Good morning, and welcome to the RPM International Fiscal Second Quarter 2024 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Matt Schlarb, Senior Director of Investor Relations. Please go ahead.

Thank you, Gary, and welcome to RPM International's conference call for the fiscal 2024 second quarter. Joining today's call are Frank Sullivan, RPM's Chair and CEO; Rusty Gordon, Vice President and Chief Financial Officer; and Michael Laroche, Vice President, Controller and Chief Accounting Officer. The call is also being webcast and can be accessed live or replayed on the RPM website at www.rpminc.com. Comments made on this call may include forward-looking statements based on current expectations that involve risks and uncertainties, which could cause actual results to be materially different. For more information on these risks and uncertainties, please review RPM's reports filed with the SEC. During this conference call, references may be made to non-GAAP financial measures. To assist you in understanding these non-GAAP terms, RPM has posted reconciliations to the most directly comparable GAAP financial measures on the RPM website. Also, please note that our comments will be on an as-adjusted basis and all comparisons are to the second quarter of fiscal 2023, unless otherwise indicated. We have provided a supplemental slide presentation to support our comments on the call. It can be accessed in the Presentation and Webcasts section of the RPM website at www.rpminc.com. Additionally, as a reminder, certain businesses in Asia Pacific that were previously part of the Construction Products Group are now being managed and reported under the Performance Coatings Group effective June 1, 2023. As a result, all references to CPG and PCG today reflect the updated structure. The recast businesses generate approximately $100 million in annual sales and this change has no impact on consolidated results. At this time, I would like to turn the call over to Frank.

Thank you, Matt, and welcome to everybody joining us on our call today. I'll start with an overview of our second quarter performance, then I'll turn the call over to Mike Laroche to discuss the financials in more detail. Matt will then provide an update on the balance sheet and the recent opening of an R&D facility, and Rusty will cover our outlook. At the end of the prepared remarks, we'll be pleased to answer your questions. Starting with our second quarter results on Slide 3. We generated our eighth consecutive quarter of record sales and adjusted EBIT. While revenue growth was slightly positive because of softness in certain end markets, we continued our trend of good margin expansion led by our MAP 2025 initiatives. This resulted in double-digit adjusted EBIT growth, which is squarely in the guidance we provided and in addition to the strong growth we generated in the prior year quarter. The MAP 2025 initiatives were also a key reason we generated all-time record cash flow of $408.6 million from operating activities during the quarter. Enhanced collaboration between commercial and operational functions means we are now able to respond to customer demand more quickly without having to build large safety stocks as we have done in the past, and this is having a positive impact on working capital. Through the first six months of fiscal 2024, we generated $767.8 million of cash flow from operating activities, which surpassed our previous all-time fiscal year record. Turning to Slide 4. Sales were led by our Construction Products Group and Performance Coatings segment, which benefited from their focus on repair and maintenance as well as their positioning to serve strong demand for infrastructure, reshoring, and high-performance buildings with their engineered solutions. Volumes declined in the Consumer and Specialty Products Group segments as demand in DIY and especially OEM end-markets, particularly those with residential exposure remained soft. Both segments have been pressured for the past year as individuals have focused their spending on travel and entertainment, and existing home turnover has been at a multi-decade low. Pricing was positive in all segments and helped offset lower overall volumes. Despite these challenging end markets, we achieved another quarter of strong margin expansion led by our MAP 2025 initiatives. Margin expansion was strongest at the Construction Products Group and the Performance Coatings Group, which both generated positive volume during the quarter. This demonstrates the potential for our MAP 2025-enabled margin expansion in our businesses underperforming when volumes begin to grow again. As a reminder, second quarter growth was in addition to a strong quarter in the prior year period. The two-year stack growth for sales and adjusted EBIT was 9.3% and 50.6% respectively. Moving to Slide 5, I'm pleased to report that the changes we recently made to our management structure are showing good progress. In Europe, new management teams have focused their sales strategy and implemented MAP 2025 initiatives to grow sales and expand margins. In Africa, the Middle East, and Asia Pacific, which are now aligned under our Performance Coatings Group management, our businesses are realizing the potential of increased collaboration in our operations. Sales in Africa and the Middle East grew 13%, and Asia-Pacific increased 6.4%, and we're realizing operational synergies that are leading to even greater profitability growth. Overall, I'm proud of our associates' performance in the second quarter. We're executing exceedingly well in the things that we can control and the hard work we are doing on MAP 2025 initiatives is enabling collaboration, efficiencies, and cash flow to benefit us now. And I'm optimistic that we have even greater opportunities in the future. I'd now like to turn the call over to Mike Laroche to cover our financial results in more detail, Mike?

