Welcome to RPM International’s Conference Call for the Fiscal 2021 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, all 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'd like to turn the call over to RPM’s Chairman and CEO, Mr. Frank Sullivan for opening remarks. Please go ahead, sir..

Thank you, Denise. Happy New Year and welcome to the RPM International Inc. investor call for our fiscal 2021 second quarter. Joining me on today’s call are Rusty Gordon, RPM's Vice President and Chief Financial Officer; and Matt Ratajczak, our Vice President of Global Tax and Treasury, who is also supporting our Investor Relation activities.

I'll take a few moments to provide an overview of the factors driving our strong financial performance for the quarter, and also share an update on our MAP to Growth operating improvement program.

Matt will then review our second quarter financial results in detail, and then Rusty will wrap up with our formal remarks with an outlook for the third quarter of our fiscal 2021 year. After which we'll take your questions. I'm very pleased to report that we generated record sales, earnings and cash flow for our second quarter.

The excellent performance was achieved largely due to the efforts of our associates to grow our top line, which was achieved by three out of our four segments, despite challenging economic conditions worldwide, coupled with operational efficiency improvement activities.

The MAP to Growth initiative once again generated strong leverage to the bottom line and moderate sales growth of 6%. Organic sales grew in a broad range of categories, including cleaning, disinfecting products, air purification equipment, small project paints, OEM coatings and other areas.

Acquisitions also contributed to sales, including the second quarter edition of Ali Industries, which is best known for its Gator brand of abrasive products.

Ali is the largest acquisition we've made since fiscal 2013 and positively impacted both sales and earnings in the quarter, while also demonstrating our renewed focus to invest in growth initiatives. Foreign currency translation also added to sales as international markets, particularly those in Europe, showed improvement.

On an adjusted basis, our consolidated EBIT margin increased 240 basis points to 13.4% during the quarter, driven by three of our four segments registering substantial EBIT margin improvements and high EBIT growth. This was even more impressive given a tough comparison last year when adjusted EBIT increased 22%.

Our consumer business continues to lead the way driven by unprecedented consumer demand for its small project paints, caulks, sealants, stains and cleaners, while our other segments are finding ways to compete and win in the markets they serve.

Our businesses remained focused on growth and are continuing to develop new innovative solutions for our customers. One example is DAP’s Eclipse Rapid Wall Repair Patch, which is just introduced and was developed to quickly fix most common drywall damage with simple mess -- very mess free repair.

And other is Carboline’s Pyrocrete 341, a next generation cementitious coating for passive fire protection. With enhanced application properties and excellent durability, Pyrocrete 341 positions Carboline as a market leader in fire – in passive fire protection.

In addition, our Construction Products Group recently introduced a suite of products that will keep us working this winter in temperatures as low as minus 20 degrees Fahrenheit, including AlphaGuard PUMA and Vulkem EWS waterproofing coatings, which are used to protect roofs and concrete.

And in a challenging construction market, our Construction Products Group continues to focus on renovation is exemplified by its Spectrum Simple Seal for façade restoration. And one recent residential tower in Minnesota, a complete window replacement was estimated to cost $15 million.

Tremco won the job by recommending its Spectrum Simple solution which was used to restore the façade at a cost of only $1 million. We expect significantly more of this restoration product project sales. Our MAP to Growth program continues to have tremendous momentum.

During the second quarter, we announced the closure of two plants, which brings our total to 25 out of the 31 plants that were originally targeted for closure at the start of the program.

We're also becoming much more efficient in utilizing our manufacturing assets as our focused improvement team meetings continue to deliver cost savings opportunities.

One example is a Dryvit manufacturing engineer recently trained in Six Sigma principles, who identified process improvements to reduce scrap and increase yields, which will result in $250,000 in annual savings.

There are literally hundreds of other continuous improvement examples like this across RPM, as we have invested in training our operations associates throughout the MAP to Growth program.

In addition, the targeted benefits from our center-led procurement initiatives are ahead of plan and our administrative improvements in ERP consolidations are continuing to be implemented.

As mentioned last quarter, we expect that we will reach the MAP to Growth programs planned run rate of $290 million in annualized savings by the inclusion of this fiscal year.

That said to our culture of continuous improvement, we continue to add to our robust pipeline of cost savings initiatives and operational improvements that will carry into fiscal 2022 and beyond, and will ultimately result in exceeding our original MAP to Growth expectations.

Based on our improved margins and better working capital management, our business units generated record cash from operations, which increased 93% to $580 million. We've been strategic in managing this record cash flow, using it to pay down debt, make acquisitions and an increase in our cash reserve.

At quarter-end, total liquidity stood at $1.6 billion, making our balance sheet stronger than it's been in a long time. One final comment I'd like to make relates to my predecessor, Tom Sullivan, who is also my father and mentor who passed away on November 30. I share this because he had a tremendous influence on shaping the RPM of today.

He took over the business in 1971 after his father died unexpectedly. At that time, RPM sales were $11 million. Following a 55-year career with RPM, Tom retired from our Board in 2016 when annual sales had reached nearly $5 billion.

His leadership engrained practices within the organization to continue to perpetuate our growth and success and his spirit continues to drive RPM. I'll now turn the call over to Matt Ratajczak, who will review our fiscal 2021 second quarter financial results in more detail..

Thanks, Frank, and good morning, everyone. Please note that my comments will be on an as adjusted basis. During the second quarter, we generated record consolidated net sales of $1.49 billion, an increase of 6% compared to the $1.4 billion reported during the same quarter of fiscal 2020. Organic sales increased 3.5%, or $49.5 million.

