RPM International Inc. (NYSE:RPM) Q3 2023 Earnings Call Transcript
RPM International Inc. (NYSE:RPM) Q3 2023 Earnings Call Transcript April 6, 2023
Operator: Good morning and welcome to the RPM International's Fiscal 2023 Third Quarter Earnings Conference Call. Please note this event is being recorded. I would now like to turn the conference over to Matt Schlarb, Senior Director of Investor Relations. Please go ahead.
Matt Schlarb: Thank you, Sarah and welcome to RPM International's conference call for the fiscal 2023 third quarter. Today's call is being recorded. Joining today's call are Frank Sullivan, RPM's Chairman and CEO; Rusty Gordon, Vice President and Chief Financial Officer; and Michael LaRoche, Vice President, Controller and Chief Accounting Officer. The 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. More information on these risks and uncertainties, please review RPM's reports filed with the SEC.
During this conference call, references maybe 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. Also, please note that our comments will be on an as-adjusted basis and all comparisons are to the third quarter of fiscal 2022, unless otherwise indicated. We have provided a supplemental slide presentation to support our comments on this call. It can be accessed in the Presentations and Webcasts section of the RPM website at www.rpminc.com. At this time, I would like to turn the call over to Frank.
Frank Sullivan: Thank you, Matt and good morning and thanks for joining us on today's call. I will begin today's call by discussing our high level performance for the third quarter, Mike will then provide details on our financial results and Matt will provide some business updates. Finally, Rusty will conclude our prepared remarks with our outlook, after which we will be pleased to answer your questions. In the third quarter, RPM associates remained focused on the execution of our MAP 2025 and other initiatives to grow both sales and adjusted EBIT to record levels for the fifth consecutive quarter. This focus on execution helped overcome several headwinds, including customer destocking and slowdowns in certain end markets. As these slowdowns are expected to continue, we began taking additional actions in the third quarter to address the changing market conditions by narrowing our investment focus to our top growth opportunities and reducing expenses where appropriate.
These actions are in addition to ongoing structural improvements as part of our MAP 2025 initiative. A good example to illustrate how we are driving ongoing structural improvements is our green belt program. During the quarter, 58 additional associates underwent training to become green belts, focused on continuous improvement initiatives. To earn this certification, they must identify and execute at least two projects with savings of $100,000 each. RPM now has 200 associates who have undergone green belt training and are serving its internal resources to drive structural savings, both now and in the future. Before we begin discussing the segments, I'd like to highlight that over the past five quarters, we have successfully navigated several challenges, including severe supply chain disruptions, war in Europe, elevated inflation and a recent demand slowdown.
Our ability to generate record-setting performance in this dynamic environment demonstrates the value of our strategically balanced business model and the agility of our associates to leverage our broad product portfolio and entrepreneurial culture in a changing market condition. Turning to the segments on Slide 4, all four achieved record third quarter revenue. The primary driver of this growth was increased pricing in response to continued inflation. The strongest revenue growth was generated by our businesses, providing engineered solutions, targeting infrastructure and reshoring projects. These include our concrete additives and admixtures businesses, our flooring systems businesses and our protective coatings and fireproofing businesses.
These businesses have positioned themselves in the highest growth sectors of the construction market, such as manufacturing facilities for electrical vehicles and microchips. Businesses that serve OEM markets and residential and commercial construction sectors experienced weak market conditions. The demand in these areas has been negatively impacted by higher interest rates, deteriorating economic conditions and customer destocking and their impact on the U.S. housing market and commercial construction activity. Additionally, in our Consumer segment, unit volume declined as retailers were cautious about increasing inventory in advance of the spring season and from reduced consumer takeaway at retail. In addition to our customer destocking their inventory, we reduced production at our facilities to continue to normalize inventory levels and improve cash flow.
This resulted in lower fixed cost utilization at our plants, which offset most of the MAP 2025 benefits we generated during the third quarter. Inflation continued with material costs rising 2.5% year-over-year basis. Foreign currency also remained unfavorable during the quarter. Despite these headwinds, we achieved record adjusted EBIT in the third quarter due in large part to the successful execution of MAP 2025 profitability initiatives across the organization as well as margin recovery in our consumer group. We remain on track to exceed our year one MAP 25 target of $120 million in EBIT benefit. Looking at sales by geography in the next slide. North America, which represents 76% of sales in the third quarter, grew the fastest to 8%, followed by Latin America, where sales grew over 7%.
