Rpm International Inc (RPM) Q3 2021 Earnings Call Transcript

Welcome to RPM International's Conference Call for the Fiscal 2021 Third 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 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 Web site. Following today's presentation, there will be a question-and-answer session. Operator instructions: Please note that only financial analysts will be permitted to ask questions. At this time, I'd like to turn the call over to RPM's Chairman and CEO, 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 2021 third quarter ended February 28, 2021. Joining me on the call today are Rusty Gordon, RPM's Vice President and Chief Financial Officer; and Matt Ratajczak, our Vice President of Global Tax and Treasury, who is also supporting our Investor Relation activities. Before we begin, I would like to note that yesterday, I received my second COVID-19 vaccine shot. I have encouraged our associates to get vaccinated, and I recommend the same to everyone listening to this call. It's the only way we can all do our part to end the pandemic and return to normalcy and reinvigorate the global economy. I'll start today's call by summarizing the factors that drove our strong financial performance for the quarter and how we were able to overcome the disruption caused by the severe winter weather storm that hit the U.S. in February. I'll then discuss how we are utilizing our record cash from operations, and provide an update on our MAP to Growth operating improvement program. After that, I'll turn the call over to Matt, who will review our third quarter results in more detail. Rusty Gordon will conclude our formal remarks with the outlook for our fourth quarter. As you recall in mid-February, a severe winter storm blanketed nearly 75% of the U.S. in snow, which disrupted transportation, distribution, and supply chains. In anticipation of severe transportation gridlock, the potential of losing multiple shipping days in North America, which makes up 70% of our revenue, and the desire to maintain transparent communications with our investors, we lowered our third quarter guidance on February 18. The third quarter is our seasonally low quarter and historically generates only 5% to 10% of our annual earnings. So, the magnitude of relatively small changes in earnings becomes magnified. However, in the end, through the extraordinary measures of our associates as well as the fact that plants, distribution centers, and transportation networks resumed operations more quickly than we anticipated, we were able to catch up and execute delivery of most of our customer orders in the final week of February, which enabled us to exceed our original third quarter sales and earnings guidance. For the quarter, we generated record consolidated sales, earnings, and cash from operations. Sales grew 8.1% with 4.9% being due to organic initiatives, 2.1% resulting from acquisitions and 1.1% as a result of favorable foreign exchange. Internationally, Europe and Canada showed good growth as well. Latin America showed growth in local currencies, but was flat when its results were translated back into U.S. dollars. Much like last quarter, three of our four operating segments generated solid sales growth and significant leverage to the EBIT line due to our MAP to Growth operating improvement program benefits, while being leveraged to the bottom line as we have done for the last eight quarters. This was particularly impressive given the supply chain challenges in comparison to last year's third quarter when our adjusted EBIT increased 304%. On a segment basis, our Specialty Products Group led the way with organic growth of 13.4% in the quarter, and produced a second consecutive quarter of double-digit top line and bottom line growth. Our Consumer Group also generated double-digit organic growth as it continued to benefit from strong DIY demand. The Construction Products Group again generated solid sales and significant EBIT growth in challenging market conditions by focusing on infrastructure, which encompasses about 15% of RPM's consolidated sales, and its strong performance in repair and renovation. Results in our Performance Coatings Group declined due to difficult conditions in its primary end markets. Matt Ratajczak will cover the segment results in more detail in a minute. We continue to prove why RPM is the best home for entrepreneurial businesses in our industry with two acquisitions in March. These include the Tuff Coat line of rubberized non-stick coatings used for aquatic applications, which is a great strategic fit with our Recreational Marine Products Group; and Bison Innovative Products, a manufacturer of raised flooring systems that will operate as part of our Fibergrate business. We have taken a more collaborative view of our manufacturing footprint as we add capacity. For example, to meet the consumer segment's explosive growth for its products, we are installing packaging and blending equipment at plants in our Performance Coatings and Specialty Products groups. This is in addition to capital spending in our consumer segment facilities, which includes new filling capacity for consumer group plants with particular emphasis on meeting the increased demand for small project paints, caulks and sealants in our repair categories. Other investments in our operations include new presses and injection molding equipment to meet surging orders for our Nudura ICF products and wall systems, and the construction of a new liquid applied roof coatings plant. I would now like to discuss our MAP to Growth restructuring program, which continues to pay dividends. During the quarter, and so far in the fourth quarter, we announced the closure of two plants, which brings our total to 27 of the 31 plants that we originally targeted for consolidation at the beginning of the MAP to Growth Program. As discussed last quarter, we continue to be more efficient in utilizing our manufacturing assets to generate cost-saving opportunities. The benefits of our center-led procurement initiatives are becoming even more evident in the current inflationary raw material environment. Rusty Gordon will provide more color on this when he walks through our fourth quarter outlook. Lastly, in the G&A area, we continue to consolidate IT systems and accounting and finance operations. At the end of our fiscal year, May 31, 2021, we expect to exceed the original MAP to Growth program's planned run rate of $290 million in annualized savings. The program's learnings of continuous improvement in efficiency have become ingrained in our culture, and we will continue to add to our robust pipeline of cost savings initiatives and operational improvements. As we sustain the efficiency gains achieved through MAP to Growth, we are now shifting more focus and resources towards top line growth through internal investments and acquisitions. Our goal is to return to the exceptional revenue growth rates that have been one of the hallmarks of RPM success since its founding in 1947. I will now turn the call over to Matt Ratajczak for a detailed review of our financial results for the third quarter of fiscal 2021.

