumer Group is a leading producer of patch and repair products, caulks and sealants and small project paints, wood stains and finishes. In North America, we serve every major customer channel from home centers, discount, hardware with these leading brands. And we are also growing in various other end users from makers, professionals and MRO industrial. Our Specialty Products Group is truly a unique collection of entrepreneurial businesses, typically the leaders in small niches globally. You can see 4 of our Specialty Products Group businesses here. Leaders in air handling equipment with Legend's, fluorescent color with DayGlo, OEM and small distribution wood stains and finishes with our Mohawk business and pleasure marine coatings in North America with our Pettit business. These are the target markets we serve. And again, high margin, very niche businesses and an opportunity for us to continue to deliver on that entrepreneurial acquisition model that has been the hallmark of our success for 5 decades. I mentioned that we're in a very unique time in RPM. We have been working for more than 2 years to reposition RPM for the next level of growth. We're combining that entrepreneurial approach to the marketplace where we've been known as the best home for entrepreneurial companies. We've completed more than 100 acquisitions of freestanding businesses or product lines. Most of our freestanding businesses brought with them a management team that was typically a second or third generation of the original owner or founder, and we are marrying that with an operating improvement program that I'll talk about in more detail to combine that entrepreneurial legacy with the disciplines of continuous improvement in driving operational excellence on a more consistent basis across all of RPM. In November of 2018, we introduced our 2020 MAP to Growth operating improvement plan. You can see the elements of this here. These were the financial targets, the absolute goals that we laid out at the time. We've communicated that we're a little behind on these goals, but you'll see in terms of operating improvement, margin improvement and our earnings results, this program is having a tremendous impact in RPM in terms of our performance. The purpose to position RPM for sustained profitable growth, creating superior value for our customers, entrepreneurs, associates and shareholders. And the vision is to transform RPM into a more connected and efficient company focused on operational excellence and continuous improvement, while maintaining the strength of our historic entrepreneurial culture. In November of 2018, we laid out our goals in what we call the Waves. These efforts were focused on manufacturing center-led manufacturing, where we are bringing lean manufacturing disciplines across RPM on a more centralized and center-led basis. We had 155 plants. We are in the process of eliminating 31 of those plants. We have completed or announced 19 plant closures, and so we're ahead of the curve there. We have centralized procurement, which is having tremendous benefits for RPM across our $5.6 billion of business, and we're also looking at consolidating G&A in the areas of accounting, finance, legal, IT and others. As you can see from this slide, our original target for Wave 1 was $83 million, and we actually achieved $102 million. We are in the midst of Wave 2, with a target of an additional $101 million in cost savings, and we are at the current time ahead of that run rate as well. So we are highly confident that when we complete this at the end of our '21 fiscal year, we will meet or exceed the original $290 million targets in savings. I'm going to skip through our recent results, you can see those. This is our second quarter that was just completed on a GAAP basis and then on adjusted basis. This is our 6-month year-to-date for the 6 months ended November 30. And I'll spend a little bit of time on this slide. This is RPM's year-to-date as of November 30 results on a consolidated and segment basis. And the proof of the benefits of our operating improvement plan are here. On a consolidated basis, revenues are up $51 million, and EBIT is up $66 million. That's 129% yield. That's hard to continue. We expect to continue that type of leverage to our bottom line for the next 4 to 6 quarters, after which, we'll get back to growing RPM with a better margin profile and where the incremental dollar of sales will yield better earnings and better cash flow to RPM. On a segment basis, you can see that we now report in 4 segments. Previously, our largest segment was our industrial segment, which was a combination of our Construction Products Group and our Performance Coatings Group. That was the area where we had the most opportunities for margin improvement. And as you can see from these results, it's happening. Our Construction Products Group sales year-to-date were up 5%, driving nearly a 31% EBIT margin improvement on an adjusted basis. You can see the performance in our Performance Coatings Group relatively flat sales, driving an EBIT margin improvement of 21%. And then our Consumer Segment, similar results. Our Specialty Products Group is our smallest and, quite candidly, was underinvested in for a number of years. So we are in the process of reloading growth investment for that business, and we would expect our Specialty Products Group to start generating positive sales and earnings results and solid leverage in our new fiscal year, which begins June 1. The other thing that I would say on this slide is in relationship to revenues. One of the reasons that we are behind our absolute goals is because we are experiencing lower than we anticipated growth. As you can see, year-to-date growth is only up 1.8%. There's 3 reasons for that. Number one, growth outside of our core North American business, particularly in our second largest market Europe and other parts of the world, has been slower than we anticipated. Number two, as part of our operating improvement program, we have taken a very aggressive look at closing businesses that have been underperforming or discontinuing product lines that do not meet our earnings goals. We have, in this program, eliminated roughly $60 million of revenues through that program. And I