These areas benefit from strong infrastructure and reshoring-related spending. Europe was again the weakest region for growth with sales declining 3.6%. Foreign exchange rates continue to be a meaningful headwind during the quarter and reduced overall sales by 2.3%. Absent these FX headwinds, sales in all regions would have increased in the mid-single to mid-teen percentage range. I'd now like to turn the call over to Mike LaRoche to cover our financial results in more detail.
Michael Laroche: Thanks, Frank. Consolidated sales increased 5.7% to $1.52 billion, which was a third quarter record. Organic sales growth was 7.3% or $104.3 million and acquisitions net of divestitures contributed 0.7% to sales or $10.4 million. FX decreased sales by 2.3% or $32.4 million. Consolidated adjusted EBIT grew 4.2% to a third quarter record of $83.9 million compared to $80.6 million reported in the prior year period. Adjusted diluted earnings per share were $0.37 compared to $0.38 in the third quarter of 2022. The decline was primarily driven by higher interest expense of $30.8 million compared to $22 million in the prior year period. During the third quarter of 2023, we excluded several items which are not indicative of our ongoing operations from adjusted EBIT and adjusted EPS.
On a pre-tax basis, these include $59.2 million of expenses related to MAP 2025 initiatives, which includes $39.2 million of non-cash impairment charges in PCG, the result of a go-to-market strategy change in Europe, a $25.8 million gain on the sale of the non-core furniture warranty business and other assets in our SPG segment and a $20 million gain from an insurance recovery in our Consumer segment. Next, we will discuss our segment results. On Slide 7, our Construction Products Group achieved record third quarter net sales of $497 million, an increase of 3.1% compared to the prior year period. Organic sales growth was 4.3% with acquisitions contributing 1.4% and foreign currency translation reducing sales by 2.6%. Sales growth was led by pricing increases and strength in our concrete admixtures and repair products, which benefited from market share gains and infrastructure and reshoring-related spending.
Demand for restoration systems for flooring, facades and parking structures also contributed to CPG's revenue growth. Partially offsetting this growth, demand was weak in residential and certain commercial construction markets. This weakness included the impact of customer destocking. Sales in Europe also remain soft. Adjusted EBIT was $13.3 million, a decline of 62.1% from the prior year period when adjusted EBIT was $35.1 million. The decline was caused by unfavorable fixed cost utilization resulting from lower customer demand and internal inventory normalization initiatives that reduced production at our plants. As a reminder, CPG faced challenging comparisons to the prior year when adjusted EBIT increased 89.7%. The next slide, the Performance Coatings Group achieved record fiscal third quarter net sales and adjusted EBIT.
Revenue of $299.6 million was an increase of 10.6% compared to the prior year period. Organic sales increased 13.2%, acquisitions added 0.8% and foreign currency translation was a 3.4% headwind. Sales were driven by pricing and volume growth in nearly all its businesses, fiberglass grading, protective coatings and flooring systems all achieved strong growth. These businesses are targeting fast growing vertical markets, benefiting from continued spending on reshoring and infrastructure projects. Strong energy demand also contributed to the segment's growth. Adjusted EBIT increased 16.4% to a third quarter record of $31.2 million. The growth was driven by strong sales and MAP 2025 benefits, partially offset by FX headwinds. This growth was achieved in addition to strong results in the third quarter of 2022 when adjusted EBIT increased 89.9%.
Photo by Scott Blake on Unsplash
PCG's adjusted EBIT excludes the impact of non-cash asset impairment charges of $39.2 million that I previously mentioned. Turning to Slide 9, the Specialty Products Group reported record third quarter sales of $191 million, an increase of 0.9% compared to the prior year period. Organic sales increased 2.2%, divestitures net of acquisitions reduced sales by 0.2%, and foreign currency translation was a headwind of 1.1%. Third quarter sales were led by strength in the disaster restoration business, which was able to quickly respond to the deep freeze in December and flooding in California, thanks to prior investments we have made to improve operational efficiency. Additionally, the Food Coatings and Additives business grew double-digits, which was driven by a strategic refocus of sales management.
Price increases in response to continued inflation also contributed to sales growth. Offsetting this growth were businesses serving OEM markets, which experienced weak demand as they felt the dual impact of economic pressures and customer destocking. SPG adjusted EBIT was $16.8 million or a decline of 37% compared to the prior year period. Unfavorable mix and lower fixed cost leverage drove the decline. Adjusted EBIT excludes the $25.8 million pre-tax gain on the sale of the non-core furniture warranty business and other assets. Moving to the following slide, the Consumer Group grew sales 7.5% to $528.5 million, which was a third quarter record. Organic sales increased 8.9%, acquisitions contributed 0.3%, and foreign currency translation was a headwind of 1.7%.