Thanks, Frank, and good morning, everyone. Note that my comments will be on an as adjusted basis. During the third quarter, we generated consolidated net sales of $1.27 billion, an increase of 8.1%, compared to the $1.17 billion reported during the same quarter of fiscal 2020. As Frank mentioned, organic sales growth was 4.9%, or $58 million. Acquisitions contributed 2.1% of sales, or $24.5 million. Our foreign exchange was a tailwind that increased sales by 1.1%, or $12.9 million. This was strong top line growth during the third quarter, which typically generates our most modest results each year because it falls during the winter months when painting and construction activity is slow. Adjusted diluted earnings per share were $0.38, an increase of 65.2% compared to $0.23 in the year-ago quarter. Our consolidated adjusted EBIT was up 32.2% to $79.9 million, compared to $60.5 million reported in the fiscal 2020 third quarter. These excellent results were largely due to initiatives under our MAP to Growth restructuring program and our ability to leverage higher sales to the bottom line. Turning now to our segments. Sales in our Construction Products Group were strong, and increased 6.4% to $396 million. Growth was primarily organic at 5.4% or $20.3 million. Foreign currency translation increased sales by 1% or $3.6 million. With softness in commercial and institutional construction markets, our Construction Products Group remained focused on renovation and restoration projects, leading to solid sales growth during the quarter. Our roofing business performed well as did our Nudura Insulated Concrete Forms, or ICFs, which are experiencing accelerated long-term adoption as a wall system, as the lumber supply is tightened and prices have skyrocketed. The ICFs also provide the benefits of improved energy efficiency and structural integrity. Adjusted EBIT in the Construction Products Group increased 206.4% to $18.5 million from $6 million during last year's third quarter. The group generated 310 basis points of adjusted EBIT margin growth due to MAP to Growth savings and the favorable leverage of sales volume increases. The segment’s European businesses continue to improve as a result of ongoing restructuring and better product mix. During the quarter, challenging market trends persisted for our Performance Coatings Group, including weak energy demand that impacted industrial coatings and COVID-19 protocols that continue to restrict access to facilities for flooring system installations. Sales in this segment were $226.5 million, an 11.4% decrease from the $255.7 million reported during last year's third quarter. Organic sales decreased 12.7%, or $32.4 million. Foreign exchange provided a tailwind of 1.3%, or $3.2 million. Segment adjusted EBIT decreased 41.6% to $14.1 million from $24.2 million during last year's third quarter. Lower sales volumes and pricing pressures resulted in earnings de-leveraging which was offset in part by discretionary cost cuts and MAP to Growth savings. As vaccines are administered and the impact of the pandemic diminishes, we expect the segment to rebound as its industrial customers catch up on maintenance and energy markets recover in part due to increased travel. In the Consumer Group, sales were robust, increasing 19.8% to $477.7 million. Organic sales increased 12.7% or $50.4 million and acquisitions increased sales by 6.1% or $24.5 million. Foreign currency translation increased sales by 1% or $4.1 million. The Consumer Group continued to capitalize on the positive DIY Home Improvement market trend by leveraging its broad distribution and market leadership in caulks, sealants, cleaners, abrasives, and small project paints. Similar to the U.S., the segment's international results were equally robust in Europe and Canada. Adjusted EBIT in the Consumer Group was $47.8 million, an increase of 48.6% over the prior-year. Adjusted EBIT margin improved as a result of MAP to Growth savings and the leveraging of higher sales volumes, which offset rising distribution expenses. Results in our Specialty Products Group were a record and improved dramatically for the second consecutive quarter. Fiscal 2021 third quarter net sales increased 14.7% to $169.2 million from $147.5 million in the fiscal 2020 third quarter. Organic sales growth was 13.4% driven by more aggressive business development efforts and growth investments initiated by new management as well as improving market conditions for many of its businesses. In particular, our restoration equipment business driven by extreme weather events in North America experienced excellent top line growth, as did our businesses serving the furniture, outdoor recreational equipment, food, cleaning, disinfecting and OEM markets. Favorable foreign currency translation at 1.3% of sales helped results. Adjusted EBIT was $25.3 million during the quarter, an increase of 44.2% compared to adjusted EBIT of $17.5 million in last year's quarter. The Specialty Products Group was able to drive MAP to Growth savings and operating leverage from higher sales volumes to the bottom line. Next, a few comments on our liquidity; our year-to-date cash flow from operations improved by $270.7 million or 71% over the last fiscal year to a record of $651.9 million as a result of better working capital management, where all components of working capital improved as compared to the prior year, and margin improvement from our MAP to Growth program. At the quarter's end, our total equity was $1.4 billion. Our net leverage ratio as calculated under our bank agreements was 2.13 on February 28, 2021, which was a significant improvement as compared to 2.90 a year ago. Our balance sheet remains strong and we've strategically deployed a record cash flow to reduce debt. Simultaneously, we were completing acquisitions and making investments to improve the efficiency of our operations. Additionally, we repurchased approximately $24.6 million of stock during the quarter. I'll now turn the call over to Rusty for our outlook for the remainder of fiscal 2021.

