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

Rusty Gordon, CFO; and Scott Copeland, VP of Financial Planning and Analysis. Before we get started, I'm just going to remind you about the important disclosures that are found on the Morgan Stanley website at morganstanley.com/researchdisclosures. We suggest you read those disclosures and ask your Morgan Stanley contact any questions you have about those. We will do Q&A at the end. You can log into the Q&A or send the Q&A and through the web browser or you can e-mail it to me. I'll ask it anonymously. And before we do the fireside chat, Rusty is going to tell you a little bit about some videos that you'll see quickly. And then we'll come back and we'll do the fireside chat. Rusty, over to you.

Yes. Thank you, Vincent, and thanks for having us again. Good to see you again. And I'm going to start with a couple of videos that demonstrate 2 different aspects of RPM's business. One is a 2-minute video showing waterproofing on a large bridge job by our Performance Coatings Group and the other one is a new commercial we're running right now from DAP on an innovative way to repair walls. So we can run them now. Thank you. [Presentation]

Okay. Welcome back. So Rusty, maybe you want to tell us a little bit more about the products we saw on those videos and sort of how they're fitting into the portfolio and where they are and sort of your growth trajectory for them?

Sure. Thanks, Vincent. Yes. One product from Universal Sealants protects that bridge you saw in Brunei and that's an example of how our products protect the infrastructure. We have several products used in infrastructure from coatings to admixtures, to waterproofing. And that's a very, as you can imagine, complicated project to execute. We're just -- not just the material supplier, but also the applicator as well. And then the other was DAP, showing the innovation we have in our consumer segment with kind of a disruptive new way of patching walls that need repair. It's a simple solution that we think will expand the uses for patch and repair products, and we just launched it this fall.

Okay. Well, that's great. Those videos were very interesting. Maybe we just can sort of circle back to the guidance you gave for fiscal 2021 and you can kind of walk us through the puts and takes about getting to the high end of the guidance versus the low end of the guidance and what you have in there for COVID risk, maybe particularly in the European market, where we're starting to see some deceleration there?

Yes, absolutely. Yes, when we talk about our 4 segments, I'll go from the best scenario to the most challenged scenario. Obviously, the best is in the DIY market as people are spending more time at home, less time on vacation. They're doing more fixer upper jobs, and they're using a lot of our products. We see that continuing. We continue to see good housing turnover. We continue to see people who have experienced our products once who want to try more projects now that they're gaining confidence. So that's an area where we see sales growth in the mid- to upper single digits for the balance of our year -- the last 3 quarters of our fiscal year ended May 31. Our Specialty Products Group, as you probably know, has been a drag on our results in recent quarters, but they're turning the corner now. We expect flat results in Q2, which should turn positive in Q3 and Q4. We've made a lot of management changes there. They've done a lot of restructuring. And I think we're going to start to see the benefits of all that hard work soon. In the last 2 segments, Performance Coatings Group and Construction Products Group, there are some macro challenges namely in our Performance Coatings Group, their big brand for protection of exterior steel is called Carboline, and they do $250 million of business in the energy sector. Parts of that are promising like wind blades we protect with Carboline, but the majority of it is in oil and gas. And maintenance is being deferred right now, as you've probably read in the big oil companies' annual reports. They're cutting capital spending and maintenance spending. So that's going to be a challenge, and we expect down results in Q2 and Q3 before getting back to growth in Q4. And then the last I'll address is our Construction Products Group. That group is tied somewhat to new construction, but most of their emphasis these days is on renovation of buildings. And they as well are expecting negative growth, not to the extent of Performance Coatings, but negative top line growth in Q2, Q3. They're doing a great job on the MAP restructuring. So we might see earnings growth in spite of negative sales in those quarters. And then the fourth quarter, again, like Performance Coatings, we expect that to flip to positive revenue growth.

Okay. But just in the current quarter, so far, trends are playing out as you anticipated, particularly in the DIY side of the equation?

Yes. We'll provide that on our next earnings call in January. But as far as the dynamics go in DIY, basically, if people -- our biggest competitor is what people do with their time. And if they have nothing to do like go on vacation, they spend time using our products. So we do see positive factors for elevated demand in that business. We've also struggled just to meet the unprecedented demand. So if you go to retailers, you'll see that, unfortunately, we haven't been able to keep up with it, and you'll see some holes on the shelf. But we are working 24/7. We're investing in new capacity now, and we're trying to catch up. So there will be, Vincent, as the weather turns colder, some catch-up that's necessary just to fill the pipeline again because our inventory and our retailers' inventory has gotten lower than we'd like.

Okay. But you're still very confident even as we get in -- later into your fiscal year where the comparisons start to get very challenging that you're going to still be maintaining sort of a base level of demand commensurate with what we saw during the initial parts of COVID?

Yes. That's right. For the consumer segment, I assume you're talking about?

Yes, exactly.

