Q4 2023 RPM International Inc Earnings Call
Good morning.
And welcome to the RPM International fiscal fourth quarter and full year 2023 earnings conference call.
All participants will be in a listen only mode and should you need any assistance during the call. Please signal a conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions. Please note that this event is being recorded.
I'd now like to turn the conference over to Matt Schlarb Senior director of Investor Relations. Please go ahead Sir.
Thank you Joe and welcome to RPM Internationals conference call for the fiscal 2023 fourth quarter and full year results. Today's call is being recorded joining today's call are Frank Sullivan, Rpm's, Chairman and CEO , Rusty Gordon Vice President and Chief Financial Officer, and Michael The Roche, Vice President controller and Chief.
After this call is also being webcast and can be accessed live or replayed 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 review Rpm's reports filed with the SEC.
During this conference call references maybe made to non-GAAP financial measures to assist you in understanding. These non-GAAP terms RPM has posted reconciliations to the most directly comparable GAAP financial measures on the RPM website.
Also please note that our comments will be on an as adjusted basis and all comparisons are to the fourth quarter of fiscal 2022, unless otherwise indicated.
We have provided a supplemental slide presentation to support our comments on this call can be accessed in the presentations and Webcasts 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 and good morning, everyone for those following the slides I'm going to start with slide three will.
We'll begin by discussing our high level performance for the fourth quarter after which Mike will provide details on our financial results and then I'll provide a balance sheet and business update.
Finally, Rusty I'll conclude our prepared remarks with our outlook after which we'll be pleased to answer your questions.
Starting on slide three you can see that in the fourth quarter, we generated a sixth consecutive quarter of record sales and adjusted EBIT on top of the strong growth we achieved in the fourth quarter of last year.
Shortly we achieved these record results at the same time, we generated record fourth quarter operating cash flow.
In a time of economic uncertainty, we prioritize cash flow generation over P&L management, which resulted in cash flow from operations of $314 million, primarily through initiatives to normalize inventories and benefits from our map 2025 initiatives the.
The strong cash flow allowed us to reduce debt by nearly $140 million during the quarter.
Moving to slide four for the agility of our business has demonstrated played an important role in achieving these record results. As an example, several of our businesses repositioned to focus on engineered solutions for infrastructure and re shoring projects, which are the fastest growing sectors in the construction.
Industry.
Our strategic focus on maintenance and repair our differentiated service model and the agility of our sales teams to find pockets of growth helped offset a decline in other new build construction sectors, where volume declines were compounded by customer destocking.
We have also improved our operational agility through our map 2025 program. So we can quickly respond to demand changes.
In our consumer group, our customers were holding leaner than normal inventories heading into the warm months when demand usually picks up as is typical there was an increase in consumer takeaway late in the quarter and we were able to quickly fill these orders.
Stocking was a driver of volume declines at our specialty products group, particularly in businesses, serving OEM manufacturing.
We faced additional profitability headwinds in this segment from continued cost inflation.
<unk> and initiatives, we put in place to normalize our inventory, which had a particularly pronounced impact on the SPG profitability.
Turning to slide five looking at sales by geography sales growth was strongest in emerging markets where growth range between high single digits to high teens, despite foreign currency headwinds.
These regions are investing significantly in infrastructure, an area that we are well positioned to serve.
Europe declined nearly 2%, but excluding FX headwinds Europe grew in the quarter. The first sign of improving performance after more than a year of challenging economic conditions.
Despite the challenging second half fiscal 2023 was a solid one for RPM with sales up 8% driving adjusted EBITDA nearly 19% we.
We finished the year with improving results in our construction products group and in particular, the Transco roofing Division.
Improving performance in Europe .
The challenges of supply chain disruptions and customer inventory destocking, mostly now behind us and finally, an improving cost price mix dynamic with major raw materials cycling down from historic highs.
These dynamics indicate a strong start to our new 2020 for fiscal year.
I'd now like to turn the call over to Mike to cover our financial results in the quarter in more detail.
Thanks, Brian starting on slide six consolidated sales increased one 6% to $2.0 billion to $1 billion, which was a fourth quarter record.
<unk> sales growth was two 6% or $51 1 million in acquisitions net of divestitures contributed 0.4% of sales or $8 $4 million.
<unk> decreased sales by one 4% or $27.2 million consolidated adjusted EBIT for the fourth quarter record and increased one 5% to 267 $8 million. The growth was driven by sales increases map 2025 benefits and consumer margins recovering.
Towards historical averages following the supply chain disruptions of the prior year.
We also took cost reduction actions in the fourth quarter and businesses with declining volumes, primarily in the SPG and CPG segments.
These actions had a modest impact on Q4 profitability. They will have a more pronounced impact going forward.
Adjusted diluted earnings per share were $1 36, compared to $1.42 in the fourth quarter of 2022. The decrease was primarily driven by highest higher interest expense.
Turning to segment results on slide seven our construction products group achieved a record fourth quarter net sales of $748 million up slightly from the prior year period.
Organic sales growth was <unk>, 8% with acquisitions, contributing 1% and foreign currency translation, reducing sales by one 5%.
Sales growth was led by pricing increases and strengthening concrete admixture and repair products, which benefited from infrastructure and re shoring related capital spending.
Demand increased for restoration systems for roofing facades and parking structures, which benefited from its strategic focus on repair and maintenance differentiated service model.
Demand was weak in new residential and certain commercial construction sectors, which included the negative impact of customer destocking.
Adjusted EBIT was $124 $5 million, an increase of one 7% from the prior year period pricing increases and map 2025 benefits more than offset reduced fixed cost leverage.
From lower volumes and as Earl initiatives to reduce inventory.
As I mentioned, we took cost reduction actions at CPG in the fourth quarter.
On the next slide the performance coatings group achieved another quarter of record net sales and adjusted EBIT.
Revenue increased eight 8% to $358 4 million organic sales grew 10, 4% acquisitions added 0.9% and four.
Foreign currency translation was a two 5% headwind.
Sales were driven by strong demand for the segments engineered solutions for infrastructure in a reassuring capital projects.
Increased pricing and energy demand also contributed to the segment's growth.
Adjusted EBIT increased 21, 5% to a fourth quarter record of $51 $7 million.
