RPM International Inc.

Welcome to the RPM International Conference Call for the fiscal 2020 first quarter. Today's call is being recorded. This call is also being webcast and can be accessed live or replayed on the RPM website at www.rpminc.com. Comments made on this call may include forward-looking statements based on current expectations that involve risk and uncertainties. which could cause actual results to be materially different. For more information on these risk uncertainties, please review RPM's report 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. Following today's presentation, there will be a question and answer session, at which time, if you wish to ask a question, you'll need to press star then one on your telephone. Please note that only financial analysts will be permitted to ask questions. At this time, I would like to turn the call over to RPM's chairman and CEO, Mr. Frank Sullivan, for opening remarks. Please go ahead, sir.

Thank you, Hilda. Good morning and welcome to the RPM International Inc. investor call for our fiscal 2020 first quarter ended August 31, 2019. On the call with me today are Rusty Gordon, RPM's vice president and chief financial officer, and Matt Radicek, our vice president of global tax and treasury, who is leading our investor relations function. I'll provide some high-level commentary on our first quarter results and an update on our 2020 map to growth operating improvement plan. Then Matt will review the first quarter numbers in more detail. Rusty will wrap up our prepared remarks with our outlook for the remainder of fiscal 2020, after which we'll be happy to answer your questions. The benefits of our 2020 Map the Growth Operating Improvement Plan, which really began to take hold over the fourth quarter of last year, carried over into the first quarter of fiscal 2020 and generated significant earnings leverage. Initiatives that proved particularly beneficial included actions to rationalize our manufacturing and distribution footprint, improve production processes, and strengthen our supplier relationships through center-led procurement. In particular, during the first quarter, we announced the closure of three additional plants, which brings our total to 15 out of 31, which are targeted for the total program. Additionally, we continue to streamline our workforce with approximately 80 additional reductions, which brings our total over the course of our restructuring to slightly more than 600. On a consolidated basis, we realized 2020 map to growth savings in the first quarter that totaled $26 million, $7 million from manufacturing and operations, $7 million from procurement, and $12 million from G&A, all of which flowed through our P&L. These efforts resulted in an increased adjusted EBIT of 25.3 percent and adjusted diluting earnings per share of 25 percent over the prior year quarter, which exceeds our guidance despite modest sales growth in the quarter, which we had anticipated. This was the direct result of three factors. Number one, the decision to exit low margin product lines and businesses as we pursue a value over volume strategy in certain businesses. For the fiscal 2020 year, this will reduce revenues by approximately $40 million in total. Also, we had an extremely wet June that slowed painting and construction activity, which particularly impacted our consumer segment and our construction products group. And sluggish international markets, particularly in Europe, coupled with unfavorable foreign exchange impact on a transactional and translational basis. I should note that the improvement in EBIT margins are not just contained to one or two segments, but were spread across the entire enterprise, which demonstrates the breadth and effectiveness of our 2020 Map to Growth operating improvement program across RPM. We continue to have a positive outlook on the outcomes of a restructuring program, and as a result, repurchased approximately $100 million of our common shares during the quarter. This was in addition to the $200 million we repurchased during fiscal 2019. When combined with the $200 million cash redemption of our convertible notes in November of 2018, we are approximately halfway to our 2020 map to growth goal of repurchasing a billion dollars of our stock. I'll now turn the call over to Matt Radicek for a more detailed review of our financial results in the quarter.

