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

Good afternoon, everyone. Excited to be here live in New York City and seeing everybody. This is Mike Sison. I cover chemicals for Wells Fargo. I did want to introduce RPM Corporation, ticker symbol RPM. It's a company that is a leader in specialty coatings, sealants and building products and materials. RPM spent the last several years on a well-executed restructuring program called MAPS, took well over $300 million of cost out, significantly improved its operating structure, and we're entering fiscal '22 really to pivot to growth. And we've really seen that significantly in 3 to 4 segments, all have reached -- recorded pretty record levels so far through the third quarter. The stock hit an all-time high of $101 in December 2021. Year-to-date, it's down with a lot of other -- of its peers. And inflation unfortunately has become kind of the major issue for a lot of the companies in the paint and coatings sector. But with that said, I wanted to welcome the team from RPM, Rusty Gordon, CFO; and Mike Laroche, VP, Controller and Chief Accounting Officer. Got a big title, Mike.

Yes.

They're here today to help us understand how we get back to $101 and keep on going.

So I guess first question, Rusty, at the beginning of the year, you really were talking about pivoting to growth and enabling the business to sort of return to the old growth story that you had in the past. So I thought maybe we'd start there, talk about the growth story, which, unfortunately, has been a little bit impacted by the external environment, but just conceptually, where are you headed right now in terms of the growth aspect of RPM?

Sure. Yes. We fared through COVID better than a lot of companies. There was a big do-it-yourself boom, and RPM did very well in fiscal '21. We really faced big challenges after winter storm Uri. Our EBIT margins had improved for several quarters in a row as we were on our way to the 16% EBIT margin goal. And then after winter storm Uri, we had supply challenges, and that was especially acute in our consumer segment. But nevertheless, coming into the year, we were very optimistic coming out of COVID. We'd see a lot of the deferred maintenance come back to us. And we have, in fact, seen that in our Performance Coatings Group. The oil and gas sector is back. That helps Carboline. In our Construction Products Group, there's a lot of renovation activity going on. That's really helped us. Our product portfolio is really geared toward building renovation as opposed to building from the ground up. And our roofing division has been tearing the cover off the ball all year. So...

Great. I thought maybe a little bit of history on acquisitions. That was a big part of your historical growth story. Maybe you could acquire Baker Mayfield. It doesn't seem like anybody wants poor Baker. But in terms of maybe give folks just a feel for the historical acquisition, which has been great. I always love to tell a story how Rust-Oleum was a really teeny-weeny business in the mid-'80s, and then look at it now, right? So maybe talk about the acquisition near term and potential.

Yes. Really, our acquisition story from the beginning is that we could take good companies and make them great companies by accelerating their growth with RPM. We have an investment-grade balance sheet. We have a global business. And we've done that -- like with Rust-Oleum, we acquired them in 1994. They were known for protecting the little red wagons and bicycles and metal surfaces. And they've expanded into new surfaces, general purpose, into garage floors, cabinet renovation, all kinds of additional surfaces. And the business has grown multiple times. The acquisition story has changed a bit as we entered the margin acceleration plan in 2018. It used to be at RPM, we'd buy a business on Friday. We tell the owner, you can come back Monday, and nothing would change. Well, now things do change. I mean we are -- when we acquire businesses, we put them on one of our segments, ERP systems. Each segment has their own ERP platform. So that's changed. We're consolidating the accounting. All the employees, of course, go on our benefits plan. So there are a few things that changed. Quite honestly, over the last 10 years, we've done more and more product line acquisitions. We've gotten very good product line integrations. And we still do acquire the entrepreneurial business where the founding family stays on. And most recent was in 2020, we acquired Ali Industries, got us into the abrasives market, and the Ali brothers still run the business, but we have integrated certain back-end activities like IT, distribution. So hopefully, that answers your question.

Yes. That's great. Are you planning to maybe outbid Elon Musk on Twitter? No, I'm joking.

We would probably not be able to do it.

But before we sort of go into the -- some of the businesses, I thought maybe -- just your current thoughts on your geographic regions. You're not as international as a lot of the other companies, which could be good. But maybe start with Europe. It's a tough environment over there now with the war, and any effects on you? Which businesses are sort of focused there? Why don't we start with Europe?