Thanks, Matt. The fourth quarter is seasonally our strongest and started off well in March. However, several macro-economic factors are creating inflationary and supply pressures on some of our product categories. These factors include supplier refineries operating at lower levels due to low fuel demand, the disruption the winter storm Uri caused on supply chains, intermittent supplier plants shutting down in response to the pandemic and significant worldwide demand for packaging solvent and chemicals used in cleaning products. We expect that these increased costs will be reflected in our results for the fourth quarter of fiscal 2021 and more significantly during fiscal 2022. We are moving aggressively to offset the increased costs with commensurate selling price increases. Fortunately, due to our MAP to Growth program, we are in a much better position to weather these challenges than we were three years ago, when the last inflationary cycle occurred. With a stronger partnership with our supplier base and longer-term contracts, we are working with our supplier partners to secure necessary raw materials and control costs to whatever extent possible. In addition, our improved center-led processes and systems are providing more timely and actionable information to address these challenges. We are also working in collaboration with customers through the supply chain difficulty. On a segment-by-segment basis, we are encouraged by the following: Number one, resumption of discussions on federal action on an infrastructure program, as well as municipal funding and the recent federal COVID stimulus bill that should support building maintenance and major end markets of our construction products group. Number two, the resumption of travel and the recent rebound in energy markets give us optimism that our industrial protective coatings business in our Performance Coatings Group may have bottomed out as they start to lap into easier comparisons. Number three, the increasing re-entry of home improvement professionals into the market as more consumers become vaccinated and welcome outside contractors back into their homes, which will benefit our Consumer Group; and number four, high demand in our Specialty Products Group for its legend brands, restoration equipment and solutions, which resulted from the property damage caused by winter storm Uri. While it disrupted many of our other businesses, the storm provided revenues for legend brands in February and a backlog of more orders in the fourth quarter as we help our customers respond to this natural disaster. As we look ahead to our fourth quarter and beyond, there is currently a great deal of volatility around input costs and uncertainty regarding material availability. While our third quarter earnings did not reflect recent material cost spikes due to our FIFO inventory methodology, inflation will likely be significant in our fourth quarter and into the first quarter of fiscal 2022. We have been, and are in the process of implementing appropriate price increases and changes in terms, which we anticipate will offset the inflationary impact by the end of the first quarter of fiscal 2022. There is also much uncertainty related to the breadth and speed at which global economies reopen as people become vaccinated. Based on the information available to us today, we expect our fiscal 2021 fourth quarter sales to increase by double digits compared to the fiscal 2020 fourth quarter. Last year's fourth quarter should prove to be an easier revenue comparison because it was heavily impacted by the onset of the pandemic. Our earnings comparison versus last year on the other hand will be more challenging because of raw material inflation as well as an extraordinary situation last year when our non-operating segment reported a profit due to lower travel and medical expenses, incentive reversals, and other factors. As a result, our fourth quarter adjusted EBIT is expected to increase double-digits coupled with the rate of sales growth. Excluding our non-operating segment, adjusted EBIT for our four operating segments in total is expected to increase by more than 20%. This concludes our formal comments. We will now be pleased to take your questions.

Operator instructions: Please note that only financial analysts will be permitted to ask questions. Your first question comes from Frank Mitsch from Fermium Research. Your line is open.

Yes. Good morning, Frank as well, and congrats on your second shot. I hope the other folks in the room are making progress on that front as well. And appreciate the commentary, especially the interplay between raw materials and pricing, you are going to have it fully offset by end of the fiscal first quarter of 2022. I am just curious if you could offer kind of qualitative comments or quantitative comments in terms of what percent raw material inflation you think you are facing here in the fiscal fourth quarter and in the fiscal first quarter? How significant are these headwinds?

Sure. I think a couple of things are happening. Number one, we were seeing inflationary increases at the end of calendar 2020 and beginning of calendar 2021 that were structural. Those were impacted, as I think everyone on this call knows, by the winter storm and its impact. We are seeing temporarily certain raw materials like epoxies that are more than double in cost what they were a year ago; that's true across a number of categories. And so, with that aside, we think that you are going to see inflation. In our markets, it's going to be high single digits. And I think an important thing for people to understand is that inflationary impact on us and in our market and our industry exists throughout the P&L. It's not just raw material cost, it's transportation cost of all types: rail, over-the-road, truck, ocean freight—not a big issue for us, but ocean freight—and it's also labor cost. You are seeing higher labor cost in factories and distribution centers, and to a certain extent across the organization. Labor costs are particularly interesting over the last year. To a certain extent, we are competing with the government. In some of our distribution centers, we would have seasonal part-time workers decide that if they could get paid more by staying at home, they would. We had replaced many of those with full-time workforce that has a higher benefit expense. So, inflation, in total, is going to be mid to high single digits throughout the year, that's structural. That does not include some of the extraordinary spikes that resulted from the storm and they're throughout the P&L.

That's very helpful. So, you are replacing that throughout the year, but by the time you come within six months or less than six months, actually, your price increases will have more than—will have fully offset that. That's how we will think about it, correct?

That's correct. We will see some gross margin deterioration in our fourth quarter, particularly in our Consumer business. We will see gross margin deterioration in Q1 — again, in the Consumer business — particularly which will be a combination of two things: one, cost price mix; and two, the fact that the consumer in Q1 will be rounding a first quarter performance last year, where organic growth is up 34%, and we do not expect to exceed that. But those are the big challenges that we see. And I think you'll see a return to gross margin improvement after Q1 with strong sales leverage and the continued benefits of MAP to Growth. We should see EBIT margin improvement modestly in Q4 at the operating levels, as Rusty said, and then continuing in fiscal 2022.

Very helpful. Thanks so much.

Thank you, Frank.

Your next question will come from Rosemarie Morbelli from G Research. Your line is open.

Thank you. Good morning, everyone, and I got my second shot as well.

Congratulations.

Just multiple people ringing the bell. So, Frank, can you talk about the trends you are seeing at the big box and other retailer outlets as far as your Consumer business is concerned? I mean, you mentioned the anticipated benefit from the increasing vaccination for performance products, but people on the other hand are going back to work. So, they will be less do-it-yourself. And is professional painters and others enough to affect a potential decline on the DIY in 2022?

