Q4 2021 RPM International Inc Earnings Call
Welcome to RPM Internationals conference call for the fiscal 2021 fourth quarter and year end today's call is being recorded.
This call is also being webcast and can be accessed live or replayed on the RPM website at www.
The Dod I B M I N C dot com.
Comments made on this call may include forward looking statements based on current expectations that involve risks and uncertainty.
Which could cause actual results to be materially different.
For more information on these risks and uncertainties. Please review Rpm's reports filed with the S E C.
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 I B M Web site.
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.
RPM then the number 1 on your telephone. Please note that only financial analysts will be permitted to ask questions.
At this time I would now like to turn the call over to Rpm's, Chairman and CEO, Mr. Frank Sullivan for opening remarks. Please go ahead Sir.
Thank you Angelica good morning, and welcome to the RPM International Inc. Investor call for our fiscal 2021 fourth quarter and for the full year ended May 31.2021.
With me on today's call are Rusty Gordon Rpm's, Vice President and Chief Financial Officer, and Matt Ratajczak, Our Vice President.
Global cash and Treasury, who support our investor relation activities.
On today's call I'll provide details on the successful completion of our map to growth operating improvement program. Matt will then review our fourth quarter results in some detail and Rusty will conclude with comments on our outlook for the first half of fiscal 2020.
No.
We'll then be pleased to answer your questions.
On our April Investor call, we referenced rising inflation across our P&L at structurally high single digits with some select spikes of 150% to 200%.
Some of our call today thought that by now raw material cost and availability.
He would've gotten better to the point of pressure from some customers to give back price that was wrong in April and way wrong today.
Material costs have increased to levels on average in the high teens.
More importantly, certain critical raw material shortages across our industry are negatively impacting our ability to produce.
To meet market demand.
In Q4, this raw material availability caused us an estimated $100 million in revenue.
It's likely to cost us more in Q1, and we anticipate having more raw material availability lost production days in.
Q1, this year than we had from the impact of Covid shutdowns in Q1 last year.
These challenges notwithstanding thanks to our successful map to growth operating improvement program, we generated strong results for our 2021 fiscal year.
Our full.
<unk> consolidated sales increased 11% to $6.1 billion.
Our EBIT margin increased by 150 basis points and adjusted EBIT was up 26, 5%.
Operating cash flow climb nearly 40% to a record $766.2 million and our adjusted EBIT margin.
Your line to 12, 8%, which was also a record.
Our map to growth program has been the principal driver of this strong financial performance the.
The successful execution of our map to growth operating improvement plan.
Lastly in light of the incredible disruptions caused by the Covid pandemic and more recently.
<unk> precedented supply chain challenges is a true testament to the dedication and resilience of the RPM associates worldwide.
At the program's onset we recognize that RPM had reached the point, where our center led approach in selected areas of the business was required to take it to the next level of growth.
By on manufacturing, we formed a center led team that has created a lasting culture of manufacturing excellence and continuous improvement disciplines across the organization.
This team launched our EMS 168 manufacturing system, which is allowing us to produce better products more quickly more cost effectively and more sustainably.
In addition, we reduced our global manufacturing footprint by 28 facilities consolidating production to more strategically advantageous plants.
Our original target was 31 plants, but consolidation efforts were slowed by the Covid pandemic.
We expect to exceed the original target in the coming year.
We also created a center led procurement team that is consolidated materials spending across our operating companies negotiated improved payment terms with our supplier base and has helped us reduce working capital.
These initiatives have created millions of dollars in cost savings with stronger supplier partnerships longer term contracts.
Here, we are in a much better position to secure necessary raw materials and control cost through the current raw material supply shortages than we would have been just 3 years ago.
Additionally, we took significant steps to streamline many of our administrative functions.
Through our financial realignment, we consolidated.
Track 46, accounting locations improved controls develop more effective and efficient accounting processes and reduce costs.
Similar initiatives were undertaken in our it infrastructure as we have migrated 75% of our organization to 104 group level ERP platforms and.
Additionally, we.
David pushed the number of data centers, we manage by shifting systems and hardware to the cloud and we are creating a number of platforms for a centralized data driven decision making.
Over the course of the 3 year map to growth program. We have returned $1.1 billion of capital to shareholders through a combination of cash dividends and share repurchases.
We have reduced side from our significantly improved profit margin profile and stronger cash generation as reflected in the cumulative total return generated by RPM, which has exceeded our peer group over the 3 years of the map to growth program. The lasting legacy of our map to growth operating improvement plan is a revolutionary change in how people work together.
RPM.
Our operating company leadership is managing today with a broader view of RPM as a whole, allowing us to better leverage resources. Another permanent change change has been the operational disciplines. We developed that will continue to generate improvements in profitability cash flow and operating efficiency.
<unk> it all into the future.
Perhaps more significant has been our ability to maintain our unique entrepreneurial growth oriented culture evidenced by the fact that our revenues continued to grow at or above industry averages throughout the map to growth program.
The real heroes behind the map to growth.
Well, that's where our associates worldwide, particularly our frontline workers, who kept our manufacturing and distribution distribution centers operating during the Covid pandemic.
We also owe a debt of gratitude to my good friend and 1 of Rpms, Great operating leaders, Steve <unk>, who was the architect of the map to growth program and passed.
60 prematurely in 2019.
Additionally, I'd like to recognize Mike Sullivan, Vice President of operations, and Chief restructuring Officer, Tim Kinser, Vice President of operations procurement and Gordy Hyde Vice President of operations manufacturer manufacturing, who successfully executed the program with an intense focus.
Waste and strong leadership that were integral to delivering these results and instilling a permanent focus on operating efficiency and continued continuous improvement into our culture.
While we have reached the 2020 map to growth conclusion, there will be some run off from the map to growth program in fiscal 'twenty 2.
Focus and which we expect to capture approximately $50 million in incremental savings.
We will also be leveraging the lessons learned from this program to chart a course for 2025.
Over the next 6 to 12 months, we will be working on a map to point O program in conjunction with our operating leaders.
Leaders.
