Executive Summary / Key Takeaways

• RPM International (NYSE:RPM) has fundamentally strengthened its operational foundation through multi-year MAP initiatives, significantly improving manufacturing efficiency, working capital, and SG&A structure, positioning it for substantial profitability leverage when market volumes recover.
• Despite recent macroeconomic headwinds, including unfavorable weather, soft DIY demand, and project timing delays impacting Q3 FY25 results, the company demonstrated resilience, achieving strong cash flow generation and maintaining solid margins relative to volume declines.
• Strategic portfolio management, including the pending acquisition of The Pink Stuff brand and a focus on high-growth niches like data centers and infrastructure, is expected to broaden market access and drive future growth, complementing organic initiatives like new product introductions and a platform approach to emerging markets.
• The balance sheet is in its strongest position in decades, enabling significant debt reduction, consistent dividend increases (51st consecutive expected), and increased capacity for opportunistic, value-accretive M&A, particularly in small to medium-sized strategic bolt-ons.
• While the near-term outlook remains cautious (flat sales, low single-digit EBIT growth in Q4 FY25) due to ongoing market uncertainty and temporary under-absorption from operational transitions, the full-year FY25 guidance anticipates low single-digit sales growth and mid-single to low double-digit EBIT growth, reflecting confidence in MAP benefits and expected volume improvement in the latter half of the fiscal year.

Setting the Scene: RPM's Foundation and Strategic Evolution

RPM International (NYSE:RPM) is a global leader in specialty coatings, sealants, and building materials, operating a diverse portfolio of businesses serving industrial, specialty, and consumer markets. For decades, RPM has built a reputation for entrepreneurial spirit and differentiated product offerings. This foundation has been significantly enhanced over the past several years through a deliberate and comprehensive transformation journey. Beginning with the MAP to Growth program in the fall of 2018, which exceeded its initial savings targets, the company embarked on a path to fundamentally improve its operational efficiency and financial structure. This effort continues with the multi-year MAP 2025 initiative, designed to further streamline business processes, reduce working capital, implement commercial excellence initiatives, and improve operating efficiency. Expected to be largely completed by the end of fiscal 2025, MAP 2025 targets $465 million in total savings, with potential to reach $500 million, building a structurally stronger organization poised for enhanced profitability.

RPM's core strategic approach is centered on a balanced portfolio, a strong focus on repair and maintenance activities (which provide resilience in uncertain economic times), and delivering high-performance solutions for demanding applications. By leveraging the operational discipline instilled by the MAP programs, RPM aims to translate these efficiencies into significant bottom-line leverage, particularly as market conditions improve and volume growth returns.

Competitive Landscape and Differentiated Technology

Operating across diverse segments, RPM faces a varied competitive landscape, including large global players like Sherwin-Williams (SHW), PPG Industries (PPG), and Axalta Coating Systems (AXTA), as well as numerous smaller, niche-focused companies. While RPM's overall scale and market share (estimated 5-7% in primary markets) are smaller than giants like SHW (15-20% share, $23B revenue) and PPG (10-15% share in industrial coatings, $18B revenue), RPM strategically competes by excelling in specialized product performance and niche market expertise.

RPM's competitive moat is significantly underpinned by its proprietary technology and deep application know-how. For instance, its advanced epoxy resins and corrosion-control coatings offer quantifiable advantages, providing 20-30% higher efficiency in corrosion resistance and 10-15% better durability in harsh environments compared to standard alternatives. These performance metrics translate into tangible benefits for customers, such as extended asset life and reduced maintenance costs, supporting RPM's ability to command premium pricing and achieve superior margins in these specialized areas. In flooring, RPM's solutions can offer 15-20% lower operating costs per unit in certain applications due to optimized chemical processes, and some products boast 20% faster curing times. In building envelope solutions, products like Nudura insulated concrete forms offer a 250-mile wind rating and improved energy efficiency, while fire-stopping solutions provide 20-30% better thermal resistance. The PureAir business, focused on HVAC refurbishment, competes effectively against the replacement market, particularly against equipment often manufactured outside the U.S.

Innovation is a continuous process at RPM, supported by strategic investments in R&D and dedicated facilities like the Innovation Center of Excellence in Greensboro and the Resin Center of Excellence in Belgium. These centers aim to drive new product development and process improvements across segments. The Greenbelt program, part of the MS-168 operational excellence initiative, empowers associates to identify and implement efficiency improvements, having already generated over $36 million in verified savings. Recent product innovations like the Mean Green refillable cleaner (awarded "best concentrate"), Rust-Oleum low odor aerosol paint, and the Gator Reptilion abrasive line (lasts 4x longer) demonstrate the ongoing focus on bringing differentiated solutions to market.

These technological advantages and innovation efforts are critical for RPM's "so what" for investors. They enable the company to defend its market position against larger competitors who may have broader distribution (like SHW's retail network) or greater R&D scale (like PPG's investment). By focusing on high-performance, specialized applications, RPM can pivot to growing markets like data centers and infrastructure, where its products' demanding requirements are valued, even when broader commercial construction is weak. This niche focus and technological edge help mitigate the impact of RPM's smaller operational scale, which can sometimes lead to higher costs per unit compared to larger rivals.