So, in general, we are seeing still solid consumer takeaway across all of our Consumer Group customer base. But it's certainly down from what it was in the summer and the fall. In the summer and the fall, we were looking at 30% organic growth rates. Consumer takeaway in the third quarter was more in the low single-digit to low teen range. And we expect to start rounding much more difficult comparisons in April and May, and the first and second quarter of fiscal 2022. So, I would expect, as we indicated a minute ago, that we will see some gross margin challenges and quite candidly some very difficult comparisons in our Consumer segment. Our results will be above what were records in fiscal 2019. But in the first half of next year and really starting in April and May, I would expect this to be flat to slightly down relative to the comparisons that we will be facing. The flipside is, as we sit here, we are starting to see positive sales and earnings contribution from our Performance Coatings Group, really the first positive results in the top and bottom line from those more industrial-focused businesses and industries that we’ve seen in more than a year. And as you can see in our results, the Specialty Products Group is roaring and the Construction Products Group is performing very well. And the dynamics of their underlying markets suggest that that will continue for some time in both segments.

And Frank, you talked about going back to RPM historical revenue growth. Can you remind us of what the— you have had a lot of acquisitions during that particular timeframe, so can you remind us what the organic growth was historically?

Well, historically, Rosemarie, and this goes back to the beginning of our MAP to Growth Program, we had a 15 or 20-year compounded annual growth rate of about 6%. I would say, about half of that was from acquisitions. But when you look at where we were after our last restructuring in the 1999–2000 range, from 2003 for about a decade, our organic growth averaged about 5% or 6%, so very impressive numbers. And we think we are going to get back to that. In fact, we are back to that as we speak. And I will tell you, our fourth quarter, our current view is we expect revenue growth somewhere in the 15% to 20% range. And we — I think we are well-poised for good growth in fiscal 2022. And the underlying fiscal dynamics will support perhaps even stronger growth, although I think it remains to be seen what actually comes out of Washington in terms of a big infrastructure build, and also when and how quickly Europe recovers. We're continuing to see some modest challenges in Europe with these COVID lockdowns across some of the major countries that we operate in, while the United States seems to be picking up and that pick up is gaining momentum.

And if I may, that Q4—just following up on one of your comments that Q4 revenue growth of 15% to 20%, how much is from FX and acquisition, how much organic do you anticipate?

I don't have that specific number, I would tell you in general less than a quarter of it is from price and the balance will be mostly from organic growth. I would guess if we looked in this quarter and acquisition activity, yes 2%. So you would expect another 2% of impact from acquisitions I think in Q4, the balance of the organic growth.

Okay, thank you.

And your next question will come from Ghansham Panjabi from Baird. Your line is open.

Good morning, Frank. Good morning, everybody. Thanks for fitting me in. So Frank, can you— in your comments you talked about, just given the journey you've been on and not the growth being better equipped to handle the current raw material environment, can you just give us some more detail in terms of what exactly that means. And then also, how's your pricing strategy just broadly changed since the last inflation cycle, which was three years ago?

Sure. So I'll hit you, you're going to steal my concluding comments, Ghansham, with that question, which is a good one. Our MAP to Growth program has fundamentally changed RPM. And it's not just about saving or achieving the $290 million in savings—in fact, by May 31 '21 we'll be at roughly a $300 million run rate, and we expect $50 million of MAP savings to benefit incrementally in fiscal '22. But it really has in a relatively short period of time, begun to ingrain continuous improvement and lean manufacturing disciplines into our manufacturing and operations and really into our distribution and administrative areas. The work that our teams have done in procurement has been extraordinary. We went from a decentralized collaboration to a centralized procurement activity. Mike Sullivan, who took over as Chief Restructuring Officer from Steve and Tim Kinser and Gordie Hyde and their teams have done extraordinary work. Then the other thing that has fundamentally transformed RPM is the work of Rusty Gordon, Scott Copeland, Lonny DiRusso, who is our IT Director, and his teams; we have developed systems for tracking savings and efficiency programs out of the MAP to Growth initiative. We have a consolidated effort to look much more aggressively and much more proactively at cost, price and mix. So what we've been able to do in terms of utilizing information across RPM on a centralized basis, to communicate better, share best practices, and really have more real-time data in which to make decisions is dramatically different from what RPM was three years ago. And we expect to continue to build on that. The last comment I'll make is that our procurement effort has really established us as a good partner to some of our major raw material suppliers in ways that we were not before and we have substantially more and different raw materials under global contracts than we did three years ago and that has been very fortuitous, and has helped us in this challenging raw material cost increase environment. But at least as we speak now also the raw material and availability environment—time aside, the cultural change that we've effected in MAP to Growth is, I think in the long run, probably more important than the execution of achieving a particular efficiency number. And that concludes my prepared remarks.

And also for my second question, going back to 3Q in your original guidance before you had that release on the 18th, construction came in well above, I think what you'd originally seen. I know it's a small quarter. But can you just give us a sense as to where exactly the upside came from and what drove that specifically within 3Q?

So I have commented before on this, Paul Hoogenboom who leads our Construction Products Group and his team are doing extraordinary work. And it's a combination of two things that came together at the right time. One is an effort to bring together—and this started before MAP to Growth—our collection of Construction Products businesses, so Dryvit, Nudura, different parts of Tremco, some of which operated relatively independently, into a much more integrated, holistic approach to the market. So while we call it the RPM Construction Products Group, they're going to market globally as the Tremco Construction Products Group and so that integration on the common IT platforms, common commercial and specification efforts is really paying big dividends. You overlay that with the benefits of MAP to Growth. And you're seeing a really good combination of market-beating top line performance and leverage to the bottom line. And that's continuing to see continue in the fourth quarter. And I would expect it to continue for the next couple of years. We have some more work to do. But the enthusiasm amongst our people in the Tremco Construction Products Group and the extraordinary work they're doing is just fantastic. And you can see it in the marketplace. And the last comment I'll make is, there's been a decided shift there towards more renovation as opposed to new construction. New construction is still probably 30% of the Construction Products Group if not more, but we've become more renovation focused, which has really served us well. Infrastructure spending, a big boom in construction activity will only serve to help accelerate the performance that we're seeing.

