Q2 2020 Earnings Call
Good morning, and welcome to RPM Internationals conference call for the fiscal 2022nd quarter today's call is being recorded.
This call is also being webcast and can be accessed life or replayed on the RPM website at www Dot RPM high end Si Dot 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 our P. EMS reports filed with the FCC.
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 at which time, if you wish to ask a question you'll need to press star one on your telephone.
Please note that only financial analysts will be permitted to ask questions.
At this time I would like to turn the call over to Rpms, Chairman and CEO Mr. Frank Sullivan for opening remarks, you may begin sir.
Thank you Brandon.
Happy New year and welcome to the RPM International Inc. Investor call for our fiscal 2022nd quarter ended November 32019 on today's call with me today are Rusty Gordon RPM, as Vice President and Chief Financial Officer, and Matt Ratajczak, Our Vice President of Global Tech Treasury.
Also in charge of our Investor Relations.
I'll kick off the call with some comments on our second quarter results in an update on our 2020 map to growth operating improvement plan, then Matt will review the second quarter numbers in more detail.
Rusty will conclude our formal comments with our outlook for the remainder of fiscal 2020.
Then we'll take your questions.
For the third consecutive quarter earnings were up significantly over the prior year and ahead of expectations are strong bottom line growth in the quarter was primarily driven by our 2020 map to growth program, which is enabling us to grow earnings at a faster rate than our peers last year selling price increases coupled with moderating raw material and.
Flaishon is also positively impacted results.
Revenue was up 2.8% during the quarter organic sales growth were up 3.5% due to market share gains and some pricing activity.
We're pleased with this organic growth given the aggressive product line rationalization, taking place at RPM, along with the current macro environment in which we were operating in.
In regard to our 2020 map to growth operating improvement plan. The specific actions, we have taken during the quarter, including continuing to de layer management. It different groups consolidating manufacturing and shedding low marketed product lines to free up resources for more value added EBIT accretive volume.
So far through 2020 map the growth program, we have discontinued product lines on an annualized basis with revenues of approximately $60 million to $70 million.
We also announced the closure of three plants in the second quarter.
Along with one more plant completed so far in the early part of the third quarter. This brings our total to 19 out of a plan to map the growth program 31 plant consolidations.
Consolidated basis, we realized 2020 map to gross savings in the second quarter totaling about $31 million 9 million of which came from manufacturing 10 million from procurement and 12 million from DNA.
May recall, we realize savings during the fourth quarter of fiscal 2019 in the first quarter fiscal 2021st quarter fiscal 2020.
Of 21 million in $26 million respectively.
I point this out because the success of quarterly increases in 2020 map to growth operating improvement plan total savings demonstrates a strong momentum of earnings improvement that the program is generating.
In terms of our operating improvement plan, we continue to make progress in our sector led procurement function as we better leverage our spending through consolidation of material spending across operating companies. Our strategic suppliers are finding opportunities as well since they can grow their business with RPM by capitalizing on this recent change in.
Our approach.
Also on the procurement side, we continue to negotiate improved payment terms with the supplier base innovate and some significant supplier financing programs that provide advantages for both RPM and our suppliers in manufacturing, we are increasing productivity by closing underutilized plants, while improving efficiency in the plants that we continue to operate.
Allowing us to reduce costs and improve service to our customers.
We continue to invest in training, our workforce and continuous improvement disciplines and we're seeing good progress in our plants through our focused improvement team efforts. We are in the early innings of our accounting consolidation and expect to see the additional savings that it generates as well as savings from ERP consolidations in way.
Three of our 2020 map the growth program I.
I'll now turn the call over to Matt Ratajczak to review our results for the quarter.
Thanks, Frank and good morning, everyone. Please note that my comments will be about our financial results for this year second quarter, and we'll be out and as adjusted basis.
We achieved record consolidated net sales of 1.4 billion up 2.8% compare to the 1.36 billion reported during the second quarter of fiscal 2019.
Frank stated organic sales growth was 3.5% for 47.7 million.
Acquisitions contributed 0.6% to sales for 8.5 million, while foreign exchange continued to be a headwind the reduced sales by 1.3% or 17.5 million.
As Frank also mentioned, our 2020 mapped to growth program generated significant earnings leverage to the bottom line.
Also contributing to the bottom line was the margin improvement, resulting from pricing in some moderating raw material costs.
EBIT increased 22% to 153.7 million for an EBIT margin of 11% versus last year's EBIT margin of 9.2%.
Diluted EPS increased 31% to 76 cents per diluted share from 58 cents per diluted share a year ago.
Share repurchases in the prior years convertible bond retirement resulted in two cents per diluted share accretion for the quarter.
Now looking at our performance on a segment basis.
Sales our construction products groups was very strong and increased 6.9% to 499.5 million.
Growth was largely organic at 7.4% for 34.5 million aided by a backlog from last quarter that resulted from exceptionally rainy weather that had slowed construction activity.
In addition, we picked up market share in a somewhat lukewarm north American commercial construction market.
Acquisitions contributed 1.2% for 5.8 million, primarily from the recent new Dura and short transactions.
Organic growth was offset by foreign currency translation, which reduced sales by 1.7% or 8.1 million and also by product rationalization through which we are discontinuing product offerings that did not meet our more stringent margin for working capital standards.
