RPM International Inc. (RPM) Q1 2021 Earnings Call Transcript

RPM International Inc. (NYSE: RPM) Q1 2021 earnings call dated Oct. 07, 2020

Presentation:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the First Quarter 2021 RPM International Earnings Conference Call. [Operator Instructions]. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions]. I’d now like to hand the conference over to your host today, Mr. Frank Sullivan, Chairman and CEO. Please go ahead, sir.

Frank C. Sullivan — Chairman and Chief Executive Officer

Thank you, Liz. Good morning and welcome to the RPM International Inc. investor call for our fiscal 2021 first quarter. Joining me on today’s call are, Rusty Gordon, RPM’s Vice President and Chief Financial Officer and Matt Ratajczak, our Vice President of Global Tax and Treasury, who is supporting our Investor Relation activities.

I’ll share insights behind our strong financial performance for the quarter as well as an update on our MAP to Growth operating improvement program, then Matt will walk you through a review of our first quarter adjusted financial results. Rusty will conclude our formal remarks with our outlook for the remainder of fiscal ’21 after which we’ll take your questions.

Our strategically balanced business model, the resiliency of our operating companies in our MAP to Growth operating improvement program have enabled RPM to pull through the depths of the economic slowdown, created by the COVID-19 pandemic. With the dual benefit of improved margins and better working capital management, our businesses are generating excellent cash flow which allowed us to pay down nearly $200 million of debt during the first quarter.

Today, our liquidity is up to $1.5 billion. We have pivoted back to investing for accelerating growth as demonstrated by the acquisition of Ali Industries as well as our strong organic growth in a number of our segments in the first quarter. During our fiscal ’21 first quarter, selected segments of the global economy began to gain momentum as stay-at-home orders were relaxed. This freed pent-up demand from last year’s fourth quarter and helped drive our record topline results, which grew 9.1% over the prior year period.

This was in sharp contrast to the COVID-19 related sales decline we reported for the fiscal 2020 fourth quarter. Our two largest segments posted positive growth in the first quarter, while two of our segments declined. Overall RPM’s results benefited from the positive impact of our MAP to Growth operating improvement program and our balanced business model where strength in one segment offsets weakness in another.

In addition, much credit for our strong performance is due to our management philosophy, which keeps customer centric decision making at the operating level and enables our companies to be very nimble and adapting to change. Some examples around RPM of leaning into the pandemic’s disruption include Rust-Oleum, tinting wall paint and shipping to residents through a new e-commerce program hosted by a big box home center. Tremco developing innovative indoor air quality services with a global MRO distributor for use on its customer’s facilities and our Legend Brands business pivoting from disaster remediation to disinfecting and air purification in response to evolution of its contractor’s business needs.

The most significant driver of RPM’s first quarter growth was our Consumer segment, which had already been experiencing unprecedented demand for its small project paints, caulks, sealants, paint, cleaners, patch repair products as consumers completed more DIY home improvement projects. On a consolidated basis, international markets rebounded with 2% growth after a 26% drop during the difficult fourth quarter when construction and hardware channels were not deemed essential and were thus locked down in most of the international markets we serve.

We continue to benefit from successfully implementing our MAP to Growth program which enabled us to leverage the first quarter sales growth and the even stronger bottom line results with adjusted EBIT that increased nearly 40%. During the first quarter, we announced the closure of one additional plant, which brings our total to 23 out of the previously announced 31 plants that were originally targeted in our MAP to Growth operating improvement program.

The momentum behind our MAP to Growth program continues to accelerate as it drives efficiency and operational excellence throughout our businesses. We are on track to reach the targeted run rate of $290 million in annualized savings by the inclusion of our current fiscal year, which ends May 31, ’21. The projected benefits from our center led procurement initiatives are ahead of plan and our administrative improvements and ERP consolidations will continue into fiscal ’22. In regard to our IT investments, we are currently enhancing our capabilities and analytics by centralizing systems and databases.

This is allowing RPM to harness more complete information across its multiple business units and build decision support tools to improve the effectiveness of our procurement distribution and sales teams. We are leveraging our information resources to make RPM stronger and our success is a direct result of the cooperation and buoyant [Phonetic] of our associates across RPM. While the MAP to Growth operating improvement program will be reaching its annualized cost savings target by the end of the fiscal year, we will run through that target as a result of continuing opportunities in the MAP to Growth pipeline including consolidation of more accounting locations after the setup of new ERP systems are completed.

