Yahoo Finance RPM International Inc. (NYSE:RPM) Q3 2024 Earnings Call Transcript
RPM International Inc. (NYSE:RPM) Q3 2024 Earnings Call Transcript April 4, 2024
RPM International Inc. beats earnings expectations. Reported EPS is $0.52, expectations were $0.47. RPM isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning everyone and welcome to the RPM International's Fiscal Third Quarter 2024 Earnings Call. [Operator Instructions] Please also note that this event is being recorded. At this time, I'd like to turn the floor over to Matt Schlarb, Senior Director of Investor Relations. Sir, please go ahead.
Matthew Schlarb: Thank you, Jamie and welcome to RPM International's Conference Call for the fiscal 2024 third quarter. Joining today's call are Frank Sullivan, RPM's Chair and CEO, who is dialing in remotely today; Rusty Gordon, Vice President and Chief Financial Officer; and Mike Laroche, Vice President, Controller and Chief Accounting Officer. This call is also being webcast and can be accessed live or replayed on the RPM website at www.rpminc.com. Comments made on this call may include forward-looking statements based on current expectations that involve risks and uncertainties which could cause actual results to be materially different. For more information on these risks and uncertainties, please visit RPM's reports filed with the SEC.
During this conference call, references 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 2023, 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. Additionally, as a reminder, certain businesses in Asia Pacific that were previously part of the Construction Products Group are now being managed and reported under the Performance Coatings Group effective June 1, 2023.
As a result, all references to CPG and PCG today reflect the updated structure. The recast businesses generate approximately $100 million in annual sales and this change has no impact on our consolidated results. At this time, I would like to turn the call over to Frank.
Frank Sullivan: Thank you, Matt and thank you to everybody for participating on our call today. I'll start with a high-level review of our third quarter results. Then I'll turn the call over to Mike Laroche to discuss the financials in more detail. Matt will then provide an update on the balance sheet on organic growth investments in emerging markets and Rusty will cover our outlook for the balance of the year. At the end of the prepared remarks, we'll be pleased to answer your questions. I'll begin on Slide 3 with our third quarter results. In addition to our strategic balance and focus on repair and maintenance, positive momentum with our MAP 2025 operational improvement initiatives continued in the third quarter which generated our ninth consecutive quarter of record sales and EBIT results.
Margins expanded and we had our fourth consecutive quarter of record cash from operations. During this trailing 12-month period, we generated $1,260 million in cash flow from operating activities far exceeding any previous 12-month period in RPM's history. Much of this has been driven by improvements in working capital which has been a particular area of focus with our MAP 2025 initiatives. Turning to Slide 4. Sales growth was led by our Construction Products Group and our Performance Coatings Group. These segments benefited from their focus on repair and maintenance as well as their ability to serve strong demand from infrastructure, reshoring and high-performance building projects with their engineered solutions. Favorable timing of some project completions, particularly in the Performance Coatings Group contributed to sales growth in Q3.
Due to challenging market conditions, volume declines in the Consumer and Specialty Products segments continued. Consumer was negatively impacted by lower DIY takeaway and retail customers who continue to tightly manage inventory levels, partially offset by market share gains. While volumes declined in the Specialty Products Group due primarily to challenging comparisons in the Legend Brands disaster restoration business, there were signs of stabilization in our core specialty OEM markets. As expected, pricing was positive in all segments as we catch up with inflation, including continued inflation in wages, benefits and insurance. On a consolidated basis, pricing during the quarter was up approximately 1% quarter-over-quarter. We achieved record adjusted EBIT as our MAP 2025 benefit inclusive of the commodity cycle recovery drove a 170 basis point improvement in margins.
MAP 2025 initiatives were a benefit to all businesses, particularly those that generated positive unit volume growth. It is imperative that throughout cycles we invest in initiatives to leverage our entrepreneurial spirit and generate volume growth that will allow us to fully realize the benefits from the MAP initiatives we have put in place. Some recent examples include capacity expansions, increasing R&D spending through the establishment of our Innovation Center of Excellence and improving our data-driven decision-making capabilities. We are also expanding our sales forces and training them to increase sales of higher-margin products as well as introducing new products such as DAP, one component wall and cavity spray foam which is helping us win market share this spring.
Moving to Slide 5. The positive momentum from improved coordination outside the United States continued in the third quarter, emerging markets led growth for the company as a result of RPM's heavy emphasis on engineered solutions for infrastructure investments in these geographies. In Europe, we are taking share with our focused sales strategy. After excluding the impacts of a divested business, sales in the region were roughly flat despite macroeconomic pressures in several economies. And our focus on implementing MAP 2025 initiatives in the region generated strong EBIT margin improvement. Overall, I'm proud of our associates' continued commitment to our MAP 2025 program which has consistently generated efficiencies, higher levels of cash flow and record results.
We remain focused on expanding margins, accelerating organic growth and improving cash flow to achieve our MAP 2025 targets. I'll now turn the call over to Mike Laroche to cover our third quarter financial results in more detail.
Michael Laroche: Thanks, Frank. Starting on Slide 6. Consolidated organic sales increased 0.9%, driven by positive volumes at Construction Products Group and Performance Coatings Group as well as higher pricing in all segments. FX was 0.4% headwind to revenue. MAP 2025 benefits, including the commodity cycle drove adjusted EBIT margin expansion of 170 basis points, improved fixed cost leverage at Construction Products Group and Performance Coatings Group also contributed to better margins. As Frank mentioned, we are investing in initiatives to accelerate organic growth and this contributed to an increase in SG&A during the quarter. Incentives to sell higher-margin products and inflation and wages and benefits also added to the SG&A increase.