think by the time we complete our operating improvement program by the end of our fiscal '21, we will have eliminated another $60 million of revenues of underperforming product lines or businesses that aren't going to be part of our future. The last comment I'll make is that acquisitions have been a little bit lower than we had anticipated. We anticipated about $200 million of acquisitions a year, and we're doing about half of that. The market likes what we're doing. This is RPM's stock price performance over the 2-year period so far of our operating improvement program. As you can see, we have outperformed most of our peers. I think what's most interesting about this slide, and I need to add this statistic is, our valuation metrics haven't changed. Our PE hasn't changed over this time frame, our firm value to EBITDA has not changed. So it has truly been driven by our performance in the midst of this operating improvement program, and our ability to have revenue growth equal to or better than most of our peers, which is a real accomplishment as we've got most of our businesses focusing on consolidating production and taking a look at costs. This was our former org chart as of May 31, 2018, and it highlights the truly unique entrepreneurial nature of RPM, our growth through entrepreneurial acquisitions and how decentralized we were. This is our org chart today and was initiated as part of our MAP to Growth operating improvement program. We are consolidating on a centralized basis procurement. We have moved to be center-led, which is a combination of centralized of the corporate headquarters who are coordinated within our 4 groups: IT, legal, accounting and finance. We are moving from closing the books in 105 places around the globe every month to 20. We are consolidating what was 55 different ERP systems to 4, and in the midst of that, finding opportunities for other savings in a number of areas. When we get through this, and our plan is to complete our operating improvement program at the end of our fiscal '21 year, which starts on June 1, the real challenge for us is to continue to drive that outperformance to growth. This slide is a little dense up here, but I would encourage you to take a look at it in the materials that we've handed out or on our website. We've worked to refine what we think are the addressable markets for the RPM companies. In total, globally, they amount to $134 billion. And you can see by each one of our segments, how we break that down as it relates to the addressable markets. So a lot of exciting opportunities for our continued growth. I'm going to skip through these slides pretty quickly. Innovation and introduction of new products has been a hallmark of our ability to drive somewhat better than our peer organic growth, and you can see some examples here in our Construction Products Group, new product introduction opportunities in our Performance Coatings Group, in our Consumer Group, in our Specialty Products Group. Acquisitions have been a critical part of our growth for the last 40 years. These are some recent acquisitions that we've completed. Nudura involved in insulated concrete forms. It's a patented system. It is one of the most durable, energy-efficient systems for residential and light commercial construction in the market today, and this is growing organically at double digits. Up in the upper right-hand corner, recent acquisitions by our Consumer Group, now have RPM with an $80 million base of business in specialty cleaners. That's a multibillion-dollar market that we're excited in growing double digits in. Intercompany connections. With that 4 group structure, our ability to drive opportunities across our businesses is greater than it's ever been and it's happening. Some recent examples: our Tremco Roofing business is the leader in North America on roof restoration coatings. Roof restoration coatings for us is an opportunity to go and take on 30- or 40-year-old end-of-their-life industrial roofs and for 1/3 of what it would cost to tear off those roofs and replace them, we can extend the useful life for 15 or 20 years. We have a test through Rust-Oleum, with one of our largest home center customers of taking those Tremco Roofing products and putting them in the home center, which allows us to get at tens of thousands of smaller contractors that we've not been able to reach before. We have an opportunity that we're pursuing now, again, through our Consumer Group with some of their big MRO customers of bringing our Stonhard flooring business on a turnkey basis to some of those MRO companies' customers. So the opportunities are starting to become much more real than they were in the past for sharing channels, sharing technology and leveraging growth across RPM from one company to another. This is a slide of our revenues as of May 31, 2019. It speaks for itself in terms of the opportunities that we have to grow around the rest of the globe. We have made steady progress in growing from what was mostly a North American business 15 years ago to a business that's much more global today. The other point that I would make about this slide, particularly as it relates to questions around coronavirus, to the extent that, that is mostly a China and Asia phenomena at this time. Only 3% of our revenues are in that market. And so the impact on us is very modest, the impact in terms of raw materials today is very modest, and we don't see that having much of an impact unless, of course, it becomes a much larger global issue. I will tell you, in the Asia Pacific region on this very small base of business, in the last 45 days, we've seen our revenues drop 20%. So if you're in that market, it's certainly having an impact. Our stock price performance has not only been good for our shareholders over the last 2 years, but it's been good over longer periods of time. A combination of that growth of a dividend that rises every year. And more recently, a more aggressive share repurchase program. We're about halfway through a commitment to repurchasing $1 billion of our stock. That's as quickly as I can go through these slides on RPM and really preserve most of this time to answer your questions and sit down and have a chat with Steve. So I look forward to doing that.

