Q3 2023 RPM International Inc Earnings Call
Speaker 1: uncertainties, please review RPMs reports filed with the SEC.
Speaker 1: During this conference call, references may be made to non-GAAP financial measures. To assist you in understanding these non-GAAP terms, RPM has posted reconciliations to the most directly comparable GAAP financial measures on the RPM website. Also, please note that our comments will be on an as-adjusted basis, and all comparisons are to the third 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 Webcasts section of the RPM website at www.rpminc.com. At this time, I would like to turn the call over to Frank. Thank you, Matt, and good morning, and thanks for joining us on today's call. I'll begin today's call by discussing our high-level performance for the third quarter. Mike will then provide details on our financial results, and Matt will provide some business updates. Finally, Rusty will conclude our prepared remarks with our outlook, after which we'll be pleased to answer your questions.
Speaker 1: In the third quarter, RPM associates remained focused on the execution of our MAP 2025 and other initiatives to grow both sales and adjusted EBIT to record levels for the fifth consecutive quarter. This focus and execution helped overcome several headwinds, including customer destocking and slowdowns in certain end markets. As these slowdowns are expected to continue, we began taking additional actions in the third quarter to address the changing market conditions by narrowing our investment.
Speaker 1: To earn this certification, they must identify and execute at least two projects with savings of $100,000 each.
Speaker 1: RPM now has 200 associates who have undergone green belt training and are serving as internal resources to drive structural savings both now and in the future.
Speaker 1: Before we begin discussing the segments, I'd like to highlight that over the past five quarters, we've successfully navigated several challenges, including severe supply chain disruptions, war in Europe , elevated inflation, and recent demand slowdown.
Speaker 1: Our ability to generate record-setting performance in this dynamic environment demonstrates the value of our strategically balanced business model and the agility of our associates to leverage our broad product portfolio and entrepreneurial culture in changing market conditions.
Speaker 1: Turning to the segments on slide 4.
Speaker 1: All four achieved record third quarter revenue.
Speaker 1: The primary driver of this growth was increased pricing in response to ongoing inflation.
Speaker 1: The strongest revenue growth was generated by our businesses providing Engineered solutions targeting infrastructure and re-assuring projects.
Speaker 1: These include our concrete additives and admixtures businesses, our flooring systems businesses, and our protective coatings and fireproofing businesses.
Speaker 1: These businesses have positioned themselves in the highest growth sectors of the construction market, such as manufacturing facilities for electric vehicles and microchips.
Speaker 1: Businesses that serve OEM markets and residential and commercial construction sectors experience weak market conditions.
Speaker 1: The demand in these areas has been negatively impacted by higher interest rates due to changing economic conditions in customer destocking and their impact on the US housing market and commercial construction activity.
Speaker 1: Additionally, in our consumer segment, unit volume declined as retailers were cautious about increasing inventory in advance of the spring season and from reduced consumer takeaway at retail. In addition to our customer de-stocking their inventory, we reduced production at our facilities.
Speaker 1: To continue normalizing inventory levels and improving cash flow.
Speaker 1: This resulted in lower fixed cost utilization in our plant, which offset most of the MAP 2025 benefits we generated during the third quarter.
Speaker 1: Inflation continued with material costs rising 2.5% year-over-year basis.
Speaker 1: Foreign currency also remained unfavorable during the quarter.
Speaker 1: Despite these headwinds, we achieved a record adjusted EBIT in the third quarter, due largely to the successful execution of MAP 2025, profitability initiatives across the organization, and margin recovery in our Consumer Group.
Speaker 1: We remain on track to exceed our year one MAP 25 target of $120 million in EBIT benefits.
Speaker 1: Looking at sales by geography in the next slide, North America, which represents 76% of sales in the third quarter, grew the fastest to 8%.
Speaker 1: Fought by Latin America, where sales grew over 7%.
Speaker 1: These areas benefit from strong infrastructure and reshoring related spending.
Speaker 1: Europe was again the weakest region for growth with sales declining 3.6%.
Speaker 1: Foreign exchange rates continue to be a meaningful headwind during the quarter and reduced overall sales by 2.3%.
Speaker 1: Absent these FX headwinds, sales in all regions would have increased in the mid-single to mid-teen percentage range.
Speaker 1: I now like to turn the call over to Mike LaRose to cover our financial results in more detail.
Speaker 1: turn the call over to Mike LaRoche to cover our financial results in more detail. Thanks, Frank.
Speaker 2: Consolidated sales increased 5.7% to 1.52 billion dollars, which was a third-quarter record. Organic sales growth was 7.3% or 104.3 million dollars, and acquisitions net-of-divestitures contributed 0.7% to sales for 10.4 million dollars.
Speaker 2: FX decreased sales by 2.3% for $32.4 million. Consolidated Adjusted EBIT grew 4.2% to a third quarter record of $83.9 million compared to $80.6 million reported in the prior year period.
Speaker 2: Adjusted diluted earnings per share were 37 cents compared to 38 cents in the third quarter of 2022.
Speaker 2: The decline was primarily driven by higher interest expense of $30.8 million compared to $22 million in the prior year period.
Speaker 2: During the third quarter of 2023, we excluded several items which are not indicative or ongoing operations from adjusted EVIT and adjusted EPS.
Speaker 2: During the third quarter of 2023, we excluded several items which are not indicative of our ongoing operations from adjusted EBIT and adjusted EPS. On a pre-tax basis, these include...
Speaker 2: $59.2 million of expenses related to MAP 2025 initiatives, which includes $39.2 million of non-cash impairment charges in PCG that were the result of a go-to-market strategy change in Europe . For more information, visit www.fema.gov
Speaker 2: A $25.8 million gain on the sale of the non-core furniture warranty business and other assets in our SPG segment, and a $20 million gain from an insurance recovery in our consumer segment.
Speaker 2: Next, we'll discuss our segment results. On slide 7, our Construction Products group achieved record third quarter net sales of $497 million, an increase of 3.1% compared to the prior year period.
Speaker 2: Organic sales growth was 4.3%, with acquisitions contributing 1.4% and foreign currency translation reducing sales by 2.6%.
Speaker 2: Sales growth was led by pricing increases and strength in our time-create admixtures and repair products, which benefited from market share gains and infrastructure and reshoring related spending.
