Q1 2023 RPM International Inc Earnings Call
[music].
Western and answer session. At this time, if you would like to ask a question. Please press star one on your telephone. Please note that our financial analysts will be permitted to ask questions.
At this time I would like to turn the call back.
Shallow.
Senior director of Investor Relations at all P. M. Please go ahead Sir.
Thank you have a siem and welcome to RPM Internationals conference call for the fiscal 2023 first quarter today's call is being recorded.
During today's call are Frank Sullivan, Rpm's, Chairman and CEO , Rusty Gordon Vice President and Chief Financial Officer, and Michael <unk>, Vice President Controller, and Chief Accounting Officer.
This call is being webcast and can be accessed live or replay it on the RPM website at Www Dot RPM, Inc. Dot com.
Comments made on this call may include forward looking statements based on current expectations that involve risks and uncertainties, which could cause actual results to be materially different.
For more information on these risks and uncertainties. Please visit Rpm's reports filed with the SEC.
During this conference call references maybe made to non-GAAP financial measures.
If you in understanding these non-GAAP terms RPM has posted reconciliations to the most directly comparable GAAP financial measures on the RPM website.
Also please note that our comments will be on an as adjusted basis and all comparisons are to the first quarter of fiscal 2022, unless otherwise indicated.
We have provided a supplemental slide presentation to support our comments on this call. It can be accessed in the presentations and webcast section of the RPM website at Www Dot RPM, Inc. Dot com.
At this time I would like to turn the call over to Frank.
Thanks, Matt good morning.
I'll share a broad commentary on our consolidated performance for the quarter and then Mike Labelle, who will provide details on our financial results after which Rusty Gordon who will conclude our prepared remarks with our outlook.
After our prepared remarks, we'll be pleased to take your questions.
Before I begin discussing our results I'd first like to send our best wishes and thoughts to all those impacted by hurricane and including many of our own associates.
Im grateful for the first responders and safety professionals, who are playing a critical role in keeping people safe and rescuing those in danger.
As people in the affected area work to rebuild their homes or property, our legend brands disaster restoration business and our Tramco waterproofing business are responding to help return their lives to some sense of normalcy.
For example, in our Tramco weather Proofing Technologies, Inc. Business associates drove eight hours to obtain additional supplies in preparation for the storm and use in one instance chain sauce declared downed trees to reach a commercial customer in the.
These include hospitals and schools.
Additionally, one of our supervisors in Central Florida, Steve Reeves came in late Friday evening that the night before his son's wedding to ensure that our crews would be able to patch a customer's roof Saturday morning.
These examples demonstrate the commitment we take in serving our customers and we will do our part to help the affected regions recover as quickly as possible.
Now turning to our results if you look at slide three in our Powerpoint presentation.
The first quarter was a positive one for RPM, despite several market and macroeconomic challenges.
Revenues grew by double digits in all of our segments to reach a record for the first quarter and our adjusted EBIT margins recovered, resulting in all time record high adjusted EBIT for RPM.
While supply conditions remained tight material availability did improve throughout the quarter.
This was primarily a result of measures our teams have taken including using our Corsicana, Texas plant for self sourced raw materials.
Our R&D and procurement personnel have slot throughout the supply chain challenges by identifying new sources of raw materials and qualifying them to ensure our customers receive the quality products they expect from us.
This collaboration which is occurring across rpm's businesses has allowed us to better meet customer demand add resiliency to our supply chain and realized additional savings from our map 2025 margin achievement plan.
During the first quarter, we generated $30 million of incremental map savings, which were a key driver in achieving record adjusted EBIT.
Positive momentum in sales growth, we achieved in fiscal year 'twenty. Two continued during the first quarter of fiscal 2023.
I am exceedingly proud of our associates ability to overcome macroeconomic headwinds and supply chain challenges and convert this sales growth into expanded margins and improving profitability.
Turning to slide four you'll see all four segments generated double digit sales growth, resulting in record first quarter revenue.
Consolidated unit volume increased approximately 5%.
While pricing on a consolidated basis increased an average of 15% as we work to catch up with continuing cost inflation increased year over year, 28% in the first quarter.
Driven by operational efficiencies, including the $30 million of map 2025 savings.
Pricing initiatives and three three of our four segments achieved strong adjusted EBIT growth with our performance coatings group and specialty products group achieving record results and consolidated EBIT margins expanded by approximately 170 basis points.
Looking at sales by geography on slide five growth was led by North America, our largest market, which generated 80% of our first quarter revenue.
Demand in North America was strong and we generated good sales growth across all of our segments emerging markets also performed well during the first quarter with double digit revenue growth in Latin America, Asia Pacific and Africa, and the Middle East.
Europe , which comprised 13% of our overall sales of the first quarter was the outlier with revenue down eight 5%, which drove operating earnings down in the region, 35% quarter over quarter.
These declines resulted from the challenging macroeconomic conditions in Europe exacerbated by rapid inflation.
Our construction products group and performance coatings group, which have relatively sizable presence in Europe felt the impact of these challenging market conditions most acutely.
I'll now turn the call over to Mike Laroche to discuss our consolidated and segment financial results in more detail.
Yeah.
Greg we.
We generated record first quarter consolidated net sales of $1 93 billion.
An increase of 17, 1% compared to the $1 $65 billion reported in the prior fiscal year period.
Organic sales growth was 19, 5% or $321 9 billion acquisitions contributed 1% of sales or $16 million, while foreign exchange was a headwind that decreased sales by three 4% or $56 million.
Adjusted diluted earnings per share were a record $1 47.
And represents an increase of 36, 1% compared to the $1 eight reported in the year ago quarter.
Our consolidated adjusted EBIT.
Increased 33, 1% to an all time record $275 $3 million compared to $206 $8 million reported in the prior year period.
