RPM International Inc. (RPM) Q1 2020 Earnings Report, Transcript and Summary

Welcome to RPM International's Conference Call for the Fiscal 2020 First 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. Following today's presentation, there will be a question-and-answer session. [Operator Instructions] Please note that only financial analysts will be permitted to ask questions. 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.

Thank you, Hilda. Good morning and welcome to the RPM International Inc. Investor Call for our fiscal 2020 first quarter ended August 31, 2019. On the call with me today are Rusty Gordon, RPM's Vice President and Chief Financial Officer; and Matt Ratajczak, our Vice President of Global Tax and Treasury who is leading our Investor Relations function. I’ll provide some high-level commentary on our first quarter results and an update on our 2020 MAP to Growth operating improvement plan. Then Matt will review the first quarter numbers in more detail. Rusty will wrap up our prepared remarks with our outlook for the remainder of fiscal 2020 after which we’ll be happy to answer your questions. The benefits of our 2020 MAP to Growth operating improvement plan, which really began to take hold during the fourth quarter of last year carried over into the first quarter of fiscal 2020 and generated significant earnings leverage. Initiatives that proved particularly beneficial included actions to rationalize our manufacturing and distribution footprint, improve production processes, and strengthen our supplier relationships through center-ledprocurement. In particular, during the first quarter we announced the closure of three additional plants, which brings our total to 15, out of 3, which are targeted for the total program. Additionally, we continue to streamline our workforce with approximately 80 additional reductions, which brings our total over the course of our restructuring to slightly more than 600. On a consolidated basis, we realized 2020 MAP to Growth savings in the first quarter to total $26 million; 7 million from manufacturing and operations, 7 million from procurement, and 12 million from G&A all of which flowed through our P&L. These efforts resulted in an increased adjusted EBIT of 25.3% and an adjusted diluted earnings per share of 25% over the prior year quarter, which exceeds our guidance despite modest sales growth in the quarter, which we had anticipated. This was the direct result of three factors. Number 1, the decision to exit low margin product lines and businesses as we pursue a value over volume strategy in certain businesses. For the fiscal 2020 year, this will reduce revenues by approximately $40 million in total. Also, we had an extremely wet June that slowed painting and construction activity, which particularly impacted our consumer segment and our construction products group, and sluggish international markets, particularly in Europe coupled with unfavorable foreign exchange impact on a transactional and translational basis. I should note that the improvement in EBIT margin does not just contain to one or two segments but were spread across the entire enterprise which demonstrates the breadth and effectiveness of our 2020 MAP to Growth operating improvement program across RPM. We continue to have a positive outlook on the outcomes of our restructuring program and as a result repurchased approximately $100 million of our common shares during the quarter. This was in addition to the 200 million we repurchased during fiscal 2019. When combined with the $200 million cash redemption of our convertible notes in November 2018, we are approximately halfway to our 2020 MAP to Growth goal of repurchasing $1 billion of our stock. I’ll now turn the call over to Matt Ratajczak, or a more detailed review of our financial results in the quarter.

