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

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Good afternoon, everyone. Cheers from Cleveland. The Cleveland Browns could be Super Bowl champs. I'm sure my buddy here at RPM will support me on that. With that said, I did want to introduce RPM, whose stock is up 6% year-to-date, which we believe could be an attractive buying opportunity. RPM has generated stronger earnings growth in the last couple of years driven by its MAP to Growth program and its portfolio realignment into 4 business units. RPM expect to generate double-digit sales growth in the upcoming fourth quarter, which ends May. This should translate to 20% EBIT growth despite heavy raw material headwinds. We see good upside of the stock bill to $104. With us today is Rusty Gordon, Chief Financial Officer. Rusty, thanks for joining us. And just one quick note. If anyone has a question, feel free to e-mail me at [email protected]. With that, I'll turn it over to you, Rusty, to run through a quick PowerPoint and then a video.

Yes. Thanks, Mike. I appreciate it. Thanks for the invitation again this year. And I would like to just show a quick 1.5-minute video since we've been getting a lot of investor questions these days related to the ESG topic. RPM is really in the sweet spot for ESG and that our products help restore property. Whether it's consumer-type goods like lawn furniture and barbecues, these days, a lot of people tend to -- when the barbecue looks shabby, what they tend to do is throw it out, go to Walmart, replace it with a new one. We have products like Rust-Oleum that can make their old property look new again. So that prevents a lot of landfill waste. And then maybe even more importantly, I found out recently that up to half of U.S. landfills are filled with construction and demolition waste. And a lot of RPM products help renovate buildings, whether it's renovating roofs or facades. We have a lot of products for restoration. And we have a lot of products that help buildings save energy. Close to 10% of the energy used in this country could be saved with a tighter building envelope. So we have one product called Nudura that I'm going to show a brief video on. Nudura is an insulated concrete form that allows you to build stronger buildings, better insulated buildings and is a better alternative to traditional stick-frame construction. So with that, [ Chris ], can you run the quick video for us, please? [Presentation]

We like to say that the less money you spend on energy, the more money you have for bourbon, betting on horse racing and on basketball. So that's the end of that. Mike, I'll turn it over to you.

Great. Now thanks, Rusty. I appreciate the update on sustainability. It's important for investors these days. So what I thought we would do is maybe talk about the growth story. You spent a lot of time on your earnings call and maybe you can tack on some of the sustainability initiatives that is going to help you drive some of this growth. But I think one of the messages that Frank and you were trying to convey was that you've improved the company on an operating and cost structure, on a productivity basis. You've got 4 business units, and you want to get back to growth. So maybe give us a quick history lesson on the growth algorithm for RPM historically and what that looks like going forward.

Sure. Yes, if you look over the last 20 years, our growth has been very well balanced between acquisitions and organic growth. We tend to grow faster than GDP. We are known for being a very innovative company in the coatings and construction chemicals space. And over the long haul, Mike, it's probably been about 6% growth over the last 15 years or so, half acquisition, half organic growth. And what we're really proud of is through this MAP restructuring program over the last 3 years, we've been able to keep our attention on improving margins and all the very time-intensive restructuring activities while growing the top line because, as you know, there's no benefit to reducing cost if the top line is going down. And that just means it's an endless cycle of cutting to try to improve the bottom line. And instead, we've been able to improve our adjusted EBIT margin year-to-date by 260 basis points. And that's on top of a 180 basis point increase that we had last year over the same time frame. So it's really working for us, and you can see it in the P&L.

Right. And part of the algorithm for growth historically has been acquisitions. You had a little bit of a pause at the early parts of MAP to Growth. The -- we have seen other coatings players pick up the momentum there. Can you maybe talk about what type of acquisitions fits for each of your different business segments going forward?

Sure. Yes, all our 4 groups are really active in acquisitions. We tend to do at RPM, in a usual year, between 5 and 10 acquisitions. And we're getting back to that pace now after having a lot of our attention on restructuring recently. But in terms of the markets that we're acquiring businesses in, they are huge markets. They have a lot of small niche players in specialty coatings and specialty chemicals, construction chemicals. Lately, another platform for us has been cleaning. We've done a lot of acquisitions in specialty cleaning in our Consumer Group, also in our Specialty Group. So that's a real growth area for us, and it's paid off, as you can imagine, in the last year.