Acquisitions contributed 2.3% to sales, or $32.6 million. Foreign exchange was a tailwind that increased sales by 0.2%, or $2.5 million. Adjusted diluted earnings per share were $1.6, an increase of 39.5% compared to $0.76 in the year ago quarter.

Our consolidated adjusted earnings before interest and taxes, EBIT, increased 29.7% to $199.3 million compared to $153.7 million reported in the fiscal 2020 second quarter. Turning now to our segment results. Sales in our Construction Products Group increased 0.8% to $503.5 million compared to $499.5 million a year ago.

Organic sales increased 1.2% or $6.1 million. There was no impact from acquisitions. Foreign currency translation reduced sales by 0.4% or $2.1 million. Adjusted EBIT in the Construction Products Group increased 26.8% to $78.5 million from adjusted EBIT of $61.9 million reported in the year ago period.

The segment was able to leverage its modest sales growth into outstanding results on the bottom line, largely due to MAP to Growth initiatives, aggressive discretionary cost cuts and proactive management to improve its product mix. This was achieved despite soft commercial and institutional construction markets in North America and in Europe.

The segment was able to maintain its top line by focusing on renovation and restoration projects, expanding its position as a single source provider of building envelope systems and continuing to take market share with its industry leading construction technologies, including its Nudura insulated concrete forms Sales in our Performance Coatings Group decreased 11.6% to $258.8 million from $292.7 million a year ago.

Organic sales declined to 12.2% or $35.6 million. Acquisitions contributed $0.6 million or 0.2% to sales. Foreign exchange increased sales 0.4% or $1.1 million. The segment's adjusted EBIT was down 24.2% to $28 million compared to $37 million in the prior year period.

Similar to last quarter, the Performance Coatings Group's sales continue to be impacted by COVID-19 restrictions that limited access to construction sites, and also by weak energy markets that have resulted in a deferral of industrial maintenance spending.

Industrial capital spending has been restricted, especially in the energy sector, which is the largest market for our industrial corrosion control and fireproofing coatings businesses. The segment was particularly challenged in emerging markets, and its Carboline business was temporarily disrupted by hurricanes in the Gulf region of the U.S.

The segment's earnings were impacted by declining sales, partially offset by MAP to Growth savings and discretionary cost reductions. Out of all of our segments, the Performance Coatings Group has been unfavorably affected the most by the pandemic.

However, it also stands to benefit significantly from the pandemics end as its customers catch up on deferred maintenance and construction projects. The unprecedented demand for our consumer products continued this quarter, resulting in a significant increase in sales for our Consumer group.

They increase 21.4% to $547.5 million from $450.9 million in the fiscal 2020 second quarter. Organic sales increased 15.2% or $68.6 million. Acquisitions contributed $26 million or 5.8% of sales. Foreign currency translation increased sales by 0.4% or $2 million.

Adjusted EBIT in the Consumer group increased 65.8% to $90.7 million compared to $54.7 million in last year's second quarter. Our Consumer group’s outstanding performance was driven by our broad distribution, and by leveraging our market leading position as homebound consumers tackled significantly more projects.

We are investing in paint making and aerosol filling capacity to help meet this demand. The top line also benefited from vigorous cleaning product sales, favorable translational foreign exchange, and the acquisition of Ali Industries. Raw material costs were stable overall during the quarter.

However, we are currently seeing broad based inflation in a number of raw materials. High sales volumes and MAP to Growth savings were leveraged to the segment’s strong bottom line. Specialty Products Group sales were $176.1 million, an increase of 11.3% compared to $158.2 million in the year ago period. Organic sales increased 6.6% or $10.4 million.

Acquisitions contributed 3.8% or $6 million to sales. Foreign currency translation increased sales by 0.9% or $1.5 million. Adjusted EBIT in this segment increased 27.7% to $29.6 million this quarter, compared to $23.2 million in the second quarter of fiscal 2020.

Management changes that we implemented at the Specialty Products Group have helped to turn around results at the segment this quarter. Sales were boosted by increased hurricane and wildfire fire activity, which drove demand for our water restoration equipment as well as fluorescent pigments which are used in fire retardant tracer dyes.

Additionally, we continue to experience strong demand for our expanding product lineup of disinfectants, air purification equipment and HEPA filters. Several of the segment’s end markets have improved.

For example, sales of its industrial wood protection products increased as a result of improved lumber demand in the U.S., and we have expanded sales in our forestry chemicals business in Australia and New Zealand. The segment’s bottom line increased as a result of higher sales volumes, operational improvements and MAP to Growth savings..

Now, Rusty will walk you through our outlook..

Thanks, Matt. As we look ahead to the fiscal 2021 third quarter, we anticipate consolidated sales growth in the mid-single-digit range with continued strong leverage to the bottom line from our MAP to Growth program, resulting in adjusted EBIT growth of 30% or more.

Our third quarter typically provides relatively modest sales activity each year, because it falls during the winter months when painting and construction activity slow. As a result, there is typically greater volatility in percentage terms, given the unpredictable weather.

Also, this seasonal reduction of activity will benefit our consumer segment, enabling it to replenish retail inventory after working to meet unprecedented demand over the last 6 months. From a segment perspective, we expect fiscal 2021 third quarter sales to be flat to negative in the Construction Products Group.

This group will continue to outperform its peers in a challenging construction market by continuing to focus upon building restoration and renovation with innovative products and service solutions. We expect the sales declined to continue in the Performance Coatings Group, which serves the most challenged end markets at RPM.

We expect the Consumer group to continue to leverage its market leading position into double-digit sales growth due to a number of factors including number one continuation of strong POS results.

