Q2 2021 RPM International Inc Earnings Call
On T. 21 second 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 I N C dot com comments.
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 from.
For more information on these risks and uncertainties. Please review Rpms reports filed with the FCC.
During this conference call all 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. 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 then one on your telephone.
Please note that only financial analysts will be permitted to ask questions. At this time arbitrage on a call over to RPM, Chairman and CEO Mr. Frank Sullivan for opening remarks. Please go ahead Sir.
Thank you Denise.
Happy New year welcome to the RPM International Inc, and basket called characters from 2021 second quarter.
Joining me on today's call on Rusty Gordon RPM, as Vice President and Chief Financial Officer.
Ratajczak, our vice President Global tax and Treasury, which also supporting our Investor relations activities.
I'll take a few moments to provide an overview of the factors driving our strong financial performance for the quarter non.
So share an update on our map to growth GAAP.
Program.
Matt will then review our second quarter financial results in detail and then Rusty on wrap up with our formal remarks within.
With an outlook for the third quarter marketing 2021 year.
After which we'll take your questions.
I'm very pleased to report that we generated record sales earnings and cash flow from our second quarter.
You actually performance was achieved largely due to the efforts of our associates to grow our top line, which was achieved by three out of Air Force segment, despite challenging economic conditions worldwide.
Operationally efficiency improvement activities.
The map to growth initiative once again generated strong leverage on the bottom line.
Moderate sales growth of 6%.
The index sales grew on a broad range of categories, including cleaning disinfecting products.
Your purification equipment small project page OEM coatings and other areas.
Acquisitions also contributed to sales, including the second quarter addition of allergy industries, which is best known for its greater brand of abrasive products.
Alex largest acquisition, we made since fiscal 2013 positively impacted both sales and earnings in the quarter.
Also demonstrating our renewed focus to investing growth initiatives.
Foreign currency translation also added to sales is international markets, particularly those in Europe showed improvement.
On an adjusted basis, our consolidated EBIT margin increased 240 basis points to 13.4% during the quarter.
Driven by three of our four segments registering substantial EBIT margin improvements and higher EBIT growth.
This was even more impressive given a tough comparison last year when adjusted EBIT increased 22%.
Our consumer business continues to lead the way driven by unprecedented consumer demand from small project paints clock sealants stains and cleaners.
While our other segments are finding ways to compete and win in the markets. They serve.
Our businesses remain focused on growth and our continued growth new innovative solutions for our customers.
One example is depth equips rapid wall repair patch, which was just introduced was developed to quickly fix most common drywall damage was simple mess mess free repair.
In other words carb Orange pirate pre 341 next generation cementitious coatings for passive fire protection with.
With enhanced application properties next month durability, I greet threeforty one positions Carboline is a market leader in fire in passive fire protection.
In addition, our construction products group recently introduced a suite of products that will keep us working this winter temperatures as low as minus 20 degrees Fahrenheit income.
Including Alpha Guard Puma and welcome E.W.S. waterproofing coatings, which are used to protect groups in concrete.
In a challenging construction market our construction products group continues to focus on renovation is exemplified by its spectrum simple shield for for side restoration.
On one recent residential tower in Minnesota, a complete window replacement was estimated to cost $15 million.
Tremco one the job by recommending it spectrum simple solution, which was used to restore the facade at a cost of only $2 billion. We expect significantly more of this right restoration products project a sales.
Our map to growth program continues to have tremendous momentum during the second quarter, we announced the closure of two plants, which brings our total 25 out of the 31 plants that were originally targeted for closure at the start of the program.
We're also becoming much more efficient to utilizing our manufacturing assets sorry.
As our focused improvement team meetings continue deliver cost savings opportunities.
One example is a driver manufacturing engineer recently trained and six Sigma principles, we identified process improvements to reduce scrap and increase yields which will result in $250000 on annual savings.
There are literally hundreds of other continuous improvement examples like this across RPM as we've invested in training our operations associates throughout the map to growth program.
In addition, the targeted benefits from our center led procurement initiatives are ahead of plan in our administrative improvements in ERP consolidations are continued to be implemented.
As mentioned last quarter, we expect that we will reach the map to growth programs planned run rate of $290 million in annualized savings by the conclusion of this fiscal year.
That said to our culture of continuous improvement, we continue to add to our robust pipeline of cost savings initiatives and operational improvements that will carry into fiscal 22 would be on <unk> and <unk>.
Ultimately result in exceeding our original map the growth expectations.
Based on our improved margins and better working capital management, our business units generated record cash from operations, which increased 93% to $580 million.
We've been strategic in managing this record cash flow using it to pay down debt make acquisitions and an increase in our cash reserves occurred.
At quarter end total liquidity stood at $1.6 billion, making our balance sheet stronger than its been on a long time.
One final comment I'd like to make.
Relates to my predecessor, Tom Sullivan Zone.
It is also my father, and mentored who passed away on November 30.
I share this because he had a tremendous influence on shaping the RPM of today.
He took over the business and 971. After his father died unexpectedly at that time RPM sales were $11 million.
Following a 55 year career with RPM time retired from our board in 2016, when annual sales had reached nearly $5 billion.
His leadership in grain practices within the organization that can.
Can you to perpetuate our growth and success.
Spirit continues to drive RPM.
I'll now turn the call over to Matt Ratajczak will review, our fiscal 21 second quarter financial results in more detail.
Thanks, Frank and good morning, everyone. Please.
Please note that my comments will be on an as adjusted basis.
During the second quarter, we generated record consolidated net sales of 1.49 billion, an increase of 6% compared to the 1.4 billion reported during the same quarter of fiscal 2020.
Organic sales increased 3.5% for 49.5 million.
