RPM International Inc.

Good day, and welcome to the RPM International Fiscal Year 2025 Second Quarter Earnings Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a touch-tone phone. To withdraw your question, please press star, then two. Please note that this event is being recorded. I would now like to turn the conference over to Matt Schlarb, Vice President of Investor Relations and Sustainability. Please go ahead.

Thank you, Nick. Welcome to RPM International's conference call for the fiscal 2025 second quarter. Today's call is being recorded. Joining today's call are Frank Sullivan, RPM's Chair and CEO, Rusty Gordon, Vice President and Chief Financial Officer, and Michael 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 review 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 second quarter of fiscal 2024, 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 Webcast section of the RPM website at www.rpminc.com. Now I would like to turn the call over to Frank. Thanks, Matt, and thank you to everybody joining us for today's call. I'll start by providing a high-level review of our results, then Michael Roth will cover the financials in more detail. Matt Schlar will then give a balance sheet update and provide details on our MAP 2025 progress, and Rusty Gordon will provide our outlook. At the conclusion of our prepared remarks, we'll be happy to answer your questions. Our second quarter highlights are on slide three. We had a strong quarter with records in several areas, including sales, adjusted EBIT margin, and adjusted EPS. We achieved these results in a continuing no to low growth macroeconomic environment, and despite a $4.4 million earnings headwind from a customer bankruptcy charge in our consumer group. Additionally, we achieved record adjusted EBIT for the 12th consecutive quarter. Over the last three years, our associates have consistently made progress implementing our MAP 2025 operating improvements while simultaneously demonstrating their ability to navigate mixed economic conditions to outgrow our markets. We are pleased with the structural improvements we've made through MAP 2025. Our pipeline of MAP improvements remains full and continues to grow. And we will implement these initiatives for the balance of the 2025 fiscal year and in fiscal 2026. Turning to slide four, our ability to outgrow our markets was evident during the quarter as each one of our segments generated positive organic volume and sales in a mixed economic environment. Across our segments, we leveraged our focus on repair and maintenance in our entrepreneurial culture to capture growth opportunities. Demand for our technical products serving high-performance construction projects was strong, particularly in our construction product group's turnkey roofing systems business. Residentially focused end markets, which have been under pressure for some time, showed signs of stabilizing in the second quarter, aided by favorable weather conditions through the first two months of the quarter. This was an incremental positive for our consumer and specialty products groups. Across all our segments, we continued executing on MAP 2025 initiatives, including SG&A streamlining. It is important to note that after more than a year of increasing, SG&A as a percent of sales declined during the quarter, which is due to our associates' focus on structurally reducing expenses while improving efficiencies. These MAP 2025 improvements drove adjusted EBIT growth in each of our four segments. Rusty Gordon will cover this in more detail, but so far in the third quarter, we are facing real winter compared to mild conditions in the prior year. This is putting pressure on some of our businesses, particularly in the consumer segment, which is offsetting growth in other areas of RPM and MAP 2025 initiatives that we've put in place. RPM associates continue to do an excellent job executing on the things within our control, And I want to thank them for their commitment to our MAP 2025 program and to growing their businesses and making RPM a structurally stronger organization. To summarize our current expected results, our strong MAP 2025 driven performance is being temporarily interrupted by a real winter, but will continue in our spring fourth quarter where we expect to see a return to strong sales and earnings growth. I'd like to turn the call over to Mike LaRoche to provide details on our quarterly results. Thanks Frank. Starting with consolidated results on slide five, record sales were driven by positive volumes in sales in all four segments, with FX being a headwind, particularly in emerging markets. The commodity cycle was neutral on a consolidated basis, but there were pockets of inflation, particularly within our consumer group. Adjusted EBIT grew 7.7% to a second quarter record, driven by sales growth and MAP 2025 benefits, including progress on facility consolidations and continued SG&A streamlining, partially offset by unfavorable mix. Adjusted EBIT includes the negative impact of a $4.4 million bad debt expense from a consumer