Earnings Call: Q4 2019

Jul 22, 2019

Welcome to Call for the fiscal 2019 fourth quarter year end. Today's call is being recorded. This call is also being webcast and the access live or replayed an 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. Measures. To assist you in understanding these non GAAP terms, RPM has posted reconciliations to the most directly comparable GAAP financial measures on RPM website. Following today's presentation, there will be a question and answer session 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, Paulette. Good morning and welcome to the RPM International Inc. Investor call for our fiscal 29 4th quarter ended May 31, 2019. On the call with me today are Rusty Gordon, RPM's vice president and Chief Financial Officer and Christine Schulte, our Senior Director of Financial Reporting. Also on the call is Matt Radachek, our Vice President of Global Tax And Treasury, who is taking on a senior leadership responsibility for investor relations. He'll be working with Christine, Cathy Rogers, and of course, with me and Rusty. Matt joined RPM in 2004 as Director of Global Tax. He was promoted to Vice President, Global Tax in 2005 and became our Vice President Global Tax And Treasury in 2012. He is getting up to speed on the Investor Relations functions, is well versed in our financial matters and is an excellent communicator on RPM's businesses. Going forward, he will be our primary point of contact with the investment community. It's my pleasure to introduce Matt Radachek. Thanks, Frank, and good morning, everyone. Before discussing our results, I would like to take a few moments to further introduce myself. After 15 years with the company, I certainly have a good handle on the inner workings of RPM, which I intend to leverage on our investors behalf as I ramp up from an investor relations perspective. My objectives include sharing your feedback internally with management on the one hand, and communicating externally the workings of our businesses on the other. In this new role, I have the pleasure to expand my existing working relationships with Christine, Cathy, Rusty, and Frank. Together, we have a solid IR team that will continue to ensure that you have the information needed to make sound investment decisions about RPM It certainly is an exciting time to come involved in the IR functions here at RPM, and I look forward to meeting and working with you in my new role. Next, I will provide a broad overview update on our 2020 MAP to Growth operating improvement plan and share our outlook for fiscal 2020. During his comments, Rusty will walk through supplemental slides to illustrate progress on our operating improvement plan. You can find them on the Investor Information section of our website at www dotrpminc.com. Frank will then have a few comments to wrap up our formal remarks, after which we will conclude the call by taking your questions. During the fiscal 2019 fourth quarter, we generated significant earnings leverage, which was largely driven by our 2020 MAP to Growth operating improvement plan, the benefits of which are beginning to be realized after being fully initiated in the fall of last year. Also contributing to the bottom line were recently implemented price increases and stabilizing raw material cost inflation. These gains were partially offset by increasing costs for distribution and labor. On an adjusted basis, 4th quarter EBIT increased 22.4 percent to 241,400,000 and diluted EPS increased 21.6 percent to $1.24 from 1 point 0 $2 a year ago. Share repurchases and the early retirement of our 2.25 percent convertible senior notes due in 2020 resulted in $0.05 per diluted share accretion for the quarter. On the top line, We generated fiscal 2019 4th quarter consolidated sales of $1,600,000,000, which was an increase of 2.8percentor43000000 over the same period in fiscal 2018. Organic sales growth was 3.5%. Acquisitions contributed 1.9% while foreign exchange reduced sales by 2.6 percent or $41,000,000. We were pleased with these top line results in the face of several challenges. Sales in our largest market in North America were slowed by 1 of the wettest springs on record, which delayed painting and construction projects. Economic conditions remain weak in South America and in Europe, which is our 2nd largest market. Translational foreign exchange continued to be a headwind. Despite these challenges, our businesses were able to drive top line growth and gain market share. I'll now turn the call over to Christine, who will walk through our results in more detail. Thanks, Matt, and good morning, everyone. The 4th quarter results for fiscal 2019 2018 include restructuring and other charges, totaling $36,800,000 $62,200,000, respectively. As I walk through our results of operations for the quarter, my comments will be on an as adjusted basis which excludes these charges. Additionally, for both fiscal 2019 2018, we adjusted EPS for investment related charges. First, due to changes in accounting standards during the current year. Our adjusted EPS excludes the impact of unrealized net gains and losses from marketable equity securities. Additionally, our adjusted EPS further excludes the impact of realized net gains and losses on sales of all marketable securities. These investment related items resulted in a net after tax loss of $1,700,000 for the fourth quarter of fiscal 2019 and an after tax gain of $3,200,000 during the same quarter last year. As Matt mentioned, our consolidated net sales for the quarter were $1,600,000,000, which was an increase of 2.8%. Over the $1,560,000,000 reported during the fourth quarter of fiscal 2018. Organic growth was 3.5%, or $54,100,000. Acquisitions contributed 1.9 percent or $30,100,000, while foreign exchange was again a headwind that reduced sales by 2.6 percent or $41,000,000. Higher costs for shipping, labor, and energy impacted earnings, as an unfavorable foreign exchange. We're seeing raw material cost inflation beginning to decelerate across a number of categories. While some materials, including certain categories impacted by tariffs, such as packaging and chemical sourced from China, continue to increase. The price increases we instituted in prior months have been taking hold and have helped to offset cost increases and contribute to our margin recovery. We began to see our margins catch up Turning now to our segments. Net sales in the Industrial segment were $809,000,000, which was a slight decrease of $3,900,000 or 0.5 percent in the fourth quarter of fiscal 2019 versus the same period last year. The decrease was driven by translational foreign exchange, which negatively impacted the segment by 3.5% or $28,500,000. As you'll recall, the Industrial segment has our largest exposure to international markets. Organic growth in the segment was 2 percent or $16,100,000 and acquisitions contributed $8,500,000 or 1%. Driving organic sales growth in the Industrial segment, where our business is providing corrosion control coatings, fiberglass reinforced grading, commercial sealants, and concrete admixtures. Sales were impacted by the combination of extremely wet weather during the quarter, that slowed construction projects, as well as strategic decisions to exit several product offerings with low margins and high working capital requirements. Despite slightly lower sales, we were able to increase earnings by leveraging our 2020 MAP to Growth savings to the bottom line. This resulted in an increase in 4th quarter adjusted EBIT of $6,400,000 or 5.9 percent to $115,700,000 from $109,300,000 a year ago. In our Consumer segment, fiscal 2019 4th quarter net sales were $585,000,000, which was an increase of 36,600,000 or 6.7% versus the same period last year. The current quarter sales reflect organic growth, of $38,500,000 or 7 percent and acquisitions of $8,300,000 or 1.5%. Despite the wet weather, our