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

Okay. The next company is RPM International, and it is my pleasure to introduce our next speaker. Russell Gordon is the company's Chief Financial Officer. After monitoring the performance on RPM's operating companies, Rusty became CFO in 2012. RPM is a global holding company and its operating business is manufacture leading brand coatings, building solutions and other products used for industrial application and for the consumer DIY market. The primary focus is on maintenance and repair. The company has a history of growing internally and from acquisitions. Following a quiet period during the recession, RPM has resumed its M&A effort. It is now in the midst of implementing a multi-wave program, aiming to improve returns and accelerate flows. RPM has approximately 128 million shares, closed at $63.49 yesterday. Market cap, $8.1 billion. Net debt is $2.3 billion, for a total enterprise value of $10.4 billion. I will now let Rusty talk about these company's progress towards the financial goals, the market trends in both the consumer and industrial operation. Rusty?

Thanks, Rosemarie, and thanks for allowing us to participate in the conference today. I will go through these slides briefly, so we have time to answer questions. I'll start with the slide on regulation G and then move on to the next slide, which is RPM at a glance, Slide #3. So RPM is often thought of as a coatings company. And in reality, that's about half our business. The other half of our business is construction chemicals and waterproofing. And we do have some other businesses that don't fall into those 2 buckets in our specialty segment that are small. Our company is now 73 years old. We've always provided products that protect against the weather. And I'd also carry that to say that RPM has weathered several storms over its history. We've raised our dividend by 46 -- or over 46 straight years through all economic cycles. We are a very consistent cash flow-generating business. Moving on to the next slide, #4. This shows our 4 operating segments. We are a company of leading brands. And the company has changed quite a bit from the one I joined 25 years ago. We used to be structured as a very decentralized holding company, and we'll talk later about a number of changes we've made recently with the MAP plan that Rosemarie referenced at the beginning. Moving to Slide 5. Starting off with our 4 segments. I'll talk first about our Construction Products Group. This group provides construction chemicals, waterproofing products and some building materials as well. Our biggest brands here are Tremco, Euclid and Dryvit. Moving to Slide #6. This shows some of our markets. Construction products really supplies engineered solutions for protecting all 6 sides of the building. We provide systems of products that ensure that buildings are not only well insulated but dry as well. On the right side, we talk about some of our infrastructure markets. We supply concrete admixtures, concrete repair products as well as some protective coatings for concrete as well. The second of our 4 segments is on Slide 7, the Performance Coatings Group. They supply high-performance coatings used for protecting steel and also high-performance flooring systems with the Carboline and Stonhard brands, respectively. Also, we supply fire protection and fireproofing products as well. On Slide 8, this talks about some of our target markets for Performance Coatings. Really, this group has a global customer base and our businesses are global as well. We've recently reorganized this group under Dave Dennsteadt, who's been the President now for about 2 years, and he reorganized to a globally brand-managed structure, which led to a lot of delayering of management and put us in a better position to work with giant global customers such as Intel, for example, on the Stonhard side as well as the big energy and oil companies on the Carboline side. Slide 9 talks about our consumer group. This is the 1 group among our 4 segments that sells to DIY customers. Our other 3 segments supply principally to professional applicators and contractors. The powerhouse brands here are Rust-Oleum and DAP. We are well-known for being innovative as a supplier in the do-it-yourself market. We bring a lot of new products to market. We were the first to bring category management to the paint category 25 years ago. And we have great distribution. We are not tied to 1 big box. We sell our brands across multiple customers and retailers. Slide #10 talks about our target markets. We're mainly a North American business in the consumer segment. And besides do-it-yourselfers off on the right side, you can see, we do supply industrial coatings. We sell to professional painters as well as facility managers through different types of distribution and consumer channels. We sell to those end users through paint distribution as well as MRO and industrial distributors. Moving to Slide 11. This talks about the smallest of our 4 segments called the Specialty Products Group. This is a diversified collection of businesses. We supply everything from edible coatings to dehumidification equipment. One thing that a lot of these businesses share in common is that they're leading brands in niche markets. You can almost call them big fish in small ponds. And they tend to have nice margins. As we've spoken about in recent earnings calls, we do have some initiatives to improve growth in this segment. The next slide, #12, talks about some of the specialties target markets. I'll move on to Slide 13, and this talks about where we are now at RPM. We've done close to 200 acquisitions over our history. And as a result, we built a great company, but there's a lot of complexity. We have a lot of plans, a lot of ERP systems, a lot of locations where we have administrative activities going on. And really, in the 2015 to 2017 time frame, we and our investors noticed that our bottom line was not growing as we would have expected in line with our top line growth. We really weren't getting the leverage. So we started, in 2017, with discussions with our Board of Directors about the changes RPM would need to make to its business model and structure so that we could take RPM to the next level of growth. Moving to Slide 14. This talks about our MAP, or our margin acceleration plan, which kicked off in the summer of 2018. We covered the specifics of this in Investor Day held in November of 2018 and gave some financial goals. Really, the principal elements of that MAP program is we have moved to 4 segments from 3 segments that started here in fiscal '20 on our external reporting. We became center-led in 3 areas: procurement, manufacturing and administration. Also we discussed some things that would not change. We were going to continue to let sales, marketing and product development reside in the individual businesses where they're close to the customers. So I think the way to summarize it is that we're going to do what matters most for our customers at the front lines or in the business units of RPM. And what was changing was that we were going to do the back-end functions, the things more invisible to our customers, as efficiently as we can with this center-led approach. Moving to the next slide, #15. This shows our goals for reducing cost at $290 million, and we broke this into 3 waves. And also we broke this $290 million into 3 areas as I mentioned earlier: manufacturing, procurement and G&A. And the goal was to have this cost reduction completed by December 31, 2020, so about 9.5 months from now. And so far, so good. You could see we completed Wave 1 in fiscal '19. And really, we're able to find savings ahead of our goals, which was good news. We have instituted a culture of continuous improvement at RPM, that's helping us in the manufacturing area as we introduced new disciplines to our plans. We're also reducing our plant footprint from starting out with 155 plants and we plan to close 31 over this MAP period. In terms of procurement, we're going to be better coordinated. From now on, we're going to assume all companies are in a coordinated purchasing program. We have centralized our purchasing department to be an RPM function that used to reside in the individual businesses, and we have formed strategic partnerships with major suppliers. On the administrative front and G&A, we had started this MAP program with 75 