Acquisitions contributed 2.3% to sales or 32.6 million.
Foreign exchange was a tailwind the increased sales by 0.2% for 2.5 million.
Adjusted diluted earnings per share were one dollar six an increase of 39.5% compared to 76 cents and a year ago quarter.
Our consolidated adjusted earnings before interest and taxes, EBIT increased 29.7% to 199.3 million compared to 153.7 million reported in the fiscal 2022nd quarter.
Turning now to our segment results.
Sales in our construction products group increased 0.8% to 503.5 million compared to $499.5 million a year ago.
Organic sales increased 1.2% for 6.1 million.
There was no impact from acquisitions.
Foreign currency translation reduced sales by 0.4% for 2.1 million.
Adjusted EBIT in the construction products group increased 26.8% to 78.5 million from adjusted EBIT of 61.9 million.
According to the year ago period.
The segment was able to leverage its modest sales growth and outstanding results on the bottom line.
Largely due to map to growth initiatives aggressive discretionary cost cuts and proactive management to improve its product mix.
This was achieved.
Despite soft commercial and institutional construction markets in North America and in Europe.
The segment was able to maintain its top line by focusing on renovation and restoration projects.
Expanding its position as a single source provider of building a level of systems.
And continuing to take market share with its industry, leading construction technologies, including its interest insulated coffee force.
Sales our performance coatings group decreased 11.6% to 258.8 million from 292.7 million a year ago.
Organic sales declined 12.2% or 35.6 million.
Acquisitions contributed 0.6 million four 0.2% to sales.
Foreign exchange increased sales, 0.4% or 1.1 million.
The segment's adjusted EBIT was down 24.2% to 28 million compared to 37 million in the prior year period.
Similar to last quarter. The performance coatings groups sales continued to be impacted by COVID-19 restrictions that limited access to construction sites and also by weak energy markets have resulted in a deferral of industrial maintenance spending.
Does your capital spending has been restricted especially on the energy sector, which is the largest market for our industrial corrosion control and fireproofing coatings businesses.
The segment was particularly challenged in emerging markets.
And as part of my business was temporarily disrupted by Hurricanes in the Gulf region of the U.S.
The segment earnings were impacted by declining sales, partially offset by net to gross savings and discretionary cost reductions.
Out of all of our segments. The performance coatings group has been unfavorably affected most by the pandemic.
However, it also stands to benefit significantly from the Pandemics, Ed as its customers catch up on deferred maintenance and construction projects.
The unprecedented demand for our consumer products continued this quarter, resulting in a significant increase in sales for our consumer group.
They increased 21.4% to 547.5 million.
From 450.9 million in the fiscal 2022nd quarter.
Organic sales increased 15.2% or 68.6 million.
Acquisitions contributed 26 million or 5.8% of sales.
Foreign currency translation increased sales by 0.4% for 2 million.
Adjusted EBIT in the consumer group increased 65.8% to 90.7 million compared to 54.7 million in last years second quarter.
Our consumer groups outstanding performance was driven by our broad distribution and by leveraging our market leading position as homebound consumer tackled significantly more projects.
We are investing in paint, making airsoft filling capacity to help meet this demand.
The top line also benefited from vigorous cleaning products sales.
Favorable translational foreign exchange and the acquisition of Ali industries.
Raw material costs were stable overall during the quarter. However, we are currently seeing broad based on inflation in a number of raw materials.
Hi sales volumes and net to gross savings were leveraged to the segment strong bottomline.
Specialty products group sales were 176.1 million, an increase of 11.3% compared to 158.2 million in the year ago period.
Organic sales increased 6.6% for 10.4 million.
Acquisitions contributed 3.8% or 6 million to sales.
Foreign currency translation increased sales by 0.9% or 1.5 million.
Adjusted EBIT in the segment increased 27.7% to 29.6 million this quarter compared to $23.2 million in the second quarter of fiscal 2020.
Management changes that we implemented at the specialty products group has helped to turnaround results at the segment this quarter.
Sales were boosted by increased hurricane in wildfire fire activity, which drove demand for our water restoration equipment as well as fluorescent pigments, which are used in fire retardant trace or dies.
Additionally, we continue to experience strong demand for our expanding product lineup of disinfectants air purification equipment and have a filters.
Several of this segments end markets have improved.
For example sales of its industrial Wood protection products increased as a result of improved lumber demand in the U.S.
And we have expanded sales in our forestry chemicals business in Australia, and New Zealand.
The segment bottom line increased as a result of higher sales volumes operational improvements and map to gross savings.
Now Rusty will walk you through our outlook. Thanks.
Thanks, Matt.
As we look ahead to the fiscal 2021 third quarter, we anticipate consolidated sales growth in the mid single digit range with continued strong leverage to the bottom line from our map to growth program, resulting in adjusted EBIT growth of 30% or more.
Sure.
Our third quarter typically provides relatively modest sales activity each year, because it falls during the winter months, when painting and construction activity low.
As a result, there is typically greater volatility in percentage terms given the unpredictable weather.
Also the seasonal reduction of activity will benefit our consumer segment, enabling it to replenish retail inventories after working to meet unprecedented demand over the last six months.
From a segment perspective, we expect fiscal 2021 third quarter sales.
To be flat to negative into construction products group.
This group will continue to outperform its peers in a.
Challenging construction market by continuing to focus upon building restoration and renovation with innovative products and service solutions.
We expect the sales decline to continue on the performance coatings group, which serves the most challenged end markets Ad RPM.
We expect the consumer group to continue to leverage its market leading position into double digit sales growth due to a number of factors, including number one a continuation of strong Pos results.