Right. Okay. And then in terms of acquisitions, you've tended to focus on small bolt-ons. Are there other more meaningful-size acquisitions? Some folks tell me it's as easy to integrate a $1 billion deal versus a $10 million deal. I'm not sure if that's true, but maybe a bigger deal impacts the bottom line faster. So are there opportunities like that for RPM?

Sure. Yes, now that we're getting our internal house in order by consolidating ERP systems, consolidating our plant footprint, consolidating accounting locations, we've centralized procurement, clearly, Mike, we can get more synergies in the future from acquisitions. We can compete and win on more deals. And we also are capable today of integrating bigger acquisitions. So there are those possibilities. We do have a number of long-term acquisition targets on our radar that we keep in contact with regularly. But if you look over the last several years, our real bread and butter has been the smaller niche product line acquisitions. Probably about 3/4 of our acquisitions today are product line acquisitions. And we're very good at integrating those in all of our groups. We've developed that skill set. And like I say, thanks to our MAP program, we'll only get better at it.

Right. And I was going to shift gears a little bit to talk about the segments, and the Consumer Group sort of comes to mind. And I thought maybe just for fun, I always like hearing your story about Rust-Oleum. That was a great acquisition. And when you bought it, how small it was and how big it is today is really amazing.

Yes, that's right. Yes, when we bought Rust-Oleum, Mike, it was known as the rust paint you use on your red wagon, your mailbox, your bicycle. And we expanded it right after acquiring it in 1994 to more broader applications like general purpose, decorative paint, garage floors, kitchen cabinets and counters. So we like to say if there's a surface, there's a Rust-Oleum for that. So we have grown the business tremendously to really a global business today with a number of opportunities for growth. Again, in cleaning, we've done some deals, starting with Krud Kutter, about 6 years ago kicked us off. And we've done some other acquisitions in cleaning. So we see lots of other opportunities to expand that product portfolio. Probably the most exciting deal for us recently has been getting into the abrasives market with the Ali acquisition in September. That's a market RPM has not played in, but we see a lot of room for innovation there and a lot of room to pick up shelf space, much like we did, as you mentioned, with Rust-Oleum over the last 27 years.

Right. And then for the Consumer Group in total, DIY is obviously a big -- or the biggest channel for that segment. The pandemic had boosted demand. Can you remind us how strong that has been? And I think through the May quarter, you expected another sort of quarter of double-digit growth. And then heading into '22, I thought there was sort of a hope that, that business could be kind of flattish to up or flattish to down after amazing growth in '21, and maybe talk about some of the dynamics that could allow you to do that next year.

Sure. Yes, we are rounding tough comparisons, as you mentioned, Mike. We're going to lap the anniversary of shelter-in-place orders in this quarter starting in last month, in April. And our first quarter of fiscal '22, we certainly have tough comparisons because last year, organic growth was 34%. There's some more tough comparisons in Q2 facing us. So that's the story. We still see elevated demand, though, in DIY because there are a lot more single-family homeowners today than there were last year. There's a lot more people who've got their hands dirty with our products. And there's some other upsides, too. For example, probably 1/4 of our Consumer segment is -- has the pro as a customer, and they've been locked out of homes. So we see a lot of that coming back. We've incurred a lot of expense involved in meeting demand through a pandemic, whether it's safety costs, people out on quarantine. Of course, that's the most important thing, but it has been costly. And distribution costs with expediting, that's something that we've been incurring. So as things get back to normal, that should certainly help the cost side of the equation, too. There's -- as you know from following us for a while, our Consumer segment is very innovative. We're always picking up shelf space somewhere. Over the last year, we've had to have our salespeople less on offense because the real battle and challenge has been meeting demand. Now as we get back to a more normalized world, we do see lots of opportunities to keep growing shelf space. Like I mentioned, in abrasives, wood stains, we're the fastest-growing wood stain brand in America now. So there'll be more of that to come.

And heading into last year and maybe into this year, you had some new wins like Walmart and other retailers. And as you head into '22, can you maybe update us on some of those wins? And are there any other shelf space sort of opportunities as you head into next year?