The Consumer Group sales growth was driven by price increases to catch up with continued cost inflation. Volumes declined as retailers were cautious about increasing inventory levels in preparation for the spring season as well as from a slowdown in consumer takeaway. Adjusted EBIT was a third quarter record at $48.3 million or an increase of 180.4% compared to the prior year period. The successful implementation of MAP 2025 initiatives as well as solid sales increases were the key drivers of the increase in profitability. As a reminder, the Consumer Group experienced extraordinary low profitability in the third quarter of 2022 as a result of an explosion at an alkyd resin suppliers plant that caused severe supply disruptions and from high material cost inflation that was not offset by commensurate price increases.
This contributed to the strong year-over-year growth. Additionally, third quarter 2023 adjusted EBIT excludes the pre-tax impact of a $20 million gain associated with the receipt of a business interruption insurance recovery. This recovery was a result of lost business in the prior year caused by the explosion of the alkyd resin supplier. Turning to Slide 11, we have continued to return cash to shareholders during the third quarter. We paid $54.2 million in dividends and $12.5 million in share repurchases, bringing our fiscal year-to-date total in these two areas to combined $197.3 million. Looking at our working capital, we have spoken several times today about our initiatives to normalize inventories that have been elevated to add resiliency to our supply chain during periods of raw material shortages.
While these initiatives are having a temporary unfavorable impact on our profitability, we are starting to see positive results elsewhere in our financials. Our cash flow from operations was $72 million in the third quarter of 2023 compared to a negative $3 million in the prior year period. Inventory levels declined $48 million since the end of November and we expect our inventory normalization initiatives to continue benefiting working capital in the future. I would also like to provide an update on our debt maturity schedule. As a reminder, in January 2022, we pre-funded a bond that was maturing in November 2022 at an attractive fixed rate of 2.95%. And in August 2022, we extended the maturity of a term loan to 2025 and our revolving credit facility to 2027.
As a result, we have significant liquidity of over $840 million, no maturities until May 2024 and the vast amount of our debt not coming due until 2027 or later. Now, I'd like to turn the call over to Matt to provide a business update.
Matt Schlarb: Thanks Mike. Over the past several years, political events and societal changes have created transformational forces that are driving investments in new projects and renovations worldwide. A few examples of these transformational drivers are highlighted on Slide 12 along with how our businesses are supporting these events. The key area for transition is energy. From providing protective coatings to wind turbine blades to improving safety at LNG facilities with specified fireproofing solutions, our engineered products and services are helping create and protect facilities that are diversifying and ensuring the supply of energy. Additionally, we offer multiple energy savings solutions for both new and existing structures.
We have spoken several times about the transitioning of manufacturing capacity closer to its customer base or reassuring. This is ongoing across several vertical markets and one of these seeing significant investments is electric vehicles. Globally, changing consumer preferences are driving significant growth for EVs and the batteries and the power dynamics. We are supporting this transformation by providing engineered solutions for the facilities that are producing the EVs and batteries to meet this growing demand. Moving to Slide 13, legislation is helping to accelerate these transformations. In addition to stimulus passed in 2020 and 2021, where we are benefiting from increased spending on infrastructure and institutions, the U.S. Congress recently passed legislation that is expected to increase the reshoring of manufacturing capacity to North America for multiple years.
The first is the chipset that contains significant incentives for the manufacturing of microchips in the U.S. Several chip manufacturers, with whom we have strong relationships, have started projects or announced capacity additions in the U.S. The second is the Inflation Reduction Act, which extended the tax credit for the purchase of EVs in the U.S. with the stipulation that a percentage of the battery must be manufactured in North America. As a result, the growing number of construction projects for EV battery manufacturing plants in North America, have been announced or are underway. Now, let's take a look at the role we are playing in these facilities. On Slide 14, the construction and operation of EV battery and assembly facilities have demanding and specific requirements, which our engineered products are designed to meet.
Some examples include Euclid Chemical, which provides multiple admixtures and additives that benefit the foundation of the facility. One example is a high-range water reducer that lowered the amount of both water and portland cement needed during construction. Additionally, Euclid Chemical offers TUF-STRAND patented macro synthetic fibers, which are used as a replacement for steel reinforcement providing enhanced 3D protection against cracking, improve construction times, increase worker safety and better overall durability of a facility's concrete applications. Another is Carboline's Thermo-Sorb VOC, which is applied to interior steel structures to provide up to 3 hours of passive fire protection. It has been extensively tested for outgassing for clean room environments and EV plants and can be applied quickly in the field to keep large projects on schedule.