The growth was driven by strong sales and map 2025 benefits. These results are on top of a strong prior year increase when adjusted EBIT grew 37, 3%.
Turning to slide nine specialty products group sales declined 14, 3% from the prior year period to $193 $4 million.
Organic sales declined 12% divestitures net of acquisitions reduced sales by one 8% and.
Foreign currency translation was a headwind of <unk>, 5%.
OEM demand was weak during the quarter due to a reduction in customer manufacturing activity, which was compounded by destocking.
This segment faced a challenging comparison to the fourth quarter of fiscal 2022, when our disaster restoration business had a strong CIT had strong sales as it made progress in resolving its micro chip supply chain issues.
During that quarter SPG sales increased 11, 4%.
SPG also face more challenging comparisons from the divestiture of the non core furniture warranty business in the third quarter of fiscal 2023.
SPG adjusted EBIT was $16 $3 million or a decline of 63, 1% compared to the prior year period.
Unfavorable product mix and lower fixed cost leverage drove the decline.
A $3 4 million dollar expense related to the resolution of a legal matter also negatively impacted adjusted EBIT.
Since SPG has the highest concentration concentration of intercompany sales. It was most impacted by Rpm's inventory normalization initiatives. We also took cost actions to align resources with demand levels during the quarter.
Moving to slide 10, the consumer group grew sales four 9% to a fourth quarter record of $716 $4 million.
<unk> sales increased five 6% acquisitions contributed <unk>, 3% and foreign currency translation was a headwind of 1%.
The consumer group sales benefited from pricing increases in response to continued inflation volumes declined as consumer takeaway was lower in the quarter. However, as Frank described earlier, our ability to quickly respond to increased demand at the end of the quarter helps limit the volume declines.
Additionally, we had some market share wins as we return to playing offense, we gained shelf space in aerosol paints and embraces and over the summer we expect to continue to offer new products and innovation to the market.
Adjusted EBIT increased 34% to $104 $7 million the successful implementation of map 2025 initiatives as well as solid sales increases were key drivers of the increase in profitability and resulted in margins approaching historical averages following the supply chain disruptions of the prior.
Year.
Now I'd like to turn the call over to Matt to go over the balance sheet and cash flow and provide a business update.
Mike as Frank mentioned earlier, we prioritize cash flow during the quarter and the progress can be seen in our results on slide 11, we continue to make progress in reducing inventory both inventory management and also structural improvements enabled by map 2025.
We reduced inventories by $205 $8 million in the fourth quarter. This has played an important role in generating record fourth quarter cash flow from operations of 314 million $314 $1 million during the quarter versus $22 $8 million in the prior year. When we were building inventories to add resiliency to our supply chain.
Yeah.
We funded these investments in our supply chain with debt. So it was working capital improved we've reduced debt by nearly $140 million during the fourth quarter.
We also have continued to return cash to shareholders. During the fourth quarter, we paid $54 $1 million in dividends and $12 $5 million in share repurchases, bringing our full fiscal year total knees to barry's areas to a combined $263 $9 million.
Moving to slide 12, we spoken several times about how our businesses are well positioned to provide engineered solutions for infrastructure projects and I'll highlight a few of them in Europe . The continents busiest train station the gardener in Paris selected Cpg's flow Creed flooring systems for our payers in advance of the 2024 Olympics because of its durability.
<unk> EZ maintenance and ability to be installed during the six hours cessation is closed each day.
And the hydroelectric plant in Manitoba P. C to use carbo I'm fire protection system was chosen because there's two component of Patsy.
And fire resistant material required specifications is able to be applied offsite can withstand the variable weather conditions in northern Canada.
And Australia, CPG shrimp co was selected or Pan waterproof, the Sydney Harbour Bridge tower because of its ability to provide a membrane waterproofing system that can be installed in a variety of temperatures here within an hour of installation and has weather assistance.
Slide this slide shows a few examples of the many projects we are where we have provided a engineered solution of infrastructure projects. We expect to continue benefiting a fiscal year 'twenty 'twenty four is global investments to build and maintain infrastructure grub now.
Now I'd like to turn the call over to Rusky Rusty to cover the outlook.
Smith.
We will start on slide 13.
Yeah.
As we look forward to the first quarter many of the demand trends. We saw in Q4 are expected to continue.
Pricing is still expected to be positive, but with a lower year over year impact than this past fourth quarter as we lap some of the larger pricing increases implemented last summer.
From a profitability standpoint map 20 twenty-five benefits are expected to continue well several Q4 headwinds, including FX customer destocking internal inventory normalization initiatives and inflation are expected to abate.
Taking all this into account for the first quarter, we expect consolidated sales to increase in the low single digit range and adjusted EBIT to increase in the high single digit range. This would represent the seventh consecutive quarter of record sales in the <unk>.
Adjusted EBIT and is on top of a strong prior year comparison when sales grew 17%.
Adjusted EBIT increased 33%.
For sales by segment in the first quarter.
C. P. J is expected to increase in the low single digit percentage range.
P. C. G is expected to increase in the mid single digit percentage range.
S. P. G is expected to decrease in the high single digit percentage range.
And consumer is expected to increase in the low single digit percentage range.
Moving to slide 14.
As we think about the full year demand visibility remains limited and volatility by end market makes longer term forecasting challenging.
That being said our expectation is that our focus on repair and maintenance and strong position, providing engineered solutions for re shoring and infrastructure projects will be able to offset potential weakness. If there is a downturn in commercial construction sector.
<unk>.
Additionally, we expect to leverage our map 2025 initiatives to help expand margins.
Yeah.
Our current expectation is there will be modest economic growth and we will achieve consolidated sales growth in the mid single digit range and adjusted EBIT growth in the low double digit to mid teen percentage range.
Growth is expected to be strongest in the second half of the year aided by less challenging comparisons as much of the unfavorable impact of Destocking occurred in the second half of fiscal year 2023.
This outlook assumes that we will not enter recession in the FX and inflation pressures will continue to ease.
By segment, we expect the following for fiscal year 'twenty 'twenty four.
At C. P. G. We expect continued share gains in concrete admixtures continued momentum in roofing and stabilization in the residential sector with continued uncertainty in commercial construction.
Once again, we benefit from our focus on re shoring infrastructure as well as on building maintenance and restoration.