Speaker 2: Demand for restoration systems for flooring, facades, and parking structures also contributed to CPG's revenue growth.
Speaker 2: Partially offsetting this growth, demand was weak in residential and certain commercial construction markets.
Speaker 2: This weakness included the impact of customer descocking.
Speaker 2: Sales in Europe also remain soft. Adjusted EBIT was $13.3 million, a decline of 62.1% from the prior year period when adjusted EBIT was $35.1 million.
Speaker 2: The decline was caused by unfavorable fixed cost utilization, resulting from lower customer demand and internal inventory normalization initiatives that had reduced production at our plants.
Speaker 2: As a reminder, CPG faced challenging comparisons for the prior year when adjusted even increased 89.7%.
Speaker 2: The next slide. The performance coding group achieved record fiscal third-quarter net sales and adjusted even.
Speaker 2: Revenue of $299.6 million was an increase of 10.6% compared to the prior year period. Organic sales increased 13.2%, acquisitions added 0.8%, and foreign currency translation was a 3.4% headwind. Sales were driven by pricing and volume growth in nearly all its businesses.
Speaker 2: Adjusted EBIT increased 16.4% to a third quarter record of $31.2 million.
Speaker 2: The growth was driven by strong sales and MAP 2025 benefits partially offset by FX headwinds.
Speaker 2: This growth was achieved in addition to strong results in the third quarter of 2022 when the JSTA event increased 89.9%.
Speaker 2: DCG's adjusted EBIT excludes the impact of non-cash asset impairment charges of $39.2 million that I previously mentioned.
Speaker 2: Turning to slide 9, the Specialty Products Group reported record third quarter sales of $191 million, an increase of 0.9% compared to the prior year period. Organic sales increased 2.2%, divestiture net of acquisitions reduced sales by 0.2%.
Speaker 2: And foreign currency translation was a headwind of 1.1%.
Speaker 2: The third quarter sales were led by strength in the disaster restoration business, which was able to quickly respond to the deep freeze in December and flooding in California. Thanks to prior investments we had made to improve operational efficiency.
Speaker 2: Additionally, the food coatings and additive business grew double digits, which was driven by a strategic refocus of sales management.
Speaker 2: Price increases in response to continued inflation also contributed to sales growth.
Speaker 2: Offsetting this growth were businesses serving OEM markets, which experienced weak demand as they felt the dual impact of economic pressures and customer destocking.
Speaker 2: SPG adjusted EBIT was $16.8 million for a decline of 37% compared to the prior year period. Unfavorable mix and lower fixed cost leverage drove the decline. Unfidelity bet excludes the $25.8 million pre-tax gain on the sale of the non-corp.
Speaker 2: 8.9%, acquisitions contributed 0.3%, foreign currency translation was a headwind of 1.7%.
Speaker 2: The Consumer Group sales growth was driven by price increases to catch up with continued cost inflation.
Speaker 2: Volumes declined as retailers were cautious about increasing inventory levels in preparation for the spring season, as well as from a slowdown in consumer take away.
Speaker 2: Adjusted EBIT for the third quarter recorded $48.3 million, an increase of 180% compared to the prior year period.
Speaker 2: The successful implementation of MAP 2025 initiatives, as well as solid sales increases, were the key drivers of the increase in profitability.
Speaker 2: As a reminder, the consumer group experienced extraordinarily low profitability in the third quarter of 2022 as a result of an explosion at an alken resin supplier's plant that caused severe supply disruptions.
Speaker 2: and from high material cost inflation that was not offset by commensurate price increases.
Speaker 2: This contributed to the strong year-over-year growth.
Speaker 2: Additionally, third quarter of 2023 adjusted EBIT excludes the pre-tax impact of a $20 million gain associated with the receipt of a business interruption insurance recovery. This recovery was a result of loss business in the prior year caused by the explosion at the Alcat Residence Supply. During the slide 11.
Speaker 2: We have continued to return cash to shareholders. During the third quarter, we paid $54.2 million in dividends and $12.5 million in share repurchases.
Speaker 2: Bring our fiscal year-to-date total in these two areas to a combined $197.3 million.
Speaker 2: Looking at our working capital, we have spoken several times today about our initiatives to normalize inventories.
Speaker 2: that had been elevated to add resiliency to our supply chain during periods of raw material shortages.
Speaker 2: While these initiatives are having a temporary, unfavorable impact on our profitability, we are starting to see positive results elsewhere in our financials.
Speaker 2: Our cash flow from operations was $72 million in the third quarter of 2023, compared to a negative $3 million in the prior year period.
Speaker 2: Inventory levels declined $48 million since the end of November , and we expect our inventory normalization initiatives to continue benefiting working capital in the future.
Speaker 2: I would also like to provide an update on our debt maturity schedule. As a reminder, in January 2022, we pre-funded a bond that was maturing in November 2022 at an attractive fixed rate of 2.95%.
Speaker 2: provide an update on our debt maturity schedule. As a reminder, in January 2022, we pre-funded a bond that was maturing in November 2022 at an attractive fixed rate of 2.95%. And in August 2022,
Speaker 2: We extended the maturity of a term loan to 2025 and our revolving credit facility to 2027.
Speaker 2: As a result, we have significant liquidity of over $840 million, no maturities until May 2024 and the vast amount of our debt not coming due until 2027 or later.
Speaker 1: Now I would like to turn the call over to Matt to provide a business update. Thanks Mike. Over the past several years, political events and societal changes have created transformational forces that are driving investments in new projects and renovations worldwide.
Speaker 1: A few examples of these transformational drivers are highlighted on Slide 12, along with how our businesses are supporting these investments.
Speaker 1: The key area for transition is energy. From providing protective coatings to wind turbine blades to improving safety at LNG facilities with specified fireproofing solutions, our engineered products and services are helping create and protect facilities that are diversifying and ensuring the supply of energy.
Speaker 1: Additionally, we offer multiple energy-saving solutions for both new and existing structures.
Speaker 1: We have spoken several times about the transitioning of manufacturing capacity closer to its customer base or reassuring.
Speaker 1: This is ongoing across several vertical markets and one of these things significant investments is electric vehicles. This is an example of a
Speaker 1: Global changes in consumer preferences are driving significant growth for EVs and the batteries that power them.
