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A Bright Shinning Star



Basic Materials
Chemical Manufacturing
NYSE: RPM

RPM, Inc.

2628 Pearl Road
Medina, OH 44258
Phone: 330-273-5090

Frank C. Sullivan
President and
Chief Operating Officer

Interview Conducted By:
Diane Reynolds, Co Publisher

CEOCFOinterviews.com
August 7, 2002

Bio of President/Chief Operating Officer
FRANK C. SULLIVAN
Frank Sullivan received his B.A. degree from the University of North Carolina as a Morehead Scholar in 1983. From 1983 to 1987, Mr. Sullivan held various commercial lending and corporate finance positions at Harris Bank and First Union National Bank prior to joining RPM as a Regional Sales Manager at its AGR Company joint venture. In 1989, he became the Company’s Director of Corporate Development. He became a Vice President of the Company in 1991, Chief Financial Officer in 1993, Executive Vice President in 1995, President in 1999, and was elected to the additional post of Chief Operating Officer in October 2001. Frank is the son of Thomas C. Sullivan, Chairman and CEO, and grandson of Frank C. Sullivan, Sr., founder of RPM.

CEOCFOinterviews: RPM, Inc., please tell my readers a little bit about this company, how it got started and where it is headed.

Mr. Sullivan: RPM was founded by my grandfather, also Frank Sullivan in 1947 and after a career in the industrial maintenance coatings business as Republic Powdered Metals.  He founded the business in his garage, named it Republic Powdered Metals, hoping that people might mistake it for a larger neighbor, Republic Steel, a company called Republic Powdered Metals.   The first product line was a product called Alumanation.  It was an asphalt-based aluminum pigmented roofing coating and maintenance coating and that really carried the business for many years.  In 1963 we first went public, basically on an intrastate basis within the state of Ohio.  We had our initial public offering on a national basis in 1969.  In August of 1971, my grandfather passed away very suddenly leaving an $11 million dollar business, that was half owned by the Sullivan family and half owned by the public, to my then 34-year old father, Tom, who has really been the leader of this business from our growth over the past 30 years to approximately $2 billion dollars in annual revenues.  RPM, Inc. was formed in 1972 as a holding company and about half of our growth since that time has been through the acquisition of other leaders in the industrial or consumer specialty coatings or sealant areas.  Today, RPM is approximately $2 billion dollars in revenues, about half of that is in high performance industrial coating for concrete or structural steel and construction chemical products.  Our businesses are typically the leading brand in large global markets, like our Carboline business, which is the most specified high performance coating for structural steel and corrosion control globally, our Stonhard business, which is the number one producer globally in industrial polymers for floors or concrete.  The other half of RPM is basically a North American consumer business.  Our leading brands include Rustoleum, DAP caulks and sealants, Zinsser primers and specialty coatings, and Bondo automotive repair materials, just to name a few.  That is RPM today.

CEOCFOinterviews: Between the industrial maintenance products and the consumer products, where is the majority of the growth?

Mr. Sullivan: It has been evenly divided between the two.  It has been a balance that we pursued for two decades and it has been an excellent strategy for us and I think this last year was a good example.   Our industrial businesses are somewhat more impacted by the movements in the economy, where our consumer businesses seem to be steadier.   For instance, in the last year a number of our industrial businesses have seen some softening, especially from the recession in North America, typically in the manufacturing sector, but with the housing boom and a strong consumer, our consumer segment has more than managed to make up for any short fall in the industrial segment, so it’s been a nice mix.  In the last year, we have seen certainly stronger growth out of our consumer business, but over time the two have been relatively even.

CEOCFOinterviews:  With the big boom in new construction, it’s interesting how that market has moved so quickly.

Mr. Sullivan: It’s been tremendous.  The opportunities for the housing market in this country are extraordinary, it’s the foundation of the wealth of the average citizen, there is a ton of equity in homes. It has been a great market for us; however, we do not produce products that generally go into new home construction.  Most of our products are maintenance and repair products, so certainly the housing boom of the 90’s has created a huge inventory of homes and new homeowners who will be using Rustoleum or other products to maintain or fix up their homes.  That bodes well for our consumer segment for continued years to come.

CEOCFOinterviews: I think one of the main concerns in the market, on the resale end, is that mold problem that many people are dealing with today. Do you deal with that issue?

Mr. Sullivan: We are.  It’s certainly an issue in housing; it’s been an issue going back to biblical times.  There is a reference in the bible to mold in grain storage areas so it’s not a new issue for the world.   When it comes up, wherever there is water that can seep into a home because of bad flashings or a broken HVAC system, things like that, our products can be used to mitigate water intrusion. In our industrial segment we own a business called Kop-Coat, and they are a leader in additives to treat wood and lumber.   We are working with a lot of producers of OSB and a number of synthetic wood products to provide an additive that is a fungicide and a mold resistant product.  So there are areas we are working on there that will help solve that problem in the future for new homes and also be a new growth area for us.  It is certainly an issue that manufacturers of building products and air conditioning systems, and contractors need to be aware of.

CEOCFOinterviews: You have 68 plants in 17 countries, how can you control the quality when it’s spread out so widely?

