RPM International Scaling Back Paint Production
On a recent financial report call, global coatings company RPM International leadership said they would be decreasing production at some of its plants due to reduced demand, the supply chain environment and “softening” construction activity.
“With the softening macro environment, we are reducing production at some of our plants to be better balanced with expected demand,” said Russell L. Gordon, Vice President and Chief Financial Officer.
“As a result, we expect to reduce inventories, which have been temporarily elevated to navigate supply chain challenges and positively impact our cash flows. We also expect that these actions will lead to lower fixed cost absorption and be a headwind to earnings.”
Recent Financial Report, Latest Move
Earlier this month, RPM released its second-quarter earnings report for 2023, with net sales coming in at a record $1.79 billion, up 9.3% over this period last year, which reported $1.64 billion. Net income was reported at a record $131.3 million, increasing 5.2% over last year, which came in at $124.9 million.
Net sales in the company’s Performance Coatings Group, Specialty Products Group, Consumer Group and Construction Products Group also showed increases year-over-year.
However, RPM noted that there is continued weak demand in Europe and reduced demand for businesses that serve the new residential home construction market. This reportedly became more pronounced late in the fiscal 2023 second quarter.
“While long-term visibility remains limited, economic conditions have recently become increasingly challenging as higher interest rates have negatively impacted construction activity, existing home sales, and overall economic activity. Additionally, some customers are temporarily moderating purchases as they normalize inventories in response to a more stable supply chain,” commented RPM Chairman and CEO Frank C. Sullivan at the time.
Paint maker cuts production amid falling orders https://t.co/izeftuTvHr— Supply Chain Dive (@SupplyChainDive) January 12, 2023
Additionally, the company noted during the Q2 call that the construction sector has particularly weakened demand. Some industrial clients such as manufacturers RVs, door and cabinets manufacturers, have also extended holiday production shutdowns into January to work through their own inventory backlogs.
“With a settling down of supply chains, which I think [are] back to normal, now you are seeing people try and modulate back into a normal inventory level and a refocus on working capital position back to something that’s more normal and more stable and more predictable,” Sullivan said on the call with investors.
As a result, the company plans to reduce production at some of its plants to better balance with expected demand and reduce inventories that had been temporarily elevated to navigate supply chain challenges and positively impact cash flows.
This is also reportedly anticipated to lead to lower fixed cost absorption and be a headwind to earnings. Overall, RPM anticipates that third quarter fiscal 2023 adjusted EBIT will be in the range of $75 million to $85 million compared to the prior year record amount of $80.6 million.
“The weakness was really in the Construction Products Group at -- particularly as we start Q3. I can't tell you sitting here whether it's a sustained weakness that's continuing that's more recession-like or whether some of it was a result of the winter storm that impacted all North America. We saw weakness in the OEM portion of our specialty products group or our Specialty Products Group is about $800 million,” Sullivan noted.
In October 2021, RPM had hoped to strengthen its supply chain and increase resin production amid global shortages with the purchase of 178,000-square-foot chemical manufacturing facility in Corsicana, Texas.
The company reported in its press release at the time that the facility would be repurposed to act as a manufacturing campus for a number of RPM’s operating companies and would also provide opportunities for expansion to meet its customer demand and strengthen its supply chain.
The facility is owned and operated by the company’s Tremco Construction Products Group. In addition to acquiring the land, facility and equipment, the Tremco Group was expected to hire the plant's more than 80 existing employees and reports that it could potentially hire more employees in the future.
“The fixed cost leverage, both at Corsicana, which is serving consumer, and some of our construction products businesses, also Carboline in terms of alkyd resins, it's not just Corsicana, it's knocking off some weekend activity in plants or knocking off a shift to try and make inventory adjustments basically to slow down production so that we can get our inventory back in line,” said Sullivan in the latest call.
“And so the overhead absorption hit as a result of that, it's going to negatively impact Q3.”