We remain fully committed to achieving our long term goal of a 16% EBIT margin and we will be sharing more information about our progress for a new program in the coming quarters.
I would now like to turn the call over to Matt Ratajczak, who will discuss our fourth quarter results in detail.
Thanks, Frank and good morning.
During <unk>. Please keep in mind that my comments will be on an as adjusted basis for.
For the fourth quarter, we generated consolidated net sales of $1.74 billion, an increase of 19, 6% compared to the $1.46 billion reported in the year ago period.
Sales growth was 13 now.
Everyone's that organic 2.2% the result of recent acquisitions.
3.5% due to foreign currency translation tailwind.
We are very pleased with this strong top line growth in light of raw material shortages and supply chain disruptions.
It has been challenging but we've been managing these difficult.
<unk> difficulties, thanks to our center led procurement team improved internal collaboration and leveraging of internal resources to get materials, where they are most needed.
Adjusted diluted earnings per share increased 13, 3% to $1.28, compared to $1.13 in the fiscal 2024th quarter.
9%.
Our adjusted EBIT was $236.2 million compared to $213.6 million during the year ago period, which was an increase of 10, 6%.
Keep in mind that last year's fourth quarter was impacted by the pandemic onset, which create the extraordinary situation.
Where our non operating segment reported a profit due to lower medical expenses incentive reversals and other factors.
On the other hand.
During this year's fourth quarter, we experienced higher insurance costs due to business interruptions created by Hurricanes and the winter storm Uri as well as higher incentives tied.
Quarter proved performance.
If you exclude the impact of our net operating segment from both years, our 4 operating segments combined generated impressive sales growth of 19, 6% and adjusted EBIT growth of 27, 5% as they overcame margin pressures and supply availability challenges.
<unk>.
Turning now to our segment performance for the quarter.
Our construction products group generated record results construction maintenance and repair activity accelerated in the U S. During the quarter and even more so in international markets.
Construction products group net sales were a record 6.
<unk> hundred $2009.4 million during the fiscal 2021 fourth quarter, which was an increase of 33, 2% compared to fiscal 2024th quarter net sales of $472.4 million.
Organic growth was 28.28, 4% and.
600 currency translation provided a tailwind of 4.8%.
Leading the way for the segment, where our business is in North America that provided commercial roofing materials and concrete admixtures and repair products as well as our European businesses, all of which generated record sales.
Demand for our new Dura insulated.
Foreign concrete forms remained at elevated levels due to their relatively low installed cost in addition to their environmental and structural benefits as compared to traditional building methods.
Adjusted EBIT was a record $110.4 million compared to adjusted EBIT of $77.3 million reported during the year ago period.
Period. This represents an increase of 42, 7%.
The bottom line was boosted by volume leveraging savings from our map to growth program and higher selling prices.
Our performance coatings group also benefited from the release of pent up demand for the construction maintenance and repair.
<unk> in the U S and abroad, which had leveraged into strong financial results.
The segment's net sales were $283.3 million during the fiscal 2021 fourth quarter, which was an increase of 25% compared to the $235.1 million reported a year ago.
Obstruct organic sales increased 12, 9% and acquisitions contributed 2.9%.
Foreign currency translation increased sales by 4.7%.
This segment had been particularly challenged through the pandemic because of its greater exposure to international markets and the oil and gas industry.
As well as a greater reliance on facility access to appliance products.
Points of strength in the performance coatings group, where it's businesses, providing commercial flooring systems in North American Bridge and highway products as well as recover recovery in its international businesses.
Adjusted EBIT was $31 million in.
Third quarter of fiscal 2021, compared to $23.7 million during the year ago period, representing an increase of 31, 2%.
Segment earnings increased due to higher sales volumes, the map to growth program and pricing, which helped to offset raw material inflation.
Our consumer group.
The fourth where did record net sales of $628.9 million during the fourth quarter of fiscal 2021, an.
An increase of 2% compared to net sales of $616.2 million reported in fourth quarter of fiscal 2020.
Organic sales decreased 3.8% since this was the first.
Reported on which we comped against the surge in demand at the beginning of the pandemic.
Acquisitions contributed 3.8% of sales force.
Foreign currency translation increased sales by 2%.
During the first 3 quarters of this fiscal year, our consumer group sales and earnings have grown rapidly as it serve the extra ordinary demand.
First quarter for DIY home improvement products by consumers, who are homebound during the pandemic.
As more Americans became vaccinated and we're no longer confined to their homes DIY home improvement activity began to slow from its toward pace during the quarter, though the pace of sales remained higher than the pre pandemic levels.
<unk> and international markets, many of which still have stay at home orders in place they remain quite strong.
Fiscal 2021 fourth quarter adjusted EBIT was $93.6 million a decrease of 10, 4% compared to adjusted EBIT of $104.5 million reported during the prior year period.
Helping to partially offset the cost pressures were selling price increases and savings from our map to growth program.
Some of which we're investing in advertising programs to promote new products.
The specialty products group reported record net sales of $202.8 million during the fourth quarter of fiscal 2021, which.
Breached 49, 9% compared to net sales of $135.2 million in the fiscal 2024th quarter.
Organic sales increased 46, 2%.
While acquisitions contributed <unk>, 7% to sales and foreign currency translation increased sales.
By 3%.
For the second quarter in a row, our specialty products group generated the highest organic growth among our 4 operating segments.
<unk> results have improved sequentially over the past 3 quarters with excellent top and bottom line results by nearly all of its businesses, including those providing coatings for recreational watercraft.
Which inc. OEM equipment.
Wood food.
Food and pharmaceuticals, as well as cleaning and restoration equipment and chemicals.
Adjusted EBIT was a record $36.3 million in the fiscal 2021 fourth quarter.
An increase of 395% compared to adjusted EBIT of $7.3 million.
<unk> per year period.
It's record results were driven by recent management changes.
Increased business development initiatives and improving market conditions.
Lastly, I have a few comments on our liquidity or.
Our fiscal 2021 cash flow from operations as Frank mentioned was a record $766.2.