Well, thank you, Frank. You -- one of the comments you made was about the MAP to Growth program. And you said -- I think you used the word, "we're a bit behind." Would you say that it's going slower than you expected? Or is that right after you rolled it out, you kind of dropped into a deeper hole in with respect to EBIT margin, but it's been climbing out of that at a steady clip, but you fell into a deeper hole?

Absolutely. So I want to clarify something on that. We are actually nicely ahead of our operating improvement plan goals. That $290 million of savings, the plant consolidation, consolidating IT systems, it's all going very well, and we're continuing to build our pipeline. So it's likely when we're done, we will exceed that $290 million. We got off to a rough start principally because we announced this in the fall of 2018, and our whole industry was still in the teeth of what was a pretty aggressive raw material price increase and availability challenge. That started to ease up across our industry in the mid part of 2019. And so we actually went backwards in terms of our EBIT results. But when you look at our leverage to our bottom line and you look at the margin expansion that we've been generating for the last 3 quarters, it is better than almost all of our industry peers. So on a relative basis, we are outperforming. And the area that we are also behind is really revenues because we are experiencing a lower -- we had assumed a 5.6% compounded growth rate over the 3 years of this program and that had been consistent with RPM's compounded growth rate over the prior 20 years and the prior 5 years. Right now, our compounded annual growth, because of market dynamics principally outside of North America and slower-than-anticipated acquisitions, is looking more like 2% or 3%.

That whole process of having an activist and then bringing in AlixPartners caused you, I'm sure, to do some self-reflection on the focus -- on the structure of the organization. What do you think you learned from that? And where do you think it can go from here?

So it's a great question, and it's turned into a really good story. We were working on this operating improvement program with our Board of Directors for the better part of the year and had planned to roll this out in the summer of 2018 in conjunction with some senior leader retirements. And we were slow to the starting blocks and before we could go public, Elliott Management jumped into our stock. Our initial meeting with Elliott was very challenging, very provocative. But we developed, I think, a pretty constructive dialogue with them. And I think the fact that we were in the midst with our Board of developing this operating improvement program led to a constructive settlement with them. I have a different view today than I might have had 18 years ago. Their involvement in our stock and the public announcement of a settlement agreement with Elliott helped generate a greater sense of urgency for the change that we had to do than we probably could have generated on our own. And so when you look at where we are in terms of plant consolidation, systems consolidation and the exceptional attitude that the people across the globe for RPM have taken in this change, I think they, in hindsight, are part of helping us get there.

And when you look at what you've accomplished so far, have you thought of additional areas that you could pursue beyond this kind of focus on the supply chain, manufacturing footprints and so forth?

So the -- another great question. I didn't comment on the AlixPartners piece. So AlixPartners came in and really helped us kick-start an operating improvement program focused on our plants and bringing lean manufacturing disciplines into our operations. The area that I think, over time, we will most outperform is in manufacturing. So we are bringing, on a consistent basis and ways we hadn't in the past, common measurements around lean manufacturing across all of our operations in the globe with a center-led manufacturing and operations team. We're getting into plants and we're finding opportunities that would save within a particular plant $1 million. And that's what the leadership team, who's kind of new to this, and these aren't new disciplines for the world, but they're new to RPM. So they'll sign up for $1 million of savings. As we begin to implement that, we're waking up 6 months later and finding out that it's really $2.5 million. And so when you look at the centralized nature of RPM, there are no single places where we're going to get tens of millions of dollars of savings, but there are single categories, like manufacturing improvements, and it is happening almost everywhere, where we thought $1 million is going to happen and it's $2.5 million, where we thought in a small plant we'd save $0.5 million and it's going to be more like $1 million. We have a single OEM manufacturing facility business in the south, it's a $100 million business, we'll save $4 million in that plant just by instituting new disciplines. So that's the area that over time could be probably twice what we originally thought it would be. And we're really excited about that. The other area that I think is most exciting in terms of growth is our Construction Products Group. Aside from all the manufacturing and operational efficiencies and systems efficiencies, pulling together in one place, the companies that serve the construction markets under one strong leadership team is something we should have done years ago. And they are able to system sell, they have an energized sales and spec base and what's happening there is really exciting.