Number two more shelf restocking after retail inventories have dropped due to unprecedented demand and number three continued benefit on both the top and bottom line from the Ali acquisition, which is performing better than we anticipated.
We expect positive sales growth from the specialty products group to continue into the third quarter as well.
New management has brought fresh ideas and processes for business development and their OEM customer base has recovered as manufacturing has picked back up from the shutdowns last spring.
Additionally, RPM cash flow has soared to new high due to margin improvement and better working capital management as well as the unprecedented consumer demand, which has drawn down our consumer inventory.
A portion of this working capital reduction will not be sustained sense, we will need to rebuild consumer group inventory.
Across all of RPM, there's still much work to do to improve our manufacturing flexibility and planning processes.
That will help us simultaneously serve our customers well.
While reducing the necessary safety stock levels.
Sales in all four segments should be up in the fiscal 2021 fourth quarter due to an easier comparison to last year's fourth quarter, which is when the economic interruption caused by the pandemic with most severe.
With recent optimism surrounding the vaccines for COVID-19, let me spend a moment to tell you about what life getting back to normal means for our force segment.
For consumer we would expect the iwai activity to return to more normalized level as people venture out of their homes are.
Well, we still anticipate elevated demand due to the expectation of continued low interest rate.
Good housing turnover and expanded end user base sense more D.I. wires have recently entered the category.
And our consumer pro business picking up again as contractors gain access.
More often to residences.
We also believe that cleaning as an area of greater consumer interest as we go forward.
For our CPG and PCG segment getting back to normal well improve facility access for contractors and likely improve construction activity from what has been a challenging 2020 calendar year.
We would also expect a boomerang effect in the future as deferred maintenance catches up for those who followed RPM in the last great recession, you'll recall that our former industrial segment experienced double digit growth in 2011 and 2012.
From the catch up of deferred maintenance.
For SPG, we continue to rebuild growth momentum under the new management team.
Due to continued economic uncertainty related to the impacts of COVID-19, we are not providing fiscal 2021 full year earnings guidance.
This wraps up our formal comments, we will now be pleased to take your questions.
[noise] again as a reminder to ask a question. Please press Star then the number one on your telephone keypad to withdraw your question press. The pound key your first question comes from John Mcnulty with BMO capital markets. Your line is open.
Yeah. Thanks for taking my question first my condolences to you on the RPM team with the passing of Tom who obviously love to an amazing legacy behind.
Just on the for sure. So I guess the first question because we've obviously seen some inflation in some of the in some of the raw materials and you made mention of it in some of the prepared remarks can you speak to the type or level of inflation do you expect to see as you work through the rest of your fiscal year and also speak.
To the ability that you have to price. It true cash that you can you can offset some of those headwinds in a timely fashion.
Sure. So we're seeing some challenges in areas like silicones apoc sees on mental.
Metal cans.
In certain other raw material categories.
You know, we fully expect to offset those.
Initially through the continuing benefits of our consolidated procurement activities, which have been providing I think leverage and benefits beyond what our original after growth expectations were and then.
While we're very stable in terms of pricing now I think it's highly likely.
That you will see across our industry some price increase activities. This spring.
Got it fair share enough and then I guess, you've got a number of new growth initiatives, you've got some grab and go programs coming on from you.
Made mention of some of the investments even in net new paint capacity can you speak to how programs are going at this point in terms of in terms of the growth in your expectations and also how how you're thinking about the investment needed to drive these businesses.
Sure number one we are making the investments needed to drive these businesses as we speak today and expand the capacity consumer in and on number of categories. We're also expanding capacity on our construction products group and we're making a not so subtle shift in on that to growth activities to the growth aspect of it.
I think you can see that most pronounced in our construction products group, which actually had modestly positive.
Organic growth in this quarter in a very challenged end market pretty much globally and they have shifted to some major restoration activities. The combination of our driver business neuter. The tremco roofing tremco sealants in the spec efforts are paying big dividends and we would expect more on.
That to come particularly in any type of construction activity rebound.
And so you're seeing that we mentioned a few of the new product categories today.
We are keenly focused on driving organic growth in the coming years and at the same time I think.
Rusty made reference to the fact that.
We would expect mapped to growth, which is exceeding our expectations to continue to deliver additional savings as we get into fiscal 2002.
Got it thanks very much for the color.
Thanks, John.
Your next question comes from Rosemarie Morbelli with GE Research Your line is open.
Thank you.
Good morning, everyone and again I will join up.
On my condolences regarding some staffing now frankly on all terribly sorry, and they worked with him for many years more than I like to think about it.
Yes.
Looking at.
Looking at your investments.
What.
Which particular.
Roddick lines are you thinking of growing I mean, they were.
Rephrase this which products lines are you investing towards additional capacity in a in your different businesses.
Sure in consumer we are.
We are investing in small project paint capacity aerosol capacity.
We're also looking at Allen goods and capacity and Caulks and sealants, so pretty much across the board Russell expand capacity and clean product categories.
In our construction products group, we are expanding capacity looks restoration coatings across a whole broad.
Spectrum of areas and we're expanding capacity in the side.
On the side restoration projects, so that ranges across new Jersey.
Dryvit and Tremco sealant.
You mean product categories.
We're also expanding capacity in number of specialty products group businesses, particularly a legend brands in terms of their capacity for air filtration and you're handling and.
Restoration equipment.
About the only area that we're not expanding capacity at this point is that our performance coatings group given the impact of the.
A pandemic in oil and gas prices on some of their products major product categories.
Do you do you think you need to eliminate some capacity on the performance coatings.
So some categories may not go back to the pre COVID-19ien level.
We would fully expect categories to get back to pre cobot levels over the next coming years and that's been our history in the past.