Mr. Sullivan: We have a rather unique operating philosophy that was laid down by my grandfather when he started RPM.  Our mission statement is simple—“Hire the best people you can find, create an atmosphere to keep them and let them do their jobs.”  Our corporate staff is 45 people, from our chairman to our receptionist, and we allow a great deal of autonomy in the management teams that run the RPM companies.  I think if you lend people trust and responsibility, most often you get the same in return and it has worked very well for us.  We do have a very sophisticated global consolidation system that is tied into the general ledger of each one of our companies, so we can pull the financial data for an income statement, balance sheet and cash flow statement from any of our legal entities globally, and that helps us to stay on top of the performance of our companies against budget, as well as to monitor their ability to continue to grow the business.   When we bump into issues, we are quick to get on a plane or phone to try and understand what is going on.  We also actively travel in this office, whether it be our audit staff, our chairman or me, to our businesses to keep a close idea of what is going on.   On the other hand, we pretty much leave the customer interface up to the businesses themselves.

CEOCFOinterviews: Now, as the market grows, as we said the demand is becoming greater with the boom in the housing, are you able to keep up with the demand?

Mr. Sullivan: We completed our first ever restructuring over a year ago.    In August of 1999, we announced a restructuring which was the first in RPM’s history and it was pretty much focused on our operations and manufacturing.  We had built up some excess capacities as well as some inefficiency, basically through the acquisition program that had been part of our growth.  We have today a team that is bringing MRPII Class A manufacturing disciplines into RPM’s plants driving efficiencies across all of our manufacturing operations and it is making a big difference in terms of our overall costs and our margins by lowering the cash investment required for our businesses, both on a PP&E and a working capital basis.  That restructuring resulted in the consolidation of 17 manufacturing facilities, and it was completed in May of 2001. This year our results are up dramatically, as a result of our restructuring.  Even though our revenue performance overall has been flat, year-over-year, sales among our consumer businesses have been up 6% or 7%, while our industrial businesses have been impacted by the recession and have been down by 4% or 5%.  Our cash flow from operations increased from $74 million dollars last year to about $190 million dollars this year.  A big part of that swing has been attributed to the restructuring and a real focus on operations and efficiency.  We are in good shape going forward to keep up with revenue growth and to put that demand more efficiently on our bottom line.

CEOCFOinterviews: Because you are addressing on a global basis do you see outside of North America growing quicker right now, would you want to address that market a little bit closer?

Mr. Sullivan: We really don’t see any global growth in foreign markets right now.  While the recession in the manufacturing sector has been hit hard in North America and has gotten all of the headlines, our European business has been rather steady, but not terribly dynamic. Our presence in a number of developing markets has hit some trouble this year. We have a small operation in Argentina, some business in Brazil, and given the economic disruptions in Argentina, those businesses have had a difficult time.  We export a fair amount of business to Japan and while that business has been steady, it is not growing because the Japanese market is not.  There have not been any areas in the manufacturing segment with any real strength, although we are starting to see today, both in Europe and in North America and other parts of the world, a firming up of these areas that have been soft for over a year and a half now. 

CEOCFOinterviews: What about new products?  Is it through R&D or through acquisitions?

Mr. Sullivan: It’s a combination.  Given the independent entrepreneur focus of RPM and our operating philosophy, our R&D efforts are very decentralized.  That has been by design and we have looked in the past at the benefits of consolidating our product development and coordinating it more aggressively, and decided to manufacture our decentralized product development strategy.  Our companies tend to be leaders in problem solving and bringing out new products, but in our case it has been very much from the market back into our lab, as opposed to from our lab out to our markets.  I can give you a couple of examples.  Years ago, Archer Daniels Midland was transporting corn syrup for Coca Cola in stainless steel tanker cars and rail cars. It was very expensive and they were working with our business to develop an FDA-approved tank lining for carbon steel tanks that would allow them to transport the same FDA grade liquids in a tanker or rail car that was one third the cost of stainless steel.  We solved that problem for them and cut their costs and their investments in rail cars by two-thirds. Having solved that problem, we put a new name on that product, and looked globally to sell it to anyone who was having the same issue, who was investing heavily in a rather fragile stainless steel tanker or rail car, to transport FDA grade liquids. We have been very effective in developing new products by being known as a problem solver in the marketplace, and taking those problems back into our lab and developing a solution for them and that has been very effective for us.

CEOCFOinterviews: That is a very interesting way of going about it.   Instead of you going to your lab and trying to think of ways to improve things, you actually take an issue back to your labs and find solutions to fix it. 

Mr. Sullivan: Absolutely.   I can give you one more quick example—about ten years ago, INTEL was having a lot of problems with a lot of their cold weather plants with some static electricity build-up, where workers were actually damaging the micro electronics they were working with. Our Stonhard operation worked with INTEL to develop a static dissipating floor, basically a polymer for concrete floors that had special metal filament in it that takes the static electricity out of your body through your feet into the floor and out of the building.  Today, we are the global leader in the electronics industry for static dissipating floors.

CEOCFOinterviews: Someone looking at this company now is saying where can they go next? 