I can start the construction products group generated first quarter record net sales of $729 7 million, an increase of 13, 2% compared to the fiscal 2020 to first quarter.
Organic sales growth was 15, 8% with acquisitions contributing one 9% and foreign currency translation headwinds reducing sales by four 5%.
Roofing systems generated strong growth and benefited from increased public sector spending.
It's turnkey service model and a focus on renovations.
Admixture and repair products for concrete also grew strongly during the quarter as the business gained share Jia.
Geographically Asia Pacific markets performed well, while sales and earnings declined significantly in Europe , and Canada, where CPG is more concentrated compared to RPM overall.
Europe experienced severe inflation and macroeconomic challenges, while Canada was negatively impacted by strikes and concrete shortages that impeded the completion of construction project projects and lead to inefficiencies.
These market challenges in Europe , and Canada were key drivers of adjusted EBIT decline, which was down five 1% to $111 2 million compared to $117 2 million in the prior year period.
Additionally, the corsicana flat rolls up through CPG and resulted in a negative financial impact during the first quarter as efficient as the facility increases production towards full capacity.
<unk> and mix also negatively impacted EBIT.
Partially offsetting these headwinds was pricing in response to continued cost inflation, which was a positive contributor to adjusted EBIT.
Performance coatings group's fiscal 2023 first quarter net sales were a record $344 million an increase of 19, 2% for the prior year period.
Organic sales increased 23, 6% acquisitions did not impact sales and foreign currency translation was a four 4% headwind.
Flooring systems protective coatings, and FRP grading all generated double digit growth.
These businesses are well positioned to benefit from the trend of re shoring manufacturing to the U S. Additionally.
Additionally, energy markets continue to generate strong growth as did emerging markets pricing management also contributed to the strong growth.
Adjusted EBIT increased 27, 6% to a record 47 $9 million.
In the first quarter of fiscal 2023.
The growth was driven by a positive volumes selling price increases and sales management, which generated favorable mix partially offsetting these positive factors was foreign exchange, which was a headwind to adjusted EBIT.
Specialty products group reported record net sales of $202 $7 million for the first quarter of fiscal 2023, an increase of 11, 3% compared to the period a year ago.
Organic sales increased 12, 8% acquisitions added <unk>, 6% and foreign currency translation was a headwind of two 1%.
Record first quarter sales were driven by strength in the fluid coatings and additives business with new management team positioned to this operating unit to benefit from increased institutional demand as pandemic restrictions were lifted.
The disaster restoration equipment business also grew its top line as we work through backlogs caused by previous semiconductor chip shortages.
Selling price increases in response to continued cost inflation also contributed to revenue growth.
Yes.
<unk> adjusted EBIT of $29 $6 million was a first quarter record and an increase of 18, 9% compared to adjusted EBIT of $24 $9 million in the prior year period.
The increase was driven by improved sales and pricing as well as fixed cost leverage resulting from higher production volume and the disaster restoration equipment business.
Yes.
The consumer group achieved record first quarter net sales of $659 $5 million in fiscal 2023, an increase of 22, 5% compared to the first quarter of fiscal 2022.
Organic sales increased 24, 1% acquisitions added <unk>, 4% and foreign currency translation was a headwind of 2%.
The consumer group's revenue growth was driven by improved supply of key alkyd resins produced by the courts at Canton manufacturing facility, we acquired last September as well as from new suppliers, who our teams worked hard to qualify.
This increase in supply allowed us to better meet customer demand price increases in response to continued inflation also contributed to the strong revenue growth.
Consumer group's adjusted EBIT in the fiscal 2023 first quarter was $117 1 million an increase of nearly 150, 150% compared to adjusted EBIT of $46 9 million reported for the prior year period, when sales and profitability suffered from severe supply.
Shortages, resulting from our plant explosion at an alkyd resins supplier.
The growth was driven by map operational efficiencies that were realized as a result of the improved material supply.
Pricing increases in response to continued cost inflation also contributed to adjusted EBIT margins approaching long term averages.
Now I'd like to provide an update on capital allocation and structure. During the first quarter of fiscal 2023, we repurchased $25 million of shares and paid dividends of $51 $4 million.
These actions demonstrate our long held commitment to enhance shareholder value by returning capital.
Turning to our capital structure, we took actions to enhance our balance sheet strength and flexibility.
First we increased the size of our revolving credit facility by $50 million to $135 billion.
And extended its term to August 1st of 2027.
This credit facility provides us the flexibility to implement strategic initiatives, including map 2025 and M&A.
Additionally, we prepaid $50 million of our term loan and extended its maturity to August 2025 from February 2023.
The outstanding principal on this term loan is now $250 million.
As a result, we only have modest repayment requirements through 2026.
With that I'll turn the call over to Rusty to discuss our outlook.
Thank you Mike.
As we look forward to the second quarter of fiscal 2023 several of the challenges we faced in the first quarter are expected to continue and possibly intensify.
Supply chains are improving both from our initiatives and market conditions, but remains tight.
And any disruptions can delay the realization of benefits from the execution of our growth initiatives.
A strong U S. Dollar is expected to continue to be a headwind to both sales and adjusted EBIT growth, particularly in our CPG and <unk> businesses, which have a larger percentage of their sales outside the U S.
From a macroeconomic perspective, Europe is expected to be challenged by high inflation and impacts from the war in the Ukraine.
In the U S persistently high inflation and rising interest rates have increased economic uncertainty and the possibility of an economic downturn.
Even with this uncertainty we are confident that the strategic actions, we have taken position us to succeed in the second quarter and beyond.
These include.
Number one actions to further improve material supply.
Number two implementing map 2025 initiatives.
Number three positioning our businesses to benefit from the re shoring of manufacturing to the U S and continued infrastructure and stimulus spending.