From a geographic perspective European markets remained soft where combating this by reducing overhead and proactively managing our product mix to simultaneously improve earnings and margins.
Our Latin American businesses generated good growth in constant currencies.
Segment income segment, EBIT increased 43.3% or 18.7 million to 61.9 million.
This improvement was largely attributed to volume growth 2020 mapped the gross savings pricing and the contribution from acquisitions.
Sales in our performance coatings group were 292.7 million up a modest 0.3% from last year.
Organic growth was 1.74 4.8 million driven by our business is providing corrosion control and fireproofing coatings.
As we noted last quarter, the Sequans reorganize under a global brand management structure, which is beginning to bear fruit is enabling us to pick up market share in Europe , and we expect experienced continued growth in North America, particularly in our Carboline product line.
Impacting organic sales were strategic actions to exit soft international markets and low margin product lines.
Acquisitions added 0.1% to sales, while foreign exchange was 84.3 million for a 1.5% headwind.
Segment, EBIT increased 12.6% to 37 million.
Much like last quarter 2020 mapped to gross savings provided this segment was strong earnings leverage despite essentially flat sales growth.
Operating improvement initiatives included workforce reductions and the exit from to margin dilutive businesses.
Also contributing the bottom line was pricing and improved product mix.
And the consumer group sales were strong increasing 6% to 450.9 million.
Organic sales increased 6.4% for 27.1 million driven by new sealant and adhesive products that generated new accounts and market share gains.
The segment also benefited from pent up North American demand for exterior small project paints and coatings that was caused by the exceptionally wet weather during the spring and early summer.
Sales in Europe , a large percentage, which on the UK were soft due to weak macroeconomic conditions in Europe and also uncertainty surrounding Brexit.
Acquisitions contributed 0.6% for 2.5 million to sales, while foreign currency translation reduced sales by 1%.
EBIT in the consumer group was 54.7 million an increase of 26.8% over the prior year.
This improvement was the result of actions taken including the 2020 map to growth initiatives, such as enhance manufacturing disciplines and two plant closures plus a price increases from last year. These programs are helping margins recover and trend higher towards historical levels.
The specialty products group topline was impacted by a difficult comparison to the prior year when demand was elevated due to natural disasters. These included hurricane activity that boosted demand for our restoration equipment and more rapid wildfires that drove demand for our fluorescent pigments, which are used in fire retardant tracer dies.
In order to accelerate growth in the segment's top line, we have made recent management changes.
Segment sales were 158.2 million.
Organic sales decreased 10.5% and foreign currency translation reduced sales by 0.6% there was no impact from acquisitions.
EBIT was 23.2 million during the quarter, which was lower than the $28.8 million EBIT in the prior year.
We continue to implement operational improvements to reduce costs in this segment, including the consolidation of the ERP system to one platform and we also continue invest in selective initiatives to revive growth going into fiscal 2021.
We expect at the segment will see the benefits of these actions in the coming quarters.
Lastly, a comment on cash flow for the first half of fiscal 2020 cash from operations grew by 102.4% to 300.2 million compared to $148.3 million a year ago.
This increase of $151.9 million was due to initiatives to reduce working capital and improve margins.
Now I'll turn the call over to Rusty for details on our outlook for the remainder of fiscal 2020. Thanks Man.
Looking forward to our 2023rd quarter, we expect to generate consolidated sales growth of 2.5% to 4%, we anticipate leveraging the sales growth to the bottom line for an estimated 25% to 30% adjusted EBIT growth, resulting in.
Adjusted diluted EPS in the high teens to low 20 cents range.
Historically, our third quarter generates our most modest results each year because it falls during the winter months of December through February when painting and construction activity slow due to cold and snowy weather. Additionally, I should point out that based on history, we expect.
Roughly 20% of our annual consolidated sales to be generated during the third quarter and a proportionate amount.
This fiscal years 2020 man to growth savings will result during that period as well.
Our fourth quarter results are typically the strongest as weather improve and work begins to accelerate on painting and construction projects.
Based on our results for the first half and our expectations for the remainder of the fiscal year. We are reaffirming the full year fiscal 2020 guidance. We provided on July 22nd 29 team and maintained in our last earnings release in October .
Our full year sales growth is anticipated to be on the low end of our previously disclosed range of 2.5% to 4%.
As previously disclosed we expect to leverage the positive momentum of the 2020 map to growth operating improvement plan to our bottom line and are maintaining our projected adjusted EBIT growth in the 20% to 24% range.
We expect this will result in adjusted diluted EPS between $3.30 and $3.42 for our full 2020 fiscal year. This concludes our formal comments and we will now be pleased to take your questions.
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And from BMO capital markets, we have John Mcnulty. Please go ahead.
Thanks for taking my question good morning, and congratulations.
With regard to the construction business and the and the pick pick up that you saw there and the strong volumes I guess when you look at the at the backlog of projects I guess, how should we think about how much of that pent up demand from the wet weather has already worked itself through and and how much may still remain for kind of the especially I guess the fourth quarter levels.
As they roll through the right through the rest of the year.
Sure in our roofing and waterproofing businesses, our backlog remains pretty robust.
In the construction sealant business, we have seen some slowing mostly around major projects.
Our real strength is in.
Broad distribution, so that continues to be pretty good there.
In the last comment I'll make is whether its admixtures were roofing or waterproofing.