Number two, more shelf restocking after retail inventories have dropped due to unprecedented demand; and number three, continued benefit on both the top and bottom line from the Ali acquisition, which is performing better than we anticipated. We expect positive sales growth from the Specialty Products Group to continue into the third quarter as well.

New management has brought fresh ideas and processes for business development, and their OEM customer base has recovered as manufacturing is picked back up from the shutdowns last spring.

Additionally, RPM’s cash flow has soared to new highs due to margin improvement and better working capital management as well as the unprecedented consumer demand, which has drawn down our consumer inventory. A portion of this working capital reduction will not be sustained. Since we will need to rebuild Consumer group inventory.

Across all of RPM, there is so much work to do to improve our manufacturing flexibility and planning processes that will help us simultaneously serve our customers, while reducing the necessary safety stock levels.

Sales in all four segments should be up in the fiscal 2021 fourth quarter, due to an easier comparison to last year's fourth quarter, which is when the economic interruption caused by the pandemic was most severe.

With recent optimism surrounding the vaccines for COVID-19, let me spend a moment to tell you about what life getting back to normal means for our four segments. For consumer, we would expect DIY activity to return to more normalized levels as people venture out of their homes.

But we still anticipate elevated demand due to the expectation of continued low interest rates, good housing turnover, and expanded end user base since more DIYers have recently entered the category and our Consumer Pro business picking up again as contractors gain access more often to residences.

We also believe that cleaning is an area of greater consumer interest as we go forward. For our CPG and PCG segments, getting back to normal will improve facility access for our contractors, and likely improve construction activity from what has been a challenging 2020 calendar year.

We would also expect a boomerang effect in the future as deferred maintenance catches up. For those who followed RPM in the last great recession, you'll recall that our former industrial segment experienced double digit growth in 2011 and 2012 from the catch up at deferred maintenance.

For SPG, we continue to rebuild growth momentum under the new management team. Due to continued economic uncertainty related to the impacts of COVID-19, we are not providing fiscal 2021 full year earnings guidance. This wraps up our formal comments. We will now be pleased to take your questions..

[Operator Instructions] Your first question comes from John McNulty with BMO Capital Markets. Your line is open..

Yes. Thanks for taking my question. First, my condolences to you and the RPM team with the passing of Tom who obviously left an amazing legacy behind..

Thanks, John..

For sure. So, I guess the first question, because we've obviously seen some inflation in some of the raw materials and you made mention of it in some of the prepared remarks.

Can you speak to the type or level of inflation you expect to see as you work through the rest of your fiscal year? And also speak to the ability that you have to price it through, so that you can offset some of those headwinds in a timely fashion?.

Sure. So we're seeing some challenges in areas like silicones, epoxies, metal cans, and certain other raw material categories.

We fully expect to offset those initially through the continuing benefits of our consolidated procurement activities, which have been providing, I think, leverage and benefits beyond what our original MAP to Growth expectations were.

And then, while we're very stable in terms of pricing now, I think, it's highly likely that you will see across our industry some price increase activities this spring..

Got it. Fair enough. And then I guess, you've got a number of new growth initiatives, you've got some grab and go programs coming on, you made mention of some of the investments even in new paint capacity.

Can you speak to how programs are going at this point in terms of the growth and your expectation? And also, how you're thinking about the investment needed to drive these businesses?.

Sure. Number one, we're making the investment needed to drive these businesses as we speak today. We expanded capacity in consumer and a number of categories. We're also expanding capacity in our Construction Products Group. And we are making a not-so-subtle shift in our MAP to Growth activities to the growth aspect of it.

I think you can see that most pronounced in our Construction Products Group, which actually had modestly positive organic growth in this quarter in a very challenged end market pretty much globally. And they have shifted to some major restoration activities.

The combination of our Dryvit business, Nudura, the Tremco Roofing, Tremco Sealants and the spec efforts are paying big, big dividends and we would expect more of that to come particularly in any type of construction activity rebound. And so, you're seeing that we mentioned a few of the new product categories today.

We are keenly focused on driving organic growth in the coming years. And at the same time, I think, Rusty made reference to the fact that, we would expect MAP to Growth, which is exceeding our expectations to continue to deliver additional savings as we get into fiscal 2022..

Got it. Thanks very much for the color..

Thanks, John..

Your next question comes from Rosemarie Morbelli with G-Research. Your line is open..

Good morning, Rosemarie..

Thank you. Good morning, everyone. And again, I will join up on my condolences regarding Tom's passing. Frank, we are all terribly sorry and I worked with him for many years more than I like to think about. Looking at your investments, what – which particular product lines are you thinking of growing.

I mean, we face this, which product lines are you investing towards additional capacity in your different businesses?.

Sure. In consumer, we are investing in a small project paint capacity, aerosol capacity. We're also looking at gallon goods, and capacity and caulks and sealants, which are pretty much across the board. We're also expanding capacity and cleaning product categories.

In our Construction Products Group, we're expanding capacity and roof restoration coatings, across a whole broad spectrum of areas and we're expanding capacity in facade restoration projects, so that range is across Nudura drive it in Tremco Sealant unique product categories.

We're also expanding capacity and number of specialty products group businesses, particularly a legend brands in terms of their capacity for air filtration and air handling and restoration equipment.

About the only area that we're not expanding capacity at this point is in our Performance Coatings Group, given the impact of the pandemic in oil and gas prices on some of their projects -- major product categories..

Do you see you need to eliminate some capacity on the Performance Coatings, as some categories may not go back to the pre-COVID level?.