Number four diversifying our portfolio of businesses, which have limited exposure to China in autos, while focusing on sustainability, including maintenance restoration and energy efficiency.
As a result, we anticipate that second quarter sales growth on a consolidated basis will increase 9% to 12% led by consumer which is expected to continue to benefit from better material supply and pricing increases in response.
Two continued inflation.
Fiscal 2023 second quarter consolidated adjusted EBIT is expected to increase by 30% to 40% as we benefit from map 2025 savings.
And favorable comparisons to the second quarter of fiscal 2022.
When we were challenged by severe supply chain disruptions.
This concludes our prepared comments, we will now be pleased to take your questions.
Steve.
Can you. Please open the line for questions.
Okay.
As a reminder that is star one if you would like to ask a question. We will now pause for a few more.
Vince will allow questioners to enter the queue.
Okay.
Yes.
We will now take our first question from John Mcnulty with BMO capital markets.
Good morning, Thanks for taking my good morning, Frank and congratulations and across the board really solid results.
So wanted to understand the consumer business, maybe a little bit better because it was definitely stronger than we thought and I guess they were kind of two parts of that the top line and the margin side on the top line I guess.
How reflective is that all kind of the current demand environment and is there like a catch up because I know <unk> kind of held you back from stocking the shelves in the past like was there a little bit of a catch up or are you actually seeing that kind of point of sales demand right now and then on the margin front again the margins definitely came back.
Faster than we thought and it seems like you've got an even better handle on the alkyd situation, where it came back faster than we thought I guess.
Is that a fair characterization of the quarter, where there were some onetime things that maybe benefited you in maybe we shouldnt be thinking about this as a good kind of normal run rate going forward I guess, how would you characterize that.
Sure.
So John let me start with some big picture.
Comments that will then get specific to your question is on consumer So I commented on.
Our organic growth and the split which is roughly 5% unit volume on a consolidated basis and 15% price.
Neither we nor any of our competitors provide specific price detail or at a segment level.
But with that guidance.
Higher than average price increases in consumer.
That's consistent with the historic patterns of.
Getting price typically at a six to nine month lag to what we get in other parts of RPM. So you could see that in our results a year ago, where.
Where we were really challenged and operating at historic low.
Margin levels and low profitability that was part of it so lagging pricing relative to raw material cost increases, which we're now catching up on us.
Second issue is clearly <unk>.
Cereal.
We moved aggressively to be able to source.
Our own alkyd resins with the purchase of the course of the Cana plant in Texas last September .
And that has helped us significantly we believe to catch up on.
On demand.
Demand that we werent in the industry wasn't able to meet because of this alkyd resins shortfall.
And then lastly.
Map 2025 is something that we have been working on for a year.
We interrupt C&I had hoped to.
Introduce it and provide more detail before now.
You know, we have an investor day, which will be webcast on Friday.
That will provide more details on map 2025, we were waiting for a more stable period of time.
And.
It started to feel like waiting for Godot, because there has not been a more stable period of time in the last two years that I don't think it is very stable today.
I say all that because we have been.
Designing and beginning to implement map 2025 over the last let's call it six months plus.
And better than half of that work initially has been at our consumer group.
So if you look at the adjustments of consulting fees and other fees.
We had a lot to do with a lot of work to do on operating efficiencies and S. IOP.
Efficiencies, particularly consumer so theres been a lot of work on that and last year.
Three things I think combined to generate the strong recovery.
At consumer the last comment I will make and then I'll stop and answer additional questions is that despite the strong quarter only at our performance coatings group are we operating at record EBIT margins.
We are not back to record EBIT margins at construction products specialty products for our consumer so we still have some more work to do both in terms of executing on map 2025 and on addressing.
Price mix issues that had been driven by the inflationary environment that we're in.
Got it.
That's hugely helpful on the color.
Maybe I can ask just as a follow up on the construction segment, because you actually kind of pointed gave a good segue on that so the margin in that one when I look at <unk> was was down about 300 basis points from the prior year and even the year before that.
Related a couple of different things that might have impacted it.
I'll have to get a little bit better understanding on it you mentioned there was a strike there was a concrete shortages. You also have the course, the Cana plant. It's now in here and maybe isn't kind of running on all cylinders quite yet I guess can you unpack, how we should be thinking about the margin degradation in that business and how.
How to think about that going forward as maybe some of these things reverse themselves.
Sure.
So the Corsicana plant is owned and operated by our construction products group. The primary beneficiary of owning that facility. So far has been our consumer group and in particular <unk> relative to introducing acrylic resin production there.
It carries a.
Cost of about $3 million bucks negative per quarter.
And so we're working to fill up that capacity and we have every belief that we will do so successfully both with some external production as well as more internal production across some different chemical products, but right now that cost is borne on the piece on the EBIT.
P&L of our construction products group.
Europe is something we talked about when we talked to investors in July in our concerns had been borne out.
Europe's in a recession.
Our biggest exposure.
In Europe is in our construction products group, whether it's in the U K <unk> on the continent.
And so energy costs are a mess inflation as a.
Happened, a little later and so a little bit bigger than what we're seeing now in North America.
Our ability to get <unk>.
Price there in the construction products group.
Cause of Europe , I talked about the average price on a consolidated basis of 50% in the construction products group was actually somewhat less than the average across all of RPM.
And then the Canadian situation surprised us, but I think it's circumstantial.
This is a quarter that happened over the summer months and as you'll recall there were some significant trucking strikes.
There also has not been new cement capacity in North America, particularly in Canada for probably 20 years and.
So there has been a cement and related concrete shortage that has particularly been a problem in Canada. Although it is somewhat of an issue in the U S.
And that negatively impacted both revenue base and the.
