Good morning, and welcome to RPM International's conference call for the fiscal 2020 Second Quarter. Today's call is being recorded and is also being webcasted, accessible live or for replay on the RPM website at www.rpminc.com. Comments made during this call may include forward-looking statements based on current expectations involving risks and uncertainties that could lead to actual results differing materially. For more information on these risks and uncertainties, please review RPM's reports filed with the SEC. References may also be made to non-GAAP financial measures. To help you understand these non-GAAP terms, RPM has posted reconciliations to the most directly comparable GAAP financial measures on the RPM website. At this time, I would like to turn the call over to RPM's Chairman and CEO, Mr. Frank Sullivan, for opening remarks. You may begin, sir.

Thank you, Brandon. Happy New Year, and welcome to the RPM International Inc. investor call for our fiscal 2020 second quarter ended November 30, 2019. On today's call with me are Rusty Gordon, RPM's Vice President and Chief Financial Officer; and Matt Ratajczak, our Vice President of Global Tax, Treasury, and also in charge of our Investor Relations. I'll kick off the call with some comments on our second quarter results and an update on our 2020 MAP to Growth operating improvement plan. Then Matt will review the second quarter numbers in more detail. Rusty will conclude our formal comments with our outlook for the remainder of fiscal 2020, and then we'll take your questions. For the third consecutive quarter, our earnings were up significantly over the prior year and ahead of expectations. Our strong bottom line growth in the quarter was primarily driven by our 2020 MAP to Growth program, which is enabling us to grow earnings at a faster rate than our peers. Last year, selling price increases coupled with moderating raw material inflation have also positively impacted results. Revenue was up 2.8% during the quarter. Organic sales growth was up 3.5% due to market share gains and some pricing activity. We are pleased with this organic growth given the aggressive product line rationalization taking place at RPM along with the current macro environment in which we are operating. In regard to our 2020 MAP to Growth operating improvement plan, the specific actions we have taken during the quarter included continuing to delayer management at different groups, consolidating manufacturing, and shedding low-margin product lines to free up resources for more value-added EBIT-accretive volume. So far through the 2020 MAP to Growth program, we have discontinued product lines on an annualized basis with revenues of approximately $60 million to $70 million. We also announced the closure of three plants in the second quarter along with one more plant completed so far in the early part of the third quarter. This brings our total to 19 out of a planned MAP to Growth program of 31 plant consolidations. On a consolidated basis, we realized 2020 MAP to Growth savings in the second quarter totaling about $31 million, $9 million of which came from manufacturing, $10 million from procurement, and $12 million from G&A. As you may recall, we realized savings during the fourth quarter of fiscal 2019 and the first quarter of fiscal 2020 of $21 million and $26 million, respectively. I point this out because these successive quarterly increases in the 2020 MAP to Growth operating improvement plan total savings demonstrate the strong momentum of earnings improvement that the program is generating. In terms of our operating improvement plan, we continue to make progress in our central-led procurement function as we better leverage our spending through a consolidation of material spending across operating companies. Our strategic suppliers are finding opportunities as well so they can grow their business with RPM by capitalizing on this recent change in our approach. Also on the procurement side, we continue to negotiate improved payment terms with the supplier base and have added some significant supplier financing programs that provide advantages for both RPM and our suppliers. In manufacturing, we are increasing productivity by closing underutilized plants while improving efficiency in the plants that we continue to operate, allowing us to reduce costs and improve service to our customers. We continue to invest in training our workforce and continuous improvement disciplines, and we are seeing good progress in our plants through our focused improvement team efforts. We are in the early stages of our accounting consolidation and expect to see the additional savings that it generates as well as savings from ERP consolidations in Wave 3 of our 2020 MAP to Growth program. I'll now turn the call over to Matt Ratajczak to review our results for the quarter.