Thanks, Frank. Starting on Slide 6. Consolidated sales increased slightly as positive volumes at the Construction Products Group and Performance Coatings Group, higher pricing, and favorable FX were offset by end-market weakness in Consumer and the Specialty Products Group. MAP 2025 benefits, including the commodity cycle drove 320 basis points of gross margin improvement. Improved fixed cost leverage at the Construction Products Group and the Performance Coatings Group also contributed to gross margin expansion. SG&A as a percentage of sales increased during the quarter as we reinvest MAP savings in long-term growth initiatives and to incentivize the sale of higher margin products and services. Inflation in areas like wages, benefits, and healthcare expenses added to the increase in SG&A. Expense reduction actions taken at the end of fiscal 2023 helped to mitigate the increase and we are taking additional actions to limit SG&A increases in the second half of 2024. Adjusted EPS grew 10.9% to $1.22, which is a second quarter record and was driven by adjusted EBIT growth with an increase in interest rates being offset by debt pay-downs. Turning to the Construction Products Group results on Slide 7. They achieved record Q2 sales led by concrete admixtures that continued to benefit from reshoring and infrastructure projects, as well as market-share gains. The segment also benefited from increased demand for high-performance buildings, both new and renovations, with particular strength in sealants and wall cladding. As Frank mentioned, Europe is benefiting from a more focused sales strategy, and this includes CPG, which is our largest segment in Europe. Adjusted EBIT increased to a second quarter record led by higher sales, improved fixed-cost leverage, and MAP 2025 benefits. As a result of the strong financial performance, variable compensation increased and was partially offset by expense reduction actions put in place at the end of fiscal 2023. On Slide 8, the Performance Coatings Group achieved record second quarter sales, driven by strong demand for the segment's engineered turnkey flooring systems due to heavy activity in reshoring capital projects and market-share gains. The businesses in Africa, the Middle East, and Asia Pacific were all recently aligned under PCG management, contributed to the segment's growth. This volume growth resulted in improved fixed-cost leverage, and along with MAP 2025 benefits, generated all-time record adjusted EBIT during the quarter. Moving to Slide 9, Specialty Products Group sales declined as specialty OEM demand remained weak, particularly in the end-markets that have exposure to residential housing, including furniture, doors, windows, and cabinets. The divestiture of the non-core furniture warranty business last fiscal year reduced sales and the segment also faced challenging comparisons to the prior year period when the disaster restoration business benefited from the response to Hurricane Ian in Florida, which did not repeat in fiscal 2024. The reduced volumes resulted in unfavorable deleveraging and adjusted EBIT declines, which were partially offset by expense reduction actions implemented at the end of fiscal 2023. SPG also continued strategic investments in long-term growth initiatives, which weighed on adjusted EBIT margins. Matt will talk about one of those growth investments shortly. Please note that adjusted EBIT excludes a $4 million expense related to an adverse legal ruling for a divested business. Turning to Slide 10, the Consumer Group was pressured by soft takeaway at retail stores from DIY customers as they focused their time and spending on travel and entertainment rather than projects around the house, and as housing turnover hit multi-year lows. Certain retailers were also more cautious with inventory levels, which pressured volumes. Market-share gains, strength in international markets, and increased pricing to catch up with prior material and current labor inflation helped limit the volume declines. As a reminder, Consumer faced challenging comparisons as sales increased 15.3% in the prior year period. Despite challenging end markets, Consumer still generated record second quarter adjusted EBIT. This was achieved primarily due to MAP 2025 benefits and strength in international markets and was in addition to strong growth in the prior year when adjusted EBIT increased over 180%. Now I'd like to turn the call over to Matt, who will cover the balance sheet, cash flow, and provide an investment update.

Thank you, Mike. Moving to Slide 11, we continue to make significant progress on improving working capital, primarily through lower inventories, which decreased $287 million from prior year levels. This combined with our improved profitability, resulted in all-time record cash flow from operating activities of $408.6 million in the second quarter. As Frank mentioned, our cash flow in the first six months of the fiscal year has surpassed our previous 12-month fiscal year record. Year-to-date, we have returned $113.3 million of cash to shareholders through dividends, and in October, we achieved our 50th consecutive year of increasing our dividend, an accomplishment only 41 other publicly traded companies can claim. This sustained dividend growth has been enabled by our strategic balance, our focus on repair and maintenance, and our entrepreneurial spirit, all of which help us grow throughout economic cycles. We have also returned additional cash to shareholders through share repurchases which total $225 million to date. Finally, we've continued to repay debt, and at the end of the second quarter of 2024, total debt is $592 million lower than the prior year. These debt repayments have helped mitigate the impact of rising rates on interest expense and provided flexibility to take advantage of future opportunities. Moving to Slide 12, as Mike mentioned, our segments are making investments to accelerate long-term growth. We'd like to highlight one of those investments, the RPM Innovation Center of Excellence. We recently celebrated the ribbon cutting on this new state-of-the-art facility located in Greensboro, North Carolina. This facility is the first of its kind at RPM, where multiple businesses can collaborate and share resources to help drive innovation. This is particularly important for some of our smaller businesses that do not have the scale or local talent to run a comprehensive R&D led by themselves. Additionally, the Innovation Center of Excellence serves as a showcase to customers, where they can visit and see first-hand our ability to find solutions to their challenges. Also, by sharing resources, we are eliminating the need to have duplicative equipment and multiple labs which will control long-term expenses. The facility is being overseen by the Specialty Products Group because many of their businesses are prime candidates to utilize it, and we already have businesses from all four segments collaborating there today. Now, I'd like to turn the call over to Rusty to cover the outlook.