Okay, perfect. Thanks, Frank, and congrats again on the vaccine.

Thanks, Ghansham.

And your next question will come from Steve Byrne from Bank of America. Your line is open.

Good morning, Frank. So, you made a comment about as MAP to Growth is winding down, you're going to start shifting your investment internally. And I'm curious to hear your outlook for the key revenue growth drivers over these next couple of years. How would you rank the buckets, the potential share gains from cross selling, integrating the commercial efforts as one bucket, another one being growing more outside of the U.S. and the third one being M&A?

Sure. And a great question in terms of where we're going and how we're thinking about growth. First of all, in our investor presentation, we outlined what we think are the addressable markets globally for our four segments, and it comes up to about $134 billion, half of that relates to our Construction Products Group. So, given the comments I just made and the opportunities that we see there, I would expect that to be probably our fastest growing group, particularly in light of the extraordinary year which Consumer has had. We're also in the early stages of cross-selling between our Construction Products Group and our Consumer Group, particularly where there's an interest with some of our Big Box customers in some of the Construction Products Group's waterproofing, roofing, coatings and sealant products, as well as concrete patch and repair products. So there're opportunities there. We have, as part of MAP to Growth—this was not part of the original plan—but we brought in McKinsey to really help kick start growth in our Specialty Products Group. We had underinvested in our Specialty Products Group for a long time in part because most of those businesses were managed for cash. And I think you're seeing the early results of both our focus on growth in those businesses in the Specialty Products Group and some leadership changes that we're in a position to talk about more over time as they come to fruition. And then lastly, we're better able to integrate bolt-on acquisitions than we ever have. Having said that, all of our bolt-on acquisition activity is really done with a focus on growth—how can we take a unique product line or a unique technology and leverage it over our distribution and sales forces? So, the combination is pretty exciting for us. And there's a pretty good M&A pipeline.

And maybe just to drill in on one of those, Frank, the Construction Products, are those contractors that do the renovation work, and you obviously have good relationships with them, how do you develop those in new regions and grow ex-U.S. or do you need acquisitions to give you some of a footprint in a new region that you can then grow relationships?

Sure. That should start to pay off in Europe. A disparate collection of construction chemical businesses in the U.S., when you look at Europe between Flowcrete and Dryvit—which is headquartered in Poland—our Yield Growth business and our Tremco business, they all operated independently. And under the leadership of Melissa Schoger who is doing a great job and leads the Tremco Construction Products Group efforts in Europe, we have integrated those businesses; we're going to market more as Tremco Construction Products Group. It's been a real fixer-up job. And I think we're getting towards the end stages of the fixed part in terms of planning, consolidation, really getting people to see themselves as part of one Construction Products Group team. And then they'll quickly be able to shift to a focus on growth. Hopefully, we'll be lucky on the timing because Europe is certainly behind the United States relative to opening up activity principally related to the recurring national shutdowns in some of our major markets, like Germany and France and Italy. We're actually doing pretty well in the U.K. And then outside of that, we've got really exciting growth opportunities in places like Asia and other parts of Europe, but it's on a very small basis. And so, acquisitions will certainly help us accelerate growth and establish a bigger presence in international markets.

Thank you.

And your next question will come from Jeff Zekauskas from JPMorgan. Your line is open.

Thanks, Frank. By calculation to offset your raw material inflation, you'd need about a 3% increase and 3% is normally tough to get in the middle of a calendar year, in that things really readjust themselves at the beginning of the year. Is 3% roughly the right number, and is the reason that you're confident that you can achieve that is that customers really need a product. And so they're willing to be more flexible in pricing terms?

So I think that just to reflect the comments we made earlier, we anticipate structural changes in inflation in our markets throughout our P&L, there's going to be high single digits. And we have gone out with price increases that are in the 6% to 8% range. We went out—some of our businesses went out early in anticipation—these are industrial businesses and looking at the changes at the end of the calendar year and beginning of this calendar year, with 3% to 5% price increases and as we sit here today, it goes on and off and they're going out again. And in certain categories, I mentioned epoxy; we've increased prices on certain of our product lines by 14%. That's in light of epoxy primer, which we think are temporary, which have more than doubled. They'll certainly come down from their current highs, but they will be substantially higher than they were a year ago and that from our perspective is a structural change in most all of our raw materials from acrylic resins to epoxy resins to all types of polymers and polyols. It's just been an extraordinary period of time in terms of spikes, but really in terms of inflation, corrugate, packaging, transportation costs all going up. And so, we'll have maybe better information in July in terms of where we are. And then the last comment I'll make to your question is, I think, both good and fortunate in our ability not to have to short and/or not be able to supply. We have continued work to do on working capital. We've been a heavy working capital company. We've generated in excess of $200 million of positive cash flow from improvements in working capital, but whether it was raw material or inventory, new contracts—so far we've been able to manage through these circumstances I think pretty well.

Okay. Then for my follow-up, do you think volumes in Consumer products are going to grow in fiscal '22. Or do you think they're going to shrink or be flat or roughly how should we think about it?

As I commented earlier on the call, starting in April and May and certainly through the first and second quarter, we anticipate Consumer volume flat or slightly down; we think it will be picking up in the second half of next year. And that's in light of—a first quarter of fiscal '21 organic growth of 34%, which is a mountain we don't expect to beat in the first quarter of this year. We do have some market share gains. We do have some new product introductions and to the extent that there is acquisition activity that could end up resulting in a year-over-year higher performance, but on an organic basis starting in April, I think we anticipate flat to slightly down results in our Consumer segment on the top line and the bottom line.