Mike, on Europe.

Yes. Absolutely. Europe was a region for us -- it was a little bit slower kind of coming out of the COVID pandemic and rebounding. Leading up in the back half of calendar 2021, we started to see signs of improvement there. That all kind of hit the brakes when the Russia and Ukraine conflict began. We don't have a big exposure in that region from a revenue standpoint. So directly, it's not impacting us all that much. But we have seen things start to slow down. It's not really going backwards, but we're not growing a whole lot in Europe either. So overall, things have improved from where we were during the pandemic, but it's still fairly flat there now.

Yes. And then Asia, as you know, we don't have much exposure. We've never found that acquisition platform yet in Asia. So we're not seeing exposure there. Most of our business is in North America.

Right. And just for the audience, it's -- I think North America is 80%, 80-ish.

It's about 70%.

70%. So it is the biggest area. So great. Let's -- well, I guess we got to talk a little bit about inflation. I was telling on another fireside chat, I had take my kids out to soccer tournament this weekend and go to Five Guys. It's $11 burger. I'm like, holy, an $11 hamburger. So it's something real. You and the other paint companies have seen significant year-over-year inflation. I think you were in the 30s or 40s recently in terms of your outlook. So just maybe give us a feel for what percent of cost of goods sold or your input cost, what your outlook is, which a lot year-over-year? And maybe what areas of the raw materials are you seeing the most pressure?

Yes. Sure. Mike, I'll let you answer. But first of all, in terms of material costs, it's -- generally, for RPM businesses, it's between 70% and 80% of cost of sales. As you know, we do install roofing, flooring. So that's part of our cost of sales at select businesses is the installation cost. But Mike, go ahead and talk about inflation.

Yes. Certainly, inflation has been significant. Year-over-year, we've seen inflation in the 40% range. Things started to moderate a little bit kind of before the Russia-Ukraine conflict. And then once that kind of started, we've seen prices go up 20%, 30% in the last 3 months or the first part of 2020 here. So inflation is going to continue to be a struggle in the fourth quarter and going forward. One of the big areas that we see significant increases in packaging, especially in our Consumer Group that sells a lot of small units -- high-volume, small units. Those prices for cans and things have gone up exorbitantly in the recent times.

Right. Okay. And then your outlook, I guess, might be the most impossible question, right, to answer these days. Do you think we're close to peak? Or do you think it's just -- it's hard to tell? And what do you think is going to drive that inflation going forward? And...

Sure. Yes. It seems that the inflation has been driven by black swan events. First, we had winter storm Uri, then we had Hurricane Ida, which took a toll on Gulf Coast chemical industry. And then we have the Russian invasion as well as Omicron and other black swan events. So it's hard to say what's the next black swan event. It seems that the most worrisome thing is energy security in Europe right now. So to the extent that gets worse, I think that could be the next thing that we're not thinking about happening this minute, but tomorrow, that could become an issue. In terms of inflation, we have gotten ahead of it at 3 of our 4 segments this year. The last one is our Consumer segment, and they are taking significant pricing action now for the reason Mike mentioned on the cans. That's a big issue since we sell a lot of units in our Consumer Group of aerosol paints and pints and quarts of Rust-Oleum, for example. So that's the fourth segment that has not been ahead of the game on pricing. But right now, they are executing a price increase to catch up finally.

Okay. Shifting gears a little bit. Your Construction Products Group has been fantastic. I think your year-to-date up over 20% sales and EBITDA and adjusted EBIT. The outlook for the fourth quarter is impressive. Maybe give us a little bit of idea of some of the major brands. I know Tremco is pretty big there, Euclid. What's driving the growth that you're seeing this year and going forward?

Mike, go ahead.

Yes. Absolutely. Yes. I mean the big brands, I think you mentioned Tremco on the roofing and sealant side; Euclid with concrete admixtures; Dryvit with exterior cladding for buildings. And there's a lot of really strong momentum in that group. A couple of things that are favorable for us. There are -- all the money that's out there from the COVID recovery acts, the infrastructure bills. That money takes time to get distributed and be spent, quite frankly. And a lot of that's going to municipalities, schools, which is really our wheelhouse when it comes to roofing restoration projects. The other thing is we go to the market as kind of a one source solution for a builder or a contractor. We can service all 6 sides of the building, whether it's roofing, whether it's walls, moisture barriers, flooring. So that kind of total product package and being able to go as kind of the one sole source has been beneficial to us as well.