Customer and supplier dynamics also play a role. RPM's agile sales force has demonstrated the ability to shift focus to where growth exists, effectively navigating a challenging market. While facing inflation in raw materials (including potential tariff impacts on resins, solvents, packaging, and "predatory" pricing from U.S. steel producers) and labor, RPM's procurement strategy and manufacturing footprint (producing locally where possible) help manage these pressures, and pricing actions are taken to offset costs. Low customer inventory levels, particularly in the Consumer segment, also present an opportunity for quicker volume recovery when demand rebounds.

Financial Performance: Navigating Headwinds with Operational Discipline

RPM's recent financial performance reflects a company grappling with a challenging macroeconomic backdrop while simultaneously benefiting from internal operational improvements. For the three months ended February 28, 2025 (Q3 FY25), consolidated net sales declined 3.0% year-over-year to $1.48 billion, primarily due to unfavorable weather conditions impacting construction and restoration activities, coupled with negative foreign exchange translation. Year-to-date fiscal 2025 (nine months ended Feb 28, 2025) consolidated net sales were down a modest 0.7% to $5.29 billion.

Profitability in Q3 FY25 was pressured, with consolidated gross profit margin decreasing by 150 basis points to 38.4%. This was mainly attributed to reduced fixed-cost absorption resulting from lower volumes and ongoing material/labor inflation, partially offset by pricing and MAP 2025 savings. Consolidated SGA expense decreased in dollar terms but rose as a percentage of sales (34.0% vs 33.1%). Adjusted EBIT declined by $31.9 million year-over-year in Q3 FY25, bringing profitability closer to fiscal 2023 levels than the record highs of fiscal 2024, which benefited from milder weather.

Despite these headwinds, the year-to-date picture shows the resilience built by MAP 2025. YTD FY25 consolidated gross profit margin remained flat at 41.0%, as MAP 2025 savings offset inflationary pressures, unfavorable mix, and under-absorption. YTD SGA expense was slightly lower in dollars but marginally higher as a percentage of sales (29.4% vs 29.3%), impacted by the non-recurrence of a prior year business interruption insurance gain and a $4.4 million bad debt expense from a customer bankruptcy, partially offset by MAP savings. YTD Adjusted EBIT grew, demonstrating the underlying strength.

Segment performance was mixed. CPG saw organic sales declines in Q3 FY25 due to weather but achieved YTD organic growth driven by turnkey roofing systems and a focus on high-performance building systems like those used in data centers. PCG experienced slight organic declines in Q3 FY25 against a strong prior year but delivered YTD organic growth led by flooring and emerging markets, benefiting from infrastructure and high-performance building demand. Both CPG and PCG faced reduced fixed-cost absorption from lower volumes in Q3 FY25. Consumer generated modest organic growth in Q3 FY25 from new products and share gains but saw YTD organic declines due to persistent DIY softness and customer destocking, although international markets showed strength. SPG faced organic declines in Q3 and YTD FY25 due to weak specialty OEM markets and disaster restoration, partially offset by growth in food coatings.

Tax rates were notably favorable in FY25 YTD, with an effective rate of 14.7% compared to 25.5% in the prior year period. This was significantly influenced by favorable adjustments related to U.S. foreign tax credit carryforwards ($22.1 million in Q3, $21.8 million in Q2) and incremental credits from foreign earnings distribution in Q1, reflecting reassessments based on U.S. tax case law and strategic cash redeployment.

Strengthening the Balance Sheet and Capital Allocation

A major highlight of RPM's recent performance is its exceptional cash flow generation and the resulting balance sheet strength. Cash provided by operating activities reached a record $1.12 billion in fiscal 2024, a $545 million increase year-over-year. This momentum continued into fiscal 2025, with $619.0 million generated in the first nine months, although lower than the prior year period primarily due to changes in working capital components as inventory levels were managed down and payables increased.

The improvement in operating cash flow is a direct outcome of MAP 2025 initiatives focused on working capital efficiency. Working capital as a percentage of sales improved significantly, reaching 23.5% in Q4 FY24 (down 350 bps) and improving by 70 basis points in Q3 FY25 towards a 20% goal, driven by better management of receivables (DSO decreased to 61.9 days), inventory (DIO decreased to 85.2 days), and payables (DPO increased to 89.9 days).

This robust cash generation has enabled substantial debt reduction, with approximately $557 million repaid in fiscal 2024. As of February 28, 2025, the company's financial health is strong, with available liquidity of $1.21 billion and a Net Leverage Ratio of 1.56 to 1.00, well within covenant limits. This improved financial position provides significant flexibility for capital allocation.

