# To the Shareholders,
Associates and
Customers of RPM

_Source: `DeepSeekOCR_Ardian_pruned_1k/basic-materials-specialty-chemicals/NYSE_RPM_2018/NYSE_RPM_2018.mmd` · pages 5-11_

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To the Shareholders,
Associates and
Customers of RPM:
Fiscal 2018 will prove to be a seminal year in RPM's seven-plus decades of consistent growth, success and superior long-term value creation. In the midst of slowing growth over the prior couple of years, and disappointing results for RPM in fiscal 2017, we engaged in discussions with our board and some of our large, long-term shareholders. The objective was to chart a course that would position RPM for continued growth and value creation over the coming decades.

## COMPARISON OF CUMULATIVE TOTAL RETURN
(Among RPM International Inc., the S&P 500 Index and a Customized Peer Group)

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2-YEAR CUMULATIVE TOTAL RETURN
(2016-2018)

Over the last two years, RPM's results have stalled due to several factors outlined on page 3. RPM is implementing a Margin Acceleration Plan (2020 MAP to Growth) that will position the company to resume its run of sustained growth and reward shareholders.

## 13-YEAR CUMULATIVE TOTAL RETURN (2003-2016)

From fiscal 2003 through fiscal 2016, RPM's cumulative total return outperformed the broader market by 123% and its peer group by 37%. These impressive results were generated while maintaining an active pension for its employees and paying $1.4 billion of pre-tax capital to resolve a legacy asbestos liability.

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## WHO WE ARE

We began by taking an unfiltered look at who we are as a company. On a base level, we are a manufacturer and marketer of specialty coatings, sealants and construction materials. We are ranked as the fourth largest coatings company in the world by Coatings World magazine and number 528 on the Fortune 1000 list. Our products are brand leaders, as measured by market share and recognition. They are trusted to protect and beautify people's most important assets – from their homes and businesses, to iconic structures worldwide.
Beyond the surface, it was clear that what makes RPM unique is our growth-oriented, entrepreneurial operating philosophy. Customer-centric functions are maintained at the operating level, including sales, marketing, customer service, research and development, and technical support. This approach keeps us in close partnership with our customers, enables us to identify their needs, and allows us to quickly respond with innovative products and services that solve their problems. These key aspects of who we are will not change.

## WHERE WE ARE

Over the long term, this entrepreneurial philosophy has served RPM and our shareholders well, as demonstrated by our track record of consistent sales and earnings growth and the ability to increase our cash dividend for 44 consecutive years. This is evident when you consider our total shareholder return (TSR), which takes into account stock price appreciation and reinvestment of dividends. Starting in fiscal 2003, when the current leadership team of RPM took the helm, through fiscal 2016, RPM's TSR outperformed the broader market by 123 percent and our competitive peer group by 37 percent (see chart on page 2).

This performance was generated while retaining an active pension plan for our employees, something few public companies still provide. In fact, just 5 percent of Fortune 500 companies still offer a traditional defined benefit plan to their newly hired employees. This is down from 50 percent in 1998. At the same time, we managed through the crushing pressure of the SPHC legacy asbestos liability that cost us and our shareholders $1.4 billion of pre-tax capital. This was a heavy load to carry, but we did so by maintaining our focus on growth. Our final payment to the SPHC trust was made in May 2018. Going forward, this frees up significant capital that we can invest in our businesses and return to shareholders.

We're very proud of this track record of growth and success. At the same time, we're well aware that our performance has not been up to par the last couple of years. After seven consecutive years of strong growth and stock price appreciation, our results began to stall in fiscal 2017. This was largely due to the accumulated impact of foreign exchange headwinds, global industrial market declines, and the uncharacteristically poor performance of our Synta and Kirker acquisitions. Additionally, we did not fully leverage our top-line growth to the bottom line during this period. The stock market has recognized this, resulting in a TSR that has lagged the S&P 500 and our peers over the last two years (see chart on page 2).

