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Why RPM International’s Specialty Segment Earnings Margin Expanded

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RPM International’s Specialty segment

RPM International’s (RPM) Specialty segment has the lowest revenue share in RPM’s overall revenue. This segment had a revenue share of 14% in fiscal 1Q18, the same as in fiscal 1Q17. The segment reported revenue of $188.50 in fiscal 1Q18 as compared to $176.30 in fiscal 1Q17, implying revenue growth of 6.9% on a year-over-year basis.

The segment’s revenue growth was primarily due to the acquisition growth of 4.1%, and organic growth contributed 3.0% while foreign currency transaction had an adverse impact of 0.2%.

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Segment’s EBIT and margins

In fiscal 1Q18, RPM’s Specialty segment reported EBIT (earnings before interest and taxes) of $33.0 million as compared to $30.4 million in fiscal 1Q17. This implies growth of 8.9% on a year-over-year basis. The increase in EBIT was primarily driven by the reduction in the segment’s selling, general, and administrative expenses as a percentage of sales. The closure of unprofitable manufacturing facilities in fiscal 2017 also helped to reduce the segment’s SG&A expenses.

As a result of controlled SG&A expenses, the Specialty segment’s EBIT margin rose by 30 basis points in fiscal 1Q18 to 17.5% as compared to 17.2% in fiscal 1Q17.

Outlook

RPM expects low-to-mid-single-digit revenue growth in the Specialty segment, and the controlled SG&A expenses within the segment are expected to drive the margins up going forward.

Investors looking to invest in RPM International indirectly can invest in the Vanguard Materials ETF (VAW), which invests 0.80% of its holdings in RPM. The other holdings of the fund include Monsanto (MON), Lyondell-Basell (LYB), and Sherwin-Williams (SHW), which have weights of 5.8%, 3.8%, and 3.5%, respectively, as of October 4, 2017.

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