group customer's bankruptcy. As Frank mentioned, adjusted EBIT margin of 13.8% was a second quarter record. Adjusted EPS of $1.39 was also a second quarter record and increased 13.9% compared to the prior year. This was primarily driven by adjusted EBIT growth and lower interest expense from $226.5 million in debt pay down over the past 12 months. Turning next to geographic results on slide six, North American sales were generally solid across all segments. In Europe, macroeconomic conditions remained challenging However, MAP 2025 improvements and improved collaboration in the region continue to drive strong profitability growth. In Africa and the Middle East, our management team's focus strategy on serving high performance construction and infrastructure projects with technical solutions generated strong growth. FX headwinds drove the decline in Latin America sales, while Asia Pacific sales declined due to challenging comparisons to the prior year when large projects were completed. Next, moving to the segments on slide seven. Construction Products Group generated another quarter of solid growth led by its turnkey roofing systems and services business. With its focus on restoration, direct sales model, and high level of service, our roofing business offers a compelling value proposition to high-performance building owners and has been outgrowing its markets. We've also introduced new products that contributed to sales growth. One example from our concrete admixtures and repair business includes a patent-pending bond breaker, Yuko Tilt WB. which increases user productivity in the expanding tilt-up construction market by providing clean release of cast panels and reduces need for repairs. In line with our Building a Better World sustainability program, it also has lower VOCs than competing products. We've also introduced VeriSpeed RMC, which is a premixed product that can be used in multiple restoration situations. It has low permeability and free fall resistance to prevent cracking and is able to cope in only five hours to enhance productivity on the job site. CPG second quarter sales in the southeastern U.S. were negatively impacted by hurricane activity in the quarter. Despite this, CPG achieved record Q2 adjusted EBIT due to sales growth and MAP 2025 benefits partially offset by unfavorable mix. On slide eight, Performance Coatings Group achieved record sales, led by the flooring and protective coatings businesses, serving high-performance construction projects. European sales growth was strong, driven by improved collaboration through MAP 2025. Double-digit sales improvement in Africa and the Middle East also contributed to the growth. Adjusted EBIT was a second-quarter record and was driven by MAP 2025 benefits and sales growth. Moving to slide nine, specialty products group returned to sales growth led by the disaster restoration business as the response to hurricane activity resulted in higher demand for its products. The food coatings and additive business also grew during the second quarter, aided by a previous acquisition. Specialty OEM, which serves many residential focused end markets, showed signs of stabilization during the quarter. Adjusted EBIT growth was driven by MAP 2025 benefits as well as improved sales. On slide 10, the consumer group also returned to sales growth in the quarter as a gain in market share and DIY takeaway stabilized. This was also aided by favorable weather conditions in September and October. Customer inventory levels were steady during the quarter. International growth continued, primarily driven by targeted marketing campaigns focused directly on end users. Consumer generated record adjusted EBIT in the quarter due to MAP 2025 benefits, higher sales, and the rationalization of lower margin products, particularly or partially offset by moderate inflation and negative impact of the $4.4 million in bad debt expenses from a customer bankruptcy. Now I'll turn the call over to Matt, who will cover the balance sheet and cash flow and provide an update on MAP 2025 initiatives. Thank you, Mike. On slide 11, we continue to make progress on working capital efficiency. Working capital as a percentage of sales declined 100 basis points from the last year and 670 basis points from two years ago, driven by MAP 2025 initiatives. This working capital efficiency and expanded margins result in an operational cash flow of $279 million during the quarter, the second highest amount in RPM's history. The record was in fiscal year 2024 when we benefited from a larger working capital increase as supply chains normalized. Strong cash flow over the past year has allowed us to reduce debt by $226 million. In the second quarter, we increased our dividend for the 51st consecutive year, returned $83.1 million to shareholders through dividends and share purchases during the period. Liquidity remained strong at $1.5 billion. Now I'd like to provide an update on our MAP 2025 initiatives on slide 12. As Frank mentioned earlier, we are confident that we will be able to continue building on the