And the price compared to last year's record of $549.9 million. This is primarily due to continued good working capital management and margin improvement initiatives for our map to growth program.
At year end, our total liquidity was $1.46 billion and included $246.7 million of cash and $1 to 1 billion.
Million committed available credit.
Our net leverage ratio as calculated under our bank agreements was 2.7 as of May 31, 2021. This was an improvement as compared to $2.89, a year ago.
With a healthy balance sheet, we continue to use some of our record cash flow to reduce debt.
Total debt at the end of fiscal 2021 was $2.38 billion compared to $2.54 billion a year ago.
And as Frank mentioned, we are also investing more aggressively in growth initiatives, including the advertising operating improvements and acquisitions.
Plus we're rewarding our shareholders through our cash dividend and our stock repurchase.
The program.
Since the beginning of the fourth quarter, we repurchased approximately $38 million of stock.
I'll now turn the call over to Rusty for comments on our outlook.
Thanks, Matt.
As we discussed last quarter various macroeconomic factors are creating inflationary answer.
Purchase ply pressures on some of our product categories.
As a result of the lag impact from our FIFO accounting methodology, we expect that our fiscal 2022 first half performance will be significantly impacted by inflation throughout our P&L.
<unk>, which is currently averaging in the upper teens.
We are working to offset these increased costs with incremental map to growth savings and commensurate selling price increases, which we will continue to implement as necessary.
More importantly, the limited availability.
The of certain key raw material component.
Negatively impacting our ability to meet demand.
Our most significant challenge for the first half of fiscal 2022 will be in our consumer group. Several factors are compressing margins in this segment first selling.
<unk> negotiations took place last spring and material costs have rapidly risen further since then.
Secondly, insufficient supply of raw material several of which are severely constrained.
Due to trucking shortages or force measure being declared by suppliers.
<unk> has led to intermittent plant shutdowns and low productivity.
Lastly, the consumer group has outsourced production in several cases to improve service levels at the expense of margins to address these first half margin challenges the consumer.
<unk> price cutting costs and working with customers to secure additional price increases.
We expect that our other 3 segments will successfully manage supply challenges to continue their robust top and bottom line momentum from the fourth quarter and carried into.
To the first half of fiscal 2022.
Turning now to Q1 of fiscal 2022, we expect consolidated sales to increase in the low to mid single digits compared to Q1 of fiscal 2021, when sales grew 9% creating.
Group, a difficult year over year comparison.
Additionally, supply constraints have slowed production in some product categories.
Despite these factors our revenue growth is expected to continue in 3 of our 4 segments.
We anticipate our construction products.
Products group and performance coatings group to generate sales increases in the high single or low double digits.
The specialty products group is expected to generate double digit sales increases.
Net sales projections assume that global economies continue to improve.
Prove sales in our consumer group are expected to decline double digits.
It continues to experience difficult comparisons to.
2 of the prior year when organic growth was up 34%.
However, the consumer group's fiscal 2022 Q1 sales.
<unk> are expected to be above the pre pandemic record indeed.
Indicating that we have expanded the user base for our products since then.
We expect our Q1 adjusted EBIT to grow in 3 of our 4 segments with the exception again being our consumer.
Based on the anticipated decline in this 1 segment. Our Q1 consolidated adjusted EBIT is expected to decrease 25% to 30% versus a difficult prior year comparison, when adjusted EBIT in last year's first quarter was up nearly 4.
<unk>, 40%.
Moving to Q2 of fiscal 2022, we expect good performance again with the exception of the consumer group.
As discussed earlier the challenges in this segment are anticipated to result in a significant decline.
And adjusted EBIT against difficult prior year comparisons when sales were up 21% and adjusted EBIT was up 66%.
We anticipate that the Q2 decline in consumer will be mostly offset by the combined EBIT growth in our 3.
3 other segments.
Leading to consolidated adjusted EBIT being roughly flat versus another difficult prior year comparison.
When consolidated adjusted EBIT was up nearly 30%.
After we work through the temporary supply chain challenges.
We expect to emerge with a consumer group that has broader distribution and a larger user base than it had pre pandemic.
For our other 3 segments. Good results are expected to continue due to recent strategic changes in our specialty products group continuing to.
Pay off and the catch up of deferred maintenance driving additional business at our construction products group and performance coatings group.
This concludes our formal comments and we will now be pleased to take your questions.
As a reminder to ask a question.
Ken you will need to press, Taiwan on your telephone David.
Draw your question press the pound key.
Our first question comes from the line of John Mcnulty from BMO capital markets.
Your line is now open yes, good morning, good morning, Frank.
Thanks for taking my question so.
I guess the first 1 would just be in terms of the pricing that you need for each of the divisions can you kind of walk us through how we should be thinking about that and the timing of which you hope to kind of implement some of these some of these price increases just so we can kind of measure that versus the timing of the raw materials and when they may kind of level off.
Sure so in.
Q4 on average based upon the timing of the effectiveness of various price increases that we negotiated this spring the effect was about 3%.
In Q4 and we.
We would expect or anticipate at this point that the effect of pricing in Q1 will be in the 5% to 6%.
Cent range.
And Thats based upon price increases that are in effect.
At this point and we are going forward with additional price increase activity.
In the next months across a lot of our different businesses I think we will report.
Obviously Q the Q1 results when we report those results in October, but we are pursuing additional price increases in consumer in.
In particular as well as other parts of RPM on top of whats already been enacted.
Got it that's helpful and then.
When we look at the construction business the growth the growth was pretty pretty chunky, but admittedly there is a lot of which weird comps that were we're trying to deal with I guess is there a way to think about how much of it is just the core business coming back versus how we should be thinking about market share gains in what you are what you've been doing there.
Sure our construction products group.
<unk> just completed its third consecutive year of strong sales growth very strong EBIT margin improvement and it's driven by market share gains the introduction of <unk>.
New products and the integration of what were a collection of very often kind of independent.
Innovations and Youre going to see more to come we enter.
We enter the first quarter with really good momentum in our construction products group our performance coatings group in our specialty products group some of that momentum is being disrupted by the <unk>.
Supply chain and really.
