RPM Intl Q1 2027 Earnings Call Transcript

RPM Intl (NYSE: RPM ) held its first-quarter earnings conference call on Tuesday. Below is the complete transcript from the call. This content is powered APIs. For comprehensive financial data and transcripts, visit View the webcast at Summary Full Transcript OPERATOR Good morning and welcome to the RPM Intl Fiscal 2027 First Quarter Earnings Conference Call.

All participants will be in 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 your telephone keypad.

To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the call over to Matt Schlarb, Vice President of Investor Relations and Sustainability. Please go ahead.

Matt Schlarb, Investor Relations Thank you, Gary, and welcome to RPM Intl'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; and Michael Roesch, Vice President, Comptroller and Chief Accounting Officer. This call is also being webcast and can be accessed live or replayed on the RPM website at Comments made on this call include forward-looking statements based on current expectations and 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 for 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 Webcasts section of the RPM website at Effective June 1, 2026, certain Latin American businesses in the Construction Products and Consumer groups 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. Frank Sullivan, Chairman & CEO Thanks, Matt, and thanks to everybody on the call this morning. I'll begin on slide 3 with a high-level overview of our performance. Michael Roesch will review the financial results.

Then Max Laird will cover our balance sheet, cash flow, and discuss some of our successes in the emerging markets. And then 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 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, the 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. So 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'll provide more details on these operational improvements and other aspects of our MAP 2030 at a 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; David 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'd now like to turn the call over to Michael Roesch to provide more details of our quarter. Michael Roesch, VP, Comptroller and Chief Accounting Officer Thank you, Frank. Turning to slide 6, first quarter sales increased to a record, led by our Performance Coatings Group and Consumer 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. 98. Moving to the segment details on slide 7, CPG sales increased, driven by the CALZIP 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 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.

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. Matt Schlarb, Investor Relations 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 materials situation.

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 ReadySeal, CALZIP, and PAVA Resin.

Most recently, we acquired Volteco at the beginning of October. Volteco is an Italy-based leading supplier of below-grade waterproofing solutions used globally in demanding applications. The company generated calendar year 2025 sales of 28 million euros. Volteco has joined the Construction Products Group and provides complementary technology to their leading waterproofing solutions.

Turning to slide 11, as Frank mentioned, we have taken a more collaborative approach to operating emerging markets with our platform structure. The investments we have made in the region and in our associates there have contributed to double-digit growth in the region for multiple quarters. Similar to other geographies, our solutions are resonating with owners and builders of high-performance buildings in these markets. As a reminder, high-performance buildings have demanding specifications where the cost of building failure is elevated.

With our people, service, engineered solutions, and the trust we have built in the marketplace, we have been winning more of these jobs and are optimistic that emerging markets will be a key growth driver for us in the future. Now I'll turn the call over to Rusty to cover the outlook. Rusty Gordon, Vice President and Chief Financial Officer Thank you, Matt. Turning to slide 12, I'll provide an update on raw materials before we get to the outlook.

Inflation expectations have increased since we held our last earnings call on July 22nd. As we mentioned in July, there were shortages in polyurethane feedstocks during the first quarter, and those became more pronounced than we had expected and negatively impacted sales. Our procurement team quickly secured additional supply to mitigate the impact, but at a higher cost that, because of FIFO accounting, will impact our P&L. Additionally, the sustained rise in oil and other commodity prices over the past couple of months has caused our inflation expectations to increase in other raw material categories.

As a result, we now expect second quarter inflation will be in the 9% to 11% range, up from our previous estimate of 6% to 8%. For the third quarter, we anticipate inflation will be 7% to 9% as inflation remains widespread, but we start to annualize prior-year inflation in some raw material categories. We have implemented additional pricing increases across all our segments which will help offset this inflation, but it will lead to gross margin pressure for the year. Now moving to the outlook, our second quarter outlook is on slide 13.