Speaker 1: We are supporting this transformation by providing engineered solutions for the facilities that are producing the EVs and batteries to meet this growing demand.
Speaker 1: Moving to slide 13, legislation is helping to accelerate these transformations.
Speaker 1: In addition to stimulus passed in 2020 and 2021, where we are benefiting from increased spending on infrastructure and institutions, the U.S. Congress recently passed legislation that is expected to increase the reshoring of manufacturing capacity to North America for multiple years. The first is the chip sack.
Speaker 1: that contains significant incentives for the manufacturing of microchips in the U.S. Several chip manufacturers with whom we have strong relationships have started projects or announced capacity additions in the U.S. The second is the Inflation Reduction Act, which extends the tax credit for the purchase of EVs in the U.S.
Speaker 1: With the stipulation that a percentage of the battery must be manufactured in North America as a result, a growing number of construction projects for EV battery manufacturing plants in North America have been announced or are underway. Now let's take a look at the role we are playing in these facilities. On Slide 14, the construction and operation of EV battery and assembly.
Speaker 1: lowers the amount of both water and Portland cement needed during construction.
Speaker 1: Additionally, Euclid Chemical offers Tough Strand patented macro-synthetic fibers, which are used as a replacement for steel reinforcement, providing enhanced three-dimensional protection against cracking, improved construction times, increased worker safety, and better overall durability for a facility's concrete applications.
Speaker 1: Another option is Carbine's Thermosoar VOC, which is applied to interior steel structures to provide up to three hours of passive fire protection.
Speaker 1: It has been extensively tested for outgassing in clean room environments in EV plants and can be applied quickly in the field to keep large projects on schedule.
Speaker 1: Finally, Stoneyard Stoneclad Gtopoxy mortar floor system provides the abrasion and impact resistance necessary for manufacturing facilities.
Speaker 1: Additionally, stoneclad GS controls static electricity, which is critical in a cleanroom environment and is also resistant to chemicals.
Speaker 1: Importantly, Stone Hard Art installs this system to ensure that the project is completed properly and on time.
Speaker 1: As an example of RPM's agility that Frank highlighted earlier, a couple of years ago, these businesses were serving the construction of warehouses, which was growing quickly at the time.
Speaker 1: As that area of construction slowed, you've been able to pivot to this fast-growing sector because of the entrepreneurial nature of our people and strong portfolio products and services.
Speaker 1: On the following slide, I'd like to highlight another growth driver for RPM: innovation.
Speaker 1: Bringing new products to market has been integral to RPM's growth strategy for decades.
Speaker 1: In recent years, R&D has been ongoing. However, new product introductions have been limited due to supply chain disruptions.
Speaker 1: Now that these issues are largely resolved, we are back on offense. As an example, in our consumer segment, Potolum recently introduced their biggest spray paint innovation in over a decade: the Custom Spray 5-in-1.
Speaker 1: With patent-pending spring technology, the user can customize the output of the can to match the project simply by rotating the dial.
Speaker 1: These five spray patterns increase precision, minimize drips, and reduce waste. Additionally, the Stop-Thrust Advanced Formula provides 30% greater corrosion resistance and color retention compared to the traditional Stop-Thrust formula.
Speaker 1: We are introducing this product with a sophisticated Omni Channel Marketing campaign that will reach users at all points during their shopping journey. The QR code on the slide provides an example of this.
Speaker 3: Okay.
Speaker 4: while we reconnect. Thank you.
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Speaker 1: Thank you for holding. I would like to turn the call back over to Matt Schlarb. We apologize for that technical interruption.
Speaker 2: I'm going to turn the call back over to Rusty, who will start at the beginning of the outlook section. Thanks, Matt. The challenging economic conditions we experienced in the third quarter have continued and in some instances become more pronounced as elevated interest rates and tightening credit conditions have caused customers to become more cautious.
Speaker 2: While our strategically balanced portfolio of businesses and focus on repair and maintenance helps insulate us from economic slowdowns, we are not immune and this is reflected in our outlook. For sales by segment, we are expecting
Speaker 2: CPG to decline low amid single digits versus prior year. Record sales, which increased 18%. Strength in concrete admixtures is expected to be more than offset by continued weakness in certain sectors such as residential and office construction, while distributors are holding inventory levels below the store.
Speaker 2: 16%.
Speaker 2: SBG declined low double digits compared to prior year record results when sales increased 11.4%. And from OEM markets which are economically sensitive is expected to remain weak.
Speaker 2: Consumer to increase mid-single digits; higher pricing is partially offset by lower volumes due to lower consumer takeaway, as well as the fact that retailers are being cautious about building inventories heading into seasonally strong months.
Speaker 2: This sales increase is on top of prior year record results when sales grew 8.6%.
Speaker 2: Overall, we anticipate fourth quarter 2023 consolidated sales will be flat compared to prior year record results when sales increase 13.7%.
Speaker 2: Turning to EBIT, we anticipate that the fourth quarter of fiscal 2023 adjusted EBIT will be in a range of flat to down high single digits compared to the record results in the fourth quarter of fiscal 2022.
Speaker 2: This range reflects the economic uncertainty in the coming months.
Speaker 2: It also includes the negative impact of lower fixed-cost utilization due to softer customer demand and our initiatives to normalize inventories.
Speaker 2: as well as increased non-service pension and insurance expenses. This guidance implies full-year 2023 sales growth of 8% to a record $7.2 billion and adjusted a bit of approximately 815 million to 835 million.
Speaker 2: Which represents 15% to 18% growth over fiscal year 2020-2022.
Speaker 2: Both of these amounts would be annual records. Given this difficult and uncertain environment, we are focusing on what we can control. This includes...
Speaker 2: with MAP 2025 continued execution of data-driven initiatives to structurally improve profitability.
Speaker 2: Leveraging our strong position in markets benefiting from spending on infrastructure and reorganizing.
Speaker 2: Introducing new products over the next several quarters, including our Restoleum Custom Spray 5-in-1 aerosol paint that Matt just mentioned.
Speaker 2: Prioritizing and investing in our highest growth opportunities.
Speaker 2: Reducing expenses and aligning resources with demand levels.
Speaker 2: Focusing on cash flow, including initiatives to normalize inventories.
