RPM International : Fiscal 2021 Fourth-Quarter Conference Call Transcript

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EDITED TRANSCRIPT

RPM.N - Q4 2021 RPM International Inc Earnings Call

EVENT DATE/TIME: JULY 26, 2021 / 2:00PM GMT

OVERVIEW:

Co. reported 4Q21 consolidated net sales of $1.74b and adjusted diluted EPS of $1.28.

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JULY 26, 2021 / 2:00PM, RPM.N - Q4 2021 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

Matthew T. Ratajczak RPM International Inc. - VP of Global Tax & Treasurer

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

Arun Viswanathan RBC Capital Markets, Research Division - Senior Equity Analyst

Frank Mitsch Fermium Research, LLC - President

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

Jeffrey Zekauskas JPMorgan Chase & Co, Research Division - Senior Analyst

John McNulty BMO Capital Markets Equity Research - Analyst

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

Kevin McCarthy Vertical Research Partners, LLC - Partner

Luke Washer BofA Securities, Research Division - Research Analyst

Michael Harrison Seaport Research Partners - MD & Senior Chemicals Analyst

Richard Garchitorena Wells Fargo Securities, LLC, Research Division - Associate Analyst

Rosemarie Morbelli G. Research, LLC - Research Analyst

Vincent Andrews Morgan Stanley, Research Division - MD

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

Operator

Welcome to RPM International's conference call for the fiscal 2021 fourth quarter and year end. 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. (Operator Instructions)

At this time, I would now 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, Angelica. Good morning, and welcome to the RPM International Inc. investor call for our fiscal 2021 fourth quarter and for the full year ended May 31, 2021. With 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 supports our investor relations activities.

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JULY 26, 2021 / 2:00PM, RPM.N - Q4 2021 RPM International Inc Earnings Call

On today's call, I'll provide details on the successful completion of our MAP to Growth operating improvement program. Matt will then review our fourth-quarter results in some detail, and Rusty will conclude with comments on our outlook for the first half of fiscal 2022. We'll then be pleased to answer your questions.

On our April investor call, we referenced rising inflation across our P&L at structurally high single digits with some select spikes of 150% to 200%. Some on our call today thought that by now raw material costs and availability would have gotten better to the point of pressure from some customers to give back price. That was wrong in April and way wrong today. Raw material costs have increased to levels on average in the high teens. More importantly, certain critical raw material shortages across our industry are negatively impacting our ability to produce and meet market demand.

In Q4, this raw material availability cost us an estimated $100 million in revenue. It's likely to cost us more in Q1, and we anticipate having more raw material availability lost production days in Q1 this year than we had from the impact of Covid shutdowns in Q1 last year.

These challenges notwithstanding, thanks to our successful MAP to Growth operating improvement program, we generated strong results for our 2021 fiscal year. Our full-year consolidated sales increased 11% to $6.1 billion, our EBIT margin increased by 150 basis points and adjusted EBIT was up 26.5%. Operating cash flow climbed nearly 40% to a record $766.2 million, and our adjusted EBIT margin climbed to 12.8%, which was also a record.

Our MAP to Growth program has been the principal driver of this strong financial performance. The successful execution of our MAP to Growth operating improvement plan, especially in light of the incredible disruptions caused by the Covid pandemic and more recently by unprecedented supply chain challenges, is a true testament to the dedication and resilience of the RPM associates worldwide.

At the program's onset, we recognized that RPM had reached the point where a center-led approach in selected areas of the business was required to take it to the next level of growth. In manufacturing, we formed a center-led team that has created a lasting culture of manufacturing excellence and continuous improvement disciplines across the organization. This team launched our MS-168 manufacturing system, which is allowing us to produce better products more quickly, more cost-effectively and more sustainably.

In addition, we reduced our global manufacturing footprint by 28 facilities, consolidating production to more strategically advantageous plants. Our original target was 31 plants, but consolidation efforts were slowed by the Covid pandemic. We expect to exceed the original target in the coming year.

We also created a center-led procurement team that has consolidated material spending across our operating companies, negotiated improved payment terms with our supplier base and has helped us reduce working capital. These initiatives have created millions of dollars in cost savings. With stronger supplier partnerships, longer-term contracts, we are in a much better position to secure necessary raw materials and control costs through the current raw material supply shortages than we would have been just three years ago.