At P. C. G. We expect continued momentum driven by strength in reassuring infrastructure and energy markets, even as the segment basis challenging comparisons after a year of strong growth in fiscal year 2023.
We expect S. P G to benefit from easy comparisons in the back half of the year as Destocking headwinds abate and demand stabilizes.
And consumer we expect the volume declines from the prior year to stabilize in the second half of the year with a continued benefit from pricing.
The lower level than fiscal year 2023.
Yeah look I just provided is prior to a business transfer and we made effective at the beginning of fiscal year 2024.
On June one 2023, a few international businesses that had previously been a part of our CPG segment transferred to the P. C. G segment.
This impact is relatively small with about $100 million of annual revenue shifting from CPG two P. C G.
In October you'll see this change reflected in our Q1 FY 'twenty for reporting and.
And we will provide the recast prior period financials for ease of comparability starting in the first quarter of fiscal 'twenty four.
Again, the outlook I just provided is on the old basis.
This concludes our prepared remarks, we'll now be pleased to answer your questions.
We will now begin the question and answer session.
To ask a question you May press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys.
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At this time, we will pause momentarily to assemble our roster.
And our first question will come from John Mcnulty with BMO. Please go ahead with your question.
Great. Good morning, Thanks for taking my good morning, Frank Thanks for taking my question and congratulations on some really solid results.
And I guess, one of the things I wanted to dig into to maybe better understand it a bit was used to be.
I guess when you were coming into this quarter there were expectations for the construction business to be under a reasonable right now putting up you know better better sales than expected and as a result, better a better total numbers I guess can you help us to think about what was different from what you expected in terms of was it was it just demand was.
Stronger in certain sectors or was the Destocking last and you got better clarity on that as things kind of progressed I guess, how would you characterize the beat in construction relative to your original expectations.
Sure I am.
I think it has to do with things that we've been talking about starting in the second quarter and certainly experienced in Q3.
And the Destocking that we experienced what rusty was calling the bullwhip effect of inventory was more pronounced across more of our businesses and segments than we had ever seen.
Including construction products and.
Quite honestly I think there was.
Some hesitation once.
We made significant improvements in our inventory position there is certainly more to come in the coming years, but a big chunk of it happened this spring and as the Destocking more normalized inventory levels across most of our businesses, but in this case, particularly in the distribution channels of construction.
<unk>.
And so as weather improved and.
Economic activity picked up and also kind of our normal seasonal pick up.
And the roofing division related to schools.
As schools, let out in May and early June all resulted in a stronger finish.
Which seems to be continuing in the early parts of the summer. So you know the strength in Q4 are really occurred towards the end of the quarter.
And our construction products business and I think the Destocking.
Levels too.
More normalized or in some cases skinnier than usual inventory not only construction products, but other parts of our business are starting to show up in a positive way.
Got it okay. That's that's helpful and clear I guess.
The second thing I wanted to just dig into was was raw material deflation.
It looks like it's kind of an increasing or accelerating theme across the space. I guess you guys are on a FIFO accounting method. So it takes a little bit longer to roll through I guess can you help us to think about about raw material deflation in your fiscal 'twenty four guide and how that progresses.
As you kind of go through the go through the year.
Sure John Yeah. This is Matt so as you as we think about what we expect to see in the first quarter, we'll probably have a little bit of benefit on our P&L from raw material deflation and then as we move throughout the year, we're expecting to be down in the mid single digit range now that's just for materials, we still are rising.
And in things like labor and some of the raw materials like packaging and tio tumor sticky, but that's how we're looking at it and that's included in our forecast for the year. So I would add two more elements of that John one is as we experienced in this has been typical for us in our industry.
There is a lag as raw materials increase, particularly as dramatically as they did between the time of the increase and when we can get price.
And then as that cycle comes down we begin to pick up loss margin and so we are at the beginning stages of that.
Just to pick on one of our segments consumer.
We still aren't back to pre COVID-19 levels of margin activity, so theres more to come and recovering those margins.
<unk> will continue to see gross margin improvement not only from cost price mix relative to improving raw material cost, but also from our map benefits, which are real and had really good benefits for fiscal 'twenty three we'll continue with.
<unk> hundred 20, some million or more in fiscal 'twenty four.
And they were mask.
In the second half of the year by lower volumes and the Unabsorbed <expletive> hits, we took in the second half of fiscal 'twenty three by deliberate.
Production shutdowns and inventory adjustments and so those two things should combine to demonstrate some pretty solid gross margin improvement in fiscal 'twenty four.
Great. Thanks, very much for the color I'll get back in queue.
Yeah.
Our next question will come from David Hong with Deutsche Bank. Please go ahead with your question.
Hey, good morning Wayne.
Just on commercial construction.
I guess do you think the commercial construction activities have hit the bottom.
When do you expect those will recover.
Yeah, we don't have really good insight into that right now and we read the same headlines that everyone else does about.
Lightning in the banking and regional banking market, which had been critical providers of credit for commercial construction projects.
So the guidance we've provided does not anticipate any pickup a rebound in commercial construction activity per se.
As I commented in Mad commentary, you know our sales forces have been able to adjust.
To really focus on where the dollars are being spent.
And are.
The normal maintenance and repair activity of our construction products group in roofing and beside restoration is picking back up again and Thats really.
Driven by different dollars and different decision, making the commercial construction. So we don't have good insight into that but we do not anticipate a pickup in commercial construction.
Whether it's hospitality or office space anytime soon.
Okay, and then I guess for the full year guidance I know, you're not assuming a recession, but if there is a mild recession I guess theres map like cant come in down without.
Any additional levers that you can pull to maybe achieve that low end of your guidance.
Okay.
Sure you know we have.
Have a very deliberately.
Bested in growing SG&A and number of our businesses in particular consumer.
No I know that's a concern of some folks I can tell you just an example advertising promotion.
Marketing activities in.
In Q4 was up 70% from last year.
Keep in mind last year was abnormally.
Abnormally deflated, because we had some supply chain challenges and there was no point in advertising or promoting to drive people to the stores or the activity that we couldnt supply sufficiently for the full year that category is up 54% and so we are rebuilding across a lot of our businesses and in particular consumer.
