RPM International Earnings Call Insights: Raw Materials, Kemrock Recovery

On Wednesday, RPM International Inc (NYSE:RPM) reported its first quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Raw Materials

Unidentified Analyst – Credit Suisse: This is actually (indiscernible) calling in for John. So, quick question on raw materials, could you talk a little bit about what raw materials did sequentially and year-over-year in the quarter and your outlook for the rest of fiscal 2013?

Frank C. Sullivan – Chairman and CEO: As Rusty commented, excluding the one-time charges, we saw about a 50 basis point improvement in gross margins year-over-year. We are continuing to see improvement between our cost and price on raw materials. We are on a FIFO inventory accounting basis, so you typically see the impact of raw materials up or down a quarter or so later than most of our peers who are on LIFO. So we are experiencing pretty good improvements now, which will be reflected in our results in the coming quarters.

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Unidentified Analyst – Credit Suisse: And then also specific to TiO2, last quarter you noted a decline in some of your TiO2 costs. I guess looking through the end of the calendar year, do you expect stable prices for TiO2 through year-end or potentially further declines?

Frank C. Sullivan – Chairman and CEO: At the moment the TiO2 has been on a declining trend but it’s still higher compared to last year at this time, and as far as the outlook goes, I don’t have any comment on that.

Unidentified Analyst – Credit Suisse: Okay got in, and then last quick one if I may. So there’s recently been a fairly sizable acrylic acid outage out in Asia. Do you expect to see any impact to your acrylic purchasing from this or do you think the impact is kind of more limited to that specific region?

Frank C. Sullivan – Chairman and CEO: We’re not hearing of any impact here, and I think given some of the sluggishness in demand and what we’re seeing in price trends we would expect to see continued improvements in raw materials as it related to our prime margin or gross margin, although we’ll certainly keep an eye on that. But it’s not on our radar screen in terms of what we’re seeing here in North America and we are not an acrylic purchaser in Asia.

Kemrock Recovery

Aleksey Yefremov – Bank of America Merrill Lynch: This is Aleksey Yefremov for Kevin. Frank, a follow-up question on Kemrock, could you maybe describe a little bit more, what kind of end markets deteriorated for that business and also what are the prospects of potential recovery in the business?

Frank C. Sullivan – Chairman and CEO: The situation at Kemrock is really not one of end markets; it’s really one of capital structure and liquidity. Indian manufacturers not unique to Kemrock’s base, their own version of the U.S. 2008 and 2009 with a massive rise in interest costs for floating rate capital structures, which lot of midsize Indian companies had through the banking system. Interest rates in Kemrock’s case went from 8% of 14% in six months and the vast majority of their debt was floating rate bank debt. The rupee declined pretty significantly and like a lot of Indian manufacturers and this is true of Kemrock, a lot of their raw material costs were procured from overseas and paid for in dollars or euros, so that negatively impacted their margins. As a result of that essentially had a liquidity crisis and then their stock, which was thinly traded started being driven down. To the best of our knowledge, the business has stabilized at about $100 million to $120 million. The challenge this year for them was sufficient cash flow to meet the orders they had in hand. Their end-used markets are FRP grating into all types of structures. They’re leader in the Indian market for FRP and resin wound pipe for water installation and water movement, still a very good business and they are leaders in blade manufacturing for windmills in India and that business is still going well. There is still a lot of orders there for wind farms that are on the books and paid for with major wind producers for the Indian marketplace. So, all of those businesses remained strong. The final issue that Kemrock had that really was their biggest challenge which I think is a significant hope for recovery in one form or another is and kind of what put them in the circumstance was a license from the Indian government to produce carbon fiber. They put $100 million into a new carbon fiber facility that was not yet up and running, and so that’s really what put their capital structure in jeopardy and then unfortunate circumstances really put them in a tough spot. So, the long and short of that is, is that their business is stabilized and they are pursuing various strategic alternatives around their business as well as around certain of their divisions.

Aleksey Yefremov – Bank of America Merrill Lynch: So do you see opportunity for RPM to help them improve the capital structure?

Frank C. Sullivan – Chairman and CEO: I wouldn’t speculate about the future of Kemrock other than the principal promoters there. Again Kalpesh Patel, who in either years took his business from $8 million to $180 million did not have the type of financial sophistication with his CFO staff which has been changed to avoid a kind of an unforeseen circumstance relative to the market but he is not a guy given the challenge he has faced that I would count out given what he has proven, he can do with his business over the last eight years. and so I guess that’s as much as I would leave it. We still have a 23% ownership in that business and I think we are hopeful that they’ll get through this challenge and it will be interesting to see what the final chapters of Kemrock look like in the coming years.

Aleksey Yefremov – Bank of America Merrill Lynch: Turning to North America in your press release you mentioned weakness in the roofing business. Maybe can you talk about that, what’s driving that and also how – what are the prospects of improvement there?

Frank C. Sullivan – Chairman and CEO: There is really three components to the $11 million charge that we took; one is to wrap up on profitable contracts. The Tremco Roofing business has been highly successful in the U.S. and Canada, has the best sales force in the industry and for many years and we will continue to do contracting work where we are applying Tremco materials. International expansion efforts really were led by contracting because we were not manufacturing materials overseas. It did not prove to meet our profit targets. We are unwinding those projects. We had a U.K. office that was the center of specifications and projects and contracting that is being closed. The former President of the roofing business retired in May, and agreed to stand in a consulting capacity and we have a new leader of that business who is part of driving the changes.

Aleksey Yefremov – Bank of America Merrill Lynch: So, if I may follow-up there is no weakness in the core North American business because that’s how I read the press release?

Frank C. Sullivan – Chairman and CEO: There are aspects of our contracting work that in a division that was doing contracting around buildings and roofs, unrelated directly to the application of Tremco Roofing Materials and much of that is being wound down as well, and that’s what’s resulting in declining revenues in general; that piece and mostly the global roofing piece what is resulting in declining revenues in the Tremco or the Building Solutions Group roofing division through four months.