Thanks Frank, and good morning everyone. Before walking through our financial review, I would like to remind you of two changes that we communicated on our last earnings release on July 22. First, beginning this quarter, there is a change in classification of shipping costs paid to third-party shippers. We recast these costs from SG&A into cost of good sold. This change puts us in line with our peers and most other manufacturers classify shipping costs and provides investors with a better point of comparison, and it does not impact EBIT. And second, we realigned the business into four reportable operating segments from our previous three operating segments. The new operating segments are the Construction Products Group, Performance Coatings Group, Consumer Group, and Specialty Products Group. The goals of this change are two-fold: To position the business for accelerated growth and to also provide our investors with greater visibility into the company while providing better comparability among our peers. Starting with this first quarter, we are reporting our results under this four-segment structure. We’re providing comparable fiscal 2019 financials that have been recast to reflect both the change in classification of shipping costs and the effect of the segment realignment. Next, I will walk through our financial results for the quarter. Please note that my comments will be on an as-adjusted basis. During the quarter, we achieved record consolidated net sales of 1.47 billion compared to the 1.46 billion reported during the first quarter of fiscal 2019. Organic sales growth was nearly flat. Acquisitions contributed 2.3% to sales or 34.1 million. Our foreign exchange was once again a headwind that reduced sales by 1.3% or 19.5 million. As Frank indicated, our strong bottom line performance was primarily driven by our operating improvement initiatives, which generated significant earnings leverage. Also contributing to the bottom line was the margin recovery resulting from last year’s price increases. Raw material costs were up slightly, and we experienced increased costs for labor. First quarter EBIT increased 25.3% to 192.6 million and diluted EPS increased 25% to $0.95 per diluted share from $0.76 per diluted share a year ago. The combination of our share repurchases and last year’s convertible bond retirement resulted in $0.05 per diluted share accretion for the quarter. Now, turning to our segments. Sales in our construction products group increased 3.6% to 536.1 million during this year’s first quarter, primarily driven by acquisition growth of 4.4%, resulting from the Nudura and Schul transactions. Organic growth added 0.7%, while foreign exchange reduced sales by 1.5%. This segment also benefited from strong performance for our basement waterproofing solutions business, as well as recovery in our Brazilian operation, which generated significant sales growth. Impacting our North American businesses in the segment were labor shortages and June weather conditions that delayed construction activity. Additionally, sales were discontinued in certain product lines and geographies as a result of strategic decisions to exit low-margin, high-risk working capital operations. Segment EBIT increased 23.1% or 16.3 million to 86.9 million. The improvement in EBIT was substantially driven by savings from our restructuring program, including management delayering, plant rationalization, and improved manufacturing disciplines. Sales in our Performance Coatings Group were 297.2 million. Organic growth was 0.4%. Acquisitions added 1.8%, while foreign exchange reduced sales by 1.9%. Despite modest sales growth, savings from our 2020 MAP to Growth plan provided significant earnings leverage in this segment. EBIT increased 31% to 36.9 million during the first quarter of fiscal 2020. The Performance Coatings Group generated highest earnings growth out of all of our segments during this quarter, driven by a reduction in its operating footprint and strategic decisions to exit low margin businesses. The segment also benefited from management delayering as it executes a reorganization towards a global brand management structure. In the Consumer Group, sales were 479.3 million during the first quarter of fiscal 2020. Organic sales increased 0.1%, while acquisition growth contributed 1.3%. Foreign currency translation reduced sales by 1%. Segment sales were dampened by four factors. First, a difficult comparison to the prior year due to load ins. Second, a soft economy in the UK related to Brexit. Third, rainy weather in June. And fourth, deferred promotional activity by big box retailers. EBIT was 61.7 million, an increase of 18.6% over the prior year. The Consumer Group's improvement in EBIT was largely due to a favorable year-over-year comparison resulting from 10 million and associated costs from legal settlement during the first quarter of fiscal 2019. Additionally, segment results in the first quarter were impacted by confluence of factors. As part of our MAP to Growth program, which we kicked off over one year ago, we reduced headcount and rationalized our manufacturing footprint. These initiatives led to bottom-line savings. However, greater than expected market share gains at the end of FY 2019 led to elevated costs incurred by outsourcing production in order to service this increased demand. As a result, we are investing in new equipment, improving production methods, and leveraging our internal manufacturing network to provide increased capacity and produce more efficiently. The Specialty Products Group experienced sluggish demand in the OEM manufacturing and international markets it serves, which impacted the top line. Segment sales were [160.1 million] during the first quarter of 2020. Organic sales decreased 4.3%, and foreign currency translation reduced sales by 0.8%. However, on the bottom line, EBIT margin improved by 230 basis points during the quarter and EBIT increased by $2.2 million or 8.5% to 28.6 million. This was due to good cost discipline, manufacturing yield improvements, and restructuring activities from our 2020 MAP to Growth program. Next, a few comments on cash flow and our effective income tax rate. During the fiscal 2020 first quarter, cash generated from operations was 145.1 million, compared to cash used for operations of 7.1 million a year ago. This increase was due to improved earnings and margin improvement initiatives, as well as carryover what impact from the prior year removal of certain early cash payment discounts, which effectively shifted approximately 100 million in receipts from the fourth quarter of fiscal 2019 and the first quarter of fiscal 2020, which we discussed in our previous earnings release. Lastly, as expected, our effective income tax rate for the quarter was higher this year versus the prior year's first quarter, which was impacted by more favorable discrete tax benefits. The higher effective tax rate resulted in lower diluted EPS of $0.05 as compared to last year's first quarter. I’ll now turn the call over to Rusty for details on our outlook for the remainder of fiscal 2020.