Profit margin profile of new Dura in particular, because concrete has been shorted too.
Residential and light commercial.
Versus infrastructure or more heavy industry.
Got it thanks very much for the color Frank.
Thanks, Jeff.
Alright, great.
Now we will move on to the next question.
John Roberts from Credit Suisse. You can credit Suisse. You can go ahead with your question.
Good morning. Thanks, Congratulations good morning, congratulations on the quarter and look forward to Friday.
Where our al could resin prices versus last quarter and a year ago now and would you say <unk> are now in line with the other resins and we'll basically just follow oil prices with a lag.
So I don't I'll, let rusty answer the specific there I can tell you in the quarter.
Inflation was up year over year by 28% and sequentially from Q4 up about two 5%.
Rusty for more specifics alkyd resins, John were more than double that over 60% increase.
Was the second part of your question John .
It's just where they are relative to other resins and will they basically just lag oil prices from here forward.
Yeah and in terms of.
<unk> resins.
Those have been affected by a variety of raw materials Besides oil.
Do incorporate certain components of plant based oils.
We had difficulty getting out of Russia, and the Ukraine. So theres a number of things besides the oil that will impact that.
As you probably remember we had a major supplier outage over a year ago in North America to supply has been tight we have ramped up in sourcing at our corsicana facility, but that does not.
Take care of most of our requirements. It's a small percentage so we still rely on the.
The alkyd resins market and its way up and inflation.
And could you talk about your exposure to rising interest rates that offset part of the upside in EBIT.
Sure in general.
I think rusty and his team have done a pretty good job there.
About 60% of our debt capital structure is fixed with an average duration of almost 13 years.
And average interest cost of four 1%.
And so the latest piece of that was a 10 year bond that was done in January of this year at 295%. So we've got some really solid.
Interest rate protection there.
The remaining 40% is floating rate and still at rates below our fixed rates and part of our capital allocation strategy in the <unk>.
In the two and a half year period of map 2025 is to reduce some of those debt levels.
Alright, thank you.
Alright, though on <unk>.
Next question comes from Mike Harrison from Seaport Research partners.
Good morning, Mike Hi, good morning.
Congratulations on the nice quarter and impressive guidance was wondering if Frank Youre willing to talk at all about the second half of fiscal 'twenty, three because youre doing something like 35% year on year EBIT growth for the first half based on your guidance and what you've just delivered.
The comps do get a little bit more challenging in the second half.
But I think we'd all appreciate maybe some initial thoughts on what EBIT growth could look like in the second half.
Kind of based on what you know at this point, which I'm I'm.
Conscious that there is a lot of uncertainty out there.
Sure.
So.
We provided guidance for Q2, and I think as we sit here today, we're pretty comfortable with that guidance recognizing there's still tons of volatility when we talked to investors in July about Q1, we did not anticipate the challenges that happened to our construction products group in Canada for instance, again, we think there.
There is circumstantial and behind us.
So the Q2 guidance is there given the seasonality of our Q3 and the benefits of our map 2025 program.
Think that.
We're likely to have a pretty solid Q.
Q3 performance.
Mike beyond that I think who knows.
We are aware of that.
Fundamental primary chemicals have dropped.
Meaningfully.
That is not showing up in the paint coatings industries.
Purchased chemicals, yet as I said, we've had 28% inflation year over year in Q1.
What happens in Europe .
Relative to the Russia War on Ukraine, and its impact on energy costs and economic activity, particularly in the winter it's hard to know so.
I would.
It's impossible for us to venture beyond my comments.
Yeah.
Alright.
That's fair enough and then I was wondering if you could comment on your fill rates.
Within the consumer business, and maybe any shelf space wins and losses.
As you're kind of exiting this heavier season and starting to look at the next.
Hi, Susan.
Sure depending on the product line.
Across all of our consumer group and this is principally a north American commentary.
Our fill rates range anywhere from the mid Seventy's to mid Ninety's that is not at the 98%, 99% that our customers expect or that we delivered for decades, but it is substantially better than the.
50% to 60% fill rates.
We and others in our industry, we're operating at in fiscal 'twenty, two and part of fiscal 'twenty. One as a result of all the supply chain shortages. So theres been significant recovery there and you can see that in our consumer group results, but.
But we still have more work to do and we are utilizing outside consultants and manufacturing and operation side in various places of RPM, but in particular in our consumer businesses to address some inefficiencies that popped up both in the midst of the Covid boom and then the challenges that everybody faced with.
The supply chain issues and just as a reminder.
Just in the third quarter of this last fiscal year in January of this calendar year. So December January we had massive omicron disruptions in our pleasant Prairie plant and our Kenosha.
Houston Center those are our two largest facilities across all of RPM in the largest facilities in consumer.
So it's.
It's been pretty crazy, so fill rates were up dramatically better, but not where they need to be yet and we're working on that.
Alright, thanks very much.
Thanks, Mike.
Yeah.
We have Vincent Andrews from Morgan Stanley .
Our next question.
Thank you good morning, congratulations on the congratulations on the results.
I have a quick follow up on that last question just as you know I know its category Captain you have good access to.
What's going on in terms of retail takeaway. So understanding what you said about the fill rates, but are you making any progress.
In terms of the store shelves or is the product still going out the door faster than you can get it on the shelf.
I think we're making good.
Progress on.
Store shelves and I think.
Again across the industry.
You are seeing in comparison to prior year periods.
Declines in the low to single mid single digits in terms of consumer takeaway. So there is some weakness in some categories at DIY.
The flip side is.
On the pro area. So that is more in our primers and in our DAP.
<unk> cautions sealants youre actually seeing the opposite some low to mid single digit unit volume growth.
Because the proceeds to be holding up pretty well, but DIY is.