Those are promotional advertising and marketing dollars there are other discretionary areas, where if as the year progresses.
We see economic challenges beyond what we anticipate.
Cut back.
So that's certainly there I will tell you that.
In certain of our business is commercial construction that we just talked about an OEM, particularly the OEM businesses that we serve in doors kitchen cabinets things that go into the housing market.
Last four or five months in terms of volume share feel recessionary to us. So hopefully that hit is being mitigated and we're starting to come out of it.
Contrary to commercial construction, one area of positivity as we progress throughout the year.
So we're not seeing it yet is a pickup in residential construction, which was a headwind for us for most of 2003.
Okay. Thank you.
Yeah.
And our next question will come from Mike Harrison with Seaport Research partners. Please go ahead.
Good morning, Mike.
Hi, good morning, Congrats on a nice finish to the year.
I wanted to follow up on your comments there on the <unk>.
<unk> construction.
You called out a potential stabilization in residential markets is a positive.
For 2024 can you give a little bit more color on the trends that you're seeing in your residential business I guess as it relates to the both the new resin side as well as kind of repair and maintenance and small projects.
Sure. So we've become somewhat more exposed to residential new construction in.
Our construction products group in particular for instance, with new Dura has sizable share and ICF in Canada, and a growing share in the U S and some of the products for besides that we put on there and we were struggling for the entire year starting in the middle of the summer last year, a fiscal 'twenty three.
As residential construction declined and it was.
I believe the headlines kind of a value trap.
There are people.
We're stuck in their homes because of rising interest rates and concerns not only about maybe they'd get a higher price for their home if they sell it but theyre going to have to pay a higher price for where they went she you saw housing turnover slowed down but in terms of long term trends.
Funny dynamic because we are under.
Served by the rate of residential construction versus demand, we see that changing and.
And so a combination of easier comps as we go into 'twenty four for product lines that are high profit like new Dara and the and the sealant and coatings products that follow that and I think a stabilization and as you see in the homebuilders anticipation of a pickup in new residential.
Starts should serve us well.
Alright, and then I guess, maybe if you could give a little bit more detail on what's going on in your specialty business. This is where you seem to be seeing a lot of customer Destocking also where you're seeing the heaviest internal destocking in fixed cost impact.
Can you maybe just help us understand when those impacts are expected to stabilize their normal lives.
Sure, So again, especially our OEM tends to serve.
Elements that actually go into the residential housing market as well.
We still manufacture wood stains and finishes that go into doors kitchen cabinets, we have a particularly nice Sherwood Amish woodworking again, which tends to go into residential whether it's furniture kitchen cabinets or specialty wood.
We go into the RV sector, which was had during Covid and then cooled off dramatically in the last year. So all of those have been down meaningfully day-glo is also a part of our specialty products group and its really more of a specialty chemical company supplier and if you follow what's happening with the.
More commodity or a specialty chemical.
This in this raw material deflationary environment with its just starting where we're experiencing the same negative trend there and then lastly, we divested.
This spring the Guardian.
Furniture warranty protection business.
Revenues, but annually about $20 million about $20 million in revenues, but very high margin business, but not core to RPM and found a good home for that business.
And that will annualize next year, but that was $20 million of lost revenue at a margin that was meaningfully higher than the SPG average.
Alright, thanks very much.
Thank you.
And our next question will come from Jeff Zekauskas with J P. Morgan. Please go ahead.
Good morning, Jeff Hi, good morning, Thanks very much.
When you look at the results of PPG and Sherwin Williams, there gross margins this quarter are up about 400 basis points.
And when you listen to them over a longer period of time, they're always focused on what their gross margin should be.
And in the case of Sherwin I think they want to be somewhere between I don't know.
46 48.
And we.
With RPM your crush margins are up maybe close to a couple of hundred basis points this quarter and.
And in the old days, you used to be in the low forties, I don't know, 42% something like that.
No youre not exactly a coatings company.
Can you talk about why your gross margin expansion isn't as great.
And do you have gross margin targets in the future can you get back to that 42 or 43 number.
How do you feel about the gross margin.
Sure Jeff that's a great question and it's an area of significant focus for our RPM and our map 25.
Goals. So first of all you have to reset gross margin profitability.
In 2018.
And we were aware of this for a couple of years. Prior we were accounting for freight out differently than most of our peers.
Incorporated in SG&A. So it raised a number of questions about how come our SG&A So I.
So we changed the accounting for that in 2018 by incorporating all of our freight.
Into cost of goods sold so that readjusted basis, our forever peak gross margin that used to be represented in your correct in the.
I think it peaked close to 43%.
The equivalent is about 39.
<unk> 38 39 eight.
So almost 40% and so that's the right way to think about.
Where our peak gross margins were on an adjusted basis for that accounting allocation change.
We have set a target of 42% in our map.
Map 2025 initiative.
Clearly we have ways to go we're making really good progress in the original map initiative, and then had significant step back like the whole industry did relative to rapidly rising inflation.
And the discontinuity of the supply chain challenges.
We are experiencing.
Experiencing.
Similar dynamics to our.
Coatings peers, but versus assured Williams, we're on a FIFO accounting in there on LIFO. So typically our benefits would show up in our P&L 60 to 75 days later.
And so I would expect you to see that and lastly, you made the comment here, which is correct about 35% of Rpm's revenues are driven by our construction products business nicely profitable, but different dynamics and different economic cycles than.
More pure play coatings companies.
Okay. Thank you for that and then lastly.
When you think about your level of inventories.
The inventories really came down and benefit in working capital are you with the right level do you think your inventories a year from now will be higher or lower or it's just too difficult to tell.
So you sound like you've been.
Party to some of our strategy discussions with our board over the last year or so in the sense that there's two areas of great focus one is gross profits, which we just talked about and the other is working capital.
And our working capital is not where it needs to be we are you know I can probably talk about different elements of our success versus our peers in the broader market and working capital we are a laggard.
And so there should be.
Three or 400 basis points of working capital improvement out of RPM on a consistent basis over the next three to four years.
And so the the working capital improvement we experienced this quarter I think demonstrated a different RPM than maybe three or four years ago.
We were able to turn off production and turn it back on even in our consumer business.
We added to Italy.
We're able to communicate better to the street and internally about.
Don.
