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Innovation: The Ticket to Growth in a Mature Market



One of the great joys of the coatings industry is that there is always an opportunity to build a better mousetrap



By Tom Sullivan



Published August 10, 2005
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The featured speaker at RPM's management meeting last October was Ram Charan, an educator, management consultant and lead co-author of the book, Every Business Is a Growth Business. One of his central themes was that there is no such thing as a mature business. Reflecting on Mr. Charan's comments, I was thinking that for most of my 40-plus year career, the coatings industry has always been considered "mature," at least statistically.

RPM Leadership Then and Now
Founder Frank C. Sullivan in 1970 (left) and current president and CEO, Frank C. Sullivan (right).

Yet, in this "mature" industry, RPM International was able to grow sales for 55 out of its 56 years in business and to grow operating income in 54 of those 56 years. In both cases, our growth rates over the years have usually exceeded the averages in the key industry sectors in which we participate.

To me, one of the great joys of the coatings industry is that there is always an opportunity to "build a better mousetrap" or to meet an unfulfilled need that will allow a business to create or dominate a niche in a very non-homogenous industry.

RPM International was founded on just such a premise. My father, Frank C. Sullivan, started the original Republic Powdered Metals in 1947 around a unique asphaltic aluminum coating called Alumanation. Our Tremco unit still makes the product today and its sales continue to grow.

While the product was certainly important, the value system installed by my father was much more so. He always said, "Hire the best people you can find. Create an atmosphere to keep them. Then let them do their jobs."

After my father died in 1971, Jim Karman-my longtime business partner, close friend and retired RPM vice chairman-and I began making acquisitions using the same value system. We recognized that the coatings industry was consolidating, and we would have to be either a buyer or a seller.

Living History
Republic Powdered Metals, the precursor to RPM, was founded in 1947 on the strength of a roof covering product called Alumanation (left). Frank C. Sullivan referred to it as the "Coca-Cola of roof coatings." RPM's Tremco unit still manufactures Alumanation today.

Founding Philosophy Applied to Acquisitions
We opted to buy, and applied my father's value system to these acquisitions. Over the past 30 years, we have made nearly 100 acquisitions, with 58 occurring since 1991. Some have been the well-publicized deals such as Tremco, Rust-Oleum and DAP. But many more have been bolt-on product line acquisitions, such as Flecto and Epoxi-Tech, and stand alone independent niche businesses, such as Day-Glo and TCI Powdered Coatings.

Most of these acquisitions were family businesses, where the owners needed or wanted to sell for estate planning or other personal reasons. We offered them a chance to cash out, but to continue running and growing their businesses as part of RPM. Our goal is to be the best home for entrepreneurial companies in the markets we serve. I am extremely proud of the fact that our six senior operating managers all joined the company through acquisitions between 1984 and 1999. All of these individuals have seen substantial increases in their responsibilities since the acquisitions and their annual compensation reflects their heightened roles.

In our acquisition program, we try to do deals that have an exceptional chance of working out for both parties. Our criteria as we look at potential companies to join RPM include:

Complementary management goals and philosophy;
Participation in an industry or industry segment that we know;
Recognized leading brand in larger markets, a dominant player in a smaller niche market or a unique product line that can be quickly integrated into an existing RPM operating unit;
Gross margins at 40% or higher;
Strong management team that wants to grow their business further within RPM;
Cash flow positive and earnings accretive; and
A geographic focus on North America and Europe.

Innovation Brings Market Leadership
It is very difficult to become a major brand, to dominate a niche or to develop a unique product line without innovation. Over the years, RPM has been a heavy participant in all three of these situations, both through internal development and acquisition.

Two of our larger consumer businesses, Rust-Oleum and Zinsser, were both founded around the premise of an innovative product, but their legacy of innovation accelerated rapidly under RPM.

The original Rust-Oleum product, Stops Rust, was launched in 1921 by Admiral Robert Fergusson, following many years of research to develop a rust-preventative paint based on fish oil, but with no odor. When RPM acquired Rust-Oleum in 1994, it was the dominant brand of rust-preventative consumer coatings, yet offered only six colors of a single product line. Since then, Rust-Oleum has become the North American category leader in small package paints, offering decorative, general purpose, specialty purpose and rust-preventative coatings. In the process, it's more than tripled sales in nine years.