We would fully expect categories to get back to pre-COVID levels over the next coming years and that's been our history in the past. I will tell you we had been eliminating capacity across RPM as we highlighted in our pre-recorded or our formal remarks. We completed the closure of 25 manufacturing facilities.

And I believe by the time that we're finished, we will exceed by a few the original 31 plant closures that we targeted in MAP to Growth. And so, we're having a very deliberate reallocation of capital into growth areas and into efficiency.

So while we're expanding capacity, by the time we're done with MAP to Growth, our net manufacturing footprint around the globe will be smaller..

Thank you.

And I was wondering if you could make some comments regarding your efforts towards adding architectural paint to your portfolio?.

Sure. We have commented in the past about a number of kind of unique category architectural paint opportunities that we've had across a number of our major customers.

And in that, I think, we'll have a better sense of that this spring in the summer as we get through kind of the post-COVID supply challenges across numerous areas in the consumer DIY market..

Thank you very much..

Your next question comes from Frank Mitsch with Fermium Research. Your line is open..

Hey, good morning, and congrats on the quarter. More importantly, Frank, let me add to the condolences. I've mentioned before that I thought your eulogy was one of the best I've ever heard what an amazing man in life. And on a happier note, congrats on your browns and good luck on -- I don't know if it's Saturday or Sunday.

but be nice to take care of the guys in Pittsburgh. You spoke a little bit about cash generation, record free cash flow and your strategic uses. Didn't hear much with respect to buybacks.

And when might they resurface and/or what your pipeline is looking like on the M&A side? How do we think about the interplay for RPM on M&A versus buybacks?.

Sure. So cash generation is at record levels, and it will continue that way for the foreseeable future combination of margin expansion, the capital allocation strategies we’re deploying as well as just excellent working capital improvements.

For the time being, we have indicated that we had suspended our share repurchase program in favor of debt reduction. We've been able to affect some meaningful debt reduction. Going forward, the pipeline of M&A activity and our industry is pretty full and growing. So we continue to pursue our typical small and medium size acquisition activity.

And I think over the next 12 to 24 months, you'll see more transactions like the Ali Industry transaction we completed in the second quarter. As it relates to share repurchases, that's something that our Board will take up in Board meetings here this winter and the spring..

Got you. Got you. Obviously, the consumer business has been a standout, very strong sales. You mentioned that you're going to take the opportunity during the fiscal third quarter to rebuild inventories.

Were there -- did you lose any sales you think on the consumer side? Because you were sold out? Could the results have been better? How do we think about what could have been in that regard?.

Yes, clearly, we have lost some sales relative to go rates. It's not unique to us. It's impacted many DIY categories. As people know in our first quarter, we had organic growth and consumer of 34%. We had an organic growth in the second quarter and the mid-teens. We continue to see strong organic growth.

And certainly there were some opportunities for us for additional growth and we've been able to fill, orders at a higher rate, as Rusty commented in our in that comment or not prepared remarks. We see catching up on a lot of activity in the third quarter.

And I think we remain very bullish about both our position in the DIY market and where the DIY market will continue in terms of pretty strong growth for the foreseeable period of time in calendar. ’ 21.

Got you. Many thanks..

Thanks, Frank..

Your next question comes from Ghansham Panjabi with Baird. Your line is open. .

Good morning, Ghansham..

Hey, guys. Good morning. Happy New Year and Frank, my best to your family as well..

Thank you..

Yes. So just given that your quarter ended in November, obviously lock downs have picked up in Europe.

Since then, can you just give us a sense as to how things have progressed to December, what they're tracking, like in early January, across your businesses? And if anything is different from a pre-trend line, specific to the first lockdown across your business?.

Sure. That's, I think, a great question because the possibility exists for a lot of variability in our Q3. But we are off to a great start. Organic growth continues across our different businesses. The beginning of the third quarter, leverage from the bottom line has been tremendous.

And we would expect to meet or exceed the forecast, numbers or the guidance numbers that Rusty provided in the formal comments that we made. What could interrupt that is further lockdowns. The U.K has lockdown into mid-February as you know.

If that is followed by lockdowns throughout Europe and then back in the United States, certainly that could disrupt what otherwise would be another very strong quarter for RPM..

Got it. And then in Performance, you called out for deferred maintenance in the energy sector. Can you give us a sense as to how that dynamic impacted you specific to the 12% sales decline you reported in the second quarter? And what's reasonable in terms of the catch-up phase? Because I assume it can’t deferred for too long. Thanks..

Sure. I think the best way we can address that again was in the prepared remarks that Rusty made. We look back at calendar 2011, 2012 and we generated double-digit organic growth in our Performance Coatings Group businesses and our Construction Products Group businesses on the rebound.

And certainly, in the Performance Coatings Group area, the negative impact, particularly in oil and gas, energy and heavy industry spending has been as severe as it was back then, and so we would expect a meaningful rebound in those categories on any economic recovery activity.

And so I think we're really well poised there and you'll see in the coming quarters the benefits of the MAP to Growth activity on the performance Coatings Group.

In this quarter, their earnings performance was negatively impacted by some unique circumstances around the hurricanes and weather activity that impacted the Gulf and their major manufacturing facility in Lake Charles, Louisiana. So, part of that earnings performance was circumstantial of the quarter. So we are pleased with where they are.

The Construction Products Group, I think it has the opportunity to really drive our performance into fiscal '22. We are taking market share, we are introducing new product categories, we are combining prior independent businesses to attack facade restoration on a holistic basis.

And so, there's a lot of exciting things happening there that again we would expect to see accelerate in the new type of economic recovery..

