Companies that manufacture goods have to manage their profit margins, and when the costs of the raw materials that go into those goods goes up, manufacturers have to respond, or else suffer bottom-line declines. As a producer of anti-rust and anti-corrosion products and other chemicals, RPM International (NYSE:RPM) needs a lot of raw materials for its production process, and tough conditions in the markets that RPM has to tap for key ingredients have been putting some pressure on its financial results for quite a while.
Coming into Wednesday's fiscal first-quarter financial report, RPM shareholders hoped to see modest gains in sales and profits for the period. Instead, costs were an even bigger weight on RPM's bottom line than expected, and the company could have to take more drastic action than previously contemplated in order to get moving in the right direction again.
RPM's mixed quarter
RPM International's fiscal first-quarter results had both good news and bad news. Sales jumped 8.5% to $1.46 billion, which was a record high and represented far faster growth than the 5% rate most of those following the stock had expected. However, net income plunged 40% to $69.8 million, and even after making allowances for write-offs and restructuring expenses, adjusted earnings of $0.76 per share were down $0.10 per share from the year-ago period and missed the consensus forecast among investors of $0.88 per share on the bottom line.
In many ways, RPM's business operations seemed to be firing on all cylinders. Organic sales growth was up 7.8% from year-ago levels, with particularly strong performance from RPM's consumer segment, which enjoyed organic growth of more than 12%. The industrial segment also attracted greater revenue, with organic growth of 6.7% helping to power RPM's overall numbers upward as well. Only the specialty segment's top-line growth seemed more tepid, at 2%, but there, year-over-year comparisons were tough because of the big boost in water-damage restoration business stemming from Hurricane Harvey's aftermath in 2017.
Yet profitability remained a problem throughout much of the business. Despite strength in wood stains and automotive finishes, the consumer segment saw pre-tax profit fall 27%, due largely to legal costs and an expanded advertising campaign. Even price increases late in the quarter failed to have a marked impact on the segment's bottom line. The specialty business also saw modest declines in pre-tax profit, although the industrial division managed to see a modest gain of 2.5% after adjusting for restructuring expenses and impairment charges.
Even tax reform didn't have a really obvious impact on RPM's earnings. Tax expense was down, but effective tax rates were only about a percentage point lower than in the previous year's period.
CEO Frank Sullivan summed things up pretty well for RPM. "We saw strong top-line sales growth in the first quarter," Sullivan said, "while profitability continued to be adversely affected by rising raw material costs." The CEO also noted that restructuring and overhead expenses hurt performance, along with adverse moves in the currency markets.
What's next for RPM?
RPM understands that it still has a lot more work to do in order to recover from its earnings shortfall. As Sullivan put it, "Our businesses will continue to aggressively pursue price increases to protect our gross profit margins in the face of continued raw material cost escalation." At the same time, with changes in leadership and operational efficiency gains from strategic plant closings and improvements, RPM hopes to squeeze out even more profit from its current sales.
Disappointingly, RPM once again chose to defer giving more details about where it expects the company to land financially after all of its strategic plans take shape. Having chosen not to provide earnings guidance last quarter, RPM once again omitted any specific projections for the new fiscal year. Instead, Sullivan told investors to prepare for a more comprehensive update to come in late November.
RPM shareholders weren't happy with the earnings declines, and the stock fell 3% in pre-market trading following the announcement. In order to regain investor confidence, RPM will have to execute well on all of its turnaround plans and demonstrate its ability to adapt successfully to a tough industry environment.