Speaker 2: As we look beyond the fourth quarter into early fiscal year 2024, economic uncertainty limits visibility.
Speaker 2: However, we expect many of the positive tailwinds that we control to continue while certain profitability headwinds will start to evade, including material cost inflation and the negative impact of under absorption as we complete.
Speaker 2: our inventory normalization initiatives. This concludes our prepared remarks. We will now be pleased to answer your questions.
Speaker 4: We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone.
Speaker 4: If you're using a speakerphone, please pick up your handset before pressing the key.
Speaker 4: To withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble our roster.
Speaker 4: My first question comes from John McNeil P. with BMO Council Market. Please go ahead. Morning, John .
Speaker 5: Yeah, good morning, Frank. Thanks for taking my question. So on the construction markets in particular, it seems like there's some weakness there. And that's where a lot of the de-stocking seems to be taking place on your side as well as the customer side. I guess, can you help us to think about when you're through that? And it sounds like you may be through a lot of that come the fourth quarter. How much just the end of de-stocking may help the margin and profitability of that business? It's a little.
Speaker 1: $20 million hit to gross profit. We have halted production in a number of areas where historically we would not have and really looked to take actions that would improve our inventory levels, which have been out of whack for the last 18 months or so relative to the supply chain disruptions that......
Speaker 1: manufacturing scene pretty much everywhere. I would expect that our de-stocking activity in Q4 will have the same impact, if not slightly higher, as a result of the higher revenue level there. And then obviously the other absorption hit.
Speaker 5: that we took in the quarter and would expect to take a little bit, particularly in the construction products group in Q4, is just related to lower unit volume. Got it. Okay. No, that's helpful, Collar. On the raw material front, it does sound like raw materials are starting to come off pretty notably across a lot of…
Speaker 5: through the higher cost inventory in your system.
Speaker 1: Sure. There's a couple outliers that are still pretty big out there. Mental packaging, quarter over quarter is up 50% plus. Certain resins like Alkad's are still up. But on a consolidated basis in the quarter, we were up 2.5% year over year.
Speaker 1: But sequentially, we're starting to see things move in the right direction. So Q3 versus Q2, we're seeing an improvement of about seven percent. Got it. Okay. Thanks very much. I appreciate the answers.
Speaker 2: I was going to ask you about de-stocking versus lower underlying demand.
Speaker 6: How do you know the difference and how would you kind of characterize this difference in your volumes between these two categories?
Speaker 6: And also any sign of de-stocking that your customer's abating or improving versus what you saw in early January ? Sure. This is Rusty here. In terms of what we saw in the third quarter, there's really two pieces to it. There was the absorption hit from...
Speaker 2: lower demand and our customers' de-stocking. There is also RPM's inventory normalization effort as we knock down our inventory balance by 48 million versus the end of the second quarter.
Speaker 2: So, between those two pieces, like Frank said, there was about a $20 million hit, which is unusually high for us. It might be in the worst case in the $10 million, a little over that. So, there is definitely an extraordinary impact on the P&L in Q3.
Speaker 6: Thanks, Rusty. Just to follow up on this, I guess my question was more along the lines of...
Speaker 6: the trends in the stalking itself. Do you see anything that signals your customers are closer to the end of their stalking efforts?
Speaker 1: Yeah, I think you're going to see from us and also supply chains in general work their way back to normal this late spring and summer. So I would anticipate a lot of these levels of de-stocking, the things that we're doing and that we're seeing at customers both in our industrial businesses.
Speaker 1: and consumer businesses to be right-sized or normalized by this summer. Then the unit volume issue is separate, and where we're seeing the greatest weakness is in our construction product and construction chemical spaces.
Speaker 1: consumer businesses to be kind of right sized or normalized by this summer. Then the Univolume issue is separate and you know where we're seeing the greatest weakness is our in our construction product and construction chemical spaces. Thank you very much.
Speaker 4: Thank you. Our next question comes from Josh Spector with UBS. Please go ahead..
Speaker 4: Thank you. Our next question comes from Josh Spector with UBS. Please go ahead. Morning, Josh.
Speaker 7: Hey, good morning Frank. Thanks for taking my question. So just, you know, in your comments, in your slide for your outlook, you had the comments about tightening credit pressures and interest rates as well. Obviously, we know about the pressure and resi, I guess. Can you comment on if you're actually seeing some impacts there on the commercial side different now versus, you know, a month or so ago?
Speaker 1: and is that impacting your order book and visibility in any way? Sure. So I would highlight, kind of separate, coatings from construction. Our coatings businesses are housed principally in our consumer group and our performance coatings group. And if you look at them, I think we're performing quite well versus our more comparable coatings peers.
Speaker 1: We're up 7.5% on sales and consumer on top of a record quarter last year and really strong EBIT margins and margin recovery. Our performance coatings group, and I would differentiate their markets, our infrastructure, and really driven by industrial capital spending.
Speaker 1: their revenues were up 10.5% and their EBIT was up 16.4%. We see those businesses in the coding space and those categories continuing to be pretty strong for a number of reasons. In our construction products group, we've been hit by a slowdown.
Speaker 1: and what has grown to be almost $300 million in residential new construction in North America. And we've seen the commercial and light commercial piece of that start to go negative in January and it's been trending down for each of the months here in calendar 23.
Speaker 1: I would expect that those trends in the construction markets, particularly residential new construction and commercial construction, to continue for the balance of calendar 23.
Speaker 7: Okay, no, that's helpful. And I guess, I mean, if I could follow up, if you can comment on the same vein. Have your order books been declining there? So, I mean, some percentage of your products you apply yourself. Are you seeing any difference in demand at this point? Or is there an expectation that you'll see softening?
Speaker 1: Again, I'll bifurcate that. In terms of industrial capital spending, we're seeing pretty strong order books that would be in our flooring business, our stone core flooring business that does their own application. We're seeing good order flow into carboline protective coatings into our fiber-grade businesses.
Speaker 1: I think the real volatility here that would either meet our expectations or allow us to deliver some better performance than we currently anticipate is in our Tremco roofing business where we also do a lot of the application ourselves or take the full contract. We have a really strong order book.