Raw material availability issues that met Rusty referenced.
We literally have had.
Weeks of lost production days because of the lack of availability of certain critical elements and.
Not that you would see stronger growth.
And we even project so we're likely in the construction products group to be up in the 9% to 12% range in terms of sales for the quarter.
And the demand is higher than that and the good momentum that we've had for 3 years is continuing youll see after Q1 a return to.
Solid.
<unk> growth and margin enhancement.
Our 3 non consumer segments.
Got it and maybe I can sneak 1 last 1 with regard to cash flow.
<unk> seen a big improvement in the cash flow.
Since map to growth was really was really put in place I guess can you speak to how we should be thinking about the M&A.
<unk> that you can look at as you look at 2022 versus buybacks and how should how we should be thinking about cash being returned to shareholders.
Sure.
We continue to have a pretty strong pipeline of kind of our typical small to medium acquisitions. So we'll pursue those and get them done where we can.
We've commented in the past on larger transactions and we are committed both to achieving the original map to growth goal of a 16% EBIT margin and a return of capital between dividends and share repurchases of $1.5.
Through.
May 31.
121, our total return of capital as measured in the map to growth program was 1 billion won.
So a little short there so.
We will balance those but we've got a much stronger cash flow than we had 3 years ago to be able to.
To have fun with that balance in terms of how we return.
<unk> capital to shareholders and continue to pursue growth.
Got it thanks very much for the color Frank.
Thanks, John.
Our next question comes from the line of Mr. Frank Mitsch from Fermium.
Yes.
Frank Your line.
Hey, good morning.
Struck by the comments regarding higher ad spending.
Should we anticipate that the the Guardian protection products part of specialty products will be the official sponsor of the Cleveland Baseball team.
Thats a great suggestion.
But we have not we have not looked into that yet, but certainly there is a.
Frank action, there and go Guardians.
Oh my goodness.
That's going to take a long time to get used to it.
Really interesting that.
You got impacted by 100 million in the fiscal fourth quarter because of raw material availability and you expect an even higher impact here in the first quarter.
A nice kitting critical components et cetera can you identify what some of those critical components are so we can kind of track on the outside as to when companies are lifting force majeure is et cetera.
Sure.
So.
Some of them are specific too.
Critical elements in our roof restoration coatings.
<unk> and.
Certain intermediate chemicals had been unavailable, which has caused us to shut down production for in 1 case as long as 5 days and so we find yourself in a number of these areas.
Sourcing raw materials that were readily available in the United States that had been.
<unk> by this winter storm, Yuri the power outages in Texas and the <unk>.
The lack of investment that happened during COVID-19 and so we are now finding replacement products typically in Asia.
Sometimes at higher prices, obviously a longer.
Supply line, because they've got to show up on a boat when they get to long Beach, California. They can sit for 3 or 4 weeks because of disruptions there.
Another element and again this is in construction products.
Is on traditional re roofing projects not a roof restoration, but traditional black.
<unk>.
I think it's no surprise to people that there is a shortage and foam it's disrupting for instance, seating and the furniture markets and in the automotive seating area and it's also finds itself in a roofing where you can have all of your materials shipped and sitting.
Line instead of a school building or a hospital.
Waiting for from.
<unk> Board installation, which is on back order in a line of places. So those are a couple of instances in the more industrial side on the consumer side.
Unfortunately, there was an accident at a major alkyd resins producer in the United.
Our <unk> that represented almost 30% of alcan resin production, that's a particularly critical raw material for our small project paints category and spray paints category in our consumer business again, we're looking at.
Qualifying replacement.
I'd stick product from Asia, and other areas longer supply lines.
Higher costs and so all of these are temporary but theres certainly temporarily causing.
A pretty big disruption in our consumer business.
Understood understood and as.
Today, now obviously 3 months ago or 4 months ago, you were anticipating high single digit increases in raws and now it's coming in at upper teens, and that's very consistent with what we're hearing from other folks what gives you confidence that perhaps that's going to moderate as we get into the second half of fiscal 'twenty, 2 or is that not part of your thinking.
I think thats part of our thinking we've been successful in instituting price increases we still have some map to growth benefits.
<unk>.
I think the biggest challenge we're facing is the disruptions from materials and again I could go on for an hour.
MDI and panties in MMA and you.
You name it I'm, a finance guy not a chemist, but I'm learning a lot about chemistry.
And.
I think as we get into the second half the momentum that we have in terms of product demand market demand the benefits from our map to growth program will certainly serve us well the other comment I'd like to make is.
Well, we're going to have a very difficult period in our consumer segment for the reasons, we talked about in Q1 and Q2. Our current estimate is on the top line will be about 12% ahead in consumer in the first half of where we were 2 years ago and our fiscal 'twenty first half so a.
Is here over the pandemic expansion of 12% would indicate that we have expanded our customer base. We're excited about that.
And.
Some of these things are they are temporary but I don't envision them being corrected until we get into the winter months or early spring of next.
2.
Got you. Thanks, Thanks, so much.
Thank you.
Our next question comes from the line of Rosemarie My belly from Gabelli and company. Your line is no morning worsening.
Good morning, everyone.
Frank you just.
Last year.
Just mentioned.
Fact that you are looking at small to medium size M&A.
<unk> mentioned in the past that following the map program.
You would be able to consider a larger acquisition.
No.
We waging do you think it makes sense.
Just wait and see.
Jill you have gone through map to point to flow.
Before you can actually look at something substantially higher than what you have been doing recently.
No I think we need yes.
No I think Thats, a good question and I think we need to.
Sure.
Solidify where are.
We are in this supply chain environment.
Certainly before we bring out publicly details of our map to 0.1, but we have made significant strides in particular in our construction products group and in our consumer groups such that I think we have the talent and the capabilities.
2.
To integrate a larger transaction if 1 were to be available at the right price.
And obviously at today's prices. If you don't have the ability to drive synergies you can't be competitive.
And so in those 2 areas I think we're getting there, but solidifying the supply chain channel.
<unk> now is going to be important.
