RPM International Management Discusses Q2 2012 Results - Earnings Call Transcript

RPM International (RPM)

Q2 2012 Earnings Call

January 05, 2012 10:00 am ET


Robert L. Matejka - Chief Financial officer and Senior Vice President

Frank C. Sullivan - Chairman, Chief Executive officer and Chairman of Executive Committee


Ivan M. Marcuse - KeyBanc Capital Markets Inc., Research Division

Saul Ludwig - Northcoast Research

Aleksey V. Yefremov - BofA Merrill Lynch, Research Division

Silke Kueck-Valdes - JP Morgan Chase & Co, Research Division

Rosemarie J. Morbelli - Gabelli & Company, Inc.

Edward H. Yang - Oppenheimer & Co. Inc., Research Division

John P. McNulty - Crédit Suisse AG, Research Division



Welcome to the RPM International Conference Call for the Fiscal 2012 Second Quarter. Today's call is being recorded. 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 may 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 review 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 directly comparable GAAP financial measures on the RPM website. [Operator Instructions] At this time, I would like to turn the call over to RPM's Chairman and CEO, Mr. Frank Sullivan, for opening remarks. Please go ahead, sir.

Frank C. Sullivan

Thank you, Jennifer. Happy new year, and welcome to the RPM International Inc. quarterly conference call for the second quarter ended November 30, 2011. As you saw from the earnings release this morning and related to our comments about our second quarter during our October conference call, there are a lot of moving parts in relationship to onetime gains in last year's second quarter and a number of offsetting onetime gains and onetime expenses in this year's second quarter, principally related to investment and acquisition activity.

When you strip away the nonoperating expense from last year and the various nonoperating gains and expenses in this year's second quarter, we believe the right way to look at our results from an ongoing operating basis is the second quarter where sales grew 10% and net income and earnings per share grew about 9% year-over-year.

From a segment perspective, the nonoperating income and expense items principally impacted our corporate expense categories and our industrial segment. If you strip these nonoperating items out, our industrial segment generated a year-over-year second quarter performance of 10% sales growth and 10% earnings growth, while our consumer segment generated a year-over-year performance of 12% sales growth and a decline in EBIT of 2%.

Continuing raw material challenges in the balance of higher cost versus pricing actions resulted in less than desired leverage to the bottom line in our industrial businesses and a decline of profit margins in our consumer businesses.

Our goal in coming out of the recession was a focus on growth in global expansion, and we have been aggressively and successfully executing on this strategy. We are picking up market share in the vast majority of both our consumer and industrial businesses in excess of underlying market growth. In recent months, we are also seeing the first signs of some lessening in significant material categories with the sole exception of TiO2, which only really impacts our consumer segment, and more specifically, Rust-Oleum. It is important to note that the combination of the nonoperating income and nonoperating expense items in this year's second quarter almost all relate to our ongoing acquisition activity.

We've increased our investment in Kemrock in India to a level of 23%, allowing us to account for this investment for the first time on an equity basis. With the closing of the FEMA EIFS and coatings business in Germany on January 3, 2012, we have completed more than $160 million of annualized sales from acquisitions during this fiscal year. While these acquisitions have resulted in the expense of significant deal transactions, including on a number of the small transactions broker fees, as well as onetime hits to the cost of goods sold in relationship to inventory writeups, all of which are in our Industrial segment results. All of these acquisitions will be nicely added at the sales and earnings towards the end of our 2012 fiscal year and for our full 2013 fiscal year.

I would now like to turn the call over to Bob Matejka, RPM's Senior Vice President and Chief Financial Officer, to provide you details on the quarter. After which, we'll answer your questions. Bob?

Robert L. Matejka

Thanks, Frank, and good morning, everyone. We thank you for joining us today. And first, I'll review the results of operations and cash flow activities for our fiscal 2012 second quarter, comment briefly on some year-to-date results of operations items. I'll touch upon a few November 30, 2011 balance sheet measures and then I'll turn it back to Frank for closing comments before we take your questions.

Our fiscal 2012 second quarter resulted in a consolidated net sales increase of 10.9% over the prior year to $916.1 million, principally due to volume improvement of 5.1%, price increases of 2.9% and acquisition growth of 3%. And these all were partially offset by unfavorable ForEx of about 0.1%, almost nonexistent on the ForEx side.

The industrial segment net sales of $641.5 million, which accounted for 70% of net sales, increased 10.1% over last year with acquisition growth of 4.2%, volume increases of 3.2%, price increases 2.9%, all of which were partially offset by unfavorable foreign exchange of about 0.2%.

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