Mr. Sullivan: We have had issues like everyone else. RPM had a string thru 1997 of 50 straight years of growth in revenues, earnings and earnings per share. We actually extended that consecutive growing streak into our 1999 fiscal year, finishing that record with 52 straight years, the longest running record of consecutive growth in sales and earnings of any publicly traded company in the United States.  It ended in 2000 with our restructuring and we had to deal with the operating issues as I mentioned earlier.  As a result, our stock, which had provided a 25% compounded rate of return for more than 20 years to our shareholder base, really stalled, and with the movement of capital from the manufacturing base and other segments to the dot-coms and technology in 2000, we saw our stock fall from about $16 down to about $8. With the restructuring behind us and a shift in confidence in the market, and I think, quite honestly, the realization that we not only make real things, but also real money, our stock moved up at about 70 or 80% in the last year, back to the $15 or $16 dollar range. So if you have been a short-term holder of our stock, we have outperformed any market index by a wide margin in the last year. If you have been a long-term holder of our stock, we are back to where we were three years ago. With the manufacturing economy picking up and this restructuring behind us, I think there is a lot of opportunity for us to grow our bottom line through internal growth and through some efficiencies we have been working on for the last couple of years. We have completed 90 acquisitions over the last 30 years, but because of the restructuring, we have taken a 2-year hiatus from the acquisition market and we are just now gearing up to pursue acquisitions again, both in our consumer markets and in our industrial markets much more aggressively.  So, from that perspective, we are much more excited and I think there is a lot more growth to come.

CEOCFOinterviews: What is it you are looking for in an acquisition?

Mr. Sullivan: Typically, we are looking for, first and foremost, the leading brands in consumer or industrial markets. Brands like Rustoleum, DAP or Zinsser, and in the industrial markets, names like Carboline or Tremco, which is the North American leader in construction sealants and waterproofing.  Basically, the leading brands, with good margins and a good management team that can stay and run that business as part of RPM.  We are also looking aggressively at product lines or businesses that we can acquire and integrate into our existing businesses to leverage the strengths that we have either in our industrial markets, through distribution and with contractors or end-users, or in North America through the great relationships we have with retailers like Home Depot, Lowe’s and Wal Mart. 

CEOCFOinterviews: How quickly can you integrate the acquisition before you can see the results?

Mr. Sullivan: For stand-alone businesses, we pretty much get them integrated in about six or eight months, in terms of pulling them into administrative, purchasing, financial reporting, cash management, and treasury, as we do with any business or a product line that will be integrated into an existing company. Typically, it takes about 12 to 18 months from the completion of the acquisition to the point at which we have completed any of the manufacturing or distribution integration and certain other operational issues.  It takes a lot of attention to details in terms of the efficiencies you are looking for with the consolidations, taking care at the same time to see that there are no interruptions in your supply of product or the service to your customer base.  

CEOCFOinterviews: Now what about competition? Do you have any and how are you dealing with that?

Mr. Sullivan: We have competition all over the place.  Many of our businesses compete against privately held companies or divisions of corporations globally. It is still a very fragmented industry and there are a lot of opportunities in some of our industry areas where there isn’t a heavy capital requirement for new start-ups.  The competitive landscape depends on what segment of RPM you are talking about, whether the consumer end or industrial, but these are both highly competitive industries and I suspect they will continue to be competitive, but you will also continue to see us have a significant amount of consolidation for many years.

CEOCFOinterviews: What would you say is unique about this company over your competitors?

Mr. Sullivan: I think the unique thing about RPM is our operating philosophy and our infrastructure.  We have competitors out there who have grown through acquisitions and have integrated or consolidate everything.  We do not.   Half of our businesses are still run by second or third-generation family members of the families that we bought the businesses from.  We have 28 independent reporting units that report into 6 groups that make up the operations side of RPM. So, our operating philosophy and the amount of autonomy and really the entrepreneurial focus we have is what makes RPM rather unique to our competitors.  We push as much of the decision-making and the budget decisions down to the operations as we can and it has made us unique and it has been a key to our success and to our track record.

CEOCFOinterviews: What do you feel is attractive about RPM to a potential investor?

Mr. Sullivan: I think today we have demonstrated our ability to complete this restructuring. If you look at our cash flow from operations it has more than doubled from year to year.  We have a lot of opportunity to get our margins back to where they were three or four years ago and you will see that margin expansion continue for the next three or five years, so we do not need a lot of organic growth to really drive meaningful bottom line improvement.  The other exciting growth opportunity is that, with a very strong cash flow and the distractions of the restructuring now behind us, and a recently completed equity offering that has strengthened our balance sheet, we are in a good position to again start making acquisitions very aggressively, which will accentuate that internal growth and bottom line growth.  There are a lot of opportunities for us to start hitting on more cylinders than we have in the last couple years, to start generating top line growth, and bottom line growth and we are very excited about that.  When you combine all this with a stock that is trading at only 13 or 14 times earnings and delivering a 4% cash dividend yield, we are a very compelling investment right now.

CEOCFOinterviews: It sounds like you have a plan and it is neatly put together.