We seem to be taking some market share because I think the growth that we're experiencing in North America is.
Somewhat.
Larger than what the markets delivering.
Got it and then in a in the consumer business is there a way to figure out how much of the growth was tied to some of the channel filling that you may be doing at Lowe's and Ace first just normal demand in some of that some of that again weather related pent up demand or is it tough to figure that one out.
No John it's the latter.
It was really good solid performance in good growth.
No channel filling.
In this quarter.
Clearly we were the beneficiary of and.
The flip side is hurting the first quarter.
What was a really rainy and kind of bad weather start to the summer, which not only impacted us but impacted others.
So some of the strength in the second quarter and consumer I think was projects that were delayed from the early part of the summer because the weather into the back end of this summer and into the fall, which impacted positively our first our second quarter.
Got it and then maybe just one last question just with regard to cash flow you're running at had a pretty high level. This year given some of the some of the work that you've done on the working capital front.
I guess as we think about the back half of the year end uses for that cash going forward I guess, how should we how should we be thinking about that it looks like you took down the the $450 million note I guess I'm wondering how much may go towards buybacks as your as you are looking toward the back half sure as we communicated in the last couple of quarters, we expect it to.
Execute our share repurchase program, a little more slowly and deliberately than the fast start we got out.
As you recall on our billion dollar repurchase commitment, we completed a half of that inside a nine month and so I think the balance of it will play out over the next couple of years.
You should expect to see a balance of free cash flow.
Between share repurchases and debt repayment.
Great. Thanks, very much for the color.
From GE research, we have Rosemarie Morbelli. Please go ahead.
Hi, good morning, Thank you.
Good to Frank could you talk about.
What Matt said event has found just since he joined the firm in terms of new opportunities and potentially any change in the focus from.
Some math.
And the expectation early expectation of 290 million of savings.
Sure.
Thanks, Mike Solomon has been instrumental in helping to take over and really run the manufacturing and procurement side of our mapped growth program in partnership with.
Tim Kinzer, and Gorti hide who both part of RPM for long time, and really part of the team that Architected the map to growth program with Steve can do.
We have.
Exited the Alixpartners relationship.
Entirely and are utilizing some regional.
Consultants.
Such that our annualized spend in the early parts of the math to growth program. We're in the 25 million range and now we're in the five or $6 million range. So I mentioned that is that gives you some sense of how we are.
Internalizing some of the learnings.
That have come out of mapped the growth the work on the factory floor by our people is going really well and it's a real tribute to them.
And I think that the challenge that we face at the board level even.
Isn't the next 12 months.
Figuring out what elements of map to growth are completed.
Such that we waived the victory flag and plant consolidation and other elements and then what elements of our map to growth operating improvement initiative become permanent parts of how we operate.
And no change in that $290 million sweatshop savings over the period.
No I think that.
As I've commented before there are two assumptions, we made upfront that in hindsight were a little bit incorrect, we assumed SGN a savings equally across the three waves in fact, our biggest part of SDMA savings were in wave, one and as we get into the third and fourth quarter will be annualize.
I think those and then the second part divesting a savings.
For all practical purposes.
Has been or will be deferred.
To the point that we.
Complete the ERP implementations and some of the accounting consolidation that we're working on.
The other piece of it is the working capital there's more to come there again, our original assumptions that we would get some of that early proved to be correct because.
By necessity, we needed to get the plant consolidation and the continuous improvement elements.
Initiated a completed such that we will really start to benefit. So you will see I think more into next fiscal year beyond in terms of working capital conversion to cash which were excited about.
And as as it relates to 290 million, we are on target and.
I think.
Post the original date of December 31, 2020.
We will see ultimately more than $290 million as we benefit from some of these new initiatives in.
Subsequent years.
Thank you and if I may ask one more question about you mentioned that I could teach and doing well could you give us a little more details on a net new to us show and whoever else, you're getting better maybe than expected.
Sure.
Without getting into too much in the way of specifics in each case these were.
Product lines, particularly the new direct jewel acquisitions that we could integrate into our construction products group and bring the marketing and sales and distribution resources.
Of our construction products group to bear on those good businesses and so the organic growth rates in those businesses are teens mid to high teens and it's pretty exciting.
I will tell you.
Historically it was our 50% of revenue industrial segment that was the laggard at RPM in terms of margin performance and improvement having separated that into the construction products group and the performance coatings group, we've got to exceptional leadership teams there very strategic about the reorganization that weve affected.
And we are seeing that in our results and thats going to continue.
Alright, thank you.
From Bank of America, we have Steve Byrne. Please go ahead.
Morning, Steve.
Yes, good morning. Thanks.
For the time here it sounds like you see some potential upside to that 290 million cost target cost savings target.
When you rolled out that map to growth program you hit also targeted EBIT margin of 16% or.
Something around 500 basis points higher than where you were at the end of this quarter is that still seem realistic to you and do you do you see.
This 200 basis points year over year increases that you've had these last couple of quarters is that likely to continue based on projects you have underway.
Sure.
As we've communicated last couple of quarters principally related to growth.
The achievement of our absolute goals.
Our probably 12 to 18 months further out than we had originally plan.
And the principal reason there is that as you recall in our November 2018 Investor communication.