Speaker 1: but it seems to have been pushed later into the spring and the summer. Back to my earlier comment, we've seen three sequential months of deterioration in commercial construction activity. I think this spring will tell late spring, early summer as to whether the chemical roofing business.
Speaker 1: backlog start to get fulfilled. The good news about that business is it's 95 percent reroofing and or maintenance and repair as opposed to new construction. But as you can see in the results, our construction products group has had a week start to the calendar year.
Speaker 4: Understood. Thank you. Thank you. Our next question comes from Steven Byrne with Bank of America Securities. Please go ahead.
Speaker 6: Yes, thank you. How much of your revenue growth in the quarter was price versus volume and how much more price would you need to offset the raw material cost inflation you've seen over the last couple years? How much of a delta?
Speaker 1: Is there to get back where you would want to see even margins? Sure in the quarter on a consolidated basis Steve price was about 13% in The only place where of segment wise well, we don't provide
Speaker 1: price or unit volume by segment. The only place where we had strong unit volume growth pretty consistently was in our performance coding screw. On the flip side, consumer POS for a month by month has been down in the, let's call it load amid single digit range.
Speaker 1: And again, that's another category that we're paying attention to relative to any perk up or strengthen spring or summer. And where you need to push that price, Frank, in order to recover the laws from the last two years. And most categories were where we need to...
Speaker 1: outliers. It's up 55% year over year. Alkad residence prices have perked up a little bit there as has TIO2. And so there's some challenges there that we'll be looking to adjust to. And the likelihood of what happens with price in the coming quarters.
Speaker 8: is flat or up.
Speaker 6: Okay, thank you, Frank. Can you just comment on how large of a customer Walmart is for you and whether any of your initiatives there are at risk given this recent agreement they have with PPG? I recall you had a e-commerce...
Speaker 1: wall paint interior and exterior initiative that was relatively new a year and a half ago at Walmart and I saw the the recent PPG announcement
Speaker 1: We were not the net loser of that new announcement.
Speaker 1: the net loser of that new announcement with...
Speaker 1: or the PPG put out yesterday, from basically zero wall paint two years ago in North America with Walmart, we'll do more than $20 million in interior and exterior wall paint and growing. And so that's a category for us. That category is being reshuffled with the PPG announcement and
Speaker 1: the replacement of a major vendor. We are not that major vendor. As I said, we're north of 20 million bucks and growing from a wall paint program at Walmart that two years ago was zero. Thank you.
Speaker 1: of a major vendor. We are not that major vendor and as I said we're north of 20 million bucks and growing from a wall paint program at Walmart that two years ago was zero. Thank you. you
Speaker 6: Our next question comes from John Roberts with credit please. Please go ahead. Good morning, John . You lost share in Rust-Oleum during the Alkad shortage. When do you think you get back to your pre-shortage share? You lost share in Rust-Oleum during the Alkad shortage.
Speaker 1: I don't have a good answer to that question. It is my understanding that the spray paint positioning of some of our competitors and it's only at Home Depot is where it is and it's not expanding.
Speaker 1: But as to when we would gain that shareback, I don't have a good answer to that other than from a capacity and a supply chain position, we could take it all back today.
Speaker 1: the map expense was 20 million in the quarter. How do you expect that to trend? ? I think roughly about the same. Our map program is going really well. And I think we're actually in a really good position. ? I think we're actually in a really good position.
Speaker 1: when you take into account and map initiatives and the 20 million gross profit hit by itself. And again, I want to make sure that's clear. That the destocking that we undertook internally impacted our P&L by 20 million bucks. So.
Speaker 1: As we continue the MAP initiatives and as we get back to a normal throughput and a position in our inventory levels where they should be and working on that.
Speaker 1: in the right circumstances, you're going to see a really nice snapback in gross profit margins. Thank you. Thank you. Our next question comes from Jessica with JP Morgan, please go ahead.
Speaker 5: Morning Jeff. Hi good morning thanks very much. If you had to allocate your 120 million in map savings across your divisions how would you do it or is it just radically by cells?
Speaker 1: Across the divisions, I don't know that I have a good answer for that, and we'd have to look at that and don't know that we would communicate that specifically. It is generated by sales. Most of it is in...
Speaker 1: areas that impact gross profit margins. So it's utilizing data to manage mix better. It's continuing to see some savings in the procurement basis on a relative basis to where prices are as we are.
Speaker 1: consolidating more categories. And there's a ton of MS-168 work going on in our small to medium plants. So the lion's share of map 25 work will show up in our gross profits. And so from that perspective, it shows up in our gross profit when we sell something.
Speaker 1: And so we'll very much go up or down with our seasonality given the...
Speaker 1: Seasonality of our business with strong fourth and first quarters in a somewhat weaker second and obviously a week third quarter here
Speaker 5: And then maybe a question for Rusty. Your payables were lower year on year by a hundred million in the quarter.
Speaker 2: Do you think your payables will be lower year on year in the fourth quarter? Well, I would think our purchases, if we look back one year ago exactly, Jeff, we were probably buying more for the sake of resiliency.
Speaker 2: due to uncertain supply, and we're not in that situation today. I would think that we would not have the same level of purchasing and the same level of payables this year versus last year. Okay, great. Thank you so much.
Speaker 2: and supply and we are not in that situation today. I would think that we would not have the same level of purchasing and the same level of payables this year versus last year. Thank you so much. You are welcome. If you think that is something that they are 1931, beyond the standard. That is difficult to do. I think we could have done everything with that or something like that, religious.
Speaker 4: My next question comes from Mike Harrison with Seaport Research Partners. Please go ahead. Morning, Mike. Morning, Frank. Hi, everybody. Great to be here, Mike.
Speaker 9: Just wanted to see if I could get you guys to talk a little bit about 2024. Rusty, I think you mentioned in your comments that visibility is limited, but you expect some of the internal actions that you're taking to continue to be a positive and expect some of these cost headwinds to abate.
Speaker 9: But as we're starting to kind of turn our attention to fiscal 24, any modeling guidelines that you could maybe help us with in terms of sales growth, margin improvement or earnings growth would definitely be appreciated.
Speaker 1: Sure. So I'll give you some broad thoughts on that, Mike, and then we'll be in a position to provide more detail when we release our fourth quarter in July .