instances of ERP systems, and our goal is to get that down to 4. We also started this MAP program with 105 locations where we close the books every month, and we can certainly reduce that number dramatically. Slide 16 shows our second quarter results. These are heavily impacted by a lot of charges associated with our MAP program. Slide 17 adjusts these for these charges, so you can see the core operating performance of RPM. As you can see by the sales and EBIT growth, we are getting great leverage on our bottom line. We are outperforming our peers, and that indicates our MAP program is working. Slide 18 shows the year-to-date results as reported. Slide '19 adjusts for some of the MAP charges. And this, again, is a great evidence that our MAP program is working. On this slide, you could see sales are up $51 million. EBIT is up even greater by $66 million. This really shows the leverage we're getting from the MAP savings. A couple of things I'll point out. Our top line is pressured by headwinds on the stronger U.S. dollar as well as some of the decisions we've made with the MAP program to rationalize away product lines that do not meet our new margin criteria or carry a high working capital burden. So that's probably close to 1% of our top line through these decisions to rationalize product lines. Also, I'll point out some of our best performances from our 2 segments that used to comprise, in the old days, our industrial segment, back when we had 3 segments. Of course, I mentioned, we broke those into 4. And Construction Products, Performance Coatings used to be part of that industrial segment. We used to talk about that as our biggest opportunity for margin improvement. And you can see here that the leverage and the bottom line improvement is really coming through well for those 2 groups. Our Consumer Group is performing well. I will point out last year our earnings were burdened with about $10 million of legal settlements in the numbers you see here. But we're still getting good sales and earnings growth. Our Specialty Products Group is challenged. It's really a work in process. As I mentioned, we are working on initiatives to improve growth. Moving to Slide 20. It's nice to see that we are being recognized in the financial community, that our MAP program is working with the stock price performance versus our peers. And we are, as I mentioned, outperforming our peers on the financial performance. Slide 21, I'll skip through that, just shows the old 3-segment approach to RPM, which changed to 4 segments through the MAP program, 4 operating segments. We thought that this was a key strategic decision for us. It's created greater accountability for the 4 leaders of these 4 segments since their numbers are disclosed publicly now, and it also gives greater transparency to RPM's investors as to what's going on in our business. Slide 23 shows that RPM operates in huge markets, very fragmented, lots of room to grow by acquisitions and through organic growth. We have very big platforms, whether it's coatings, waterproofing, construction chemicals and lately, the cleaning category has been of interest to us. And we've done a number of product line acquisitions in specialty cleaning of late. Slide 24 talks about some of our new products. One very exciting one is Nudura, which was acquired through an acquisition in September of 2018. It's part of our Construction Products Group. Nudura formerly had 16 sales people that were selling insulated concrete forms, which are ways really to build buildings better. These forms allow buildings to be insulated better. It allows lots of labor savings in constructing walls. And it also, at the end of the day, allows for a stronger building that can withstand high winds. And we are spreading the message of Nudura rapidly through our Construction Products Group because of the size of their sales force, there's about 380 salespeople at Construction Products that can help us get the message out on Nudura. Moving to the next slide, 25. Talks about new products in our Performance Coatings Group. We have Carboline, which supplies a lot of products for protecting exterior steel; Prime Resins, which is really selling into the infrastructure market and Stonhard for flooring. Moving to Slide 26, our Consumer Group. A lot of people know these brands. DAP, I'd point out here this Dynaflex Ultra is using, something we're using in a few DAP products called Weather Max technology. We also use this in exterior patching as well as the caulking application shown here, and that really provides a lot of properties that are important to prevent cracking and UV fading and yellowing as well. Slide 27 talks about new products in our Specialty Products Group. We continue to roll out Tru-Core now for engineered woods. Tru-Core, you might remember if you followed us in the past, is really a great OEM wood treatment that allows a builder to offer a homeowner a guarantee for life against termite damage. So that's been a great technology for us. In the middle here, VerdeCoat offered by Mantrose-Haeuser. This is the company that has supplied edible coatings to protect sliced apples from browning. This new product called VerdeCoat is a barrier coating used for cardboard packaging. As you know, fast-food outlets are trying to get away from plastic packaging. And we're in a major trial now with a major player in the fast-food industry. Next slide, 28, talks about our acquisitions. On the left side, I'll point out over the last 10 years, most of our acquisitions have really been product line integrations. We still are doing a few of the traditional entrepreneurial-type acquisitions. As we talked about, with the culture change with our MAP program, we used to, in the past, tell a lot of our acquisitions that nothing will change when you join RPM. Obviously, that's changed with the MAP program and being center-led in manufacturing, procurement as well as administration. The MAP program, I think, will help us integrate larger acquisitions in the future that will allow us to compete and win on bigger deals and, ultimately, help us grow faster as a corporation. Moving to Slide 29, talks about intercompany connections. As you can imagine, with a diversified group of businesses like RPM, we sell through a number of different channels, have a number of different technologies and sell to a number of different end users. As a result, we are rich with opportunities for intercompany connections. One we talk about here at the top is Rust-Oleum and Tremco. Rust-Oleum sells through the MRO channel. And Tremco has become a major supplier of roofing maintenance and repair services to a lot of these MRO customers as a result of the Rust-Oleum partnerships in that area. That's really opened up a whole new group of customers to Tremco for their roofing products and services. Slide 30 shows our international expansion. Since Frank Sullivan became CEO in 2002, we purposely tried to diversify our presence outside of North America. As you can see, there's very little Asia exposure for RPM. I know China has been in the news. We do much less than 1% of our sales in China. There's no major OEM exposure for RPM. We don't sell to auto markets. We don't sell to Boeing. So that tells you a lot about our international presence. I'll wrap up here. Slide 31 shows that RPM has proven to be a great long-term investment. Slide 32. We supply a lot of products at RPM that protect valuable assets. And 70% of our sales, we estimate, is related to maintenance. That supplies steady cash flow for RPM. Back in 2009, in The Great Recession, our sales were down 7.4%. Our peer group was probably down, on average, double that. And in 2009, we had record cash flow. Really, thanks to the -- not only the maintenance nature of the sales but the balance between consumer and industrial. And usually, the consumer is the first to hit a recession, the first to get out. There's the lag effect with our construction businesses, and that balance has served us well in tough times. Slide 33. Like we show on the slide, when we're going to combine an entrepreneurial culture from our past with this new focus on continuous improvement, we're going to be tough to beat. Our MAP program formally ends in about 9.5 months, but we're going to keep this new culture of continuous improvement going, and we think RPM's best days are in front of us. With that, I'll conclude and see if there's any questions.