Thanks, Frank, and good morning, everyone. Please note that my comments will be about our financial results for this year's second quarter and will be on an as-adjusted basis. We achieved record consolidated net sales of $1.4 billion, up 2.8% compared to the $1.36 billion reported during the second quarter of fiscal 2019. As Frank stated, organic sales growth was 3.5% or $47.7 million. Acquisitions contributed 0.6% to sales or $8.5 million, while foreign exchange continued to be a headwind that reduced sales by 1.3% or $17.5 million. As Frank also mentioned, our 2020 MAP to Growth program generated significant earnings leverage to the bottom line. Also contributing to the bottom line was the margin improvement resulting from pricing and some moderating raw material costs. EBIT increased 22% to $153.7 million for an EBIT margin of 11% versus last year's EBIT margin of 9.2%. Diluted EPS increased 31% to $0.76 per diluted share from $0.58 per diluted share a year ago. Share repurchases in the prior year's convertible bond retirement resulted in $0.02 per diluted share accretion for the quarter. Now looking at our performance on a segment basis. Sales in our Construction Products Group were very strong and increased 6.9% to $499.5 million. Growth was largely organic at 7.4% or $34.5 million, aided by a backlog from last quarter that resulted from exceptionally rainy weather that had slowed construction activity. In addition, we picked up market share in a somewhat lukewarm North American commercial construction market. Acquisitions contributed 1.2% or $5.8 million, primarily from the recent Nudura and Schul transactions. Organic growth was offset by foreign currency translation, which reduced sales by 1.7% or $8.1 million, and also by product rationalization, through which we are discontinuing product offerings that did not meet our more stringent margin or working capital standards. From a geographic perspective, European markets remained soft. We're combating this by reducing overhead and proactively managing our product mix to simultaneously improve earnings and margins. Our Latin American businesses generated good growth in constant currencies. Segment EBIT increased 43.3% or $18.7 million to $61.9 million. This improvement was largely attributed to volume growth, 2020 MAP to Growth savings, pricing, and the contribution from acquisitions. Sales in our Performance Coatings Group were $292.7 million, up a modest 0.3% from last year. Organic growth was $1.7 million or $4.8 million, driven by our businesses providing corrosion control and fireproofing coatings. As we noted last quarter, the segment was reorganized under a global brand management structure, which is beginning to bear fruit. It's enabling us to pick up market share in Europe and we experienced continued growth in North America, particularly in our Carboline product line. Impacting organic sales were strategic actions to exit soft international markets and low-margin product lines. Acquisitions added 0.1% to sales, while foreign exchange was $4.3 million or a 1.5% headwind. Segment EBIT increased 12.6% to $37 million. Much like last quarter, 2020 MAP to Growth savings provided this segment with strong earnings leverage despite essentially flat sales growth. Operating improvement initiatives included workforce reductions and the exit from two margin-dilutive businesses. Also contributing to the bottom line was pricing and improved product mix. In the Consumer Group, sales were strong, increasing 6% to $450.9 million. Organic sales increased 6.4% or $27.1 million, driven by new sealant and adhesive products that generated new accounts and market share gains. This segment also benefited from pent-up North American demand for exterior, small-project paints and coatings that was caused by the exceptionally wet weather during the spring and early summer. Sales in Europe, a large percentage of which are in the U.K., were soft due to the weak macroeconomic conditions in Europe and also uncertainty surrounding Brexit. Acquisitions contributed 0.6% or $2.5 million to sales, while foreign currency translation reduced sales by 1%. EBIT in the Consumer Group was $54.7 million, an increase of 26.8% over the prior year. This improvement was a result of actions taken, including the 2020 MAP to Growth initiatives, such as enhanced manufacturing disciplines and two plant closures, plus the price increases from last year. These programs are helping margins recover and trend higher towards historical levels. The Specialty Products Group's top line was impacted by a difficult comparison to the prior year when demand was elevated due to natural disasters. These included hurricane activity that boosted demand for our restoration equipment and more rampant wildfires that drove demand for our fluorescent pigments, which are used in fire retardant tracer dyes. In order to accelerate growth in the segment's top line, we have made recent management changes. Segment sales were $158.2 million. Organic sales decreased 10.5%, and foreign currency translation reduced sales by 0.6%. There was no impact from acquisitions. EBIT was $23.2 million during the quarter, which was lower than the $28.8 million of EBIT in the prior year. We continue to implement operational improvements to reduce costs in this segment, including the consolidation of the ERP system to one platform, and we also continue to invest in selective initiatives to revive growth going into fiscal 2021. We expect that the segment will see the benefits of these actions in the coming quarters. Lastly, a comment on cash flow. For the first half of fiscal 2020, cash from operations grew by 102.4% to $300.2 million compared to $148.3 million a year ago. This increase of $151.9 million was due to initiatives to reduce working capital and improve margins. I'll now turn the call over to Rusty for details on our outlook for the remainder of fiscal 2020.

Thanks, Matt. Looking forward to our 2020 third quarter, we expect to generate consolidated sales growth of 2.5% to 4%. We anticipate leveraging this sales growth to the bottom line for an estimated 25% to 30% adjusted EBIT growth, resulting in adjusted diluted EPS in the high teens to low $0.20 range. Historically, our third quarter generates our most modest results each year because it falls during the winter months of December through February, when painting and construction activity is slow due to cold and snowy weather. Additionally, I should point out that based on history, we expect roughly 20% of our annual consolidated sales to be generated during the third quarter, and a proportionate amount of this fiscal year's 2020 MAP to Growth savings will result during the period as well. Our fourth quarter results are typically the strongest as weather improves and work begins to accelerate on painting and construction projects. Based on our results for the first half and our expectations for the remainder of the fiscal year, we are reaffirming the full year fiscal 2020 guidance we provided on July 22, 2019, and maintained in our last earnings release in October. Our full year sales growth is anticipated to be on the low end of our previously disclosed range of 2.5% to 4%. As previously disclosed, we expect to leverage the positive momentum of the 2020 MAP to Growth operating improvement plan to our bottom line and are maintaining our projected adjusted EBIT growth in the 20% to 24% range. We expect this will result in adjusted diluted EPS between $3.30 and $3.42 for our full 2020 fiscal year. This concludes our formal comments, and we will now be pleased to take your questions.