rustoleum and DAP businesses both generated strong sales growth in North America, as a result of market Rastolium landed significant customer wins by regaining business in the home center channel and a major market share win within the hardware a growth program, which was initiated about a year ago, was directed toward our Consumer segment and resulted in the elimination of 221 positions, and the closure of 4 manufacturing facilities. The Consumer segment is now beginning to realize the benefits of those difficult early actions. In addition, recent price increases have finally caught up with raw material cost escalation and have begun to restore margins in the segment. To more normalized historical levels. Combined, these factors resulted in adjusted 4th quarter EBIT of $109,600,000, an increase of 50.6 percent or $36,800,000 over the same period last year. Specialty segment net sales in the fiscal 2019 fourth quarter were $207,400,000, an increase of $10,500,000 or 5.3 percent over fiscal 2018. Organic growth was relatively flat decreasing by $500,000 or 0.2 percent. Sales growth was primarily the result of our acquisition of insulated, concrete forms manufacturer, Nudura, which contributed $13,300,000 or 6.7 percent to sales. Strong sales performers in this segment were our businesses providing seasonal additives and edible coatings. Foreign exchange had an adverse impact on sales of 2,300,000 or 1.2%. Adjusted EBIT declined by $1,400,000, primarily due to an intangible write off which was triggered by a change for our New Brick exterior cladding product. These costs were offset by savings from restructuring activities and cost control measures. Lastly, for the 2019 fiscal year, cash from operations was $292,900,000 compared to $390,400,000 in fiscal 2018. The current year reduction in cash from operations resulted from certain 2020 Master Growth initiatives, including the enhancement of margin in our Consumer segment, by ending the practice of discounting of fiscal 2019 to the first quarter of fiscal 2020. Additionally, we have centralized our procurement function and entered into new supply contracts. In some cases, payment terms have been shortened to achieve more favorable terms. These outcomes were expected and are in line with I'll now turn the call over to Rusty, who will provide an update on our 2020 Master Growth Initiative and also share our outlook for fiscal 2020. Thanks, Christine, and good morning. Looking back on our 2020 MAP to Growth program over the past year, We have moved with great urgency and have made significant progress toward the cost saving and share repurchase targets we laid out on November 28 last year. As you'll recall, last quarter, I provided some insights into each of the three key areas: where we are focusing our operating Those activities continued during the fourth quarter as well. In manufacturing, we further reduced our footprint and our instituting process improvement. Thus far, we have closed 12 plants and intend to close approximately 19 more. Over the remaining I'll refer now, excuse me, to the slides on our website, of which Matt mentioned. As you can see on slide number 2, on the slides on RPM's website, you can see that we have realized annualized savings $25,000,000 for wave 1 in manufacturing. In procurement next, we have further narrowed our supplier base and worked secure improved pricing and terms, which positions us as a stronger strategic partner with major suppliers. Turning to Slide number 3, you'll see that the Wave 1 2020 map to growth annualized savings in procurement are $36,000,000, which is ahead of So far, we have identified and executed on a significant portion of the total G and A savings in the 2020 MAP to Growth program, On Slide number 4, you'll see that this has resulted in annualized savings of $41,000,000. Which is ahead of our adjusted target as we consolidate slide number 5 shows that the combined initiatives from wave 1 of the 2020 MAP to Growth are resulting in annualized savings $102,000,000. While this is ahead of our wave 1 target of $83,000,000, It is still too early in the process to determine whether the gains from wave 1 or pull throughs from later waves or if they are cumulative to the entire 2020 MAP to Growth program. We will have more clarity on this as we continue to work through the process and will provide updates in the coming quarters. Additionally, we are well ahead of schedule with one of the goals we laid out in November. Which is to repurchase $1,000,000,000 2 years remaining to achieve that target, we are halfway there related to our share repurchase goals. Now before I shift gears to discuss our outlook for fiscal 2020, there are 2 important changes to the business which impact our financial reporting, and I will need to explain. 1st, the realignment of 4 segments As outlined in this morning's earnings release, for fiscal 2020, we will begin reporting in 4 operating segments in that of our 3 previous segments. See slide number 6 for reference. Before operating segments are the Consumer Group, Specialty Products Group, Construction Products Group, And Performance Coatings Group. The latter 2 were essentially formed from our previous industrial segment. The Consumer Group still houses our highly regarded rustolium and DAP businesses, The only minor change is that we have shifted our Kirker Nail and ammo business from the consumer group to our specialty products group. Which is a better fit for this niche business. The specialty products group, Gains Curker, but loses our exterior cladding business drive it, and recently acquired insulated concrete forms manufacturer, nudura, to the new construction products group. The construction products group combines our Tremco, Tremco, Elbrook, Euclid Chemical, Vipol, Vandex, and Flow Creek Businesses. While also adding drive it in Nudura from specialty products. The Performance Coatings Group is unchanged, with its core businesses, including Stoner, Carbline, USL, Fiber Grady and others. Had these reportable segments been in place during fiscal 2019, their pro form a sales would have been $1,900,000,000, in the Consumer Group, $700,000,000 in the Specialty Products Group, $1,900,000,000 in the Construction Products Group, and one point and their leadership will be better aligned to RPM's overall strategy. This improved alignment is critical to our growth and success has it better positions our businesses to compete and win in the products they serve. In addition, it provides our investors with greater visibility into the business and better comparability among our peers We're particularly optimistic about the creation of the construction products group, which was formed to create a cohesive portfolio of integrated construction systems that will deliver comprehensive building envelope solutions to our customers. We are also excited about changes at the Performance Coatings Group, which is being realigned from a more geographic matrix type of management into global brands with leadership teams that are responsible for the entire world. We expect that this realignment will result and improved market penetration and earnings 2020 MAP to Growth savings and gained efficiencies in these previously reported RPM Industrial segment businesses. The second change is the reclassification of shipping costs. Beginning in fiscal 2020 We will classify charges for shipping costs to customers as part of cost of goods sold instead of SG And A. This change will not impact EBIT. It puts us in line with how our peers and other manufacturers classify shipping out to customers. And will provide investors with a better point of comparison. Turning to Slide 7. At this change been in effect for fiscal 2019, our cost of goods sold would have increased by $173,600,000 to $3,480,000,000, while our SG and A expenses would have decreased by the same amount to $1,600,000,000, This