Rusty, so there are no questions online, but I do have a couple. If you could give us a feel for the trends in both the housing market and at the big boxes?

Sure. Yes. The trends have improved versus the very wet and rainy sequence of quarters we were having about 1.5 years ago. Through June of 2019, I think for that 12-month period, it was one of the wettest on record. So the paint market was down. Of course, in the second quarter of our fiscal year, we saw better weather and that allowed our sales to pick up a bit. At retail, things appear so far to be pretty healthy. I checked the comp store sales numbers out of Home Depot and Lowe's and they've been growing in the 4% to 5% range. Now lately, it appears that 3%, 3.5% might be more realistic. But consumer spending up until the recent crisis over the last 3 weeks has held up very well.

And then I was wondering if, given the current environment, you have made any change to your MAP target? Meaning, are you pushing that 9.5 months, may be difficult to reach? Are you pushing your target into 2021? And are you also adjusting the potential margin improvement?

Sure. Yes. I mean that's a great question. We feel very confident in our $290 million of cost savings and getting all those initiatives done on time by December 31, 2020. So we feel in good shape there. As far as the goal of $1 billion of EBIT, as Frank has mentioned, our top line sales have not grown as we expected on Investor Day in November of 2018. There are some reasons: lower M&A activity due to some of the distractions with this restructuring, FX headwinds, et cetera. But as far as the cost savings goals, we think we'll hit them on time. And I should also add, we are not stopping. We're going to continue to find opportunities with this new continuous improvement culture after that magical date of December 31, 2020.

Well, thank you very much. We appreciate your presentation, it was very informative. And we will talk to you later. Thanks. Bye.

All right. Thanks. Stay well. Bye.