I will tell you we had been eliminating capacity across RPM as we highlighted in our pre recorded where our.
Formal remarks, we've completed the closure of 25 manufacturing facilities and I believe by the time that were finished.
Will exceed by a few the original 31 plant closures that we targeted to growth.
And so we're having a very deliberate.
Reallocation of capital.
On to a growth areas in into efficiency.
So while we're expanding capacity by the time, we're done with map to growth.
Our net manufacturing footprint around the globe will be smaller.
Thank you and I was wondering if you could make some comments regarding your efforts.
Towards adding architectural paint to you on the portfolio.
Sure. We have commented in the past about a number of.
Kind of unique category architectural paint opportunities that we've had across a number of our major customers and.
And in that.
I think we'll have a better sense of that this spring in the summer.
As we get through kind of the post coded.
Supply.
Supply challenges across numerous areas.
And the consumer.
Why why market.
Thank you very much.
Your next question comes from Frank Mitsch with fair share.
From research your line is open.
Hey, good morning, and congrats on a quarter more importantly, Frank let me answer the condolences.
Mentioned before I take your I thought your yields she was one of the best I've ever heard what an amazing man in life and on a happier now congrats on your balance and good luck on I don't know if that Saturday or Sunday, but.
Nice to take care of the guys in Pittsburgh, you spoke a little bit about cash generation record free cash flow and your strategic uses didn't hear much with respect to buybacks.
And when when might they resurface and door what.
What your pipeline is looking like on the M&A side, how do we think about the interplay for RPM on M&A versus buybacks.
Sure so.
So cash generation is at record levels and.
And we will continue that way for the foreseeable future combination of margin expansion.
The capital allocation strategy from deploying.
As well as just a.
Excellent.
Working capital improvements.
For the time being we have indicated that we had suspended our share repurchase program.
In favor of debt reduction, we've been able to effects on meaningful debt reduction.
Going forward the pipeline of M&A activity.
Our industry is pretty full and growing.
So we continue to pursue our typical small to medium size.
Acquisition activity and.
I think over the next 12 to 24 months, you will see more transactions like the L. industrial transaction, we completed in the second quarter EPS.
As it relates to share repurchases, that's something that.
Our board will take up in board meetings here. This winter this spring.
Gotcha Gotcha.
I you know obviously the consumer business has been a stand out a very strong sales you mentioned that you are you going to take the opportunity during the fiscal third quarter to rebuild inventories were there did you lose any sales he think on on a consumer side. Because you were sold out you know good the results have been better how do we how.
How do we how do we think about what could have been in that regard.
Clearly.
We have lost some sales relative to gold rates, it's not unique to us.
It's impacted.
Impacted many DIY categories.
As people know in our first quarter, we had organic growth from consumer up 34%.
Your unit growth from the second quarter in the mid teens, we continued to see strong organic growth and certainly there is a.
There were some opportunities for us for additional growth had we'd been able to fill a.
Orders at a higher rate.
As Rusty commented in our and net commented on prepared remarks.
We see catching up on a lot of activity in the third quarter and I think we remain very bullish about both our position in the DIY market more than my DIY market will continue in terms of pretty strong growth.
For the foreseeable period of time and calendar 21.
Got you have any thanks.
Thanks Frank.
Your next question comes from Ghansham Panjabi with Baird. Your line is open.
Got you Hey, guys. Good morning, happy New year, and Frank My best to your family as well.
Thank you.
Yes, so just given that your quarter ended in November obviously locked into picked up in Europe.
Then can you just give us a sense as to.
You know how things have progressed in December but they're tracking like in early January across the businesses and if anything is different from a pre from pre trend line specific to the force lockdown across you for sure. That's I think a great question because you.
You know the possibility exists for a lot of variability in our Q3.
We're off to a great start.
Organic growth continues across our different businesses.
Beginning in the third quarter.
Leverage on the bottom line has been tremendous and we would expect to meet or exceed.
The forecast numbers were the guidance numbers that rusty provided.
In the formal comments that we made.
The what could interrupt that is.
Is further lockdowns UK has locked down to low to mid February as you know if that is followed by like down throughout Europe, and then back in the United States, certainly that could disrupt what otherwise would be another very strong quarter for RPM.
Got it and then in performance in your call out for deferred maintenance on the energy sector on.
Give us a sense as to how that dynamic impacted you specific.
To the 12% sales decline reported in the second quarter and what's reasonable in terms of the catch up phase because they seem to be cat.
Deferred for for too long thanks.
Sure.
You know I think the best way, we can address that again was in the prepared remarks that Rusty made you know we look back at.
Calendar.
2011 2012.
We generated double digit organic growth in our performance coatings group businesses in our construction products group businesses on.
The rebound and certainly in the performance coatings growth area.
Negative impact, particularly in oil and gas and energy and heavy.
Heavy industry spending has been as severe as it was back then and so we would expect day a meaningful rebound in most categories on any economic run.
Recovery activity.
So I think we're really well poised there and you'll see in the coming quarters.
The benefits of the.
The net growth activity on our performance coatings group.
In this quarter there earnings performance was negatively impacted by some unique.
Circumstances around.
On the Hurricanes and weather activity that.
Impacted the Gulf and their major manufacturing facility in Lake Charles Louisiana. So.
Part of that earnings performance was circumstantial to the quarter.
So we're real pleased with where they are in construction products group.
I think as the opportunity.
To really drive on performance into fiscal 22, we are taking market share. We are introducing new product categories. We are combining prior independent businesses to attack facade restoration on a holistic basis and so theres a lot of exciting things happening there that again, we would expect.
Accelerate in any type of economic recovery.
Terrific. Thank you so much Frank.
Thank you.