Perfect. Thank you so much, Frank..

Thank you..

Your next question comes from Vincent Andrews with Morgan Stanley. Your line is open..

Thank you and good morning, everyone. If I could just follow-up on the consumer business, a couple of questions.

Are you noticing within the DIY customer, that the product mix that they're purchasing is evolving to the extent that maybe there's sort of a lifecycle where people that were early in DIY, were doing certain types of projects, and now six months later, they're doing different types of projects.

But you're seeing a new cohort come in that sort of at the earlier stage, or just sort of any evaluation of the trends you're seeing that can help us understand your confidence and sort of the sustainability of this into the next fiscal year..

Sure. Both in terms of what we've experienced and what we've heard from our major customers, the base of confident DIYers has expanded pretty significantly and certainly in ways that neither we are big customers could have accomplished in normal circumstances on our own.

And a good example of that is our wood stains and finishes, businesses had the same type of robust organic growth as our small project paint business. And that requires a some more Craftsman skills and their larger projects. And so I think we're all pretty confident that this larger base is here to stay. And that we can grow from there.

The one area that was meaningfully negatively impacted was the Pro. And so that might be 20% to 25% of our Rust-Oleum small project paints in cleaner categories. But closer to 40% or 50% of our DAP caulks and sealants and patch repair products, and resins or primers.

And Pro contractors had been inhibited from gaining access to residences to the interior of residences, where most of our products are applied as well as its impact on some kind of small project, like commercial restoration. So we see that business coming back strongly once people have more confidence in putting the COVID pandemic behind us.

And then the last comment I'll make are new categories that we've been testing. We have had three different opportunities, which are still ongoing to test new programs in architectural paint. And so you put all that together, and we're pretty bullish about our consumer business through this pandemic period..

Okay, if I could just ask a follow-up on the alley acquisition. You mentioned that it's proceeding better than projected? Is that both on the top line and from the synergy perspective, or just any incremental color you can provide will be helpful..

Yes, it's both on the top line and what we're able to do with that business. Post MAP to Growth RPM to bring some more immediate value to businesses that we acquired.

Our manufacturing and operations folks have been working with Ali on a look forward for 3 years in terms of some manufacturing, capacity expansion, and also some automation efficiency improvements. So we're excited about that.

And the ability to take advantage of the sales and marketing expertise at Rust-Oleum, which I believe is as good as anybody in the entire DIY space across any category. It's pretty exciting as the Rust-Oleum sales and marketing folks, marry up with the Ali folks in terms of new opportunities and approaches..

Thank you, and I'm sorry for your loss..

Thank you..

Your next question comes from Kevin McCarthy with Vertical Research. Your line is open..

Good morning, Kevin..

Yes. Good morning. Frank, do you have any businesses were price declined in the fiscal second quarter. And then looking ahead as raw material costs come up, as you described, where would you say you're most confident -- confident and the ability to pass along those increases and where do you think it could be more challenging.

Sure. We've had a period of price deflation that we've benefited from as well as the benefits of our consolidated purchasing activity, which is going quite well. -We have not had meaningful price givebacks in any category across anywhere at RPM.

In terms of price increases, we've had some very modest price increases, and some very unique categories that aren't big enough to move the whole needle.

Going forward, as I mentioned, this spring and the summer, meet the product categories that are most likely to be driving price increases across a number of our businesses are end packaging, especially as it relates to metal cans, as well as in a number of chemical areas, depending on how things transpire in the coming months.

in the areas of silicones, epoxies, acetone, a number of categories that are seeing price increases, as we speak for the first time. It's worth keeping in mind from an RPM perspective, we were one of the few particularly in the U.S on FIFO accounting. So, the impact of these wouldn't hit our P&L for probably 60 to 90 days versus a lot of our peers.

And we have the ability to both lead in some categories, but also following others in terms of what's happening in price increases across the market..

Okay. And then in terms of, I guess what I was trying to get at Frank is your ability to raise price to your customers and pass that along.

Are there any areas that you would call out where you already may be out in the market with proposed increases, for example?.

Yes, we do not have any price increases in the marketplace today. I anticipate price increases in the future.

And our ability to pass on price is consistent with what it's always been relatively timely in our industrial businesses and typically with a 6 to 12-month lag in our consumer DIY businesses, I think some of that will be tightened just because of where we sit with a few product categories.

But we have passed on price appropriately in the past, you can see that in our margin expansion throughout this period. And I don't see anything that changes those dynamics, both on the plus side, which is our ability to ultimately pass on price.

And on the lag side in terms of the delay and timing that we've experienced for decades in our consumer DIY businesses..

Thank you for that. And then secondly, if I may.

In consumer, Frank, what is the level of inventory that you would need to replenish and what impact could that have on sales and door margins? And what's normally a seasonally weak recorder for the business?.

Sure. I would expect really strong performance out of consumer in our third quarter unless there is, as referenced earlier, some type of significant COVID impact which would impact everybody. But we anticipate continued strong performance there and into Q4 as well.

Rusty referenced working capital and consumer, certainly we have tens of millions of dollars, low tens of millions of dollars of inventory to catch up on. And I think that's a good news story as well for the coming quarters..

Thanks for the comments. And Frank all the best to you and the family in 2021..

Thanks, Kevin..

Your next question comes from Josh Spector with UBS. Your line is open..

Good morning..

Hey, good morning. Thanks for taking my question. Just a follow-up from a prior question quickly.

Are you able to size the hurricane impact and performance on the top and bottom line in the quarter at all?.

Well, I don't have those details. I don't know we have them.

Rusty, is that something that you might be able to comment on?.