Thanks, Matt. Before we begin, I want to clarify that the year-to-date share repurchases amount to $25 million. Now moving on to the outlook, on Slide 13, you can view our third quarter forecast, which is traditionally our slowest quarter. We expect market trends in Q3 to mirror those in Q2, with strength in consumer packaged goods and specialty products groups, along with international markets and market-share gains, being offset by weakness in DIY and specialty OEM markets. Consequently, we anticipate flat sales compared to the record results from the prior year. Regarding our consolidated adjusted EBIT, we expect growth to accelerate, increasing by 25% to 35% over last year's record, driven by the benefits of our MAP 2025 strategy, particularly in Europe, which is a key focus for us, as well as less challenging comparisons to the previous year. This adjusted EBIT outlook includes growth and efficiency investments we are making in our businesses and at the corporate level, which may impact short-term margins. Additionally, we are taking steps to control SG&A growth in the latter half of the year. By segment, both consumer packaged goods and professional consumer goods are anticipated to benefit from their emphasis on repair and maintenance, along with ongoing spending on infrastructure, high-performance building, and reshoring projects. We expect sales growth in both segments to be in the mid-single-digit range. In specialty products, we have not observed a shift in demand, with housing turnover remaining near multi-year lows. Therefore, we predict sales will decline in the mid-teen percentage range. In the consumer segment, we expect sales to decrease by low-single digits due to soft DIY demand, which we hope will be partially countered by market-share gains. Moving to our full-year outlook on Slide 14, we are revising our sales expectations for the year due to ongoing softness in the DIY and specialty OEM markets. Our updated sales growth outlook is now in the low-single-digit range, compared to our earlier expectation of mid-single-digit growth. Despite this reduction, we continue making solid progress on achieving MAP 2025 benefits and are confirming our adjusted EBIT outlook, projecting growth in the low-double-digit to mid-teen range. This includes advantages we are realizing from the commodity cycle as overall raw material prices decrease while we maintain our pricing. This concludes our prepared remarks. We are now happy to answer your questions.

We will now begin the question-and-answer session. Our first question today comes from John McNulty with BMO Capital Markets. Please go ahead.

Hi, John.

Good morning, Frank. I wanted to discuss the Consumer sector a bit more. It was down just over 5%, while you initially expected low-single-digit growth for the quarter. It doesn’t seem to be related to pricing since prices have increased across all businesses. Can you clarify how much of the decline was due to consumer demand versus some of the destocking trends? Additionally, could you discuss any share gains you experienced and possibly quantify that for us?

Sure. On a consolidated basis, price in the quarter was up slightly less than 2%, and so that should give you a sense, that's a little bit less than Consumer, and it's just month-after-month of negative Consumer takeaway. I would note that we are outperforming our directly comparable Consumer paid peers in terms of volume. But it's been a consistently minus low-single-digit, minus mid-single-digit Consumer POS over the last eight to nine months, and we don't see that changing until possibly this spring.

Okay. And when you think about some of the destocking that you've seen in the business, because I think you highlighted, at a couple of retailers that was an issue. As far as where inventories are, or at some of these bigger retailers, I guess, would you say they're kind of about where they normally would be going into the beginning of the spring paint season, or are they below? I guess, how would you characterize that?

I believe they are back to normal. There has been a significant adjustment in supply chains, both with our customers and within RPM. Around this time last year, we discussed our focus on operating efficiency and cash flow, acknowledging that profitability related to overhead absorption would be affected, and that has happened over the past year. However, the execution by the RPM team this quarter has been outstanding. We have decreased our debt by nearly $600 million in the last year. We generated record levels of cash flow over a six-month period, and our cash conversion cycle has improved by almost 30 days compared to last year. We are effectively managing what we can control, and we are pleased with the results. For the third quarter, we expect to achieve 25% to 35% EBIT growth with sales remaining essentially the same as last year, demonstrating the improvements we've made.

Got it. No. It makes sense. And actually maybe to that, if I can squeeze one last one in. You saw some notable margin lift despite a pretty soft volume environment. I guess, can you help us to think about how much of that was from the price versus raws benefit versus some of the MAP improvements? And then I guess maybe the third bucket would be just general mix improvements, but I guess, can you help us to parse out where some of that real improvement was coming in?

Sure. We achieved a positive cost price mix in most of our businesses starting in the summer, and we expect to maintain that positivity regarding raw material inflation and our price increases in Consumer during the third quarter. To illustrate, over an 18 to 24-month period, we absorbed around $500 million in higher costs from raw materials, labor, and similar expenses. Following the usual pattern in these cycles, we experienced a margin decline and spent time catching up. For the first time, we will be margin positive in Consumer during Q3. Additionally, we have maintained that positive trend in PCG and CPG since the beginning of the summer. There is also evident strong leverage when we have volume in the PCG and CPG performance, and we anticipate similar results in our Specialty Products Group and Performance Coatings once we start seeing positive unit volume in the Consumer Group.

Got it. Thanks very much. Appreciate the color, Frank.

Thank you.

The next question is from David Huang with Deutsche Bank. Please go ahead.

Good morning.

Hi, good morning. I guess, on construction, can you talk about the trends you are seeing by end markets? And I guess, specific to infrastructure and reshoring, are you seeing any project delays, either because of slower government approval or people are just delaying their projects into 2024 because of lower construction cost expectations?

