RPM International : Fiscal 2022 First-Quarter Conference Call Transcript

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EDITED TRANSCRIPT

RPM.N - Q1 2022 RPM International Inc Earnings Call

EVENT DATE/TIME: OCTOBER 06, 2021 / 2:00PM GMT

OVERVIEW:

RPM reported 1Q22 consolidated sales of $1.65b and adjusted diluted EPS of $1.08. Expects 2Q22 consolidated sales to increase in mid-single digits.

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OCTOBER 06, 2021 / 2:00PM, RPM.N - Q1 2022 RPM International Inc Earnings Call

C O R P O R A T E P A R T I C I P A N T S

Frank C. Sullivan RPM International Inc. - Chairman, President & CEO

Michael Laroche

Russell L. Gordon RPM International Inc. - VP & CFO

C O N F E R E N C E C A L L P A R T I C I P A N T S

Caleb Boehnlein BMO Capital Markets Equity Research - Associate

Cory Murphy Vertical Research Partners, LLC - Analyst

David Paige RBC Capital Markets, Research Division - Senior Associate

Ghansham Panjabi Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

Joshua Spector UBS Investment Bank, Research Division - Equity Research Associate - Chemicals

Luke Washer BofA Securities, Research Division - Research Analyst

Steven Haynes Morgan Stanley, Research Division - Research Associate

P R E S E N T A T I O N

Operator

Welcome to today's RPM International's conference call for the fiscal 2022 first quarter. Today's call is being recorded. This call is also being webcast and can be accessed live or replayed on the RPM website at www.rpminc.com.

Comments made on this call may include forward-looking statements based on current expectations that involve risks and uncertainties, which could cause actual results to be materially different. For more information on these risks and uncertainties, please review RPM's reports filed with the SEC.

During this conference call, references may be made to non-GAAP financial measures. To assist you in understanding these non-GAAP terms, RPM has posted reconciliations to the most directly comparable GAAP financial measures on the RPM website.

Following today's presentation, there will be a question-and-answer session. (Operator Instructions) Please note that only financial analysts will be permitted to ask questions.

At this time, I would like to turn the call over to RPM's chairman and CEO, Mr. Frank Sullivan, for opening remarks. Please go ahead, sir.

Frank C. Sullivan - RPM International Inc. - Chairman, President & CEO

Thank you, Tammy. Good morning, and welcome to the RPM International Inc. Investor Call for our fiscal 2022 first quarter. Joining me on today's call is Rusty Gordon, RPM's vice president and chief financial officer; and Mike Laroche, who will become our vice president, controller and chief accounting officer effective November 1. Mike was previously the CFO of our Specialty Products operating -- Specialty Products Group operating segment. He succeeds Keith Smiley who will be retiring at the end of the month after nearly 30 years of distinguished service to RPM.

I'll begin by sharing broad commentary on our performance for the quarter. Mike will then provide details on our financial results, and Rusty will conclude our formal remarks with comments on our outlook for the second quarter of fiscal 2022. Our comments will be on an as-adjusted basis, unless otherwise indicated. Please note that we've provided a supplemental slide presentation to support our comments on this call. It can be

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OCTOBER 06, 2021 / 2:00PM, RPM.N - Q1 2022 RPM International Inc Earnings Call

accessed in the Presentations & Webcasts section of the RPM website at www.rpminc.com. After our formal remarks, we'll be pleased to take your questions.

As you can see on the third slide of the presentation, our results this quarter demonstrate the benefits of our balanced business portfolio, where softness in one segment is typically offset by strength in others. For the first quarter of fiscal '22, three of our four operating segments, our Construction Products Group, Performance Coatings Group and Specialty Products Group, generated solid sales and adjusted EBIT growth. Combined sales in these three segments increased more than 15%, and their adjusted EBIT was up more than 14%. This performance was especially notable in light of the raw material shortages, supply chain disruptions and inflation all of our segments and businesses are facing.

Due to the supply disruption, we lost the equivalent of nearly 300 production days across RPM facilities around the globe during the 2022 first quarter, more days that were lost due to COVID-related shutdowns in last year's first quarter. We estimate the negative impact on consolidated sales during this first quarter was about $200 million due to these challenges and disruptions, over half of which occurred in our Consumer segment. This was about double the negative sales impact we experienced in the fourth quarter of fiscal '21.

Sales and earnings for our Consumer Group decreased during the quarter as a result of these factors, as well as a difficult comparison to the prior-year period when sales increased on an organic basis by 34% and adjusted EBIT was up 122%. These growth rates in the prior-year period were largely driven by extraordinary DIY demand during the pandemic. All indicators suggest that the underlying demand for our consumer products is still strong and that the supply and material disruptions the segment is currently experiencing are temporary.

