RPM International, Inc. 2027 Q1 Earnings Call

Please go ahead. Thank you, Gary, and welcome to RPM International's conference call for the fiscal 2027 first 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, 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 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 see 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 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 first quarter of fiscal 2026 unless otherwise indicated. We have provided a supplemental slide presentation to support our comments on the call. It can be accessed in the presentations and webcast section of the RPM website at www.rpminc.com. Effective June 1, 2026, certain Latin American businesses in the Construction Products Group and Consumer Group with annual sales of $128 million and $15 million respectively, were moved to the Performance Coatings Group. This change has no impact on consolidated results, and details of the changes can be found in a Form 8-K filed today. Current and prior year results reflect the updated structure. Now I will turn the call over to Frank.

Thanks, Matt. Thanks to everybody on the call this morning. I'll begin on slide 3 with a high-level overview of our performance. Mike Laroche will review the financial results, then Matt Schlarb will cover our balance sheet cash flow and discuss some of our successes in the emerging markets. Rusty Gordon will finish with our outlook. Our associates delivered record first quarter sales, adjusted EBITDA, and adjusted EPS, despite sluggish end markets and several temporary operating headwinds. These results demonstrate the strength of our balanced business model. Broad-based growth in Performance Coatings Group and Consumer Group more than offset temporary softness in our Construction Products Group. Additionally, our SG&A optimization actions played a role in offsetting raw material inflation and other expenses. Slide 4 illustrates how our SG&A optimization actions helped offset gross margin pressure.

As expected, we offset raw material inflation on a dollar basis, but gross margins declined 100 basis points as the rate of raw material inflation outpaced pricing and MAP benefits in the quarter. Even with that pressure, we compensated for this by leveraging SG&A as a percent of sales to maintain the adjusted EBITDA margin consistent with the prior year quarter. This outcome reflects the benefits of the SG&A-focused actions we have implemented across RPM. These savings helped offset the gross margin headwinds while also allowing us to continue investing in growth and serving customers. We are pleased with the organization's cost discipline and the ability to grow in an uncertain economic environment, and we continue to expect additional pricing and operational improvements to support margins as we face continued inflationary pressures during the balance of our 2027 fiscal year.

Slide 5 highlights emerging markets generating more than 20% revenue growth, fueled by demand for engineered solutions for high-performance buildings and infrastructure. North America delivered solid growth, led by strong performance in our Performance Coatings Group and our consumer businesses. European growth was primarily driven by acquisitions. Our emerging market success was driven by our Platform Group structure, which oversees operations across RPM businesses in these regions. The Platform Group reports as part of our Performance Coatings Group segment, but sells products for businesses across all RPM segments. Historically, our decentralized structure limited our ability to fully capitalize on emerging market opportunities. Several years ago, we created the Platform Group to have a more cohesive strategy and operations in Africa, Middle East, and the Asia Pacific regions.

Following several years of successful growth, at the beginning of this fiscal year, we added South American businesses to the Platform Group as well. The structure has been successful for multiple reasons. First and foremost, because an excellent management team has leveraged assets where it makes sense, such as shared manufacturing and distribution facilities, while still providing autonomy to local sales teams who understand the markets best. Additionally, businesses across RPM have increased cooperation to provide support to our Platform Group in areas including brand management and product development. The Platform Group is an excellent example of the power of RPM in action, leveraging our leading products and services alongside the scale of our businesses to drive growth and profitability. The addition of our South American businesses further enhances our ability to capitalize on that scale and accelerate growth in this important region.

To summarize the quarter, we made tangible progress on SG&A expense reduction, which along with other MAP initiatives and our strategic balance, helped us offset higher inflation and temporary market slowdowns in our Construction Products Group. We will provide more details on these operational improvements and other aspects of our MAP 2030 at our previously announced Investor Day on November 9th at our Stonhard facilities in Maple Shade, New Jersey. Scheduled speakers at our Investor Day on November 9th include myself, Dave Dennsteadt, our newly appointed President and Chief Operating Officer, Rusty Gordon, RPM's Vice President and Chief Financial Officer, and our Performance Coatings Group President, Greg Michael. If you would like to attend in person, please contact Matt Schlarb as there is some limited availability. We will also be webcasting the event, which will start around noon Eastern Time.

Details on how to join the event are available on our website. I now like to turn the call over to Michael Laroche to provide more details of our quarter.

Thank you, Frank. Turning to slide 6, first quarter sales increased to a record led by our Performance Coatings Group and Consumer Group segments, which both had solid organic growth. Adjusted EBITDA increased to a record. Higher sales and MAP benefits, including SG&A optimization actions, more than offset raw material inflation, warranty expenses, and bad debt expense. In non-operating expenses, healthcare expenses declined, driven by our team's effort to reduce prescription drug costs. Adjusted diluted EPS increased 5.3% to a first quarter record, $1.98. Moving to the segment details on Slide 7, CPG sales increased, driven by the Kalzip acquisition. Organically, sales declined, reflecting a slowdown in education and healthcare markets, which together comprise over one quarter of CPG's end market exposure. We also experienced finished product shortages caused by the supplier raw material constraints in polyurethanes we called out last quarter.

Adjusted EBITDA declined as lower volumes reduced fixed cost absorption, while inflation, bad debt, and warranty expenses were additional headwinds. SG&A optimization partially offset these items. While the quarter was below our expectations, several of the profitability headwinds were temporary in nature. Turning to Slide 8, the Performance Coatings Group delivered record results with broad-based growth led by engineered solutions for high-performance buildings, energy, and infrastructure projects, particularly in emerging markets. Food coatings and ingredients also contributed to the strong growth. Adjusted EBITDA and adjusted EBITDA margin increased to a record as improved fixed cost utilization and SG&A optimization actions more than offset inflation. On Slide 9, Consumer Group sales increased to a record, including 5.2% organic growth. Shelf space wins, new products, and pricing supported this growth. Both adjusted EBITDA and margin increased during the quarter.

Higher volumes improved fixed cost utilization, while MAP and SG&A optimization also contributed to increased profitability. Now I'll turn the call over to Matt to discuss the balance sheet and cash flow.

Thank you, Mike. Moving to Slide 10, we generated another quarter of strong cash flow, driven by improved profitability and working capital efficiency. Working capital improved 150 basis points compared to the prior year, despite the volatile raw material situation. As a result of the strong cash flow generation, we returned $90.5 million to shareholders through share repurchases and dividends, an increase of 10.2% year over year. Total debt declined $263 million as we used some of this cash flow to repay debt. Looking at our leverage, as you will see in our 10-Q filing later today, it has returned to a similar level to where it was prior to The Pink Stuff acquisition in late fiscal 2025, which is the largest acquisition in RPM's history. Subsequently, we have also completed several other acquisitions, including Ready Seal, Kalzip, and Pava Resine. Most recently, we acquired Volteco at the beginning of October.