Your next question comes from Vincent Andrews from Morgan Stanley. Your line is open.
Thank you and good morning, everyone.
If I could just follow up on the consumer business saw a couple of questions on are.
Are you noticing within the DIY customer that the product mix that their purchasing is evolving to the extent that maybe there is sort of a lifecycle where people that were early in DIY with certain types of projects announced its my pleasure doing different types of projects, but you're seeing a new cohort come in that's sort of at the earlier stage or just sort of any any.
The valuation of the trends you are seeing that that can help us understand your confidence in sort of the sustainability of this into the next fiscal year.
Sure well.
Both in terms of what we've experienced and what Weve heard from our major customers on the.
Constant the basic confident DIY wire has expanded pretty significantly and certainly in ways. Either we are big customers could have accomplished in normal circumstances on our own.
On a good example of that is.
Our wood stains and finishes business has had the same type of robust organic growth is our small project paint business.
And that requires a.
Some more craftsmen skills and their larger projects.
And and so on the we're all pretty confident.
That this larger base is here to stay.
And now that we can grow from there.
The one area that was meaningfully negatively impacted was the pro and.
And so that might be.
20.
25% of our rust oleum.
A small project paints and cleaner categories.
But closer to 40 or 50% of our GAAP caulks and sealants patch repair products surgeons are primaries.
And pro contractors had been.
Inhibited from.
Getting access to residents is to the interior of residences, where most of our.
Our products are applied.
As well as its impact on some kind of small project like commercial restoration, so we see that business coming back strongly.
Once people have more confidence in.
Putting the cobot pandemic behind us.
And then the last comment on maker new categories that we've been testing has had three different opportunities, which are still on going to test.
New programs and architectural paint.
And so you put all that together and we're pretty bullish about our consumer business through this pandemic period.
Okay. If I could just ask a follow up on the Alley acquisition, you mentioned that it's proceeding better than projected is that both on the top line and from a synergy perspective on just any any incremental color on quite helpful.
Yes.
It's both on on the top line and what we're able to do with that business.
Post map to growth RPM can bring some some more immediate value businesses that we acquire.
Our.
I mean, you factoring in operations folks have been working with Allie on a look forward for.
Three years in terms of some manufacturing capacity expansion and also some automation efficiency improvements. So we're excited about that on the ability to take advantage of the sales and marketing expertise at rust Oleum, which I I believe is as good as anybody in the entire DIY space across in cash.
Macquarie is.
It's pretty exciting is the rust oleum sales and marketing folks and marry up with the alley folks in terms of new opportunities in approaches.
[music].
Thank you and I'm sorry for your loss thank.
Thank you.
Your next question comes from Kevin Mccarthy with vertical research your line is open.
Moving Kevin Yes. Good morning, Frank have any businesses were price declined in the fiscal second quarter and then looking ahead as raw material costs come up as you described where would you say your most competent a confidence and the ability to pass along those increase.
Susan and where do you think it could be more challenging.
Sure.
You know we had a a period of price deflation that we benefited from as well as the benefits of our consolidated.
Consolidated pro.
Purchasing activity, which is going quite well.
We have not had a.
Meaningful price give backs in any category across anywhere at RPM.
On in terms of price increases we've had some very modest price increases and some very unique categories that are big enough to move the whole needle on going forward as I mentioned this spring and summer meet the product categories that are most likely to be driving price increases across a number of our businesses are in packaging.
Especially as it relates to metal cans as.
As well as in a number of chemical areas depending on how.
On how things transpire in the coming months near.
In the areas of silicones taxis acetone number of categories that are seeing price increases.
As we speak for the first time.
You know, it's worth keeping in mind from an RPM perspective.
On the few particularly in the U.S.
On FIFO accounting so the impact of these would hit our peak.
You know.
For probably 60 to 90 days versus a lot of our peers and we have the ability to.
Both lead and some categories Russell follow on others in terms of what's happening in price increases across the market.
Okay, and then in terms of I guess, what I was trying to get that Frank is your ability to raise price to your customers.
Pass that along there are there any areas.
You would call out where you know you already maybe out in the market with proposed increases for example.
Yeah, we do not have any price increases from the marketplace today.
Anticipate price increases in the future and our ability to pass on price is consistent with what it's always been.
Relatively timely in our industrial businesses and typically with a six to 12 month lag.
In our consumer DIY businesses, I think some of that will be tightened just because of.
Where we sit within a few product categories, but we have passed on price appropriately in the past you can see that in our margin expansion throughout this period.
I don't see anything that changes those dynamics, both on the plus side, which is our ability to ultimately passed on price.
And on the lag side in terms of the delay in timing.
Experience for decades in our consumer DIY businesses.
Thank you for that and then secondly, if I may in consumer.
Frank what is the level of inventory that you would need to replenish and what impact could that have on sales into our margins and what is normally a seasonally weaker quarter for the business.
Sure I I would expect really strong performance on a consumer third quarter.
Unless there is a as referenced earlier some type of significant coven impact, which would impact everybody.
We anticipate continued strong performance, there and into Q4 as well.
Rusty referenced.
Working capital and consumer certainly we have tens of millions of dollars low tens of millions of dollars of inventories to catch up on and I think that's a good new story as well for the coming quarters.
Thanks for the comments and Frank all the best to you on the family in 2021.
Thanks, Kevin.
Your next question comes from Josh Spector with EPS. Your line is open.
Good morning.
Good morning, Thanks for taking my question on just a follow up from a prior question quickly are you able to size the hurricane impact on performance on the top and bottom line in the quarter at all.
Well I don't have those details on it until we have them Rusty is that something that on.
You might be able to come on that.
Yes, you know in terms of unusual expenses is a few million dollars of expenses.