change does not impact EBIT as the reduction of RPM's gross profit margins by 310 basis points to 37.5 percent is fully offset by an improvement in SG And A as a percent of sales by 310 basis points to 28.7%, which is more comparable to RPM's peers. The last topic I'll cover is our outlook for fiscal 2020. On a consolidated basis, we expect to generate revenue growth in the low to mid single digit range. While sales growth is anticipated to be relatively modest, Largely due to global macroeconomic factors, we view this growth rate to be above market. We expect that sales growth will drive strong leverage to the bottom line as our operating improvement initiatives continue to take hold and we benefit from fiscal 2019 price increases. Further, we expect raw material cost inflation that has been persistent in recent quarters to moderate. In our Consumer group, sales are anticipated to increase in the mid single digit range as a result of modest organic volume growth, the rollover impact of acquisitions and fiscal 2019 price increases along with market share gains. Specialty product group sales are expected to grow in the low single digit range due to projected geographic expansion and account penetration in our wood finishes businesses, which will be offset by flat growth in our edible coatings and restoration businesses. Sales in the new construction products group are anticipated to grow in the mid single digit range, with higher growth expected in innovative technologies such as roof coatings, insulated concrete forms, as well businesses and product lines while we refocus and reposition for future growth. In the Performance Coatings group, revenues expected to increase in the low single digit range, driven by continued strength in corrosion control coatings, predominantly in North America, coupled with rollover impacts of price increases enacted in fiscal 2019, This is projected to be offset by general weakness in international markets and the impact of exiting certain businesses. We will provide more 4 segments as fiscal 2020 unfolds, quarter by quarter, starting with our fiscal 2020 first quarter results, which will be reported on October 2, 2019. For the fiscal 2020 fiscal year, We will continue to As we did in fiscal 2019, we will continue to adjust EBIT for restructuring and other related costs in an effort to provide a more transparent view into our operating quarter, we project sales to be up 1% to 2% with solid leverage to the bottom line for more than 20% adjusted EBIT and adjusted diluted EPS growth on a year over year basis. As we look forward to fiscal 2020 we project modest revenue growth in the range of 2.5% to 4%. With the impact of 2020 MAP to Growth We expect expected adjusted EPS between $3.30 to $3.42 per share in fiscal 2020. Now, I'll turn the call back to Frank. Thank you, Rusty. Before we open up the call to questions, I'd like to note an important leadership change at our corporate headquarters. Taking the reins from me on wave 2 of our 2020 MAP to Growth program, will be Mike Sullivan, who is our new Vice President of Operations And Chief Restructuring Officer. You most likely saw the announcement we issued at the end of June. Mike replaced a Steve Kanoop, who passed away recently after a brief but courageous battle with cancer. Steve was the key architect of our operating improvement plan and the structural changes that Rusty just outlined. Moving forward, we will continue for RPM's long term operating improvement, which will allow us to reach new levels of growth and performance In regards to our ongoing 2020 MAP to Growth program, we're in very good hands with Mike Sullivan as he close he was closely involved with the analysis and development of the original operating improvement plan while working as a consultant with Alex Partners. Over the our 2020 MAP to Growth operating improvement plan and drive continuous improvements across RPM for years to come. As a reminder, we are hosting a lunch meeting today at the New York Stock Exchange with financial analysts and other investors. As part of the meeting, our 4 group presidents will provide insights into their respective businesses. This will be webcast starting at 12 15 with supplemental slides. The webcast and additional slides can be accessed through the RPM website www.rpminc.com. Lastly, I'd like to thank our associates worldwide for their efforts continue growing our business while also carrying One of the hallmarks of our success has been our ability to grow the business with a world class sales and marketing organization and a very entrepreneurial approach to the market and our customers. Through we are also becoming world class in our operations. This 12 punch will make us very difficult to beat, in the markets we serve and will allow us to deliver even greater value to our shareholders in the years to come. We'd now be pleased to take your questions. Thank you. You. And our first question comes from John McNulty from BMO Capital Markets. Please go ahead. Good morning, guys. Good morning. Thanks for taking my question. Good morning, Frank. Congratulations. So you went through the 1st kind of phase or phase 1 of the cost cutting and map to grow program and it clearly moved the needle, I guess, the most when looking at the margin lift in the consumer segment as it's starting to flow through. I guess, how should we be thinking about where the next round of impacts will be in terms of the margin lift as we're looking to 2020? Sure. The, just to provide a little history, We were initiating, our own operating improvement plans, and then took a step back form an operating improvement committee of the board and engage a consulting firm, to kind of reassess and look across the whole organization. Before that, assessment process, we had already initiated a restructuring and operating improvement program at our Consumer segment. And so they were, probably 9 months ahead of the rest of RPM in terms of initiating significant change. Most of the change across the other parts of RPM happened, where we're initiated in October or November in conjunction, with our Investor Day on November 28. So with that in mind, there's two things think about for fiscal 2020. Number 1, the procurement and manufacturing activities that have really taken hold with RPM being on a FIFO basis, products that we purchased today show up in our P and L 75 or 90 days from now. Manufacturing improvements get capitalized into inventory. And so you'll see those down the road. And so we would expect to see a significant improvement in the gross margin area in fiscal 2020 as a result of the continuation of our MAP to Growth program, and as inventory purchased on a FIFO basis, loads through our P and L. Secondly, you'll see a much more balanced delivery of earnings leverage to our bottom line on a quarter by quarter basis, particularly coming from our Performance Coatings group and our Construction Products Group, which are the 2 new reportable segments, that made up our Industrial segment for quite some time. Got it. Very helpful. And then just a follow-up. On the cash flow side, it looks like 2020, you've got a kind of a lot of puts and takes. It seems like you get $100,000,000 of the delayed receipts in and it sounds like some other potential working capital improvement changes. And I guess I assume there's going to be some incremental costs around the MAP to Growth program as well. I guess, can you give us some color as to how we should be thinking about cash flow in 2020 as we look forward? Sure. Rusty is in a good position to answer that. Sure. Yes, John. We just had a simple timing difference at year end on the collection of receivables and payables as a, and that's a direct result of our MAP to Growth program. We did, eliminate some discounts for early payments. We've renegotiated procurement contracts which in some cases