That seems a little more pessimistic than you were three months ago. Is that true?

No, it's not true. I think, yes, three months ago, anytime—first of all, we didn't talk too much about fiscal '22, but I can tell you we have made numerous references to the fact that we were not going to top a 34% organic growth in the first quarter, and I believed it six months ago, and I believe it three months ago, I believe it today. And I wouldn't say we're pessimistic. We will be meaningfully above the record results of where we were in our Consumer business in fiscal '19. And so there has been an expansion broadly of the market of more confident DIYers, and we're excited about that, but circumstantially starting in April and certainly through our first quarter, we'd expect to be flat or slightly down in our Consumer business versus these extraordinary comparisons to last year.

Thank you so much.

Your next question comes from John McNulty from BMO Capital Markets. Your line is open.

Yes. Good morning, Frank, and thanks for taking my question. So a question first on Nudura, it sounds like that business is kind of really turning the corner and some of it may have been on high lumber prices. I guess, from your perspective, is it a function of—okay, you're cheaper now or more cost competitive against lumber, but if and when lumber eventually comes back down to earth, do you give some of that back or is it more, 'Hey, look, you've gotten a lot of contractors a lot more comfortable with it, and maybe this high lumber price has kind of facilitated that, but because of that it's resulted in a little bit more of a secular shift.' And now with that greater comfort level you can kind of see the growth continue to emerge from that. How should we be thinking about that?

Very much the latter, John. It was growing double digits before the lumber price issue. We are working on greater specifications. ICF with contractors is initially a challenging sell because for better, for worse and sometimes it helps us contractors, architects, engineers are hesitant to change from systems that work, and when we get people that convert to ICF, they love it. It is less labor-intensive, and in many instances it provides the most durable sidewall in the market today, bar none. And it's highly energy efficient. And so, we have been focusing efforts through our Tremco Construction Products Group again on an integrated basis, utilizing the sales force of 200 plus people in the Tremco waterproofing and sealant business to really drive sales in Nudura. The lumber price situation was some added gravy to help accelerate that, but we're very excited about that and we're also excited about the ability to deliver a more integrated wall. Nudura independently was bought and part of Dryvit. Today, they're all part of our Tremco Construction Products Group. So our specifications around Nudura are not just for an ICF wall system. Therefore the Tremco sealants and all the joints and other complementary products drive it. The opportunity there is very, very exciting. It's mostly residential and the opportunity to drive it in white commercial institutional markets like schools is huge.

That definitely makes sense. And then could you give us a little bit of color in terms of the M&A pipeline, it sounds like you've made a couple of opportunistic acquisitions just this past quarter. How should we be thinking about that going forward, because it does look like the multiples in some markets are starting to creep up at this point? How are you looking at the opportunities and the value of those opportunities as you're looking forward?

Sure. The M&A pipeline is really strong. We completed two acquisitions just this past month: Bison, which is a great addition to our Fibergrate business and also has some applicability to other parts of RPM—it's a patented raised flooring and floor leveling system; and Tuff Coat, again a non-skid Marine product that is already getting some interest from other parts of RPM and industrial settings. So, we're very excited about both of those. We've got management teams to run those even though we'll be integrating them into RPM manufacturing processes and our centralized procurement activities. So there's more of that out there in general in our space. There are a lot of larger transactions out there and I'll just repeat what I've said in the past. I don't see us paying 15 or 16 times EBITDA for anything. And so to the extent that there are large transactions and people are willing to pay those relatively peak multiples in a period of time where their peak earnings are present, that will not likely be RPM. But if there are some larger transactions that we can get done at what we believe to be reasonable multiples with a reasonable IRR, we certainly wouldn't preclude looking at them.

Okay. Got it, makes sense. Thanks very much for the color.

Thank you.

The question comes from Vincent Andrews from Morgan Stanley. Your line is open.

Good morning.

Good morning, Vincent.

Good morning, Frank. Just wanted to ask a couple of things, one, you mentioned COVID restrictions are still holding things back in Performance Coatings, and I was wondering now that Texas has pretty much opened up and Florida is pretty much opened up, big geographies, when you look at your results in those states, are you seeing that with those restrictions lifted that performance of those underlying businesses is really snapping back and how does that compare to what you're seeing in places that are kind of halfway open? Any thoughts there would be helpful.

Sure, I commented earlier on the call that as we sit here today in the spring, we're seeing positive results for the first time in a year on the top line and bottom line of those businesses. I think we'll have better color in July because the biggest reason is that we're starting to analyze really poor results. Our Carboline business in particular, given their exposure to oil and gas and heavy industry, experienced 10% to 12% sales declines pretty consistently; Stonhard and our polymer flooring businesses have been flat to slightly down, but their backlog is larger than ever. So we're very hopeful that you're going to see some nice robust growth there, but we'll have better color for you in July to really look back over three or four months and determine how much of this is a pickup in demand and good robust organic growth versus how much of this is, 'Hey, we look great because last year was terrible.'

Fair enough. I look forward to that. And just as a follow-up in Specialty Products you mentioned that you did benefit from the winter weather disruption that created some demand for you. Is that continuing given that Uri was in the middle of the last month of the quarter, is that continuing into the fiscal fourth quarter and from an order of magnitude perspective that's something that we really need to be thinking about when we model these quarters for our next fiscal year in terms of just having tough comps?