And in terms of sale.
There was disrupted and from three hurricane that Pat.
Pat either right through lake Charles or nearby and the.
A second quarter, so that did disrupt not just our plan, but our customers.
On the Gulf region.
So yeah, there was a.
From sales impact that definitely played into the decline you saw PCG.
Yes, that's why I mentioned in my comments it was circumstantial the quarter and actually despite the very challenged end markets.
Matthew growth benefits on the PCG.
Segment.
City pronounced and I think you'll see those in the coming quarters in a positive way.
Okay, Yeah, I guess I'm trying to think about around this is you know you had 12% declines in performance on both last on the both on the last two quarters.
Is there a way to think about like what the exit rate was the way what the normalized demand was as we start to look at the next quarter and think about the recovery over the next couple of quarters.
You know I think you'll see the.
Positive results as we get into our fiscal 22 in part because there will be.
Equalizing.
Easier comps.
But I do think with any economic recovery, there's a significant amount of pent up.
Maintenance and heavy industry spend that will be the beneficiaries of.
Okay, well I guess the last coming on make is is if you look at what we expect in Q3 in Q4 out of that segment I think you'll get a better sense of the positive impact of map to growth.
Even as revenues continue to be down year over year or flat and it'll give you a better sense from a margin profile of what type of leverage we would have been positive sales results return.
Okay. I. Appreciate that's helpful. Just one last quick one if I can just on NAFTA growth and the savings that you expect to realize an area reiterated your run rate savings target here are you able to quantify how much savings is set to be realized in fiscal 21 versus fiscal 22 at this point.
Yeah, I'll defer that to rusty other than to say that we're highly confident that.
Some of our ability to execute timely has been impacted by the global pandemic, we're highly confident that as we get into a.
Fiscal 20 to continue to benefit from our map to growth activities that the total program savings will be one on access at 301.
Yeah, Josh says, we said on the last call we expect.
100 million or more of map savings.
On the Favourably impact alkali 21.
Okay. Thank you.
Sure.
Your next question comes from I run this one up on with RBC capital. Your line is open.
Morning, everyone Great. Good morning, Frank Thanks for taking my question and my condolences to you as well.
I guess I just wanted to first ask about the consumer segment the margin performance.
If you think about it Q on 21 to Q2 20 on you you had about close to 500 basis point margin drop off in EBIT percentage.
You know obviously, there's a lot a lot going on in there, but how would you kind of characterize their performance do you feel that the consumer segment was potentially.
Impacted by some of those stock outs and do you see the margin is kind of recovering to higher levels in subsequent quarters.
Sure, let me address that broadly and then Rusty can address it in some detail, but all of our businesses, but particularly our consumer businesses are seasonal and I think if you look year over year, we're continuing to see significant margin margin expansion, but obviously from.
On subsequent quarter to the next as we get.
Into our fourth quarter on first quarter, which are absolutely our seasonal highs in our second quarter and third quarter are meaningfully less than revenues and there's a fixed level of expense. So that's what's driving the margin differential you will.
Quarter over subsequent quarter, but.
We've continued to experience significant year over year.
Merging improvement and we knew we would expect that to continue and I think Russ you could add a little more detail to that.
Yeah, that's correct Frank as we get into cooler months in the fall sales typically fall off as they normally do.
So you know the fact that we had stronger sales on more leverage on fixed costs, a room would naturally lead to higher margin in Q1 than Q2.
You know when I look year over year consumer is up 450 basis points in EBIT in Q2, So I I think we're doing pretty well.
Great. Thanks.
Thanks for that detail and then on construction products. You know you guys said you know.
Alluded to potential opportunities coming our way to gain share do you believe that there is.
Inorganic additions you have to make your portfolio to.
To capitalize on that or could you potentially capture that share through some of these investments you've described as well.
So I believe we can in our capturing that share through the activities that we've taken.
As we speak there will be inorganic opportunities in that category, you know broader opportunities that may appear but on a pretty regular basis product lines that we can acquire and expand across your distribution base, but fundamentally what happened in Arkansas by by going from our.
Former six groups.
Into the four groups in four segments, we have consolidated a number of businesses more completely into a more comprehensive construction products group.
And so while we operated across the globe.
Maybe five or six.
Different.
Business units.
We're now operating.
In North America, and in Europe, as a tremco construction products group and pulling together for instance, Tremco sealants than you do in the Drybulk businesses in approaching the market on an integrated basis is opening up opportunities for us on the side restoration.
That is driving organic growth that we were not experiencing the way we are organized in the past. So the biggest part of it has to do with it.
Reorganizing into a more integrated.
2 billion dollar construction products group, which from a market perspective is the tremco construction products group on a pretty integrated basis, we have exceptional leadership, there and we continue to take market share whether it's an add mixtures shifting from different business units into a more integrated approach from the marketplace.
We're really excited about there will be organic there will be inorganic acquisition opportunities to accentuate that as well, but we do not need those to keep driving market share gains and organic growth.
Okay. Thanks for that and then real quickly lastly on the raw material front, you foresee any categories I'm thinking specifically like I may and or Epoxies, where you potentially could face some supply chain.
Disruptions or availability issues that you're.
You're concerned about or you feel okay with the overall level of inventory that you have in your raw material procurement.
So we have over the last.
A few quarters and months.
Faced some challenges in certain packaging areas and particularly in metal cans.
Have faced some challenges and silicones a lot on those.
Categories in terms of the availability or being cleaned up so I don't think we have the same concerns going forward.
We've had over the last couple of quarters in those categories.
And so I think that's a share.
German comment about what's happened in a couple of categories, particularly for us and some packaging areas and silicones.
