RPM International Inc.

to the RPM International Conference call for the fiscal 2022 fourth quarter and year end. Today's call is being recorded. This call is also being broadcast 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 and involve risks and uncertainties, which could cause actual results to be materially different. 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 direct comparable gap 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 will need to press star, then one on your telephone. Please note that only financial analyst, Mr. Frank Sullivan, for opening remarks. Please go ahead, sir.

Thank you, Michelle. Good morning, and welcome to the RPM International Inc. investor call for our fiscal 2022 fourth quarter and year-end.

I'm Mike LaRoche, Vice President, Controller, and Chief Accounting Officer. I'll share broad commentary on our consolidated performance for the quarter and the year. Then Mike will provide details.

details on our financial results, and Rusty will conclude our prepared remarks with our outlook for the first quarter of fiscal 2023. Please note that our comments will be on an as-adjusted basis, and all comparisons are to the fourth quarter of fiscal 2021, unless otherwise indicated. We provided a supplemental slide presentation to support our comments on this call. It can be accessed in the presentations and webcast section of the RPM website at www.rpminc.com. After our remarks, we'll be pleased to take your questions. We generated record fourth quarter performance, which reflected accelerating momentum across RPM throughout fiscal 2022. As we progress through the year, our nimble businesses responded quickly to address ever-changing supply chain constraints, inflationary challenges, and foreign exchange headwinds. I'd like to share a few examples across RPM. In response to the scarcity of some raw materials, we purchased a manufacturing facility in Texas last September. The dedicated team quickly ramped up production of alkyd resins, which were in very short supply due to a supplier explosion at one of our primary suppliers in the industry. In addition, our R&D professionals have been working around the clock to reformulate literally thousands of products to qualify different materials, all while maintaining high performance performance. Another example is our disaster restoration equipment business, which was hampered by the semiconductor chip shortage. It found alternative supply and reconfigured its products to accommodate these challenges and deliver for its customers. As you can see on slide three, this chart reflects the momentum across our businesses throughout the year. Also having an impact were the investments we've been making to accelerate growth in the fastest-growing areas of our business, particularly our high-performance building, construction, and coding systems. Our associates' efforts, along with solid construction and industrial maintenance activity, as well as a rebound in energy markets, culminated in a fourth quarter that produced consolidated record sales and record-adjusted EBITs. On the next slide, you'll note driven by pricing adjustments and operational efficiencies, we achieved record results in all four segments in sales and record EBIT in three of our segments. The lone outlier was our consumer group, which began to narrow the year-over-year gap in adjusted EBIT results as price increases started to catch up with inflation and access to raw materials improved. Better materials availability was largely due to the production facility we acquired last fall. We also benefited from $17 million in incremental savings during the quarter from our ongoing operating improvement program efforts. On that subject, driving operating efficiency remains a top priority at RPM, and our teams have made significant progress in developing the follow-up plan to our highly successful map to growth operating improvement program. which concluded at the end of fiscal 21. We're calling the new program MAP 2025, and we will share details about it with you at an investor day to be scheduled in October, around the time of our first quarter earnings release and annual meeting of shareholders. We are confident that MAP 2025 will contribute to the momentum we are building for a successful fiscal 2023 and beyond. I'll now turn the call over to Mike LaRoche to discuss our consolidated and segment financial results in more detail.