Sure. Yes, probably the most innovative product we've launched this year is Eclipse. And we launched that with our biggest home center customer and now our largest mass merchant customer as well. So Eclipse is going well. That's a product that DAP introduced. That goes almost like tape over holes in your drywall, so it's a very simple repair solution. And it's launched at a premium price point but offers a lot of time savings to the homeowner. So that's a big one. Also, as you probably have followed us on, we have entered the wall paint market. We have launched Zinsser SmartCoat as an exact match program and with one of our big home center customers. And we've also launched a grab-and-go program at our biggest mass merchant customer, and that's expanded greatly to maybe about 20% of the chain now. So we're seeing momentum there.

Okay. And then any updates on the Walmart opportunity?

That was the mass merchant one I was just...

Oh, that one. I'm sorry.

But yes, to mention them by name, yes, Walmart, we have expanded. And that's our Studio Color and Sure Color grab-and-go program. I think that's a great way for people who may not be so particular about the color but want to get a tasteful color to get the job done. I think you'll find that -- my personal thought is that you'll find an exterior paint that probably is very viable because people aren't matching pillows and curtains like they do with interior paint. So I think it's a very interesting proposition on the grab and go.

Right. Well, moving on to the Performance Coatings Group. That business has lagged other businesses. It's more pandemic exposed, if you will. When you think about post-pandemic potential particularly as we head into fiscal '22, where do you see some opportunities for growth in that segment?

Sure. It's the Performance Coatings Group you're referring to, right?

Yes.

Yes. In that group, our 2 largest brands are Carboline and Stonhard. Carboline is our heavy-duty protective coating really mostly used to protect exterior steel. And they also provide fire protection products as well. They have about $250 million or so of revenue exposed to the energy markets, so that's been a challenge for the last several months. It does appear, with oil back at a more normalized price today at $65 a barrel, that the worst is certainly behind us. If you remember where oil was a year ago, that's quite a change. There's always a lag effect, though, when you look at the latest energy company or oil companies' earnings releases. They are not necessarily opening the spigots on capital spending right now. There's always a lag effect. But there is a lot of pent-up maintenance in that sector that we will clearly benefit from as we come out of this cycle. Also in Performance Coatings, you have Stonhard as another big brand of seamless polymer flooring. For them, facility access has posed a challenge for the last year since it's an interior-type construction project. And once again, there is great pent-up demand. As Frank Sullivan mentioned on our earnings call last month, their order backlog is the biggest it's ever been. So I think you'll see much better days ahead for that business as well.

Great. And then shifting gears to the Construction Products Group, you actually saw that business recover a little bit in the third quarter. Organic growth is up 5%, expected to grow again in the fourth quarter, so I think that bounced back a little bit faster. Can you remind us what are the major brands there? I know roofing has been hot. Concrete admixtures could be one that also picks up again. Just your general thoughts on that segment as we head into fiscal '22.

Sure. Yes. So the big brands, to answer your question is Tremco, which sells roofing and sealants and waterproofing coatings. We have Euclid for concrete admixtures and repair products. And then we have our illbruck products in Europe, which are used for thermal insulation, with insulating foams, tapes and the like. So in terms of the challenges they've been through, just to give you an idea, they are mostly commercial-type construction. Nonresidential starts in the U.S. last year, Mike, were down 25%. And they've been able to grow, so we clearly picked up market share. And clearly, we've had the right focus on building renovation. That's helped us through this. The construction put in place last year and commercial construction in the U.S. was down 8%. And we're up, so we're doing a lot of things right. I showed the Nudura video. That's our fastest-growing product line in RPM right now. It's not only offering a lot of advantages for construction, whether it's energy efficiency or durable construction that can survive tornadoes and hurricanes even. It also offers today cost savings versus traditional stick-built construction. So Nudura is soaring. Our roof coatings have been, over the last several years prior to Nudura, our fastest-growing product line at RPM. And their message of roof restoration is really gaining a lot of traction. It's a way to extend the life of single-ply roofs by up to 20 years. So that's going very well also. Also another good thing for us is infrastructure. There's talk about an infrastructure bill. That's probably at least 15% of RPM sales, much of which is our Construction Products Group. And we don't have to wait for a bill because we've already had one. The latest COVID relief bill had a lot of money for municipalities and state and local governments. And that money is finding its way to schools, for example. And schools have a pent-up backlog of maintenance that clearly we can help with at RPM.