Great. Thank you because on the quarter. Thank you. Thank you.
Your next question comes from Mike Harrison with Seaport Global Your line is open.
Thank you and our condolences to you on your family Frank.
Thanks, you you mentioned the.
Management change that occurred in the specialty.
Segment.
And talked about some new ideas new processes around business development can you give a little more color on what changes have been made there and your confidence in the sustainability of improving results in that business.
Sure we.
We have a new segment leader who's been in charge of that group or just about two years and Ronnie home and he's done a great job running started and as a leader of our R&D effort in a $15 million wood.
Wood coatings businesses. It was acquired by RPM, probably 30 years ago and.
Outgrow, our OEM coatings businesses to nearly 300 million and is now in charge of this larger group.
We have new leadership at day Globe.
We have new leadership coming in or mattress How's your business.
We have reorganized.
And new leadership across our valve Tech and.
Pettitte Marine business and really excited about what's happening there.
And so there's been a number of leadership changes there they've consolidated accounting administration.
Not only from a cost perspective, but take.
Those administrative functions away from essentially business leaders that are.
Refocused on growth.
We have also changed our mentality at RPM on your my father, Tom and his partner Jim Carmen for decades.
We just did not use outside consultants.
We've had a lot of success, both with our teams and the good work some consultants in the net to gross program and I mention that because it's something that we would not have done in the past. We're doing today, we hired mckinsey to work with our day low team and our mantra sauser specialty food business teams focused on market sizing in my.
Good market opportunities.
So the shift to that I mentioned earlier in terms of really focusing our businesses on growth as.
As well as sustaining.
And implementing the map to growth cultural changes within RPM are happening.
And I think the thing that we're most excited about big picture.
Our primary goal.
Our goal in NAFTA growth.
Was to get it efficiencies that were there to have to change our culture.
To be focused not only on growth on an efficiency, but do it in a way that did not meaningfully negatively impact our entrepreneurial culture and so far we have been able to do that and it's paying dividends I think people are going to see that.
In the coming quarters across RPM, particularly in the construction products group and particularly in our specialty products group.
All right. That's a that's very helpful. And then also wanted to ask about on.
The online.
Sales portal or your your online sales effort that was an area that you are.
We're kind of struggling with last season I was wondering if you've made some changes or progress.
In in those online sales, but should enable you to better leverage potential demand to the bottom line as we get into the busier season in 2021.
Sure and again, you know Rusty may have some more detail.
I could tell you, particularly on our consumer group on.
Our ability to serve the satellite ordering has improved dramatically.
And we have seen significant improvement.
And huge percentage gains, but they're on a small base, but improvement in our ability to fulfill and meaningful meaningful growth in some of our big box customers and.
More on traditional on line customers.
Customers like Amazon.
Yeah, our growth and online.
Sales and.
Not quite double but it's probably up close to 80 per cent a share and your question is very perceptive, because we are focusing a lot of our operating improvement.
Initiative and the area of distribution. So I think we're going to continue to improve that this year, because you're right. The landscape has shifted.
All right thanks very much.
Thank you.
Your next question comes from Mike Sison with Wells Fargo. Your line is open.
On the Michael.
Hey, guys my condolences to Frank as well and I just wanted to say I always enjoyed meeting what time during the holidays back and those Roes fund meetings, but just one quick question.
The first half from 20 on free cash flow is above 500 million and.
Looks like you'll generate some free cash flow on the second half of the year. So you know is this is this sort of 600 million plus type free cash flow potential you know kind of the right run rate that RPM can generate on an ongoing basis going forward.
Yeah, Big picture and again details I'll turn it over to Rusty, but big picture.
I think we have gotten RPM to a new level.
Of cash generation, both in terms of working capital requirements on a on a go forward basis, as well as our margin profiles and and.
We're excited about that.
Rusty can provide more details as it relates to the fiscal 21 and beyond.
Sure Yeah.
Yeah, you might remember Mike on Investor Day, we showed a slide that says our cash from operations.
Our target was 872 million I believe and if you look over the last 12 month, we're running over 800 million of cash flow from operations for the trailing 12 month. So we're pretty close to that you know if you look at the dividend and the.
Capital spending.
No. This year, we'll do over 140 million of capital spending I think the dividend is pushing closer to 200 million. So.
To answer your question on free cash flow at the rate we're running yeah, we're certainly over 400 million of free cash flow.
Hard to take on the last 12 months has any guide for what normal is because of the pandemic.
For example, we have deferred from government payment.
For about 25 million.
Including the payroll tax.
We have drawn down inventories, but you know other businesses that we've discussed are suffering because of the pandemic.
So it's tough to use the last 12 month as the guy, but we appear to be a you know tracking towards that math target.
Great. Thank you.
Thanks, Mike.
Your next question comes from Steve Byrne with Bank of America. Your line is open.
Thanks, Steve Yes, yes. Thank you.
Can you quantify how much discretionary spending cuts were in the quarter and what portion of that might reverse.
Yeah, I'll I'll defer that.
Detail too.
Rusty again.
But big picture, we have had some.
Meaningful reductions in discretionary spending that's associated with the pandemic that will come back.
I can tell you that.
You will see and this is part of our guidance a more normal spend in our consumer group in terms of advertising and promotion in the third and fourth quarter in the spring. So that's already coming back and part of our outlook.
And while some of it will return a part of it was just lucky.
In terms of coinciding with our map to growth activities because across a number of our businesses. There will be a a kind of a new level of discretionary spend that will be below probably even where we originally targeted in that growth.
Yeah in terms of on the biggest area of spend to two.
Travel costs.
So, we're probably saving somewhere around north of 10 million, a quarter and travel costs and like Frank said World.