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## MAINTAIN
ENTREPRENEURIAL GROWTH CULTURE

INCREASE
OPERATIONAL EFFICIENCY

STREAMLINE
OPERATING STRUCTURE
& LEADERSHIP

MAINTAIN
ENTREPRENEURIAL GROWTH CULTURE

INCREASE
OPERATIONAL EFFICIENCY

MULTIPLE ERP SYSTEMS REDUCED TO 4

✓ Responsive
✓ Flexible
✓ Innovative

Manufacturing Excellence

G&A

4 PROVEN SEGMENT LEADERS

3
SEGMENTS
6
GROUPS

REALIGNED TO

4
SEGMENTS

CURRENT STRUCTURE

REALIGNED STRUCTURE

INDUSTRIAL SEGMENT
CONSUMER SEGMENT

PERFORMANCE COATINGS GROUP
CONSTRUCTION PRODUCTS GROUP
CONSUMER PRODUCTS GROUP

RUST-OLEUM GROUP

SPECIALTY PRODUCTS GROUP

PERFORMANCE COATINGS GROUP

ILLBRUCK GROUP

## MARGIN ACCELERATION PLAN

The graphic above outlines the primary initiatives of our 2020 MAP to Growth (Margin Acceleration Plan), which we began to implement in fiscal 2018 and will continue to carry out through calendar 2020.

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# 2020
MAP
TO
GROWTH

The result of our discussions and related strategic analysis is our 2020 MAP to Growth (Margin Acceleration Plan) initiative. Through the implementation of the 2020 MAP to Growth, where appropriate, we will focus on scale to unlock more resources to better serve our customers, while creating greater value for our shareholders.

## THE PRIMARY ELEMENTS OF THE
2020 MAP TO GROWTH INITIATIVE ARE TO:

## Streamline Operating Structure & Leadership:

We will be realigning our businesses, which are currently organized under six operating groups (Performance Coatings, Tremco, ilbruck, Rust-Oleum, DAP and Specialty Products) within three reportable segments (Industrial, Consumer and Specialty). By the end of calendar 2020, the new structure will be composed of four segments (Performance Coatings, Construction Products, Consumer Products and Specialty Products). The four segments will be led by four proven and capable operating presidents who will report directly to me. This reorganization will enable us to better manage our assets and improve synergies across the enterprise.

Increase Operational Efficiency: Thus far, we have implemented expense reductions, closed two consumer manufacturing facilities, closed two industrial locations and restructured our global legal team. We are also in the process of consolidating IT systems and related administration to four segment centers of excellence from what, in the past, has been numerous different systems and many business profit and loss centers. As for our manufacturing facilities, we have historically left the management of these fixed assets to our individual operating companies. Going forward, we will manage them as RPM assets and, in the process, we will institute manufacturing excellence and continuous improvement disciplines across the entire organization. Leading the charge in these efforts is Timothy Kinser, who was named RPM vice president of operations in April. Additionally, we will identify more opportunities to connect our various businesses so we can leverage their technologies and brands across our global network with greater impact.

Maintain Entrepreneurial Growth Culture: While we undertake these operating improvement initiatives, it is important to note that our past success was a result of RPM having the best and most consistent growth profile in our industry. Sustaining organic growth is the hardest thing to achieve in business. That is why companies that produce steady growth are rewarded by investors with high valuations. So, as we execute on the operating improvement initiatives in the 2020 MAP to Growth program, we will do so while maintaining the key elements of our growth-oriented, entrepreneurial culture. We will continue to keep customer-focused functions at the operating level, enabling us to remain responsive to customer needs, flexible to changing market conditions, innovative in product development, and passionate about competing and winning in the markets we serve.

Our goal is to position RPM to be a larger and more valuable business, while driving sustained growth for decades to come. Between now and the end of the 2020 calendar year, we will keep you up to date on the progress of our 2020 MAP to Growth initiative.

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## Operational Improvement Bolstered by
New Directors and Committee

In order to bolster our plan for operational improvement, we have appointed two new independent directors to our board, Kirkland "Kirk" B. Andrews and John M. Ballbach, and formed an Operating Improvement Committee (OIC) of the board. Both Kirk and John are highly experienced executives, and we expect that they will add immediate value to the board and the OIC to the benefit of our shareholders.