Thanks, Matt. As we look ahead to the second quarter of fiscal 2020, we expect to generate consolidated sales growth of 2% to 3%. We expect to leverage the sales growth to the bottom line for an estimated 20% to 24% adjusted EBIT growth resulting in an adjusted diluted EPS in the low-to-mid $0.70 range. Looking ahead to our fiscal 2020 third and fourth quarters, it is important to note the seasonality in our business. Historically our third quarter provides our most modest results each year because it falls during the winter months of December through February when painting and construction activity slows due to cold and snowy weather. Our fourth-quarter results are generally stronger as work begins to accelerate on painting and construction projects. Given our first quarter results and our expectations for the remainder of the fiscal year, we affirm that fiscal 2020 full-year guidance we provided on July 20, 2019. Revenue growth is anticipated to be at the low end of our previously disclosed range of 2.5% to 4%. Despite the tightening of our revenue growth assumption, we expect to leverage the positive momentum of 2020 MAP to Growth operating improvement plan to our bottom-line results. Therefore, we are maintaining our adjusted EBIT growth guidance in the 20% to 24% range as previously reported in July. We expect this to result in adjusted diluted EPS between $3.30 a share and $3.42 a share for the full-year of fiscal 2020. This concludes our formal comments. At this point we will be pleased to take your questions.

Thank you. [Operator Instructions] We have a question from John McNulty from BMO.

Good morning, John.

Yes, good morning. Thanks, Frank, for taking my question and congratulations on solid results. I guess a couple of questions. The first one would be, in the consumer business, it sounds like some of the new business that you had won has been big enough where you’ve actually had to outsource some of the production for that at least. I guess how long do you expect that to last before you, kind of, right size the business to the growth that you’ve won, and how should we think about the cost pressures that you're seeing and when they start to subside there?

Sure. You'll start to see a meaningful improvement in the second quarter, and we’re seeing it as we speak. The first quarter results for consumer are not indicative of what they're doing now or what they’ll be doing for the balance of the year. We had two issues. Number one was significant market share gains throughout the year starting in the first quarter of last year with the wood stains and finishes pickup. And then the second issue quite candidly was some self-inflicted wounds that resulted in some manufacturing issues. When you are closing plants and you are, as we are across RPM, instituting common manufacturing measurements and disciplines pretty aggressively across your businesses and you've got a business in this case Rust-Oleum, that was operating near capacity, we caused some hiccups. So that resulted in outsourcing at significantly higher costs, most of that is behind us and we will be spending this year and into early next somewhere around $30 million in additional paint making and filling capacity to continue to meet the demands in the marketplace. So, those are issues that negatively impacted our first quarter that really have a good story underneath them, and you will see somewhat higher sales growth and leverage to the bottom line on the EBIT line and consumer that’s more consistent with the leverage you’re seeing across RPM on a consolidated basis starting in Q2.

Got it. That’s helpful. And then with regard to Michael Sullivan, I know he started with you, I guess now a few months ago, I guess any first impressions or thoughts on new opportunities around the MAP to Growth program from him?

Sure. So, Mike Sullivan is off to a great start. Just to remind folks, he started officially in June. We have regularly scheduled Board meetings starting this afternoon and tomorrow and our annual meeting of stockholders he will be presenting to our Board, and he will be present in our stockholders meeting, and he's identifying some different areas and also completing the buildout of the internal team that we need to continue the operating improvement and continuous improvement initiatives that we've undertaken at RPM. So, I would expect us to see a phase out of what has been a significant month-by-month and quarter-by-quarter third-party consulting costs as we get into calendar 2020. He’s off to a great start.

Great. And then maybe just one last question, its sounds like on the raw material front, it was, you know, maybe a little bit more benign than it had been in the prior couple quarters but not necessarily a surge in improvement. I guess how are you thinking about raw materials as we look out through the rest of the year given that it looks like a lot of commodity prices really have rolled over recently?