Thanks, Frank, and good morning, everyone. For the fourth quarter, we generated record consolidated net sales of $1.98 billion, an increase of 13.7% compared to the $1.74 billion reported in the same quarter of fiscal 2021. Organic sales growth of 15% or $261.9 billion. Acquisitions contributed 0.9% to sales or $16.3 million, while foreign currency exchange was a headwind that decreased sales by 2.2% or $38.6 million. Adjusted diluted earnings per share were a record $1.42, which was an increase of 10.9% compared to the $1.28 reported in the year-ago quarter. Our consolidated adjusted EBIT was up 11.7% to a record $263.7 million, compared to $236.2 million reported in the fiscal 2021 fourth quarter. Our construction products group generated fourth quarter record net sales of $745.9 million, up 18.5% compared to the fiscal 2021 fourth quarter. Organic sales growth was 19.9%, and acquisitions contributed 1.6%. Foreign currency translation headwinds reduced sales by 3%. Despite comparisons to a strong prior year when sales and earnings were at record levels, CPG continued to generate high growth propelled by its differentiated service model, as well as its unique building envelope and restoration solutions. The segments businesses producing the strongest sales growth were those providing roofing systems, insulated concrete forms, as well as admixtures and repair products for concrete. Results in international markets were mixed, with Europe being challenged by macroeconomic headwinds, while Latin America experienced significant double-digit sales gains. CPG fiscal 2022 fourth quarter adjusted EBIT increased 10.9% to a record $122.4 million. This segment was able to offset significant raw material inflationary pressure with selling price increases and operational improvements. Our performance codings group fiscal 2022 fourth quarter net sales were a record $329.4 million, an increase of 16.3% over the year-ago period. Organic sales increased 17.4% and acquisitions contributed 1.8%, which were partially offset by a foreign currency translation headwind of 2.9%. PCG's businesses providing flooring systems, protective coatings, and FRP grading all generated double-digit sales growth. A rebound in international markets, as well as ongoing success in the company's vertical end markets, including energy, technology, and food and beverage, helped drive PCG's results. In addition, improved sales management systems and price increases were major factors in the segment's excellent top-line results. Adjusted EBIT increased 37.3% to a record $42.6 million in the fourth quarter of fiscal 2022, driven by volume growth, selling price increases, revenue growth leveraging, good product mix, and operational improvements. The Specialty Products Group reported record net sales of $225.8 million for the fourth quarter of fiscal 2022. an increase of 11.4% compared to the fiscal 2021 fourth quarter. Organic sales increased 12.2% and acquisitions added 0.5%, which were offset by unfavorable foreign currency translation of 1.3%. The majority of SPG's businesses experienced double-digit sales growth, leading the way with OEM coatings companies, as well as its food coatings and additives business, which has improved performance under new management. Its disaster restoration equipment business continued to rebound as it cleared backlogs caused by semiconductor chip shortages and grew sales in the teens despite a difficult comparison to a strong prior year that had high demand for its products driven by winter storm URI. SPG's adjusted EBIT was a record $44.2 million in the fiscal 2022 fourth quarter, an increase of 21.8% compared to adjusted EBIT of $36.3 million in last year's quarter. The segment's increase in adjusted EBIT was bolstered by the favorable impact of higher sales, which were leveraged to the bottom line due to selling price increases that began catching up with prior cost inflation. Our consumer group achieved record net sales of $682.8 million for the fourth quarter of fiscal 2022, an increase of 8.6% compared to the fourth quarter of fiscal 2021. Organic sales increased 10%, which was partially offset by unfavorable foreign currency translation of 1.4%. The consumer group's top line growth was driven by improved supply of key alkyd resins produced by the manufacturing plant we acquired last September, as well as price increases and high growth in product lines with professional remodelers, including cost and sealants. While North American markets grew, European markets remained challenged due to macroeconomic headwinds in the region. Fiscal 2022 fourth quarter adjusted EBIT was $80.3 million, an increase, a decrease of 14.2% compared to adjusted EBIT of $93.6 million reported for the prior year period. Adjusted EBIT was impacted by continued raw material cost inflation and higher costs from ongoing shipping challenges and industry labor shortages. In response, the consumer group has been instituting price increases to catch up with inflation, building resilience in its supply chain, and investing in capacity and process improvements to better respond to customer demand. To wrap up, I have a few comments on capital allocation. Our significant liquidity enables us to fund internal growth initiatives, make acquisitions, and reward our investors with cash dividend payments and repurchases of our shares. Since our last earnings release in April, we repurchased $50 million of our common stock. This is in addition to earlier share repurchases and early redemption of our convertible notes in November 2018 with roughly $200 million of cash. Combined, this puts us at $658 million towards our $1 billion repurchase goal that was established at the onset of our map to growth program in 2018. Now I'll turn the call over to Rusty to discuss our outlook.