In addition, we are establishing a culture of continuous improvement and operational excellence that will benefit RPM’s bottom line for years to come. Most importantly, I’m proud of the efforts of our plant managers who have made our workers’ health and safety a top priority during the pandemic. Supported by Mike Sullivan and Ken Armstrong here at the corporate office, our operations personnel have successfully minimized workplace transmission of COVID-19 at a very low level.

I’ll now turn the call over to Matt Ratajczak who will review our fiscal 2021 first quarter results on an adjusted basis.

Matthew T. Ratajczak — Vice President – Global taxes

Thanks Frank and good morning everyone. Please note that my comments will be on an as adjusted basis.

During the first quarter, we generated consolidated net sales of $1.61 billion, an increase of 9.1% compared to the $1.47 billion reported during the same quarter of fiscal 2020. Organic sales increased 9.3% or $136.6 million. Acquisitions contributed 0.5% to sales or $7.4 million. Foreign exchange was a headwind that reduced sales by 0.7% or $10.1 million. Adjusted diluted earnings per share were $1.44 an increase of 51.6% compared to $0.95 in the year ago quarter.

Our consolidated adjusted earnings before interest and taxes, EBIT increased 39.8% to $269.2 million $269.2 million compared to $192.6 million reported in the fiscal 2020 first quarter. Now, I’ll discuss our segment’s results. Sales in our Construction Products Group increased 2.2% to $547.7 million compared to $536.1 million a year ago. Organic sales increased 3.6% or $18.9 million. There was no impact from acquisitions and foreign currency translation reduced sales by 1.4% or $7.3 million. Adjusted EBIT in the Construction Products groups increased 17.7% to $102.3 million compared to adjusted EBIT of $86.9 million during last year’s first quarter. The segment’s commercial sealants and roofing businesses in North America performed well driven by continued success in its restoration and building envelope systems initiatives. Sales were boosted by orders that were deferred during the fiscal 2020 fourth quarter. The segment also benefited from easier comparisons to last year’s first quarter when extremely wet weather in North America slowed construction activity. MAP to Growth initiatives, price increases and strong cost management enabled the segment’s bottom line to vastly outpace its relatively modest sales growth. Sales in our Performance Coatings Group were down 12.6% to $259.8 million compared to the $297.2 million we reported during last year’s first quarter. Organic sales declined 12.2% or $36.4 million. Acquisitions contributed $0.8 million or 0.3% to sales. Foreign exchange was a headwind of 0.7% or $1.9 million. The segment’s adjusted EBIT was down 16.4% to $30.9 million compared to $36.9 million during last year’s first quarter. Similar to the fourth quarter, the segment’s topline continued to be impacted by poor energy market conditions that resulted in deferred industrial maintenance spending as well as by COVID-19 restrictions that limited outside contractors access to facilities and construction sites. In response, the segment has managed its decremental margins well by aggressively cutting fixed costs and reducing its breakeven point. Cost savings that resulted from MAP to Growth operational improvements benefited the segment’s earnings. Adjusted EBIT margins would have actually improved during the quarter had it not been for the impact of transactional foreign exchange expense.