Sure. We are seeing some relief in major categories, and that’s partly reflected in our numbers, but we have continued to see some tariff and metal can impact. Those things should ease. Again, I would remind people that we’re on a FIFO basis, so you’re looking at raw material issues that we are dealing with 60 days or 90 days ago that are showing up in our results today. So, it is a much more benign environment than it's been over the past two years. The biggest part of the gross margin improvement and raw material improvement have been from the centralized procurement effort that we have undertaken in earnest.

Great. Thanks a lot for the color.

Thanks, John.

Our next question comes from Frank Mitsch from Fermium Research.

Good morning, Frank.

Hi, guys. Its Aziza on for Frank.

Hi, Aziza.

Hi. First question, I was hoping to get about some of the underlying expectations of the construction markets that underpin the EBIT and EPS forecast?

So, the Construction Products Group, as a newly configured group over the past year under the leadership of Paul Hoogenboom and his team are off to a great start, and I think the results in the topline, which were up 3.6% will reflect well in other similar companies publish their September 30 results, but we are exiting product lines and businesses that are lower margin so that’s having a negative effect. The flipside is the integration of Dryvit and Nudura into the Construction Products Group of Euclid and Tremco is kickstarting some growth and efficiency there, and Paul has assembled a really good team and we’re really excited about what we’re seeing there. I think when you look at Q1, and you’re going to see more the same in Q2, the former industrial segment of RPM, which was our lowest margin business, is now reporting as our Performance Coatings Group and our Construction Products Group, and you’re seeing significant margin improvement in both, and the opportunities in both of those segments to consolidate some former independent businesses, save some costs and take a more global approach to their markets is pretty exciting.

Okay. Thank you for that. And you elaborated on some of the trends, you know, you saw through the months in this past quarter, can you give some details, you know, by region or just the demands you’re seeing – you saw through September?

So, I guess the only comment I would make about our start to the second quarter is the – you know the geographic trends aren’t changing. Europe is not any better; the UK Brexit situation if anything is worse; Latin America is a mixed bag; Brazil is recovering nicely after nearly three years of the challenges. On the flipside, Argentina, which is smaller for us, but still an area where we have business in both industrial and consumer markets is a mess; so that’s a mixed bag. The last comment I’ll make is if June was September, we would have had a better first quarter. The sun’s shining and if you're in our consumer business or our Construction Products business that's a good thing, it’s only one month out of the quarter, but it certainly helped us and is part of the reason why we feel like in our forecast you'll see some slightly better sales numbers year-over-year in Q2 than we saw in Q1.

Perfect. Thank you very much.

Thanks, Aziza.

We have a question from Rosemarie Morbelli from G. Research.

Thank you, good morning everyone.

Good morning.

Frank, I was wondering if you could give us some details on the different underlying markets. You usually make comments generally on that particular subject, but today you didn't, so if you could that would be helpful.

Sure. I just commented a little bit geographically to Aziza. But in general, the – you know the geographic situation has not changed. The solid growth that we’ve been experiencing in North America for the last couple years is still positive, but slowing down, so we’re seeing a little bit slow down in the construction market, especially big projects. It impacts our Construction Products business somewhat less and some of our editors because we tend to have a broader focus on distribution that serves small-to-medium size projects. Industrial capital spending seems to be slowing a little bit. And then the other comment I would make is with the strength of the dollar foreign exchange, both transactional and translational, we’re a headwind in Q1 and we anticipate that in Q2 as well.

So, while the construction – the large construction projects are slowing, your main focus is on maintenance, so could you touch on the maintenance environment in terms of roofing for example etcetera? This is what I meant, not geography, but markets, end-markets?

Absolutely, and as I said, the Construction Products Group had revenues up in the first quarter, 3.6%, and that was despite the rainiest June in recent memory, which negatively impacted Tremco roofing, Dryvit, some pretty sizable businesses on our Construction Products Group. So, you'll see I think some better growth numbers in the fall in part related to weather, and I think there's good excitement there. We’re taking some market share in certain places and the consolidation of driving in Nudura into the Construction Products Group is opening up those product line in businesses to the broader sales force and distribution of Tremco ceilings and Tremco roofing. So, there are some good synergy market synergy with this combination as well that I think will benefit us for the balance of fiscal 2020.