Yes. That's correct. And you're right. The comparisons are tougher in that segment. But in the fourth quarter last year, I think our sales growth was 7%, which for our consumer business is not that extraordinary. They, as you know, grow year in, year out, have been picking up a lot of share over many years. But when we get to the first quarter, of course, we'll be rounding the 34% sales growth. So we'll have to figure out how to top that in the next 8 months or so.

Yes. That's going to be an interesting one. A good problem to have. And maybe you just want to help us understand your -- a lot of focus on do-it-yourself this year for obvious reasons. It's been extremely strong. Maybe talk a little bit about the exposure you have to the pro side of the business?

On the consumer segment?

Yes. Or just in general with housing and renovation and so forth. Yes.

Sure. Absolutely. That's another bullet in our holster for later on when DIY demand might start to level out. There's a whole customer base for Zinsser and DAP products that our contractors -- that's probably half their business, mostly paint contractors. But for DAP, plumbing contractors, drywall contractors, other miscellaneous people who have not been allowed into people's homes because of fears of outsiders and strangers coming in, bringing the virus. So that part of our business may actually pick up later as the vaccine becomes available and people start letting contractors in. So that could be a potential upside for our consumer business later on.

And then you're not starting to see that already though yet as the sort of construction restrictions declined as we exited 2Q into 3Q. Did you start to see a pickup in that part of the business?

Yes. I would say that we have seen a slight pickup. It does appear that people are learning to live with the pandemic a little better. So we have seen that certainly pickup from April and May when it was really restricted.

And could you just sort of help size that opportunity set versus sort of DIY? Just so as we see the DIY begin to hit those tough comps, presumably your -- pro side of your business is hitting some easy comps. And will those 2 things be able to offset each other? Or is the DIY so much bigger than the pro that it still be a headwind, but the pro can help moderate the headwind?

Yes. It will help moderate that. DIY right now is, I'm sure, over 80% of our consumer segment, probably in normal times at 70%, 75%. So it is a smaller piece, but yes, it would help mitigate any downturn in DIY. We don't see it. I mean, we see great housing turnover, low interest rates. A lot of positives for people moving in new houses, getting rid of old houses, a lot of redecorating associated with that. And like we've said, there's people who have become more confident with our products because they've had a successful experience over the last few months on DIY projects.

Okay. And Vincent, I would add just in the consumer business, we do have an emerging platform in cleaners, which is really a conglomeration of acquisitions we've made over the last 4 or 5 years, and that's getting to be a fairly chunky platform. And obviously, with the world in which we're living, the sales of those products has skyrocketed, and I think that's more of a structural change. I think people's behaviors in terms of cleanliness, I assume, are going to be altered permanently.

And do those cleaners have segment-average margins? Are they a richer mix or...

On the whole, richer.

Okay. And how has -- obviously, when pandemic hit, the DIY went crazy. I guess things have been coming off the shelves. But what do you -- what plans you have in place to kind of keep the consumer engaged with your products at retailer? Is there more innovation coming in? Is there promotion coming in? Anything you're doing with the big boxes to maintain price points or to get even price up, so to speak. Particularly because we've gone through sort of a declining raw material environment, but the industry seems to have done a very good job of holding price and expanding margins. So just wondering when that retailer is going to start sticking their hand out and looking for folks on your side of the table to either give something back or to do something to help continue to bring people in the store?

Sure. Yes, that's a constant battle. I mean, regardless of the material cycle, we face that all the time constantly. And really, what we do about it is we rely on 2 things. First is category management, which allows us to really partner with our retailers to optimize their profit per square foot of shelf space. And the second thing we do is we're very innovative, and we have a lot of new products besides the Eclipse product you saw. We also have introduced Rust-Oleum HOME for floors. So you could take old tired-looking Formica or tile floors and recoat them to give them a fresh new contemporary look. That's an innovative product. We're also expanding into wall paint with some tests right now. We have one at Walmart. And then we also got chain-wide distribution in the exact match wall paint at Menards with the Zinsser product. Is there anything else you want to mention on consumer?

No. It's just continually building the brand and building the innovation such that price becomes sort of a secondary ask.

Can you talk a bit more about that Walmart initiative and exactly what it is? Is that the grab and go?

Exactly. Yes. We've had that for a few years in [indiscernible], which is a big mass merchandiser in the Upper Midwest. We had, [indiscernible], a select group of colors, no need for a tinting, which can be a challenge in some of these stores to get qualified people to tint and match paint. Same issue at Walmart. Tinting is a bit challenging for some of the store help. So we have a grab-and-go program, roughly 20 colors. Studio Color, Sure Color are the 2 brand names. And that's going well. And hopefully, we can add more stores soon.

Okay. So that's a test within Walmart. So you're not...

Yes. Yes, that's right. And we're also testing some of our other construction products at retail. We have one with Tremco Roofing and Home Depot going on now. And then in Menards, which is another great customer of ours, we have our Tremco Vulkem polyurethane sealants sold there that just started in the spring. So there's a lot of new stuff going on.