For everybody in terms of you can talk about long term goals, but the ground is shifting a little bit and thats going to shift for a couple of quarters.
Until the supply chain.
Issue.
Become more clear.
<unk>. Okay. Thank you that is very helpful. And then looking at the consumer.
It seems as though the.
Difficult comparison on the DIY and then.
Some of those sound going back to the office and so on so it is it makes sense that it will slowdown and decline in the U S and then year over year basis, but you mentioned.
<unk> that it was stronger internationally. So when do you think that international DIY is going to.
To be faced with the same comparison issues.
I don't know that we will have the same comparison issues internationally that we have in the U S in part.
Because of market share we tend to be the leader in every 1 of the categories that we operate in in our consumer segment in North America and that is not true in the UK and Europe, which is our next biggest.
Market.
Certainly not true and export markets like Latin America and.
In Asia. So we don't anticipate seeing the same year over year challenges in those markets because of our smaller market share and also because of the smaller sizes.
Real challenge will be.
Again on the raw material side and the cost side.
We're pretty.
Pretty comfortable with.
When we finished the year will be substantially had head in terms of sales and unit volume, where we were 2 years ago.
The pandemic.
And just need to work on the product availability and cost side.
Alright, thank you.
Thank you.
Our next question comes from the line of Ghansham Panjabi from Baird.
Your line is now open good morning Ghansham.
Thank you and good morning, Frank.
Good morning, everyone maybe.
Maybe just following up on the last question. So your guidance for the fiscal first quarter for consumer is down double digits in terms of sales how much of that.
That should we sort of think about in terms of raw material accessibility in terms of the impact on there and then how would you characterize what I'm sure is going on which is just an inventory adjustment.
At the customer level as well I'm, just trying to get a sense as to what the true underlying demand as we cycle into <unk> and beyond looks like for that segment.
Sure you know our estimate across RPM is probably for another $100 million of lost revenue.
And it's.
Predominantly in construction products and consumer.
<unk>.
As I commented earlier.
Material outages components of construction products or roofing projects.
Or kind of impeding opportunities for sales that are in the market.
Certainly that's true based on our momentum and what we've accomplished and that's continuing it's also true.
True based on incredible stimulus.
Cities counties States are got billions of dollars in a lot of it's being applied towards infrastructure and renovation in school buildings in areas, where we're very strong.
On the consumer side.
It's pretty much the same thing.
We have lower than anticipated or expected fill rates principally as a result of this alkyd resins disruption and.
We're working hard too.
Meet that and so that's part of the cost issue our principal goal here.
It has to meet demand.
Quite candidly whatever additional cost we need to in the interim.
And then we will get out of tolling I believe our north American chemical supply chain will return and Youll see a significant improvement in our cost structure when those things happen.
Okay, Great and then on the consumer additional selling price initiatives that you're pursuing would that be more so a <unk> event in terms of sequential improvement.
Improvement or do you or should we anticipate something starting to hit in <unk> as well.
I think that'll hit.
Probably by mid Q2.
We are working on additional price increases in a number of places not just consumer for the end of August or September.
Fantastic. Thanks, so much.
Thank you.
Our next question comes from the line of Mr. Vincent Andrews from.
From Morgan Stanley. Your line is now open.
Good morning, Thank you and good morning, everyone.
If I could just ask Frank when you say, 12% for consumer fiscal 'twenty 2 over 20 over 19 over pre pandemic.
How are you getting how are you getting to that is that based on your order book is.
Is that based on sort of your sort of qualitative assessment of the landscape or just sort of what's giving you that bridge.
It's based upon the forecast that we've done internally for Q1 and Q2.
And.
And a big part of that as we've already talked about in the call.
It is not just a function of demand, but a function of what we think we can supply.
And so clearly it would be stronger if we werent facing the supply disruptions, but we we.
Literally do a rolling 2 for 2 quarter forecast with our board and based on that forecast that's what's driving.
<unk> debt assumption.
Okay, and Rusty could I ask you.
Just to give us some directional ideas on what could happen to working capital in fiscal 'twenty..2 just obviously you have some construction production constraints, but theres rising raw material costs and then along those same lines now.
Now that map to growth is.
Done or are sort of the 1 time expenses associated with that done. So the earnings number should be cleaner or is there still some lingering stuff and then lastly, if you have a capex number for this year.
Sure.
Yes, that's a number of questions I'll address working capital first we had a great year on working capital.
Capital, but really the supply chain disruption or thrown a wrench in our efforts to reduce inventory right. Now we're just trying to get our hands on inventory from any source. We can so that we can meet customer demand.
It probably is.
Stalled us during the supply chain challenge on inventory on payables, we have done a great job and we continue to have our procurement team negotiate better terms and that should continue to help us stick.
Sticking with cash flow looking ahead to.
Fiscal 'twenty, 2 we are boosting our capital spending.
Quite a bit to add capacity in a number of areas, we've talked a lot about new dura.
That's a product line, that's growing by 50% to 100% each quarter. So we need capacity there more in liquid.
<unk> applied roofing, which as you know Vincent has grown year after year for us and also in our consumer business as well.
We continue to.
Constantly build share year in year out and we will need capacity there.
As far as the map to.
Program goes we will have the incremental benefits there will be a few charges as we plan to close a few plants in.
Further the layer of management.
Okay.
Growth.
Our next question comes from the line of Mr. Kevin Mccarthy from vertical research.
Your line is now open.
Good morning.
Good morning, Scott in your prepared remarks.
Q referenced.
The outsourcing of production.
The consumer segment.
Efforts to improve service, albeit at the expense of margins.
Can you talk through how much of your production is outsourced or how much was outsourced last year, and whether or not you'd expect that to change in fiscal 'twenty 2 just trying to get.
And feel for what the associated margin dynamics could be.
Sure.
I do.
Don't have an exact number there, but I can tell you that the the outsourcing in some case filling in other cases, working on new resin suppliers and qualification.
Get efficient of new suppliers and their formulas.
Is costing us a couple of hundred basis points in gross margin.
And those are.
Margin points that we hope to regain both with some of the investment Rusty is talking about and then eliminating.
