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Economic Pulse: RPM CFO Says Company Enjoys Strong Position as Economy Rebounds

Monday, December 14, 2009

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RPM International Inc., the diversified company with a range of business units in the coatings and building-products industries, figures to be well positioned to capitalize on key market dynamics in the current economic climate.

 P. Kelly Tompkins

That was the opinion voiced confidently by P. Kelly Tompkins, the company’s executive vice president and chief financial officer, last week in a presentation delivered at the Bank of America Merrill Lynch Global Industries Conference in New York.

RPM, based in Medina, OH, is the holding company for a group of industrial and consumer product manufacturers. Industrial brands include Stonhard, Tremco, Carboline, Day-Glo, Euco, and Dryvit, and consumer brands include Zinsser, Rust-Oleum, DAP, Varathane, and Testors.

Tompkins, following a review of the company’s encouraging financial results for the most recent reporting period, said the industrial and consumer product mix of RPM’s portfolio of business units puts the company in a strong position to capitalize on several primary “market drivers.”

• Housing. Tompkins said that RPM  stands to benefit from the fact that roughly 65% of its revenue is connected to the repair and maintenance market, a situation that gives many of its business units the resiliency to weather downturns in the new-construction segment.

• Energy demand. In assessing the macro picture of long-term energy demand, Tompkins said RPM is taking a progressive view of environmental regulations and other government initiatives directed at controlling energy use and greenhouse-gas emissions. The company sees opportunity as a supplier of high-performance (interpretation: sustainable) materials, such as the anticorrosion coatings produced by RPM’s Carboline Company, and roofing materials and coatings used in green roofs and reflective cool-roof systems. The company also is active in the wind-energy marketplace, with wear-resistant coatings for composite wind-turbine blades.

•  Infrastructure. Tompkins pointed to a number of RPM units that make coatings products for highways and bridges, as well as  deck coatings and tank linings.

• Sustainable building. Here again, Tompkins said RPM can capitalize on its presence in the marketplace with building-envelope materials such as green-roof systems, high-performance architectural coatings, and environmentally friendly interior paint and coatings conducive to indoor air quality. “We’re very excited about the long-term opportunities presented by the building-envelope market,” he said.

• Geography. Tompkins said RPM has expanded its footprint significantly in recent years, remaking itself into a global company from one that was largely North America-centric. Growth in Europe has been fueled in large part by the 2005 acquisition of Illbruck GmbH, a building-materials company based in Germany. RPM also anticipates solid returns on investments in India and South America, with consumer products playing a key role in the latter region. The company is counting on growth due both to “organic” expansion initiatives and acquisitions, Tompkins said.

While the company has taken a conservative approach in the merger-and-acquisition arena during the economic downturn of the last year, Tompkins said the company remains “engaged” in the M&A picture, keeping the lines of communication open with prospective targets.

 “We believe there will be attractive opportunities for strategic expansion,” he said. “We’re very bullish on our prospects for acquisitions.”

Commenting on the current economic situation and the company’s recent financial performance, Tompkins said RPM is seeing the results of a rebound in the economy and the housing market, adding that the company has weathered the downturn well thanks to financial discipline by individual business units, cost-cutting measures, reduced capital expenditures, and a focus on cash flow.

Consumer-oriented businesses are staying true to form, rebounding more quickly than business units tied to industrial markets, Tompkins said. Consumer sales growth is being driven more by existing-home turnover rather than new-housing starts, he added. The product mix of the company’s operating units also benefits from the current trend of relatively modest investments in home repair and improvement projects.

Sales in the company’s industrial segment remained soft in the company’s first quarter ended Aug. 31, declining by 14% from the same period a year earlier. Businesses with diverse end-use markets fared better than those reliant on the commercial-construction segment, Tompkins said. Still, margin improvement resulted due to operating efficiencies, a better raw-materials environment, and pricing discipline. He called the segment’s 10.3% decline in EBIT (earnings before interest and taxes) “very respectable.”

On the consumer side, Tompkins noted “quite a turnaround,” with sales up 10% after declining 15% for the fiscal year ended May 31. Key factors, he said, included market-share gains and the introduction of significant new products including Rust-Oleum’s “2X,” a high-coverage paint that he described as a “great value proposition” for consumers. He also mentioned other recent product introductions that suffered from bad timing—they debuted in the “teeth of the recession”—but are showing signs of momentum as the economy improves. Consumer-segment EBIT rose 54.1% for the quarter from the prior-year period.

For the company’s most recent fiscal year ended May 31, net income fell 42%, to $134.9 million. Sales for the year declined 7.6%, to $3.37 billion. For the company’s industrial segment, EBIT declined 26.6%, to $192.25 million, while sales fell 4.3%, to $2.265 billion. Consumer-segment EBIT was off 33.7%, to $106.8 million, as sales declined 13.6%, to $1.102 billion.

Despite the sales and earnings declines for the year, the company generated record cash flow of $267 million, up 13.8% from the prior year.

Tompkins said the company anticipates continued improvement in sales and earnings results in the second half of its fiscal year, which ends May 31, 2010.

   

Tagged categories: Business matters; Coatings manufacturers; Finance; RPM

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