And then, if I may, two questions on the anticipated savings of 290 million, you were ahead – in 2019 ahead of your expectations. Are you seeing additional savings now that you are, you know, behind, I mean not behind, but you are done with 2019? And then as you are just about to have your board meetings should we expect additional dividend increase? And can you remind us of your dividend policy?

Sure. To answer both those questions, first the dividend policy, we've increased our dividend for 45 consecutive years, and in our board meeting today and tomorrow, it is highly likely that we will increase our cash dividend to shareholders for our 46th consecutive year. I think it will be somewhat more modest than what we’ve done over the last three or four years, where our dividend increases have been in the 7% or 8% range in part reflecting the significant return of capital to our shareholders over the last nine months with our share repurchase program. And so – but I think it's highly likely that we will continue our dividend – consecutive dividend increases, it’s a hallmark of RPM that we would hope to continue for a long time. And your second question, Rosemarie?

Any change in the target of 290 million in savings now that the first year 2019 was ahead of schedule?

No, we’re highly confident in achieving the $290 million of savings that we projected for our MAP to Growth program and disclosed publicly on November 28th of last year and we remain ahead of that curve. But as we communicated in the last quarter, it's likely that our absolute goals will be achieved 12 months or so later than we anticipated because of the lower growth levels that we and everybody around us are experiencing. But the MAP to Growth program is continuing to build. We’re building in our, what’s called the PMO, so building new projects and we have good momentum, and one of our challenges is to keep that momentum for the next 18 months.

Thank you.

Thank you.

We have a question from Steve Byrne from Bank of America.

Good morning, Steve.

Good morning, Frank. You had put out a 16% EBIT margin target as part of this MAP to Growth program. At this point, how would you assess your level of confidence on hitting that, maybe the timing of that and whether you’ve gained any confidence in the last couple of quarters about potentially some new initiatives that you might engage in restructuring?

Sure. So, as I commented on an earlier question, our absolute goals, the billion dollars in EBIT and the related EBIT margin goal are probably 12 months out in terms of where we had originally projected mostly because of the slower growth, but the MAP to Growth initiatives themselves are ahead of schedule. We have a firm – just as one example, a different firm and looking at our indirect spend and we’re hopeful that that effort will – you know will add maybe somewhere in the $10 million to $20 million range, that's relatively new. But we are chasing from a procurement perspective not only our significant raw materials, but paper cups and pencils if we can save money on it. And so, we’re continuing to find things that we can add to the pipeline and maintain the momentum of savings.

And then just a couple of high-level questions on your consumer segment, versus where you were a year and a half years ago before the Sherwin-Lowe's exclusivity deal went through, how would you assess your business with each of those two big-box retailers now? And how much of your consumer business is sold through e-commerce?

Couple of questions. Number one, I think that our consumer business, a really good leadership and we’re continuing to do really well across all our customers and channels in costs and sealants, patch repair products. The wood stains and finishes program is going well and, you know, our relationships are strong. As I commented earlier, we had some self-inflicted hiccups in manufacturing. When you are aggressively pursuing the things that we’re pursuing, we’re going to stop our toe here and there and it's for the right reasons. And so, we have corrected that. That caused us to do some outsourcing, which hurt our margins. In terms of customers, I think we’re solid with all our customers. The only specific comment I’ll make is a year ago or a year and a half ago, we had commented in the big strategic issue of a competitor that that resulted in about $22 million loss of business at Lowe's. As of the beginning of this summer, we’ve picked up $16 million to 18 million of that lost business back at Rust-Oleum. So, we’re continuing to focus on serving our customers in the primary areas that are our expertise and strength, which is small project paint and spray paint, wood stains and finishes, patch repair, caulks and sealants. Now, I mentioned that, you know that, but those are our focus. We wake up every day and think about innovation and how to serve customers in those markets, while we’re competing with some major players who are principally architectural paint folks, which is not a space that we’re much involved in.

And any e-commerce for you Frank?

