# TO THE SHAREHOLDERS, ASSOCIATES AND CUSTOMERS OF RPM

_Source: `DeepSeekOCR_Ardian_pruned_1k/basic-materials-specialty-chemicals/NYSE_RPM_2019/NYSE_RPM_2019.mmd` · pages 4-10_

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TO THE SHAREHOLDERS, ASSOCIATES AND CUSTOMERS OF RPM:

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Frank C. Sullivan
Chairman and Chief Executive Officer

In last year's letter to you, I laid out the blueprint of an operational improvement plan, the 2020 MAP to Growth (Margin Acceleration Plan) program, that we were about to undertake in order to position RPM for continued growth and profitability. We had achieved decades of success under our decentralized business model and, over this time, the company grew in size, scale and complexity. We recognized that RPM had reached the point where a center-led approach in select areas of the business was required to get it to the next level of growth.

The primary elements of the 2020 MAP to Growth program are to increase the efficiency of our operations – particularly in the areas of manufacturing, procurement and administration – and to streamline our operating structure and leadership, all while maintaining our successful entrepreneurial growth culture. The plan focuses on scale in order to unlock more resources to better serve our customers, while creating greater value for our shareholders.

## 2020 MAP to Growth Wave 1 Savings Ahead of Plan

We have implemented the foundational elements of the 2020 MAP to Growth operating improvement plan that we announced last year with great success. We moved with urgency and have made significant progress toward the cost saving and share repurchase targets we laid out on November 28 of last year. Over the course of the plan, we targeted $290 million in annualized savings across three waves set to conclude in December of 2020. The first wave, which was completed on May 31, 2019, targeted $83 million in annualized cost savings. We are on pace to exceed that target by 23% with annualized savings of $102 million. Approximately $52.7 million of that amount was realized in our fiscal 2019 financial statements.

In addition, we are ahead of schedule with the goal we laid out to repurchase $1.0 billion of stock by May 31, 2021. With two years remaining to achieve that target, we are halfway there via stock repurchases and the redemption of our $205 million, 2.25% convertible bond.

You can read more about our 2020 MAP to Growth achievements on pages 6-12 of this report.

## New Chief Restructuring Officer to Spearhead 2020 MAP to Growth

Taking the reins from me on leading our operating improvement initiatives will be Mike Sullivan, who is our new vice president of operations and chief restructuring officer. He joined RPM on June 24, 2019. While I certainly appreciate his last name, we are unrelated. Mike replaces Steve Knoop, who passed away recently after a brief, but courageous, battle with cancer. Steve was the key architect of our operating improvement plan. Moving forward, we're in very good hands with Mike, as he was closely involved in the analysis and development of our 2020 MAP to Growth program while working as a consultant. I'm confident that through his leadership we will successfully complete our 2020 MAP to Growth plan and drive continuous improvements across RPM for years to come.

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FIGHT
FIND THE
POSITIVE
REPEAT

Steve was an inspiring leader
with a truly unique combination of skills –
courageous in vision, sound in judgment,
decisive in action and Dutch in temperament.

## RPM REMEMBERS STEVE KNOOP

It is with a very heavy heart that RPM announces the passing of Stephen J. Knoop, our dear friend and colleague, after a brief battle with cancer. During his battle, his family found inspiration in the motto, "fight, find the positive and repeat." Steve thought that motto was also appropriate for RPM as we take on the daily challenges of implementing our operating improvement plan.

Steve, known as RPM's go-to problem solver for the company's biggest challenges, had been serving as our Head of Group Restructuring. In this role, he was the chief architect and leader behind our 2020 MAP to Growth operating improvement program, which is positioning RPM for long-term sustained growth.

Steve has been a vital part of the RPM family since he joined the company in 1996 as director of corporate development. In this position, Steve took on the responsibility for our acquisition growth strategy and went on to lead this function for 23 years. During this timeframe, Steve was instrumental in completing more than 180 transactions and brought thousands of employees around the globe into the RPM family of companies.

He later accepted the position of CEO of our Specialty Products Holding Corp. (SPHC), where he helped achieve the resolution of a legacy liability. Following the reconsolidation of SPHC into RPM in January 2015, Steve led the RPM Specialty Products Group as president. During his tenure with RPM, the company grew from a $1 billion business to $5.6 billion in revenue today.