Right. And the bulk of the end market is nonres, and it's mostly renovation versus new. So...

Correct. That's right.

And this business has had really good success in pricing. Has something changed in your ability to get price in this segment?

Yes. Mike, you can go answer.

Yes. I don't know that it's changed, but we've had a really strong focus on selling value, right, and getting paid for that value. And I think our ability to go and not only supply the product, but also apply it when there's labor shortages and things like that has allowed us to really be successful in passing along some pricing.

Yes. And we've had a lot of innovation, too. We have a lot of products nobody else has. We're out roofing one at 0 degrees Fahrenheit with our PUMA resin roofing systems, and nobody else is out there. They're watching Netflix at our competitors.

Not that much anymore, apparently.

Yes, that's true. They're stealing codes. That's right. But as far as Nudura wall systems, another innovative patent-protected product, people are constructing buildings new ways. And that product is growing like wildfire. So I think besides the roof coatings, which has been our fastest growing area for the last 7 years, there's been other innovation helping us.

Right. I guess last question on the segment, what's the ideal business or acquisition? What product lines would -- are you looking for to either add to the brands you have or maybe new brands to bring in?

Yes. I'd say in terms of where we're looking, the newest platform for this segment that's really interesting to us is indoor air quality and HVAC remediation. We bought a business called Pure Air in the fall. It's a small company, but it's a huge opportunity. We have customers that own major HVAC investments, and they're looking to change over these HVAC systems with millions and millions, almost billions of dollars of capital over the next few years. And we bump into them because we're on the roof, and we see HVAC systems. And rather than replace, we tell people why not restore what you have? So Pure Air does that. They restore. They clean HVAC systems. They monitor indoor air quality, which is very important to customers that we have like hospitals. And that opportunity for us is huge. So I think indoor air quality and HVAC is going to be an interesting high-growth area for us.

Right. Great. Shifting gears to Performance Coatings Group, another group that for the last 9 months has shown very good growth. I think mid-teens sales and EBIT growth. Maybe walk us through some of the major brands and what's driving that growth? I know Carboline -- actually have your little slide up there with so many brands, but -- you don't want to add Twitter to any of these?

Yes. So Carboline, you mentioned they provide a number of coatings and fireproofing to a variety of different industries. Oil and gas is a big end market for them. So during the pandemic when oil prices were very low, oil companies often defer maintenance, which had a negative impact on that segment in the prior year. We're starting to see that rebound now, and the deferred maintenance is starting to come back in. So it's really driving some strong sales growth in that company. Stonhard flooring is another big group in that segment. Polymer floorings that go into a number of different industrial and commercial applications. We're also seeing some really nice momentum there as manufacturing is being back onshore or brought back into the U.S. There's large facilities going in. Oftentimes, you get a lot of that flooring work. So that's been a nice benefit for us as well.

Right. And then again, this is another segment that's been able to keep up with inflation with pricing. Anything -- again, anything different in the pricing strategy there and your ability to get -- to offset the inflation pretty quickly?

Yes. In that segment, we got hit really hard with inflation. After winter storm Uri, epoxies doubled within a month. But we've had very, I call it, strategic pricing discussions with customers where we've avoided the surcharge discussion and talk more long term. So in other words, when epoxies doubled, we didn't double our selling price. We always talked to customers about 6-month, 12-month outlooks and adjusted our pricing accordingly. So that's given our customers, some runway to see what's coming and to give them a price that's fair. And it's certainly been accepted because -- everybody who reads newspapers knows there's inflation and epoxies have gone way up, and that's been well accepted.

Right. Okay. Great. And then opportunities for acquisitions for the segment, what are the areas that you think would be good additions?

Sure. We did a great one in an interesting new area. It's called Bison last year. They do pedestals, often used on rooftop decks. So very simple to install decking system, and they use our patent-protected pedestals. Rooftop decks is a growing area. A lot of people are focused on outdoor, entertaining and recreation. So that's been good. We've used some of those systems as part of our Tremco Roofing business. We sell lots of things besides just roofs. We sell green roofs. We sell roof safety systems. And this is a nice add-on to that. So that is an area we'll look to grow in. And there's, of course, even applications in our big-box customers, too. So that's an exciting area for us, and we might look to extend that platform more.