Yes, e-commerce, I would tell you in our consumer segment it's probably $15 million or $20 million, and it's our largest pieces with our largest customer. We do some through some online retailers. Interestingly enough, for instance, we actually sell some spray paint online. The nature of spray paint in terms of unit costs, in terms of shipping of a flammable good would not suggest that that’s going to be a big category, but if there are orders at major customers, through some e-commerce folks we’ll fill them.

Thank you.

The next question comes from Vincent Andrews from Morgan Stanley.

Hi, this is Steve Haynes on for Vincent. Quick question on maybe cash generation, could you maybe just lay out how you’re thinking about the cash generation in 2020? I know there's $100 million kind of timing issue last year, but how do we think about, you know, the year-over-year kind of growth in free cash generation?

Sure. So, as you saw, we had a different fourth quarter cash generation at the end of fiscal 2019 than we had done in prior year. We had changed some of our approach in terms with suppliers, as well as internally, and so what we ended up with, which is the function of timing, and you saw that in our first quarter where we had a very strong cash generation in Q1. Some of that was just good strong execution and a big chunk of that was timing difference between fourth quarter and first quarter. Over the life of the MAP to Growth program, we expect to see 230 million and I think more of reductions in working capital versus the original base, and you'll see stronger cash generation both as we become more efficient on the plant floor, more efficient in working capital, and have higher margins. And so, we’re on track for that. The pickups to that in fiscal 2020 are the significant cash costs of outside consulting firms, which will start to wind down after January 1, and an extraordinary amount between ERP implementations and some PP&E. I would guess about $70 million or $80 million of extra CapEx that as we get through MAP to Growth will not be repeating. And so, those are temporary, and other than that our projections for improved cash flow are on target.

Okay, thank you. And then maybe just a quick follow-up, there was a comment about deferred promotional activity at some of the boxes. I guess you could maybe give a little bit more color on that, and you know, what was behind that [if there’s just] maybe a timing paying or you know how to think about it?

Just a timing issue between Q4 and Q1 and Q2 and some of that relates to weather issues and some of that relates to some of the manufacturing hiccups we had in our ability to pursue maybe some more aggressive sell-ins that we deferred, because of those issues, which are now behind us.

Okay, thanks guys.

The next question comes from Kevin McCarthy from Vertical Research.

Yes, good morning.

Good morning, Kevin.

Frank, I think you, you alluded to $30 million of spending on capacity in your answer to the prior question, it sounded like there was going to be some temporarily elevated CapEx. I guess my simple question would be, what is your capital budget for fiscal 2020 and to the extent that you have visibility? How do you see that evolving going forward?

Sure, Kevin. This is Rusty here. In terms of fiscal 2020, we're expecting CapEx to be about 180 million and about half of that is related to MAP to Growth. So, there is probably about $90 million of base CapEx, and of the $90 million related to MAP to Growth. Probably, nearly half of that maybe $40 million or so is related to the ERP consolidation that we're doing as we go down from 75 instances to four. And then the rest is production related as we consolidate production and we have other cost reduction projects going on in capital investment as well.

Okay. So that level does not seem dramatically different than what you had previously contemplated. Is that correct? So, these spends that you're referencing are essentially part of the plan. Is that a fair takeaway?

Yes, that's right, yes. It should be exactly what we said in July.

Very good. And then my second question, I guess, to come back to consumer in the prepared remarks, I think you referenced four headwinds there, load-ins, the United Kingdom, June weather and then some promotional activity related to the big boxes. Obviously, June weather is behind you. Can you flush out the other three issues and maybe help clarify for us whether all of those are behind you or whether there are any lingering effects into the current quarter, if any?

I will tell you should see better sales results modestly better in the current quarter. The weather issue is not a problem in September and that's good. We can see it in consumer takeaway. We can see in our Construction Products Group. The European issue and the Brexit issue, we're not changing. There's not as much foreign exchange impact in consumers, there is in our Performance Coatings Group or Construction Products Group, but it exists. That's not changing and the hiccups that we had from a manufacturing perspective are mostly behind us. So, from a cost perspective we won't be incurring the same challenges that we had in Q1.

Okay, thank you very much.

Thanks, Kevin.