Throughout his career at RPM, Steve was an inspiring leader with a truly unique combination of skills – courageous in vision, sound in judgment, decisive in action and Dutch in temperament. He was fiercely loyal to his colleagues, friends and family. While he is gone too soon, his spirit remains in the hearts of his family, friends and colleagues.

## BOARD TRANSITIONS

After many years of illustrious service to RPM and our shareholders, two of our independent directors, General John P. Abizaid and Craig Morford, stepped down from the board this fiscal year to take on other positions.

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Abizaid resigned on April 12, 2019, following his confirmation to serve as the U.S. ambassador to Saudi Arabia, a role of significant national and international importance. As a director, he brought a unique perspective to RPM, particularly in the areas of strategy, operations, international affairs and leadership development. Abizaid was elected to the RPM board of directors in 2008 after a distinguished military career during which he rose from an infantry platoon leader to become a four-star general and the longest-serving commander of U.S. Central Command. After retiring from the U.S. Army in 2007, he served as senior partner of JPA Partners LLC, a Nevada-based strategic and analytic consulting firm.

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Morford stepped down on May 1, 2019, after retiring from Cardinal Health as chief legal and compliance officer and accepting a new executive position at ExxonMobil, which does not have senior leaders serving on other public company boards. Morford had served on the RPM board of directors since his election in 2013. During his time as a director, Morford's business acumen and deep experience in a variety of legal and compliance matters brought valuable insight to our organization. He joined Cardinal Health in 2008 following a distinguished 20-year career with the U.S. Department of Justice.

We're grateful for the significant contributions that John and Craig made while serving on RPM's board, and we wish them the best.

Following their departure, our board will be comprised of 12 members. With the appointments of Kirk Andrews and John Ballbach last year, we believe RPM's board remains sufficiently staffed in the key skill sets and expertise that are necessary for strong corporate governance.

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## 2019 Fiscal Results Benefit from 2020 MAP to Growth

For fiscal 2019, our consolidated sales increased 4.6% over the prior year to \(5.56 billion. In achieving this, our operating companies did what they do best – they grew the top line despite challenging economic conditions in Europe, our second-largest market, and an exceptionally wet spring that slowed painting and construction activity in North America, our largest market.

Impacting the bottom line during the fiscal year were higher costs for raw materials, freight, labor and energy. Benefits of the 2020 MAP to Growth operating improvement plan began to be realized during the fourth quarter and provided earnings leverage to the bottom line. On an adjusted basis, which excludes restructuring and other charges, our EBIT (earnings before interest and taxes) increased slightly to \(567.5 million from \)563.4 million a year ago. Excluding restructuring and other charges, as well as investment gains and losses, adjusted net income increased 2.0% to \(360.7 million and adjusted diluted EPS increased 3.4% to \)2.71 versus $2.62 last fiscal year. Please refer to our Management's Discussion and Analysis on pages 14-24 for more information on our financial results, including details by segment.

## Acquisitions Support Growth Objectives

During fiscal 2019 and early in fiscal 2020, we acquired businesses and product lines with combined net annualized sales of approximately $135 million. These acquisitions include the Mean Green product line; licensing for Roto-Rooter products; Strathmore and American Coatings product lines; Nudura Corporation; Siamons International Inc.; Schul International Co., LLC and Willseal LLC. These businesses are all strategic fits within our portfolio. More information about our acquisition program can be found on page 12. As part of RPM, we will accelerate their growth by leveraging our global sales, marketing and distribution networks, while also applying the principles of continuous improvement from our 2020 MAP to Growth initiative.

## Generating Value for Shareholders

Last October, our board of directors increased our cash dividend by 9.4% to \(1.40 on an annualized basis. This marked the 45 \( ^{th} \)  consecutive year we have increased our dividend to shareholders, a record only 41 other companies can match, according to the 2019 edition of the Mergent Handbook of Dividend Achievers. Annually increasing our dividend is one primary way we reward our long-term shareholders. This practice is reflected in our total shareholder return, comprised of share price appreciation and reinvested dividends, which has outpaced the S&P 500 by 27% over the past 10 years.

## Reclassification of Shipping

Beginning in the first quarter of fiscal 2020, we will change our classification of shipping costs paid to third-party shippers, by reclassifying these costs from selling, general and administrative expenses (SG&A) into cost of goods sold. This change will not impact EBIT. It puts RPM in line with how our peers and most other manufacturers classify shipping costs and will provide investors with a better point of comparison. Had this change been in effect in fiscal 2019, on an as-reported basis, our cost of goods sold would have increased by \(173.6 million to \)3.48 billion, while SG&A expenses would have decreased by the same amount to $1.60 billion. The result would have been a reduction of our gross profit margins by 310 basis points to 37.5% and an improvement in SG&A as a percent of sales by 310 basis points to 28.7%, which is on par with our peers.