Thanks, Mike. Looking ahead to the first quarter of fiscal 2023, we will continue to focus on navigating a number of challenges. The strengthening U.S. dollar is expected to be a headwind, impacting the translation of our international results. We expect significant cost increases to continue for certain raw materials, labor, and packaging. We also anticipate continued higher costs from unreliable bulk transportation, which are being driven by high energy prices that have been exacerbated by the conflict in Ukraine. These cost pressures are expected to disproportionately affect. Despite these challenges, the proactive measures we took over the course of fiscal 2022 enabled RPM to accelerate momentum expected to carry over into fiscal 2023. We expect to continue implementing price increases as needed and continue improving operational efficiencies in order to minimize cost pressures and restore margins closer to historical levels. While there is a recessionary undercurrent in the economy, we anticipate that demand for our products and services will remain strong, particularly those that improve energy efficiency and extend the useful life of our customers' assets through protection and restoration. In addition to growth initiatives, focused on market opportunities and industry trend infrastructure and on-shoring of industries, responsible for pharmaceutical, food, technology, and energy. Back to generate fiscal 2023 first quarter consolidated sales growth in the mid-teens over last year's record first quarter sales. For each of our four segments, we anticipate sales growth in the teens. It is likely that the consumer group will generate the highest growth of the four segments due to, number one, selling price increases that should allow it to catch up with inflation, number two, improved alkyd resin supply, and number three, investments made in new capacity, sales, inventory, and operational planning, and fiscal 2023 first quarter consolidated adjusted EBIT as anticipated to increase 20% to 25% that we have hired Matt Schlarb as our investor relations. He previously held investor relations positions with Lottery.com, Mettler Toledo, and Fairmount Central. We're pleased to have him join RPM and look forward to having him raise our investor relations function to a new level. Matt will be joining us on our equity analyst calls this week, and you'll be working more closely with him as we near the announcement of our first quarter results and the investor event that will provide details on our MAP 2025 initiative. This concludes our prepared remarks, and we will now be pleased to take your questions.

Thank you. Ladies and gentlemen, we will now begin the question and answer session.

Should you have a question, your questions will be pulled in the order they are received.

Should you wish to decline from the polling process, please press the star followed by the 2. If you're using a speakerphone, please lift the handset before pressing any keys. Your first question comes from John Roberts. Please go ahead.

Thanks. Good morning, and nice quarter. Does the Alkyd resin capacity get you to the integration that you want, or would you like to have even further integration if possible? It's always a tradeoff between having capital deployed versus having your margins higher?

Sure. I think the Corsicana plant is relatively unique. We have another kind of backward integrated business as well with our Stoneheart Group. And I believe we have the backward integration that we desire at this point in time. We do plan to spend probably close to $100 million over the next three years at Corsicana to backward integrate into a few other categories as well as use that site for expansion of our new Dura product line. But we do not plan any additional significant investments in backward integration at this time other than internal investments on that site.

Okay, and then you noted the recessionary undertones to the economy. Which markets do you think are most at risk here for RPM?

For us, we're doing quite well in North America. Latin America is relatively strong compared to last year. The areas that we see the biggest challenges shouldn't be a surprise. It's printed some of the inflation hitting Europe later, slowing growth and Ukraine and its impact there. both on current economic activity and anticipated challenges in the energy markets in Europe specifically.

Thank you.

Thank you. The next question comes from Mike Harrison, Seaport Research Partners. Please go ahead.

Good morning, Mike. Hi, good morning. I was wondering if you can talk a little bit about the construction business, and I guess specifically, can you break down how much of that organic growth, 20% organic growth, was pricing and how much was volume? And I guess on infrastructure spend and some of the onshoring or reshoring that you referenced might be enough to keep that underlying growth looking pretty solid.

Sure.

in general feel really good about the dynamics, particularly North America, for our construction products group and our performance coatings group. In both cases, unit volume growth was in the mid to high single digit, particularly in our construction products group, but we continue to face shortages that impact projects. Some of those shortages are related to intermediate chemicals that that we purchase and others of those shortages related to fasteners or insulation board or other types of components on projects. So that organic growth could have been better in the quarter, and we continue to face some of those challenges. I will tell you that the demand continues to be strong, and we feel pretty good about the literally hundreds of billions from the American Rescue Plan of 21 and the $1.9 trillion infrastructure bill, at least $800 million to real hardcore infrastructure, both of which bodes well for the dynamics in the markets that our construction products group and performance codings group serve.