Right. Great. And just a reminder, we got about 7 minutes left. If anybody has any questions, just feel free to e-mail me. One question that did come in, Rusty, regarding the MAP to Growth program, you're ahead of plan, obviously. What do you think beyond MAP to Growth could RPM generate in terms of productivity? And what are the opportunities now that your 4 business units are set up to continue to generate some growth?

Sure. Yes. When we hit the end of this month, we're expecting to exceed our MAP cost savings target, which was $290 million. So that's good news. We -- I've been very successful at changing our culture to one of continuous improvement. That's going to continue. As Frank Sullivan alluded to on our last earnings call, we are thinking about what is the next program after MAP to keep the continuous improvement going. We still have room to improve our margins. The goal is 16% EBIT margin. So we still have things to do. I could tell you on MAP 1.0, we've been very successful, a lot of it in terms of manufacturing, with introducing a lot of our operating disciplines and consolidating plants. That's been better than expected. Centralizing in procurement has yielded savings that were better than expected. The pandemic did slow us down on a lot of the administrative consolidation, both in ERPs and accounting consolidation. So we have more room, which is good news, to improve there as we look forward.

Great. And then another question obviously on -- that's come in for everybody today is raw materials. You talked about procurement. That's been a big help in offsetting that. And I guess the question is just simply what do you think the raw material headwind looks like and why do you think if you can get some pricing to close the gap faster than maybe the prior cycle.

Sure. Yes, this is different than the last cycle around Hurricane Harvey in 2017 and '18. Right now, everybody reads the same newspapers, and everybody's concern is supply, just making sure you have enough supply. So with that backdrop, we've been able to get selling price increases quicker, as a result, compared to past cycles. We're getting price increases implemented this quarter across all 4 segments. We're going to continue to execute on those selling price increases probably through the end of August. And then we should be caught up there, assuming inflation doesn't move. Inflation has gotten to be what I'd call a upper single-digit type inflation rate, which is higher than we saw in the last cycle. We also have freight inflation, labor inflation, so we do have a lot of higher costs. And as a result, we're going out more aggressively this time around with selling price increases in the mid- to upper single-digit range; and on some products, much higher.

Okay. The last question I have in the inbox is on Specialty Products Group. And that was a business unit that was developed to kind of support and grow some of the newer acquisitions. Your question is kind of focused on what's exciting in that bucket and which of the businesses there do you see the most potential to sort of grow into its own business unit to put in one of the other ones.

Sure. Yes, our Specialty Group is a very diversified group. We have everything from edible coatings to dehumidification equipment, to fluorescent pigments. So they're very diversified. It's kind of like the old RPM in that there's a lot of businesses that really don't have a whole lot in common. They do now, of course, according to our MAP program, share administration, they're on centralized procurement, but they're in very different markets. It's really a good place as like an incubator for potential new ideas and new growth. And that's how we're running it now under new management. We have some new initiatives that are being launched right now that will help us improve top line growth in the years ahead. One example is we have formed a food group under the management of our recent PFI acquisition. That includes everything from our edible coatings, namely NatureSeal, which has been used on McDonald's Sliced Apples and Happy Meals for years; and other dairy thickeners and food additives, including [ marine ] stabilizers, all kinds of different things. And they have some interesting technologies, one of which is a barrier coating to use on paper packaging used for food. So it could replace single-use plastics and be much better for the environment. This product is called VerdeCoat that we're testing and launching right now in the quick-serve food channel. So they have a lot of great ideas.

Right. Well, Rusty, we have about 30 seconds left. I just want to thank you for your time. I don't have any more questions in the inbox at this point. But if you have any closing comments, you're welcome to do it. And if not, thanks again for joining us this year in 2021, and look forward to seeing you in person. You're so close.

That's right. I'm just a few miles away. Yes, thanks a lot, Mike. We appreciate it. And we look forward to talking about the conclusion of our MAP program in July.

Great. Thank you. Go Browns.

I agree.