Based on our historic growth rates over the prior five and 20 years, we assumed the combination of organic growth in acquisition growth of about 5.6% compounded over that three year period.
The first half of this year consolidated.
Results are up 1.8%.
And so it's that growth element, that's not unique to us.
That is.
Caused us to communicate the last couple of quarters that our apps achievement of absolute goals, both in terms of $1 billion of EBIT.
And the margin goals are going to be pushed out a little bit, but we're still making great progress and I think when you look at our results.
As the prior year in what we hope will will continue to be outperformance to many of our peers.
Matt to growth program is.
Working well and on track.
And frankly, you indicated you're pulling in a lot of the resources internally to run this program.
His this has you revisited the scope of the three restructuring program to determine whether theres any other levers to pull that you you had previously developed.
We are continuing to look to add elements.
To our pipeline and.
I don't know that I would add much more to that but it's an ongoing process. Obviously the bigger opportunities get done first but there continue to be opportunities and plant improvement areas that we continue to add and it's why we're very comfortable in the in the years following.
The December 31, 2020 end date, we originally communicated.
We would expect to see mapped to gross savings that exceeded $290 million in total.
And then just one quick one wanted to ask whether the year fireproof coatings and or your fire retardant increase or die is.
Our fluorinated compounds.
And if so do you see any potential human exposure pathways, where you could get sucked into the PFS issues.
No. That's a great question in the answer to that is no.
We did per to an acquisition.
For many years of a private company that.
Would have been a good part of RPM, but they had some exposure there and that was a principal reason.
That we did not require that business, which subsequently acquired by competitor and so as you might imagine given our past toward experience, we're highly sensitive to those issues.
Thank you.
Freemium research we have Frank Mitsch. Please go ahead.
Hey, good morning, and happy New year morning, Frank looking.
Thanks Frank.
Looking at the 180 Bips margin improvement I already mentioned most of that is is map the growth, but can you expand upon.
The pricing versus raw materials interplay in terms of margin improvement and what your expectations are.
The back half for your fiscal 2020.
Sure of that organic growth I think on a consolidated basis the way to think about it is uneven split between unit volume and price.
Actually that varies differently between our segments in our business units.
We have greater challenges in our consumer segment relative to some of their unique raw materials metal cans.
And packaging.
See lack a few other items and so theres been some more challenges there than there have been in our.
Industrial businesses for instance, in we begin to annualize the largest effect of our price increases at the end of the third quarter and into the fourth quarter and so you'll see the benefits of pure math to growth savings and.
What volume we can generate.
Hit our bottom line as we annualize that price activity in the spring.
All right so that so that'll slight to moderate and in the fiscal fourth quarter and you talked a little bit about some of the market share gains in any mixtures et cetera.
You know how do we think about you know.
That into the back half of the year and.
And in 21.
It's hard to say I. The economic activity is has been weak for a couple of years in Europe and that continues.
I think there's been some slowing in certain areas in North America. The good news is it seems like there is a decision on Brexit and.
In our opinion, almost regardless of the of the near term impact on the UK, eliminating that uncertainty will be helpful. It appears as if the U_s_m_c a NAFTA revisited is going to get past that will be helpful and so.
I think that we've got really good momentum in terms of growth in market share gains.
In our construction products group in general.
We continue to have some real strong performance in our performance coatings group.
Specifically, our carboline corrosion control and fire proofing coatings, and our stone art flooring businesses.
We have the manufacturing challenges.
In consumer that we believe will be overcome by the fourth quarter into the summer.
And then the biggest challenge that we haven't we're tackling pretty hard is in our specialty products group were the.
I think under investment and some of these higher margin businesses has been a problem. We've had some leadership changes is.
Matt alluded to and.
Our investing selectively in some new initiatives and we would expect to see them returned to positive sales and earnings growth in the new fiscal year.
That's very helpful. Can you just expand upon the manufacturing challenges in consumer.
Sure we.
We picked up a bunch of market share I think as folks know in certain areas interior wood stains and finishes we picked up some share gains in.
Our primary small project paint area.
We had lost some share one of our major home center customers and we regained all that back and we.
We had some manufacturing issues that were of our own making.
We had.
Some environmental equipment that shut us down and one plan for a couple of weeks that was a problem. We are investing in a significant new aerosol capacity.
The installation of which caused some disruption in another major plant and so it's a could cause any of those types of items.
Including capacity issues that were now addressing that caused some disruptions for us and I wouldn't that's probably more information than you need to know, but we worked hard to make sure that we could service our customers in light of those.
Issues and now we're working hard to make sure that we get those efficiencies that will hit our bottom line.
Terrific very helpful. Thanks, so much.
Compared we have got Chum Punjabi. Please go ahead.
Morning, guys.
Good morning, Frank Happy New year to you.
The new year to you.
I guess, just going back to the three and 5% core sales growth for the second quarter on can you just give us a sense Frank as to how it played out on a monthly basis you touched on some of the pent up demand et cetera, how did that actually play out through the course of the quarter and then just give US an early read on what you saw in December as well if you don't mind.
Sure.
I would tell you that we had a big September which was a.
That was both in our construction products group and our consumer group.
And we feel that that was little bit outsized in relationship to some of the weather impact.
In the first quarter.
And.
Well not wanting to get into details month by month in the future.
When you look at things are choppy, we didnt have a.
Particularly great October and we had a really strong November .