And, again, those are principally driven in the United States.

All right. And a pretty unusual situation as it relates to working capital. Free cash flow negative for Q4, as well as for all of fiscal 22. Can you give us some initial thoughts on working capital and capex for fiscal 23? I think we're all just trying to get a better sense of what the free cash flow might look like. Yes.

We had a rough year for cash flow in fiscal 22. When you combine decreasing margins and as a result of unreliable supply, we had to build up inventory where we could because supply was so unreliable, as was transportation. As a result of that, you know, our inventories need to get into balance better in fiscal 23, our finished goods as well as raw materials. We have cases where we don't have enough finished goods for our customers like we'd like. So that's getting better as a number of the expired over the years. But not nearly as bad as. last year. So now that, you know, as we said in our guidance, we're going to be back expanding margins again to anticipate a much better year for cash flow. As it relates to capital expenditure, looking to play offense and invest more in our businesses, we have a lot of high-growth areas, you know, including high-performance buildings.

for us.

And as a result, we're spending as the 300 million range in fiscal 23. Acquisitions, on the other hand, have continued to be at high multiples.

And as you know about our so we would anticipate

acquisition activity to continue to be lower than historically we've seen.

Thank you very much. You're welcome.

Thank you. The next question comes from John McManus. Please go ahead.

I guess maybe the first one, high level. Can you give us some color as to how to think in the quarter and overall if there are any segments that kind of stood out as the leaders or the laggards and how that may change? Sure. So I provided the unit of mid to high single digits in construction products and

unit volume was relatively flat across the different businesses in our, and we were down high single digits in consumer for the quarter.

I will tell you, we delivered the guidance that we provided.

In the fourth quarter, we are We're ahead of cost-price mix in three of our four segments. In Q1, we should be ahead of the cost-price mix dynamics in all four of our segments, meaning you will see higher EBIT growth than sales growth, and you will see EBIT margins improving, and EBIT margins will be at or near all-time records. And in consumer, we've got a lot of catch-up to do.

significant EBIT margin improvements. The quarter that just ended and that momentum that you can see in slide three that impacted our industry will continue to build in Q1 and we think even better in Q2.

Got it. No, that's helpful, Culler.

And then I guess maybe to that, you know, back to the 800 basis points, you know, for the core. Think about how that progresses. A decent run rate. Do you continue to catch up with either more pricing or the raw materials maybe even giving way a little bit? I guess how are you thinking about that? the potential for margin improvement throughout the year. Sure.

Price mix and also the operating efficiency initiatives that we're undertaking there in relationship to a very challenged fiscal 22. So you'll see significant improvement there and continued improvement with reasonable leverage to the bottom line in our other three segments. You know, Rusty indicated that in Q1 we see earnings growth in the 20% to 25% range. Q2 should be better than that. And, boy, we are hesitant to go beyond any further.

happening in Europe relative to energy markets.

So it's difficult to predict. The next two months will be rock solid in terms of sales growth, earnings growth, and EBIT improvement in every one of our segments.

Got it. Thanks very much for the caller. Thanks, John.

Thank you. The next question comes from Vincent Andrews of Morgan Stanley. Please go ahead.

Thank you, and good morning, everyone. Good morning. We can talk a little bit more about the EU.

In particular, you know, obviously there's a lot of volatility in the energy markets and, you know, a lot of anxiety over what could happen from the EU. Could you talk about, you know, your exposure and what mitigation plans you have in place and sort of what, if there was a disruption, you know, what that would mean, not just for Europeans.

Sure. So the...