William Zinsser introduced bleached shellac to the U.S. market in 1849 and our Zinsser Co. unit continues to be the largest marketer of shellac-based products in the U.S., including the ubiquitous B-I-N primer sealer. During the ensuing century and a quarter prior to acquisition by RPM, Zinsser developed or acquired one-of-a-kind products to meet distinct consumer needs, including DIF wallpaper stripper, the first enzyme-based stripper; Bulls Eye 1-2-3, the first interior/exterior water-based primer sealer; and Shieldz wallcovering primer. Since being acquired by RPM in 1986, Zinsser has furthered its leadership in primer-sealers, wallcovering preparation and removal products and mildew-proof coatings and it, too, has seen sales increases that significantly outpace the industry.

Until fairly recently, RPM's acquisition process was driven by the corporate office. But we've realized that if we are going to reach our growth goals, our six major operating platforms need to conduct their own acquisition programs, applying RPM's proven principles. We are multiplying our acquisition resources.

Taking Care of Business
RPM's leadership style lets operating companies function with autonomy. Above are some of the RPM's key leaders. Left photo, (l-r): John J. McLaughlin, president, DAP Group; Michael D. Tellor, president, Rust-Oleum Group and Robert Senior, president, Zinsser Group. Right photo (l-r): Charles G. Pauli, president, RPM II Group; Jeffrey L. Korach, president, Tremco Group and David P. Reiff III, president, StonCor Group.

Time-ly Message
The company's first ad was placed in Time magazine in 1949. At left is a
Rust-Oleum advertisement from 1952.

Value of Innovation Not Limited to Sales
Innovation, of course, doesn't just apply to growing the top line. During the 2000 and 2001 fiscal years ended May 31, RPM went through painful restructuring and reorganization programs. For RPM, these were innovations in their own right, designed to restore earnings momentum, which had slowed in the late 1990s. Frank C. Sullivan, the company's chief executive officer and my son, was instrumental in both programs and led the reorganization process. RPM has posted nine consecutive quarters of improved operating earnings since the restructuring ended.

One key priority during my final year as CEO in fiscal 2002 was to restore the strength of our balance sheet, which had become highly leveraged following the acquisition of DAP in 1999 and essentially precluded us from the acquisition market. Through a successful follow-on public equity offering and a record $191 million in cash from operations in fiscal 2002, bolstered by another $161 million in cash from operations in fiscal 2003, we restored liquidity to the balance sheet. As a result, we have been back in the acquisition game in earnest for more than a year now.

Well-Positioned for Future Growth
In our final years as executive officers of RPM, Jim Karman and I sought to build a new management team capable of growing the business well beyond where it is today. We believe we have been successful.

In Frank Sullivan, we have a seasoned CEO who participated in approximately $1.7 billion of our growth since 1989. In his role, Frank brings both a strong financial discipline and adherence to the core values of RPM, including the founding philosophy concerning people and acquisitions. He's a supporter of RPM's dividend policy, which has generated 29 consecutive years of increases in the cash dividend. He also embraces the need to give back to our communities.

At the corporate office, Frank's eight-person management team averages 45 years of age and nine years of service to RPM. Operating leaders of RPM's six focused growth platforms have an average age of 56 and an average tenure of 28 years with RPM and predecessor entities. Operating management keeps RPM close to its customers, and is responsible for product development, marketing and manufacturing. This combination of energy and experience will continue to keep RPM at the forefront of innovation in the coatings industry.

Reflections on Innovation in Coatings
One of my great joys as CEO of RPM for more than three decades has been the opportunity to get to know so many exceptional people at the helms of companies in our industry, large and small. A large part of my personal focus during that time was on acquisitions, and for every deal we closed, we probably talked to ten other companies, giving me a pretty good perspective on the quality of people that make up this business and who have succeeded in generating growth in a "mature industry."

Tom Sullivan, chairman of RPM International Inc., is currently serving as chairman of the National Paint and Coatings Association.




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