During the first quarter and early in the second quarter, we made strategic growth investments in our businesses. And as you can see on slide 4, among these were the recent acquisitions of Dudick, Pure Air and a recent purchase of a large manufacturing facility in Corsicana, Texas. Acquired in June, Dudick will allow our Carboline business to strengthen its position in the secondary containment linings market with an established and trusted product line, while simultaneously opening the door to expanded sales and future growth opportunities around the globe.

Pure Air was acquired in August and provides indoor air quality service and is complementary to our Tremco Roofing and Tremco WTI business. We intend to swiftly scale Pure Air by leveraging Tremco's North American sales force, strategic partnerships and operational infrastructure.

Also on this slide, you'll see an image from the 178,000-square-foot plant we purchased on 120 acres in Texas. This will serve as a manufacturing center of excellence for multiple RPM businesses. The plant is fully operational, has an experienced operating team that will allow us to add long-term resilience in our supply chain, improve fill rates and more easily expand production of a number of our high-growth product lines in the coming quarters and years.

From a more long-term, macro viewpoint, there are a number of market opportunities and industry trends that we are well positioned to capitalize on for continued growth and success. Among the market opportunities on slide 5 are the following: The increasing need for investment in infrastructure, with spending estimated to be $2.8 trillion globally. Our Performance Coatings Group and Construction Products Group have a vast array of products and services to meet this need. The new DIYers born from the pandemic who continue to tackle home improvement projects with both our core product ranges and expanding sales in relatively new categories, like abrasives and architectural coatings; the continued growth in more holistic connected, building envelopes, such as those provided by our Construction Products Group, which make structures more air tight, weather tight and energy efficient; and the demand for wall systems, like those that could be constructed using insulated concrete forms made by our Nudura business. They make building stronger, more energy efficient and reduce construction cycle time and labor.

Industry trends benefiting RPM include nesting by consumers who are making more home improvements, school reopenings requiring more maintenance and repair, a need for building owners and facility managers to consolidate their construction management to a single source, and a greater desire for energy efficient, driven by both the cost benefits, as well as the desire to minimize environmental impacts. RPM is well positioned to meet and grow with all of these trends.

I'd now like to turn the call over to Mike Laroche to discuss our segment's financial performance during the quarter.

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OCTOBER 06, 2021 / 2:00PM, RPM.N - Q1 2022 RPM International Inc Earnings Call

Michael Laroche

Thanks, Frank, and good morning, everyone. Turning to slide 6, on a consolidated basis, our sales increased to a record $1.65 billion, up 2.7% over a strong fiscal 2021 first quarter, which grew 9.1%, largely due to the unprecedented demand for our Consumer Group's home improvement products during the pandemic. The growth was 2.1% from recent acquisitions and 1.6% due to foreign currency translation tailwinds, more than offsetting an organic sales decline of 1%.

Adjusted diluted EPS of $1.08, decreasing 25% compared to the prior-year period's extraordinary adjusted diluted EPS growth of nearly 52%.

Our consolidated adjusted EBIT of $206.8 million decreased 23.2% due to supply chain challenges, inflation and the Consumer Group's tough comparison against the prior year.

If you look at our consolidated results on a double-stack basis that compares the first quarter of fiscal 2022 to the pre-pandemic first quarter of fiscal 2020, our sales, EBIT, net income, and diluted EPS all show strong growth. This indicates that last year's results were a bit of an anomaly created by the pandemic that we are now getting back to a more steady level of performance across the business.

Raw material shortages and inflation continue to be serious challenges. In order to protect our margins, we are continuing to implement price increases, where appropriate, across all our segments. We also continue to benefit from incremental cost savings resulting from our recently concluded MAP to Growth operating improvement program. It continues to pay dividends as we generate further operational efficiencies in our manufacturing, procurement and administrative business functions.

Moving on to slide 7. Our Construction Products Group was our fastest growing segment in the first quarter, generating record sales and record adjusted EBIT. Its organic growth of 15% was particularly impressive given that non-residential construction put-in-place, a relevant market indicator for the segment, is down 11.6% this calendar year. Nearly all of the CPG businesses experienced strong top-line performance, partially by focusing on growing markets such as technology and distribution. CPG businesses that performed particularly well were those that provide commercial roofing systems, concrete admixtures and repair products and insulated concrete forms. The segment's European operations generated double-digittop-line growth due, in part to the comparison to last year's first quarter when shelter-in-place requirements were most severe. Earnings increased due to market share gains, operational improvements, cost controls and selling price increases, which offset production inefficiencies due to supply chain disruptions and cost increases.