structural progress we have made in MAP 2025, and our Green Belt program is one example why. Our Green Belt program is part of MS168. It is a process-driven program that helps our associates identify areas for improvement, create solutions to address those challenges, implement the solutions, and then monitor the results. What started as a small program focused on the U.S. has expanded globally, and we now have over 400 associates who have completed training, which is now offered in seven different languages. Six of these green belts have been promoted to plant managers. To date, more than $36 million in verified savings have been recorded, and that number grows monthly. Initially a top-down program, it has evolved to become more collaborative and has resulted in sharing ideas and best practices across businesses. In addition to financial savings, we are realizing other benefits, such as improving safety, reducing waste, and decreasing our environmental impact. A recent Greenbelt program at Rust-Oleum developed a solvent recovery system and is producing benefits in all these areas. Greenbelt projects have also been instrumental in our ability to increase effective capacity through more efficient processes. In one example, Stoneheart implemented a Greenbelt project that eliminated unnecessary steps in the manufacturing process to increase throughput and improve quality with limited capital investments. These are just a few examples of the ongoing work across RP and businesses with several trainings and new projects in the pipeline. Now I would like to turn the call over to Ruskie to cover the outlook.

Thank you, Matt. Our outlook for the third quarter, which as a reminder is our seasonally slowest quarter, is on slide 13. We expect the mixed macro environment to continue and the weather-related tailwinds during September and October have now become headwinds, negatively impacting DIY demand and some construction activity. Additionally, at today's rates, FX will negatively impact sales in adjusted EBIT. On a consolidated basis, we expect sales growth in the third quarter to be flat compared to the prior year period. By segment, we expect low single-digit growth in our construction products group as we continue momentum in selling waterproofing solutions, partially offset by unfavorable weather when compared to unseasonably mild conditions in the prior year. In performance coatings group, we expect sales to be flat to up slightly as underlying demand for high-performance buildings remains solid. But the segment faces challenging comparisons to the prior year period, when organic sales increased 9.2% and were boosted by the timing of project completions. In residential and markets, which primarily impact our consumer and specialty products groups, we saw stabilization in the second quarter. However, favorable weather trends in the second quarter have now reversed. and mortgage rates remain elevated, delaying further in-market improvement. We expect sales in both these segments to decline in the low single-digit range. Consolidated third quarter adjusted EBIT is expected to be up or down low single digits compared to a record prior year period, as MAP 2025 benefits, including structural SG&A reductions, are offset by the softness in residential end markets and moderate inflation in raw materials and labor. On the topic of raw material inflation, there is uncertainty as to the outcome of what potential tariffs and a court strike could have. However, no matter what materializes, we are as well positioned to navigate any potential challenges as we've ever been. because of our center-led procurement team. While we have modest imports from countries potentially subject to tariffs, our procurement team has developed contingency plans to mitigate potential risks from different scenarios. Our fiscal 2025 full-year guidance is on slide 14. Our sales outlook remains unchanged with expected growth in the low single digits. We are narrowing our adjusted EBIT range to 6% to 10% growth from the previous outlook of up mid-single digits to low double digits. We expect economic conditions to generally remain similar to the second quarter. And while there is clarity on the outcome of the US election, political uncertainty has increased in other large economies like Germany, France, Canada, and Korea. The impact and trajectory of interest rate changes is also not clear. We expect pricing to be positive in response to continued inflation in raw materials and labor. By segment, CPG is expected to outgrow its markets with continued strength in high performance building and restoration projects. At PCG, We expect incremental demand improvements in the fourth quarter when comparisons become easier. At consumer and SPG, we expect that residential and market demand has potential for an improvement later in the fiscal year, but elevated interest rates for longer may push out the timing of this recovery. On a consolidated level, we expect adjusted EBIT growth to be led by NAP 2025 improvements and the realization of these benefits on the .