You put up a slide here that showed your share price performance comparison to your comps. How would that also look with respect to EBIT margin? Do you think that you're still lagging behind and, therefore, have more to go?

So in terms of EBIT margin, over the last 3 quarters, our EBIT margin expansion has outperformed almost all of our peers. You can see that in our results, and I think that's what's driving our stock price. We have a fair amount of room to grow. We have talked about some manufacturing issues that we've had in our consumer segment. That's showing up now in relation -- it was resulting from a good problem, market share gains in certain areas. And as we work through that, I think in fiscal '21, you'll see a resurgence of EBIT margin improvement there. And we probably have 200 basis points more of EBIT margin improvement in our Construction Products Group and our Performance Coatings Group on top of what's been 200 to 250 basis points of EBIT margin improvement just in the last 15 months. So there is more to come, and we're pretty excited about it.

And what would drive that subsequent 200 basis points of margin in those segments?

So what's driving that is just a follow-through on this MAP to Growth program, plant consolidation, the fit events that are happening. We started with our biggest plants and are moving down to kind of medium-size plants. And then the thing that will really accelerate that is revenue growth. The revenue growth, I've commented on a few times, has been disappointing relative to our original plans. When you look at that 6 months leverage on $51 million in sales, we put $66 million on the EBIT line in the first 6 months. Where we are, the incremental dollar of another sales will hit our bottom line really hard. And so if we can accelerate that growth and keep the good growth that's going on, for instance, in our Construction Products Group, you'll see that. The other thing that's really exciting for us is in some cross-company opportunities. So when you look at our Tremco Roofing business, we estimate about 40,000 roofing contractors in North America. We serve the top 1,000 on a direct basis. So we are now working directly with our Consumer Group. Historically, we would share technology. So we would share a Tremco Roofing technology with Rust-Oleum, and Rust-Oleum would put that on the shelf of one of their customers if they could get a position in a Rust-Oleum bucket. We're doing things at RPM that we never did in the past. We're talking about markets as RPM, not just individual groups. And when you talk about markets as RPM, what you realize is those 40,000 small- to medium-size roofing contractors who Tremco doesn't work with, they don't want Tremco technology in a Rust-Oleum bucket, they want Tremco technology in a Tremco bucket. And we have a 50-store test of doing just that with our largest home center customer. It's going extraordinarily well. And so the opportunity to leverage channels to market, whether it's MRO channels or home center channels in our consumer segment, with some of our industrial businesses and industrial products, is really exciting for us. And that's brand-new in terms of how we think and how we operate.

And how are you motivating your management to do that? As I understand, all of those businesses are still maybe headquartered separate from one another. This is -- not like this is all under one roof. And how do you motivate that collaboration between businesses at the commercial level?

Sure. So a lot of times, change when it's well accepted accomplishes what you want. And I say that because there's a lot of bigger organizations that I'm aware of that are changing their compensation more to the results of their individual product lines or units to really drive performance at that level. At RPM, our compensation, whether it's salary, cash, bonus or participation in our equity programs for the last 20 years has mostly been driven by the results of the individual business units. Half of our compensation in our equity programs across all of RPM and a significant portion of all of the compensation of a larger chunk of our leaders has now been changed to the consolidated results of RPM. And so it changes the way people think about cooperation, and it's going to change the way people are compensated and how we measure compensation at a significant level of a number of senior leaders based on the consolidated results of RPM. It doesn't sound like much, that's why I started the other way. But I think when you change your compensation programs, whether you're RPM or somebody else, it's as much about what you're signaling and what you measure and what you reward. And in our case, it's having a good result initially, and I think it's going to be a function of driving that cooperation across our businesses that we're already seeing.