On slide 8, you'll see that sales recovered at our Performance Coatings Group as they increased at nearly all of its major business units, partially aided by comparisons to last year's first quarter once the pandemic restrictions did not allow contractors on worksites and poor energy market conditions led to deferrals and industrial maintenance spending. Sales were strong at the recently acquired Bison, which is a manufacturer of raised flooring systems. We also experienced strong growth in emerging markets and in industrial maintenance outside of the energy sector. It was encouraging to see EBIT growth outpacing sales in spite of inflation, because PCG has been the segment that has been most heavily impacted by the pandemic. Earnings were boosted by improved pricing, incremental savings from operating improvement initiatives and two recent acquisitions.

Turning to slide 9, our Specialty Products produced record top-line growth, largely driven by its businesses providing marine coatings, powder coatings, wood stains and sealers, and disaster restoration equipment. Earnings increased due to higher sales volumes and incremental operating improvement program savings, which were partially offset by high raw material inflation, inefficiencies associated with supply chain disruption and investment in SG&A for future growth initiatives. In response, SPG businesses are continuing to institute price increases.

Next, on slide 10, our Consumer Group faced a tough comparison to prior year for the reasons Frank mentioned earlier. During the first quarter of fiscal 2022, this segment experienced a negative sales impact of roughly $100 million from production outages due to supply constraints and disruptions. However, the Consumer Group's fiscal 2022 first-quarter sales were 12.3% above pre-pandemic levels of the first quarter of fiscal 2020, in spite of the negative sales impact from supply chain challenges during the current year. There is pent-up demand for our products, and inventory in many of our channels are low. We expect to recover the lost sales when conditions normalize.

Earnings declined during the first quarter of fiscal '22 as a result of inflation in materials, freight and labor, as well as the unfavorable impact of supply shortages on productivity. These factors were partially offset by price increases and savings from our operating improvement program. We

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OCTOBER 06, 2021 / 2:00PM, RPM.N - Q1 2022 RPM International Inc Earnings Call

are proactively building resiliency in our supply chain to secure raw materials required today and in the future. In addition, we are adding manufacturing capacity to serve new DIY demand. While this additional capacity is being established, in the near term we are using contract manufacturing at higher cost to meet customer demand.

Now I'll turn the call over to Rusty to discuss our outlook.

Russell L. Gordon - RPM International Inc. - VP & CFO

Thanks, Mike. I'll now move on to slide 11. As we look ahead to our fiscal 2022 second quarter, we anticipate that raw material, freight and wage inflation will persist, as well the raw material shortages and supply chain challenges we have been experiencing. In addition, we faced another difficult comparison to the prior year when sales on a consolidated basis increased 6% and adjusted EBIT increased nearly 30%, driven by a 66% increase in the Consumer segment's adjusted EBIT. We anticipate these factors to be partially offset by price increases, operational improvements and new manufacturing capacity.

We expect our fiscal 2022 second-quarter consolidated sales to increase in the mid-single digits. Our Construction Products Group, Performance Coatings Group and Specialty Products Group are anticipating double-digit sales growth. Our Consumer Group is anticipated to experience a double-digit decrease in sales due to continued raw material shortages and a difficult comparison to the prior-year period when pandemic fuel demand rapidly drove organic growth up 15%. However, in a similar manner to the first quarter, we expect the Consumer segment's second-quarter sales to be above its pre-pandemic level, which is a fairer comparison.

While underlying demand remained strong for our products and services, we still face material shortages and inflationary pressures, so adjusted EBIT is expected to be down 15% to 25%. The Q2 results will be directionally similar to Q1, with significant year-over-year declines again in our Consumer Group, which is still lapping tough comparisons, and double-digit sales and earnings increases for our other three segments in aggregate.

Turning to slide 12, moving forward, we intend to maintain the positive momentum created by our operating improvement program as we complete its remaining projects, such as the one plant closure completed during Q1 of F '22, leverage resources across RPM to manage supply chain issues and meet customer demand, identify new opportunities for efficiencies through our continuous improvement culture, and make investments in growth opportunities, including capacity expansions.

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

Q U E S T I O N S A N D A N S W E R S

Operator

(Operator Instructions) Your first question comes from the line of Ghansham Panjabi with Baird.

Ghansham Panjabi - Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

Yes. In the comments on the Construction segment, you noticed that -- you noted that sales were very strong despite the indicator in terms of construction put-in-place being down significantly so far this year. Is that dynamic an issue as we look out over the next six months or so in terms of maybe an air pocket in demand? Or do you not see that at this point?

Frank C. Sullivan - RPM International Inc. - Chairman, President & CEO

No. I think you're going to continue to see strong performance there, and it's really a combination of how our leadership team has positioned our Construction Products Group. And I'll just give you a couple of examples.

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