And from BMO Capital Markets, we have John McNulty.

Congratulations. With regard to the construction business and the pickup that you saw there and the strong volumes, I guess when you look at the backlog of projects, how should we think about how much of that pent-up demand from the wet weather has already worked itself through and how much may still remain for the fourth quarter levels as they roll through the rest of the year?

Sure. In our roofing and waterproofing businesses, our backlog remains pretty robust. In the construction sealant business, we have seen some slowing, mostly around major projects. Our real strength is in broad distribution so that continues to be pretty good there. And the last comment I'll make is whether it's admixtures or roofing or waterproofing, we seem to be taking some market share because I think the growth that we're experiencing in North America is somewhat larger than what the market is delivering.

Got it. And then in the Consumer business, is there a way to figure out how much of the growth was tied to some of the channel filling that you may be doing at Lowe's and Ace where it is just normal demand and some of that, again, weather-related pent-up demand? Or is it tough to figure that one out?

No, John, it's the latter. It was a solid performance with good growth. There was no channel filling this quarter. Clearly, we benefited from the strong performance despite the challenges posed by the rainy and poor weather at the beginning of summer, which affected us as well as others. Some of the strength we saw in the second quarter in the Consumer business was likely due to projects that were delayed early in the summer because of the weather, which shifted into the latter part of summer and into fall, positively impacting our second quarter.

Got it. And then maybe just one last question. Just with regard to cash flow, you're running at a pretty high level this year given some of the work that you've done on the working capital front. I guess, as we think about the back half of the year and the uses for that cash going forward, how should we be thinking about that? It looks like you took down the $450 million note. I guess, I'm wondering how much may go toward buybacks as you're looking toward the back half.

Sure. As we communicated in the last couple of quarters, we expected to execute our share repurchase program a little more slowly and deliberately than the fast start we got out. As you'll recall, on our $1 billion repurchase commitment, we completed half of that inside of nine months. And so, I think the balance of it will play out over the next couple of years. You should expect to see a balance of free cash flow between share repurchases and debt repayment.

From G. Research, we have Rosemarie Morbelli.

Could you discuss what Matt Sullivan has discovered since he joined the firm regarding new opportunities and any changes in the focus from MAP, as well as the initial expectation of $290 million in savings?

Sure. I think Mike Sullivan has been instrumental in helping to take over and really run the manufacturing and procurement side of our MAP to Growth program in partnership with Tim Kinser and Gordy Hyde, who are both part of RPM for a long time and really part of the team that architected the MAP to Growth program with Steve Knoop. We have exited the AlixPartners relationship entirely and are utilizing some regional consultants who did our annualized spend in the early parts of the MAP to Growth program. We’re in the $25 million range, and now we're in the $5 million or $6 million range. So, I mentioned that as that gives you some sense of how we are internalizing some of the learnings that have come out of MAP to Growth. The work on the factory floor by our people is going really well, and it's a real tribute to them. And I think that the challenge that we face at the Board level even is in the next 12 months figuring out what elements of MAP to Growth are completed such that we wave the victory flag on plant consolidation and other elements, and then when elements of our MAP to Growth operating improvement initiative become permanent parts of how we operate.

And no change in the $290 million worth of savings over the period?

No. I think that as I've commented before, there are two assumptions we made upfront that in hindsight were a little bit incorrect. We assumed SG&A savings equally across the three waves. In fact, our biggest part of SG&A savings were in Wave 1, and as we get into the third and fourth quarter, we'll be annualizing those. And then the second part of SG&A savings, for all practical purposes, has been or will be deferred to the point that we complete the ERP implementations and some of the accounting consolidation that we're working on. The other piece of it is the working capital. There's more to come there. Again, our original assumptions that we would get some of that early proved to be incorrect because, by necessity, we needed to get the plant consolidation and the continuous improvement elements initiated and completed such that we will really start to benefit. So you'll see, I think, more in the next fiscal year and beyond in terms of working capital conversion to cash, which we're excited about. And as it relates to $290 million, we are on target. And I think post the original date of December 31, 2020, we will see ultimately more than $290 million as we benefit from some of these new initiatives in subsequent years.

Could you provide more details on Nudura, Schul, and any other acquisitions that are performing better than expected?

Sure. Without getting into too much in the way of specifics, in each case, these were product lines, particularly the Nudura and Schul acquisitions, that we could integrate into our Construction Products Group and bring the marketing and sales and distribution resources of our Construction Products Group to bear on those good businesses. And so the organic growth rates in those businesses are teens, mid- to high teens, and it's pretty exciting. I will tell you, historically, it was our 50% of revenue industrial segment that was the laggard at RPM in terms of margin performance and improvement. Having separated that into the Construction Products Group and the Performance Coatings Group, we've got two exceptional leadership teams. They're very strategic about the reorganization that we've affected, and we are seeing that in our results, and that's going to continue.