Eliminating.
Some of this outsource tolling.
The case, both in some cases related to filling in another cases related to.
<unk> manufacturing and.
Some of it will be as I said snapback of our traditional north American chemical supplier supply lines versus things that we.
<unk> procuring from Asia.
Which is.
Much longer lead time more challenging freight costs.
I don't want get these numbers right, but.
Painters, which are principally controlled by China used to be a couple of thousand Bucks and now there are 20000, I mean, the freight has been a big.
Now here as well and particularly for our consumer group, whether it's ocean freight it wasn't a big thing thats become bigger and more expensive.
Trucking.
And so as I commented in the last quarter and it's true today and you are hearing it from every industry inflation is hitting pretty much every aspect.
Issue at all.
Okay. That's helpful and then I apologize if I missed it but what is your capital budget.
For Capex for fiscal 'twenty, 2 relative to the $157 million that you spent last year.
Share related to the comments that.
R. P made about adding capacity this year it'll be around $220 million.
Okay. Thank you very much.
Thank you.
Our next question comes from the line of Michael <unk> from Wells Fargo.
Ross Your line is now open good morning, Michael.
Hi, its actually Richard on for Michael.
Hey, Richard.
Just wanted to touch again on the inflation.
Expectations.
If you look at price increases are you getting.
In the first quarter and.
1 of the second quarter net.
Do you expect youre going to be able to grow EBIT in the second half of this fiscal year.
Given a lot of the.
The.
Issues impacting the first quarter are largely transitory.
Yes, we will be growing EBIT in the first.
Go ahead.
And 3 of our force segments will be growing EBIT sufficiently in our.
Construction products specialty products and performance coatings to more than offset the decline in.
EBIT, we're expecting in Q2 in consumer.
And then we fully.
I see.
EBIT growth across all 4 of our segments in the second half of the year.
And as Rusty said that presumes continued strong demand and the only thing we see that would interrupt that.
It would be some issues with COVID-19.
Because the demand across all.
<unk> expenses as strong.
Both the demand dynamics that we see the new products that we have in line and the massive amount of stimulus in the United States all indicate.
It'll be a strong year end.
Will be particularly strong as we get these supply.
All our big chain challenges behind us.
It's going to take a couple of quarters, though.
Okay, Great and then just a follow up on the map to growth incremental savings of $50 million fiscal 2022.
You remind us how that's going to flow through the segments.
And.
Supply and I know Youre working on the next leg not to point out maybe if there's anything you can give us in terms of.
Where you're focused on there as well.
Sure.
I don't know that we provided how it would flow through the segments.
To flow around 10 to 12 million Bucks a quarter throughout the fiscal.
Relatively evenly.
For the seasonal low third quarter end.
Our map to growth to point out is something that we had targeted having.
Put out in Investor day in November of 2018 for something around that timeframe.
Full year, but given the massive disruptions of the supply chain challenges I think.
I know that our decision is to.
Better solidify what's happening have more certainty around our supply chain on a go forward basis.
And then come out so probably in the spring.
With some more details on what we think of as map to growth to point out.
Okay.
Spring.
Our next question comes from the line of Mr. Steve Zhang from Bank of America. Your line is now open.
Good morning, Steve.
Hi, Good morning, sorry to disappoint. This is Luke washer on for Steve. Thanks for taking my question here.
We've talked in the past.
Hi, Frank.
As you've talked about the opportunities you see in driving top line growth specifically as it relates to opening up new sales channels identifying cross selling opportunities and expanding internationally can you talk more about how you are incentivizing. Your force segment meters to collaborate more than has been done historically what have you changed that's really driving that top line sales.
And they're looking for.
Sure that's a great question.
So a couple of things that we've changed in Covid to help drive some of this although map to growth was getting us there.
We have much more.
More often and more collaborative across our group communications.
And we've had in the past.
Growth.
And we are measuring what we call connections, creating value that we've been talking about for 10 years and improving for 10 years now very metrically across 2 categories..1 is.
What's driving revenue growth in terms of technology transfer.
Channel sharing.
<unk>.
Leads from 1 division to another and then the other area is on the cost side, where we've gotten much more efficient.
And cooperative in having 1 RPM company produce for another RPM company.
Give you just a couple of quick examples all of our wood stains and finishes under the <unk> brand.
<unk> produced by our wood finishes group.
Day-glo, which is the world leader in fluorescent color is also a really high performance and specialty producer of polymers and they are providing tens of millions of dollars of polymers to other RPM companies and it's not just providing announced production its collaborate.
For run with those companies for a unique polymers.
Have a specialty coatings business or net specialty coatings specialty chemical business called our net polymers. This is part of stone hard.
Their growth.
Has gone from 15 million to $30 million in terms of supplying multiple RPM companies critical.
Collaborate on materials chemical raw materials, and as you might imagine we're investing heavily in that given the supply chain challenges we have today.
So I can give you tons of examples, but we're measuring that a lot more concretely.
We are finally, having some really solid success and the introduction of the roof restoration coatings.
<unk> go through our consumer group channels into big boxes, we had mentioned that in the past. Unfortunately are big kickoff introduction was in the spring of 'twenty. So it was disrupted by Covid.
Post COVID-19 that is taking off and.
So the potential for our.
Drop ship products groups roof restoration coatings.
Sealants and concrete repair products into our consumer group.
Strong home center customers in the coming years, I think could be hundreds of millions of dollars.
And so this is an area that we've spent a lot.
From talking about and focusing on and now measuring.
That's going to produce some really good results for us in the coming years.
It sounds good it Frank and I wanted to touch a little bit on your map to Porno program I know youre going to be talking about that a little bit later, it sounds like but.
<unk> really going to be an initiative to drive further margin to that 16% EBIT level that you've talked about or could we also see potential sales targets looking out to 2025 and as you look at the map to point out program are there less specific lessons that you learned from the original map to program that Youre looking to take the map to point out any kind of examples of the.
But is this something that you've had from the original program.
Sure.
So in the <unk> 106, 8 or manufacturing area COVID-19 disrupted our ability to take these continuous improvement initiatives.