has led to earlier payments in exchange for other, aspects of the contract. So, we have a timing difference between the fourth quarter 1st quarter on cash flow. And, we expect to continue to make progress in the main areas being inventory and payable days as we go throughout fiscal 2020. We're going to continue to have, some cash outflows, though, as a result of restructuring such as severance, some CapEx as we consolidate plans. We do have consultants, for our operating improvement initiative So those will be some of the outflows, but we'll continue to make progress on the key working capital area. Great, thanks. And maybe one last question, just Frank, it looks like you were starting to really make some traction in terms of the price versus raw materials. I guess how should we be thinking about the pricing flowing would we be looking at as we go through 2020? So I think on average across RPM, it would be around 2%. We got early price increases in our industrial segments, more than a year ago, but those price increases proved to be relatively low relative to or inadequate relative to where raw materials continue to go. I think a number of our industry peers have communicated that they saw raw materials continue to rise into the spring of this year and now they've started to moderate. We did have a meaningful impact in our fourth quarter on consumer price increases in part because those were the last price increases that we really achieved. Given some contract issues and other issues. And so those hit in the late winter or early spring of this year. The combination of all of that across RPM will be around 2% for fiscal 1.5% to 2% for fiscal 2020. Great. Thanks very much for the color. Our next question comes from Frank Mitsch from Fermium Research. Please go ahead. Good morning, Frank. Good morning. Hey, good morning, Frank, and congrats on a nice end to the year. And welcome to IR Matt. Look forward to, to working with you. Thank you. As I look at the consumer segment, obviously the biggest surprise in terms of, in terms of growth you referenced, some wins, in the home center area as well as in the hardware chain. And I was curious if you might be able to size in terms of a percentage increase perhaps in the fiscal fourth quarter or more importantly, how we should think about some of these market share gains impacting, 2020. Sure. I'll provide as much color as we can, particularly in relationship, the comments we made a year ago, recognizing that we tend not to provide much detail on customers, but a year ago, there was a strategic partnership between one of our largest competitors and Lowe's. And, as a result of that, we were able to pick up all of the interior wood stains and finishes business at Home Depot, which is the largest home center in the world. And we lost a little more than $20,000,000 of small project paint, spray paint business at Lowe's. This spring, we picked up more than half of that lost business. While we have continued to, really drive the interior wood stains category, to levels that equal or exceed our original expectations a year ago. Secondly, there was a significant strategic change at one of the major hardware co ops, where we were able to pick up principally the sole supplier business in spray paint, as of this spring versus, one of our largest competitors. And that was, I think, a little bit in connection too, but obviously separate because we're focused on small project paints and patch repair and cocks and sealants and really the niches where our time and energy is spent. But also, timed with a significant gallon So, I mean, net net, are we talking about a percent? We're talking more than a percent, that we should think about 2020, coming from these, from these wins, the market share gain? I would think between the two of them somewhere in the neighborhood of $40,000,000. All right. Terrific. Terrific. And then Rusty, You clearly mentioned, look, it's too early to step up the targets on the $290,000,000 map to growth. I was just curious on the procurement side, because obviously that was the biggest outlier terms of what you're able to, to garner versus your original expectations. Is that you know, as you look at just the procurement side of the, of the, the, the, the map to growth, are are these gains, business that you thought you would get over time and it just came early, or are you uncovering new opportunities that you weren't even planning on when you rolled out the original targets. So, this is Frank, and I'll answer that. Comments that Rusty made in the supplemental slides were on an annualized run rate basis is how we've been talking about our MAP to Growth program. We can tell you specifically that in fiscal 2019, we had $53,000,000 of MAP to Growth savings flowed through our P and L. 32 of that flowed through our P and L in the 1st 9 months and was almost entirely eaten up by higher than anticipated raw material costs. $21,000,000 of that flowed through our P and L in the fourth quarter, and that hit our bottom line, just about dollar for dollar. I mentioned earlier, Frank, about FIFO, we are making great progress in procurement. We're continuing to add new things. To the procurement pipeline, new categories, in areas like indirect spend and logistics And we're going to keep adding, in every category, where we can, we can find new opportunities But you will see that the both the procurement and manufacturing were relatively, modest in fiscal 2019. All related to FIFO. And so the inventory that we are selling in the fourth quarter was procured in the winter early spring months of this year. When raw materials were still relatively at peak levels, For all practical purposes, they remain at or close to peak levels, but their 2 year ascent has seemed to stabilize. So we feel pretty good about these activities and how they'll unfold in our P and L and fiscal 2020, quarter by quarter. All right. Thank you. That's helpful. Appreciate it. Look forward to seeing you later on. Our next question comes from Rosemarie Morbelli from G. Research. Please go ahead. Thank you. Good morning, everyone, and congratulations for a great end of the year. Thank you. Frank, following up in the other Frank question, when we look at the benefit you had in the fourth quarter regarding the new business Home Depot and at the hardware stores. When do we see an anniversary or is this when we look at 2020, it will be on an apples to apples basis or will there still be some benefit from the change? I think you'll see a strong performance throughout fiscal 2020. We are off to a slow start in the first quarter because June was a terrible weather month, and that negatively impacted Our consumer businesses negatively impacted our construction products group, particularly our Tremco Roofing business. The backlog at Tremco Roofing is very strong. POS picked up nicely across most all of our consumer categories from Cox sealants and patch repair and small project paints for July. It's really just a question of whether we can make up what was a very difficult June. I mentioned that because that difficult June will impact our first quarter results in Consumer. But I don't think it will reflect the strong performance and the continuing MAP to Growth benefits that we'll be leveraging to our bottom line across all of our segments. And as I mentioned earlier, more evenly across all of our segments, as we get into the new fiscal year. But you will still have Well, from your gaining that particular new business? We will, through the 1st 9 months of fiscal 2020. Okay. And then if we look at the construction, have you seen first, have you seen a pickup in demand, although I don't know what is going on with this hit whether anyone is working out there. And could you give us a feel for the North America versus international size? So that's a difficult question to answer in this sense. As