## Segment Realignment to Drive Growth & Efficiency

Starting with our 2020 fiscal year, instead of reporting in three segments (Industrial, Consumer and Specialty), we will be reporting in four segments (Construction Products, Performance Coatings, Consumer and Specialty Products). This is a change that we mentioned would be coming in our annual report last year. The leaders of these businesses now have much of their compensation tied to the consolidated results of RPM, rather than the individual results of their business units. Under this structure, our group presidents and CFOs are more connected to the board, our investors and the overall strategy of the business. This improved alignment is critical to our future growth and success and better enables us

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to compete in the markets we serve. In addition, it provides our investors with greater transparency into the business and better comparability among our peers. We expect that this realignment will result in improved approaches to the market, increased sales and meaningful margin improvement. If these segments had been in place during fiscal 2019, their proforma sales would have been \(1.9 billion in the Consumer Group, \)0.7 million in the Specialty Products Group, \(1.9 billion in the Construction Products Group and \)1.1 billion in the Performance Coatings Group. You can learn more about our four segments on page 9.

## Fiscal 2020 Outlook Positive

For fiscal 2020, we anticipate Consumer Group sales to increase in the mid-single-digit range as a result of modest organic volume growth, the rollover impact of acquisitions and fiscal 2019 price increases, along with market share gains.

Specialty Products Group sales are expected to grow in the low-single-digit range due to projected geographic expansion and account penetration in our wood finishes businesses, which will be offset by flat growth in our edible coatings and restoration businesses.

Sales in the Construction Products Group are anticipated to grow in the mid-single-digit range, with higher growth expected in innovative technologies such as roof coatings, insulated concrete forms and differentiated service offerings. Offsetting this growth will be lost revenues as we rationalize lower-margin international businesses and product lines.

In the Performance Coatings Group, revenue is expected to increase in the low-single-digit range, driven by continued strength in corrosion control coatings, predominantly in North America, coupled with rollover impacts of price increases enacted in fiscal 2019. This is projected to be offset by general weakness in international markets and the impact of exiting certain product lines.

We will provide more detail on sales, EBIT and adjusted EBIT for our new segments as fiscal 2020 unfolds, quarter by quarter, starting with our fiscal 2020 first-quarter results, which will be reported on October 2, 2019.

For the 2020 fiscal year, we will continue to have significant restructuring activity related to our operating improvement plan. As we did in fiscal 2019, we will continue to adjust EBIT and EPS for restructuring and other related costs to provide a clear view of our operating performance.
On a consolidated basis, we project modest revenue growth in the range of 2.5% to 4% for fiscal 2020. While sales growth is anticipated to be relatively modest, largely due to global macroeconomic factors, we view this growth rate to be above market. It is expected that this sales growth will drive strong leverage to the bottom line as our operating improvement initiatives continue to take hold and we benefit from fiscal 2019 price increases. Further, we expect raw material cost inflation that has been persistent in recent years to begin to moderate. These factors are anticipated to result in adjusted EBIT growth in the 20% to 24% range and adjusted diluted EPS between \(3.30 and \)3.42 for fiscal 2020.

## Strong Foundation Established for Fiscal 2020

During fiscal 2019, we built the foundation for a very exciting future through our 2020 MAP to Growth plan. However, there's much more work to be done. A year from now, we will have raised the framework on our operating improvement plan by having executed on most of its key structural elements. Looking ahead to fiscal 2021, we will be putting in place the finishing touches necessary to complete the 2020 MAP to Growth operating improvement program.

It's an exciting time to be a part of RPM. Moving forward, we are committed to maintaining the entrepreneurial approach to the market that has been the hallmark of our growth and success. When combined with our vision to be a more connected and efficient company focused on operational excellence and continuous improvement, we are transforming RPM into a more competitive business with the ability to generate even greater returns for our shareholders.

I would like to express my gratitude to our associates worldwide for continuing to grow our business, while also taking on the challenges of implementing our operating improvement plan. It is your efforts, day in and day out, that drive our success. I would also like to thank our shareholders for their ongoing trust, support and investment in RPM.

Very truly yours,

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Frank C. Sullivan
Chairman and Chief Executive Officer

August 27, 2019