From Bank of America, we have Steve Byrne.

It seems you see some potential for exceeding the $290 million cost savings target. When you launched the MAP to Growth program, you also aimed for an EBIT margin of 16%, which is about 500 basis points higher than your position at the end of this quarter. Does that still seem achievable to you? Additionally, do you believe the 200 basis point year-over-year increases observed in the last few quarters are likely to persist based on the projects you have in progress?

Sure. As we've communicated the last couple of quarters, principally related to growth, the achievement of our absolute goals are probably 12 to 18 months further out than we had originally planned. The principal reason there is that, as you'll recall, in our November 2018 investor communication and based on our historic growth rates over the prior 5 and 20 years, we assume the combination of organic growth and acquisition growth of about 5.6% compounded over that three-year period. The first half of this year consolidated results are up 1.8%. And so it's that growth element that's not unique to us that has caused us to communicate in the last couple of quarters that our achievement of absolute goals both in terms of $1 billion of EBIT and the margin goals are going to be pushed out a little bit. But we are still making great progress, and I think when you look at our results versus the prior year and what we hope will continue to be outperformance to many of our peers. The MAP to Growth program is working well and on track.

And Frank, you indicated you're pulling in a lot of the resources internally to run this program. Have you revisited the scope of this restructuring program to determine whether there's any other levers to pull that you hadn't previously developed?

We are continuing to look to add elements to our pipeline. And I don't know that I would add much more to that, but it's an ongoing process. Obviously, the bigger opportunities get done first. But there continue to be opportunities in plant improvement areas that we continue to add, and it's why we're very comfortable in the years following the December 31, 2020, end date that we originally communicated, we would expect to see MAP to Growth savings that exceed the $290 million in total.

And then just one quick one. Wanted to ask whether your fireproof coatings and/or your fire retardant tracer dyes are fluorinated compounds. And if so, do you see any potential human exposure pathways where you could get sucked into the PFAS issues?

Yes. No, that's a great question, and the answer to that is no. We did pursue an acquisition for many years of a private company that would have been a good part of RPM, but they had some exposure there, and that was the principal reason that we did not acquire that business. It was subsequently acquired by a competitor. And so as you might imagine, given our past experience, we're highly sensitive to those issues.

From Fermium Research, we have Frank Mitsch.

Looking at the 180 bps of margin improvement, I imagine most of that is MAP to Growth, but can you expand upon the pricing versus raw materials interplay in terms of margin improvement? And what your expectations are in the back half of your fiscal 2020?

Sure. Of that organic growth, I think, on a consolidated basis, the way to think about it is an even split between unit volume and price. Obviously, that varies differently between our segments and our business units. We have greater challenges in our Consumer segment relative to some of their unique raw materials, metal cans and packaging, seedlac, a few other items. And so there's been some more challenges there than there have been in our industrial businesses, for instance. And we begin to annualize the largest effect of our price increases at the end of the third quarter and into the fourth quarter. And so you'll see the benefits of pure MAP to Growth savings and what volume we can generate hit our bottom line as we annualize that price activity in the spring.

All right. So that will start to moderate in the fiscal fourth quarter. And you talked a little bit about some of the market share gains in admixtures, etc. How do we think about that into the back half of the year and in 2021?

It's difficult to assess. Economic activity in Europe has been sluggish for the past couple of years, and that trend continues. There has been some slowdown in certain sectors in North America as well. However, the positive news is that a decision on Brexit seems imminent, and we believe that resolving this uncertainty will be beneficial, regardless of the immediate impact on the U.K. Additionally, it looks like the USMCA, a revised version of NAFTA, will be approved, which should also be advantageous. Overall, we are experiencing strong momentum in growth and market share within our Construction Products Group. Our Performance Coatings Group continues to perform exceptionally well, particularly with our Carboline corrosion control and fireproofing coatings, as well as our Stonhard flooring businesses. We are facing manufacturing challenges in the Consumer segment that we expect to resolve by the fourth quarter or into the summer. The most significant challenge lies in our Specialty Products Group, where we believe a lack of investment in some higher-margin businesses has created issues. As mentioned by Matt, we have undergone some leadership changes and are selectively investing in new initiatives. We anticipate seeing a return to positive sales and earnings growth in the upcoming fiscal year.

That's very helpful. Can you just expand upon the manufacturing challenges in Consumer?

We gained a significant amount of market share in specific areas, particularly in interior wood stains and finishes, as well as in our main small-project paint segment. After losing some share with one of our major home center customers, we have successfully regained it. However, we faced some manufacturing challenges, including issues that originated from our own operations. We experienced a shutdown in one plant due to environmental equipment failure that lasted a couple of weeks. Additionally, we are investing heavily in new aerosol capacity, the installation of which disrupted operations in another major plant. All these factors, including capacity constraints, contributed to some operational disruptions. While I may have shared more detail than necessary, we have worked diligently to ensure our customers were serviced despite these challenges, and we are focused on achieving efficiencies that will positively impact our bottom line.