Kirk brings strong portfolio and operational review and execution experience to the board. He currently is chief financial officer of NRG Energy, Inc., a Fortune 500 integrated power company. He leads all of NRG's corporate financial functions, including treasury, financial planning, accounting, risk management, tax, insurance, supply chain and investor relations. He also plays an instrumental role in formulating and executing NRG's capital allocation strategies and in financing the company's repowering initiatives. Kirk has also helped lead NRG's transformation plan, announced in 2017, which is targeting significant cost and operational enhancements across the company. He joined NRG in 2011 after a successful 15-year career in investment banking.

John is a seasoned chemicals and coatings industry executive. He was an independent director at Valspar from 2012 until the company's sale in 2017. In addition, he is a former corporate officer of Valspar, having served as president and chief operating officer from 2002 to 2004 and in various senior management positions since 1990. He most recently served as an operating advisor with Clayton, Dubilier & Rice, a private equity investment firm, from 2014 to 2017. In connection with this role, he also served as chairman and director for Solenis, LLC, a specialty chemicals manufacturer and portfolio company of Clayton. From 2007 to 2012, John served as chairman of VWR International, LLC, a leading global laboratory supply and distribution company, and as president and CEO from 2005 to 2012.

The OIC will focus on operational and financial initiatives to create and enhance shareholder value. Certain initiatives will center around setting and achieving new margin targets and optimization of our balance sheet, including streamlining working capital and implementing new capital allocation guidelines and capital return plans. We have engaged AlixPartners, LLP, a leading outside management consulting firm, to work with the OIC on this review. We expect to provide a comprehensive update on these efforts, which will work in conjunction with our 2020 MAP to Growth initiative, by no later than November 30, 2018.

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Changing of the Guard with Senior Leader Retirements
As a result of the more streamlined senior leadership structure that has developed from the 2020 MAP to Growth program, our President and Chief Operating Officer Ronald A. Rice decided to take early retirement from the company on July 6, 2018. Ron has been a key member of our leadership team for more than 20 years and played a vital role in overseeing our day-to-day operations and building our business. During his tenure as president and COO, he was instrumental in RPM increasing its annual revenue from \(3.6 billion in fiscal 2008 to \)5.3 billion in fiscal 2018.

In addition, David P. Reif retired as president of our Performance Coatings Group and Thomas E. Reed retired as president of the Rust-Oleum Group. Dave joined RPM through the acquisition of Stonhard in 1993, where he served as chief financial officer. Subsequently he served as chief financial officer of RPM, president of our StonCor Group of operating companies, and in June 2000 was appointed president and CEO of the Performance Coatings Group, which he led to tremendous top- and bottom-line growth. Tom joined Rust-Oleum in 1983 and became CEO and president in 2006. He was responsible for the day-to-day operations of all Rust-Oleum companies, leading the charge on the company's commitment to customer intimacy and innovation. Through his leadership, Rust-Oleum developed into one of the world's best-known and trusted consumer paint brands.

We are grateful to these three outstanding leaders for their contributions to RPM's growth over the years and wish them all the best in their future endeavors.

As Dave and Tom depart, they are being succeeded by well-groomed executives. Assuring that we cultivate highly effective leaders of the future, we have promoted our vice president of public affairs, Randell McShepard, to the additional role of chief talent officer. In this position, he will spearhead senior leadership development opportunities companywide.

"As we execute on the operating improvement initiatives in the 2020 MAP to Growth program, we will do so while maintaining the key elements of our growth-oriented, entrepreneurial culture. We will continue to keep customer-focused functions at the operating level, enabling us to remain responsive to customer needs, flexible to changing market conditions, innovative in product development, and passionate about competing and winning in the markets we serve."

— Frank C. Sullivan, Chairman and CEO, RPM International Inc.

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Now that I've laid out where we're headed, I'd like to step back and share our results for our 2018 fiscal year ended May 31.