Take away is somewhat less than last year in recent periods is very volatile and you could see one week to the next where Phil not fill rates, but consumer takeaway is up and then a week later, it's down so there's a lot of volatility there in the DIY space, but some pretty saw.
<unk> unit volume growth.
Pro contractor space.
And just as a follow up you talked about the new management team.
In particular, they doing in the food coatings or additive space to sort of shake things up for you guys.
Sure.
Our <unk> group, which is part of the specialty products group.
Is.
Originally the business it created nature seal, which was a patented product that eliminated Browning and sliced apples until it really revolutionized the apple market and we rode a great profitability on that for a long time until it went off patent.
So that was a challenge we also acquired Holton foods, a couple of other businesses that I don't recall off the top of my head two or three other businesses that were rare.
Relatively small a business called <unk>.
And so they were.
High margin food coding and or specialty sustainable food additives businesses.
And we had the leader retire.
The <unk> business three years ago, the head of <unk>, who actually was an owner who we bought the business from ran that business for a couple of years. We have worked together with him to hire a really talented industry experts.
Who is pulling those businesses together on a more integrated base.
Basis in terms of our approach to the market.
And it's working.
And they're doing a really nice job there theres, some exciting product areas or it's a product called vertical fits in testing.
It is a coding for cardboard.
That would eliminate the need for plastic clam shells. So they have a lot of exciting things going on in that business. We've got a really talented industry expert that is now leading it and pulling together what formally were good but really independently operating businesses that were relatively small.
Okay. It makes a lot of sense. Thanks for all the detail.
Thank you.
We have Steve.
Bernie from Bank of America.
Good morning, Steve.
Okay.
You mentioned, some consulting fees and so forth. So it was a net earnings benefit of that in.
Perhaps more importantly.
Is that a sustainable earnings contribution in subsequent quarters or was this more of a one timer.
And I'm sure you'll get into more detail on Friday, but can you highlight anything in particular.
<unk>.
You implemented to achieve that $30 million in cost savings.
Okay.
We will get into it in more detail on Friday.
And we've got some good slides that provide that detail and so.
I don't want to get too much in front of that and that will be webcast. So all that information will be available to both those people present.
As well as people that are online. If you are president you'll also get a tour of our Tramco sealant business and get to see their test will also we would encourage people to.
B here for that I think youll get some really good insights.
Onto some unique things that we're doing in our construction products group.
Specific to your question.
We have been working with outside consultants around.
Big data management, particularly as it relates to cost price mix.
We have been working with folks in the.
Consumer group on <unk>.
Better.
Efficiencies in our manufacturing facilities, and we are making good progress, that's particularly true at rust oleum.
Where we have more purpose driven.
Facilities around for instance, large volume runs versus more specialty niche smaller runs so theres a lot of areas that we are really focused on and they all are areas that should be gifts that continue to keep on giving not one time.
<unk>.
The original map to growth program, a key element of that was <unk>.
106, eight which is our manufacturing systems 168.
<unk>, introducing lean manufacturing disciplines.
Those efforts did not end with the formal end.
Of the 2020 map to growth program, which was May 31 of 21, they are continuing and that is giving us incremental benefits at the plant efficiency line as well so.
And I guess the last comment I would make is we have been developing and beginning to execute Nab 2025 over the last year.
We just kept waiting for the world to get more stable before we introduced and committed to some three year.
Our goals and I guess, we decided there.
We'd be waiting forever, So we will and very excitedly introduce more detail on the map 2025 program on Friday.
And frankly, you can comment on what the EBIT contribution was from that it sounds like.
Whatever the cost associated with it.
It's already been spent so perhaps the the margin benefit could expand from here.
So it was $30 million in Q1.
And again some of that as a result of the map 2025 initiatives and some of that is the continuation of the original map program.
<unk> and I think we will provide more detail and more guidance on what we expect.
In the coming years and in some cases.
For this year by quarter on Friday.
And frankly, if I can squeeze one more in here you mentioned.
Of course, the counter is owned by <unk> co.
It sounds like the fixed costs associated with the plant.
Or not necessarily allocated to the other segments based on production is that right and does that does that not reducing incentives.
<unk> Cross segment collaboration.
Now we have a.
A formulaic cost plus approach to intercompany manufacturing and coordination and Thats whats being applied here, but one of the great benefits of our map to growth program.
Was the reorganization into four segments and four groups and being center led in manufacturing in this lead.
Leanne.
Manufacturing discipline disciplined approach being center led really to the point of centralized procurement.
And the data that was required the data lake or data.
Base that was required to allow that to happen.
So the collaboration and cooperation across Rpm's, a hell of a lot better today than it ever was and so your question I think sharply reflects following RPM for a long time and the fact that 10 years ago that might've been a problem, it's not a problem today.
Thank you.
Thank you.
We have our own wishing often.
From RBC capital markets.
Good morning Arun.
Yes.
Okay.
Yes.
Please go ahead with your question I don't know if Youll Nelson.
Your line is open.
Please go ahead.
Your line is open. Please go ahead, okay I'm sorry.
You're asking a question.
I was wondering can you guys hear me now.
Yes, yes, yes, we can okay grabbing some having.
Having some technical great I'm, sorry about that.
So real quick I was just wondering if you could help us understand.
Again consumer was well above our estimates so.
Looking at that segment, if you could maybe split the the upside that you saw between maybe alkyd resins availability improvement.
<unk> cost and demand how would you kind of characterize how the segment performed and your outlook I guess in those three buckets.
Sure.
Pretty much the comments we made earlier.
The.
A disproportionate share of our early map 2025.
<unk> had been focused on consumer, particularly in manufacturing efficiencies and so.
We have picked up some manufacturing conversion cost efficiencies there.