The next question comes from Jeff Zekauskas from J.P. Morgan.

Good morning [indiscernible]. Oh, Jeff.

Thanks for – This is Jeff. Yes, good. Were your average prices up between 1% and 1.5% in the quarter?

More like 2% across RPM.

2%. And U.S. interest rates have come down. Do you think that that's going to make a difference to the construction sector, that is, do you think, even though you've got a little bit of slowing, do you expect that to lift in its growth pattern or do you think because we're at such a low level of interest rates to begin with, it doesn't really make much difference?

We're not economists here, but I think from our perspective, the upside to us in the next year that we're not counting on, and this would be true for a lot of businesses would be the elimination of a lot of the distractions around trade wars and tariffs, and there are things that could be corrected politically. If they're corrected, when you look at our first quarter and I think you'll see similar results in Q2. The leverage that we're putting on our bottom line to modest sales growth is pretty solid. If we can find a way and economic help would certainly be welcomed to generate another 2% or 3% of sales growth, you really see that bottom line same. That's not in our forecast. We're not counting on it, but there is a scenario in which some of the economic disruptions out there globally get resolved or get better, and that could certainly pick up the housing market and the construction markets and we're hopeful that that will happen, but it's not in our forecast for the year.

I realize that you had all kinds of weather events in the quarter, but was there organic volume growth in any of your businesses this quarter?

I think the area where we had the best organic growth was in our Construction Products Group, when you carve out the revenues that they are eliminating. On a consolidated basis, we are going to shed about $40 million of revenues this year. But our growth in control coatings business is having a rock-solid year. We just picked up the contract for the Eiffel Tower, which will be a nice piece of business for, maybe as much as nine months. We are taking market share in a lot of places there. The [TBS] business of our Construction Products Group, which is a below grade and in many instances residential level water proofing is having high single-digit revenue growth. And so, there is a number of areas where we're doing well. The caulks, sealants, patch and repair products business had organic growth of nearly 10%, really good business there and some of its market share – some of it's a combination of kind of small contractor, as well as DIY. So, there is a lot of patches of good growth. The flip side is our Specialty Products Group. You're not going to see in the rest of the year a lot of leverage to the bottom line with nearly 18% EBIT margins. We don't have an EBIT margin problem there. We have a growth problem and we're addressing that with some select investments and in some cases some leadership changes.

Okay, great. Thank you so much.

Thank you.

We have a question from Mike Sison from Wells Fargo.

Good morning, Mike.

Hi guys, nice start to the year. Frank, when you look at your outlook for sales in 2020, given the environment still doesn't seem easy, but if you do that, the low end 2.5% pretty good achievement there, but can you maybe walk through some of the components? I know you'll have some pricing there; you'll have some acquisitions; FX will be a negative and just wanted to get a clear feel for what your volume outlook will be this year?

So, I think you'll see some better volume growth in consumer versus what we reflected in the first quarter. As I commented earlier, we're seeing some nice pickups in some of the now being integrated construction Products Group companies like Nudura and Dryvit. And so I think for the balance of this year, we can pick up some revenue growth, just by expanding the specification and sales and distribution more broadly for those businesses that doesn't last forever, but that's still going on and then we'll have pockets in our Performance Coatings Group like our Carboline business to continue to put up solid numbers. And so those are the things that make us feel like we'll hit the bottom end of that. The other thing that's worth noting is most of the acquisition activity that we reported in Q1 and that will impact Q2 starts to be annualized. So, at this stage, there isn't much in the way of acquisition activity planned for the second half of the year.

Got it. And then when you think about acquisitions going forward in this environment. Can you maybe talk about the backlog or the project acquisition pipeline might be challenging in this environment? I understand what you're buying in terms of earnings power, but just give me your thoughts on what you think – how you think about acquisitions going forward?

So, our small to medium-sized acquisition program is generally alive and well. I will tell you that our pipeline is a little thinner than it's been for a while, in part because we've got most of the leaders of RPM focused on executing on our MAP to Growth program. And so, we're working on that and I think that will continue to be an important part of adding revenues and leveraging it to our bottom line in the coming years. But as I commented a minute ago, the second half of this year will likely not have much acquisition impact because of how we're annualizing transactions that were done last year and I think a small lull in acquisition activity that we hope to see pick up.