Additionally, we took significant steps to streamline many of our administrative functions. Through our financial realignment, we consolidated 46 accounting locations, improved controls, developed more effective and efficient accounting processes and reduced costs. Similar initiatives were undertaken in our IT infrastructure as we have migrated 75% of our organization to one of four group-level ERP platforms. Additionally, we have reduced the number of data centers we manage by shifting systems and hardware to the cloud, and we are creating a number of platforms for centralized data-driven decision making.

Over the course of the three-year MAP to Growth program, we have returned $1.1 billion of capital to shareholders through a combination of cash dividends and share repurchases. Aside from a significantly improved profit margin profile and stronger cash generation, as reflected in the cumulative total return generated by RPM, which has exceeded our peer group over the three years of the MAP to Growth program, the lasting legacy of our MAP to Growth operating improvement plan is the revolutionary change in how people work together at RPM. Our operating company leadership is managing today with a broader view of RPM as a whole, allowing us to better leverage resources.

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JULY 26, 2021 / 2:00PM, RPM.N - Q4 2021 RPM International Inc Earnings Call

Another permanent change has been the operational disciplines we developed that will continue to generate improvements in profitability, cash flow and operating efficiency well into the future. Perhaps more significant has been our ability to maintain our unique entrepreneurial growth-oriented culture, evidenced by the fact that our revenues continue to grow at or above industry averages throughout the MAP to Growth program.

The real heroes behind the MAP to Growth success were our associates worldwide, particularly our frontline workers who kept our manufacturing and distribution centers operating during the Covid pandemic. We also owe a debt of gratitude to my good friend and one of RPM's great operating leaders, Steve Knoop, who is the architect of the MAP to Growth program and passed away prematurely in 2019.

Additionally, I'd like to recognize Mike Sullivan, vice president of operations and chief restructuring officer; Tim Kinser, vice president of operations-procurement; and Gordy Hyde, vice president of operations-manufacturing, who successfully executed the program with an intense focus and strong leadership that were integral to delivering these results and instilling a permanent focus on operating efficiency and continuous improvement into our culture.

While we have reached the 2020 MAP to Growth conclusion, there will be some runoff from the MAP to Growth program in fiscal '22, during which we expect to capture approximately $50 million in incremental savings. We will also be leveraging the lessons learned from this program to chart a course for 2025. Over the next six to 12 months, we will be working on a MAP 2.0 program in conjunction with our operating leaders. We remain fully committed to achieving our long-term goal of a 16% EBIT margin, and we will be sharing more information about our progress for a new program in the coming quarters.

I'd now like to turn the call over to Matt Ratajczak, who will discuss our fourth-quarter results in detail.

Matthew T. Ratajczak - RPM International Inc. - VP of Global Tax & Treasurer

Thanks, Frank, and good morning, everyone. Please keep in mind that my comments will be on an as-adjusted basis. For the fourth quarter, we generated consolidated net sales of $1.74 billion, an increase of 19.6% compared to the $1.46 billion reported in the year-ago period. Sales growth was 13.9% organic, 2.2%, the result of recent acquisitions and 3.5% due to foreign currency translation tailwinds. We are very pleased with this strong top-line growth in light of raw material shortages and supply chain disruptions. It has been challenging, but we've been managing these difficulties, thanks to our center-led procurement team, improved internal collaboration and leveraging of internal resources to get materials where they are most needed.

Adjusted diluted earnings per share increased 13.3% to $1.28 compared to $1.13 in the fiscal 2020 fourth quarter. Our adjusted EBIT was $236.2 million compared to $213.6 million during the year-ago period, which was an increase of 10.6%. Keep in mind that last year's fourth quarter was impacted by the pandemic's onset, which created the extraordinary situation where our non-operating segment reported a profit due to lower medical expenses, incentive reversals and other factors.

On the other hand, during this year's fourth quarter, we experienced higher insurance costs due to business interruptions created by hurricanes and the winter storm Uri, as well as higher incentives tied to improve performance. If you exclude the impact of our non-operating segment from both years, our four operating segments combined generated impressive sales growth of 19.6% and adjusted EBIT growth of 27.5% as they overcame margin pressures and supply availability challenges.