basis is about a billion dollars. I think it's highly likely that when we finish 23, it could be less than that. Demand is certainly weaker than North America, and that will further lessen or negatively impact translator results back into U.S. dollars. It's really a slower demand throughout Europe economically and significantly higher. Again, part of it is the oil and gas dynamics globally, and part of it is what's happening with Russia and the impact on natural gas. Natural gas is the primary source. European, Russian chemical suppliers in terms of energy. And in some cases, in our facilities, some of our construction product facilities, it's a primary driver of energy as well. So that's something we'll be paying attention to, and those are the dynamics. And back to not being able to look out very far, you can certainly picture where things get better nicely if things move in direction and if things persist and the threat of Russia in turning off natural gas to Germany in particular but Western Europe happens then you're going to have a very quick and negative dynamic shift I think in all manufacturing in Europe. And just as a follow-up, in PCG, you know, you mentioned sort of the sales management systems, and I guess two questions about that. One would be just sort of how much runway is left in that improvement process, and is there any question of PCG catching up with where everybody else is? A couple things. Number one, PCG is benefiting, particularly in our Carboline unit, from a high rate, and certainly that's cyclical, and it's not a cyclical upturn. It's an indicator. chunks of money, particularly in the United States, and the infrastructure bill and the American Rescue and Recovery Act are serving our performance coatings business. The dynamics of benefits and commercial excellence that we've experienced in our performance coatings group are certainly shareable across other parts of RPM. The fact of the matter is that we are utilizing data on a more consensus in all of our businesses. In some cases, it might be RPM catching up to RPM in a lot of places.

And those practices are particularly shareable because of commonalities in Salesforce.

our performance codings group, and our construction products group.

Thanks very much.

Thank you.

The next question comes from Josh Spector, UBS. Please go ahead.

Morning. Hey, good morning. Thanks for taking my question. Just to follow up from an earlier question around construction, first quarter, and construction margins have been generally an outperformer the past couple years. So I'm curious if you can give some more comments about what drove and, you know, where you see those heading over the next year.

Sure. There's two elements that I would call out that drove the construction products group challenges. The owner of our courses, Our primary beneficiary today is our consumer group relative to alkyd resin productions. So there is a hit for the year or through nine months that we owned it. That should get better as we further utilize that plant. The second area is silicones. Silicones have been the primary largest year over year, up hundreds, a couple hundred percent in terms of cost. Our construction products group has silicone polymers that are up 211% versus last year in the fourth quarter. And our construction products group is the largest purchaser of silicone or silicone-related products.

And so those are the primary drivers of it. Including those, and to a certain extent that's a silly statement because the That's the world we work in.

But those two factors were what impeded the construction products from otherwise generating record EBIT. And as you'll note through the Map to Growth program, their EBIT results anticipate that continuing to expand on a sustainable basis in the next couple of years.

Thanks, that's helpful. Just another follow-up just on construction but related with Europe. Are you able to quantify what you're seeing volumes in?

Well, it's flat to slight. across all of our businesses.

And in the construction products group in particular, we have a really nice manufacturing facility in Poland. And Poland's been very challenged.

We have Ukrainian workforce who have left to fight.

We have Polish associates who are hosting Ukrainian families in their homes. And so there's a lot of challenging things going on there, and that's particularly in Poland. Other than that, it's pretty weak demand and concerns in our segments.

Got it. Thank you. Thank you.

Thank you. The next question comes from Kevin McCarthy of NPR.

Good.

Thank you. On the bottom of slide three, you reference product reformulations.

And in your prepared remarks, I think you used the word thousands of products.

I imagine that was quite an undertaking. Can you help us frame it in terms of, you know, what percentage of your sales would have been reformulated and whether that had any material cost?

A good number. We can work on that. But I can tell you across our businesses, we reformulated them.

certify them do the quality control checks it's it's literally but it was a lot of the smaller more modest

intermediate chemicals that we were unable to get one of the larger categories would be in seed oils and that's a challenge coming out of russia and ukraine and so our construction products group in particular has reformulated a lot of coatings into more bio-based seed oils and very favorable performance and a very favorable environmental footprint. In a few places, we've had to reformulate back into more solvent-based resins, just as an example. And so you've got to go through the reformulation process, the recertification process with your customers or with codes, and then make sure you're doing the QC checks such that this reformulation is impacting performance. And And this is not unique to RPM in our industry. You know, there's lots of heroes, I think, frontline workers during the COVID period, and certainly in the last year, our folks in our labs have worked overtime to address this issue. And we can get a better sense of that for you. That's in light of what across the board in terms of materials, quarter over quarter is up about 35% in terms of material inflation in the quarter last year versus this quarter. But it was really an intermediate chemical raw material availability that drove most of the reformulation.

And then just to follow up on that latter comment, how do you expect that 35% inflation level to trend in the first quarter? And then, you know, related to that, you commented on silicones and oils.