Christine commented, the spring And we're not we're one of the last to comment on this. The spring was one of the, wettest periods on record that carried all the way through June. So that did hamper our growth in our construction products group, as well as consumer. While there are still positive aspects of North American construction activity, they seem to have slowed down from in the last couple of years. So it's at a more modest growth level. And international is still very punked Europe is, been flat to slightly down across every category that we operate in. And, we don't see that changing FX will have a negative impact on RPM year over year. We anticipate in Q1 And then hopefully, with the strong performance of the dollar over the last year, it'll stabilize, if not back up part in part depending on interest rates, but we also anticipate a little bit of a FX headwind in Q1. In the split between North America and the international on the construction piece? We haven't provided that detail and, we may have some detail on that. In our investor webcast for the launch today. But our performance coatings group at 1.01 is about 50% U. S. And 50% outside the U. S. Construction is more predominantly North America, but would be 2nd largest international exposure, for RPM of our 4 new segments. Our next question comes from Steve Byrne from Bank of America. Please go ahead. Good morning, team. Yes, good morning. Just thinking through the splitting up of the industrial segment in performance and and and construction, do those 2 now segments, sell to any of the same customers? Or is one primarily new construction and the other one aftermarket and renovation? There's a little bit of overlap I would tell you in terms of product categories that by far and away RPM is the largest producer in the world of polymer flooring. We sell polymer flooring to consumers in North America through our consumer segment. We sell polymer flooring in our construction products group, mostly through contractors and distributors. And then in the Performance Coatings group, we do polymer flooring But on a pretty unique supply and apply basis through our stone hard business, we believe that the largest a producer and installer of polymer flooring in the world. And, we'll have a couple slides this afternoon that highlight the uniqueness of our Performance Coatings group, as in polymer flooring and particularly in their infrastructure, product categories they have a pretty unique supply and apply model, that is a different channel than some of the, competitive products that are in our construction products group. So there is some overlap there, but they tend to be the different channels as I just described them. And where will the 4 segment presidents reside and kind of along that same theme, any any outlook for a reduction in the number of accounting locations. Rusty talked about it, in the fall. Are there being more than a 100 of these locate the tax or accounting locations, any outlook for changing that structure? Sure. I mentioned, the savings, in FY 2019 from our MAP to Growth program, the largest chunk of that was in SG And A, and the largest chunk of the SG and A savings came out of consumer because they started first. As we look into fiscal 2020, we anticipate roughly $30,000,000 of wave 2 of MAPTA growth to flow into our P and L on top of a continuation of the wave 1 activities that will be somewhere 50. So roughly about $80,000,000 of MAP to Growth hitting our P and L in fiscal, 2020. The predominant portion in wave 2 will be from procurement in manufacturing, as it really will take the finalization of our ERP consolidations, which are about 35% complete, to be done before in wave 3, we get to the next meaningful level of SG And A savings. And that has to do in part with reducing the number of accounting locations and essentially centralizing a number of areas in administration either at the group level. So in one of four places, or at the RPM level on a consolidated centralized basis. And these group presidents located near you? No. They, remain where they are. Paul Hoogan, boom, runs construction products, is headquartered on the east side of Cleveland, at the Tremco headquarters. Terry Horan splits his time between DAP in Baltimore, and rustoleum in Chicago. Ronnie Holman runs our Specialty Products Group from Hickory, North Carolina, where he was previously the head of our, OEM, industrial wood group, which was a large piece of the Specialty Products group. And Dave Denstead, who came up through RPM, through Stonehard is, headquartered at eemable Shade, New Jersey, site of Stonehard, but oversees all the Performance Coatings Group Businesses. Okay. Thank you. Our next question comes from Vincent Andrews from Morgan Stanley. Please go ahead. Just a couple of questions on the specialty segment in the quarter. Maybe give a little bit more detail on why sales were flat there. And then you had the intangible write down, if you could quantify that, and then talk a little bit about the the startup costs in New Brick and how much they were and if they continue into, future quarters as well. Sure. I'll answer it generically and then let Rusty provide some of the detail. More on the earning side, we had the impairment charge in New Zealand and we I think Euro, I don't have the quarter detail, but year over year, we lost an additional $4,000,000 on the operating line in development of new brick. And so if you adjust for those, we did have a positive EBIT growth albeit modest in the Specialty segment. And then the other comment on the revenue side, our specialty segment is our highest margin, highest performing niche businesses, their EBIT margins in prior years, and they've been a reportable segment for the last 4 or 5 years peaked around 17%. We intend to get back there, and I think we'll do so relatively quickly. The challenge in particular in our specialty segment businesses is not margin. It's growth. And so it's the area where I think you'll see good performance, but the least leverage to the bottom line as we figure out in these very unique specialty businesses, how to drive that $700,000,000 relatively small reportable segment, to over $1,000,000,000 in the coming years. I don't have much to add other than growth was pretty, level across the board. There were not much in the way of standouts either good or bad. We were, of course, hit with FX like in our other segments. It does seem that OEM market have cooled a bit for our wood coatings and powder coatings business relative to earlier quarters. And we were annualizing, and this is the last year of that the patent expiration of the Mantroshauser Natureseal product line the coming off a year prior, some significant weather related, sales for our Electro Brands business. And so there's some, particularly in the Legend Brands business, some volatility there around weather. That's a business that has grown considerably as part of RPM and their core business is much higher. But, around weather events, you could see revenue spikes in the $10,000,000 to $15,000,000 range that positively impact 1 year and then essentially just here the next. Underlying business is doing phenomenal, but it's just a volatility around weather that is the nature of their business. Okay. Thanks very much guys. See you later. Our next question comes from Ghansham Panjabi from Baird. Please go ahead. I guess, going back to fiscal 2020 guidance, Frank, you talked about 2.5% to 4% core sales growth 1.5% to 2% from pricing. You also talked about shedding some underperforming businesses, etcetera. Can you just sort of size the contribution of that aspect as it relates to your core sales guidance? Yes, we're probably in our Industrial segment, looking at this year coming up, shedding about $20,000,000 in the revenues. So about $20,000,000. So about $20,000,000 and they tend to be product lines