Turning now to our segment performance for the quarter. Our Construction Products Group generated record results. Construction, maintenance and repair activity accelerated in the U.S. during the quarter and even more so in international markets. Construction Products Group net sales were a record $629.4 million during the fiscal 2021 fourth quarter, which was an increase of 33.2% compared to fiscal 2020 fourth-quarter net sales of $472.4 million. Organic growth was 28.4% and foreign currency translation provided a tailwind of 4.8%.

Leading the way for the segment were our businesses in North America that provided commercial roofing materials and concrete admixtures and repair products, as well as our European businesses, all of which generated record sales. Demand for our Nudura insulated concrete forms remained

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JULY 26, 2021 / 2:00PM, RPM.N - Q4 2021 RPM International Inc Earnings Call

at elevated levels due to the relatively low installed cost, in addition to their environmental and structural benefits as compared to traditional building methods.

Adjusted EBIT was a record $110.4 million compared to adjusted EBIT of $77.3 million reported during the year-ago period. This represents an increase of 42.7%. The bottom line was boosted by volume leveraging, savings from our MAP to Growth program and higher selling prices.

Our Performance Coatings Group also benefited from the release of pent-up demand for the construction, maintenance and repair of structures in the U.S. and abroad, which has leveraged into strong financial results. The segment's net sales were $283.3 million during the fiscal 2021 fourth quarter, which was an increase of 20.5% compared to the $235.1 million reported a year ago. Organic sales increased 12.9% and acquisitions contributed 2.9%. Foreign currency translation increased sales by 4.7%.

This segment had been particularly challenged through the pandemic because of its greater exposure to international markets and the oil and gas industry, as well as a greater reliance on facility access to apply its products. Points of strength in the Performance Coatings Group were its businesses providing commercial flooring systems and North American bridge and highway products, as well as recovery in its international businesses.

Adjusted EBIT was $31 million during the fourth quarter of fiscal 2021 compared to $23.7 million during the year-ago period, representing an increase of 31.2%. Segment earnings increased due to higher sales volumes, the MAP to Growth program and pricing, which helped to offset raw material inflation.

Our Consumer Group reported record net sales of $628.9 million during the fourth quarter of fiscal 2021, an increase of 2% compared to net sales of $616.2 million reported in the fourth quarter of fiscal 2020. Organic sales decreased 3.8%, since this was the first quarter in which we comped against the surge in demand at the beginning of the pandemic. Acquisitions contributed 3.8% to sales. Foreign currency translation increased sales by 2%.

During the first three quarters of this fiscal year, our Consumer Group sales and earnings have grown rapidly as it served the extraordinary demand for DIY home improvement products by consumers who were homebound during the pandemic. As more Americans became vaccinated and were no longer confined to their homes, DIY home improvement activity began to slow from its torrid pace during the quarter, though the pace of sales remained higher than the pre-pandemic levels. In international markets, many of which still have stay-at-home orders in place, they remain quite strong.

Fiscal 2021 fourth-quarter adjusted EBIT was $93.6 million, a decrease of 10.4% compared to adjusted EBIT of $104.5 million reported during the prior-year period. Helping to partially offset the cost pressures were selling price increases and savings from our MAP to Growth program, some of which were invested in advertising programs to promote new products.

The Specialty Products Group reported record net sales of $202.8 million during the fourth quarter of fiscal 2021, which increased 49.9% compared to net sales of $135.2 million in the fiscal 2020 fourth quarter. Organic sales increased 46.2%, while acquisitions contributed 0.7% to sales and foreign currency translation increased sales by 3%.

For the second quarter in a row, our Specialty Products Group generated the highest organic growth among our four operating segments. Its results have improved sequentially over the past three quarters, with excellent top- and bottom-line results by nearly all of its businesses, including those providing coatings for recreational watercraft, OEM equipment, wood, food and pharmaceuticals, as well as cleaning and restoration equipment and chemicals.

Adjusted EBIT was a record $36.3 million in the fiscal 2021 fourth quarter, an increase of 395% compared to adjusted EBIT of $7.3 million in the prior-year period. Its record results were driven by recent management changes, increased business development initiatives and improving market conditions.

Lastly, I have a few comments on our liquidity. Our fiscal 2021 cash flow from operations, as Frank mentioned, was a record $766.2 million compared to last year's record of $549.9 million. This is primarily due to continued good working capital management and margin improvement initiatives

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