From Baird, we have Ghansham Panjabi.

I guess, just going back to the 3.5% core sales growth for the second quarter. Can you just give us a sense, Frank, as to how it played out on a monthly basis? You touched on some of the pent-up demand, etc. How did that actually play out through the course of the quarter? And then just give us an early read on what you saw in December as well, if you don't mind?

We had a significant September in both our Construction Products Group and our Consumer Group, which we believe was somewhat higher than usual due to the weather impacts experienced in the first quarter. Looking ahead, the monthly performance has been inconsistent. October was not particularly strong, but November showed great strength, and we are optimistic about December. I believe we are on track for a strong forecast for the third quarter, which should also provide excellent leverage to our bottom line. As I mention this, I see it is snowing in Cleveland, Ohio, reminding us that the third quarter can still be affected by weather and other factors, especially given its typically low seasonality.

Okay. That's helpful. And then Matt made a comment on, I think, a lukewarm North American commercial construction market. Can you just expand on that? What do you see going into this year on a calendar year basis specific to North American commercial construction?

Sure. We are experiencing a continuation of trends, and we are optimistic that some of the trade-related uncertainties could stimulate industrial production in construction markets. The primary area where we notice a decline is in large projects, such as the Apple headquarters. We saw considerable success in Canada with a quick expansion in the cannabis industry for warehousing and production. However, we faced a setback with the cancellation of significant specifications at the New Mexico City Airport. So, if there is any disappointment or weakness, it stems from that area. On the other hand, our broad distribution, which mainly caters to maintenance, repair, and lower commercial construction, remains quite strong.

Okay. Just one final question. You provided the figures for MAP to Growth: $21 million in the fourth quarter, $26 million in the first quarter, and $31 million in the second quarter. How should we consider those numbers for the second half of the year on a quarterly basis?

Sure. There are two key points to address. First, we've annualized most of our SG&A savings, and the next phase of SG&A savings will occur in Wave 3, as I mentioned earlier. The improvements in manufacturing and plant consolidation will impact our P&L alongside sales. Consequently, the impact in Q3 will be smaller due to lower sales. However, you can expect the same or even greater leverage on the EBIT line compared to previous quarters, but that will correlate with the sales of the quarter. Then, in Q4, we anticipate a rebound in sales volume, which will follow this trend. We are maintaining solid momentum and will provide more insights into our outlook for fiscal '21 in April and certainly by July. The upcoming quarters appear strong, and our MAP to Growth program is progressing well. Additionally, we are continually adding items to the program.

From RBC, we have Arun Viswanathan.

Congratulations on the results and the continued progress on MAP. I guess, the first question is just on the top line. When you think about the Consumer business, you mentioned some of the manufacturing issues. Would you be able to kind of size what that maybe costs to you? And if you see that coming back in the coming quarters?

Yes, I am unable to provide detailed information on the manufacturing issues beyond what I mentioned earlier. We faced several challenges related to capacity and encountered some setbacks in our efforts to resolve these. However, we anticipate seeing improvements starting in Q4 and continuing into the next fiscal year, as Q3 typically experiences lower seasonal performance and may not reflect these changes well.

And just to, I guess, dig a little deeper, when you think about the Consumer business, I know that in the past, you've mentioned that there's been some headwind from low unemployment and weakness in the small project category. Is that continuing? And how would you expect that to play out if we do see continued improvement on some of the building products and homebuilding numbers that we're seeing right now?

Sure. The last four months, from August through this quarter, have been quite strong in terms of consumer demand and project work. We don't anticipate any specific weaknesses in those areas. Much of the challenges we faced in the past year, we believe, were related to weather conditions from last spring and early summer. For example, our performance in the wood stains and finishes category at a major home center exceeded expectations. Overall, the performance in that area is very solid. The manufacturing issues you inquired about were partly self-inflicted, and we have resolved those. Sure. I think the results that we've been seeing from a market perspective in Europe in the primary markets we serve there have been weak for two years. And in particular, as it relates to MAP to Growth, we have taken a very deliberate approach to looking to exit lower-margin business and, in some cases, discontinue lower-margin or, in a few instances, no-margin product lines. And so we've had a better earnings performance in the European market for our Construction Products and Performance Coatings business than we've had sales performance. And it's a very deliberate process of strategically engineering a higher-margin business profile. I'd like to think with the Brexit decision and a focus on Europe that we'll see some activity in Europe improving, but we don't see that as we sit here today.

And then just lastly, if I may, on price cost. Looks like your price gains have been in the kind of 100 to 200 basis point range for a little while. Assuming that continues for the next couple of quarters. Or do you expect that to continue, I guess, just given raw materials or potentially entering a period maybe over the next two quarters of raw material deflation? Are we thinking about that the right way that is raw material rise should continue to kind of trend lower over the next couple of quarters, but you still hold on to price? Is that a fair characterization?