It's not that we're not concerned about but the absorption hits that we took were the right things to do and if we take more absorption hits by aligning our operations.
And the efficiency of our operations.
You will see working capital continue to improve.
And so I think that's also.
So a very smart question and an area that has gotten a lot of attention over the last year and a half with our board.
Youre seeing the benefits of the map 25 program and the good cash conversion cycle in Q4, but there is significantly more to come and again, it's an area where versus our peers. We are three or 400 basis points behind the curve.
Great. Thank you so much.
Thank you.
And our next question will come from Vincent Andrews with Morgan Stanley . Please go ahead.
Thank you Vince and good.
Morning, everyone.
Just wanted to tie together your comments about the consumer demand picking up sort of seasonally as the quarter progressed.
Can you give us a little color as you have in the past about what youre seeing in terms of point of sale versus whats you are actually selling in and just help us understand if the point of sales improving I think last quarter. You said it was still running down low to mid single digits, but sort of is that is that gap narrowing between what your customers are doing and what their customers are doing.
During the last unit volume sales.
We're positive where in the first quarter of last year.
We experienced.
Negative unit volume or negative consumer takeaway in most of our consumer product lines and businesses throughout the rest of fiscal 'twenty three.
And it was high single digits or low double digits. This spring.
Part of it was a function of consumer takeaway and changes in consumer spending patterns again things you can read about headlines about more experiences and less DIY stuff post COVID-19.
Part of it was aggressive.
Destocking <unk> inventory adjustments within our supply chain relative to the supply chain disruptions and inventory challenges and in all types of areas, including for our consumer businesses and so I think by the time, we got into the spring a lot of that.
<unk>.
Inventory destocking of right sizing and a lot of our own supply chain issues were behind us doesn't mean, we won't see those things in the future relative to supply change that have happened in consumer, but a lot of that corrected and.
While consumer takeaway was still negative in the fourth quarter.
Was improved from the last priority from the two prior quarters. So we're seeing the consumer week by week.
Picking up.
And I would expect us to be positive sometime this fall in part because of what we're seeing in part because of the new products. We're introducing some market share gains and also we'll be annualizing.
Some easier comps and team in terms of negative consumer takeaway.
Okay, and if I could just follow up on.
The 2020 for fiscal 2024 sort of the shape of the year.
And then maybe if you want to comment on specific segments, but it seems like and it seems like that there's going to be kind of a bit of a handoff between the residual price it's in the system.
The residual destocking, maybe in the first half of the fiscal year and then the back half of the year it seems like Youre anticipating.
Now more of a volume recovery and then and then less pricing and then presumably to the EBIT line Youre going to see more of the deflation that we've been talking about is that the right way to think about the shape of the four fiscal quarter.
Yeah, that's right Vincent this is rusty here.
First half of fiscal 'twenty three we obviously you have more difficult comps.
With sales up double digits and EBITDA up in the mid 30% range in the first half of fiscal 'twenty three.
We did suffer of course as well in the back half of 'twenty three from the under absorption as we made a conscious effort.
Throttled back production so as a result, yes, we do expect.
Fiscal 'twenty four it goes on that we will see.
Pick up in the growth.
We faced some easier comparisons.
Thank you very much.
Sure.
And our next question will come from Steve Byrne with Bank of America. Please go ahead with your question.
Good morning, Steve.
Good morning, Frank.
The $200 million on sales of businesses between CPG and <unk>.
What's the logic behind that and maybe more broadly given both of those segments.
Benefit from re shoring and infrastructure.
Is there potential logic in.
In combining them.
Having at least at a commercial level, where you could potentially drive more.
Ross selling between these businesses within the two segments, what do you think of that.
Sure again, another really kind of sharp strategic question. So.
Particularly in the developed world.
<unk>, our performance coatings group and our construction products group had relatively small.
And needing more investment operations in places like the Middle East.
Elements of Africa, India, and Southeast Asia.
And rather than go it alone.
What we've done is taken a platform approach.
We have a particularly sharp management team out of South Africa.
The leader there is a gentleman named grant Boone desire he is a PCT.
Liter runs air platform group, but because of the dynamics there and his success. The success. His team they have become the platform in South Africa for rust Oleum that had a business there.
For our construction products group, so tramco nuclear concrete repair products and then the original businesses that they've had there for many years, which were carb aligning stone hard.
We've taken that model and again grant is part of PSEG and we've taken the construction products group businesses in the Middle East Africa. The construction products group in India, and the construction products group business in Southeast Asia and they are operating on.
A more combined basis as you're suggesting in those developing countries. We are investing in new facilities in southeast Asia and in India that will serve multiple product lines and all of those businesses will now report the grant boons higher so they they have shifted from reporting to the construction products group.
Reporting to what we consider the developing world platform approach and that's part of our <unk>. So thats the primary driver of that $100 billion shift.
And revenues, we would expect it to drive synergies and cost synergies in a way of expanding revenues more quickly than if they operated on their own and improving unit margins there.
Last comment I would make on that this will have no effect whatsoever on our consolidated results or guidance.
Okay.
Okay.
Okay.
In consumer do you still provide guidance to I believe it's home depot as a product category leader and maybe aerosol paint is one of them.
I ask about this are these are these positions that you have with them in particular categories, enabling you to have more pricing power and or enabling more share gains.
So first of all we are great partners with all of our retail customers and we are the leader in our small project paint category.
And in every.
Major customer that you can think of and in every major channel. The only exception is one that you would easily gather which is.
Sherman Williams paint stores.
And.
And so we are a partner in.
Understanding consumer takeaway in analyzing profitability and so that's been true for many years and continues.
That really doesn't drive profitability what drives profitability is innovation.
New products and the strength of our brands and so for example, this spring and we're just advertising it now rust oleum introduced a five in one spray cabot's patented it was first introduced into their primary stops rust category, you'll see that patent and five in one spray tip. So it allows the consumer to adjust the spray to get a fee.
<unk> spray or a narrow spray light spray fan up and downs pretty unique product that will be introduced across more of the product line.
DAP has introduced a number of new products.
The benefits of a two component foam and putting it in one can.
And that'll be a consumer like a heavy consumer or a pro product.
Where we're coming out with some other products for popcorn ceiling spray, which has so far been dominated by a single supplier and we intend to.