Into our small and medium plants, and so theres certainly tens of millions of dollars.
Learning a benefits that we were not able to get to that we would get to going forward.
There is a whole another level of indirect spend that our procurement activities, which had been highly successful.
Have not gotten too so that's an area for us.
And then there.
Number of areas on the revenue side and that will be much more part of the map to grow 2 point.
Where we have some opportunities to really spend with a big growth.
We have.
Our <unk> industrial business, which has got some exciting opportunities in AG Chem.
Their arms.
Our <unk> business is working on a product called vertical.
Patented and it is a coatings for paper and cardboard.
It would allow for use in various food packaging.
And including temporary food packaging like the plastic clamps.
Chemical wells that we've been all using for the last 2 years.
That both.
Served its purpose of temporary packaging relative to fats or other food items.
But it is also completely composed to bowl or biodegradable. So there are a number of exciting areas for us, particularly in our specialty products.
Sure.
That we will talk about more detail in map to growth to point out.
Sounds great. Thank you Frank.
Thank you.
Our next question comes from the line of Josh Spector from UBS. Your line is now open.
Good morning, Josh.
Group, Hey, good morning, Frank and good day, everyone.
On construction within EMEA particular in your oil growth brand I'm. Just wondering if you can give some thoughts on where you are there versus 2019 and how things are developing currently versus the last quarter.
Sure.
Under the leadership of Melissa.
Sugar and she reports to Paul Hogan boom.
We have made great progress and we took a collection of relatively independent and decentralized businesses that we're under scale.
<unk> businesses, there we have El broke we had different tramco businesses.
It's just their flow Creek and now they are all operating as the Transco construction products group in Europe.
We have integrated back office functions, we have coordinated in some cases consolidated sales forces.
And we really have created <unk>.
Greater efficiency greater focus and in some cases.
<unk> is better scale.
And that's an area, where we went from mid single digit EBIT margins to low double digit EBIT margins and theres more to come.
And so I appreciate that question because it was really an area that was decentralized and 2 to a certain extent unfocused.
Cases, and our construction products group.
Our leadership team has brought real focus and discipline to that and we're in a much better position to drive solid bottom line growth with with the top line performance. So we've made a lot of strides here.
No. Thanks.
I appreciate that Frank I guess, where I was trying to go with that was more from a volume perspective and trying to understand if there is room for further recovery there perhaps than what <unk> seen in North America and the rest of the segment or would you say things are generally similar regionally.
No there is clearly room for growth.
This is our experience and it's also on the headlines the.
The United States is leading the economic recovery.
In the solid demand, we're seeing that high single digit low double digits.
And you see it in our fourth quarter organic growth is principally U S driven I would say.
In Europe because of some resurgence in COVID-19.
Is probably 3 to 6 months behind the United States.
The rest of the world.
That we operate in quite candidly is a pretty good mass and the results that our people are generating is pretty.
Incredible and I say that about Latin.
<unk> America, we have a big operation in Brazil, where in Colombia, We're in Mexico, but COVID-19 is still a.
Rising challenge there, we have a African and middle East business, that's run out of South Africa by a great team and they performed extraordinarily well, although COVID-19 continues to be an issue in that market and then we're not.
Player in Asia Pacific, but our largest presence there is in India and again they they also have their COVID-19 challenges so.
Unless things turnaround there I would say that that rest of the world is probably a year behind where we are in the U S.
Got it thank you.
Thank you.
Our next question comes from the line of Mr. Jeff <unk> from.
From JP Morgan.
Good morning, Hi, Hi, good morning, Thanks very much.
You used a FIFO accounting so if it turns out.
At your raw material costs.
Right after the end of <unk>.
Your may quarter.
Net.
But.
How long would it take.
Phil you were reflecting that level of raw material costs in other words, how long this the LIFO FIFO delay.
So I think the LIFO FIFO delay.
David versus our peers.
It's probably 60 or 90 days and we're on FIFO because somebody.
70 years ago decided to be on FIFO, and then accounting regulations.
Disallowed a change to LIFO. So we are where we are and don't have that.
Flexibility of changing.
But the delay versus our peers is about 60 to 90 days.
Yeah.
Okay.
Yes.
And in your negotiations with.
Large big boxes in your commentary it sounds like.
Like you negotiate price once a year.
Is that true and are you trying to have a different.
Kind of negotiation with them or do you have to wait until.
Next year comes before you can effectively with them with the big Big box.
Yes, we had.
The price negotiations and price increases that average in the 5% to 6% range with.
With most of our consumer customers.
In fact with all of our consumer customers in the spring.
And as Rusty commented, our raw material situation has escalated wrap.
Thirdly, and further from there and we intend to have price negotiation discussions with all of our consumer customers at the end of the summer or early fall.
Okay, Great and then lastly, do you quantify what your FIFO benefit is relative to LIFO for 2021.
And for the May quarter.
Yes, I don't think there is a I think there's a LIFO reserve that people on LIFO get to talk about there is no FIFO benefit.
Okay. Thank you very much.
Thank you.
Our next question comes from the line of Mr. Matt.
Mike Harrison from Seaport research.
Hi, good morning.
In specialty Frank you called out the strong results you mentioned some recent changes in management.
And this development initiatives can you give a little more detail on what's going right in that business.
And maybe talk about your confidence level that we're seeing sustained improvement in that specialty business.
Sure.
First of all Ronnie Holman, who has been part of RPM. He was.
Randall lab at our chemical coatings business in Hickory, North Carolina, 30 years ago, and it's been with RPM ever since he is running that.
It's a division succeeds Steve canoe.
And he's done a great job.
Those businesses were relatively starved of growth capital because many of them were part of the <unk> bankruptcy process to address the bond decks.
Especially.
This issue that's behind us.
And so 2 things have happened underwriting leadership number 1 we.
We changed the operating company leadership in line of places in the last 2 years, we have a new leader of Day-glo, a new leader of our TCA powder coatings business.
We have a long serving.
<unk> leader at our mantra <unk> food group that retired and have a new leader there.