We have not encountered significant project delays. Any delays we might face are mostly due to weather, especially in the Construction Products Group, and currently, we are in a good position. It feels like there is a manufacturing revival happening, largely because of the government's commitment of a trillion dollars towards infrastructure and other stimulus initiatives. We are engaged in several key onshoring projects, particularly in the technology sector, and this is positively affecting our suppliers as well. We have a solid standing with products like stonehard flooring, Carboline high-performance coatings, Euclid Chemical and admixtures, along with various construction chemicals. Additionally, our Tremco roofing business generates about $800 million, with 95% of that coming from reroofing or renovations, which makes us less vulnerable to the commercial construction cycle, and that sector is performing very well. Finally, we have made strides in our WTI business by moving into asset management areas, including our acquisition of Pure Air a couple of years ago, which focuses on the refurbishment and renovation of commercial and industrial HVAC systems, and this segment is experiencing considerable growth as well.

Okay. Got it. And then on raw material, how much was the raw material costs during the quarter? And I guess, when do you expect the deflation benefits to peak?

Sure. Matt, do you want to take that?

Sure. Yeah. So, raw materials were down about 5% in the second quarter. Now, other things like labor are still going up and it varies by product category, like some things, particularly in the Consumer segment, like acetone was up 25%, metal packaging and TiO2 were pretty flat, and propellant was little bit up, but other raw materials were down that brought the overall average down about 5%. So, we think that we'll probably hit a peak of raw material deflation sometime in the third or fourth quarter of fiscal 2024.

Okay. Got it. Thank you.

The next question is from Josh Spector with UBS. Please go ahead.

Good morning, Josh.

Hey, good morning, Frank. So, I just wanted to follow up on the comments on SG&A. So, your inflation in the first half is about 8% year-on-year, talked about some discrete items driving that and some actions to reduce that in the second half. So what are your expectations for second half SG&A inflation and how does that carry into fiscal '25?

Sure. You can see SG&A growth at a lesser rate in the second half of the year, particularly in the fourth quarter as we round our performance last year. And as we talked about, there are some specific areas that we are committed to investing in, in relationship to being in a good position to capture growth when the market turns. Matt mentioned one of those today. We committed tens of millions of dollars to the establishment of a new R&D center. It's part of our Wood Finishes Group and our Specialty Coatings Group. Their performance in the last year hasn't been particularly good because of their direct or indirect exposure to things in housing, which has been a really tough market environment. Nonetheless, we are committed to investments there, to investments in our Legend Brands business in terms of air handling and de-humidification equipment in a number of areas there. We have been investing significantly in some new product categories in our Consumer Group. And we're seeing placements of some new DAC spray products and re-capture of some Rust-Oleum market share as well coming this spring. So, we've been very deliberate about the balance between harvesting MAP savings and reinvesting in what we believe is future growth opportunities.

Yeah. I guess…

I would also like to mention that we monitor our growth investment spending separately. If we reach a situation where the soft landing evolves into a more challenging economic environment, we could quickly reduce tens of millions of dollars in SG&A expenses.

Thanks. No. That's helpful. And if I kind of carry that forward, so, could you remind us of the expectation for the realized MAP to growth savings in fiscal '24, excluding raw material and price cost movements? And your comments on investment, has that increased versus your prior expectations in that, maybe the realization of those savings is less because you're investing more, or is it the same calculus you were running too, previously?

Sure. I'll let Matt provide the details on the numbers we discussed, but our investment programs remain essentially unchanged. While we haven't increased our activities in the MAP program, we also haven't scaled them back. We are dedicated to several initiatives across multiple SBUs, aiming to be well-positioned to capture growth when the economy strengthens.

Yeah. And related to the MAP savings, in prior calls we communicated a run rate basis of $160 million and a P&L rate of about $100 million. We're still on-track for that. The thing is, those savings and those benefits are actually being masked by a lot of the under-absorption we've had from lower-than-expected volumes.

Okay. Thanks, guys.

The next question is from Jeff Zekauskas with J.P. Morgan. Please go ahead.

Good morning, Jeff.

Hi, good morning. As a base case, how much is variable compensation likely to be up this year?

I don't know that we have that number specifically, but in a number of our businesses, we have addressed commercial disciplines that didn't exist before in terms of some CRM programs and other things, such that we've replaced some old compensation structures in Tremco Roofing and part of our Construction Products Group with more variable compensation associated with pricing and margin. And so, that's part of the increase in SG&A which goes hand-in-glove with the increase in gross margin profitability.

Okay. And can you make some general remarks on your outlook on demand in the United States over the next 12 months in your various businesses and how you think it might change as the year progresses?

Sure. Regarding the Construction Products Group and Performance Coatings Group, we are well-positioned given the substantial federal stimulus in the areas we serve. We are optimistic about this for the next year. The end of the aggressive interest rate hikes by the Fed should yield better results. Specifically, our Specialty Products Group, which includes Industrial Coatings, wood stains, and finishes, is heavily linked to items that go into new homes like windows, doors, and wood trim. These markets have been struggling since December of last year. If you analyze their declining performance, the first half of fiscal '23 was strong, but the impact of rising interest rates on the housing market has been negative, affecting both new home construction and housing turnover. Many people are staying in their homes due to favorable mortgage rates, which has directly impacted the market. On the Consumer side, we are also witnessing what remains of the post-COVID boom, where people tackled various projects and redecorating. Although some headlines suggest consumer spending is strong, it's more focused on services than goods. As the interest rate situation improves, we expect to see a rise in both consumer activity and housing activity, coupled with significantly easier comparisons. If the interest rate environment begins to show modest improvements in the housing market, both in new construction and turnover, we anticipate seeing an uptick in our numbers across both our Consumer DIY businesses and our Specialty Products Group.