Thanks, Frank, and good morning, everyone. Before walking through our financial review, I would like to remind you of two changes that we communicated in our last earnings release on July 22nd. First, beginning this quarter, there is a change in classification of shipping costs paid to third-party shippers. We recast these costs from SG&A in the cost of goods sold. This change puts us in line with how our peers and most other manufacturers classify shipping costs and provides investors with a better point of comparison. It does not impact EBIT. And second, we realigned the business into four reportable operating segments from our previous three operating segments. The new operating segments are the construction products group, performance codings group, consumer group, and specialty products group. The goals of this change are twofold, to position the business for accelerated growth and to also provide our investors with greater visibility into the company while providing better comparability among our peers. Starting with this first quarter, we are reporting our results under this four-segment structure. We are providing comparable fiscal 2019 financials that have been recast to reflect both the change in classification of shipping costs and the effect of the segment realignment. Next, I will walk through our financial results for the quarter. Please note that my comments will be on an as-adjusted basis. During the quarter, we achieved record consolidated net sales of $1.47 billion compared to the $1.46 billion reported during the first quarter of fiscal 2019. Organic sales growth was nearly flat. Acquisitions contributed 2.3% to sales or $34.1 million, while foreign exchange was once again a headwind that reduced sales by 1.3% or $19.5 million. As Frank indicated, our strong bottom-line performance was primarily driven by our operating improvement initiatives, which generated significant earnings leverage. Also contributing to the bottom line was the margin recovery resulting from last year's price increases. While material costs were up slightly, then we experienced increased costs for labor. First quarter EBIT increased 25.3% to $192.6 million, and diluted EPS increased 25%, to $0.95 per diluted share of $0.76 per diluted share a year ago. The combination of our share repurchases and last year's convertible bond retirement resulted in $0.05 per diluted share accretion for the quarter. Now turning to our segments. Sales in our construction products group increased 3.6% to $536.1 million during this year's first quarter, primarily driven by acquisition growth of 4.4% resulting from the Nudura and Shul transactions. Organic growth added 0.7%, while foreign exchange reduced sales by 1.5%. This segment also benefited from strong performance for our basement waterproofing solutions business, as well as recovering our Brazilian operation, which generated significant sales growth. Impacting our North American businesses in the segment were labor shortages and conditions that delayed construction activity. Additionally, sales were discontinued in certain product lines and geographies as a result of strategic decisions to exit low-margin, high-risk working capital operations. Segment EBIT increased 23.1% or $16.3 million to $86.9 million. The improvement in EBIT was substantially driven by savings from our restructuring program, including management delaying, plant rationalization, and improved manufacturing disciplines. Sales in our performance codings group were 297.2 million. Organic growth was 0.4%. Acquisitions added 1.8% while foreign exchange reduced sales by 1.9%. Despite modest sales growth, savings from our 2020 map to growth plan provided significant earnings leverage in the segment. Even increased 31% to 36.9 million during the first quarter of fiscal 2020. The performance codings group generated the highest earnings growth out of all of our segments during this quarter, driven by a reduction in its operating footprint and strategic decisions to exit low-margin businesses. The segment also benefited from management de-layering as it executes a reorganization towards a global brand management structure. In the consumer group, sales were $479.3 million during the first quarter of fiscal 2020. Organic sales increased 0.1%, while acquisition growth contributed 1.3%. Foreign currency translation reduced sales by 1%. Segment sales were dampened by four factors. First, a difficult comparison to the prior year due to load-ins. Second, a soft economy in the UK related to Brexit. Third, rainy weather in June. And fourth, deferred promotional activity by big box retailers. EBIT was $61.7 million, an increase of 18.6% over the prior year. The consumer group's improvement in EBIT was largely due to a favorable year-over-year comparison resulting from $10 million in associated costs from legal settlements during the first quarter of fiscal 2019. Additionally, segment results in the first quarter were impacted by confluence of factors. As part of our map to growth program, which we kicked off over one year ago, We reduced headcount and rationalized our manufacturing footprint. These initiatives led to bottom line savings. However, greater than expected market share gains at the end of FY19 led to elevated costs incurred by outsourcing production in order to service this increased demand. As a result, we are investing in new equipment, improving production methods, and leveraging our internal manufacturing network to provide increased capacity and produce more efficiently. The specialty products group experienced sluggish demand in the OEM, manufacturing, and international markets it serves, which impacted the top line. Segment sales were 160.1% in the first quarter of fiscal 2020. Organic sales decreased 4.3%, and foreign currency translation reduced sales by 0.8%. On the bottom line, EBIT margin improved by 230 basis points during the quarter, and EBIT increased by $2.2 million, or 8.5%, to $28.6 million. This was due to good cost discipline, manufacturing yield improvements, and restructuring activities from our 2020 Map to Growth program. Next, a few comments on cash flow and our effective income tax rate. During the fiscal 2020 first quarter, cash generated from operations was $145.1 million, compared to cash used for operations of $7.1 million a year ago. This increase was due to improved earnings and margin improvement initiatives, as well as a carryover impact from the prior year removal of certain early cash payment discounts, which effectively shifted approximately $100 million in receipts from the fourth quarter of fiscal 2019 to the first quarter of fiscal 2020, which we discussed in our previous earnings release. Lastly, as expected, our effective income tax rate for the quarter was higher this year versus in the prior year's first quarter, which was impacted by more favorable discrete tax benefits. The higher effective tax rate resulted in lower diluted EPS of $0.05 as compared to last year's first quarter. I'll now turn the call over to Rusty for details on our outlook for the remainder of fiscal 2020. Thanks, Matt.