NET SALES
$5.32b
2017: $4.96b

NET INCOME
$337.8m
2017: $181.8m

DILUTED EPS
$2.50
2017: $1.36

Sales were strong across all three of our business segments and were well balanced between organic and acquisition growth. Our consolidated net sales increased 7.3 percent to \(5.32 billion in fiscal 2018. We were particularly pleased with this top-line performance in light of the winter weather that extended through nearly two-thirds of the fourth quarter and inhibited outdoor coatings projects, especially in our consumer segment. Contributing to sales were nine acquisitions made in fiscal 2017, as well as the positive effect of foreign currency, which had been a headwind the past three years. Cost reduction efforts, rigorous SG&A spending discipline and the implementation of price increases helped to offset higher raw material costs that weighed on gross profit margins. On a consolidated basis, net income increased 85.8 percent to \)37.8 million and diluted earnings per share were up 83.8 percent to $2.50 from a year ago. Consolidated EBIT was $501.2 million, up 53.1 percent from last year.

Fiscal 2018 included restructuring, inventory-related and other charges of \(62.2 million. Fiscal 2017 included a \)12.3 million charge for closing a Middle East facility, a severance charge of \(15.0 million, and a goodwill and an intangible asset impairment charge of \)188.3 million. Excluding these items, net income for the year increased 18.3 percent to \(394.2 million, diluted EPS increased 18.2 percent to \)2.92 and EBIT increased 3.8 percent to $563.4 million.

Sales in our industrial segment improved 9.8 percent to \(2.81 billion in fiscal 2018 and were driven by solid performance in North America and most of our international markets, particularly Europe, while our Latin American businesses struggled. As anticipated, our companies serving the oil and gas industry saw steady growth over the course of the year as that market rebounded. We expect this positive trend to carry over into fiscal 2019. Industrial segment EBIT improved 11.9 percent to \)281.3 million. Margins were impacted by higher raw material costs, which we are offsetting with the implementation of price increases. In fiscal 2018, the segment reported restructuring and other nonrecurring charges of \(10.0 million, as well as fiscal 2017 charges of \)20.0 million to exit a Middle East business and for severance expenses. Excluding these charges, industrial segment EBIT increased 7.4 percent to $291.3 million.
Consumer segment sales increased 4.4 percent in fiscal 2018 to \(1.75 billion. Driving this sales growth were last year's acquisitions of Touch 'N Foam in the U.S. and SPS in Europe. Organic sales, however, were hampered by extremely unfavorable weather conditions in North America, the segment's largest market, which resulted in sluggish consumer takeaway. Our retail partners reacted by reducing inventory, further compounding the problem. EBIT increased 192.3 percent to \)172.6 million from a year ago. The segment reported restructuring and inventory-related charges of \(47.3 million in fiscal 2018, as well as a goodwill and intangible impairment charge of \)188.3 million and a severance charge of $4.3 million in fiscal 2017. Excluding these charges, EBIT was \(219.8 million versus \)251.6 million a year ago. Contributing to the decline in EBIT was an extremely fierce environment among our competitors and big box retailers that made it difficult to implement meaningful price increases to offset rising raw material costs. Despite these challenges, our consumer segment continues to win the ground war and take market share from competitors, as evidenced by Rust-Oleum's agreement with The Home Depot to exclusively carry Varathane Classic interior wood care products at nearly 2,000 stores nationwide. In hindsight, fiscal 2018 will be remembered as a challenging performance year for our consumer segment, but also a very important year strategically, in relationship to continuing market share gains and, related to the restructuring and product line rationalization that will enable the segment to better optimize manufacturing, focus on key products and improve working capital going forward.

Specialty segment sales in fiscal 2018 increased 5.5 percent to \(752.5 million. Top-line sales growth was driven by our restoration equipment business, which experienced a sales boost due to three hurricanes last fall, as well as solid performances by our powder coatings and wood finishes businesses. This helped to overcome lost sales from last year's closure of an unprofitable European business and a patent expiration at our edible coatings business. The segment generated very strong improvement in EBIT, up 14.0 percent to \)122.4 million, largely as a result of SG&A cost savings actions. The segment reported ERP implementation costs of $1.4 million in fiscal 2018, as well as a fiscal 2017 severance charge of $2.9 million. Excluding these charges, specialty segment EBIT increased 12.3 percent to $123.8 million.

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