We expect consolidated sales to increase in the low- to mid-single-digit range. By segment, we expect CPG sales to increase in the low-single-digit range, PCG in the mid- to high-single-digit range, and Consumer in the low- to mid-single-digit range. We expect consolidated EBITDA to also increase in the low- to mid-single-digit range. SG&A optimization actions, pricing increases, and MAP benefits are expected to offset sluggish end markets, inflation, and startup costs at new shared facilities.

Next, moving to our full-year outlook on slide 14, we are narrowing our fiscal 2027 sales growth to mid-single-digit growth from our previous outlook of 3% to 7%. Adjusted EBITDA is now expected to grow mid-single digits compared to a previous outlook of up 5% to 10%. MAP benefits, including the previously announced $75 million of SG&A-focused savings and incremental pricing, are expected to offset persistent inflation which has increased from our previous outlook. Additionally, we'll face startup costs at new facilities and more challenging comparisons in the second half of the year.

For the end of the year, we do expect our CPG segment to return to positive organic growth. That concludes our prepared remarks. We will now be happy to take your questions. OPERATOR We will now begin the question and answer session.

To ask a question, you may press Star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press Star then two. Our first question today is from John Roberts with Mizuho.

Please go ahead. John Roberts, Analyst at Mizuho Good morning. For the CPG segment, for the healthcare and education market specifically, what's the outlook there? I think Rusty just said we expect CPG to be positive by the May quarter.

Do we expect education and healthcare as well, or are we just going to offset continued headwinds there? Frank Sullivan, Chairman & CEO I think we'll see a rebound in both of those areas. In the school system area, it is a slowdown in part driven by funding at local levels and state levels, and we're starting to see some of that free up. But given the nature of our Tremco roofing business in particular, where it's most acute, if we don't see it this fall, it really won't show up in terms of activity until the spring of next year.

And in the healthcare sector, we think it's a temporary slowdown. But again, in both instances, we would expect to see improved results and improved activity in the second half of the year. That's why we've addressed a reduction in our outlook for Q2. John Roberts, Analyst at Mizuho And then customer bankruptcies have popped up a couple of times now in recent quarters with the higher interest rates and weak end markets.

Are you increasing your provisions in your guidance? Frank Sullivan, Chairman & CEO Our provisions are appropriate. A prior bankruptcy was related to a retailer that was serving our Industrial Coatings Group. And in this case, we actually took a charge for a defense project that we're on, and it was a defense contractor that declared bankruptcy.

We wrote off the receivables, but believe that we'll have an opportunity to recover a significant amount of that given the nature of the project. OPERATOR The next question is from John McNulty with BMO Capital Markets. Please go ahead. John McNulty, Analyst at BMO Capital Markets Good morning, Frank.

Thanks for taking my question. So I guess maybe just to flesh out the CPG side a little bit more. Can you help us think about how much of the weakness was tied to the education and healthcare side versus the product shortages due to some of the supplier raw material challenges, and how quickly—or are we through the supplier raw material challenge issues—or do they drag on for another quarter or so? Frank Sullivan, Chairman & CEO Sure.

The polyol issue negatively impacted the Construction Products Group in both our sealants business and roofing business as it relates to urethanes and coatings, and we're one of the leaders in roof restoration coatings. So it was a drag to sales. The shortage issue is now behind us in terms of production, but we're catching up on inventory in Q2, so we still have some work to do. And it's part of our understanding as to how things will recover.

Some of this is work we have to catch up on, on a backlog of projects that we couldn't fulfill because of raw material shortages. On the weakness in education and healthcare markets, some of that's just a shrinking backlog, again principally in Tremco Roofing and our WTI contracting business. We are seeing efforts to rebuild that and they're moving in the right direction. I think sequentially you'll see an improvement in Q2 over Q1 in our Construction Products Group.

But again, given the seasonal nature of our roofing business, that rebuilding backlog will impact our second half of the year and really the spring months, so the end of Q3 and into Q4.