RPM is committed to its long-standing capital allocation model: investing in internal growth, pursuing strategic acquisitions, consistently raising its dividend, and repurchasing shares. Capital expenditures totaled $158.9 million in the first nine months of FY25, supporting growth initiatives and operational efficiencies. The company anticipates its 51st consecutive annual dividend increase, a testament to its commitment to shareholder returns. Share repurchases are expected to be at least $50 million annually, with the capacity for larger, more consistent buybacks given the balance sheet strength. The M&A market is seen as improving, with multiples becoming more reasonable and a good pipeline of opportunities, particularly for small to medium-sized strategic bolt-ons that can leverage RPM's existing footprint and capabilities. A notable recent move is the pending acquisition of The Pink Stuff brand, expected to close soon, which offers significant market and channel expansion potential.

Outlook and Strategic Initiatives for Future Growth

RPM's outlook for the remainder of fiscal 2025 and beyond reflects a cautious but strategically focused approach in a persistent low-growth environment. For the fourth quarter of fiscal 2025, consolidated sales are expected to be flat year-over-year, with adjusted EBIT projected to be up low single digits. This reflects the ongoing impact of market headwinds and temporary under-absorption from operational transitions, but also an expected return to modest earnings growth.

The full-year fiscal 2025 guidance anticipates sales growth in the low single digits, consistent with prior guidance. Adjusted EBIT growth is projected in the mid-single digits to low double-digit range, a narrowing of the previous outlook. This guidance is based on the expectation that the mixed macroeconomic environment will continue, with ongoing inflation in labor and benefits, and moderate raw material cost increases in the second half, which pricing is intended to offset. Volume growth remains uncertain, influenced by factors like the trajectory of interest rates (impacting housing) and geopolitical uncertainties (tariffs, elections).

Strategic initiatives are central to achieving this outlook and driving future growth. The completion of MAP 2025 is expected to deliver approximately $100 million in annualized benefits in fiscal 2026, building on the structural efficiencies already gained. The Pink Stuff acquisition is a significant step to expand the Consumer segment's market reach into grocery, drug stores, and e-commerce, leveraging RPM's operational expertise. Continued focus on high-growth niches like data centers, infrastructure projects, and the platform approach to developing markets (Middle East, Africa, India, Southeast Asia) is expected to generate growth despite broader market weakness. Operational improvements continue through plant consolidations (12 recently consolidated or in process) and investments in new facilities (India, Malaysia, Belgium), which will enhance efficiency and capacity over the long term, although they may cause temporary under-absorption headwinds initially. SG&A streamlining and leveraging centralized functions are also expected to contribute to margin expansion.

The core investment thesis hinges on RPM's ability to leverage the significant operational improvements and balance sheet strength achieved through MAP 2025. While current market conditions are masking the full potential, any pickup in volume growth is expected to translate into substantial bottom-line leverage, driving strong EBIT and cash flow growth.

Key Risks and Challenges

Despite the progress made, RPM faces several pertinent risks that could impact its performance and outlook. Macroeconomic uncertainty remains a primary concern, with a persistent low-growth environment, potential for further deterioration, and the impact of political uncertainty and trade policies (tariffs) on customer confidence and spending decisions. External weather factors can significantly affect construction and consumer activity, as demonstrated by the impact on Q3 FY25 results. Inflation in raw materials and labor, while currently expected to be manageable with pricing, could accelerate unexpectedly, pressuring margins. Supply chain disruptions, such as port strikes, also pose a risk.

Specific legal proceedings, including the EPA notification regarding an alleged TSCA violation (with a proposed penalty of $6.2 million) and the ongoing lawsuit against a Consumer segment subsidiary (with a reduced judgment of $110.8 million plus interest currently under appeal), represent potential financial liabilities, although the company is vigorously disputing these matters and believes the likelihood of the full judgment being affirmed is not probable. Environmental remediation obligations also exist, though management currently believes they will not have a material adverse effect. The timing and magnitude of a recovery in residential end markets, heavily influenced by interest rates and housing turnover, remain uncertain and could impact the Consumer and SPG segments more than anticipated.

Conclusion

RPM International (NYSE:RPM) has undergone a significant transformation, emerging as a more operationally efficient and financially robust company thanks to its multi-year MAP initiatives. These programs have instilled a culture of continuous improvement, streamlined operations, and dramatically improved working capital and cash flow generation. While the current macroeconomic environment, marked by low growth, weather volatility, and sector-specific softness, is temporarily masking the full earnings power of these improvements, RPM is strategically positioned to capitalize on an eventual market recovery.

The company's differentiated technology and niche expertise provide a competitive moat, enabling it to pivot to resilient and growing markets like repair and maintenance, data centers, and infrastructure, even as broader construction and DIY markets face headwinds. Strategic acquisitions like The Pink Stuff are set to expand market access and leverage RPM's global operational footprint. With a strong balance sheet supporting continued investment in organic growth, opportunistic M&A, and shareholder returns, RPM appears fundamentally stronger. The investment thesis hinges on the realization of significant profitability leverage as volumes rebound, driven by the structural efficiencies already embedded within the organization and further enhanced by ongoing strategic initiatives and technological advantages. While near-term challenges persist, the long-term outlook is underpinned by a more resilient and strategically focused RPM, poised to deliver enhanced value when market conditions align.