December looks good and I think we're on track for the.
The forecast for the third quarter, which is going to be another strong quarter with great leverage to the bottom line as I say that I'm looking at my window, and it's snowing in Cleveland, Ohio, and so our third quarter is always subject to.
Weather impacts and other rides and and given its relatively low seasonality.
Okay. That's helpful and then.
Made a comment on I think a lukewarm north American commercial construction market can you can you just expand on that what do you see going into.
This year on a calendar year basis specific to North American commercial construction.
Sure I think we see more the same and I think we're hopeful that.
Maybe some of the uncertainty around trade will revive.
Industrial production activity and construction markets.
The biggest area of.
Softness that we see our in big.
Projects.
Things like.
The Apple headquarters, we had a lot of success in Canada around.
A very rapid build out on cannabis in the cannabis industry in terms of warehousing and production.
We had significant specification in the Mexico.
The New Mexico City Airport, which was cancelled and so the if theres any disappointment or weakness in that area, our broad distribution, which really serves kind of the maintenance and repair and or low commercial construction continues to be pretty solid.
Okay. Just one final one I mean, you gave us some of the cadence of.
The growth for Q, I think with 21 million, one Q2 6, and 31 million for Twoq you how should we think about that same those.
Same element for the back half of the on a quarterly basis. Thanks, So much sure well yes.
Two two elements there number one weve annualized most of our SG Nay savings in the next bank fresh in a savings will come and wave three I commented on that earlier.
And so the manufacturing improvements the plant consolidation.
Those flow through our PNNT with sales and so you'll see a lower impact in Q3, because we have lower sales.
That's.
The flip side is you'll see the same or more leverage to the EBIT line than we've done in the past, but it will be in relationship to the sales in the quarter and then you'll see that pick back up again in Q4, because we have a higher sales volume typically in our fourth quarter and so it will follow that.
And we still have pretty good momentum.
And we'll.
Being a position to talk more about what we see for fiscal 2001 in April and certainly in July .
But the next couple of quarters look solid in the map to growth program is on track and on the margin, we're continuing to add items to it.
Thanks, so much right.
Thank you.
From RBC, we have our route Viswanathan. Please go ahead.
Good morning, everyone.
Great. Thanks, Good morning, congratulations on the results and the continued progress on that.
I guess the first question just on the topline when you think about consumer business.
You mentioned some of the manufacturing issues.
It would you would you be able to kind of size what that maybe cost you and.
If you see that coming back in the coming quarters.
Yes, I don't know that we would get into detail on on the manufacturing issues. There it was.
Beyond the detail at price provided on an earlier question.
It was a number of challenges around capacity and our.
Efforts to address that with a few hiccups in the process.
And we would expect to begin to see that.
You will see the better impact to that in Q4, and then into the next fiscal year.
Q3, again, given the seasonal low nature of it.
On a show up very well there.
And just I.
I guess they go deeper when you think about the consumer business I know that in the past you've mentioned that there.
Some headwind from.
Low unemployment and weakness in the small project category.
Is that continuing and how would you expect that to play out.
See continued improvement on some of the building products and homebuilding numbers that were seeing right now.
Sure.
The last four months for us I guess kind of August through through this quarter.
I have been pretty solid in terms of consumer takeaway and project work and we don't see any particular weakness there.
A lot of the weakness that we had over the last 12 months. We believe is weather related going back last spring in the early parts of this summer and.
Our.
For instance.
Our performance.
Wood stains and finishes category that we picked up at a major home center customers.
At or exceeded expectations in terms of what that would do so the performance there is very solid.
The the manufacturing issues that you had asked about.
We're part self inflicted and we've addressed those.
And then on a.
Construction products and performance coatings.
You'd mentioned some weakness in Europe .
Last quarter I think that there was a.
That was that was definitely called out I think you're continuing to see that I.
I guess I just wanted to get your thoughts and you mentioned Brexit as well is it your sense that Europe .
I guess deteriorated incrementally through fiscal second quarter and would you expect that to continue.
In the next couple of months I'm, just curious just given that maybe an easier comp.
At this part of the here.
Sure. The I think the results that we've been seeing from a market perspective in Europe in the primary markets. We serve there have been weak for two years and.
And in particular as it relates to map to growth.
We have taken a very deliberate approach to.
Looking to exit lower margin business.
And in some cases discontinue.
Lower margin or in a few instances no margin product lines and so we've had a.
Better earnings performance.
In the European market for our construction products and performance coatings business than we've had sales performance.
And it's very.
Very deliberate process of.
Strategically engineering, a higher margin business profile.
I'd like to thank with the Brexit decision.
And a focus on Europe that we'll see some activity in Europe , improving but we don't see that as we sit here today.
And then just lastly, if M&A on.
Price cost looks like your price gains have been in the kind of one to 200 basis point range for a little while I'm assuming that continues for the next couple of quarters or do you expect that to continue I guess, just given the raw materials or potentially and entering a period maybe over the next two core.
Orders of raw material deflation.
Are we thinking about that the right way a that is Robert rise should should continue to kind of trend lower over the next couple of quarters.
Got you still hold on to price is that a fair characterization.
That's a fair characterization.
Lot of categories to deflation that's happened in the last 12 or 18 months is ending.
We annualize our price increases depending on the business unit in the segment.
Starting in February and through the spring so.
