Release Date: July 25, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- RPM International Inc (RPM, Financial) achieved its tenth consecutive quarter of record adjusted EBIT.
- Sales for the year reached a record high, with adjusted EBIT increasing by approximately 12%.
- The company generated record cash flow from operating activities of $1.12 billion, an improvement of over $545 million from fiscal 2023.
- Debt was reduced by approximately $557 million during the year, resulting in lower interest expenses.
- The construction products group led growth during the quarter, with significant strength in roofing and turnkey offerings.
Negative Points
- Performance coatings group experienced a decline in the fourth quarter due to challenging comparisons and project completion delays.
- Specialty products group continued to face challenges with some end markets showing signs of bottoming out.
- European sales declined by 4% due to FX headwinds and divestitures in the performance coatings group.
- SG&A expenses increased during the quarter due to incentives, long-term growth investments, and compensation and benefits.
- The consumer group faced a sales decline due to continued DIY softness, despite achieving market share gains and an upgraded product mix.
Q & A Highlights
Q: Can you talk about some of the broader trends in the performance coatings business and what kind of visibility you have in that business?
A: The biggest impact in the quarter for our performance coatings group was project timing. We had a number of projects that ended up being accelerated into Q3, which negatively impacted the fourth quarter. We anticipate continued growth, although at a more modest level in the performance coatings group for the balance of fiscal '25. Additionally, the divestiture of several European UK-based service businesses hampered our results year-over-year but improved profitability.
Q: Can you elaborate on the MAP 2025 initiatives to streamline SG&A that you implemented during Q4?
A: They fall into two categories. One was a necessary reduction in force across several business units, impacting about 170 RPM associates, with annualized benefits around $25 million. The other area involves continuing investments in significant growth areas that are providing good momentum while paring back on those that have not met expectations.
Q: Can you quantify the impact of lower operating rates and associated fixed cost absorption masking some of the MAP program restructuring benefits?
A: In fiscal '24, there was a little over $50 million of unfavorable impact from unfavorable absorption conversion costs, with over $15 million in the fourth quarter. We expect more of that in this low volume growth environment. As we go through plant consolidation projects, we will have some start-up inefficiencies that will eventually generate efficiencies overall for RPM.
Q: What are your expectations for volume growth in the consumer segment for fiscal year '25?
A: We expect Q1 in consumer to look like Q4, with modestly negative consumer takeaway. As we get into the back half, we anticipate low to mid-single-digit growth, partly due to easier comps. New product introductions and market share gains will help offset near-term softness in DIY.
Q: What is your expectation for infrastructure sales for your business in fiscal '25 and beyond?
A: We expect infrastructure sales to continue benefiting from the $1 trillion infrastructure bill and the CHIPS Act. These projects will impact our performance coatings and construction products groups positively through 2026. However, growth will be more modest due to challenging comparisons from the previous year.
Q: How should we think about capital allocation for FY25, especially in the absence of acquisitions?
A: Our capital allocation will remain consistent. We expect $50 million or more in share repurchases and anticipate our Board to raise our dividend for the 51st consecutive year. We also expect to increase M&A activity, focusing on small- and medium-sized businesses or product lines.
Q: Can you provide more color on the slowdowns in reshoring projects?
A: The slowdowns are due to more challenging comparisons and delays in project completions. These delays are often related to labor and training issues for new facilities. However, the projects are continuing, and the dollars are committed, but the spending is spread out over a longer period.
Q: What are the cost savings tied to the 12 facilities you are rationalizing?
A: The plant consolidations are a significant part of our MAP 2025 initiatives, which are projected to generate $185 million of annualized savings in fiscal '25. These savings will be meaningful as we progress through the year.
Q: How should we think about the potential benefits from the MAP 2025 initiatives if demand weakens further?
A: Our MAP initiatives are being executed at a high level, and while they are methodical, there is room for additional expense reductions in SG&A if necessary. We don't see things deteriorating further, but we are prepared to adjust if needed.
Q: Can you comment on the impact of raw material cost deflation on your cost of goods sold?
A: Almost all of the lower COGS was related to raw material deflation, which was about mid-single-digit in Q4. We also had MAP benefits in procurement and manufacturing work streams, contributing over $20 million in savings impacting COGS in the quarter.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