Okay, great. Thank you so much.

Thank you.

The next question is from Vincent Andrews with Morgan Stanley. Please go ahead.

Good morning, Vincent.

Could you discuss how far along you are in reshoring and infrastructure activities and whether you have any insights into the potential variability for your business? Specifically, is there sell-in for the projects you are involved in, and as these projects reach completion, will there be a smooth transition to another set of projects of similar or greater volume? How should we assess the potential variability of this benefit to your business?

Yeah. Sure. Back to my earlier comments. It feels like we're in a mini-manufacturing renaissance. Because, while we're being specified on a lot of these larger onshoring projects, in some cases, they haven't even put a shovel in the ground. And so on some larger projects that could be multimillion dollars, they will add some lumpiness to our results, as you suggest. But that's down the road. What we're seeing now is just a pretty solid industrial capital spending number and a market share gains target to point to in terms of new products with our Construction Products Group or Performance Coatings Group. But there's been a preference in some instances for our Stonhard flooring because we not only provide the material, but we supply the labor. So, we do a turnkey project in an environment where labor has been challenging, and that's provided a competitive advantage for us. The same thing is true in our Tremco Roofing business with our WTI business. And so, having a labor component both in elements of Tremco and in the Stonhard division of our Performance Coatings Group has also helped us from a competitive advantage.

And then as a follow-up, in areas like Consumer, where the volume is challenged, are you facing any pressure from your retail partners to either price promote more or to step-up media or ad spend or any types of things that might encourage foot traffic?

Sure. We are facing pressure from customers across RPM businesses for modest price reductions here and there. As I mentioned, specific to Consumer, we absorbed over that was our largest hit in terms of raw material costs. We absorbed about $500 million of rising costs over an 18-month to 24-month period. And frustratingly, it remains the one segment that's still seeing some inflation. There are some tariff items around tin plate, which goes directly to metal cans, and a couple of other chemicals like acetone, that have not experienced the meaningful raw material reduction that some broader chemical categories have, like epoxy resins or silicones.

Okay. Thanks, guys. I appreciate it.

Thank you.

The next question is from Mike Harrison with Seaport Research Partners. Please go ahead.

Good morning, Mike.

Hi, good morning, Frank. I was hoping maybe you could give us a little bit more detail on the improvement that you've seen in the Construction business in Europe related to the more focused sales strategy and the benefits that you saw in Asia Pacific and Africa, and the Middle East in your Performance Coatings business, where there is some better coordination going on? Maybe just, again, some more detail on the changes that you've made there? And it sounds like you expect some additional improvement to come, just wanted to gauge your confidence around how much more legs you could have from those actions. Thank you.

Sure, that's a great question. First, it's important to remember our 2020 MAP to Growth operating improvement program. We made significant progress, but that was disrupted by the COVID pandemic. In the initial years of the program, we primarily focused on North America, particularly in what we refer to as MS168 operating focus. Our entry into Europe was halted. However, post-COVID and with MAP '25, we've seen excellent collaboration between our Construction Products Group and our Performance Coatings Group. The President of our Performance Coatings Group moved to Europe with his family, providing direct senior leadership for implementing the MAP to Growth initiative there. Additionally, we had numerous small, dispersed, and uncoordinated operations in the developing world. We have now streamlined and unified oversight through a leadership team based in South Africa, which has performed exceptionally well. As a result, we are now approaching markets in the Middle East, Africa, India, and Southeast Asia as a unified entity rather than just by individual products. This includes consolidation in asset allocation, accounting, finance, and IT systems, which brings significant benefits. We are placing the right people in appropriate roles and cutting redundant costs, having previously closed our financial books in 104 locations every month. All these measures have positively impacted our operations. In Europe, we experienced strong performance in the most recent quarter. The UK was the first major market we operate in to enter a recession, but there still seems to be some spending activity. On the other hand, continental Europe is facing economic challenges. Therefore, much of what we see there is attributed to self-help and effective execution of the European MAP to Growth initiative, with senior leadership actively overseeing operations.

All right. Thanks for that. And then, you guys have done a really nice job managing working capital and obviously, that's showing up in the cash flow. But as you look across your segments, are your internal inventory levels where they need to be at this point? I'm just kind of trying to think about how we should look at production rates and fixed-cost absorption, particularly in that Specialty business and maybe Consumer, as we're kind of moving through the seasonally slower period in Q3 and they get into the spring pickup in Q4?

Sure. Thank you. There is more room for us to improve in working capital. It will be incrementally smaller in the coming quarters because again, as you recall, this time last year, we talked about tackling inventories in particular and the underlying operating efficiencies. And we've been doing that very effectively. And there, as I mentioned earlier on the call, we picked up almost 30 days over the last 12 months in our cash conversion cycle, we've got another 30 days to pick up. But there is incremental improvement that we will be generating in the coming quarters and the coming years.

All right. Thanks very much.

The next question is from Mike Sison with Wells Fargo. Please go ahead.

Good morning, Michael.

Hey, everyone. Happy New Year. Frank, you mentioned that the Consumer Group might experience an inflection point in the spring. What are you looking for to gain confidence that this could happen?