or some small startups in the developing world that, just have not performed over the last couple of years to our expectations. And so, in the MAP to Growth program, not only are we looking at the category areas that we're talking about, but we're looking across each of our segments, in their portfolios and pruning non operating entities and either product line or small operating entities that, have not delivered the, earnings growth that we anticipated and they tend to be smaller developing country operations that will just be closed. And we completed a fair amount of that in fiscal 2019 as well. Okay, that's helpful. And then going back to your EBIT guidance, 20% to 24% year over year growth. So that implies at the midpoint about 125,000,000 Is it sort of fair to think about half of that coming from the margin acceleration program and then the rest coming from just operating leverage, the flow through pricing and then just your assumption on raw material costs. Is that fair? No, I think about 2 thirds is going to come out of the operating improvement program. And then the balance will come out of leverage to the bottom line. I think the Disappointing element of our forecast for 2020, its sales growth estimate of 2.5 4%. That's a couple points below where, we had hoped sales would be when we originally provided our investor, naphtha growth program on November 28, as you heard, Matt comment today, and I think is, some of our peers have recently reported, if we're generating 2% or 3% hopefully 4% revenue growth, it seems to be outperforming the broader market. Although we don't have a big exposure in China or Asia. So that's helpful. Okay. And then just one final one on the annual guidance for fiscal year 2020. Anything in particular we should keep in mind in terms of the distribution of earnings between the various quarters, any specific call outs, etcetera? Thanks so much for your time. Sure. And to that question, I'll repeat what I said earlier. I think we'll have some more modest leverage and in our first quarter, particularly around consumer and our construction products group because of what was a very wet, June. So we get off to a rough start. The good news is our performance in July to be pretty solid. It's just a function of what we can get out the door shipping wise and how demand continues to evolve. In August, into the fall as to whether or not we make up that shortfall in June. And, but we're seeing P and Ls that when sales are up 2% or 3% with the MAP to Growth program initiatives that we've already undertaken. The leverage to the bottom line is pretty good. And so I'd be more modest Q1, and then you'll see Q2, Q3 and Q4, pretty strong Also, on Consumer, I think you should plan for a more modest Q4, given the strong Q4 performance that they just generated. Our next question comes from Kevin McCarthy from Vertical Research Partners. Please go ahead. Good morning, Kevin. Congratulations again on impressive results. Question for you on the re segmentation, as an outsider looking in, as I survey performance coatings, it seems to me that you've still got quite a few products in there that one could argue are construction linked, such as concrete admixtures, fiber grade. And you mentioned flooring earlier, And so I guess my question is why not go further and transfer some of those lines into the new construction products segment, maybe you could elaborate a little bit on the thinking there? Sure. I think segment reporting is both a function of products and markets, similar P and L makeups and also how a company is organized. And, we're organized in 4 groups. That's how we operate. That's how we measure performance within RPM today at the board level. And, I think we fix what's been a little bit of an anomaly in our part, which is our fault, which is a industrial segment that for the last given acquisition activity and market dynamics and also the Special Products Group formation following the SPAC transaction, an industrial group that represented 50 percent of our revenues, but did not have leader ship. So we did not have a industrial segment president. So we have separated into Performance Coatings And Construction Products because we have 2 very good leaders there and they run, great businesses with good management teams. The other thing that I think will be very helpful for investors. And also as we think about growth opportunities in the future, it separate out, what will be this year, a $2,000,000,000 construction chemical group, because very often only get compared to our coatings peers. And this $2,000,000,000 business, is really much more aligned from a peer perspective with pure play construction chemical, peers and competitors. And so we're excited about what this new segmentation does for us in terms of focus and strategic growth opportunities. And I think it will also provide, more clarity, to our investors around the various elements of RPM where we can go and grow and what our performance will be like versus real, peers as opposed to a peer group that's made up only of major paying companies. That's helpful. And then as a follow-up, Frank, would this resegmentation, make it any easier for RPM to separate businesses if you chose to do that strategically at some the growth program, we're a little more than a third of the way through and you're seeing the results of it and position these four segments in all of our PM to continue to grow, compete and win in the marketplace and deliver superior returns to our shareholders on a sustainable basis for a long time. And we're off to a good start, and we think that this re segmentation is an important part of that. Great. And then lastly, if I may, what is the level of raw material cost inflation in fiscal 2020 versus fiscal 2019 that you've baked into your earnings guidance? It's really hit and miss. I don't know the exact number. It's it's low tens of 1,000,000 of dollars of inflation at this stage and it assumes things that have stabilized stay that way. And as Christine mentioned, it's mostly around metal packaging, which negatively impacts our consumer segment in particular rustoleum, but in our consumer segment, we tend to be the kings of small project stuff, whether it's patch and repair, cocks and sealants, spray paint or small project paints. And, this is a statistic that we'd have to freshen up, but A few years ago, we saw data that indicated that RPM, in terms of the U. S. Retail paint market represented about our Consumer segment, about 1% of paint by volume and almost 19% of paint by units. And so it really gives you a sense of the challenge that we're facing in packaging in general and metal packaging, template related specifically. So that's a little bit of a headwind in fiscal 'twenty. The other headwind is in some unique raw materials in different places. I'll just give you one example. Day Glow has had some chemical raw material challenges based on chemicals that they import from China, that have been subject to both the tariff activity and also the just trade up and down activity that the country has been facing. That's helpful. Thanks a lot. Thank you. Our next question comes from Arun Viswanathan from RBC Capital Markets. Please go ahead. Good morning, Aaron. Good morning, Frank. Thanks for taking my question. I hope you guys are well. Just wanted a couple of questions on the cash flow side. Looks like you're well ahead of plan on the buybacks. Maybe you can just give us your thoughts on, where you are on the working capital improvements that you're targeting from MAP to Growth and your free cash flow generation? Thanks. Sure. Thanks for the question, Arun. This is Rusty. In terms of inventory, we have made some progress, but it's probably going a little slower because of the plant consolidations. We've learned that, we have to be really careful as we close plants and consolidate production