Youll recall, a year ago that we talked about our gross margins were down in fiscal 'twenty two in certain quarters by as much as a 1000 basis points pretty dramatic and we had talked about how hundreds of basis points of that was just poor throughput because of the.
Material shortages because of some of the labor issues, we faced so a combination of access to <unk>.
Alkyd resins, and we think we have developed with corsicana, maybe some better access to alkyd resins and some competitors.
And a more normal throughput in our plants.
Overhead cost absorption as well and then certainly cost price mix.
We got higher.
Price increases over the summer in consumer than we got over the summer and or other businesses. Because we were late so again, if you go back last year on a quarter by quarter basis, you saw really solid performance as we were gaining.
Rice and our industrial segments.
And.
And it took us that typical six to nine month lag to be able to.
Start to catch up on the cost price mix in consumer.
And you saw that obviously in the first quarter. So those are the primary drivers of our consumer business.
We did have positive unit growth, which in this environment is not true in all consumer categories.
And some of Thats the nature of our businesses relative to small project redecorating patch and repair and maintenance and I think some of it is catching up on some of the supply shortages and fill rate issues that we've been.
Improving upon since last year.
Okay.
Great. Thanks, and if I could just ask a quick follow up.
So you've guided to it looks like about 16% adjusted EBIT margin.
In fiscal 'twenty five.
It looks like over the last say five years, you have been more in the 11% 12% range. So on an annual basis. So it's a nice kind of four to 500 basis point uplift.
Of that improvement.
Would you say that the progress would be equally split between the segments or which segments do you see the greatest opportunity.
And that move would it be ratable over the period or would it be kind of backend weighted how do you think about that thanks.
Sure. So I can answer that from a big picture perspective, and then obviously, we'll provide segment.
Our results when we release those and talk about them in January .
From a big picture perspective, we made really good progress in our 2020 map to growth program and we were a little bit behind the curve in terms of our goals and then we got walloped by Covid and the supply chain challenges and took a big step backwards that you saw in our results, particularly in consumer.
As volumes coming through our businesses and as we're catching up on cost price mix across all of our businesses you are seeing us regain some of the map 2020 margin improvement that we obtained in Israel, but was impacted by supply.
Hi chain challenges.
And as I indicated earlier the map 2025 program has been in the works.
For a year and been in execution, particularly.
They focus on consumer starting in January and so we're getting the benefit of that and that will continue throughout fiscal 'twenty three.
<unk>.
We expect positive sales and EBIT results in each of our four segments in the second quarter.
But the volatility is such that beyond that I wouldnt say much about it.
Further about our expectations other than what we'll realize and then report in more detail in January .
Okay. Thanks.
We will take our next question comes from Josh Spector UBS.
Yeah, Hey, good morning can you guys hear me.
Yes.
Okay great.
So just wanted to follow up on Europe , specifically within construction and performance.
The drivers there are pretty different in terms of the customer buying patterns and I tend to think about performance at least a little bit more linked to the kind of industrial capex maintenance spending. So I don't know if you could comment if <unk> seen that part of your market pullback equally so what you've seen on the construction side or if they've been more similar and then kind of related to that.
I mean, most companies are talking about September got a lot worse versus August and the prior couple of months.
Are you seeing that as well and can you dimensionalize that versus a 5% decline you reported this quarter. Thanks.
Sure.
So first of all.
Europe was a challenge for all of our segments in the quarter.
And we have a sizable presence there in consumer performance coatings and construction products. The biggest piece is construction products. Your observation is spot on there are different dynamics and so.
The construction products group underperformed our expectations for the reasons that we mentioned Europe was a big piece of that so on a relative basis, our performance coatings group, while we struggled in Europe . There. It was not nearly to the extent as our construction products group because of their end markets oil and gas.
More industrial capital spending.
And.
I will tell you we expect in Q2 and it is.
Within our guidance continued negative performance on the topline and Bottomline.
European marketplace and.
I don't know that its going to be any different than what we experienced in Q1.
But we are a little bit anxious about the winter months and you know what.
The.
What it's going to look like when we get into the winter and then into the spring relative to the trajectory of the economy and its impact in Europe .
Okay, maybe I can just try one other way just on the volume side I guess within Europe , I guess, if you were down 8% to 9% for the quarter.
August down meaningfully more so I guess, where volumes down there mid teens, plus or was it more ratable for Ya.
Yes.
I don't know that.
Would want to get into talking about a month, a particularly a month in our in our second quarter.
But again I don't.
I think in Q2, we would expect a similarly disappointing or deteriorated performance that we saw in Q1 and so it's a combination of weak economic activity a meaningful contribution of it was the strong dollar and foreign exchange, So youre probably looking at a.
<unk> down eight or 10%.
And the top line in a down comparable to the I think 30.
Operating earnings were down 30% I don't have.
Don't run EBIT.
And don't disclose EBIT necessarily by geography, but we thought it was important to highlight Europe because it was a key factor across all of our businesses, particularly in the construction products group in terms of the challenges that we're facing and thats going to continue at the same level.
Okay I appreciate it thanks Frank.
Thank you.
Our next question comes from Jeff.
Co Katz.
From JP Morgan.
Good morning, Jeff Hi, good morning.
I think you said in the course of the call that your raw materials are up 28%.
But in the Q1, our raw materials were up 28% year over year and they were up about actually two 6%.
From quarter to quarter from Q.
Four to Q1.
We are increasing at a lower rate certainly than what we saw in Q4 and Q3, but there is still up year over year.
So I was puzzled by that because your cost of goods sold is up 14, 5%.
And even if you take your map to growth savings of $30 million and you add that back.
Then cost of goods sold this up 18%. So how can raw materials to be up 28, if cost of goods sold is only up 2014.
I would have to do the math.
And get back to you or our cost of goods sold incorporate.
That's basically our chemical cost of goods sold.