Great, thank you.

Thank you.

The next question comes from Kevin Hocevar from Northcoast Research.

Hi, good morning everybody.

Good morning.

Frank, I think you mentioned that MAP to Growth added $26 million to EBIT in the first quarter, but looks like EBIT grew $39 million in total. So, what would you say is that other $13 million of EBIT growth is, because organic growth was pretty flat, so, but you mentioned price was positive? So, is that price rise – is that you have some acquisitions, is the acquisitions adding? What would you say drove the balance of that EBIT growth?

Sure. If you carve out our MAP to Growth savings, EBIT would have been up. This is rough because you can't be exact, but EBIT would have been up in the 8% to 10% range and basically a 1% gain in revenues. So, pretty solid and I think that's a combination of price cost mix, which has been negative for two years and is now finally moving in the right direction on the gross margin line. The impact of acquisitions are small, but they certainly contribute some. And then the reason, it's not exactly a precise number is, our businesses have demonstrated really good SG&A discipline and leverage and so measuring how much of that would have happened without MAP to Growth per se or how much of its MAP to Growth is a judgment call. So, I think the way I would look at it internally, the way I do look at it internally is, is that EBIT would have been up in the 8% to 10% range, excluding the MAP to Growth and the balance of that's the MAP to Growth range is pretty good – pretty good leverage still on what's very modest revenue growth, and we'll keep plowing away.

Yes. Perfect. And then on the last quarter you gave some sales guidance by segment with mid-single-digit growth expected in Construction and Consumer and low single-digit in Performance and Specialty. Curious, if there's any update there on given you lower – didn't I guess move to the low end of the sales expectation range for the year. And just what you're seeing last several months, does that change at all? Are those still good expectations for the year?

Sure. Kevin, this is Rusty. I would say one major change has been the impact of Brexit and the strengthening U.S. dollar. U.S. dollar, I read yesterday is at a two-year high against foreign currencies, including the euro for that matter and the FX impact on sales definitely looks like more of a headwind and we anticipated as we started off the year.

Let me, answer that by segment a little bit. I think you'll see, as we highlighted – I think you'll see somewhat better sales results in consumer, not only for Q2, but for the balance of the year versus Q1. I think you'll see better sales results in our Construction Products Group. So, both of those, kind of, low to mid-sales growth. Our Performance Coatings Group is going to be kind of flat-to-low for the balance of the year. Some of that is a result of the very deliberate decisions to exit or discontinue product lines or businesses, most of those are kind of faraway relatively small overseas businesses. They don't have the margins that we'd like to see. And then the most challenged segment we have for the balance of the year will be our Specialty Products Group and in that case I think we're seeing flat to slightly down revenues for the reasons Rusty mentioned, foreign exchange will be a hit, they're annualizing tougher comps, but we've got some growth issues in some of those businesses, high margin really solid business. We have a new leader leadership team at Day-Glo, new leadership and our TCI business. I could go down the list in some selected investments. So, you're going to see the most challenge revenue segment for us to be Specialty Products. All great businesses, all high margin and hopefully you'll begin to see the benefits of the changes that we're making in the fourth quarter and in fiscal 2021.

Okay, great. Thank you very much.

Thank you.

We have no further questions at this time. I would like to turn the call back to Mr. Sullivan for final remarks.

Great. Thanks, Hilda. I'd like to remind everybody that tomorrow afternoon, at 2 o'clock, at the Crowne Plaza in Middleburg Heights is RPM's Annual Meeting of Stockholders. We regularly welcome 800 to 1,000 individual shareholders and a handful of institutional shareholders to our Annual Meeting. And lastly, I'd like to close by recognizing the RPM associates around the world who are doing a great job on executing on our MAP to Growth program and when we get through this program, the entrepreneurial spirit and culture of RPM combined with the operational excellence and continuous improvement culture that we are instituting is going to be hugely successful both in the marketplace and for our shareholders. Thank you very much for your time on the call today. We look forward to providing you our second quarter results in early January of 2021. Have a great day.

Thank you, ladies and gentlemen. This concludes today’s conference. We thank you for participating. You may now disconnect.