I think it is continuing into the fourth quarter, and I think that's true of our Legend Brands business. But we have new leadership in a number of places over the last two years and we've been really looking to drive growth. If you look at our marketing profile and how it's improving in Specialty Products in the last two quarters I think you'll see comparable improvement in Q4. That's in our Day-Glo and colorant business. It's in our marine coatings and some of the specialty products there. It's pretty exciting in terms of the work we're doing there. And some of the leadership changes that we've effected are doing good things for that segment. So we'll have much tougher comps next year in Q3 and Q4 for Legend Brands, but I think the Specialty segment is poised for some pretty solid growth in the top and bottom line for the coming year.

Okay, great. And congrats on that second shot.

Yes. Thank you. I encourage everybody to go get theirs.

The next question will come from Kevin McCarthy from Vertical Research. Your line is open.

Good morning. How are you?

Fine.

Frank, in Washington, D.C., I imagine there'll be a lot of conversations and perhaps some horses traded before we know what an infrastructure bill could really look like. But that said, I'm tempted to ask two things. A, what were your preliminary thoughts on the bill as it was unveiled? And then B, to the extent we might have a little bit better visibility at this juncture, is there anything you feel that you would be doing differently in terms of capital allocation or operating strategy ahead of such substantial fiscal stimulus?

Sure. Without being too political, I think we're going to have an infrastructure bill. I'm hopeful that it'll be more bipartisan than some of the recent bills. And I say that because it's more focused on bridges and highways and airports and poor facilities and the things that will drive our business. And so I do think we'll be a beneficiary of that, and I think whatever benefit comes out of that will be in addition to the growth that we're experiencing in our Construction Products Group now.

Okay. Then second a bit more of a housekeeping question, but as it relates to winter storm Uri you talked about catching up in the final week of February. You also talked about some benefits flowing through into your Legend Brands business. And if we kind of roll up all the puts and takes was Uri a material positive or negative in February and what do you think the answer to that question would be for March as well?

Certainly for our Legend Brands business, it was a positive in terms of driving their air handling equipment, dehumidification equipment and related products as they helped homeowners and light commercial customers recover from storms like this. For RPM as a whole, I would call it a net neutral. I think we panicked a little bit with literally two days of trucks not coming in and trucks not going out, and at least one of our more significant consumer plants closed for a short period and we didn't know when all that would change. I think we recovered most of it. So I would say in the quarter it's a net neutral, as you think about what our comparisons might be for next year with the exception of the Legend Brands business.

Okay. Thank you very much.

Next question comes from Arun Viswanathan from RBC Capital Markets. Your line is open.

Good morning, Frank. Thanks for taking my question here. I guess first off just on the pricing outlook, could you just elaborate on maybe by business segment if possible what you feel the pricing outlook is? I'm just curious as volumes in Consumer are relatively robust, while industrial Performance is a little bit weaker. Does that imply weaker pricing prospects over the next couple of months? How should we think about pricing by segment?

I don't know that we would provide pricing by segment. I do think it's driven certainly by the underlying raw materials in specific areas and then by my commentary on inflation throughout our P&L in general. And so, I would anticipate—again, we're not going to recover every temporary spike—but we think there's an underlying inflation that's high single-digits across our P&L. And in some cases we've had modest price increases, in other cases like epoxy resins, as I commented earlier in certain product categories, we've gone out with a 14% price increase in certain lines. The other aspect of this that's important is you're trying to manage your supply chain. If you want to get product to meet customer demands and serve your customers then you're going to have to work with your suppliers on product availability and what their costs are doing and what they're doing with their prices in order to get raw materials to serve our customers. And so that's certainly part of what's driving some of our price increases as well.

Okay. That's helpful. And then when you think about subsequent quarters, ultimately, it sounds like you will be able to get price here. But it may take some time; in the future, maybe beyond the August quarter, would you expect that you should see some margin expansion i.e., hold onto that price in subsequent periods as well?

Sure. I mentioned earlier there's about $50 million of expected incremental benefits from our MAP to Growth program in fiscal '22, most of that in manufacturing and procurement areas. So I would hope that after our first quarter you'll start to see gross margin improvement. We're keenly focused on that in terms of our conversion costs as well as that centralized procurement activity. Broadly speaking, given the stimulus and spending environment, we expect some level of continued inflationary pressure, but we also expect our price actions and MAP to Growth savings to mitigate that over time. We certainly expect to come down from the crazy spikes in certain raw materials, like epoxy resins, but prices will likely remain higher than a year ago.

Okay. That's helpful. One more quick one—on the M&A side, I know that you said that valuations may be a little bit high now, especially for the larger deals, but given the changes in your strategy through MAP and potentially integrating prior acquisitions, do you foresee greater synergy opportunities with future acquisitions, and is there any color you could share on what you expect to drive out of the Bison or other acquisitions that you've completed recently?

Sure. I think that if we look at bigger deals for the most part they would have to come with meaningful synergies—versus 20 years ago, many acquisitions were family-owned businesses that operated independently. Today most of our acquisitions are driven by strategic growth imperatives of our groups. We look for bolt-ons where we can leverage unique product lines or technologies across our distribution or sales platforms. Bison brings patented raised flooring systems that add to Fibergrate's capabilities and potentially other businesses; Tuff Coat is a good strategic fit in marine and recreational offerings. Integration and centralized procurement can produce synergies, and we're better at that than we were in the past.

And your next question will come from Mike Harrison from Seaport Global Securities. Your line is open.

Hi, good morning. I'm wondering if just to follow-up on some of the acquisition discussion when you acquired the Ali business it looks like that had annual sales around $75 million and this quarter it looks like around $24 million, which would be a seasonally weaker quarter. So can you talk about how you've been able to leverage Ali and the Gator brand relative to your expectations and where we should think about those revenue run rates as we get into the spring and summer a heavier season here?