Yes. In terms of unusual expenses, it was a few million dollars of expenses. And in terms of sale, there was disruption from three hurricanes that pass either right through Lake Charles or nearby in the second quarter. So that did disrupt not just our plant, but our customers in the Gulf region.

So, yes, there was some sales impact that definitely played into the decline you saw at PCG..

Yes, that's why I mentioned in my comments, it was circumstantial to the quarter. And actually, despite the very challenged end markets, the MAP to Growth benefits on the PCG segment pretty pronounced. And I think you'll see those in the coming quarters in a positive way..

Okay. Yes, I guess I'm trying to think about around this is you had 12% declines in performance in both last -- in both of the last two quarters.

Is there a way to think about like, what the exit rate was or what the normalized demand was as we start to look at the next quarter and think about the recovery over the next couple of quarters?.

I think you'll see the positive results as we get into our fiscal '22 in part because they'll be annualizing easier comps. But I do think with any economic recovery, there's a significant amount of pent-up maintenance and heavy industry spend that will be the beneficiaries of..

Okay. Thanks for that..

And I guess the last comment I'll make is, if you look at what we expect in Q3, and Q4 out of that segment, I think you'll get a better sense of the positive impact of MAP to Growth, even as revenues continue to be down year-over-year or flat.

And it'll give you a better sense from a margin profile of what type of leverage we would have when positive sales results return..

Okay. I appreciate. That's helpful. And just one last quick one, if I can just on MAP to Growth and the savings that you expect to realize. I mean, you reiterated your run rate savings target here.

Are you able to quantify how much savings you expect to be realized in fiscal '21 versus fiscal '22 at this point?.

Again, I'll defer that to Rusty other than to say that we're highly confident that some of our ability to execute timely has been impacted by the COVID pandemic. But we're highly confident that as we get into fiscal '22 and continue to benefit from our MAP to Growth activities, that the total program savings will be well in excess of $300 million..

Again, Josh, as we said on the last call, we expect $100 million or more of MAP savings to favorably impact FY '21..

Okay. Thank you..

Sure..

Your next question comes from Arun Viswanathan with RBC Capital. Your line is open..

Good morning, Arun..

Great. Good morning, Frank. Thanks for taking my question. And my condolences to you as well. I guess I just wanted to first ask about the consumer segment, the margin performance. If you think about it, Q1 '21 to Q2 '21, you had about close to 500 basis point margin drop off in EBIT percent.

Obviously, there's a lot going on in there, but how would you kind of characterize that performance? Do you feel that the Consumer segment was potentially impacted by some of those stock outs and do you see the margins kind of recovering to higher levels in subsequent quarters?.

Sure. I only address that broadly and then Rusty can address it in some detail. But all of our businesses, particularly our Consumer businesses are seasonal. And I think if you look year-over-year, we're continuing to see significant margin expansion.

But obviously, from one subsequent quarter to the next as we get into our fourth quarter and first quarter, which are absolutely our seasonal highs and our second quarter and third quarter are meaningfully less in revenues, and there's a fixed level of expense. So that's what's driving the margin differential quarters over subsequent quarter.

But we've continued to experience significant year-over-year margin improvement and we would expect that to continue. And I think Rusty could add a little more detail to that. .

Yes. That's correct, Frank. Yes, as we get into cooler months in the fall, sales typically fall off as they normally do. So, the fact that we had stronger sales and more leverage on fixed costs, Arun, would naturally lead to higher margin in Q1 and Q2.

But when I look year-over-year, Consumers is up 450 basis points in EBIT in Q2, so I think we're doing pretty well..

Agreed. Thanks for that detail. And then on construction products, you guys alluded to potential opportunities coming your way to gain share.

Do you believe that there is inorganic additions you have to make to your portfolio to capitalize on that, or could you potentially capture that share through some of these investments you've described as well?.

So I believe we can and are capturing that share through the activities that we've taken. As we speak, there will be inorganic opportunities in that category, broader opportunities that may appear, but on a pretty regular basis product lines that we can acquire and expand across our distribution base.

But fundamentally what happened in -- by going from our former six groups into the four groups and four segments, we have consolidated a number of businesses more completely into a more comprehensive construction products group.

And so, we operated across the globe with maybe five or six different business units, we are now operating in North America and in Europe as a Tremco Construction Products Group.

And pulling together for instance, Tremco sealants, the Nudura and the Dryvit businesses and approaching the market on an integrated basis is opening up opportunities for us and FACADE restoration that is driving organic growth that we were not experiencing the way we are organized in the past.

So the biggest part of it has to do with reorganizing into a more integrated $2 billion construction products group, which from a market perspective is the Tremco Construction Products Group on a pretty integrated basis. We have exceptional leadership there.

And we continue to take market share, whether it's in add mixtures shifting from different business units into a more integrated approach to the marketplace, it's something we're really excited about. There will be organic, there will be inorganic acquisition opportunities to accentuate that as well.

But we do not need those to keep driving market share gains and organic growth..

Okay, thanks for that. And then real quickly lastly on the raw material front.

You foresee any categories, things specifically like MMA and/or epoxies, where you potentially could face some supply chain disruptions or availability issues that you're concerned about? Or do you feel okay, with the overall level of inventory that you have in your raw material procurement?.

So we have over the last few quarters and months facings challenges in certain packaging areas, and particularly in metal cans. We have faced some challenges in silicones. A lot of those categories in terms of availability are being cleaned up.

So I don't think we have the same concerns going forward as we've had over the last couple of quarters in those categories. And so I think that's certainly an observant comment about what's happened in a couple categories, particularly for us in some packaging areas and silicones..