Sure. I think we need to get into the spring months which is our typical strongest selling season. We introduced the Rust-Oleum five in one and Stop Rust this time last year. We've introduced a highly-anticipated new DAP spray product, it's a essentially a single component that replaces a prior two-component product. So, we've got a number of new product areas. We're also picking up a little bit of lost market share from the prior year. And so, some of it's going to be some new product placements and others of it is going to be a sense that if the economy picks up a little bit, particularly as it relates to housing turnover, you'll see improvement in our Consumer and Specialty Products Group. As a reminder, and I think all of you on the call know this, housing turnover, particularly for us, is more an indicator of economic activity than new home construction. We're not directly involved in new home construction except in our Specialty Products Group and to a lesser extent at DAP. But when you have housing turnover, a lot of repair and maintenance and a lot of fix-up for people that are selling and then a lot of repair and maintenance and redecorating for the buyers, and that activity has been at multi-decade lows over the last 12 months.

Got it. And then just a quick follow-up, I apologize if I missed this, what did you think pricing would be in the third and the fourth quarter? And then, there are some sort of news on the home improvement guys, they want to get a lot of the inflation back from their suppliers. So, it sounds like they are pushing for price decreases. How do you sort of handle that in the Consumer Group and are there other ways to really keep some of the pricing that you achieved over the last several years?

I focus more on margin than pricing. Some of this relates to new product launches and category management efforts with major clients. Additionally, we are working to recover lost margins from the commodity cycle. In terms of price expectations for the third and fourth quarters, I don't foresee significant changes. The only potential exception could be in limited areas like Consumer, where the current tariff negotiations concerning tin plate are of concern, along with some industry consolidation. We're monitoring a few specific areas, but whether that leads to price increases remains uncertain. Overall, we don't expect much movement in pricing for Q3 or Q4.

Got it. Thanks.

The next question is from Aleksey Yefremov with KeyBanc. Please go ahead.

Good morning. This is Ryan on for Aleksey. I kind of wanted to piggyback off of the last pricing question there. So, I was wondering if you could maybe talk about how pricing is trending on bids for new projects in both CPG and PCG.

Well, in general, we have held price across most RPM businesses. Very few exceptions and the exceptions tend to be more commodity spaces around epoxy resins or silicones. We participate in line striping and in bridge and highway work, and that tends to be a little more price-sensitive because they tend to have basic coatings that are more directly related to the underlying chemical raw materials.

Okay. That's helpful. Thank you. And then, can you just maybe talk about what you guys are seeing in the repair and maintenance business? Obviously, it's held up relatively well. Is this business still growing? Or any color here would be great. Thank you.

Absolutely, it's holding up really well. You can see that in our Construction Products Group. The vast majority of that is repair and maintenance. And then also industrial capital spending, which seems to be pretty solid. That also impacts our Performance Coatings Group. So, we're pushing, as I mentioned earlier, other opportunities. I mentioned the Pure Air acquisition of a couple of years ago over the last two calls, we're seeing some nice growth there. And that was really in response to customers who talk to Tremco and our WTI services component. When we're up on their roof, can we help them with their HVAC equipment? And we didn't have any answer to that question for many, many years and we do now. So, we're able to sell more on the same roof and/or sell new components with the same sales force, and we're pretty excited about it and over time, I think we'll look for other opportunities as we think about this business more as an asset management, asset maintenance business, as opposed to just a purely roofing materials business.

Very helpful. Thank you.

The next question is from Stephen Byrne with Bank of America. Please go ahead.

Good morning, Steve.

Yes. Thank you. Frank, with respect to the new Innovation Center down in North Carolina, I was curious whether you're seeing any responses and changes between the various segments. Is there any increase in collaboration between them? And maybe more specifically, do you expect that multi-segment R&D center to benefit primarily from across a transfer of technology from one segment to another or do you think that it will have more effect on cross-selling, at the more of the commercial level between the segments?

That's a great question. As you may remember, one of the main components of our original MAP to Growth program was shifting from a fairly decentralized RPM structure to a more focused approach in three areas: staying independent and entrepreneurial, becoming centralized, and implementing a center-led model. We've successfully centralized our procurement efforts across RPM, which has been significantly beneficial. This was a key aspect of the original MAP to Growth program. In terms of manufacturing and operations, we are adopting a center-led strategy and establishing a standardized playbook for our manufacturing sites worldwide. While we will continue these efforts, they will be on a smaller scale. During the original MAP to Growth program, we closed about 25 facilities, and you can expect a few more closures, particularly in Europe. The R&D Center emerged from our operations' recognition of the need for improved collaboration among our businesses. We anticipate sharing best practices and exchanging technologies between sectors, such as moving innovations from the industrial sector to the consumer sector. We're looking forward to this process, though it will take time to see the full results. This aligns with our goal of transforming RPM from a traditional holding company with numerous independent units to a more centralized and collaborative organization. Our four Group Presidents are leading this collaboration effectively, and it's positively influencing the organization. The execution of our strategies this quarter has been strong, and I expect this trend to continue. However, our results will be affected by overall economic conditions.

Well, thank you, Frank. And maybe just continuing with this potential for cross-selling. I wanted to ask you a little bit about the Specialty Group. Are you reevaluating that segment in any way? Are there businesses in there that you would view as maybe not having either sufficient growth potential or maybe there's just no potential for cross-selling with your other businesses and thus some might be targeted for divestiture?

