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Solid Results in Specialty Products

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Ghansham Panjabi, Ph.D.

Robert W. Baird & Co.


[email protected]

Solid organic growth: We believe that RPM International (RPM) continues to offset market-related (energy/heavy machinery) and transitory (inventory management issues with caulk & sealants) issues with innovation and increased exposure to higher-growth markets (U.S. commercial construction/etc.).

U.S. commercial construction up mid-to-high single digits: As for the latter, U.S. commercial construction organic sales were up mid-to-high single digits with momentum expected to continue for the remainder of the year.

Meaningful contributions from innovative products: Moreover, product innovations across all three of RPM’s major businesses are expected to contribute positively over the medium term, noting that approximately 15–20% of RPM’s organic growth over the last five years has been generated by new product categories.

Global demand mixed: As for trends outside of the U.S., results have been mixed, with choppiness in Europe (year-over-year comparisons more difficult) offset by a rebound in Latin/South America (constant currency sales +12%) — Asia still small. Longer term, management expects to grow its international presence through organic growth and M&A — noting that the company has realigned its Euclid Chemical and Flow-Crete brands to work collectively to expand their global reach.

Consumer issues transitory: Meanwhile, inventory issues in the caulk and sealants business (within Consumer) are expected to be mitigated through capacity expansion by the end of Q2’F17 (second fiscal quarter 2017) noting that management estimated a loss of 1–2% of sales during Q1’F17 due to the inventory shortfall in the context of strong market demand.

Guidance reiterated despite moving pieces: In terms of guidance, while fiscal year ‘17 guidance ($2.68–$2.78, consensus at $2.77) was reiterated, we note that pension (lower discount rate) and corporate expense are expected to be larger headwinds than previously forecast, offset by lower taxes (26%) and strong operating leverage — organic sales forecast by business largely unchanged.

Elliott L. Schlang, CFA

Wellington Shields & Co.


[email protected]

RPM International, the specialty coatings and chemical company with 70% of sales from maintenance and repair products, reported Q1’17 (August) EPS of $0.83 (versus $0.74 the prior year … 4 cents above our estimate. Foreign exchange (FX) reduced sales by $26 million.

Sales: $40 million under our estimate, were up only 1% year over year (YoY) and 2% organically to $1.25 billion, with acquisitions contributing 1% and FX subtracting 2%. The gross margin was up 120 basis points (bps) YoY to 44.1% of sales due to lower raw material and manufacturing costs and supply chain improvements, partially offset by FX and an unfavorable product mix.

Selling, general and administrative (SG&A) expense increased 3% YoY due to higher pension expenses, impacted by the falling discount rate (RPM incurs approximately $7 million in pension expense for every 1% decrease in the discount rate), acquisition expenses, and bad debt expenses, and rose 70 bps to 30.7% of sales.

Operating income (aka earnings before interest and taxes) rose 5% to $168 million, increasing to 13.4% of sales (vs 12.9%). The bad debt reserve is up by $3 million from the end of FY16 due to lower oil prices impacting customers from the Middle East, but with RPM hopeful results will improve as oil prices recover. Net interest and other expense was $19.5 million (versus $18 million), impacted by the loss of joint venture income from the acquired Dalian China business and increased licensing royalties.

The tax rate was only 24% (vs 29% last year and our 26% projection), due to an accounting rule change. Aided by the lower tax rate, net income was up 13% to $113 million for a net margin at 9.0% of sales (vs 8.0%).


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