I think that's a fair characterization. In a lot of categories, the deflation that's happened in the last 12 or 18 months is ending. We annualize our price increases depending on the business unit and the segment, starting in February and through the spring. So we won't have as much year-over-year price impact in Q3, and we will have a little or none in Q4. In a number of our businesses, our margins are still not where they were five or six years ago, so we've got work to do.

From Vertical Research, we have Kevin McCarthy.

Frank, you spoke to market share gains at some length, but I wanted to ask you to elaborate there in terms of where you're gaining share, why that's happening and how sustainable you think that will be. Do you think, for example, you could grow at 1% to 2% above market over the next year, or perhaps longer? What sort of framework might we apply to that dynamic?

Sure. In our Construction Products Group, I believe that's a positive perspective and one that is sustainable. We have established ourselves as leaders in roof restoration coatings and continue to seek out products that perform better and are more environmentally friendly, particularly with bio-based resin materials. Progress in this area is going well. We have experienced notable market share increases in our Carboline and DAP product lines. This spring, I anticipate additional market share movements in our Consumer segment that we can discuss after they occur. I think our greatest achievement, which reflects well on the RPM team, is our ability to keep our sales, marketing, and business strategies customer-focused while undergoing significant changes in our operations and factory settings. That has been our objective, and thus far, it seems to be effective, which excites us. Additionally, we have benefited within the Construction Products Group from major competitors who have been in the process of selling or restructuring, allowing us to concentrate on growth, which has been advantageous for us.

Okay. And then with regard to raw materials, obviously, the energy complex has become more volatile and uncertain in recent weeks. But maybe you could talk a little bit about how you see the basket trending? And also what you're doing on a company-specific basis? In your prepared remarks, I think you mentioned your procurement folks are negotiating some improved terms. So would you expect to benefit beyond what is transpiring at the market level in terms of raw material costs?

Yes, our gross margin improvement reflects that. We have seen gross margin expansion surpassing many of our competitors. This growth is influenced by a mix of price adjustments and raw material costs, but a significant part is due to the centralization of our procurement activities. We have streamlined our suppliers from eight or ten to just two or three in several categories. With assistance from outside consulting, we have reduced categories that previously had an annual spend of $50 million to as low as $0.5 million, and we are beginning to reap the rewards of this consolidation. Approximately half of our gross margin improvement, which I refer to as prime margin, can be attributed to plant consolidation and continuous improvement efforts on the factory floor. I would estimate that about 50% of the improvement comes from the industry-wide cost/price mix benefits, while the other 50% results from centralizing procurement and consolidating our supplier base.

From UBS, we have Josh Spector.

Just on the EBIT bridge year-over-year, I mean, you highlighted earlier $31 million in cost savings from the MAP to Growth plan. I mean if I exclude Specialty and then look at the organic growth maybe in the low mid-single digits, it seems like there was a little bit less leverage to the bottom line than expected on that basis. Can you help maybe bridge what some of the factors would be to drive that year-over-year?

I'm not sure I understand the question. If you exclude Specialty from our consolidated results, I think you would conclude that we have higher leverage in some of the other businesses. Could you please repeat that?

Sure. So I guess what I'm looking at is your adjusted EBIT for the quarter was $154 million. It was $126 million a year ago. The cost savings was $31 million. So that bridges to around $159 million. You've lost $6 million in Specialty. So I'm looking at kind of that bridge as being roughly flat despite organic growth being 3.5% plus. And I understand some of the manufacturing issues, which might have been a factor. Just wondering if there's any other things that you would call out that might have led to like a lower year-over-year growth as a result of that?

Sure. Josh, it's Rusty here. In terms of the MAP savings we disclosed of $31 million, that's really total savings. That is not an incremental year-over-year savings. So that's maybe part of the confusion. And when I look at Specialty, just to focus on that, I see the sales were down $20 million, and the EBIT in Specialty was down about a little more than $5 million. So I think that's the normal drop down we'd see from a revenue loss. So did that help? Or can I answer some...

Yes. No, that helps. Yes, I didn't realize it was cumulative versus just what was realized in the quarter. So that's helpful.

Yes. That would be the Wave 1 and the small portion of Wave 2 savings, which we talked about last summer in our year-end earnings release. And as we discussed, much of Wave 2 is deferred to the back half of this fiscal year.

And you would have to net that $31 million against the disclosed MAP savings this time last year in the quarter.

Yes. And what we disclosed last year with that in year-end. First three quarters, we disclosed $32 million savings.

Okay. Great. No, that's helpful. And then secondly, just on the Performance Coatings business, I was wondering if you can give some color on perhaps the backlog within the different parts of that business. So you noted strength in energy. Curious how you're seeing that kind of pan out with some lower CapEx potential for next year. And then maybe on the flooring side as well? Sure. We don't see any change in the market outlook for either of those. The deferment or cutting of kind of the capital spending budgets in the energy markets of a couple of years ago when oil prices plunged, have stabilized, and that spend seems to be back to a normal level. Our energy activity is pretty broad as well. It's everything from pipelines to windmill blades to transmission to different refineries. One of the areas that used to be strong for us and it's been overcome by other parts of the market was offshore oil, not a lot of activity there. But it's been a real strong area of growth for us. And quite candidly, it's been like the one exception in the European marketplace where those product lines, both through the normal spends and some market share gains, have actually shown year-over-year solid growth in the European marketplace, about the only business unit or product lines that we've seen some solid growth in Europe.