It's a great question, and we regularly evaluate divestitures with our Board. However, in our MAP '25 program, we're actually moving in the opposite direction. While we've faced challenges in our Day-Glo business, we have seen significant success with Arnette Polymers and the Corsicana chemical plant we acquired in Texas, which is part of our Construction Products Group. We are leveraging those leadership teams to collaborate with Day-Glo in establishing a Resin Center of Excellence in Europe, anticipating similar benefits there as we are seeing from controlling key chemical raw materials. Our Legend Brands business is focusing on a new MRO strategy that will provide more stability rather than the fluctuations caused by weather events that have led to wild swings in business from quarter to quarter and year to year. There are complementary efforts with our Construction Products Group, which is already involved in asset management. We continuously seek divestment opportunities. As you’re aware, the M&A market has been quite stagnant, so for both buying and selling, we will need to see interest rates decrease and M&A activity and valuations rise for movement in either direction.

Thank you.

The next question is from Frank Mitsch with Fermium Research. Please go ahead.

Good morning, Frank.

Good morning, and Happy New Year. I would like to follow up on the previous question regarding your thoughts on cash usage. You mentioned that the M&A market is currently a significant focus, and you also noted that your buybacks have been somewhat overstated. I'm curious if you were hinting at the possibility of increasing your buybacks at this level. What are your views on the balance between M&A and buybacks?

So, we are committed to buying back the dilution in every year. And then, boy, throughout my career here, we've been pretty strategic as to whether we get aggressive in buybacks relative to how we perceive value, and that will continue. But, we will be a more regular buyer of our stock quarter-by-quarter-by-quarter, along with increasing our dividend. Frank, if you look at the opportunities we have with a higher level of permanent cash flow, a year ago we talked about, and I think it might have been a question from you, focus on cash generation and we indicated it would be to pay down debt. We've done that very successfully. But our dividend payout ratio over 20 years has gone from the mid-50% to the mid-30%. Our cash flow has increased dramatically and we're in a better position to be a regular buyer of our stock and/or continue our dividend program unless in relationship to buying our stock we see some sizable acquisition opportunities at the right value.

Got you. Very helpful. And if I can come back earlier, I believe it was Matt made the comment that, unabsorbed fixed costs are kind of masking the benefits of the MAP program, what have you, and I guess, I was thinking that for fiscal 2024, unabsorbed fixed costs would be materially less than they were in fiscal '23, how are you thinking about the interplay between this fiscal year and last fiscal year on that item?

Sure. They should be less than fiscal '23 in the second half. Unfortunately, not as much of a recovery as we had hoped because of our original expectation on volume growth, which is, we covered in today's call, we're not seeing yet in Consumer or in the Specialty Products Group. But you are seeing in this quarter, and you'll see in future quarters, a real strong leverage to the bottom line of our Construction Products Group and Performance Coatings Group, because of the MAP 25 benefits. When we have good volume and it's going to be coming, you're going to see nice leverage.

Very helpful. Thank you.

Thank you.

The next question is from Kevin McCarthy with Vertical Research Partners. Please go ahead.

Good morning, Kevin.

Yes. Good morning, Frank. A question on your sales mix by geography, if I look at Slide 5, it seems to me that there is a very large disparity between your negative 3% in North America and what looks to be an average of positive 9% to 10% overseas. It doesn't look like currency was a big factor this quarter. So, I'm curious, can you speak to why you're doing so well overseas, what are maybe the two or three most important drivers in your view, and how sustainable those might be? And do you think that in future quarters, we'll continue to see faster growth overseas versus the U.S.?

Yeah. So, I commented earlier in the call, Kevin, that what we're seeing, particularly in Europe, is just a better focus and better organized approach. Think of it as a MAP to Growth for Europe. And so, we are driving efficiencies there. We're also having a more focused sales effort in a bunch of our businesses. And then, lastly, we're rounding some easier comps, particularly in the UK, that went into a recession before most of the other markets that we serve. We also organized in what we call a platform approach for the developing world and it's having a real positive effect. So, unless there is some type of further disruption in a world with plenty of disruptions, I would expect that we would see really solid growth in Europe and the rest of the world and the growth in North America probably is not going to be a lot different in the coming quarter than you see here, again because of the year-over-year flat to negative in Consumer and Specialty Products Group. Hopefully, that will change in Q4, but we will see.

Okay. That's helpful. And then, I wanted to follow up on the discussion regarding Specialty Products. Can you speak to the margin level and outlook there, Frank? I'm cognizant that you had a step-down when you divested the higher-margin Guardian business there. First half of the year, it seems to be running 9%, 10%, how would you characterize the current level versus normal? And do you have a target for that segment margin? Looking out a couple of years, how can we think about the likely trajectory there?

Yes, that's a good question. We expect the Specialty Products Group to achieve mid to slightly higher-teen EBIT margins in a stronger economic environment, similar to past performance. The Guardian Products business posted a higher EBIT margin, but that was a smaller $40 million segment. We anticipate that as the economy recovers over the next few years, the Specialty Products Group will return to mid-double-digit EBIT growth. I am very confident in our ability to reach that goal. We are currently leveraging this opportunity to create synergies. However, if we are unable to achieve this, we will reevaluate the Specialty Products Group or parts of it concerning RPM's future.

Very good. I appreciate the color.

The next question is from Ghansham Panjabi with Baird. Please go ahead.