We continue to selectively raise prices at businesses with the most pronounced inflationary pressures and took expense reduction actions at the end of fiscal year 2023 to help mitigate the SG&A rise. Adjusted EPS increased 40.5% to $0.52 which was a third quarter record and was driven by the adjusted EBIT growth. Interest expense declined in the quarter due to a $629 million debt reduction over the prior year as a result of record cash flow and this contributed to the adjusted EPS increase as well. Now turning to the segment results. Starting with Construction Products Group on Slide 7. Third quarter sales were a record and growth was led by concrete admixtures which continued to benefit from reshoring and infrastructure projects, including in Latin America.
The segment also generated growth from increased demand for high-performance buildings and market share gains. The rise in adjusted EBIT was led by MAP 2025 benefits driving a favorable product mix and improved fixed cost leverage from volume growth. On Slide 8, Performance Coatings Group achieved record sales, once again driven by the demand for engineered solutions serving reshoring projects, including favorable timing of some project completions as well as market share gains. The businesses in Africa, Middle East and Asia Pacific that were recently aligned under the Performance Group -- Performance Coatings Group management contributed to the segment's growth driven by RPM's engineered solutions focused on infrastructure projects. Adjusted EBIT was a third quarter record, driven by sales growth, favorable mix and improved fixed cost leverage that was enhanced by MAP 2025.
Moving to Slide 9. Specialty Products Group sales declined primarily due to challenging comparisons to the prior year period for the disaster restoration business, when it benefited from the response to freeze-related flooding which should not recur to the same extent this year. The divestiture of the noncore furniture warranty business also contributed to the sales decline. After several quarters of weakness, specialty OEM markets began showing signs of stabilization during the quarter. The reduction in adjusted EBIT was driven by the sales and volumes decline in the disaster restoration business which resulted in unfavorable absorption as well as the divestiture of the noncore furniture warranty business. SPG also continued strategic investments in long-term growth initiatives which were partially offset by expense reduction actions taken at the end of fiscal 2023.
On Slide 10, the Consumer Group was pressured by weaker takeaway at retail stores from DIY customers, customers maintaining lean inventories and the rationalization of lower-margin products. Market share gains partially offset the decline in volumes. MAP 2025 initiatives and the rationalization of lower-margin products resulted in margin expansion which was partially offset by under-absorption associated with lower volumes and higher expenses from wages and benefits. Now, I'll turn the call over to Matt who will cover the balance sheet and cash flows and provide an update on emerging markets.
Matthew Schlarb: Thank you, Mike. Moving to Slide 11. The positive momentum in working capital improvements continued in the third quarter as inventories declined by $261 million compared to the prior year. Year-over-year in the third quarter, we reduced working capital as a percentage of sales by 580 basis points to 21.4%. This contributed to a record $173 million in cash flow from operating activities during the quarter. Over the trailing 12-month period, we have generated $1.26 billion in cash flow from operating activities which is a record and represents an increase of $969 million from the same period in the prior year. We have used the strong cash flow to reduce debt by $629 million compared to the prior year and returned $210 million in cash to shareholders through dividends and share repurchases during the first 9 months of the fiscal year.
On Slide 12, I'd like to highlight investments we've been making in emerging markets. As we've previously discussed, businesses in Asia Pacific, Africa and the Middle East have recently aligned under a new management structure. This alignment has resulted in improved coordination and growth has accelerated as we are better positioned to capture increasing demand for our engineered solutions serving infrastructure projects. We've seen this growth continuing and we are making investments in new plants in Malaysia and India to add capacity, reduce shipping costs and improve our ability to serve our customers. In line with our Building a Better World initiative, the construction of these plants incorporate several sustainability features, including solar panels, rain water harvesting and a solvent recovery system.
These plants are also incorporating MAP manufacturing improvement initiatives and will produce from multiple brands across RPM segments, demonstrating the increased collaboration between RPM businesses that has been enabled by MAP. The Malaysian facility is scheduled to open in the first half of fiscal 2025 and the Indian plant is expected to come online in the second half of fiscal year 2025. Now, I'd like to turn the call over to Rusty to cover the outlook.
Russell Gordon: Thanks, Matt. Our fourth quarter and full year outlooks are on Slide 13. On a consolidated level, fourth quarter sales are expected to be approximately flat compared to a record prior year period. CPG is expected to lead growth with sales up low to mid-single digits, driven by demand for solutions serving infrastructure and institutional projects and its focus on restoration and maintenance. After multiple years of achieving record sales, PCG sales are expected to be approximately flat in the fourth quarter. This is primarily due to the timing of project completions, including some that were pulled forward into the third quarter. Additionally, PCG's results will be impacted by a previously announced business divestiture.
SPG sales are expected to decline in the mid-single-digit percentage range as the disaster restoration business remains challenged, while specialty OEM markets stabilize, albeit at low levels. In Consumer, market share gains are expected to be more than offset by continued softness in DIY demand, resulting in sales declining in the mid-single-digit range. With these continued share gains, we believe we are poised to achieve accelerated growth when existing home sales and DIY markets ultimately recover. Consolidated fourth quarter adjusted EBIT is expected to increase in the high single-digit percentage range compared to a record prior year period driven by MAP 2025 benefits which are being partially offset by under-absorption from lower volumes.
Finally, our full year guidance is at the bottom of Slide 13. We anticipate that full fiscal year sales growth will be near the midpoint of our previous guidance of up low single digits and adjusted EBIT growth will be near the midpoint of our previous guidance of up low double digits to mid-teens. This concludes our prepared comments. We will now be pleased to answer your questions.
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