US RPM shares fall 3% after cutting sales outlook on soft housing

HOUSTON (ICIS)–Shares of US-based RPM were trading down by 3% on Thursday after the company lowered its sales outlook for its fiscal year because of lingering softness in residential markets, with the CEO remarking that housing turnover in the country is at multidecade lows.

The coatings, adhesives and sealants producer expect consolidated sales to rise by the low single digit percent range in its fiscal year, which ends on 31 May 2024.

Earlier, it expected consolidated sales to increase by the mid-single digit percent range in fiscal 2024.

RPM maintained its guidance for a low to mid teen percentage range increase in earnings before interest and tax (EBIT).

CONSUMERS FAVOR TRAVEL OVER HOME DIY
RPM sales to residential markets are under pressure part because consumers are choosing to spend their money on services such as travel and entertainment instead of do-it-yourself (DIY) home projects, RPM said.

The shift away from DIY projects should cause sales to decline in RPM’s Consumer Group during its fiscal third quarter, which ends on 29 February 2024. RPM did not provide guidance for the full fiscal year.

The Consumer Group owns such brands as the coating Rust-Oleum and the sealant DAP, which are sold in retail stores.

Another segment hurt by this trend is the Specialty Products Group. Some of its businesses sell products to original equipment manufacturers (OEMs) that make furniture, doors, windows and cabinets. Its sales should also decline during the fiscal third quarter.

LOW EXISTING HOME SALES HITS SALES
Sales in the Specialty Products Group and the Consumer Group are also hurting because of slow housing turnover in the US.

Sales of existing homes are low because of the rapid rise in rates on 30-year mortgages. These have swung from a low near 2.5% to nearly 8% at its recent peak.

Consumers who financed their homes at lower rates are reluctant to sell them if they have to finance a replacement house at a much higher rate.

Slow housing turnover drags down sales for both of these segments because consumers tend to undertake home repairs prior to putting their home on the market. Consumers who buy the homes also undertake renovations.

If consumers are selling fewer homes, demand will fall for the paints, coatings, sealants and other construction products used in these projects.

Higher rates and consumer preference towards services do not bode well for paints, coatings, adhesives and sealants that are used in renovation projects at existing homes.

These products are important end markets for the pigment titanium dioxide (TiO2), the binder ingredient vinyl acetate monomer (VAM) and various solvents used to make paints and coatings, such as butyl acetate (butac), butyl acrylate (butyl-A), ethyl acetate (etac), glycol ethers, methyl ethyl ketone (MEK) and isopropanol (IPA).

RPM does not expect the outlook to change until possibly the spring.

RECOVERY DEPENDS ON LOWER RATES
Sales for these construction projects could get a jolt if mortgage rates continue to fall.

Already, the prospect of the Federal Reserve lowering its benchmark interest rate has caused 30-year mortgage rates to fall by more than a point to the current 6.62%.

“The halt of the most aggressive in history interest rate rise campaign by the Fed will start to produce some better results,” Frank Sullivan, RPM CEO said. He made his comments during an earnings conference call. If the interest rate environment modestly improves, then that should benefit RPM’s Consumer DIY businesses and its Specialty Products Group.

Federal Reserve board members and bank presidents expect the benchmark rate could fall by 0.75 point in 2024, representing three quarter-point cuts.

If that forecast holds true, then mortgage rates could continue declining and that could encourage more homeowners to put their houses on the market.

OTHER SEGMENTS BENEFIT FROM RESHORING, INFRASTRUCTURE
RPM expects that its other two segments will continue to benefit from infrastructure projects and manufacturers moving capacity closer to their customers, a phenomenon known as reshoring.

Those two segments are RPM’s Construction Products Group and Performance Coatings Group.

Focus article by Al Greenwood

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