Finally, Stonhard's Stonclad GS epoxy motor floor system provides the abrasion and impact resistance necessary in the manufacturing facility. Additionally, Stonclad GS controls static electricity, which is critical in a clean room environment and is also resistant to chemicals. Importantly, Stonhard installs this system to ensure that the project is completed properly and on time. As an example of RPM's agility that Frank highlighted earlier, a couple of years ago, these businesses were serving the construction of warehouses, which was growing quickly at the time. As that area of construction slowed, we have been able to pivot to this fast growing sector because of the entrepreneurial nature of our people and strong portfolio of products and services.
On the following slide, I'd like to highlight another growth driver for RPM, innovation. Bringing new products to market has been integral to RPM's growth strategy for decades. In recent years, R&D has been ongoing. However, new product introductions have been limited because of supply chain disruptions. Now that these issues are largely resolved, we are back on offense. As an example, in our Consumer segment, Rust-Oleum recently introduced their biggest spray paint innovation in over a decade, the custom spray 5 in 1. With patent-pending spraying technology, the user can customize the output of the can to match the project simply by rotating the dial. These 5 spray patterns increase precision, minimize drips and reduce waste. Additionally, the stop rust advanced formula provides 30% greater corrosion resistance and color retention compared to the traditional stop rust formula.
We are introducing this product with a sophisticated omnichannel marketing campaign that will reach users at all points during their shopping journey. The QR code on the slide provides an example of this.
Operator: Pardon me. This is your conference operator. Thank you for holding. I'd like to turn the call back over to Matt Schlarb.
Matt Schlarb: Hi, everyone. Yes. We apologize for that technical interruption. I am going to turn the call back over to Rusty who will start at the beginning of the outlook section.
Rusty Gordon: Yes. Thanks, Matt. The challenging economic conditions we experienced in the third quarter have continued and in some instances, become more pronounced as elevated interest rates and tightening credit conditions have caused customers to become more cautious. While our strategically balanced portfolio of businesses and focus on repair and maintenance helps insulate us from economic slowdowns, we are not immune, and this is reflected in our outlook. For sales by segment, we are expecting CPG to decline low to mid-single digits versus prior year record sales, which increased 18.5%. Strength in concrete admixture is expected to be more than offset by continued weakness in certain sectors such as residential and office construction while distributors are holding inventory below historical averages.
PCG to increase mid-single digits as the segment continues to benefit from infrastructure and reshoring project spending as well as MAP 2025 benefits. This growth is on top of prior year record results when sales grew 16.3%. SPG declined low double digits compared to prior year record results when sales increased 11.4% from OEM markets, which are economically sensitive, is expected to remain weak. Consumer increased mid-single digits as higher pricing was partially offset by lower volumes due to lower consumer takeaway as well as the fact that retailers are being cautious about building inventories heading into seasonally strong months. This sales increase is on top of prior year record results when sales grew 8.6%. Overall, we anticipate fourth quarter 2023 consolidated sales will be flat compared to prior year record results when sales increased 13.7%.
Turning to EBIT. We anticipate that fourth quarter fiscal 2023 adjusted EBIT will be in a range of flat to down high single digits compared to the record results in the fourth quarter of fiscal 2022. This range reflects the economic uncertainty in the coming months. It also includes negative impact of lower fixed cost utilization from softer customer demand and our initiatives to normalize inventories as well as increased non-service pension and insurance expenses. This guidance implies full year 2023 sales growth of 8% to a record $7.2 billion and adjusted EBIT of approximately $815 million to $835 million, which represents 15% to 18% growth over fiscal year 2022. Both of these amounts would be annual records. Given this difficult and uncertain environment, we are focusing on what we can control.
This includes with MAP 2025, continued execution of data-driven initiatives to structurally improve profitability, leveraging our strong position in markets benefiting from spending on infrastructure and reshoring, introducing new products over the next several quarters including our Rust-Oleum custom spray 5 in 1 aerosol paint that Matt just mentioned, prioritizing and investing in our highest growth opportunities, reducing expenses and aligning resources with demand levels, focusing on cash flow, including initiatives to normalize inventories. As we look beyond the fourth quarter into early fiscal year 2024, economic uncertainty limits visibility. However, we expect many of the positive tailwinds that we control to continue while certain profitability headwinds will start to abate, including material cost inflation and the negative impact of underabsorption as we complete our inventory normalization initiatives.
This concludes our prepared remarks. We will now be pleased to answer your questions.
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