Speaker 1: So I'll give you some broad thoughts on that, Mike, and then we'll be in a position to provide more detail when we release our fourth quarter in July .
Speaker 1: But I think obviously volume is a key area to look at. And I say that because in the second half of 23, we will take an absorption hit of somewhere between $40 and $50 million associated with our own de-stocking and inventory leveling activities.
Speaker 1: That is aside from the impact of lower unit volume. When we correct those and we see a return to more normal throughput, there should be a meaningful improvement in gross profitability, particularly in the second half of next year. That's something to think about. As I indicated earlier, this is really repeating, we see good back.
Speaker 1: And as Rusty commented, we are playing offense in our consumer business in ways we haven't in the last two years relative to supply chain issues, and we feel pretty good about that. I believe that the residential and commercial construction markets are going to be...
Speaker 1: challenging for the rest of calendar 23. And we're doing what we need to do to adjust to that, but we don't anticipate those underlying markets getting better probably until the spring of next year. Beyond that, I think we would.
Speaker 1: provide, and we will provide some more detail, both on a consolidated basis and broadly by segment when we release results for our year-end in July .
Speaker 9: All right, thank you. That's very helpful. And then the other question I had was on the consumer business. You kind of indicated that your key retail partners are keeping inventory levels low. They're being cautious as we're heading into the busier season. Just any thoughts on how you're predicting the DIY?
Speaker 1: indicated, we're seeing, and we have seen pretty consistently for the last, I call it four or five months, POS, so consumer takeaway in the negative mid, low to mid single digits. I would anticipate for us that we will see some improvement there, both in terms of consumer takeaway.
Speaker 1: Also, I think by the time we get through this spring, both we and our customers will have completed inventory adjustments. So if there's a purchase, it'll be reflected on our sales as opposed to seeing a difference between those Sustainable so that's also an issue like that.
Speaker 1: consumer purchasing and lower unit volume growth relative to internal and external inventory adjustments. We're playing offense. We've got new patented spray foam product going into a number of our retailers with DAP. We have a patented spray foam product that's
Speaker 1: new spray nozzle that will first be introduced in stops rust. That's going to be shipping in the coming weeks. You'll see it at retailers throughout the summer. By the end of the summer, early fall, we should be pretty much rider retail distribution.
Speaker 1: We're excited about that, and we're going to start a larger advertising and promotion campaign in May around that. It'll carry us through the summer. We're hopeful for some pretty good performance there, and that we'll see an uptick in that area. One of the last pieces to an earlier question...
Speaker 1: The share loss, particularly at Home Depot, that we experienced in the last 12 months, we believe is over. Time will tell whether we get that business back, but we're led to believe that that position is now where it's going to be.
Speaker 4: Great, thanks very much. Thank you. Our next question comes from Gensham. Jobby, please go ahead.
Speaker 10: Morning, Gantjim. Thank you. Good morning, Frank and everybody else. Hey, Frank, you know, just kind of stepping back. I mean, obviously, you sell into several end markets that are sensitive towards interest rates. And of course, rates are up quite a bit over the past year. Is there anything notable that you see different this go around with higher rates or is everything essentially playing out how you thought it would based on historical patterns and and I'm sort of asking just to.
Speaker 1: in context of raw materials which have a fair amount of stickiness? Sure. So yeah, first of all, you know, I think at least from a manufacturing perspective, it's not unique to us. You can see it in different segments. We are in a good old-fashioned recession. And as I commented earlier, I think more cyclical businesses.
Speaker 1: Certainly we're seeing it in our more cyclical businesses are experiencing that and are going to do so for the rest of calendar 23. My guess is all these fancy economists that call recessions, as you'll recall, they typically look in August or September and say, hey, we're in a recession and it started in February . So I think we're there. I think what's different this time is what we've talked about on the past call and on this call, we've never experienced the broad de-stocking.
Speaker 1: That we've had to address here, both with our inventory levels and with inventory levels in our industrial segments and channels. We've had sophisticated consumer customers over time continue to figure out how to reduce inventories, and we've seen those inventories fluctuate up or down. Historically, until this period, typically when we talked about the stocking, it really only related to our consumer segment.
Speaker 1: And so, I think that's what's different. We've never experienced the type of overhead on absorption, just on our own inventory actions, that we experienced in Q3, and that will impact Q4. In the grand scheme of things, I think going forward, that's good news because when that stops, there are tens of millions of dollars in gross profit that are going to show up on our bottom line. And, as I said, I'm very bullish about the positive impact of our MAP 25 activities.
Speaker 1: Knowing that when we get our inventories right, we'll stop shooting ourselves in the foot in terms of these overhead absorption, as well as with a return of volume. If, as we experience a downcycle in commodities, I still think, going forward, there is good potential for strong gross margin recovery in the coming years.
Speaker 1: And I'm sorry, Frank, if I missed this, but what was the impact, you think, purely from destocking at the customer level as it relates to your volumes for 3Q, which I think were down, you know, mid-single digits? Yeah, so I think it's $20 million, $40 million in total, and I think the way to think about that is $20 million of lower unit volume sales across RPM.
Speaker 1: And $2 million associated with our own internal inventory adjustments, which literally involved a number of our operations - including eliminating shifts and/or outright holding production for days or a week at a time, which is something I can't remember. We've eliminated shifts in certain areas in the past in light of recessions and things like that.
Speaker 1: But there's a couple plants that we close for a week and that's incredibly unique to RPM in my career.
Speaker 8: Thank you, Frank. Thank you. Yeah, a simple way to reduce your inventory is to stop making it. And so that's some of what happened in the quarter. My next question comes from Prince Mitch with...
Speaker 5: Thank you so much. Yeah, good morning, Frank. Thank you so much. You were following up on MAP 2025, which is a positive to your results. If I think about the 240 to 260 EBITs in the fourth quarter, how much do you think MAP will contribute to that?
Speaker 1: any sort of color in terms of what you need to do to hit the low end or hit the high end of that fourth quarter EBIT range. So as I commented earlier, Frank, the biggest driver of our MAP benefits through our P&L is sales, because most of the MAP benefits are in either prime margin to the extent that we're managing mix better, or in our conversion costs.
Speaker 8: In both cases we're making progress. Obviously the other factor here is beginning to see what I think you can see at the end of Q4 into the summer. Some positive delta on past price increases of last 18 months and at raw material basket.