Great. Let's talk to Consumer Group. As you've said, had a phenomenal 2021. The Rust-Oleum is kind of the big brand name in that segment. You have a lot of other ones in there. The big trend in '21 was we were kind of stuck at home, and we learned how to do stuff. I didn't learn to do anything. So I wasn't helping your cause in the small project paints. But sort of give us an update there, what you think DIYers doing. I think you're pointing to growth in the fourth quarter. So sort of -- that's finally turned the corner there. And maybe just give us the trends in DIY and what you're seeing.

Sure. Mike, you go ahead.

Yes. Absolutely. I think you alluded to it. During the pandemic, with people forced at home, they've tried more projects than they maybe would have ordinarily. And we firmly believe that our user base for our products in that segment has grown. The other thing that has kind of helped us is that with people migrating away from cities and buying more single-family homes, there's more projects that come along with that. So we got a larger user base, people with first-time homeowners and things like that, that are going to tackle some of these projects going forward. So overall, the demand is there. Now it's the one group that is kind of most acutely impacted by the supply chain issues, mainly alkyd resins. And largely, that availability issue is behind us now. So we're starting to see supply come back in, and it should help us in the coming quarters.

Right. And then you have a big relationship with Home Depot and the big boxes, Walmart. And pricing is harder. So you're still a little bit behind. And so how do you think you catch up? And the shy stock up on some paint now, or is it going to get a lot worse?

You go ahead.

Yes. Certainly, that has been the segment that's lagged a little bit from a pricing perspective. As we mentioned previously, we have gone out with some additional pricing here in the last month or so. We expect that to start to kick in our first quarter of the next fiscal year through the rest of June 1. So certainly, there's some more yet to come in that respect.

Yes. We've had a significant impact of inflation, and cans this year going up 70%, 7-0. Alkyds have doubled in cost. So as a result this price increase we're going out with in this current quarter will be much more significant than the others. And you can see quite frankly in our P&L that this segment has lagged, and they need to catch up.

Right. Okay. Great. And then acquisitions, anything particular that would be a good addition for the Consumer Group?

Yes. We've done a lot of acquisitions in cleaning, and I call it specialty cleaning products. Krud Kutter might be the best known of the brands, but we've gotten some others, too, over the last few years. That's an interesting platform for us. And another platform we added during the pandemic was abrasives. We bought Ali Industries near Dayton, Ohio, and the founding family still runs the business, but we've integrated some back-end activities like IT and distribution. But that abrasives category seems to be one that's right for a new entrant and bring innovation to the category. So we're really excited about playing offense in abrasives.

Right. We got about 10 minutes left. So if anybody in the audience has a question, feel free to raise your hand, and I can grab it for you. So Steve?

Just looking at this one slide. I mean, there's really quite a lot of brands. So maybe just talk about complexity in the business. I think are you [ closing ] manufacturing? Are these like high-mix low-volume products? Or maybe if you can kind of just flesh that out a little bit for us.

Yes. Sure. Yes. Complexity is a key word for us. In fact, we started our restructuring in 2018 to reduce complexity. RPM has grown over the years with over 200 acquisitions, and we had never really integrated well all those acquisitions and then the MAP restructuring program. We approached manufacturing differently. Instead of looking at each plant that's only a Rust-Oleum plant or a Tremco plant, they're really RPM plants. And we had 70 or 80 of those plants back in 2018 operating on only a single shift basis. So we were able to close 30 plants in this MAP restructuring program by better leveraging our existing footprint. And that's helped us a lot. We've also changed our approach to manufacturing. You want to talk about CI, Mike?

Yes. So another big part of the MAP program is what we call MS-168. It's our manufacturing processes, procedures, philosophy. It's really a continuous improvement mindset. And the goal there is really increasing efficiency, and we've had a lot of success at that. We've rolled that out to most of our larger plants. We've still got to get to some of our smaller and medium-sized plants there. The other bit of a change in the manufacturing point of view, too, is our acquisition of a -- the chemical plant in Texas this fiscal year. That is purely going to be an RPM plant, servicing all 4 of our segments. Right now, we've been mainly focused on alkyd resin supply and have done a real nice job of getting that up and running to help backfill for some of the shortages we saw in the Consumer Group there.