And so there has been a significant number of leadership changes really to get.
Those organizations revitalized.
We talked about in our map to growth program and somebody earlier asked about map to growth 2.1.
And an emphasis on sales and I think that's very perceptive as part of our map to growth. We added work with Mckinsey specifically at 3 different specialty products group companies are day-glo business, our <unk> business and our Kop coat.
Industrial business and.
I laughed with our board if my father God Bless them heard me tell our board that we hired Mckinsey and company are Oliver Wyman or any of these other good consulting firms to work on growth strategy with our businesses you'd be rolling over in his grave.
But we are and and the combination of new leaders.
<unk> and some outside perspective and some.
Some views of the markets and the opportunities that are beyond what we have the resources to do here.
Have us on track for some very very exciting growth in those businesses and what spurred that and I've said it in the past is these.
These are businesses with opportunities literally to double or triple their sales.
And if we can't get on that path.
Would consider their divestment so right now we're in a good place there and we're very excited about what we see and the leaders in those businesses are really generating positive momentum and.
We'll talk more in detail about that when revealed map to growth to point out.
Alright, and then maybe a question for Rusty you mentioned the non operating segment was elevated due to the insurance costs and higher incentive comp looking forward into fiscal 'twenty 2.
Something.
In the $25 million to $30 million per quarter range, a good placeholder for not non operating costs any guidance for that segment.
Yes, Yes, you are in the right range Mike.
Alright, thanks very much.
Thank you.
Our last.
Last question comes from the line of Mr. Rune. This 1 this 1 is from RBC capital. Your line is now open.
Hey, Frank Thanks for taking my question here I, just I guess wanted to get your thoughts and your perspective, so you've obviously.
Incurred a lot of raw material inflation.
We've been hearing that from a number of folks maybe if you'd go with cross your.
Your different SEC segments, but just can I get your thoughts on.
How your your suppliers or partners or customers are dealing with the raw material inflation as well.
You don't get the sense that.
You know a lot of it is being placed upon you or do you feel any any support from your partners here.
As to shoulder some of this pain or is it being placed squarely on on the coatings companies and I guess I'm, just curious, especially in the consumer segment, where again you are doing a lot to meet demand.
A man so just wondering what kind of sharing your get on getting on some of these raw material increases. Thanks, yeah. Thank you I think you know many of our suppliers are working double time to get their own per.
<unk> back in order and it's particularly related to the U S.
Chemical supply and the impact that the this Texas winter storm and the power outages had.
And that's disrupted things the other thing that was far more disruptive than I think people realized until winter storm you already happened.
Was how underinvested or offline in the chemical industry.
<unk> in many supply bases around the globe.
<unk>.
Relative to Covid and actions people took and Covid people are also waking up to the fact that China controls the vast majority of shipping containers those costs have gone through the roof, you've got port problems in China.
China in long Beach, California, So when materials get from Asia to long Beach, they can sit for 3 or 4 weeks before they are offloaded.
So I could go on and on we have had suppliers that had been over backwards..2 other comments on net clearly Apache resins, a huge raw material for.
Us.
Is up significantly in terms of cross acrylic resins are up all kinds of primary raw materials are up in terms of price, but the things that are disrupting us. The most are like the critical ingredients to some of those.
Talked about alkyd.
Resins.
<unk> important.
Chemical raw material for our consumer group, and particularly small project paints.
Penta as an ingredient to that it is in short supply globally and so that's a challenge for anybody producing alkyd resins, and then sadly as I commented.
<unk> entered earlier there was a explosion at a alpha.
Alkyd resins producer in Ohio.
And it.
Ended up.
Really tragic circumstance.
That 1 supplier supplied roughly 30% of the alkyd resins in North America. They are offline and so we've had to work hard to.
To replace them, we've worked with them so the level of cooperation and work.
Within the supply chain.
<unk> is better than you would expect.
Given all of these disruptions.
And we are working over time, both in terms of expanding.
Additional opportunities so we're <unk>.
Supplying summarized from Europe and from Asia that were.
Traditionally supplied in the United States.
We're expanding some of our own chemical.
Specialty chemical capabilities.
And the responses that we have I don't.
Our unique to RPM in this circumstance.
Great. Thanks, and just as a quick follow up then.
Consider that.
Essentially there are some from capacity additions coming that would help.
Maybe some of the supply chain tightness loosens up as well.
How are you how should we assume kind.
Kind of the upper teens raw material increases.
Kind of progress.
Progress from here do you expect that to kind of moderate in <unk>.
<unk> fashion say over the next.
4 quarters when do you expect your pricing to catch up to the raw materials inflation that you've experienced.
Sure I will tell you the 2.
Things that we think about here as we think about that.
I think we feel like we're kind of in that piece of the worst part of it now and that we should be working our way out of these challenges in the coming months in the coming quarters.
The things that we worry about the principal thing that we worry.
Worry about which wouldn't be unique to RPM is the chemical industry rebooting rebuilding in North America is happening and it's happening at a pretty good pace, but our chemical supply base is pretty much Gulf coast in Texas positioned in North America and.
And a major hurricane.
That further disrupted that area could put everybody way back on their heels and so we don't predict the weather I'm, just telling you relative to I think what's a very perceptive question.
The 1 hand, it feels like we are in the worst of it and it's starting to get better on the other.
We look forward, we ask ourselves all right what are the things that we need to be prepared for and how can we be prepared and that's 1 of the things that's on People's mind.
Thanks, a lot.
There are no questions at this time please.
Continue.
Thank you for your participation on our call today, I, particularly want to thank our associates, who found ways to grow our businesses throughout the last year and a half through COVID-19 and now through the supply chain difficulties.
And all along successfully executing.
<unk> on our map to growth operating improvement program.
We look forward to providing you the details of our first quarter results. When we meet in October. We also plan to have the RPM annual meeting of stockholders. During the first week of October in person, which will be the first time in nearly 2 years.
And we remain grateful for your interest and investment in RPM. Thank you and have a great day.
This concludes today's conference call. Thank you for participating you may now disconnect presenters. Please standby for your post financing.
Paul.
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