Sure. The Ali family built a great business with a strong brand and complementary products for our Consumer segment. Our initial challenge post-acquisition was some supply disruptions early in the COVID period, but we've worked aggressively—both investing and outsourcing in a few categories—to correct that disruption and we have caught up. There's good demand there and it's a great business. Combining it with Rust-Oleum's sales and marketing teams allows joint selling into big accounts. We would expect that business to grow at a high single-digit to low double-digit organic rate and we're thrilled to have them as part of RPM.

All right. And then in the Consumer business, you had noted that Europe and Canada were pretty robust. I believe the DIY demand trajectory was a little bit different in those international markets than what you saw with the strength in the U.S. in April and May. So how should we think about the comps of that international Consumer business and maybe the pace of DIY demand over the next couple quarters there?

We do several hundred million dollars of DIY business in Europe, disproportionately in the U.K., and there has been more activity there. The U.K. execution has been strong and we've seen surprising growth in e-commerce—paint products and accessories direct to consumers. E-commerce has been an accelerated channel for us and one that our teams executed well in Europe. That trend should continue and is a positive long-term change.

All right, thanks very much.

And your next question will come from Josh Spector from UBS. Your line is open.

Hey, good morning, Frank. Thanks for squeezing me in. Just a quick one on price again, when you talked about how you're going to capture the higher raw materials, you talked about changes in terms as something you could work with. Can you just give us an example of how that would work and how that would close the price gap?

Sure. Without getting into customer-specific details, changing terms is part of the price negotiation process—effective dates for the price increase, acceleration of rate changes, and sometimes adjustments to payment terms can be part of the negotiation. It's account-by-account. On our payables side, we've had favorable programs that help both suppliers and us. But I wouldn't provide specific contract details for obvious reasons.

Okay. Thanks. That's helpful. And just quickly, you talked about M&A for cash deployment. How about buybacks? Now that you've initiated buybacks again or started doing them, initially you had targets to do a certain amount over a period of time—I think there's maybe a half a billion left in that target. Do you have any plans for the timeframe you plan to execute that over?

Yes. We have an open-ended repurchase program that's active again. In the spring of last year we preserved cash and planned for the worst. With our board's approval we reinitiated our repurchase program in January and repurchased about $25 million of stock in the quarter. We intend to continue repurchases subject to stock price and other considerations, but we would not purchase the remaining half billion as quickly as some past periods. I would expect it to take multiple years to complete significant additional repurchases.

Okay. Thank you.

And your next question comes from Kevin Hocevar from Northcoast Research. Your line is open.

Hey, good morning. Thanks for squeezing me in here. On the raw material supply side, you talked a lot about the inflation that you're seeing, but curious if the supply issues have impacted your ability to produce at all. Have you had to take any plant downtime or reduce shifts or anything like that? Just curious if it's impacted your production capabilities at all?

The answer is yes, but thankfully not on a sustained or meaningful basis. We've had situations where we would have to stop production briefly and/or wait for raw materials. We have pursued certain raw materials directly through distribution under contracts. The good news is many of the forced outages are starting to roll off, which is a good sign. But at the end of February and early March we in our industry saw roughly 30 plus force majeure triggers from primary raw material suppliers. Most of those are starting to roll off, so we haven't had sustained outages due to raw material disruptions, only some temporary spot outages.

Okay. And then on the roofing side of the business, I know you've got a nice position in liquid applied roofing with Alphagard and I believe that this is a lower cost alternative to a full tear-off and replace. I imagine that's appealing. Are you seeing a lot more adoption of folks that might have previously done a full tear-off with roofing membranes now choosing liquid applied instead, and is that holding up in this environment?

Yes, absolutely. We're investing about $20 million to expand our roof restoration coatings capacity. Roof restoration coatings can extend life of many roofs for 10 to 20 years at a fraction of the cost of ripping off and replacing a roof. Benefits include shorter timelines, lower cost, less landfill impact, and improved energy efficiency. That market is growing for us at double-digits and we continue to invest in capacity there.

Great, thank you.

I have no further questions. Thank you. I'll turn the call back over to Mr. Sullivan for closing remarks.

Yes, thanks, Michelle. Ghansham grabbed most of my concluding comments, but I did want to just reemphasize that our people have executed our 2020 MAP to Growth Operating Improvement Program extraordinarily well. But the real benefits of the MAP to Growth program have been to transition and really transform RPM in a lot of ways that will serve us well into the future. It's a program that will formally end at May 31, 2021—five months longer than we anticipated because of COVID. We're working on what's next and look forward to communicating some of the details of that to our investors in July or perhaps October. I mentioned a lot of people that are driving that success; two people that have been paramount to the success of the program are Steve Knoop and Paul Hoogenboom. Steve, as many of you know, passed away a couple years ago, but he was the primary architect of this and was a big, passionate believer in MAP to Growth and our ability to execute. And we've done it. Paul Hoogenboom has been a leader in also developing this program and driving our performance in our Construction Products Group. There's a lot of exciting things to come there. So, with that, I'd like to thank you all for your participation in our Investor Call today. I want to thank our associates for their tremendous efforts and dedication in what's been the most volatile environment that any of us have ever operated in, and as volatility continues, and thank our investors for their investment in RPM. We very much look forward to talking about the details of the conclusion of our fourth quarter and our fiscal '21 full-year when we release earnings in July, and also provide you more detail both about our fiscal '22 outlook and some of the longer term MAP to Growth 2.0 ideas we have, both on the growth side and efficiency side. Thanks for participating in our call today, and have a great day.

Thank you everyone. This will conclude today's conference call. You may now disconnect.