How RPM International Is Coping With Supply Chain Challenges

Like other materials companies, RPM International (RPM -0.98%) is dealing with some shortages from supply chain disruptions, but demand remains strong. In this episode of "Beat and Raise" recorded on Jan. 20, Fool contributors Ryan Henderson and Brian Withers discuss RPM's long-term prospects and why it should be able to overcome supply chain headwinds. 

Ryan Henderson: RPM International felt very similar to looking at SGH in terms of just investor reaction and what might have caused it, but demand for the quarter was pretty high, I guess maybe I should go through. You mentioned it, but RPM has different subsidiaries and their roles are basically manufacturing and selling specialty chemicals, and so they've divided the business into four reporting segments and I won't go through every sealant or coating because they have, I want to say close to 100 or something like that, but they divided into construction products group which is supplying sealants and adhesives to industrial customers, and then they have the Performance Coatings Group. That's like high-performance foreign solutions and then the Consumer Group which gets, that's probably what we'll talk about most because it impacted the earnings, I think the most.

This is their largest segment and it's basically them supplying their sealants and coatings to do-it-yourself home centers and they didn't breakout the customers exclusively, but I think it's pretty much Home Depot and Lowe's, and I think that comprises about 24 percent of overall revenue, just the big do-it-yourself home centers, and then the last one is the Specialty Products Groups. That's a smaller portion of revenue, I think it's about 11 percent.

But the headline here was that demand was strong, but there's the same supply constraints that we talked about with SMART Global Holdings, and not only bogged down revenue, but it also raised costs for them, and so, the CEO talked about this. They beat revenue or they're guided revenue and they grew at 10 percent year-over-year, but they missed out on $200 million worth of additional revenue because they procure certain raw materials, and so, they're still not meeting demand and you could tell that the CEO is pretty upset about that, and then the earnings-per-share was basically in line as well as their guidance, and then their outlook was for double-digit sales growth but they're also still factoring in that continued supply chain problems.

I guess there were two things that really bog them down, which was profitability was lower than the year-ago quarter. The earnings before taxes margin a year ago was 11.2 percent. This quarter, it was 9.9 percent and the CEO attributed that to continued material and wage inflation, freight inflation as well, and then they also had supply chain disruptions that were exacerbated by Hurricane Ida.

One of those, hopefully, is temporary, which is the supply constraints hampered by Hurricane Ida, but the freight inflation, the wage inflation, and the material inflation could be persistent problems, and I'm guessing that's why we saw the drop after earnings. That was big headline and big takeaway. I was looking at this in the last year, their consumer segment was up like 60 percent or something like that. I was trying to think back to why that was [laughs].

I remember that during COVID, it was like all the dads were in their house were like it's time to fix up the house and so they had, for some reason, unprecedented demand in the consumer segment. People were just going into the do-it-yourself home centers and everyone decided they really wanted to fix some part of their house. That made the adjusted EBITDA a year ago look really high. I want to say it was down 21 percent this quarter. But if you look at it on a two-year comp, it's a little better. I recommend looking because this was a company that was definitely impacted by COVID, especially on the demand side. I'd recommend looking at the two-year comps just to get a more normalized look at the business.

All-in-all, the big takeaway seems to be, it's the same problem with SMART Global Holdings, which is, I think investors have a lot of uncertainty right now around cost inflation. If you're a business that provide somewhat of commodity products, and in this case I'm sure they were. Actually, RPM was able to increase prices a little bit on some of their products and that helped offset some of the cost inflation. But unless you're like a digital business that has total pricing power, that cost inflation is going to hit you and it's going to hurt earnings. I think that's what we're seeing and that really, I imagine impacted the investor reaction that we saw.

Brian Withers: I'm not surprised. This is a heavy manufacturing and people-heavy business for all the different brands that they have and all the different products that they have. It's not surprising that they run into some specific supply chain issues that may be impacted a portion of their portfolio. But these guys have been around since 1947. When I take a step back and look at five-years, the revenue over The five-years has only gone up just short of 30 percent but the net income over that same period of time has more than doubled.

You think about a mature company and they're producing products and they're getting better at scale and producing these with a better products. That's resulted in a 73 percent gain in the stock price over the last five years. I will not be surprised if they can fix these supply constraints and enable to raise prices over time because I think they've been doing it since the beginning.

Ryan Henderson: I think that's the big questions like how much of the costs that are going to be able to pass through to the consumers. If they're able to do that, it seems like they are well oiled machine operationally. I guess just a big question investors should be looking at.