To become a major player in that space as well, so I think its innovation and new product introductions and the strength of brands that allows us to maintain our price levels more so than the size of our business or the relationship we have with the customers in terms of understanding consumer dynamics.
Okay.
Thank you.
And our next question will come from Ghansham Panjabi with Baird. Please go ahead.
Good morning, <unk> morning, everybody good morning.
So Frank last quarter, you basically quantify the current operating environment as a good old fashioned recession. This was back in April .
Just curious as to your updated thoughts on what your how you would quantify the current backdrop.
You touched on new home construction.
Or residential as a whole, but any other categories that are either better or worse relative to what you saw maybe three months ago.
Sure well three months ago and for the.
The three months prior it was looking back and as we sat there in April .
When consumer takeaway is mid to high single digits negative when your specialty products group and your construction products group that serve elements of the residential market in North America.
Our negative in terms of unit volume.
Sure felt like a recession to us.
With the exception of the especially products group.
Companies.
We have seen improvement in the rest of our portfolio and so while we're still negative consumer takeaway, it's much more modest than it was for a period of five or six months.
We actually saw an uptick at the end of the quarter and our construction products group, particularly in the roofing division and waterproofing.
And we see signs.
The challenges in the residential construction market, which were driven by a bunch of different dynamics are changing for the better.
This summer and we anticipate going into the rest of the year. So.
Yeah.
Sure.
Red lights are turning into yellow lights and in a few places even green lights, which is a nicer place to be than where we were how we felt just a few three.
Three or four months ago.
And I guess lastly, I would say I credit our operating people and our map program.
Our ability to adjust to these dynamics as quickly as we did is way better than it used to be.
Okay.
Got it.
And then as it relates to.
The construction segment specific to the fourth quarter and the margin upside there relative to the few quarters prior to that when they were declining year over year, what drove that significant increase in the fourth quarter specifically.
Much like my earlier comment on consumer but also here.
We were.
Within our supply chain and internally dealing with inventory challenges destocking.
Across our distribution for construction products and internally and that seems to have corrected itself and I think there was some anticipation that.
Thanks, we're moving in the right direction. The question was whether we were going to experience that in may or June and.
We had a few distributors that were hinting at a we could move some product if you discount and I think we held our pricing and held our discipline.
And.
Let's say everybody held their breath until they needed inventory and it started showing up in may.
And that positive trend is continuing as we enter the first quarter.
Got it and then.
Just one final question so as it relates to your fiscal year 'twenty four construct.
Basically guiding towards three X operating leverage relative to your sales guidance.
Is the delta between what you're guiding towards for fiscal year 'twenty for versus what you would typically have in terms of operating leverage as the delta purely map or is it also a contribution from raw materials deflation.
It's a combination of both as I commented earlier when you look at our cycle.
And we experienced this as our industry did were behind the curve in terms of catching up with raw material prices, particularly during this cycle as quickly as they went up and so we are experiencing deflation.
Versus the prior period and versus now for the first time the prior year.
But we're not back to the margin profile and a few of our businesses that we were.
<unk>.
Pre COVID-19 and so we've got work to do there so a part of it will be.
The benefits of that cost price mix moving positively and we're starting to see that as as is our industry and the other benefits and we talked about it we're talking about map, we're doing the right things on the ground, we talked about $120 million plus benefits in fiscal 'twenty three it was hard to <unk>.
Fine.
We had $50 million of Unabsorbed hits.
Gross profit in our P&L in the second half of last year as a result of lower volume market wise, but also the production shutdowns to rightsize inventories internally and so.
Those map benefits covered a lot of that.
In a rising unit volume environment, which we're working hard to get back to an open for you.
Youll start to see those snap benefits add to that margin expansion. So those are the two dynamics that will drive a pretty meaningful margin expansion and what we anticipate to be relatively modest revenue growth at least for the first half of the year.
Got it thank you Frank.
Sure.
And our next question will come from Josh Spector with UBS. Please go ahead.
Good morning, John Hi, It's just hey, good morning, just a couple of quick follow ups first can you just talk with pricing in the fourth quarter and what's your assumption for the first quarter.
In terms of pricing in the fourth quarter. It was in between nine and 10% for an impact and then the first quarter, we would expect that to diminish somewhat because we'll be lapping the anniversary of the.
Major catch up selling price increases that were done in the consumer segment in the first quarter of 'twenty three.
We still do have price increases going out.
Stays at RPM in various product lines.
More modest of course than we saw last year when we had the.
The ramp in inflation, but we'll continue to get selling price benefits shifts more modest.
Thanks, and just on under absorption you made some comments I believe when talking about construction and specialty that you expect the impact to get larger into the first quarter and maybe the first half I guess is that just the roll through of that cost through inventory.
Or are you actually ramping up efforts and just what's the quantum that you're baking into your guide for first half or further under absorption impact.
I don't expect them to be larger.
In fiscal 'twenty four than they were in 2003 in fact there'll be smaller, particularly in the second half, but we will still have some level of unabsorbed Shen until were positive unit volume everywhere.
And we still will have some level of unabsorbed.
We're we're continuing to adjust down inventory levels as I commented earlier, we have more to do but boy and if on the full year, we had 60 or $70 million of Unabsorbed cost, we would have substantially less than that.
In fiscal 'twenty, four unless we bump into some unanticipated economic challenges.
Yeah.
Got it thank you.
And our next question will come from Mike Sison with Wells Fargo. Please go ahead.
Good morning, guys. Congrats again on a nice.
This quarter and outlook.
If I recall wave two is especially something like $160 million of seller.
And map savings.
If I did the math for you.
Your growth for 24 versus 23, that's kind of like all of it and then some right.
It doesn't seem like there's a lot of deflation in that number.
It looks like you're going to have some volume growth. So.
Great.
Am I doing the math right is there.
It seems like your outlook could be a little bit conservative.
Well in terms of the outlook the outlook is for volume declines.
Be modest in Q1, and then start to turn around as we get into Q2.
<unk>.
As Frank mentioned.
We will see map benefits that we didn't see last year, because they were masked by under absorption so for that reason.
We did have a outlook for the full year is actually better in the last nine months in total compared to the first quarter sure Mike I would add to that just we commented on this earlier.