From Morgan Stanley, we have Vincent Andrews.

This is actually Steve on for Vincent. I guess, just two kind of quick ones. On the third quarter EBIT growth, it was a bit lower maybe than expectations. So considering that it is a smaller quarter for you guys, but is there anything in there that is like notable to call out that could be maybe bridging that gap?

Yes. In terms of some confusion, I think you're talking, Steve, about the third quarter and not the second quarter, right?

Correct. Yes, the 3Q guidance.

Yes. As we tried to convey through our outlook, it's a seasonally low quarter. So we typically do roughly 20% of our sales in the third quarter. And if you're looking at MAP savings, and I'll make this up, let's say, there's $100 million of MAP savings, we would expect evenly throughout the year, you would not get 25% of those savings in the third quarter because sales volume is down, our cost of sales is down as a percent of the total year. So that might be some of the confusion in terms of the third quarter outlook.

Yes. As I mentioned in my prepared remarks, the SG&A savings have been annualized, so there's no year-over-year MAP savings in SG&A. The next wave for us will be Wave 3. What has been continuing to grow is the plant consolidation and continuous improvement activity and the procurement activity. All of that gets capitalized into inventory, and then it gets realized as we sell products. And on a lower-revenue month, you're going to have lower income and a lower impact. Having said that, a 25% to 30% EBIT growth year-over-year is actually an improvement over the EBIT growth that we just experienced in 2Q. And so we're well on track in terms of where we are. And we're on track in terms of our internal forecast relative to what we expect in the third quarter. And it continues to be solid EBIT growth on what appears to be continuing relative modest sales growth somewhere in the 2% to 4% range.

Okay. That's helpful. And then just a follow-up on Specialty. I think maybe last quarter, you mentioned that you'd kind of see some of the initiatives underway starting to kind of work its way through by the fourth quarter and kind of starting in the beginning of fiscal 2021. Is that still the timeline? Or are things maybe a bit pushed out? Like how long should we expect weakness to kind of last?

No. That's the timeline. I think that's correct, and that's what we see. You'll see them being a positive contributor to sales and earnings growth towards the back half of this fiscal year and into fiscal '21. So I think that's exactly the timeline that we see.

From Seaport Research, we have Mike Harrison.

I also had a quick one on the Specialty segment. You had guided last quarter that the full year fiscal '20 would see sales flat to down slightly, and now this quarter is coming in down 10.5% organically. Can you just help us frame up whether that was worse or better than you had expected? And should we still be using flat to down slightly number for the full year sales assumption?

The performance in the second quarter in the Specialty segment was somewhat below our expectations, primarily due to a few major product categories. The Legend brands business experienced only a modest impact from weather-related events. Additionally, for our Day-Glo business, which Rusty mentioned, one of their key product categories—dyes and pigments for fire spotting chemicals and retardants—saw a very moderate fire season compared to previous years, despite the media coverage of fires around Los Angeles. This resulted in slower performance in that area. Both categories are high-margin businesses that generated lower-than-anticipated revenues, adversely affecting the segment. I believe they will return to form for the remainder of the year, but they won't compensate for the lower-than-expected sales results in Q2.

The fluorescent tracer dyes for fire retardants, are those being used in Australia right now? Or is that not a market that you sell into?

Yes. I don't believe so, but I actually don't know the answer to that question. We can certainly find out and get back to you offline.

Okay. And then last question is more on the consumer side of the business. Can you talk about what you're seeing in terms of sell-through and point of sales data at your big box retail customers? Any sense of where those customers stand on inventory levels as we start to move into this slower seasonal period? Is that relatively normal inventory levels? Or are they running a little bit high?

No. I think consumer takeaway has been pretty solid. It was choppy, as we commented earlier, relative to slow in the summer or slower-than-expected and pretty solid in the fall. We were negatively impacted by some significant inventory adjustments by some of our major customers last year. I think inventory levels are lower, and we don't expect the same impact this year that we had last year from some significant inventory adjustments by our big box customers. So that, I think, year-over-year will be a positive.

From JPMorgan, we have Jeff Zekauskas.

At the beginning of the call, Frank, you characterized a lot of the operating profit progress as coming from the MAP to Growth program. But I was a little bit puzzled by the results because if your prices were up, I don't know, 1.7%, that would be about $24 million. And if your raw materials were down 1%, that would be another $8 million or $9 million. And so the combination of raw materials and price increases would account for all of the operating profit growth. So what's wrong with that analysis? In other words, how is the MAP to Growth program really influencing things given those two considerations?