into other plants to ensure that we have adequate safety stock on hand during the interim so we can continue to keep up our service levels. So I would say on the inventory front, we are making the progress we expected, but It's probably not coming quite as fast, but we'll get there. In terms of the payables, we mentioned already that we had timing difference at year end. We are making great progress with our procurement team in terms of negotiating, so supplier contracts on both pricing and terms. And that's going, certainly at the pace we expected, if not a little bit ahead So, hopefully, that answers your question. Great. Thanks. Thanks, Rusty. Yeah, and just as a follow-up, just on the sales growth guidance, you noted that it's maybe a couple points below your November 28 outlook, yet you're able to keep the, the EBIT growth targets intact. So maybe just getting back to the earlier question on accelerating or increasing some of the MAP targets. If you were to see sales growth kind of get back into that mid single digit range, would that provide, you know, a greater lift to your map targets, and and and and would that be mainly dependent on macro recovery, or how should we think about potential changes there? So I think the way we think about that and back to my earlier comments about the savings we had in we anticipated. We are ahead of the curve on the $290,000,000 improvement goal that we had and we continue to add different projects, to our pipeline. So we're highly confident in our ability to hit that number. I do think as a result of the, raw material challenges that persisted longer than we anticipated and the slower growth rates. We're probably 6 to 12 months behind the absolute goals in terms of an absolute EBIT margin goal and the absolute goal of hitting a $1,000,000,000 in EBIT, but that's a function of timing and growth rates. The leverage our bottom line is really strong. And if, interest rate reductions or trade activity piece, you name it If we got back leveraged to our bottom line that would eliminate that timing issue that I just mentioned. So we're excited about what we're seeing but we're also realistic about where we see growth in the market today. Our next question comes Hey, guys. Nice quarter. Frank, in terms of acquisitions, can you maybe give us a quick update on the pipeline and and what you think could be possible this year and and maybe where the opportunities are by by the new segments. Sure. I think part of the growth, dynamics that are a little below what we anticipated do relate to acquisitions. I think we completed roughly $120,000,000 of acquisitions in terms of revenue base in fiscal 2019. We announced a relatively small acquisition at the beginning of this fiscal year with our construction products group a specialty tape producer. And so there's a decent pipeline out there. All four of our segments are focused on both on acquisitions. And, I think it's likely that we would be in that $100,000,000 range That's half of what we planned for in the November 28, Investor Day presentation. But there are some sizable deals out there that $100,000,000 or $150,000,000 that, if we were able to get something like that, would catch us up on those. So that's, really the comments that I would make. All four of our businesses are focused on finding both on acquisitions. The good news about those is that while they're not big and they're not moving the needle on the $200,000,000 a year in MAP to Growth, the IRRs in those as we've gotten better, in general and better through map the growth of integrating, acquisitions and bolt ons the IRRs are great and the contributions to the bottom line are working out very nicely. Great. And then just one quick one on pricing with the new segments, is there any any, the change difference between the pricing power between the new segments? Does does everybody have similar pricing power or will it, differ between each of the businesses? No. The the dynamics are still what they've been for quite a while. It takes us 9 to 12 months to catch up in a rapidly rising raw material environment in our consumer segment. Because of the nature of their customer base, we can pass on prices quicker in most of our industrial businesses, notwithstanding the new segmentation. As I mentioned earlier, we were early in price increases in a lot of our industrial businesses when we, for a number of reasons, contractual and otherwise, we're not getting them in consumer, but those early price increases prove to be inadequate And so we need to do another round of price increases in our Industrial segment businesses, which we did this spring. But the dynamics that we've talked about for quite a while still persist between the timing of raw material price increases and when we're able to get those back in terms of product pricing and consumer versus the rest of RPM. Great. Thank you. Thank you. Our next question comes from Silcox from JPMorgan. Please go ahead. Good morning, Silke. Hi, good morning. How are you? Good. Thank you. I have one question on the consumer segment and the rest are all cash flow questions. Are you done with the business wins at Home Depot and what's left in 20 20th, the true value relationship that you won? So the we're continuing to perform for all of our customers. The major strategic change both in our categories and in the gallon good categories, we're not at true value they were at Ace. I see. Okay. That's helpful. Thank you. There's a second slide that you put out that was helpful that had some of the reconciliations, in there to to get from EBIT to to EBITDA. And it says that for 2019, your restructuring expense was maybe $42,000,000 and the professional fees were $26,000,000. Are all of those already paid out? What is the amount that you expect to pay out in 2020? Sure. I think all of those are paid out. And at least as a run rate, in the first quarter, Well, we'd probably be at the same place. But as, fiscal 2020 unfolds, I think you'll start to see in certain areas, those decline. And in, in terms of your targets, do you have a cash flow target for 2020? And what might that be? Sure. The answer is yes, we have a cash flow target in 2020. And no, we have not disclosed that publicly. Okay. And my last question is when I go back to the November presentation, I think what you put out is or your expectation was that maybe over the 3 years going from fiscal 2019 to fiscal 2021, maybe you could generate $2,200,000,000 off cash flow. And then you laid out a slide as to what you might spend it on. Do you think that's still a reasonable target or because of the timing issues and how things roll along? Like that may be tough domestic? I think it's a reasonable target, but as I commented on a question earlier, And I think this would apply to our cash flow generation as well because of the raw material environment, in the spring of this year or persisting as long as it did. And because of the slower growth, it's likely that that, along with, kind of our absolute earnings targets, will be delayed, by 12, 6 to 12 months And as Rusty indicated, and these are temporary and they'll be picked up. But I think we've learned that the inventory improvement, which is coming, will be a little bit slower because what we've learned on the ground is, A, it doesn't take 90 days to close the plant, from announcement to closure. It takes more like 5 months. And B, in a number of cases, our companies have found it appropriate to build, safety stock inventory in light of closing a plant and then relying on another RPM plant. At the luncheon today, and it's worth noting as you see our patients throughout the year, you'll see a change in our work chart. And the cultural change that is happening at RPM is as, profound and important, as the individual initiatives. In terms of how we're thinking about our future and how we think about our businesses, and