In its annual report for 2022, RPM reported that the company brought in $6.7 billion in revenue for fiscal year 2022, which ended on May 31, 2021, up 9.8% from fiscal year 2021’s $6.1 billion revenue. Net income, however, did decrease from $502.6 million in fiscal year 2021 to $491.5 million in fiscal year 2022.
In particular, the company noted that despite meeting record sales in fiscal year 2021 due to do-it-yourself projects driven by the COVID-19 lockdowns, the Consumer Group also faced challenges in fiscal year 2022 such as increases in the cost of raw materials, labor and transportation issues, and the ongoing pandemic.
“With regard to investments in working capital, for several quarters, we have talked about increases in working capital driven by higher raw material inventories that were designed to improve supply chain resiliency,” said Matt Schlarb, Senior Director of Investor Relations, on the recent call.
“As material availability has significantly improved, we have begun normalizing our purchases of raw materials in Q2 2023, and we expect these actions to contribute to improve working capital levels in Q3 2023.”
Economic Uncertainty, Hope for 2023
At the end of last month, the American Chemistry Council released its November 2022 resin production and sales statistics, showing that year-to-date production in November totaled 85.3 billion pounds. This was a 2.6% increase compared to the same period a year prior.
However, according to recent reports, the freezing winter weather at the end of 2022 in the United States could begin to impact resin production and prices once more.
Prices offered by plastic resin and polyethylene distributors in the U.S. Gulf Coast plants reportedly showed the lowest levels in about two years. Despite this, a Mexican plastic resin market source told Reuters that freezing weather in the U.S. in December could lead to rises in costs.
Citing names of five companies that include some the biggest petrochemical manufacturers in the U.S. where freezing weather affected large part of the country including the petrochemical hub, the unnamed source said that it is very probable that some distributors may have removed from the market some of the lowest priced product, waiting to learn the extent of the production impacts due to the extreme winter weather event.
In general, rising costs for materials were continuing to impact infrastructure projects across the United States, shrinking the effect of the bipartisan infrastructure law with officials scaling back, delaying projects and prioritizing needs. According to the U.S. Department of Labor in June, consumer prices across the board had surged 8.6% in May year-over-year, the highest rate since 1981.
According to reports, the price hikes are driven by a variety of factors, including worldwide supply chain backlogs, strong consumer and business spending in the country and Russia’s invasion of Ukraine. Reports also indicated that the United States and Canada were experiencing other challenges in labor shortages and recruitment, with some builders forced to defer or cancel work as they continue to address these issues.
Despite all these concerns, industry economists shared in July while prices are continuing to increase, the risk of a recession still isn’t definite—at least not until later in 2022 or sometime in 2023.
A report from the National Association of State Budget Officers showed that while total state spending rose 7.3% overall in fiscal year 2022, infrastructure construction spending increased 15.3%, thanks to funding from the bipartisan infrastructure law.
The annual report outlines that capital expenditures are made for new construction, infrastructure, major repairs and improvements, land purchases and the acquisition of major equipment and existing structures. Minor repairs and routine maintenance are also reported as operating expenses.
In this category, capital spending has increased the past three fiscal years in 2020, 2021 and 2022 at 4.3%, 3.6% and 15.3%, respectively. The latest figure is reportedly the highest growth rate since 1994, largely due to federal government funding.
In fact, at the end of last year, a year-end report published by Dodge Construction Network shared findings that the construction industry could remain positive in 2023.
In maintaining growth in 2022, Dodge predicts that the rise in sustainable construction and adoption of new technologies will remain the leading trends in 2023. This, in addition to recently passed legislation to fund the construction industry, is another factor believed to contribute to a generally positive outlook in 2023.
However, while the economy is still pressed through the ups and downs, Dodge predicts that construction starts in the nation could remain relatively unchanged next year at $1.08 trillion. In expecting economic downturns in the future, the construction industry will be tasked again with managing increased lead times and increasing costs from material prices to labor, while also supplying the built environment with its crucial needs.
While the management of these issues could seem daunting, Dodge foresees that while the U.S. continues to onshore more manufacturing and warehousing, supply chain bottlenecks will be better combatted throughout 2023.