Yes. A couple of things, Jeff. Number one, I would look at our margin expansion versus our peers. And for the last couple of quarters, we have had some meaningful margin points of expansion better than a number of our peers. So that should be one touch point because we're all benefiting from cost/price mix. Secondly, across RPM, your assumption on raw material savings is mixed. So that's been true in our Construction Products Group and in our Performance Coatings Group, the old Industrial segment. It has not been true yet in our Consumer segment because of some of the categories that I talked about, principally packaging, and the fact that we're on FIFO accounting. So some of the benefits that you see, finally some breaks. Some final breaks in packaging that hit this fall will show up in our results in the coming quarters. And we are, like everybody, suffering some meaningful increases in labor costs and other items. And so I think that the simplest way to compare our results and whether MAP to Growth is working is to continue to look at our gross margin and our EBIT margin expansion versus our peers. And if it's equal to or less than, then I would suggest that your comments are correct. But if we continue to put up some pretty good numbers, you're seeing the benefits here. The last thing I can tell you is we're closing plants. Our headcount is down by 600 or 700 people. And we are instituting successfully lean manufacturing disciplines in plants where it didn't exist before, and it's hitting our bottom line.

Okay. Maybe a final quick question for Rusty. What's the adjusted cost of goods sold in the quarter?

Yes. We don't disclose that. If you go to our website, you'll see that we do have some reconciliation slides that give you...

Correct. And I don't think for any number of competitive reasons that we or any of our competitors break out specifics of their cost of goods sold.

From Wells Fargo, we have Michael Sison.

This is Richard on for Mike. Just a quick question on M&A. How much are you assuming for your 2.5% to 4% revenue growth range? And have you seen any change to the environment right now? How does the pipeline look? And which segments do you think you'll have opportunities?

I don't expect much impact in Q3 from mergers and acquisitions. We did announce Profile Foods, which is part of our Specialty Products Group and is a relatively small business. There are some good manufacturing synergies there. However, our M&A pipeline has been somewhat limited. As I mentioned earlier, we are really pleased with how our businesses are focusing on their customers and the marketplace, which is reflected in our results. One area that has been somewhat disappointing through MAP to Growth is the revenue from acquisitions. This is due to two main factors. First, the price expectations for sizable deals suggest that we can utilize that capital more effectively for better returns through share repurchases and other investments. Second, the organization has been concentrating on executing MAP to Growth, which has somewhat negatively affected our focus on acquisition activity, and we are actively working to address that.

Great. And just on Capex. I know last quarter, you'd guided $180 million of the year. Looks a little light so far in the first half. Do you expect that to step up in the second half? Or...

Yes. I think that's our current target. We could fall short of that just because of the ability to execute on the things that we have planned, but that's still the target for the year.

And from Bloomberg, we have Christopher Perrella.

A question, I guess, on the pull forward from the first quarter into the second quarter and touching on the backlog. Do you expect any of that backlog or the backlogs discussed earlier to continue into the third quarter? Or you're caught up at this point with your customers?

I think that we're at kind of normal rates. We did see a bump, let's say, between our first quarter and the beginning of our second quarter in Consumer and Construction Products. But the backlog, as I mentioned earlier, in our roofing and waterproofing businesses is very solid. And the revenue growth we're experiencing in corrosion control coatings and industrial flooring seem to be pretty good. And as long as we don't get whipsawed by weather from one quarter or another, I think we've got some pretty solid expectations for growth for the second half of the year in our Consumer segment.

All right. And a follow-up. So you should see a larger working capital release with the seasonally strong fourth quarter compared to last year?

No, actually, you'll notice the opposite. The most significant improvement in working capital will become apparent in fiscal '21. Of the $150 million increase in cash flow compared to last year, around $70 million to $80 million of that stems from timing differences as we have renegotiated payment terms with key suppliers and focused on cash flow management daily rather than just at the end of the quarter. We experienced some timing discrepancies, particularly in the Consumer segment. In total, we're looking at a $150 million year-over-year improvement in cash flow from our operations, which is a strong figure. The $70 million to $80 million was related to timing, while the remainder reflects higher earnings and more sustainable improvements in working capital. Regarding the fourth quarter, I don't think we will see much improvement in cash flow, if any, due to the timing differences from the previous year. However, as we move into fiscal '21, we anticipate continued strength in our cash flow generation.

We'll now turn it back to Frank Sullivan for closing comments.

I'd like to commend our associates worldwide for their continued hard work and dedication as they simultaneously focus on growing their business and execute on our 2020 MAP to Growth operating improvement plan. By combining our entrepreneurial growth-oriented culture with the continuous improvement in operational excellence that is resulting from our operating improvement programs, we are positioning RPM for sustained growth that will provide tremendous value for our customers, employees and shareholders in the coming quarters and the coming years to come. Thank you very much for joining us on today's call. We look forward to updating you on our fiscal 2020 third quarter results in April. Happy New Year.

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for joining. You may now disconnect.