Finally, we announced one more facility closing in this segment during the quarter. As Frank mentioned, there was unprecedented demand for our Consumer Products which drove incredibly strong consumer Group sales. They increased 33.8% to $641.2 million from $479.3 million during last year’s first quarter. Organic sales increased 34% or $163.2 million. There was no impact from acquisitions and foreign currency translation reduced sales by 0.2% or $1.3 million. Adjusted EBIT in the Consumer Group increased 121.6% to $136.7 million compared to $61.7 million in the prior year period. Results were up significantly in the segment due to robust DIY demand as consumers spent more time in their homes completing improvement projects during the pandemic. Our Consumer Group was a large beneficiary of this trend, due to our market leadership position and many years of building our retail distribution network. We are working around the clock to meet this unprecedented demand and are also making significant investments in plants, equipment and operational disciplines to expand our capacity. The segment also benefited from an easier comparison to the prior year’s first quarter when its product sales were tempered by extremely wet weather. The segment’s bottom line increased as a result of volume leveraging, MAP to Growth savings, temporary reduction in discretionary spending, favorable product mix and moderation in some raw material categories. However, future cost pressure is anticipated due to recent inflation in certain raw materials and packaging, as well as additional overhead expenses resulting from ongoing investments in capacity. We anticipate that we will see elevated demand over the next few quarters as housing turnover improves and more DIYers gain successful experience with new projects. Specialty Products Group sales were $158 million during the fiscal 2021 first quarter, a decline of 1.3% compared to sales of $160.1 million in the prior year period. Organic sales decreased 5.7% or $9.1 million, which was partially offset by acquisitions, which contributed 4.1% or $6.6 million to sales. Foreign currency translation increased sales by 0.3% or $0.4 million. Adjusted EBIT in the segment was down 15.9% to $24.1 million in the fiscal 2021 first quarter compared to $28.6 million in fiscal 2020. The segment’s first quarter sales rebounded and were nearly flat as compared to last year’s first quarter. This was due to more favorable market conditions that drove demand for some of its products. Marine coatings were boosted by increased outdoor activity, wet protectants were boosted by a stronger lumber sales and nail enamels increased because of greater demand for home beauty care. The unfavorable impact to the bottom line from product mix operating disruptions associated with COVID-19 and deleveraging on lower volumes was partially offset by savings from the MAP to Growth operating improvement program. Now Rusty will walk you through our outlook for the remainder of fiscal 2021.

Russell L. Gordon — Vice President and Chief Financial Officer

Thanks, Matt. For the second quarter of fiscal 2021, we expect to generate consolidated sales growth in the low to mid single digits with strong leverage to the bottom line for more than 20% adjusted EBIT growth, which are growth rates that are more in line with recent quarters prior to the outbreak of COVID-19.

Our MAP to Growth momentum continues to be excellent and the Ali acquisition, excluding acquisition related costs will contribute towards good results in our second quarter. Our first quarter consolidated growth of 9.1% was a bit of an anomaly due to double-digit growth in the month of June as lockdown restrictions were eased in several markets.

Looking ahead to the full year of fiscal 2021, our guidance is relatively unchanged from the direction we provided in our fiscal 2020 fourth quarter earnings release. We anticipate that our Construction Products Group and Performance Coatings Group could experience sales declines for the next two quarters and then turn positive in the fourth quarter.

Our Consumer Group should continue its strong sales momentum throughout the fiscal year. The Specialty Products Group is likely to face flat sales comparisons during the second quarter, which should turn positive in the second half of the year. These estimates assume that we do not experience a surge in COVID-19 that results in a second round of stay at home orders. Due to continued economic uncertainty related to the impacts of COVID-19 and the upcoming U.S. elections, we are not providing fiscal 2021 full year earnings guidance.

This wraps up our formal comments. We will now be pleased to take your questions.

Questions and Answers:

Operator

[Operator Instructions]. Our first question comes from John McNulty with BMO Capital Markets. Your line is now open.

John McNulty — BMO Capital Markets — Analyst

Hey, good morning. Thanks for taking my questions and congratulations on a really solid set of results. I guess one of the — one of the questions I had — like you did have some really strong numbers, and I think some of it was expected, I think there was a lot of hope on the DIY side picking up and that type of thing. But you also had a lot of big new initiatives that you were launching some with Home Depot and Walmart and I think even Grainger may have been on the list as well.

So, I guess, can you help us unpack how much of it came from kind of just core traditional growth versus how much of it came from kind of new product introductions and some of the initiatives that you’re pushing there? How should we think about that?

Frank C. Sullivan — Chairman and Chief Executive Officer

I think most of it John came from our core traditional growth and just the surge in North American DIY activity. We’re also starting to see that pick up in the U.K. and parts of Europe. And the new initiatives are some tests in the wall paint area that we talked about and a few other categories that I think will have hopefully a greater impact in the coming quarters and into next year.

John McNulty — BMO Capital Markets — Analyst

Got it. That’s helpful.

We are still processing the Q&A portion of the conference call. We will be updating it as soon as we analyze and process the con call. Stay tuned here for more updates.