Good morning, guys. Happy New Year.

Happy New Year, Ghansham.

Thank you, Frank. To you as well. Just going back to the lower consolidated sales guidance for fiscal year '24, can you just sort of clarify what specific segment or segments it is due to and the offset in maintaining your EBIT guidance just purely incrementally more favorable price-cost?

No, the EBIT guidance reflects a favorable price-cost mix and significant improvements from our MAP '25 initiatives. Additionally, as mentioned by Frank Mitsch earlier, we are experiencing better overhead absorption compared to last year when we addressed inventory issues and halted production in several locations. We have been proactive in right-sizing our inventories, and after 30 years of focusing on improving working capital, we are finally achieving sustainable results. This has been our priority, and we are executing effectively. We are enthusiastic about these developments. The improvement in EBIT margin results from a combination of a positive cost-price mix this fiscal year and the advantages of the MAP '25 program in our operations. A key aspect of this is that most MAP '25 initiatives relate to commercial activities, specifically how we incentivize salespeople concerning margins. This focus is on conversion costs across various areas. Consequently, the impact primarily affects gross margin, which means it is only realized when sales occur, unlike SG&A cuts that can be annualized. Instead, the benefits flow through the P&L as we move units.

Okay. Regarding the Consumer business, there have been many fluctuations over the years due to COVID and supply chain challenges, as well as interest rates. What is RPM's baseline expectation for volumes in calendar year '24? Are you anticipating an improvement? Interest rates affected the markets last year, but that should already be considered in last year's base.

Sure. I think you're asking about maybe fiscal '25, which starts on June 1. Our fill rates are back in the high-90%s across the board. That was not true two years ago. We are at lower levels of inventory. And last year for the first time in my career, shut down production in January and February to right-size inventories where typically we'd be adding inventory to sell into a big spring season. So, we've gotten much more agile in our manufacturing ability, so that we don't have to have the same size of safety stock. So, those are the improvements that we have made. But fill rates are where they need to be. I think inventories for the most part in the supply chain are where they need to be. And we just need to help with our retail customers drive consumers back into the stores. Help them think of projects that they can do. And the real first opportunity for us to do that will be this spring because of the seasonality of the business in particular. You see, we expect good leverage in the third quarter, but the third quarter is not where we expect to see any revenue surprises because of the weather seasonality of some of our industrial businesses and certainly our Consumer Group.

Okay. Thank you.

The next question is from Arun Viswanathan with RBC Capital Markets. Please go ahead.

Good morning, Arun.

Good morning, Frank. Thanks for taking my question, and Happy New Year. So, I guess, first, I just wanted to go back to kind of the sales outlook. It looks like it's kind of a tale of two cities here with the Consumer and Specialty Products Group maybe a little bit more sluggish, while reshoring infrastructure drives more strength in Construction Products and PMC. Would you see that maybe switching as we move into the back half of calendar '24? Maybe I'll just start with that and just see if that's kind of in line with your thinking.

No. We think that the Construction Products Group and Performance Coatings Group will have a solid second half of fiscal '24, and the dynamics that we had talked about earlier in terms of stimulus, infrastructure bills, and increases in industrial capital spending and a resurgence in manufacturing, should bode well for those business units and product lines in fiscal '25. I think the thing that we're focused on is continuing to improve our businesses and operating leverage with the expectation, whether it's in Q4 or as we get into fiscal '25, seeing some positive unit volume growth at a Consumer and a return to growth in most of our Specialty Products Group companies. And again, that's what we are most exposed to OEM, coatings to residential construction and we're not alone in having a very difficult challenge. There are certain segments of manufacturing that have had a tough year, and anything that touches housing in the last year has not done very well.

Got it. And then, you mentioned fiscal '25; I think previously you had put out some MAP 2025 targets of that 16% adjusted EBIT margin. Do you still see that in the cards? I think we're maybe a couple of hundred basis points below that on an annual basis right now, but maybe what's kind of the bridge to getting there? What are some of the factors that we would need to see to realize that level of margin performance?

Sure. I think we're on target for that. I think whether we can achieve that on the timeliness or within the timeframe that we communicated depends on when we see the turn in positive unit growth in Consumer and Specialty Products Group. But we'll have a pretty robust appraisal of that when we release our fourth quarter results in July and talk about the balance of our 2025 fiscal year, which is the end of the MAP '25 program.

I would like to follow up on a question you may have addressed earlier. Are there specific areas within any of the businesses that you believe are unlikely to recover and might be considered for divestiture? Additionally, how is the portfolio review progressing? Thank you.

Sure. Yeah. Not at this time. But back to your earlier question, one of the key elements of getting to that 16% consolidated EBIT margin is Specialty Products Group whose consolidated or Group level EBIT margins are in the mid-teens or slightly higher, which is up from about 9% or 10% level today. So, there needs to be a significant recovery there, and we're focused on it. Without that, we will not hit the 16% consolidated goal.

This concludes our question-and-answer session. I would like to turn the conference back over to Frank Sullivan for any closing remarks.

Thank you. We appreciate everybody's participation in our investor call this morning and for your continuing interest in RPM. I'd also like to thank our associates for their tremendous dedication and hard work in fiscal 2024. We are executing at a high level and you can see it in our results. And lastly, to all on the call, we wish you a happy, healthy, and prosperous New Year. Thank you and have a great day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.