Do you feel like [indiscernible] margins? If you look at like [indiscernible] business that has similar type products and similar channels...

Yes. We see lots of opportunity. As we've alluded to in past earnings calls, we are pulling together a second phase of our margin acceleration plan right now. And we definitely see upside to gross margins and to the EBIT margin because we can continue to find opportunities in the 3 main work streams we've been working on for 3 years. That's procurement, that's manufacturing and that's administration. I'd say one thing that we haven't addressed yet, but you'll hear more about in our second phase of MAP is really using information more as a weapon to help us, whether it's our sales teams, our procurement teams. We started with 75 different instances of ERPs in 2018 when we started the MAP program, and we've consolidated that to 1 for each of our 4 segments. And now we're finding that we can use the information to compete and win on project bids more successfully, hopefully optimize margins and really help our procurement team keep their fingers closer on the real-time pulse of our purchasing information. And that allows us to make smarter decisions more quickly on pricing. So anything, Mike, I left out?

I think that sums it up.

Okay.

So as a follow-up, you are -- you have talked about that to growth 2.0, so sort of the next iteration, not likely to take out $300-plus million, but more of an ongoing productivity sort of program. I know you wanted to give a little bit more color on your fourth quarter call, but I figured anything interesting we should think about, where the opportunities to keep that productivity going?

Yes. Mike, go ahead.

I think -- Rusty alluded to it a little bit here. But I think this next version of MAP is going to really be springboarding off of the foundation that we laid in MAP 2020. From a procurement perspective, we did a lot on consolidating procurement in the first round. Now we're going to be looking to more what I call value engineering type activities where we're making raw materials more common across product lines, formulas, things like that, to drive additional savings. From a manufacturing standpoint, I mentioned earlier we still have a lot of other plants to get to from a continuous improvement perspective. That will be a benefit to us. And we continue to analyze our footprint, and we'll look to consolidate operations where it makes sense going forward. From an ERP perspective, we'll continue to, as Rusty said, use that new data to win analytically, improve performance that way. And it'll also enable us to more easily continue to consolidate some of the back-office functions and things like that.

Right. Great. Your fourth quarter ends May. You've given guidance for that quarter. You've alluded softly that you should have growth again in the first quarter. And look, it's hard to guide for a full year, right? So I understand why most companies are sticking to quarters. But as you look at the first quarter '23, which would end August, you're sort of in the heat of summer, building season, a lot of folks are worried about rising interest rates and the impact on all your businesses. And I guess the Consumer Group would be one that most are worried about with mortgage rates and such. But as you think about the first quarter, looking for good growth again and where interest rates are, what do you think the effects are could be potentially?

Yes. Sure. For interest rates, we're not really heavily dependent on new home construction. Housing turnover, though, is important for us and other paint companies. When people change homes, they redecorate, and that could be good. In terms of our business outside of Consumer, we see a lot of favorable trends that are going to continue for some time. I mean the reshoring of manufacturing, people are talking about technology security. And as you know, near Columbus, Ohio, we're going to have a $20 billion Intel plant. TSMC is building a fab in either Arizona or Texas. And those are Stonhard opportunities since we do all the Intel floors. Energy security is a big deal, and that looks good for several quarters to come for Carboline. Even food security, that's being talked about. And food and beverage is really our core market for Stonhard. We do very well there. Even furniture manufacturing is moving back to the U.S., and we have businesses in the OEM wood coatings space. So beyond interest rates, there are a lot of positives in addition to all the government money that's yet to be dispersed from all the CARES Act and infrastructure bill.

Great. Well, thanks, Rusty and Mike, for coming out today. Appreciate it. And I guess last question, how many Super Bowls is the Browns going to get, do you think? I mean...

Well, the pressure is on for one this year because they went out on a limb...

They went all in, right? So...

They went all in.

Great. Thanks, guys. Appreciate it.

Thank you, Mike.

Thank you.

Thanks, guys.