We won't have as much year over year price impact in Q3, and we will have little or no in Q4.
In a number of our businesses our margins are still not where they were five or six years ago. So we've got work to do.
Okay. Thanks.
From vertical research, we as Kevin Mccarthy. Please go ahead.
Good morning, and happy new year.
Frank you spoke to market share gains.
Some length, but I want to ask you to elaborate there in terms of.
Where you're gaining share why that's happening and how sustainable you think that will be do you think for example.
Could grow at 1% to 2% above market over the next year or perhaps longer what sort of framework might we might we applied to that dynamic.
Sure, particularly in our construction products group I think that is about the right way to think of it and I think thats sustainable.
We have been the leader and roof restoration coatings and continue to pursue.
Both better performing and for me a raw.
Oh perspective.
More environmentally friendly bio based resin products, and so thats going really well.
We've had some significant market share gains in our carboline product lines, our GAAP product lines and.
I think this spring, we'll see a couple other market share moves in our consumer segment that we can talk about once theyve happened.
So there's a there's I think the thing that were most pleased with and again, it's a great credit to the associates of RPM.
The ability to keep our sales and marketing and business is focused on their customers at the same time, we're going through significant.
Change on the factory floor and across organizations that was our goal and so far knock wood, that's working and we're excited about it.
I also think we've been the beneficiary in the construction products group of some major competitors, who have been for sale reorganizing and we've been very focused on growth and that's helped us.
Okay.
With regard to raw materials, obviously, the energy complex has become more volatile and uncertain in recent weeks, but.
Maybe you could talk a little bit about how you see the basket trending and also what you're doing on a company specific basis in your prepared remarks, I think you're you mentioned your procurement folks are negotiating some improved terms. So would you expect to benefit beyond what is transpiring at the market level.
In terms of raw material costs.
Yes, and I think our gross margin improvement have demonstrated that we have had gross margin expansion.
In excess of many of our peers.
And.
We've had a combination of some impact of cost price mix between.
Price and raw material costs, but a significant portion of it has come through.
Centralizing our procurement activities.
And we have gone in a number of categories, where we have not been very well organized to two or three suppliers from eight or 10.
And with some outside consulting help which is still involved.
We've taken categories that are $50 million annual spend all the way down to half a million dollars annual spend and we're starting to see the benefits of that consolidation.
I think about.
Half of our.
Gross margin improvement, if we were to disclose a prime margin.
I say prime margin, a big chunk of our gross margin improvement is on the factory floor in terms of plant consolidation and continuous improvement.
At the prime margin level I would.
I think the rough way to think about it is 50% is from a cost price mix benefit that the whole industry is experiencing and 50% is from the benefits of centralizing our procurement activity in consolidating our supplier base.
Half and half. Thank you so much I appreciate the color.
Yes, we have Josh Spector. Please go ahead.
Morning.
Hey, good morning, Thanks for taking my question.
Just on the EBIT bridge year over year, I mean, you highlighted earlier 31 million and cost savings that enough to growth plan me if I exclude specialty and then look at the organic growth maybe in a low mid single digits. It seems like there was a little bit less leveraged to the bottom line than expected on that basis can you help maybe bridge what some of the.
Factors would be to try that year over year.
I'm I'm not sure I understand the question I mean, I, if you exclude specialty.
Relative to our consolidated results then I think you would come to the conclusion that we have higher leverage in some of the other businesses but.
Not.
Maybe you could repeat.
Sure. So I guess, what I'm looking at is your adjusted EBIT for the quarter was 154, it was 126 million a year ago.
Cost savings plus 30 ones that bridges to around 159.
Last 6 million in specialty so I'm looking at kind of that bridge as being roughly flat despite organic growth being 3.5% plus and now understand some of the manufacturing issues, which might have been a factor just wondering if there's any other things that you called out that might have led to like a lower.
Year over year growth as a result of that.
Sure Josh its rusty here.
In terms of the map savings, we disclosed a 31 million that's really total savings that is not an incremental.
Year over year savings.
So thats.
Maybe part of the confusion and when I look at specialty just a focus on that I see.
The sales were down 20 million and the EBIT in specialty was down about little more than 5 million. So I think thats the normal.
Dropdown, we'd see from a revenue loss. So it does that help or can I answer, yes, no that Q.
No that helps the I didn't realize it was cumulative versus just what was realized in the quarter. So that's helpful.
Yes.
They are wave one and the small portion of wave two savings, which we talked about last summer and our yearend earnings release and as we discussed much of wave two is deferred to the back half of this fiscal year and you would have to net that 31 million against the disclosed map savings.
This time last year in the quarter, Yeah, and what we disclosed.
Last year with that.
Right.
First three quarters, we disclosed 32 million savings.
Okay, Great. That's helpful. And then secondly, just on the performance coatings business I was wondering if you can give some color on perhaps the backlog within a different parts of that business. So you noted strengthen energy curious, how you're seeing that kind of pan out with some lower capex potential for next year and then maybe on the Florence.
Side as well.
Sure, we don't see any change in the market outlook for either of those.
The deferment are cutting of kind of the capital spending budgets in the energy markets.
A couple of years ago, when oil prices plunged.
Have stabilized and those that spend seems to be back to normal level.
Our energy activity is pretty broad as well, it's everything from pipelines.