Speaker 8: that's starting to get better sequentially. So those are the factors.
Speaker 8: It'll certainly be bigger than the 20 million that we experience in Q3, just because we'll have a larger revenue base and how good it could be, really depends on unit volume sales. Okay, gotcha. And then Rusty, you got the working capital improvement that you're anticipating the third quarter, obviously the fourth quarter is typically a use.
Speaker 8: of cash in terms of working capital. I'm curious if you had any thoughts on order of magnitude that that might be for the coming quarter.
Speaker 2: Sure, yeah, in the third quarter, really, the improvement in inventory was offset because our payables went down year over year because we cut off purchases. So I think you're going to really see the benefit in future quarters like the fourth quarter, first quarter of fiscal 24.
Speaker 2: Because even though you see the progress on the one line called inventory, it's been offset on the payable side as we've reduced purchases. But, you know, we're going to continue to do other things as part of MAP 2025 to reduce the amount of finished goods we carry.
Speaker 2: That will lead to structural improvement. Frank, I think in terms of working capital, the best days are in front of us. We started to get the ship steered the right direction in Q3, but I think the benefit you'll see it in cash flow from operations as we look forward.
Speaker 11: Thank you so much.
Speaker 4: Welcome. Our next question comes from Mike Susan with Wells Fargo. Please go ahead. Good morning Mike. Hey guys. Hey guys. Good morning. Frank, you've made a lot of improvements in the business over the last couple of years and you've noted we're in a recession. So I'm just curious your just maybe general thoughts.
Speaker 4: on how the new portfolio and the new businesses should perform in a recession. And it should be probably more resilient than it has been in the past. Just current your thoughts there, should it be able to grow or holding stable, down? What are your thoughts on how the new RPM would perform? Here, um
Speaker 1: I think there are two factors there. 1: We have improved our conversion costs across the board, and as volume comes back, you'll see that. 2: I think our performance is pretty solid, given the underlying dynamics: the one negative to historic RPM that we have today that we haven't had in the past.
Speaker 8: And if it's a function of the strong growth of new durable and North America has led to concrete forms and some other aspects. What that has brought along is: today we have about a $3 million exposure in total to residential new construction and we didn't have that much exposure to residential new construction in the past, so that's hurting us today.
Speaker 8: I can tell you in our specialty products group, the area that's hurting us the most is our OEM coatings there. And we have a very successful, nicely profitable wood stains and finishes group, and it goes right into housing. We do a lot of work with domestic window manufacturers. We do a lot of work with domestic cabinet door manufacturers.
Speaker 8: Some furniture, although most of that has moved offshore, and all of that coating goes onto components that are typically involved in residential new construction. So that's probably the weakest area for us today and an exposure on a much larger scale for RPM.
Speaker 4: albeit larger, but we didn't have in the past. Hopefully that is helpful. And just one near-term question, I'm not sure if you have the data, but did March get better than February in total? And then when I think about your guidance for the fourth quarter, normally, you know, April gets better than March and May is better than April . It kind of sounds like...
Speaker 1: The sequential improvements throughout the quarter are not going to prove much, is it? Is that the way to think about it again? Mike can really just repeat the comments I mean earlier in our meeting.
Speaker 8: Cyclical impacted businesses January and February and March have not been good. And so you can see that in the construction products group and in the specialty coatings group. I will tell you the performance coatings group backlog is good. We expect that to continue. As Matt highlighted,
Speaker 8: Big dollars in infrastructure and driving industrial capital spending. So there are plenty of reasons to be cautious, and that's why we have a wide range in Q4. I can tell you that a couple of things to look at in terms of possible upside are consumer POS getting better in the spring.
Speaker 8: That could be an upside. Our roofing division, improving in the spring and the summer. Again, that is part of our construction products business has been slow versus record levels last year. And we're starting to see some sequential improvement in Europe . Some of that's just rounding. Everything.
Speaker 8: easier comps. Those are the elements that we'll pay attention to in the spring and the summer as possible upsides to the guidance that we provided. Thank you.
Speaker 12: Our next question comes from Vincent Andrews with Morgan Stanley . Please go ahead. reco
Speaker 13: Thank you. Good morning everyone. Two quick things for me. First, you referenced electric vehicles and could you just talk a little bit about how incremental that is versus I don't recall you guys having a lot of content in automobiles at all, but is there any sort of cannibalization versus an existing sale into an internal combustion engine vehicle?
Speaker 8: Sure, so these are not coatings that go into auto and we are not in automotive coatings, but we have a very strong presence in industrial new construction. So whether it's corrosion control coatings, various elements of industrial for steel or into mass at more architectural decorative fireproofing coatings.
Speaker 8: and a really good franchise across Stonehard, Euclid, Dudek, a number of flooring businesses, whether it's concrete coatings or fibers that go into concrete in the case of Euclid, or the actual polymer flooring.
Speaker 8: We've been a leader in microelectronics globally in those areas and to the extent that we're seeing a big influx and on-shoring, but it's partly government subsidized. We should be the beneficiaries of that and that includes the manufacturing.
Speaker 8: That includes the construction of these EV plants and also of battery plants. So those are all areas of strength in terms of specification of work, but it's entirely related to industrial capital spending or construction, not automotive coatings.
Speaker 13: Okay, terrific. And just getting back to the issues with the banks and sort of the credit outlook for customers, I mean, if we make the assumption that credit is going to become incrementally tighter for folks over the balance of the year and potentially even more expensive, what can RPM do in terms of, you know, working with your customers on that? And are you already starting to hear?
Speaker 13: The customers are having issues or thinking about paring back just because they'll have less capital to put in the markets.
Speaker 8: We're not seeing any impact on receivables, so that is not a sign or an area of concern right now. We pay attention to it.
Speaker 8: The broadest thing I can tell you is that the housing market has been hurt and that's continuing and you can see that in residential new construction which is way down and even housing turnover which is down And then the other area that is most impactful is commercial or light commercial.
Speaker 8: you know, hotels, office space. The days of the mega billion dollar Apple and Amazon new headquarters buildings is over.
Speaker 8: And so those are some examples of some big projects that our construction chemical sealants and products were on. And so it's office space, hotel and hospitality, and all those areas are weak. And so...