Now with the new World. We're in today, we're finding that we can accomplish a lot of things without travel with a video conferencing.
So I don't think necessarily all of that will come back you know in the spring, we talked about medical cost going down because.
Nobody went to the Doctor that's been back to normal. This year. So you know that a another area you might be interested in.
Okay.
And Tracy.
Thank you brought up mapped to gross and.
Yeah. The span so just wanted to drill into that on that on a couple up from one being.
How much of about 300 million close it or maybe what you can say on loves so the savings you've achieved so far away from up to growth.
What would you say was a reason from lower raw material costs.
Rusty can check me on this I would say I don't know 50, or 60 million is maybe lower raw material costs and the balance is from our specific activities. The ER and net certainly as part of day.
On a centralized procurement function.
That in combination with low rise has.
Exceeded our expectations and then the other area that we've commented on was our original target.
For manufacturing.
Manufacturing operations between plant consolidation and efficiency gains was 75 million bucks in will exceed $100 million in that category.
Yeah, I think the question might be about the commodity cycle assumption in map and we assumed 145 million of.
Procurement savings and we said I believe 65 million.
On wave three would be related to the commodity cycle.
That's still sitting there to you <unk>.
Roughly yep Yep.
Yep.
And then just just one last one for you Frank as you as you close out the map to growth initiatives is it reasonable to think that you might introduce Trinity.
Turning to the next still plan anything that you can learn from this initiative will that might lead you down on you know a new Paul of productivity initiatives.
Sure well I think we'll be in a better position to address that with some specifics.
In July when we talk about guidance for fiscal 22, and kind of maybe a longer term post map to growth outlook.
Clearly there are elements of the map to growth program that are here to stay on the B M. S. One sixeight element on manufacturing operations.
Our ability to be a more strategic partner to large global suppliers.
And what we're doing on the sales front.
As well or something that we'll be able to talk about and we we've been able to put in.
Procedures.
Little in the weeds, but what came out a map the growth was a very detailed what we call and and PGT, which is on PGT, which is the Oh I'm sorry on PST, which is the map project savings tracker and so we've been able to track literally thousands of categories of savings across procuring.
Net price across SGN any inefficiency and we are taking some of those disciplines into a growth price.
Process as well and we'll be able to talk more about that both in terms of what we're doing and the impact it's having this summer.
Very good thank you.
Thank you.
And your last question comes from a silica collect with JP Morgan Your line is open.
Good morning, So I.
Hi, good morning, Bob.
I also old enough to remember Tom Sullivan from Tom sorry to hear about it pass on but I'm glad I got to tell him.
Thank you very much.
I have two questions one on the consumer segment and one about on construction segment.
In the consumer segment.
Oh wait you quantified on to just from a ballpark terms, what the benefit Dol cobot related sales may have been in the quarter like what that something like 10 million or something that mid single digits.
Any way to think about it.
With that I'd.
Rusty might have a better answer than I do you know the only thing I can tell you is historically.
Solid organic growth in consumer it's been in the five or 6% range. So clearly a 34% organic growth in the first quarter and mid teens organic growth in Q2 is.
His extraordinary relative to historic.
Levels.
Yeah, I think the best way to think about itself is to look at the comp store sales numbers out of low and on depot and they've been running you know over 20%.
And you could compare that to a more normalized basis I think that would be probably the best way to think about it.
Right and then just a follow up question on consumer and that if you note knows has been out on.
Thank you know part of the year ahead on a calendar basis I think that you said that you know U.S.U.S. held a performance.
Market may be down I don't know five or 7% in calendar 2021.
That's the way you see it and it's set up like you said like a similar you know on alignment for RPM.
And to my business specifically.
Yes first of all that is not how we see it.
I would expect to see cash.
Continued double digit growth on the first.
Part of calendar.
First four or five months of calendar 21, and then I expect from what were seeing to see positive growth rates for the balance of the year in Lowe's perspective that you referenced is not.
Universal across our customer base, we have some significant customers see continued.
Expansion in the DIY market, albeit at a slower pace.
Okay helpful and.
My question on.
On the construction segment is the on the margin improvement on the construction segment has been on it.
That's a pretty high what's what's the map on.
Even though the sales growth has been slow and the fourth quarter is typically the largest quarter for the construction segment and you know the comparison on relatively easy EPS you pointed out and so do you think that that business from the fourth quarter can approach margin set up you know something like 20%.
If you all this on had a.
Good volume growth.
Sure on I'm going to give you a dodge in that question for two reasons number one we really are providing a detailed on our fourth quarter and will do so in April but secondly, it's really going to be hard to tell we had we should have some easier comps, particularly in April and may as you.
In this quarter the leverage to the bottom line.
Out of our out of our construction products group was pretty extraordinary and I would expect that leverage to continue.
At least directionally in what you're talking about when they start to post organic growth. That's in the mid single digits, which on a recovery is coming.
Okay. Thanks very much.
Thanks, Okay.
Can.
Now I'd like from the call back over to Mr. Sullivan for closing remarks.
Thank you.
As always I'm grateful for the hard work and dedication of our associates around the world through their efforts, we found ways to safely operate our businesses meet our customers needs development.
Develop new innovative solutions answered the communities, which we operate.
Also greatly appreciate our shareholders for their continued investment in RPM, we remain focused on generating long term value for you we learned over decades that the market.
Values growth over efficiency and what we've learned and mapped to growth is that we can do both we expect to continue to do both.
Finally to everyone on the call I wish you on your families a happy and healthy new year, we look forward to updating you on our fiscal 2021 third quarter results in April. Thank you for your investment in RPM and for joining our conference call. This morning.
Have a great day.
This concludes today's conference call you may now disconnect.
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