how it's not just about closing a plant. It's closing a plant and having an RPM company rely on another RPM company to be the primary manufacturer of their products. We're doing similar things in distribution, and it's going well. And I can't emphasize enough that the cultural change getting that right is as important as the technical change on the ground of closing things and consolidating stuff. Thanks very much. Our next question comes from Mike Harrison from Seaport Global. Please go ahead. I had a couple of questions just regarding the fiscal 2020 EPS guidance. I was wondering, maybe a question for Russ, Steve, if you can provide some of the assumptions that underpin that, things like tax rates share count as well as the amount of corporate expense, the non segment corporate indirect piece? Sure. I'll address those. First of all, with the corporate expense, we averaged about $20,000,000 a quarter It was lumpy during fiscal 2019. That'll probably be higher because of higher pension and hospitalization costs that are anticipated. So I think we'll be in the low $20,000,000 range for, non op expense per quarter as we move forward. On the tax rate, you should assume between a 24% 26% tax rate midpoint of 25, for fiscal 2020. We did better than that in fiscal 2019. At 23.2%. So those are a couple of assumptions. Hopefully, I capture those for you. And does it assume the share count is about flat from the Q4 level or does it assume some share repurchases It does assume share repurchase. We picked up about $0.05 in the 4th quarter we'll get the annualized impact of that activity during fiscal 2019 as well as more share repurchases. So we'll pick up about a dime on EPS in fiscal 2020. Okay. And then the last Last question I had was regarding the realignment of the segments. And in particular, that drive it and new Dura businesses coming out of specialty and into construction products. I was wondering is this just a formal change that reflects how these businesses are already being operated or were there in fact some inefficiencies in how you were presenting that offering. Maybe we could expect maybe some more synergies as you move those into a more cohesive offering? Sure. It's a great insight and it's very much strategic. So drive it was part of our Specialty Products group in part because it was part of the SPHC businesses that were the elements of our old now, thankfully behind the suspension resolution. And so it was in there as part of the SPHZ businesses. When we resolve that, that's when we began reporting a specialty products group with those is in part because of how we are aligned and what our management reporting structure was internally. When we acquired Nudura, it was pretty apparent and that was through Drive it was pretty apparent that the synergy there was better with our construction products group, with our Tremco sealants and waterproofing business, in particular, And so this is a very strategic move. And there are opportunities in sales, marketing and specification. I believe to drive improvement and growth at drive it in Nudura. That would not have been possible if they operated as independent businesses as part of our Specialty Products group. Got it. Thank you very much. Thank you. Our next question comes from Jason Rodgers from Great Lakes Review. Please go ahead. Good morning, Chase. Hi. Hello. Just a few quick ones here. Do you have an estimate for CapEx for fiscal 2020? Sure. We do. We're going to have a, what I call a normal CapEx budget of $90,000,000 for fiscal 2020. But on top of that, We have certain spending related directly to our MAP to Growth program. So we're going to have about, $30,000,000 of, or $40,000,000, somewhere in that range of CapEx tied to ERP. Implementations. As you know, we're going from 75 ERP instances down to 4 and that, project is going to be, intense in gear in fiscal 2020. Also, we're going to have about $40,000,000 or so of other manufacturing related CapEx as we consolidate production sites. So to do that integration, we'll have to spend some CapEx there. And then on top of that, we have a major project to in source some products that are outsourced as part of our margin improvement initiative. And that'll be about 10,000,000 So on top of the $90,000,000 Jason of normalized CapEx, there'll be about $90,000,000 of unusual items related directly to to grow. All right. And then raw material costs, what was the year over year increase for the fourth quarter? And what's the expectation for the first quarter? Yes, I don't know that we provided, specific detail on raw material costs and or pricing and We've learned over time not to do that with any great detail. Ross in the fourth quarter were modestly up year over year. And, except for the 2 categories we had commented on earlier, things have stabilized, we're seeing some declines in certain resins and, other chemical raw material categories. Then finally, for our models, would you be able to provide the reclassified gross profit margin and SG and A as a percent of sales by quarter for fiscal 2019? We will provide, the reclassified SG and A and gross profit on a quarter by quarter basis. I will tell you that when you look at the slides that, Rusty showed us or talked to supplementally, and we'll also show on the webcast this afternoon It showed adjusted SG and A on a GAAP basis. These were done on a GAAP basis, of 28.7 percent an adjusted basis, it would be 27.8 percent. And the gross margin shown on this on the supplemental slide on a GAAP basis, was, because of the reclassification down to 37.5%. On an adjusted basis, it's 38.1. It is our goal in MAP to Growth to get those on a reclassified adjusted basis gross margins north of 40% and to stay there. Okay. Thank you. Our next question comes from Richard O'Reilly from Rovere Associates. Please go ahead. Two quick questions. The guidance for the first quarter, what is the adjusted base earnings that we should be comparing with. You reported $0.76, but now if you're excluding investment gains or losses, what's what's that number? It's just so we have a right base. Yes. Last year in fiscal 'nineteen, I believe we had a pretty de minimis amount of, investment income. So yes, Richard, you know what, we'll, we'd be happy to get that to you offline and we'll provide it with anyone else, but we'd have to go back and look at that Yeah. Okay. But it's minimum if it's minimum, it's yeah. The adjusted EBITDA we reported in Q1. Okay. Like I said, it was just a small amount of Second question, on the, the co op, spray paint line change, is that your brand or is it a private label change? That's our those are our consumer segment brands. Okay. Fine. So something we can see in the store. We can see the, the impact in the store. Okay. Absolutely. Okay. Fine. Okay. And did you give the name of that? I forget what you have said before. Sure. It's a broad collection of rustoleum spray paint products, from their traditional stocks, Russ. Some of their general purpose spray paint. Well, no. Did you give the name of the of the of the co op? I'm I'm sorry. Ace. That's what I thought. Okay. Fine. Okay. Great. And we are showing no further questions. I will now turn the call back to Frank Sullivan for closing comments. Paula, thank you. Thank you very much for your participation on our call today. We look forward to hosting a number of the equity analysts follow RPM and a number of investors at a luncheon at the New York Stock Exchange this year. Our prepared remark including comments about their new that will begin at 12 15 and is, accessible at www.rpminc.com. And we look forward and reporting on another good quarter of progress when we report the first quarter of our 2020 fiscal year on October 2nd. Thank you and have a great day. Thank you, ladies and gentlemen. This concludes today's conference. Thank you for Pating, and you may now disconnect.