It incorporates.
Freight and incorporates.
Other issues. So I don't have a specific answer for you other than.
We did the calculation on our.
Primary.
Raw material chemicals, and they are up 28%.
Okay, and then in the in the year over year quarter. Your SG&A was up I don't know $57 million.
How would you divide that among the different segments was the.
Was there any SG&A growth in the <unk>.
<unk> business with that kind of flat and did volumes grow year over year in consumer.
So volumes grew.
Every in each segment, except for our specialty products group year over year.
And.
The SG&A.
Relatively.
Equal across all of our businesses, we don't disclose that level of detail.
But they were consistent with a year ago I think the thing that's benefited us.
During the map to growth program and quite honestly through Covid.
Is there was a level of COVID-19 driven.
Reductions in SG&A around travel and entertainment and other things and through the benefits of map to growth and also understanding.
Certain COVID-19 impacted expenses, what was essential and continuing so for instance.
We are again doing major sales meetings.
Most of our major businesses those were expenses, we did not occur for two years of 2020 one during COVID-19. This year recurring those but the level of <unk> is at a lower level.
That was pre COVID-19.
And so I guess those are the comments I would have but theres really nothing extraordinary in SG&A.
We are building.
Some SG&A.
Talent, if you will in our specialty products group and we are also building some SG&A in our <unk> business.
And in both cases to address either opportunities.
For growth.
Specifically with carb line to be more deliberate about expanding.
Their base of business outside of their traditional oil and gas markets, which is really what were they exceed and part of what's driving our performance coatings group today. So we have a number of growth initiatives, that's driving SG&A.
But nothing out of the ordinary.
And then lastly interest rates are going up in the United States is that making a difference to your demand profile in construction products.
It doesn't seem that your order level has changed at all or as far as you're concerned interest rates really arent, making much of a difference at all in going up to your demand, yes, it's a great question.
We have some exposure to.
Housing market now with new Dura and so maybe our housing market exposure as a couple of hundred million dollars.
And we didn't have much of it before in total so thats certainly somewhat interest rate sensitive.
But we had solid organic growth in our construction products group in the United States and it's an interesting dynamic Jeff relative to the types of things that normally you would have looked at historically in recessionary periods it would be driving activity.
And quite honestly, the fact that cities counties and states are sitting on hundreds of billions of dollars.
There has to be purpose.
From various stimulus and so the institutional work that we're doing with schools or hospitals.
And the infrastructure work is still pretty solid.
And if you know.
If the dynamics around all of the stimulus is true that should remain true in the United States for another year and a half or two years and you can't even see.
The benefits yet of the trillion plus infrastructure Bill that was passed so there's just some funny dynamics in this economy that don't fit with the normal type of indicators that you would've looked at in the past.
Okay, great. Thank you so much.
Thank you.
Our next question comes from Ghansham Panjabi.
From.
Baird.
Good morning, Ghansham. Good morning can you hear me.
Yes. Thank you.
Okay, great good morning, Brian .
I guess just as it related to a follow up to the last question.
<unk> U S and Europe , now clearly absorbing a fair amount of inflation.
Some categories that aren't even consumer staples I should have started to show some signs of distress.
Disruption is elasticity elasticity sort of unfolds, how do you see that dynamic playing out for your consumer segment over the next couple of quarters I realized from drill availabilities improve but what about the demand destruction component.
Sure. So in general I think we're seeing demand destruction in Europe , and Thats obvious from our results and we expect that to continue and we're concerned that it could get worse in the winter relative to.
Energy issues and the Russian War in Ukraine in the U S. In particular as I commented earlier.
Tumor takeaway.
It has been.
Volatility from one week to the next it's up 3% to 5%.
Other weak it might be down 5% or 10%.
It's very volatile in terms of where consumer spending is.
I think we're doing better than other than other kind of DIY categories because of the DIY small project paint patch and repair maintenance aspect of our products and also the kind of catch up.
And the poor fill rate.
Situation that we experienced in the back half of fiscal 'twenty, one and a good part of fiscal 'twenty, two so thats improving.
We are seeing and this is broadly inventory adjustments at all of the big a big.
Big accounts.
And again, so there's a lot of dynamics going on here inventory adjustments.
But fill rates improving.
<unk> <unk>.
Consumer takeaway.
Is making for a very interesting dynamic and so.
I think thats why were very confident and the forecast that we provided for Q2.
But are still in a.
The business of forecasting quarter by quarter because to go out further than that is really impossible.
Yeah, we're struggling with that as well for the second question on your comment I think you said that raw materials were up roughly 3% or just under 3% sequentially.
How do you sort of see that evolving.
<unk> onwards, and I'm asking because.
It seems like there could be some correlation between Europe , which is dealing with the energy prices.
Significant versus the U S.
That is true can you confirm that and then second are you fully caught up on price cost in each of your operating segments at this point.
So I'll answer the last part the answer is no.
We were fully caught up in a number of our industrial businesses.
And then I think people were expecting particularly with some of the underlying primary chemicals coming down that we'd see a flattening out.
So in our construction products group in a few instances were behind the curve because of continued inflation in Q1.
We're getting there in consumer and again, that's more related to the lag that we that people are aware of that has been true for us forever.
Yes.
And.
And so that.
I think that's an issue we.
We did have $30 million of benefit from the map 25 program in Q1.
We will provide more detail.
And our expectations when we when we talk in our Investor day.
On Friday, including over the map 2025 program some anticipation of a.
Improving in the commodity cycle, which should benefit our margins.
That's anybody's guess, but the current underlying.
Lower levels of propylene in polyethylene and ethylene and some of the primary chemicals, which are down but have not translated into lower prices of the type of specialty chemicals, we buy yet.
Are things that we'll talk about on Friday, and I think things that we anticipate.