Two when meal blades to transmission.
Two.
Different refineries one of the areas that used to be strong for us and has been overcome by other parts of the market was offshore oil not a lot of activity there but.
It's been a it's been a real strong area of growth for us and quite candidly, it's been like the one exception in the European marketplace, where those product lines, both through the normal spends and some market share gains have actually showing year over year solid growth in European marketplace about about the only.
Business unit or product lines that we've seen some solid growth in Europe .
Okay. Thank you.
From Morgan Stanley We have Vincent Andrews. Please go ahead.
Hi, this is actually Steve.
For Vincent Thanks for taking my question.
Yes, just to kind of quick ones.
On the third quarter.
EBIT growth.
A bit lower maybe than expectations. So.
Considering that it is a smaller quarter for you guys, but is there anything in there that is like notable to call out.
It could be maybe bridging that gap.
Yes in terms of some confusion I think you're talking Steve about the third quarter method second quarter right.
Correct, Yes, Threeq you guys.
Yes, we tried to convey through our outlook, it's a seasonally low quarter. So.
We typically do roughly 20% of our sales in the third quarter and if you're looking at map savings and I'll make this up let's say, there's 100 million of map savings we would expect.
Evenly throughout the year, you would not get 25% of those savings in the third quarter because sales volume is down our cost of sales is down as a percent of the total year, so that might be some of the confusion in terms of the third quarter.
Outlook.
Yes, I mentioned in my prepared remarks.
The SNA savings have been annualized so theres no year over year map savings and SDMA. The next wave for us will be wave three.
What has been continuing to grow is the.
Plant consolidation and continuous improvement activity.
And the procurement activity all of that gets capitalized into inventory and then it gets realized as we sell products and on a.
The lower.
Revenue month, Youre going to have lower income and a lower impact.
Having said that.
A 25% to 30% EBIT growth year over year.
It's actually an improvement over the EBIT growth that we just experienced in to Q and so we're well on track in terms of where we are and.
We're on track in terms of our internal forecast relative to what we expect.
Third quarter and it continues to be solid EBIT growth and.
What appears to be continuing relative modest sales growth somewhere in the 2% to 4% range.
Okay. That's helpful. And then just a follow up on on specialty think maybe last quarter. You mentioned that you kind of see some of the initiatives underway starting to kind of worked its way through by the fourth quarter and kind of starting in the beginning of fiscal 2021.
Is that still the timeline or are things, maybe that pushed out like how long should we expect weakness to kind of last.
Thats, a timeline I think thats, correct and and that's what we see you'll see them being a positive contributor to sales and earnings growth towards the back half of this fiscal year end into fiscal 2001, So I think thats exactly the timeline that.
We see.
Okay. Thanks.
Thank you.
From Seaport research, we have Mike Harrison. Please go ahead.
Hi, good morning.
I also had a quick one on the specialty segment.
Had guided last quarter.
The full year fiscal 2000 would be see sales flat to down slightly.
Now this quarters coming in downtown and a half percent organically.
Can you just help us frame up whether that was worse or better.
Then you had expected and should we still be using a flat to down slightly number for the full year sales assumption.
Yes, I think that the performance in the second quarter was slightly below our expectations in the specialty segment and it's principally around some major product categories. The legend brands business.
Yup.
Pad and the impact of weather related events for that business was very modest.
And then with our day glow business I think Rusty commented on this.
A major product category for them in the past has been.
Dies and pigments used in.
Fires spotting chemicals retards.
And it was a very.
Moderate.
Fire season, compared to the past seasons, notwithstanding that publicity of the fires around Los Angeles, and so that was a slower area. Both of those are high margin businesses that had.
Lower than expected revenues in that negatively impacted the segment.
For the balance of the year I think they'll be back on track.
But they will not recover the somewhat lower than expected sales results in Q2.
Our the the fluorescent tracer dies for fire retardant are those being used in Australia, right now or is that not a market that you sell into.
Yes, I don't believe so but I actually don't know the answer that question. We can certainly find out to get back you offline.
Okay.
Then last question is more on the consumer side of the business can you talk about what you're seeing in terms of sell through and point of sales data.
Your big box retail customers any sense of where those customers stand on inventory levels as we start to move into this slower seasonal period is relatively normal inventory levels are they running a little bit high.
No. We're I think consumer takeaway, it's been pretty solid.
It was choppy as we commented earlier relative to slow in the summer slower than expected and.
Pretty solid in the fall.
We were negatively impacted by some significant inventory adjustments by some of our major customers last year I think inventory levels are lower.
And we don't expect the same.
Impact this year that we had last year from some significant.
Inventory adjustments by our big box customers, so that I think year over year will be a positive.
All right thanks very much.
Yes.
From JP Morgan, we have just to customers. Please go ahead.
Hi, Thanks very much.
Morning, Jeff Hi, good morning.
At the beginning of the call Frank you characterize a lot of the operating profit progress this coming from the map to growth program.
But thats a little bit puzzled by the results because.
You know if your prices were up I don't out 1.7%.
That would be about 24 million.
And if your raw materials were down 1% that would be another eight or 9 billion.
And so the combination of raw materials and price increases would account for all of the operating profit growth.
What's wrong with that analysis. Another words, how is so growth program really influencing things given those two considerations, yes, a couple of things Jeff number one I would look at our margin expansion versus our peers and for the last couple of quarters, we have had.