Great, thank you. Good luck in the quarter..

Thank you..

Thank you..

Your next question comes from Mike Harrison with Seaport Global. Your line is open..

Hi, Mike..

Thank you and our condolences to you and your family, Frank..

Thanks..

You mentioned the management change that occurred in the Specialty segment and talked about some new ideas, new processes around business development.

Can you give a little more color on what changes have been made there and your confidence in sustainability of improving results in that business?.

Sure. We have a new segment leader who's been in charge of that group for just about two years. And Ronnie Holman who's done a great job.

Ronnie started as a leader of our R&D effort in a $15 million wood coatings businesses that was acquired by RPM probably 30 years ago, and helped grow our OEM coatings businesses to nearly $300 million and he is now in charge of this larger group. We have new leadership, the Day-Glo. We have new leadership coming at our Mantrose-Haeuser business.

We have reorganized a new leadership across our Valvtect and Pettit Marine and really excited about what's happening there.

And so there's been a number of leadership changes there that have consolidated accounting administration not only from a cost perspective, but take those administrative functions away from essentially business leaders that are refocused on growth. We have also changed our mentality at RPM.

My father Tom and his partner Jim Karman for decades, we just did not use outside consultants. We've had a lot of success, both with our teams, and the good work of some consultants in the MAP to Growth program. And I mentioned that because something that we would not have done in the past we're doing today.

We hired McKinsey to work with our Day-Glo team and our Mantrose-Haeuser specialty food business teams focused on market sizing and market opportunities. So the shift that I mentioned earlier in terms of really focusing our businesses on growth, as well as sustaining and implementing the MAP to Growth cultural changes with RPM are happening.

And I think the thing that we're most excited about big picture, our primary goal in MAP to Growth was to get it efficiencies that were there to have to change our culture to be focused not only in growth but on efficiency, but do it in a way that did not meaningfully negatively impact our entrepreneurial culture.

And so far, we have been able to do that, and it's paying dividends and I think people are going to see that in the coming quarters across RPM, particularly in the Construction Products Group, and particularly in our Specialty Products Group..

All right. That's very helpful. And then also wanted to ask about the online sales portal, your online sales efforts. That was an area that you were kind of struggling with last season.

I was wondering if you've made some changes or progress in those online sales that should enable you to better leverage potential demand to the bottom line as we get into the busier season in 2021?.

Sure. And again, Rusty may have some more detail. I could tell you, particularly in our Consumer group, our ability to service online ordering has improved dramatically. And we have seen significant improvement, and huge percentage gains, but they're on a small base.

But improvement in our ability to fulfill and meaningful growth in some of our big box customers and more traditional online customers like Amazon..

Yes, our growth in online sales is not quite double, but it's probably up close to 80% this year. And your question is very perceptive, because we are focusing a lot of our operating improvement team initiatives in the area of distribution. So I think we're going to continue to improve that this year, because you're right, the landscape has shifted..

All right. Thanks very much..

Thank you..

Your next question comes from Mike Sison with Wells Fargo. Your line is open..

Hey, Michael..

Hey, guys. My condolences to you Frank as well. And just wanted to say I always enjoyed meeting with Tom during the fall days back, and then those were all fun meetings..

Yes. Thanks a lot..

But just one quick question. The first half of '21 free cash flow was above $500 million and it looks like you'll generate some free cash flow in the second half of the year.

So is this sort of $600 million plus type free cash flow potential, kind of the right run rate that RPM can generate on an ongoing basis going forward?.

Yes, big picture and again details like I'll turn it over to Rusty. But big picture, I think we have gotten RPM to a new level of cash generation, both in terms of working capital requirements on a go-forward basis as well as our margin profiles. And we're excited about that.

I think Rusty can provide more details as it relates to fiscal '21 and beyond..

Sure. Yes, you might remember Mike on Investor Day, we’ve showed a slide that said our cash from operations, our target was $872 million, I believe. And if you look over the last 12 months, we're running over $800 million of cash flow from operations for the trailing 12 months. So we're pretty close to that.

If you look at the dividend and the capital spending, this year we'll do over $140 million of capital spending. I think the dividend is pushing close to $200 million. So to answer your question on free cash flow, at the rate we're running, yes, we're certainly over $400 million of free cash flow.

It's hard to take the last 12 months as any guide for what normal is because of the pandemic. For example, we have deferred some government payments for about $25 million, including the payroll tax. We have drawn down inventories, but other businesses, as we discussed, are suffering because of the pandemic.

So it's tough to use the last 12 months as a guide, but we appear to be tracking towards that MAP target..

Right. Thank you..

Thanks, Mike..

Your next question comes from Steve Byrne with Bank of America. Your line is open..

Good morning, Steve..

Yes. Thank you.

Can you quantify how much discretionary spending cuts were in the quarter and what portion of that might reverse?.

Yes, I'll defer that detail to Rusty again. But big picture, we have had some meaningful reductions in discretionary spending that's associated with a pandemic that will come back.

I can tell you that you'll see and this is part of our guidance, a more normal spend in our Consumer Group in terms of advertising and promotion in the third and fourth quarter in the spring. So that's already coming back and part of our outlook.

And while some of it will return, part of it was just lucky, in terms of coinciding with our MAP to Growth activities, because across a number of our businesses, there will be a kind of a new level of discretionary spend that will be below probably even where we originally targeted in MAP to Growth..

Yes, in terms of the biggest area of standard travel costs, so we're probably saving somewhere around north of $10 million a quarter in travel costs. And like Frank said, with the new world we're in today, we're finding that we can accomplish a lot of things without travel with video conferencing.

