RPM INTERNATIONAL INC/DE/ Q1 FY2025 earnings call

Management Statement and Operational Highlights

• Hurricane Response: RPM businesses contributing to disaster recovery efforts, e.g., Legend Brands supplying restoration equipment, Tremco providing tarps, generators, water, and food for those impacted by Hurricane Helene.
• Financial Performance: Achieved 11th consecutive quarter of record adjusted EBIT. Adjusted EPS increased 12.2% to $1.84. Cash flow from operations totaled $248 million, with $75 million in debt repaid during the quarter. Over the prior 12 months, $453 million in debt was repaid.
• MAP 2025 Initiatives: Executing initiatives to control costs, improve working capital efficiency, and capture growth opportunities. Sustained cash flow momentum from fiscal '24, leveraging MAP 2025 to improve working capital efficiency.
• Segment-Specific: Construction Products and Performance Coatings Groups led growth; Consumer Group faced challenges but international markets grew; Specialty Products Group had mixed results with Food Group growth.

Segment Performance

• Construction Products Group: Drove growth via turnkey roofing and wall systems for new construction and renovations. Achieved record Q1 adjusted EBIT due to improved fixed cost leverage, MAP 2025 benefits, and focus on higher-margin products.
• Performance Coatings Group: Had positive organic growth from flooring business and emerging markets, but offset by FX headwinds and divestiture. Adjusted EBIT was a first quarter record due to MAP 2025 benefits and improved fixed cost leverage from higher volumes.
• Specialty Products Group: Sales declined due to soft demand in specialty OEM markets with housing exposure, but Food Group grew aided by new business wins and acquisition. Adjusted EBIT grew as MAP 2025 benefits offset lower volumes.
• Consumer Group: Faced challenging market conditions with weak DIY demand and retailer inventory cuts. International markets grew, and while adjusted EBIT declined, margin expanded due to MAP 2025 initiatives and rationalization of lower-margin products.

Guidance

• Second Quarter Outlook: Consolidated sales expected to be flat. CPG expects low single-digit revenue growth. PCG sales expected to be flat. SPG sales down low single digits. Consumer Group sales down low single digits. Consolidated adjusted EBIT expected to increase mid-single digits.
• Full Year 2025: Sales up low single digits, adjusted EBIT mid-single digits to low double-digit range. Pricing expected to be slightly positive. Expect to improve working capital efficiency, leading to strong cash flow.

Risks

• Economic Uncertainty: Mixed economic environment, uncertainties around U.S. elections, and impact of recent port strikes.
• Market Volatility: FX headwinds, soft demand in certain segments (e.g., Specialty Products Group residential-focused OEM), and inventory levels affecting sales in Consumer Group.
• Regulatory and Political Risks: Uncertainties around election outcomes affecting manufacturing and permitting processes.

Question and Answer

Q: Good morning, Frank. Thanks for taking my question, and congrats on a nice strong quarter in a difficult environment. And I guess to that, so the Consumer margins are putting up some pretty solid numbers. I mean, I think it was 18.5% this quarter, which is nearly a record for the first quarter, and that's despite some really challenging volumes. So I guess, can you help us to think about the operating leverage in this business now that MAP is really kind of working its way through, and how we can think about kind of what the margin profile would look like for the business in a more normalized DIY type environment?

A: Sure. I'll comment to your question about consumer but it really applies to all of our businesses. We have executed really well on our MAP to Growth and our MAP 2025 follow-on operating improvement initiatives. We've gained efficiencies in our conversion costs, particularly true in Consumer and at Rust-Oleum. And I've commented in the past, without additional dollars of capital, we have uncovered almost 80 million units of new capacity. And that gives you a sense of the benefits that our operating improvement initiatives have uncovered. That doesn't do us much good unless we can sell it, and so we are really poised to lever growth to the bottom line. You can see that with a nice leverage in the Construction Products Group and the Performance Coatings Group, both of whom had positive unit volume growth in the quarter. And I think as you're referencing, you can see the operating leverage, and even in our Consumer segment, when volumes will come back, which they will. The last comment I'll make is across every segment of RPM, we have been very deliberate in focused SG&A spends on new product areas and on growth areas, as Rusty commented. We are moving our sales forces to the few pockets of where growth exists. But in each of our segments in Q1, our dollar spend in SG&A was below last year, so we are taking a pretty targeted and disciplined approach to SG&A and you'll see that continue in Q2.

Q: Good morning, Frank. Would welcome your updated thoughts on capital deployment. I guess looking in the rearview, it seems as though you did a small deal in Specialty Products. But more importantly, just thinking about the deleveraging that you've done, and by my math, you're down about 1.4 times EBITDA in terms of the net debt balance. So what are you seeing in the private market? And how would you weigh that versus potential to accelerate repurchases or alternative uses of cash?

A: Sure. We are committed to the capital allocation model that has been the hallmark of RPM, investing in internal growth, investing in acquisitions, raising our dividend. We have our annual meeting of stockholders tomorrow, and our Board will consider what would likely be our 51st consecutive increase in cash dividends. And we are committed on a regular basis now regardless of stock price to about $50 million a year, maybe a little bit more of share repurchases. And beyond that, I think we'll be opportunistic. But our ability to repurchase shares on a more regular and more consistent and larger basis exists in ways it didn't. Our balance sheet is in the best shape that it's ever been in, in my 35-year career at RPM, and so that feels pretty good. Specific to acquisitions, we are pursuing a lot of small product lines because we can get them done. The M&A market chilled through the kind of supply chain hiccups and the interest rate rises. It's starting to loosen up a little bit. And we will continue to pursue the small- to medium-sized acquisition strategy that's been so successful for us in the past. And our ability to leverage product lines or businesses because of our MAP initiatives are better today than they've ever been.