Speaker 8: It's not really an issue of credit or receivable concern. It's more just a weakness in those two categories of construction, principally in North America. Okay, thanks very much.
Speaker 12: Our next question comes from Kevin McCarthy with Vertical Research Partners. Please go ahead. Of
Speaker 5: Good morning, Kevin. Good morning. How are you, Frank? Good, thank you. I would welcome any updated thoughts you may have on near-term capital allocation in terms of what you're seeing in the M&A pipeline versus potential to just de-leverage in this environment or amplify the pace of reporting.
Speaker 8: Where our stock price is relative to a grid of a value that we discussed regularly with our Board on acquisitions, I think things have slowed down. There is a fair amount of acquisition activity, but there's still some hanging on to the old.
Speaker 8: and value expectations in the face of deteriorating results, and that tends to slow M&A down. We are seeing that slow down in the small to medium sized.
Speaker 8: market that we target and obviously if you read the headlines the big M&A activity for the same reasons is slowed down dramatically. You know even in the private equity space the big staple financings from the banks from private equity pretty much dried up right now. So the M&A markets very slow and I would expect it to stay that way.
Speaker 8: a small transaction here and there, but we're not anticipating M&A being a big part of our growth for fiscal 24.
Speaker 5: That's helpful. Secondly, if I may, you mentioned in your prepared remarks that you're taking additional cost actions. I interpreted that to mean above and beyond the scope of your MAP 2025 program, which itself seems to be trending north of your target range. Any way to quantify the incremental or additional costs of your
Speaker 8: Impacted.
Speaker 8: construction products group businesses, particularly the ones we've been talking about, as well as our specialty products group. And so we've undertaken some expense reduction and headcount reduction actions in both of those segments. On the flip side, we are very determined to continue to spend.
Speaker 8: In a couple of areas we had talked about in the past. A patented adjuvant in our COP codes, part of our specialty products group. That's a product line that is patented. It provides essentially the ability for pesticides and herbicides to be used at rates as much as 40% or 50% less.
Speaker 8: That's a product line that a couple of years ago was a few hundred thousand bucks. This year it will be three or four million dollars and it's got a tremendous growth rate. We are going to spend into that. That's part of our specialty products group, notwithstanding the deterioration in that segment. We talked about New Dura. New Dura has got a nice, unfortunately, this year, presence in residential new construction.
Speaker 8: I'll give you one example. We completed last year a new school in Kentucky, and the New Dura system was a key element of allowing that new school to operate at net zero. And the New Dura ICF is one of the most durable construction methods in the market for residential and light commercial.?? epic Martha
Speaker 8: So, institutions like schools. And so we will be spending aggressively on a promotion and a specification effort notwithstanding the decline in revenues this year in New Dura in terms of energy efficiency and in terms of safety and security in a future pandemic.
Speaker 8: And again there'll be some areas in SDNA, in a Construction Products Group or Specialty Products Group, where we are spending forward in terms of building the momentum for really strong growth in greater spec and a broader distribution in 2025 and beyond.
Speaker 12: Very helpful. Thanks a lot, thank you again. If you'd like to ask a question, please press Star, then one at this time. Our next question comes from Aaron, who is with RBC Capital Market. Please go ahead, good morning.
Speaker 12: Very helpful, thanks a lot. Thank you. Again, if you'd like to ask a question, please press star, then one at this time. Our next question comes from Aaron Bizwanathan with RBC Capital Markets. Please go ahead. Good morning. Good morning.
Speaker 1: At this point. But, have you found your businesses essentially compared from a margin standpoint, and would security be factored here at all, or is Aaron?
Speaker 8: Aroon, you're breaking up a little bit, so that was hard to hear. That's a little bit better. Yeah. Okay, sorry, Frank. Yeah, no, I was just curious if there's any divestiture.
Speaker 14: Part of MAP-25 versus mainly a portfolio. So we don't
Speaker 14: versus mainly the existing portfolio.
Speaker 8: We are taking a hard look across our portfolio in terms of MAP-25 and without commenting on any future activity.
Speaker 8: There are two examples, both of which actually happened in this quarter. We had the Guardian Protective Products business, which a decade ago was providing fabric protection products and then being part of the insurance around that for consumers. That business essentially became an insurance business for furniture.
Speaker 8: While it was a very profitable business and very nice, that's not an area that we felt we could be competitive in the future. We sold that business during the quarter and it was sold into a joint private equity and other insurance and assurance business.
Speaker 8: a great home for our Guardian Protective Products people, and an exit which generated 50 million bucks of cash in total and a nice gain in the quarter which we obviously carved out in terms of our adjusted results. That was part of MAP 25. We took an impairment charge related to our USL business in the quarter, and you saw that as well that was also adjusted out of our adjusted results.
Speaker 8: But we looked at that business and there was a contracting component of that business that did not make money and we are working with a couple parties to sell that to a UK contracting business and hang on to the high margin product lines areas there. So the net result of that will be a reduction of revenues, but an improvement of profitability and margins.
Speaker 8: Those are two examples that we can talk about because they've happened already of structural changes that we're looking at as part of MAP 25, and there certainly could be others in the future. Okay, great. Thanks a lot. Thank you. This concludes our question and answer session. I would like to turn the conference back over to Frank Sullivan for any closing remarks.
Speaker 8: Thank you to everyone for participating in our Investor call today and for your questions. While we had a challenging quarter and we are being somewhat conservative about the outlook for our Q4, I think we are actually very excited about the actions that we are taking, both in our MAP 2025 initiative specifically, and also in understanding the impact.
Speaker 8: of the inventory in particular, but working capital adjustments that are necessary to get our inventory levels back to where they should be and get our cash flow back to where they should be. And those actions are good. They had a negative impact on gross profit and profitability in the quarter and will do so in Q4. But they're one-time events that we will get behind us in the next couple of months.
Speaker 8: So we remain excited about the activities that we're taking and its impact on our margins in the coming years. And we look forward to providing you more detail on fiscal 24 when we release our fourth quarter results and talk about our 23 year end in July . Thanks again. A blessed Easter to all on the call.
Speaker 8: to you and your families and thank you for your participation and interest in RPM. Have a great day. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.