Some meaningful margin points of expansion better than a number of our peers. So that should be one touch point, because we're all benefiting from cost price mix secondly across RPM your assumption on.
How material savings.
Is.
Mixed so that's been true in our construction products group.
And in our performance coatings group the old industrial segment. It has not been true yet.
And our consumer segment because of some of the.
The categories that I talked about principally packaging and the fact that we're on a FIFO accounting. So some of the benefits that you see a slow finally, some yes. Finally, some breaks you know some final breaks and packaging that hit this fall we will show up in our.
Results in the coming quarters and.
We are like everybody suffering some meaningful.
The increases in labor costs, and other items and so.
I think the simplest way to compare our results whether mapped growth is working is to continue to look at our gross margin.
Our EBIT margin expansion versus our peers, and if it's equal to or less than than I would suggest that your comments are correct, but if we continue to put up some pretty good numbers, you're seeing the benefits here. The last thing I can tell you is.
We are closing plants or head counts down by six or 700 people.
And we're instituting.
Successfully lean manufacturing disciplines and plants were didnt exist before and it in our bottom line.
Okay, maybe a final quick question for Rusty, what's the adjusted cost of goods sold in the quarter.
Yeah, we don't disclose that if you go to our website.
You'll see that we do have some reconciliation slides.
Give you right Thats definitely yes, yes, but that doesn't reconciled to the cost of goods sold number because you don't breakout the individual items and allocates corrected and I don't think for.
Any number of competitive reasons that we or any of our competitors breakout specifics of their cost of goods sold.
Okay, great. Thank you so much thank you.
From Wells Fargo, we have Michael Simon. Please go ahead.
Hi, This is Richard on for Mike.
One quick question.
Good morning.
On M&A.
How much are you assuming for your two and half to 4% revenue.
Growth range and.
Have you seen any change to the environment right now.
How's the pipeline look and which segments do you think you'll have opportunities.
So I don't think you'll see much in the way of impact in Q3 from M&A and.
We did announce a profile foods, which is part of our specialty products group relatively small business I think theres some good manufacturing synergies there.
But the M&A pipeline spin a little skinny for us and I do think.
As I commented earlier I think we're really pleased with the focus of our businesses on their customers and on the marketplace and you can see that in our results.
If there is one area through map to growth, it's been a little bit disappointing its revenue from acquisitions and it's a combination I think of two things number one.
Price expectations on sizable deals are such that.
We.
Can put that capital to better used with better returns on share repurchases and other investments and I do think that separately. The organization has been focused on executing mapped to growth.
To a certain extent.
In a way that has negatively impacted our focus and acquisition activity and we're working to change that.
Great and just one Capex I know last quarter, you guided 180 for the year looks a little light so far in the first half do you expect that step up in the second half or.
Yes, I think I think thats our current target.
We could fall short of that just because of the ability to execute on the things that we have planned but thats still the target for the year.
Great. Thank you.
And from Lubert, we have Christopher Perrella. Please go ahead.
Good morning.
Good morning.
Question I guess on the.
Pull forward from the first quarter into the second quarter.
Touching on the backlog do you expect any of that backlog or backlogs discussed earlier to continue into the third quarter or you caught up at this point with your customers.
I think that.
We're at kind of normal rates.
We did see a bump.
Let's say between.
Our first quarter and beginning of our second quarter and consumer in construction products.
But the backlog as I mentioned earlier in our roofing and waterproofing business is very solid.
And the revenue growth, we're experiencing encroaching control coatings and industrial flooring.
Seem to be pretty good and.
As long as we don't get whipsawed.
By weather from one quarter to another I think we've got some pretty solid expectations for growth.
For the second half of the year in our consumer segment.
All right.
Hello.
Should see a larger working capital release with the seasonally strong fourth quarter.
Compared to last year.
No in fact, you will see a little bit of the opposite.
I think the biggest working capital improvement you'll start to see in fiscal 21.
The $150 million of.
Improvement year over year, and cash flow and the impact of working capital on that.
I think about 70 to 80 million of that is a tiny difference year over year.
As we have negotiated.
New payment terms with major suppliers and quite candidly a focus business is on cash flow every day as opposed to.
Cash flow at quarter end, and so we did have some timing differences, particularly consumer and so about a 150 million of year over year.
Cash flow improvement from our operations really solid number.
$70 million to $80 million at that was timing the balance of it was higher earnings and better working capital performance. It's more permanent so the fourth quarter back to your question and the fourth quarter cash flow will not show much.
Improvement if any because of that timing difference triggered last year, but then as we get into fiscal 21, you'll see continued strength in our cash flow generation.
Okay. Thank you very much.
Thank you and I'll turn it back to French Sullivan for closing comments.
I'd like to commend our associates worldwide for their continued hard work and dedication as they simultaneously focused on growing their business and execute on our 2020 mapped to growth operating improvement plan by combining entrepreneurial growth oriented culture with a continuous improvement and operational excellence.
It is resulting from our operating improvement programs, we're positioning RPM for sustained growth that will provide tremendous value for our customers employees and shareholders in the coming quarters in the coming years to come. Thank you very much for joining us on today's call. We look forward to updating you on our fiscal 2020.
Third quarter results in April happy New year.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for joining you may now disconnect.