So I don't think necessarily all of that will come back. In the spring, we talked about medical costs going down, because nobody went to the doctor, that's been back to normal this year. So that's another area you might be interested in..

And since you brought up MAP to Growth in that response, so just wanted to drill into that on a couple of fronts.

One being, how much of that $300 million target or maybe what you can say how much of the savings you've achieved so far will from MAP to Growth? Would you say that was risen from lower raw material costs?.

Rusty can check me on this. I would say, I don't know, $50 million or $60 million is maybe lower raw material costs and the balances from our specific activities, the -- and that certainly is part of a centralized procurement function that in combination with lower raws has exceeded our expectations.

And then the other area that we've commented on was our original target for manufacturing operations between plant consolidation and efficiency gains was $75 million bucks and will exceed $100 million in that category..

Yes, I think the question might be about the commodity cycle, assumption and MAP, and we assumed $145 million of procurement savings and we said, I believe, $65 million in Wave 3 would be related to the commodity cycle..

That all seem right to you, Rusty?.

Yep. Yep..

And then just one last one for you, Frank.

As you close out this MAP to Growth initiative, is it reasonable to think that you might introduce kind of the next plan, anything that you have learned from this initiative that might lead you down a new path of productivity initiatives?.

Sure. We'll -- I think we'll be in a better position to address that with some specifics. In July, when we talk about guidance for fiscal '22 and kind of maybe a longer term post MAP to Growth outlook, but clearly there are elements of the MAP to Growth program that are here to stay.

The MS 168 element of manufacturing operations, our ability to be a more strategic partner to large global suppliers and what we're doing on the sales front as well are something that we'll be able to talk about. And we've been able to put in procedures, just a little in the weeds.

But what came out of MAP to Growth was a very detailed, what we call MPGT, which is -- MPGT, which is the I'm sorry, MPST, which is the MAP project savings tracker.

And so we've been able to track literally thousands of categories of savings across procurement across SG&A and efficiency and we're taking some of those disciplines into a growth process as well. And we'll be able to talk more about that both in terms of what we're doing and the impact it's having this summer..

Very good. Thank you..

Thank you..

And your last question comes from Silke Kueck with JPMorgan. Your line is open..

Good morning, Silke..

Hi, good morning. I'm also old enough to remember Tom Sullivan. And so, I'm sorry to hear about his passing. But I'm glad I got to know him..

Thank you very much..

I have two questions. One on the Consumer segment and one of the Construction segment.

In the Consumer segment, is there a way to quantify -- just in ballpark terms, what the benefit of COVID-related sales may have been in the quarter? Whether that's something that's like $10 million or something that's mid-single digit? Or is there any way to think about it?.

Rusty might have a better answer than I do. The only thing I can tell you is historically solid organic growth in Consumer has been in the 5% or 6% range. So clearly, a 34% organic growth in the first quarter in mid-teens organic growth in Q2 is extraordinary relative to historic levels..

Yes, I think the best way to think about it, Silke, is to look at the comp store sales numbers out of Lowe's and Home Depot. They've been running over 20%. And you could compare that to more normalized base. I think that would be probably the best way to think about it..

Right. And that leads to -- so, I've had a follow-up question on Consumer. That is Lowe's have announced, thinking about like the year ahead on a calendar basis, and I think their view is that the U.S. home improvement market maybe down -- I don't know -- 5% or 7% in calendar 2021.

Is that the way you too see it, and it's sort of like -- is it like a similar alignment for RPM in the Product Consumer business specifically?.

Yes. First of all, that is not how we see it. We would expect to see continued double-digit growth in the first part of the calendar or first 4 or 5 months of calendar '21. And then I expect from what we're seeing to see positive growth rates for the balance of the year.

And Lowe's perspective, that you referenced, is not universal across our customer base. We have some significant customers that see continued expansion in the DIY market, albeit at a lower pace..

Okay, helpful. And my question on the Construction segment is the -- that the margin improvement in the Construction segment has been pretty high with the MAP program even though the sales growth has been slow.

And the fourth quarter is typically the largest quarter for the Construction segment and the comparisons are relatively easy as you pointed out.

And so, like do you think that that business in the fourth quarter can approach margins that are something like 20% if you all of a sudden had good volume growth?.

Sure. I'm going to give you a dodge on that question for two reasons. Number one, we're really not providing details on our fourth quarter. We'll do so in April. But secondly, it's really going to be hard to tell. We had -- we should add some easier comps, particularly in April and May.

As you see in this quarter, the leverage to the bottom line out of our Construction Products Group is pretty extraordinary. And I would expect that leverage to continue, at least directionally in what you're talking about, when they start to post organic growth that's in the mid-single digits, which recovery is coming..

Okay. Thanks very much..

Thanks, Silke..

And now I'd like to turn the call back over to Mr. Sullivan for closing remarks..

Thank you. As always, I'm grateful for the hard work and dedication of our associates around the world. It's through their efforts that we found ways to safely operate our businesses, meet our customer's needs, develop new innovative solutions and serve the communities in which we operate.

I also greatly appreciate our shareholders for their continued investment in RPM. We remain focused on generating long-term value for you. We learned over decades that the market that are used growth over efficiency. And what we've learned in MAP to Growth is that we can do both. We expect to continue to do both.

Finally, to everyone on the call, I wish you and your families a happy and healthy New Year. We look forward to updating you on our fiscal 2021 third quarter results in April. Thank you for your investment in RPM and for joining our conference call this morning. Have a great day..

This concludes today's conference call. You may now disconnect..