Some of our peers have had the same type of strong performance over a period of time, but not all of them have our Q1 of last year sales were up 17%, including a lot of unit volume growth.
And EBIT was up 33% in Q2 sales were up 9% and adjusted EBIT was up 36%. So and those were all time records. So we got some big mountains decline.
In the first half of the year I think we're confident with what we see that we're going to be generating sales.
Sales growth and EBIT growth, but more modest for the reasons that debt.
Rusty mentioned and the dynamics that we're slowly growing out of and more modest in comparison to the prior year, where we just had big big numbers.
As we have.
We were all high Fiving in October of last year, because unit volume growth was solid everywhere in our.
Map driven leverage was really good and then boy the bottom fell out of a couple of our businesses starting in November and December and Thats, what we communicated in January and in in the spring.
I think it's a combination of improving economics and as I mentioned earlier, a more agile organization than maybe we were four or five years ago.
Great. Thank you.
Thank you.
And our next question will come from John Roberts with Credit Suisse. Please go ahead.
Hey, good morning back to the morning back to the new product comments on consumer I think you lost some share because of the output shortage. During the pandemic do you have any data on category growth versus your growth or something that might suggest you regain some share.
Yeah.
We have picked up small project paint share a major home center. This spring so share has gone up for us in small project paint if thats, what youre, referring to yes.
And this is news from last year, we lost a portion of spray paint business to bear at home depot.
In some cases it was elimination of.
Universal, which is one of the more high performing.
Products, we've been able to reposition that product in other parts of our channels and we are making up.
In that category for instance, almost the entirety of what was lost.
And that transition and as Rusty said, we picked we picked up share on shelf at some other major retailers. So.
We are back to playing offense in our consumer business.
Boy a year ago, we had supply chain challenges, we had our own operating challenges that we were addressing.
I think that had as much as anything to do with the market share loss at a major customer.
Those issues have been corrected.
We have more than enough capacity to take on more business.
Our spending in advertising and promotion summer normal TV, a lot more online and so we're playing offense in terms of introducing new products are going after share and having the volume to be aggressive.
Waste that we didn't just a year ago.
And then on PCT I think you highlighted the energy customers with the lower energy prices I thought those customers probably had pulled back.
No.
Phil seeing solid growth in the energy markets, whether it's gas.
And fracking.
Interestingly enough there has been a resurgence in some offshore production.
And so while there has been some volatility.
In oil prices per se with slowdowns in China persisting longer than people thought I think the geopolitical issues in where the energy companies are suggest to us at least for the next year that that will continue to be a relatively solid area for business.
Thank you.
And our next question will come from Frank Mitsch with Fermium Research. Please go ahead.
Hey, Brad.
Hey, good morning, Good morning, Frank Hey, Rusty last conference call. You said that your best days were ahead in terms of cash flow and obviously this quarter delivered.
On that and obviously the inventory question, that's been discussed AD nauseum, but the net debt has come down as well. So it begs. The question you know you bought back $12 $5 million the last couple of quarters.
How do you how are you thinking about use of cash buybacks versus M&A in the current environment.
Yeah.
Yes.
Sure Yeah in terms of our share.
Share repurchase that has been modest with all the economic.
<unk> over the last couple of years and with Covid of course before then.
The biggest.
Potential use will be if we run into bigger acquisitions, we've been doing smaller acquisitions over the last couple of years with multiples being out of whack as you know we're very disciplined in the prices, we pay and as a result of the inflated.
Expectations those acquisitions have come in line, but you are correct.
Acquisitions stay.
Relatively small we will have the ability to.
Yes.
And large from the minimal level of share repurchase sure.
Directionally, we would expect.
Maybe $50 million of share repurchases next year and then.
It would be.
Somewhat opportunistic relative to market dynamics.
We will be favoring that reduction.
And small transactions the M&A markets, both globally for big M&A and on a smaller scale.
Have dropped dramatically and part of that was expectations of sellers to get multi.
Multiples from a year or two ago on earnings from a year or two ago and I think there's been good discipline on the buy side again big global deals as well as small to mid size mid market deals and you'll see I think.
Capitulation at some point relative to the interest rate environment and higher cost of capital in general, but also the higher cost of incremental capital I think some of the M&A valuations were <unk>.
Relatively on discipline some of that came out of private equity because for a period of time your incremental cost of capital was practically zero.
That's not true anymore, and so if we can we will certainly utilize free cash flow to reduce debt and improve our balance sheet modestly repurchase stock I think it's likely that when our board meets in October we will increase our dividend for the 15th consecutive year that'll be a nice milestone and then position our.
Balance sheet take advantage of opportunities when they show up at the right price.
Got you got you very helpful and Frank you indicated that Europe ex FX was actually up a little bit in <unk>.
In the fourth quarter.
Here, we are seven weeks or so into the first quarter or what are you seeing in Europe , what are your expectations for that for that region.
Sure. It's great question and I. Appreciate you are picking up on that Europe hurt us in terms of sales and earnings for five or six quarters in a row.
And.
We saw an uptick at the end of Q4 and Thats continuing its modest like everything that we're seeing is modest but it is modest and it's modest in the positive direction. So we're seeing sales moving in the right direction, we're seeing margin expansion.
We're also doing a I wouldn't call it reorganization, but a focus.
On Europe and have one of our top executives actually moving there and take responsibility for accelerating some of the map programs in Europe , which is lagging the map initiatives that we've done in North America.
Sure.
The underlying dynamic there is a positive.
Revenue growth and some margin expansion in Europe , which we haven't seen for five or six quarters. So theres a lot of.
Points of light.
Or.
Shoots of growth that we're seeing and the key for us and I guess my caveat to all of that would be none of us have ever experienced a more volatile period of time that we've seen over the last two or three years normally I would get excited about a three months trend and.
Projected into the future given the whipsaw that we've all seen in the last two or three years.
We're going to.
We will get excited about a trend when it feels like it's five or six months in a row.
Got you. Thanks, so much.
And our next question will come from Alexia <unk> with Keybanc capital markets. Please go ahead.
Good morning, good morning, everyone.
<unk>.
I think.
Historically talked about infrastructure uplift, mostly in calendar 2024, but I think you mentioned some more of the wins just on this call are you seeing acceleration in this end market in the U S. In particular.