Benefit margin recovery over the map 2025 program, but the world we're living in today is still inflationary.
The.
The situation in Q1.
Maybe surprising to some of our businesses but.
The World we live in.
Got it thanks, so much.
Thank you.
Alright, great.
Our next question comes from the line of Kevin Mccarthy.
From vertical research partners.
Good morning, Kevin Good morning can you hear me okay.
Yes. Thank you.
Excellent I wanted to talk pricing a little bit Frank.
So you referenced the raw material cost increase of 2.6% on a quarter to quarter basis.
So in that context are you continuing to seek incremental pricing at this stage of the cycle and if so where are you most encouraged or lease encouraged by prospects there and if I zoom out the lands do you think that very impressive level of 15% that you realized in the first quarter.
Can be sustained for a little while here or do you think the comps just get too tough and therefore, the price contribution starts to come down.
Sure. So I think I think we will have.
Yes.
The solid contributions from price in Q2.
It will start the benefit of price across RPM will start to it will still be positive, but start to deteriorate in Q3 and Q4 as we annualized price increase actions that our companies took.
In fiscal <unk>.
'twenty two.
And so and then.
There are further price increases which would be in response to further inflation.
I think we round.
The annualized inning of pretty much all of our price increases by the first quarter of next year.
And so youll see the impact slowly diminish.
After Q2.
But still be positive.
That assumes that things stay stable as to where they are now.
Okay, that's very helpful.
Wanted to ask about your legend brands business I think you referenced.
Hurricane Ian and some of the heroic efforts that RPM folks had been engaged in.
In recent days can you put that event in context versus history.
Back to winter storm urea Hurricane Harvey.
How do these disasters tend to flow through the financials for that business.
Sure So <unk>.
First of all fiscal 'twenty, two which are particularly challenging.
In the back half of 'twenty, one time for legend brands.
Theyre oddly because they're in the equipment business.
And over time and development very sophisticated equipment that can be controlled remotely were impacted by the chip shortage.
And so that was an issue and there really wasn't much in the way of hurricane activity or.
<unk> in <unk>.
Calendar.
'twenty, one or in our fiscal 'twenty two.
It's certainly possible that an event like Ian could drive.
$10 million plus.
A spiky.
The revenue climb.
With pretty decent margin business.
Over a call it a quarter and a half or two quarter period. So it tends. The response here is certainly going to be greater than zero.
It could be $10 million, plus and it happens over a.
I'll call it three or four month period.
But it is not a sustained increase we've grown that business nicely since we bought it.
They are selling their products into different channels.
Looking at some new product introductions those are the kind of things that lead to a steady increase in our business. It's roughly 140 million Bucks and then you can see these 10 or $15 million event related spikes overtime.
Got it thank you very much.
Thank you.
Okay.
Our next question comes from the line of Mike Sison from Wells Fargo.
Good morning, Michael.
Great Hi, this is Richard on for Mike.
Hey, Richard with one of your question.
Okay.
Question on just maybe if you can give us some color on the commercial construction market.
Both and how its impact is on CPG and <unk>.
TCG segments.
And then maybe just sorry.
Give us an outlook you mentioned.
The reassuring burner.
Benefits.
Which you should see maybe also just visibility and the lead time that you get on that as well.
Sure. So our performance coatings group is more driven by heavy industry, so oil and gas.
Marine wastewater water treatment things like that and that business.
From a demand perspective is doing very well.
Globally as well as in North America, and you'll see that continuing because of the stimulus dollars I referenced and where they will go in the infrastructure dollars that are coming and the onshoring, we do a lot of fab plants around the globe.
With our stone hard flooring business, we do a lot of.
Intervention fiery coatings.
The interesting thing is.
We had some interesting big projects in the last year, a Tesla plant expansion some Intel expansions.
That were difficult to supply because of raw material shortages, the raw material shortages that impacted that are behind us for now hopefully permanently.
So we're pretty bullish on.
Performance coatings group dynamics.
For the foreseeable future construction products is.
Related to the things I talked about earlier there are just conflicting demand signals Europe is a problem for our construction products group and that will continue.
North America has been really solid both.
Some cost price mix recovery.
And.
Good unit volume growth, but we saw these unexpected we think circumstantial situations around concrete supply for instance, and.
In Canada.
Just interesting challenge right now we are generating positive unit volume growth and and some additional price benefit on top of that although as you saw in the quarter not enough to.
To get us back to record EBIT margins.
Those things combined with the benefits of map 2025.
We would expect will drive positive EBIT results year over year in all of our segments, including.
Our construction product segment in Q2.
Yes.
Okay, great. Thanks.
Thank you.
There are no further questions.
I would like to turn the call back to Rpm's, Chairman and <unk> X.
<unk> Officer, Frank Sullivan.
Thank you Ms Amy and thank you everybody for your participation on our call today.
Tomorrow at two o'clock PM Eastern time, we will be holding a virtual annual meeting of stockholders you can participate through our website at www Dot RPM, Inc. Dot com and we would welcome your participation.
And your questions, which we will have a Q&A session virtually we hope to return to rpms in person annual meeting, which has always been an exciting event for us.
In the fall of 2023, we also have.
A.
Investor Day presentation.
On Friday morning that is also acceptable.
Are accessible via a webcast at www dot <unk> dot com.
And in that Investor day, we will highlight our sustainability activity and efforts.
We will talk about our construction products group in general and for those present I think have a very interesting tour of one of our construction products group sealant facilities and also provide details of our map 2025 program. So we would welcome all of your active participation. Thank.
Thank you very much for your participation in our first quarter call today and for your continued interest in RPM have a great day.
This concludes today's call. Thank you for your participation you may disconnect.
Yes.
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Okay.
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Yes.
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