We are seeing benefits from onshoring.
We've long been a provider of.
Fireproofing coatings and specialty flooring into the tech sector and there is significant investments there.
We're seeing onshoring.
And in other areas and so that is benefiting us.
Seeing.
Highway Marine.
Different areas.
Where youre seeing.
Pretty good investment and so we participate in all those markets.
Im a little bit hesitant, because the amount of money and a $1 two trillion dollar infrastructure Bill.
It's hard to track, where all of that is and over what period of time, it's going to flow through but it's certainly a positive tailwind for our performance coatings group and portions of our construction products group.
Thanks, Frank and then another question on pricing how is competitive environment.
Especially in the areas, where you have to bid on.
And projects Hasnt been disciplined so far.
Sure historically, we've been able to hold on to most of our price in most of our businesses the categories, where that has not been true had been more commodity pass throughs. So.
In some areas of silicones, we had a lot of value in the more commodity space of silicones, we package it and sell it through and silicone prices rose dramatically, we fought to kind of catch up on price that's true in our construction products group and in the silicon portion of our DAP business and as silicon prices of.
Dropped our prices have moderated as well.
Probably the only other area, where I would tell you historically, we've seen prices go up and down is in the highway portion of infrastructure pretty highly competitive there and so youll see prices go up and go down based on the underlying core raw materials to some of those.
Systems.
But other than that historically, we've been able to hold on price and.
That's what we're doing at this point as I said, we've got some loss margin to pick up.
And I would expect that to continue for the foreseeable future.
Thanks, Brian .
And our next question will come from Kevin Mccarthy with vertical research partners. Please go ahead.
Good morning, Kevin Good morning, how are you.
Good. Thank you should come back to the subject of of cash generation. It sounds like you have.
Some ongoing benefit from reduction of inventories. So can you comment on on the working capital that you might be able to extract in fiscal 'twenty four as well as your capital expenditure budget for the year.
Capex budget for the year Rusty.
In line with where we were in fiscal 2003 for $250 million or so.
And then on working capital I think I'd, rather report our achievements in hindsight other than the comment I made earlier, which is we.
We have a goal of improving.
Our working capital as a percentage of sales by three or 400 basis points over the next three to four years and so if you just do the simple math call. It 100 basis points a year maybe.
Maybe we can do a little bit better than that but if you apply that three or 400 basis points as a percent of sales.
You can get a pretty good sense of the additional cash flow that we should be able to generate on top of what we would generate based on revenue growth in our profit margin profitability and it's a function of us getting better more efficient.
Our team is doing a really good job on the map 25 initiatives.
And the fact that we are.
Underperformer in this area so.
Versus our peers there is efficiencies that we're gaining.
We have not had in the past.
That's our challenge and it's something we're up for today relative to the disciplines, we have and the approach we have now with <unk> 106, eight and a more center led approach to our operations and what we had at RPM five years ago.
Okay. That's very helpful. I appreciate the comments.
Thanks, Kevin.
As a quick reminder, if you have a question you May press Star then one to join the queue.
Our next question here will come from Arun Viswanathan with RBC capital markets. Please go ahead.
Good morning, Arun Alright, good morning, Frank Thanks for taking my question Congrats on the strong results and a favorable outlook here.
So in listening to your comments.
It sounds like there were a couple of positive drivers, maybe slightly better infrastructure and re shoring activity.
Some some price holding price cost a little bit.
Or as well.
And then your own <unk>.
<unk> gains as well.
Is that accurate maybe at the top three.
And then if you if you were to kind of see how that moves forward.
Are there further improvements in each of those categories do you expect or is it maybe a recovery.
Commercial and some other weak parts that would be bigger drivers. Thanks.
Sure. So I think you got that right I would add that.
Some of the <unk>.
More solid or stable.
This activity. We are seeing is a result of this bull whip inventory effect in supply chain challenge that we saw more broadly across our businesses and we've never seen before and so as <unk>.
Excess inventories or having the wrong inventory in the wrong places because people overbought.
During a period of time, where they couldnt get stuff.
That's been corrected.
I've been corrected perfectly know or there is still adjustments here and there both at RPM and with our supply chain that will occur yes, but the biggest chunk of that's been corrected. So so now there is a normalized.
Demand, that's serving we think an improving market.
In the construction area.
Improving consumer takeaway, although it is still modestly negative as we sit here today.
And so those are the dynamics I think thats right, so going forward improvement in the underlying dynamics.
And then lastly.
Assuming that we avoid recession substantially easier comps for the RPM businesses.
And substantially better leverage capabilities, if we have positive unit volume in the second half of the year.
If we have positive unit volume in the second half of the year versus what we experienced this year in the internal challenges that we undertook to drive cash flow Youll see nice margin expansion. So those are the dynamics to think about for the year.
Great. Thanks for that and then I'm sorry, if you already addressed this but on the map games.
Did you provide an actual dollar number that would maybe flow through in fiscal 'twenty four out of that 160.
And if it's less than 120 or something and then would it be the remaining 40 and in our fiscal 'twenty five or how should we think about what actually close it.
Thanks.
The original guide we provided on the Investor day, a little more than a year ago was $160 million for fiscal 2004.
And.
Some of that's on the come in other words as we realize it throughout the year. It is a ongoing sustainable basis and so we will report on that on a quarterly basis as we get through the year, but I would expect to realize over $100 billion in our P&L in fiscal 'twenty four and on a run rate by the end of the year.
<unk> we will.
If we hit our targets, we will have achieved on a run rate of $160 million. That's the plan, but again, given our momentum and where we are I would expect it to at least $100 million of flow through the P&L during the year.
Great. Thank you.
Thank you.
And this concludes our question and answer session I would like to turn the conference back over to Frank Sullivan for any closing remarks.
Thank you Joe and thank you to everybody for your participation on our call today.
We're excited about improving business dynamics.
Throughout RPM in combination with the effective execution of our map 2025 program.
We look forward to updating you on our first quarter results.
Talking about our dividend activity and our outlook for the balance of the year. When we're together again in October .
Enjoy the rest of your summer and have a great day.
The conference has now concluded. Thank you very much for attending today's presentation. You may now disconnect your lines.